The Economic Outlook By Roger Bootle Roger Bootle 1. Agenda - - PowerPoint PPT Presentation

The Economic Outlook

By Roger Bootle Roger Bootle

• 1. Agenda

Prospects for Asia and America. The euro: survival or implosion? Prospects for the UK Prospects for the UK Implications for the markets.

• 2. Merchandise Exports to US & Euro-zone

(As a % of GDP) (2010)

15 20 25 30 15 20 25 30 Exports to US Exports to euro-zone 46% 42%

Sources: Thomson Datastream, Capital Economics

5 10 15 5 10 15

• 3. Government Debt (% GDP, 2010)

40 60 80 100 120 40 60 80 100 120

Source: IMF Fiscal Monitor

20 40 20 40

• 4. Official Interest Rates (as of 1 Feb 12)

4 5 6 7 8 9 4 5 6 7 8 9

Source: Bloomberg

1 2 3 4 1 2 3 4

• 5. US Unemployment Rate (%)

(Latest = December)

8 9 10 11 8 9 10 11 F'cast

Source: Thomson Datastream

3 4 5 6 7 3 4 5 6 7 94 96 98 00 02 04 06 08 10 12

• 6. US Government Net Debt (As a % of GDP)

(1940 – 2020)

1945 - 1980

60 80 100 120 60 80 100 120 CE Forecast

Source: Thomson Datastream

20 40 60 20 40 60 1940 1960 1980 2000 2020

• 7. Government Receipts

(As a % of Outlays) (2011)

70 80 90 100 70 80 90 100

Source: OECD

40 50 60 70 40 50 60 70 US Ire Jap UK Gre Spa Por Ita

• 8. Public Sector Debt (As a % of GDP)

(2011 Forecast)

100 120 140 160 180 100 120 140 160 180

60 % Maastricht Treaty Reference Value

Source: Capital Economics

20 40 60 80 20 40 60 80 Fin Net Spa Aus Ger Fra Bel Por Ire Ita Gre

Reference Value

• 9. UK Government Net Debt (As a % of GDP)

(1700 – 2020)

150 200 250 300 150 200 250 300 OBR Forecast

Sources: Thomson Datastream, OBR

50 100 150 50 100 150 1700 1730 1760 1790 1820 1850 1880 1910 1940 1970 2000

• 10. Share of Years in Default (%)

(since 1800 or independence)

30 40 50 60 30 40 50 60 Source: Reinhart and Rogoff, “This Time is Different” 10 20 30 10 20 30 Spain Brazil Arg Hung Russia Mexico Greece

• 11. Banks’ Exposures to Peripheral Economies

(As a % of GDP) (Q1 2011)

15 20 25 30 15 20 25 30

Source: BIS

5 10 15 5 10 15 Por Fra Bel Net Ger Ire Aus Spa Ita Gre

• 12. UK Banks’ Exposures to Euro-zone

(As a % of Tier 1 Capital) (Q3 2011)

60 80 100 60 80 100 Public sector Banks Non-bank private sector

Sources: Thomson Datastream, Bank of England

20 40 20 40 Greece Portugal Italy Spain IrelandGermanyFrance

• 13. Unit Wage Costs (1999 – 2010)

(1999 = 100) (Latest = 2010)

130 140 150 130 140 150 Greece Portugal Ireland Spain Italy France Germany Source: OECD 90 100 110 120 90 100 110 120 99 00 01 02 03 04 05 06 07 08 09 10 Germany

• 14. The future of the euro

Badly conceived from the start. Requires fiscal and political union. This cannot work for the current membership. This cannot work for the current membership. The euro should split into two - north and south. More likely, Greece will leave, later followed by

• ther countries.

• 15. UK Consumer Confidence & Real

Household Spending (Latest = December)

2 4 6 8 10

• 5

5 15 25 GfK composite balance of consumer confidence (LHS, adv. 6m) Real household spending (%y/y, RHS)

Source: Thomson Datastream

• 6
• 4
• 2

2

• 45
• 35
• 25
• 15

85 87 89 91 93 95 97 99 01 03 05 07 09 11

• 16. UK Real Household Disposable Income

& Spending (% y/y)

1 2 3 4 5 1 2 3 4 5 Forecasts

Sources: Thomson Datastream, Capital Economics

• 4
• 3
• 2
• 1

1

• 4
• 3
• 2
• 1

1 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Real disposable income Real household spending

• 17. UK House Price to Earnings Ratio

(1971-2015) (Latest = Q3)

5 6 7 5 6 7 Long-Run Average

Sources: Nationwide, Thomson Datastream, Capital Economics

2 3 4 2 3 4 1971 1977 1983 1989 1995 2001 2007 2013 Forecast

• 18. Unemployment (ILO Measure) (%)

(Latest = October)

8 10 12 14 8 10 12 14 Forecast

Source: Thomson Datastream

2 4 6 2 4 6 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

• 19. Household Debt (As a % of Income)

(1988 – 2013) (Latest = Q3 2011)

130 140 150 160 170 180 130 140 150 160 170 180

Sources: Thomson Datastream, Capital Economics

80 90 100 110 120 130 80 90 100 110 120 130 88 90 92 94 96 98 00 02 04 06 08 10 12 CE Forecast

• 20. Level of Real Household Spending

(Q4 2007 = 100) (2000 – 2016) (Latest = Q3 2011)

90 95 100 105 90 95 100 105 Lost decade

Sources: Thomson Datastream, Capital Economics

75 80 85 90 75 80 85 90 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 CE Forecasts 2011: +0.8% 2012: -1.5% 2013: +1.0%

• 21. UK Trade in Goods (£bn, % y/y)

(Latest = November)

10 20 30 10 20 30

Source: Thomson Datastream

1

• 30
• 20
• 10
• 30
• 20
• 10

08 09 10 11 Exports Imports

• 22. Destination of UK Goods Exports

(As a % of Total) (2010)

Euro-zone Oil exporters Rest of world

Source: Thomson Datastream

Euro-zone Other Europe

• N. America

Other OCED

• 23. Shares of Exports to China

(As a % of Total Exports) (2010)

5 6 7 8 9 10 5 6 7 8 9 10

Source: Thomson Datastream

1 2 3 4 1 2 3 4 US Ger Fra UK

• 24. UK Public Sector Borrowing As a % of GDP

(Latest = 2010/11)

100 120 140 160 180 100 120 140 160 180 CE Forecast OBR Nov. Forecast

Sources: OBR, Capital Economics

20 40 60 80 20 40 60 80 05 06 07 08 09 10 11 12 13 14 15

• 25. Net debt as a share of GDP (%) (2000-2017)

50 60 70 80 90 100 50 60 70 80 90 100 CE OBR

Sources: OBR, Capital Economics

10 20 30 40 10 20 30 40

• 26. Breakdown of Gilt Holdings (2000 – 2013)

(Latest = Q3 2011)

750 1000 1250 1500 750 1000 1250 1500

Gilts held by the market Gilts held by the Bank of England Total gilt stock

Based on £500bn of QE and DMO projections for gilt issuance

Sources: DMO, Bank of England

250 500 750 250 500 750 00 02 04 06 08 10 12

Total gilt stock

• 27. Commodity Prices (Jan. 2000 = 100)

(Latest = 1 Feb)

400 500 600 700 400 500 600 700 Energy Industrial Metals Agriculturals

Sources: Thomson Datastream

100 200 300 100 200 300 00 01 02 03 04 05 06 07 08 09 10 11 12

• 28. UK Average Earnings (2001-2013) (% y/y)

(Latest = October)

2 3 4 5 6 7 2 3 4 5 6 7 Forecasts Average

Source: Thomson Datastream

• 3
• 2
• 1

1 2

• 3
• 2
• 1

1 2 01 02 03 04 05 06 07 08 09 10 11 12 13

• 29. UK Consumer Price Inflation (%)

(Latest = December)

2 3 4 5 6 2 3 4 5 6 2% target

Sources: Thomson Datastream, Capital Economics

• 2
• 1

1 2

• 2
• 1

1 2 06 07 08 09 10 11 12 13 Headline CPI inflation Core CPI inflation 2% target Forecasts

• 30. What will bring escape from recession?

Fiscal and monetary policy can be relaxed in most of the emerging markets. A move towards stronger domestic demand and higher exchange rates in Asia, led by China. More QE in the US and the UK. Structural measures to incentivise private investment spending. Relief from the euro crisis. Lower commodity prices, leading to higher consumer real incomes.

• 31. UK Official Interest Rates and Market

Interest Rate Expectations (1990-2011) (%)

8 10 12 14 16 8 10 12 14 16 Official Interest Rate Market Expectations at Start of Year for interest rates over the next year

Source: Bloomberg

2 4 6 8 2 4 6 8 90 92 94 96 98 00 02 04 06 08 10 12

• 32. Capital Economics Rate Expectations (%)

(2000 – 2013) (Latest = 1 Feb)

4 5 6 7 4 5 6 7 US Euro-zone UK Japan Capital Economics

Sources: Thomson Datastream, Capital Economics

1 2 3 4 1 2 3 4 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Forecasts

• 33. UK Gilt Yields & Inflation

(1990 – 2013) (Latest = 1 Feb)

8 10 12 14 8 10 12 14 UK 10 Year Gilt Yield (%) UK CPI Inflation (%) Forecast

Source: Thomson Datastream, Capital Economics

2 4 6 2 4 6 89 91 93 95 97 99 01 03 05 07 09 11 13

• 34. All-Property Initial Yields and 10-Year

Government Bond Yields (%) (1989 – 2013) (Latest = December 2011)

8 10 12 14 8 10 12 14 Forecast

Sources: IPD, Thomson Datastream, Capital Economics

2 4 6 8 2 4 6 8 89 91 93 95 97 99 01 03 05 07 09 11 13 Property initial yields 10-year gilt yields

• 35. All-Property Initial Yields Less Equity

Dividend Yields (%) (1990- 2011) (Latest = December)

4 5 6 4 5 6 Property looks cheap

Average since 1990 = 3.4%

Source: Thomson Datastream, IPD

1 2 3 1 2 3 90 92 94 96 98 00 02 04 06 08 10 12 Propertylooks expensive

• 36. Service Sector Employment Index and

Central London Office Rental Values (1997-2011) (Latest =December)

5 10 15 20 25 30 35 52 54 56 58 60 62 CIPS employment balance, 3m avg (adv 4m, lhs) IPD Central London office rents, %y/y (rhs) Sources: IPD, Markit, Capital Economics

• 35
• 30
• 25
• 20
• 15
• 10
• 5

5 38 40 42 44 46 48 50 52 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

• 37. Consumer Spending and Real Retail

Rental Values (1980 – 2013)(latest = Q3 2011)

3 6 9 12 15 1 2 3 4 5 6 7 8 9 CE forecasts

Sources: IPD, Thomson Datastream, Capital Economics

• 15
• 12
• 9
• 6
• 3
• 5
• 4
• 3
• 2
• 1

1 2 80 83 86 89 92 95 98 01 04 07 10 13 Real consumer spending (%y/y, LHS) Real retail rents (%y/y, RHS)

• 38. Real GDP and Real Industrial Rental

Values (1975 – 2013) (Latest = Q4 2011)

6 12 18 24 2 4 6 8 CE forecasts

Sources: IPD, Thomson Datastream, Capital Economics

• 30
• 24
• 18
• 12
• 6
• 4
• 2

2 75 78 81 84 87 90 93 96 99 02 05 08 11 GDP, %y/y, adv 1 year (LHS) Real rents, %y/y (RHS)

• 39. All-Property Capital Values and Total

Returns (%y/y) (2000- 2013) (Latest =2011)

5 10 15 20 25 5 10 15 20 25

CE forecasts

Sources: IPD, Capital Economics

• 30
• 25
• 20
• 15
• 10
• 5
• 30
• 25
• 20
• 15
• 10
• 5

2000 2002 2004 2006 2008 2010 2012

Capital Values Total Returns

• 40. Conclusions

Asia to continue to grow strongly. The US, euro-zone and UK will continue with austerity and face a long slog back to prosperity. The euro will not survive in its present form. Inflation will fall sharply. Inflation will fall sharply. Interest rates will remain at near-zero for years. Bonds overvalued but will probably rise further. Outside the US, equities reasonably valued. UK commercial property is at fair value.

The Economic Outlook

By Roger Bootle Roger Bootle