Transcript (Inter)National Enrico Longoni RBS Group Economics

The Economic Grand (Inter)National
Enrico Longoni
RBS Group Economics
October 2012
Back to recession…
UK GDP (GBP bn, 2008 prices)
375
370
365
360
355
350
345
340
2005
2006
Source: Office for National Statistics
2007
2008
2009
2010
2011
2012
Austerity not to be blamed
UK Q2 2012 GDP – output approach (%q/q)
GDP
-0.5
Government & other
0.3
Business services & Finance
-0.1
Services
-0.1
Manufacturing
-0.9
Production
-0.9
Agriculture
Construction
Source: Office for National Statistics
-2.6
-3.9
Worse than the great depression?
UK GDP during the Great Depression and the Great Recession (q/q)
105
Output since start of downturn (= 100)
100
Great Depression
95
Great Recession
90
t
t+1
t+2
t+3
t+4
t+5
t+6
Source: Bank of England and Office for National Statistics
t+7
t+8
t+9 t+10 t+11 t+12 t+13 t+14 t+15 t+16
UK labour market puzzle
600
Employment: Private vs Public Sector
500
400
300
200
100
0
-100
-200
-300
Q1
2010
Q2
2010
Q3
2010
Public Sector
Source: Office for National Statistics
Q4
2010
Q1
2011
Q2
2011
Private Sector
Q3
2011
Q4
2011
Q1
2012
Cumulative net change
Q2
2012
Deficit reduction…a long way to go
1
0
-1
-2
-3
-4
-5
10-11
Source: Office for Budget Responsibility
12-13
14-15
16-17
Most of the pain is still to come
Share of fiscal tightening still to be implemented after April 2012 (%)
100%
94%
88%
90%
80%
88%
75%
70%
66%
60%
50%
40%
27%
30%
20%
10%
0%
All fiscal tightening
Tax increases
Source: The Institute for Fiscal Studies
Total spending cuts
Investment cuts
Benefit cuts
Other current spending
cuts
Corporates to the rescue?
5
Net Surplus of Private Non-Financial
Corporations (cumulative % of GDP)
4
3
2
1
0
-1
-2
-3
-4
Bureau of Labor
Statistics
20
12
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
-5
Bernanke to the rescue?
US labour market
300
9.5
250
9
8.5
(%)
(000s)
200
150
8
100
7.5
50
7
Fe
bM 11
ar
-1
Ap 1
rM 11
ay
Ju 11
n1
Ju 1
lAu 1 1
gSe 11
p1
O 1
ct
N 11
ov
D 11
ec
Ja 11
nFe 12
bM 12
ar
-1
Ap 2
rM 12
ay
Ju 12
n1
Ju 2
lAu 1 2
gSe 12
p12
0
Change in non-farm payrolls (lhs)
Source: Bureau of Labour Statistics
Unemployment rate (rhs)
US approach to fiscal policy
$100
$10,000
$1,000,000
$100,000,000
$1,000,000,000
$1,000,000,000,000
Walking along the “Fiscal Cliff”
A lot could happen
GDP (%y/y)
Unemployment
No fiscal cliff
2.5%
8.6
1
Full fiscal cliff
-1.0%
10.1
2
75% of cliff
-0.1%
9.7
3
Only tax cuts implemented
0.6%
9.4
4
50% of cliff
0.8%
9.3
5
Only spending cuts
implemented
1.5%
9.0
6
25% of cliff
1.7%
9.0
Source: Group Economics
(%)
Super Mario to the Eurozone rescue?
“…All it takes to save the €…”
8.0
OMT announcements
LTROs
7.5
7.0
6.5
6.0
5.5
Italy (6.6% - 5.1%)
Spain (7.6% - 6%)
5.0
4.5
Jan
Feb
Mar
Source: Bloomberg & Group Economics
Apr
Ma
Jun
Jul
Aug
Sep
Something’s changed
Contribution to Global GDP Growth (Past and Present)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2001-2008
Advanced Economies
2010-2011
2012-2016
Developing and Newly Industrialised Asia
Source: Datastream & Group Economics calculations
Other
This slowdown is the start of a structural change
China GDP annual growth
16
14
12
10
GE forecast
8
6
4
2
0
2004
2005
2006
2007
Source: Group Economics calculations
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Still plenty of investment left to go in China
Road Density (km per sqkm)
Length of Railway (km)
1.5
1
0.5
0
US
China
OECD
0
50,000 100,000 150,000 200,000 250,000
Central Western
China
China
Capital Stock ($ trn)
Underground Transport
100
China Eastern
Average China
China
50
US
0
Cities with population
over 5 million
Number of those cities
with a subway
0
10
20
30
40
50
UK fiscal policy – Plan A2,B, C
Monetary policy – rates low for how long?
7
UK Bank rate and expectations
6
5
4
Feb 2011
3
2
Aug 2011
Feb2012
1
Aug 2012
0
Source: Bank of England & Group Economics calculations
The UK remains a world leader
Wealthy
AAA rated
Highly skilled
workforce
10th largest exporter of
goods
7th largest economy
Innovative
Attractive for foreign
investment
6th largest
manufacturer
3rd largest exporter of
services
World class education
8th most competitive economy
UK economic growth in the long run
6.4
Spot the Great Depression
6
5.6
5.2
4.8
Source: Bank of England; RBS Group Economics
2008
2002
1996
1990
1984
1978
1972
1966
1960
1954
1948
1942
1936
1930
1924
1918
1912
1906
1900
4.4
“Great things are not done by
impulse,
but by a series of small things
brought together."
~Vincent van Gogh~
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What is happening in the labour market?
Cumulative change in private employment (000s)
600
500
400
300
200
100
0
-100
2011 Q1
2011 Q2
Employees FT
2011 Q3
Employees PT
2011 Q4
Self employ FT
2012 Q1
2012 Q2
Self employ PT
Source: ONS
UK growth: the long and winding road
GDP following recessions, start of recession = 100
115
1990s recession/recovery
110
105
100
Current recession/recovery
95
90
0
1
2
3
4
5
6
7
Years since start of recession
Typical UK recovery
Recovery so far
RBS forecast
Source: Datastream and Group Economics calculations
Fiscal rebalancing: a good start, but still far to go
Net borrowing as % of GDP
12
OBR forecast
10
8
6
4
2
7
16
/1
6
15
/1
5
14
/1
4
13
/1
3
12
-1
/1
2*
20
11
1
10
/1
0
09
/1
9
08
/0
8
07
/0
7
06
/0
6
05
/0
5
04
/0
4
03
/0
3
02
/0
20
01
/0
2
0
Source: Office for Budget Responsibility
Would a Plan B work?
There is some additional debt capacity, but unquantifiable risks
Public sector net debt:GDP, UK forecast & selected countries in 2012
100%
80%
Public sector net debt as % of GDP
IMF recommended debt:GDP
ceiling
Reinhart & Rogoff say growth
falters above this level
Debt:GDP likely unsustainable
60%
40%
20%
0%
12-13 13-14 14-15 15-16 16-17
Ireland Italy
Spain Portugal
High levels of household and public debt constrain growth
Household debt as a % of income
170
70
160
Public sector net debt as % of GDP, excluding
financial sector interventions
60
150
50
140
130
40
120
30
110
20
100
10
90
80
1990
0
1995
2000
2005
2010
2015
2003
2005
2007
2009
2011
Source: Datastream & Group Economics calculations
Main economic problem facing the UK
39
61
Q2 10
43
57
Q3 10
48
47
50
51
51
52
53
50
49
49
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
The lack of economic growth - we need to spend and lend more to create jobs & keep business going
The size of the debt burden - we need to borrow less & save more to ensure we keep interest rates low
Corporates have the cash….
Flow of funds financial surplus/deficit 2011 (% of GDP)
9.0%
8.0%
Rest of the World, 1.7%
7.0%
6.0%
Households, 1.4%
5.0%
Government , 8.3%
4.0%
Non-financial companies,
3.6%
3.0%
2.0%
1.0%
Financial companies, 1.7%
0.0%
Financial deficit
Government
Financial companies
Financial surplus
Non-financial companies
Households
Rest of the World
Source: Office for National Statistics
Drastic times, drastic measures?
Increase demand
(symptom)
Reduce debt
(cause)
Massive fiscal stimulus
QE max
Liquidity unbounded
“Use it or lose it” deposit tax
PFI v2.0
Beg to China
(Big) “bad bank”
Debt forgiveness
Financial repression
Monetise debt
Raise interest rates
Outright default
China’s growth is slowing, should we be worried?
China - Loan Growth and Industrial Production
- Y/Y Change
Source: Datastream & Group Economics calculations
2
b1
Fe
-1
1
D
ec
-1
1
-1
A
ug
Ju
n1
1
1
A
pr
-1
1
Fe
b1
-1
0
D
ec
0
-1
O
ct
0
-1
A
ug
0
n1
Ju
A
pr
-1
0
Industrial
Production
1
Loan
Growth
O
ct
24
22
20
18
16
14
12
10
Emerging markets: huge export opportunity
70%
% share of global GDP
65%
60%
Emerging Economies
55%
50%
45%
Developed Economies
40%
35%
30%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Datastream & Group Economics calculations
Source: IMF
Trade headwinds
UK export market share & growth
14.0
Major markets
(1)
12.0
Share of UK exports (%)
(2)
EZ problem markets
10.0
(3)
8.0
Emerging markets
(4)
6.0
(6)
(5)
4.0
(8)
(9)
(7)
(11)
(10)
2.0
(20)
(15)
(27)
0.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
2011 Y/Y growth in exports (%)
Source: Datastream & Group Economics calculations
Source: IMF
30.0
35.0
40.0
45.0
Exports heading to the wrong places – for now
UK 2010 exports – by destination and growth rates
50
45
40
35
30
25
20
15
10
5
0
Export growth (%y/y)
Source: Office for National Statistics
Market share (%)
EZ imbalances, more than fiscal
Unit labour costs: Germany vs. the PIIGS
150
140
130
120
110
100
90
80
70
1995 1997
Germany
1999
Italy
2001 2003 2005 2007 2009 2011
Greece
Spain
Portugal
Ireland
Source: Datastream & Group Economics calculations