NOVEMBER 2015 The Economic Outlook Roger Martin-Fagg Behavioural - - PowerPoint PPT Presentation

NOVEMBER 2015 The Economic Outlook Roger Martin-Fagg Behavioural Economist

THE DEFINITION OF VALUE ADDED

SALES REVENUE minus ALL PAID INVOICES equals

plus

WAGES AND SALARIES

This is Nominal Gross Domestic Product (GDP) 65% produced by businesses employing less than 200 people

PROFIT AFTER TAX AND INTEREST

SHORT RUN ECONOMIC ACTIVITY

MONEY

multiplied by

VELOCITY

is driven by the flow of spending

equals

NOMINAL GDP 95% manufactured by commercial banks M4

Det ermined by int erest rat es, t he media, t he weat her and house prices

Banks manufacture money when they make a loan(bank credit) and can destroy money when a loan is paid down.

UK Real GDP Quarterly Growth

Source: ONS

Q2 Q3

UK Nominal average weekly earnings growing at 3% Real post tax income growing at 2.9%

Source:ONS

The UK tax and benefits system is highly redistributive

The current objective is to raise incomes before tax and reduce benefits

Strong growth in Retail as a whole

Weather and sport effects!

Tough trading environment for food producers

Food price deflation for past two years

Significant upturn in business investment growth(a)(b)

(a) Chained-volume measures. Contributions may not sum to total due to rounding and seasonal adjustment. Contributions prior to 2011 are indicative estimates. (b) Figures in parentheses are shares in total business investment in 2011. (c) Total business investment growth, with the impact of the transfer of nuclear reactors from the public corporation sector to central government in 2005 Q2 removed.

Source: Bank of England

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Excess liquidity creates house price booms: Interest rates need to rise now

There is plenty of money about 80% of bank lending for property

Windfall payouts

Since Jan 2011 an average of £400m a month has been paid out by banks for mis-selling financial products Average payout £7k In total 20Bn so far. Another 8Bn expected to be paid over next two years. Since the change in pension legislation 137 people have withdrawn in excess of £250k each 47,000 have withdrawn up to 30k Average £15k

2010 2011 2012 2013 2014 2015 2016

% change year on year

2 4 6 8 2 4

Average House Price England and Wales

Source: Land Registry

Net migration has supported labour supply

Source: ONS International Passenger Survey. (a) Rolling four-quarter data. Data are half-yearly up to December 2011, and quarterly thereafter.

Source: Bank of England

Recent employment growth has been more

concentrated among the lower skilled, low wage employees.

Sources: Labour Force Survey and Bank calculations. (a) Uses the Standard Occupational Classification (SOC) 2000. Seasonally adjusted by Bank staff. (b) Includes elementary occupations, plant machine operatives, sales and customer services. (c) Change in total employment less changes in employment in high and low-skilled occupations. (d) Includes managers, professional and associate professional and technical occupations.

Source: Bank of England

The UK Economy is performing well driven by strong consumer demand and rising investment spending 0.5% increase in base rate in February 2016: will not derail growth overall but may cause a short pause in Q2 before rebound in Q3 What are the risks to sustained growth?

A doubling in the price of oil Current evidence suggests $50-60 will remain until end 2016. But M.E. politics drives sudden, big price shifts. Impossible to predict.

Risk 1

Oil price up 2.5x Oil price up 2x Oil price down 2x Oil price up 2x Oil price down 2x Oil price up 2.2x Oil price down 2x

OIL price shocks increase the probability of a recession to 90% within 18 months

The export of products below cost from China SOE eg steel: causing insolvencies and unemployment in the UK and the West

Risk 2

A growing perception that the UK will

vote to leave the EU

Risk 3

The UK is No 2 recipient of global overseas investment It pays for our trade deficit If the markets believe there will a vote to leave there will be a sterling crisis.

Europe

Large scale money creation by the central bank is working Spain,Ireland growing strongly All others now out of recession (except Greece) The largest single market on earth, 46% of UK exports $50,000 per capita cf to China at $9000

The UK Balance of Payments

Any negative current balance must be financed by net overseas investment in the UK circa 90Bn pa

UK Forecast for 2016 Real GDP 2.6% CPI 1.1% Consumer spend: value 5%, volume 3.5% Employees earnings 5% Average house prices 5%

Money Supply and bank credit in the Eurozone. Eurozone banks destroyed around 500Bn from 2012. QE now is creating 80Bn a month.

7%

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