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The global and UK economic outlookDr Andrew SentanceFormer MemberMonetary Policy CommitteePresentation at Citywire Investm...
Outline   Why has the global economy slowed?   Resolving the euro area crisis   Key issues shaping the recovery   UK a...
World economic growth  % per annum change in GDP in G-13 economies*               IMF, Jun 2011                   OECD, No...
The rise of AsiaPercentage share of world GDP, current market prices and exchange rates                                   ...
Why is global growth slowing?•   Policy tightening in Asia-Pacific in response    to inflationary concerns•   Financial vo...
Global inflation on the rise% per annum change in consumer prices12                               Sep-1010                ...
Forces underpinning global inflation•   End of global disinflationary decade•   Strong growth in late 2000s•   Global stim...
Global disinflation ends in mid-2000s  % per annum change in UK goods prices                                          CPI ...
Global primary energy consumptionMillion tonnes oil equivalent                                                            ...
Shares of world GDP and population2010 figures              GDP at market prices                                          ...
Problems with global monetary policy•   Tailwind of global disinflation is no longer helping to    maintain price stabilit...
Public debts and deficits compared% of GDP in 2010                                       Euro              US         UK  ...
Budget deficits in US, UK and euro area General government borrowing, % of GDP                                    UK     E...
Fixing the euro “deficit problem”•   High deficit economies to show commitment    to the “hard grind” of fiscal consolidat...
Will the euro area break up?•   Likely to make problems worse not better•   Practical, institutional and political issues•...
UK economic growth  % per annum change in non-oil GDP                      Previous data   Latest data   Trend    6    4  ...
The progress of the UK recovery•   Growth has slowed after initial rebound•   This partly reflects broader global slowdown...
High inflation squeezing spending  % per annum growth in retail sales (3-month ave)                                       ...
UK inflation stubbornly above target  % per annum increase in consumer prices index                                       ...
Broad-based rise in consumer prices % annual rise in CPI categories, October 2011         Miscellaneous goods and services...
The MPC Inflation Record                 Period                   Target      High   Low    Ave    May 1997 - Dec 2003    ...
Large official inflation forecast errorsMean of forecast percentage annual increases in consumer prices                   ...
Why has UK inflation been so high?•   Global inflationary pressures•   Large sterling depreciation•   Persistent services ...
The global economy and UK inflation                      Impact of monetary                      policy            Cost of...
Sterling depreciation since 2007Rebased to 100 in January 2005                                                            ...
Episodes of Sterling depreciationIndex, base year = 100                                                                   ...
Euro/UK inflation differential & exchange rate        Euro/ sterling                                                      ...
Persistently high UK services inflation  % per annum change in UK consumer prices                                         ...
Capacity utilisation in UK economy  Bank of England Agents’ scores relative to normal                                     ...
Unemployment in UK recessions  Unemployment rate, % of labour force                               77Q4-83Q4               ...
Problems with the MPC•   Emphasis on forecast has allowed the Committee to    redefine its own target•   Persistent modell...
Key issues shaping the recovery•   Legacy of financial crisis, holding back spending    growth in western economies•   The...
Outlook for advanced economies  % per annum change in GDP                                           US       UK   Euro   O...
UK GDP and consumer prospects  % per annum change – latest OBR forecast                                          GDP      ...
Can growth recover in 2012?•   Easing pressure on consumers from fall-back    in inflation•   Global growth to pick up as ...
Employment in UK recessions  Index of employment, 100 = cyclical peak                               77Q4-83Q4             ...
Key conclusions•   Global and UK growth to pick up during 2012 after    current weak patch•   Asia-Pacific region the key ...
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Citywire 011211

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  1. 1. The global and UK economic outlookDr Andrew SentanceFormer MemberMonetary Policy CommitteePresentation at Citywire Investment Conference, 1st December 2011
  2. 2. Outline Why has the global economy slowed? Resolving the euro area crisis Key issues shaping the recovery UK and global economic outlook
  3. 3. World economic growth % per annum change in GDP in G-13 economies* IMF, Jun 2011 OECD, Nov 2011 Ave 1990-2010 6 5 4 3 2 1 0 -1 -2 -3 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* EU, US and 11 other economies accounting for 85% of world GDPSource: IMF World Economic Outlook Update, June 2011, and OECD Economic Outlook
  4. 4. The rise of AsiaPercentage share of world GDP, current market prices and exchange rates 40% US EU-27 Asia-pacific G10 * 35% 30% 25% 20% 15% 10% 5% 0% 1980 1990 2000 2010*: Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.Source: IMF World Economic Outlook
  5. 5. Why is global growth slowing?• Policy tightening in Asia-Pacific in response to inflationary concerns• Financial volatility and euro area problems affecting business and consumer confidence• Relatively high inflation squeezing disposable income and consumer spending• Structural factors continuing to hold back growth in US and other western economies
  6. 6. Global inflation on the rise% per annum change in consumer prices12 Sep-1010 Sep-11 8 6 4 2 0 -2Source: The Economist
  7. 7. Forces underpinning global inflation• End of global disinflationary decade• Strong growth in late 2000s• Global stimulus in 2009/10• Tension from East-West rebalancing• Assymmetric monetary policy responses
  8. 8. Global disinflation ends in mid-2000s % per annum change in UK goods prices CPI goods Factory gate prices 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11Source: Office for National Statistics
  9. 9. Global primary energy consumptionMillion tonnes oil equivalent 6500 OECD 6000 Non-OECD 5500 5000 4500 4000 3500 3000 2500 2000 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007Source: BP Statistical Review 2010
  10. 10. Shares of world GDP and population2010 figures GDP at market prices Population EU-27, Apac 26% EU-27, G10*, Apac 7% 46% G10*, US, 5% 27% US, 23% Other, Other, 24% 43%*: Apac G10: Asia-Pacific G10, including Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.Source: IMF World Economic Outlook, World Bank and Eurostat.
  11. 11. Problems with global monetary policy• Tailwind of global disinflation is no longer helping to maintain price stability• Asia and other emerging market economies are strongly growth-oriented• Other western authorities (especially US and UK) using monetary policy to cushion structural adjustment post-financial crisis• Energy and commodity price inflation treated as “one- off” or someone else’s problem• Risk of inflationary bias to global monetary policy
  12. 12. Public debts and deficits compared% of GDP in 2010 Euro US UK Japan 140 12 10.6 10.4 10.3 117.5 120 10 100 8 80 69.4 6.1 64.4 64.8 6 60 4 40 20 2 0 0 Net debt Govt deficitsSource: IMF, April 2011 World Economic Outlook
  13. 13. Budget deficits in US, UK and euro area General government borrowing, % of GDP UK Euro US 14 12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: OECD
  14. 14. Fixing the euro “deficit problem”• High deficit economies to show commitment to the “hard grind” of fiscal consolidation• Strong medium term fiscal rules and effective mechanism for mutual support• Clarifying and strengthening role of ECB• Recapitalising and restructuring banks• Better communication, co-ordination and market management
  15. 15. Will the euro area break up?• Likely to make problems worse not better• Practical, institutional and political issues• Departing currencies would lack credibility• Leaving euro would not help weaker economies address structural problems• Policy “failure” would have severe adverse knock-on impact on all EU economies (including non-euro members such as UK)
  16. 16. UK economic growth % per annum change in non-oil GDP Previous data Latest data Trend 6 4 2 0 -2 -4 -6 -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: ONS
  17. 17. The progress of the UK recovery• Growth has slowed after initial rebound• This partly reflects broader global slowdown and fading impact of stimulus measures• But it is also due to a squeeze on consumers from high inflation, including VAT impact• Pressures on consumer should ease next year but spending likely to remain subdued• Global economic situation and resilience of business investment hold key to UK outlook
  18. 18. High inflation squeezing spending % per annum growth in retail sales (3-month ave) Value Volume Average 97-08 10 8 6 4 2 0 -2Source: Office for National Statistics
  19. 19. UK inflation stubbornly above target % per annum increase in consumer prices index Value Target Ave 2008-11 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%Source: Office for National Statistics
  20. 20. Broad-based rise in consumer prices % annual rise in CPI categories, October 2011 Miscellaneous goods and services Restaurants and hotels Education Recreation and culture Communication Transport Health Furniture & household eqpt/maintce Housing, water and energy Clothing and footwear Alcoholic beverages and tobacco Food and non-alcoholic beverages -2 0 2 4 6 8 10Source: Office for National Statistics
  21. 21. The MPC Inflation Record Period Target High Low Ave May 1997 - Dec 2003 RPIX = 2.5% 3.2% 1.5% 2.4% Jan 2004 - Dec 2007 CPI = 2.0% 3.1% 1.1% 2.0% Jan 2008 – Sep 2011 CPI = 2.0% 5.2% 1.1% 3.4%Source: Office of National Statistics
  22. 22. Large official inflation forecast errorsMean of forecast percentage annual increases in consumer prices 6 May-09 Nov-09 May-10 Nov-10 5 May-11 Actual CPI inflation 4 3 2 1 0 2007 2008 2009 2010 2011 2012 2013Source: Bank of England
  23. 23. Why has UK inflation been so high?• Global inflationary pressures• Large sterling depreciation• Persistent services inflation• Limited impact of spare capacity• MPC response to financial crisis
  24. 24. The global economy and UK inflation Impact of monetary policy Cost of imports Exchange rate Domestic Global Demand demand UK inflation economy Expectations and credibility Pricing climate
  25. 25. Sterling depreciation since 2007Rebased to 100 in January 2005 110 105 100 95 90 Euro-Sterling exchange rate 85 Sterling EER * 80 Average EER *, 97-07 75 70 2005 2006 2007 2008 2009 2010 2011*: Effective exchange rateSource: Thompson Datastream and Bank for International Settlements
  26. 26. Episodes of Sterling depreciationIndex, base year = 100 110 100 90 80 70 1967-1971 1972-1977 1981-1986 1991-1996 2007-2010 60 50 0 1 2 3 4 5 Number of years from start of periodSource: Bank for International Settlements
  27. 27. Euro/UK inflation differential & exchange rate Euro/ sterling % 0.3 2.0 1.5 0.2 1.0 0.1 0.5 0.0 0 -0.5 -0.1 -1.0 -0.2 -1.5 Euro-area/UK CPI differential (RHS) * -2.0 -0.3 Euro-Sterling exchange rate (LHS) ** -2.5 -0.4 -3.0 1997 1999 2001 2003 2005 2007 2009 2011*: Euro-Sterling exchange rate is expressed as the deviation from its average over the same period.Source: Thompson Datastream
  28. 28. Persistently high UK services inflation % per annum change in UK consumer prices Goods Services 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Jan-04 Jan-05 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11Source: Office for National Statistics
  29. 29. Capacity utilisation in UK economy Bank of England Agents’ scores relative to normal Manufacturing Services 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11Source: Bank of England
  30. 30. Unemployment in UK recessions Unemployment rate, % of labour force 77Q4-83Q4 88Q2-94Q2 06Q2-11Q3 12 11 10 9 8 7 6 5 4 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 Number of quarters from employment peakSource: Office for National Statistics, Labour Force Survey
  31. 31. Problems with the MPC• Emphasis on forecast has allowed the Committee to redefine its own target• Persistent modelling and forecasting errors, with excessive weight on “output gap” model• Assymmetric policy response• “Benign neglect” of sterling and policy of talking down the pound• Lack of effective scrutiny and accountability• Perception that inflation target has been downgraded and that growth is now the focus of monetary policy
  32. 32. Key issues shaping the recovery• Legacy of financial crisis, holding back spending growth in western economies• The rise of Asia and emergence as a major engine of global growth• High and volatile energy and commodity prices, leading to bursts of global inflation• Uncertainty about policy-making and lack of economic leadership fuelling financial volatility and affecting confidence
  33. 33. Outlook for advanced economies % per annum change in GDP US UK Euro OECD 3 2.5 2 1.5 1 0.5 0 2011 2012 2013Source: OECD and Office for Budget Responsibility
  34. 34. UK GDP and consumer prospects % per annum change – latest OBR forecast GDP Consumer spending 4 3 2 1 0 -1 -2 -3 -4 -5 2000-08 2009 2010 2011 2012 2013 aveSource: ONS and Office for Budget Responsibility
  35. 35. Can growth recover in 2012?• Easing pressure on consumers from fall-back in inflation• Global growth to pick up as Asian economies recover momentum• Some resolution of euro area situation and reduction in financial volatility• Confidence-building measures from policy- makers• Resilience of UK non-financial private sector
  36. 36. Employment in UK recessions Index of employment, 100 = cyclical peak 77Q4-83Q4 88Q2-94Q2 06Q2-11Q3 100 98 96 94 92 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 Number of quarters from employment peakSource: Office for National Statistics, Labour Force Survey
  37. 37. Key conclusions• Global and UK growth to pick up during 2012 after current weak patch• Asia-Pacific region the key engine of global growth• Growth recovery hinges on some resolution of current euro area crisis• Global inflation to subside in 2012, but inflationary pressures likely to re-emerge as global economy picks up again• UK inflation unlikely to fall as sharply as MPC expects, aggravating credibility issue
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