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) 46% 30 30 Exports to US 42% Exports to euro-zone 25 25 20 20 15 15 15 15 10 10 5 5 0 0 Sources: Thomson Datastream, Capital Economics

3. Government Debt (% GDP, 2010) 120 120 100 100 80 80 60 60 40 40 40 40 20 20 0 0 Source: IMF Fiscal Monitor

4. Official Interest Rates (as of 1 Feb 12) 9 9 8 8 7 7 6 6 5 5 4 4 4 4 3 3 2 2 1 1 0 0 Source: Bloomberg

5. US Unemployment Rate (%) (Latest = December) 11 11 F'cast 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 94 96 98 00 02 04 06 08 10 12 Source: Thomson Datastream

6. US Government Net Debt (As a % of GDP) (1940 – 2020) 120 120 CE Forecast 100 100 1945 - 1980 80 80 60 60 60 60 40 40 20 20 0 0 1940 1960 1980 2000 2020 Source: Thomson Datastream

7. Government Receipts (As a % of Outlays) (2011) 100 100 90 90 80 80 70 70 70 70 60 60 50 50 40 40 US Ire Jap UK Gre Spa Por Ita Source: OECD

8. Public Sector Debt (As a % of GDP) (2011 Forecast) 180 180 160 160 140 140 120 120 100 100 60 % Maastricht Treaty Reference Value Reference Value 80 80 60 60 40 40 20 20 0 0 Fin Net Spa Aus Ger Fra Bel Por Ire Ita Gre Source: Capital Economics

9. UK Government Net Debt (As a % of GDP) (1700 – 2020) 300 300 OBR Forecast 250 250 200 200 150 150 150 150 100 100 50 50 0 0 1700 1730 1760 1790 1820 1850 1880 1910 1940 1970 2000 Sources: Thomson Datastream, OBR

10. Share of Years in Default (%) (since 1800 or independence) 60 60 50 50 40 40 30 30 30 30 20 20 10 10 0 0 Spain Brazil Arg Hung Russia Mexico Greece Source: Reinhart and Rogoff, “This Time is Different”

11. Banks’ Exposures to Peripheral Economies (As a % of GDP) (Q1 2011) 30 30 25 25 20 20 15 15 15 15 10 10 5 5 0 0 Por Fra Bel Net Ger Ire Aus Spa Ita Gre Source: BIS

12. UK Banks’ Exposures to Euro-zone (As a % of Tier 1 Capital) (Q3 2011) 100 100 Public sector 80 80 Banks Non-bank private sector 60 60 40 40 20 20 0 0 Greece Portugal Italy Spain IrelandGermanyFrance Sources: Thomson Datastream, Bank of England

13. Unit Wage Costs (1999 – 2010) (1999 = 100) (Latest = 2010) Greece 150 150 Portugal Ireland 140 140 Spain Italy 130 130 France Germany Germany 120 120 110 110 100 100 90 90 99 00 01 02 03 04 05 06 07 08 09 10 Source: OECD

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 other countries.

15. UK Consumer Confidence & Real Household Spending (Latest = December) GfK composite balance of consumer 25 10 confidence (LHS, adv. 6m) 8 Real household spending (%y/y, RHS) 15 6 5 4 -5 2 2 -15 0 -25 -2 -35 -4 -45 -6 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Source: Thomson Datastream

16. UK Real Household Disposable Income & Spending (% y/y) 5 5 Forecasts 4 4 3 3 2 2 1 1 1 1 0 0 -1 -1 Real disposable income -2 -2 Real household spending -3 -3 -4 -4 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Sources: Thomson Datastream, Capital Economics

17. UK House Price to Earnings Ratio (1971-2015) (Latest = Q3) 7 7 6 6 Long-Run Average 5 5 4 4 3 3 Forecast 2 2 1971 1977 1983 1989 1995 2001 2007 2013 Sources: Nationwide, Thomson Datastream, Capital Economics

18. Unemployment (ILO Measure) (%) (Latest = October) 14 14 12 12 Forecast 10 10 8 8 6 6 4 4 2 2 0 0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Source: Thomson Datastream

19. Household Debt (As a % of Income) (1988 – 2013) (Latest = Q3 2011) 180 180 170 170 160 160 150 150 140 140 130 130 130 130 120 120 110 110 CE Forecast 100 100 90 90 80 80 88 90 92 94 96 98 00 02 04 06 08 10 12 Sources: Thomson Datastream, Capital Economics

20. Level of Real Household Spending (Q4 2007 = 100) (2000 – 2016) (Latest = Q3 2011) 105 105 Lost decade 100 100 95 95 90 90 90 90 CE Forecasts 85 85 2011: +0.8% 2012: -1.5% 80 80 2013: +1.0% 75 75 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Sources: Thomson Datastream, Capital Economics

21. UK Trade in Goods (£bn, % y/y) (Latest = November) 30 30 20 20 10 10 0 0 0 0 1 -10 -10 Exports -20 -20 Imports -30 -30 08 09 10 11 Source: Thomson Datastream

22. Destination of UK Goods Exports (As a % of Total) (2010) Rest of world Oil exporters Euro-zone Euro-zone Other OCED N. America Other Europe Source: Thomson Datastream

23. Shares of Exports to China (As a % of Total Exports) (2010) 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 US Ger Fra UK Source: Thomson Datastream

24. UK Public Sector Borrowing As a % of GDP (Latest = 2010/11) 180 180 CE Forecast 160 160 OBR Nov. Forecast 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 05 06 07 08 09 10 11 12 13 14 15 Sources: OBR, Capital Economics

25. Net debt as a share of GDP (%) (2000-2017) 100 100 90 90 CE 80 80 OBR 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Sources: OBR, Capital Economics

26. Breakdown of Gilt Holdings (2000 – 2013) (Latest = Q3 2011) 1500 1500 Based on £500bn of QE and DMO projections for gilt issuance 1250 1250 Gilts held by the market 1000 1000 Gilts held by the Bank of England Total gilt stock Total gilt stock 750 750 750 750 500 500 250 250 0 0 00 02 04 06 08 10 12 Sources: DMO, Bank of England

27. Commodity Prices (Jan. 2000 = 100) (Latest = 1 Feb) 700 700 Energy 600 600 Industrial Metals 500 500 Agriculturals 400 400 300 300 200 200 100 100 0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: Thomson Datastream

28. UK Average Earnings (2001-2013) (% y/y) (Latest = October) 7 7 Forecasts 6 6 Average 5 5 4 4 3 3 2 2 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Thomson Datastream

29. UK Consumer Price Inflation (%) (Latest = December) 6 6 5 5 4 4 3 3 2 2 2 2 2% target 2% target 1 1 0 0 Headline CPI inflation Forecasts -1 -1 Core CPI inflation -2 -2 06 07 08 09 10 11 12 13 Sources: Thomson Datastream, Capital Economics

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) (%) Official Interest Rate 16 16 Market Expectations at Start of Year for 14 14 interest rates over the next year 12 12 10 10 8 8 8 8 6 6 4 4 2 2 0 0 90 92 94 96 98 00 02 04 06 08 10 12 Source: Bloomberg

32. Capital Economics Rate Expectations (%) (2000 – 2013) (Latest = 1 Feb) US 7 7 Euro-zone UK 6 6 Japan 5 5 Capital Economics 4 4 4 4 Forecasts 3 3 2 2 1 1 0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Sources: Thomson Datastream, Capital Economics

33. UK Gilt Yields & Inflation (1990 – 2013) (Latest = 1 Feb) 14 14 UK 10 Year Gilt Yield (%) UK CPI Inflation (%) 12 12 10 10 Forecast 8 8 6 6 4 4 2 2 0 0 89 91 93 95 97 99 01 03 05 07 09 11 13 Source: Thomson Datastream, Capital Economics

34. All-Property Initial Yields and 10-Year Government Bond Yields (%) (1989 – 2013) (Latest = December 2011) 14 14 Forecast 12 12 10 10 8 8 8 8 6 6 4 4 Property initial yields 2 2 10-year gilt yields 0 0 89 91 93 95 97 99 01 03 05 07 09 11 13 Sources: IPD, Thomson Datastream, Capital Economics

35. All-Property Initial Yields Less Equity Dividend Yields (%) (1990- 2011) (Latest = December) 6 6 Property looks Average since 1990 = 3.4% cheap 5 5 4 4 3 3 Propertylooks 2 2 expensive 1 1 0 0 90 92 94 96 98 00 02 04 06 08 10 12 Source: Thomson Datastream, IPD

36. Service Sector Employment Index and Central London Office Rental Values (1997-2011) (Latest =December) CIPS employment balance, 3m avg (adv 4m, lhs) 62 35 30 60 IPD Central London office rents, %y/y (rhs) 25 58 20 56 15 54 10 52 52 5 5 50 0 -5 48 -10 46 -15 44 -20 42 -25 40 -30 38 -35 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: IPD, Markit, Capital Economics