UK economic prospects Association of Consulting Actuaries, 31 st Jan - - PowerPoint PPT Presentation
Legal & General Investment Management UK economic prospects Association of Consulting Actuaries, 31 st Jan 2019 James Carrick, Global Economist Chris Jeffery, Asset Allocation Strategist Intended for professional clients only. Not to be
UK economic prospects
Association of Consulting Actuaries, 31st Jan 2019
James Carrick, Global Economist Chris Jeffery, Asset Allocation Strategist Intended for professional clients only. Not to be distributed to retail clients. Legal & General Investment Management
LGIM REF: MA0076
Signposts for the UK economy
1
Stay in the EU
(via 2nd referendum)
Norway
(via Article 50 extension)
No Deal
Withdrawal Agreement
General Election
2
Source: IMF
Spot the odd one out
0.0 1.0 2.0 3.0 0.0 1.0 2.0 3.0
GDP growth (2017-18, % per annum) GDP growth (2014-16, % per annum)
Growth has picked up everywhere in 2017/18 except the UK
1% per annum ≈ £40bn over two years ≈ £350mn per week
Growing Brexit uncertainty weighing on investment
3
Source: Bank of England
4
204 434 162 68 409 83 68 488 271 145 223
For Undecided/Unclear Against
Source: House of Commons Library, LGIM calculations * Numbers include 2 tellers on each side who are not included in the official totals
No deal is easily the least popular option Composition of House of Commons
2nd referendum: current support around 160 votes, but could change dramatically if Labour policy evolves again No Deal:
supporters, clearly opposed by over 400 MPs EEA+ or permanent Customs Union: least unpopular
large group of undecided Theresa May’s deal*: rejected by 230 votes
Conservatives* 316 Labour* 254 SNP 35 Lib Dems 11 DUP 10 Independents 8 Sinn Fein 7 Plaid Cymru 4 Green Party 1 Speakers 4 Total 650
* Excluding speaker and three deputies
320 is the magic number in parliament
In hindsight do you think Britain was right or wrong to leave the EU?
5
0% 10% 20% 30% 40% 50% 60% Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
Right - Wrong Right Wrong
% Source: Yougov
What would a second referendum bring?
Play your cards right…
6
Next general election in 2019 2nd referendum in 2019 General Election before Brexit Labour as largest party after GE
Source: Betfair, 17th Jan 2019
7
An introduction to Corbynomics
Extra spending commitments:
Higher taxation commitment:
£50bn - £90bn per annum £30bn - £50bn per annum
Nationalisation
Regulation
£15bn - £20bn per annum £50bn - £100bn
Cost to public sector Cost to private sector
Source: LGIM
8
Under extreme circumstances, what is BoE independence worth?
Source: Bank of England Act (1998)
“The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances”
9
$3 trn $17 trn
UK UK EU EU Wor
ld
$80 trn
GDP (2017)
Source: IMF
Notes from a Small Island
10
When will the cycle end?
20 40 60 80 100 120 140 Dec-00 Aug-04 Jun-08 Jan-12 Dec-14 Mar-19 Jul-21 Jul-24 Nov-27 Mar-33 Jun-38 Oct-45 Oct-49 May-54 Apr-58 Feb-61 Nov-70 Mar-75 Jul-80 Nov-82 Mar-91 Nov-01 Jun-09
Cycle length (months) Expansion starting in …
US expansions since 1900
Post-WW2 average
Source: NBER
11
The gambler’s fallacy
25% of post-war DM expansions have lasted more than a decade What’s the probability of 9 consecutive BLACK spins?
10 years is not a ceiling
Australia is currently in the midst of a 26 year economic expansion Given 9 consecutive BLACK spins, what’s the probability of
(18/37)9 = 0.15% (1 in 655) 18/37 = 49%
Source: LGIM
12
US recession indicator heatmap 1989 2000 2007 2015 2016 2017 2018 2019 2020 In order of importance this cycle 1 yr before recession Inflation Senior loan officer survey Output gap Inventories Profit margins Wages Oil prices Corporate financing gap Corporate debt servicing Yield Curve Household net lending Household debt servicing Public sector deficit and debt levels Excessive investment Private sector debt levels Jobless claims Unemployment Credit growth All fine Housing Neutral Household net worth to income Watch out
Source: LGIM, Bloomberg, NBER as at November 2018.
How close are we to the end of the cycle?
Key factor: how much slack left in the US?
13
52 54 56 58 60 62 64 66 68 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
Smoothed US labour participation rate
%
US participation rate is:
Source: Macrobond, OECD
Demographics – Population Pyramid Scheme
14
Running out of workers!
1980 2015 2050
Source: UN WPP 2015
Western Europe Population Pyramids
15
400,000 420,000 440,000 460,000 480,000 500,000 520,000 540,000 560,000 1965 1975 1985 1995 2005 2015 2025 2035 2045 Population Population projection: zero immigration Population projection: median estimate
Thousands
150,000 200,000 250,000 300,000 350,000 400,000 450,000 1965 1975 1985 1995 2005 2015 2025 2035 2045 Population Population projection: zero immigration Population projection: median estimate
Thousands
Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, DVD Edition.
Who needs high immigration?
US population outlook EU population outlook
5 10 15 20 25 30 35 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Welfare spending Non-welfare spending Taxes
Tax and spend
Middle aged taxpayers fund children and pensioners
16
Source: LGIM, Macrobond, OBR
Tax receipts and public spending by age, £000s
0.0 2015 2020 2025 2030 2035 2040 2045 2050
Public finances under pressure
Lower taxes and higher health/pension costs to boost deficit
Source: OBR, LGIM estimates. As at 31 August 2007.
Cumulative impact on public finances (% of GDP) from ageing
17
Global growth… we’ve never had it so good?
18
Source: IMF, Maddisson Project Database, LGIM
In the last three decades, globalisation has been shorthand for the rise of China
19
0.0 0.5 1.0 1.5 1991 1996 2001 2006 2011 2016 2021 China USA
%
Contributions to global GDP growth (%)
IMF forecasts to 2023
China: still has a lot of catching up to do
20
2018 1990 1987 1970 ≈ ≈ ≈ ≈ 1940
Globalisation = urbanisation
21
Tokyo
38
Delhi
26
Shanghai
24
São Paulo
21
Mumbai
21
Mexico City
21
Beijing
20
Osaka
20
Cairo
19
New York
19
Dhaka
18
Karachi
17
Buenos Aires
15
Kolkata
15
Istanbul
14
Population (million)
2015 Tokyo
37
Delhi
36
Shanghai
31
Mumbai
28
Beijing
28
Dhaka
27
Karachi
25
Cairo
25
Lagos
24
Mexico City
24
São Paulo
23
Kinshasa
20
Osaka
20
New York
20
Kolkata
19
Guangzhou
18
Population (million)
2030
Source: UN Urbanisation Prospects, 2014
Global warming…
22
Massive changes needed to limit global temperature rise
Source: https://commons.wikimedia.org/wiki/File:Global_Warming_Predictions.png
Disruption from falling solar/battery prices
23
Trend decline in prices due to technological improvement
Source: Bloomberg New Energy Finance
Disruption from falling data storage prices
24
Will the robots destroy all the jobs? Nand Flash = SD card, DRAM = computer memory
Source: https://www.computerworld.com/article/3182207/data-storage/cw50-data-storage-goes-from-1m-to-2-cents-per-gigabyte.html
1 10 100 1,000 10,000 100,000 1,000,000 10,000,000 100,000,000 1,000,000,000 10,000,000,000 65 70 75 80 85 90 95 00 05 10 15 Price of storage and memory costs through the years
Disk DRAM Nand Flash
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 99% Annualised real income growth Percentiles of the global income distribution
Global inequality has fallen due to rise of China
25
Source: “Global Income Distribution: From the fall of the Berlin Wall to the Great Recession” Lakner and Milanovic, World Bank Economic Review, September 2015
The global “elite” EM middle class DM middle class
But developed market middle class has suffered
26
Source: BBC
Political risks across OECD a product of populism
27
In summary …
28
(1) Resource constraints (2) Populism
29
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