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Roger bootle citywire (3rd may) e mail version

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  • 1. The Economic and Financial Outlook By Roger Bootle
  • 2. 1. Agenda• The shape of the world.• The outlook for America.• The euro: survival or implosion?• Prospects for the UK.• The outlook for interest rates.
  • 3. 2. Capital Economics GDP Forecasts (% y/y) – Year Average 2010 2011 2012 2013US 3.0 1.7 2.0 2.5Euro-zone 1.8 1.5 -1.0 -2.5UK 2.1 0.7 -0.5 0.5Japan 4.0 -0.9 1.5 1.0Emerg. Markets 7.3 6.8 5.2 5.0China 10.4 9.2 8.5 7.5 Sources: Thomson Datastream, Capital Economics
  • 4. 3. GDP (Q1 2008 = 100) (Latest = Q4 2011)102 102100 10098 9896 9694 US 94 Germany92 France 92 Japan UK90 90 2008 2009 2010 2011 Source: Thomson Datastream
  • 5. 4. Exports (% of GDP) (2010)14 14 Exports to the euro-zone12 12 Exports to the US10 108 86 64 42 20 0 Emerging Emerging Latin America Middle East Europe Asia Sources: Thomson Datastream, Capital Economics
  • 6. 5. US GDP (%q/q Annualised) (2009 – 2013) (Latest = Q4)6 64 42 20 0-2 Forecasts -2 2012 = 2.0%-4 2013 = 2.5% -4-6 -6-8 -8 2009 2010 2011 2012 2013 Sources: Thomson Datastream, Capital Economics
  • 7. 6. US GDP (%y/y) (1990 – 2011) (Latest = Q4)8 Asian 8 Mexican Crisis6 Peso Crisis 64 42 20 0-2 -2-4 -4-6 -6 1990 1993 1996 1999 2002 2005 2008 2011 Source: Thomson Datastream
  • 8. 7. US Government Net Debt (As a % of GDP) (1940 – 2020)120 120 CE100 Forecast 10080 8060 6040 4020 20 0 0 1940 1960 1980 2000 2020 Source: Thomson Datastream
  • 9. 8. Average GDP growth (1999-2011) (%y/y)4.0 4.03.5 3.53.0 3.02.5 2.52.0 2.01.5 1.51.0 1.00.5 0.50.0 0.0 Source: Thomson Datastream
  • 10. 9. GDP growth (2011) (%y/y)4 42 20 0-2 -2-4 -4-6 -6-8 -8 Source: Thomson Datastream
  • 11. 10. GDP (Q1 2008 = 100) (Latest = Q4 2011)100 100 98 98 96 96 94 94 92 92 90 90 88 Portugal 88 86 Spain 86 Italy 84 84 Ireland 82 Greece 82 80 80 2008 2009 2010 2011 Source: Thomson Datastream
  • 12. 11. Current Account (% of GDP) (2011) 8 8 6 Surplus 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 Deficit -8 -8-10 -10-12 -12 Gre Por Spa Ita Fra EZ Bel Fin Ire Aus Ger Net Source: Thomson Datastream
  • 13. 12. The International Net asset Position of various countries (% of GDP) (2010) 60 60 40 40 net creditors 20 20 0 0 -20 -20 -40 -40 -60 net debtors -60 -80 -80-100 -100-120 -120 Por Gre Ire Sp It Fra Ger Source: Thomson Datastream
  • 14. 13. Public Sector Debt (As a % of GDP)180 (2011 Forecast) 180160 160140 140120 120100 60 % Maastricht Treaty 100 Reference Value80 8060 6040 4020 20 0 0 Fin Net Spa Aus Ger Fra Bel Por Ire Ita Gre Source: Capital Economics
  • 15. 14. Banks’ Exposures to Peripheral Economies (As a % of GDP) (Q1 2011)30 2525 2020 1515 10105 50 0 Gre Ita Aus Spa Ire Ger Net Bel Por Fra Source: BIS
  • 16. 15. UK Banks’ Exposures to Euro-zone (As a % of Tier 1 Capital) (Q3 2011)100 100 Public sector80 Banks 80 Non-bank private sector60 6040 4020 20 0 0 Greece Portugal Italy Spain Ireland GermanyFrance Sources: Thomson Datastream, Bank of England
  • 17. 16. Unit Wage Costs (1999 – 2010) (1999 = 100) (Latest = 2010)150 Greece 150 Portugal140 Ireland 140 Spain130 Italy 130 France120 Germany 120110 110100 10090 90 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: OECD
  • 18. 17. The future of the euro• Badly conceived from the start.• Requires fiscal and political union.• 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.
  • 19. 18. Contributions to Change in Real GDP (By Expenditure Component) (%, Q1 2008 – Q4 2011)4 4 UK Other G73 32 21 10 0-1 -1-2 -2-3 -3-4 -4 Hhold Govt Investment Net Trade Spending Spending Source: Thomson Datastream
  • 20. 19. UK Real Household Disposable Income & Spending (% y/y)5 54 Forecasts 43 32 21 10 0-1 Real disposable income -1-2 -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
  • 21. 20. Household Debt (As a % of Income) (1988 – 2013) (Latest = Q4 2011)180 180170 170160 160150 150140 140130 130120 120110 110 CE Forecast100 10090 9080 80 88 90 92 94 96 98 00 02 04 06 08 10 12 Sources: Thomson Datastream, Capital Economics
  • 22. 21. Level of Real Household Spending(Q4 2007 = 100) (2000 – 2016) (Latest = Q4 2011)105 Lost decade 105100 10095 9590 90 CE Forecasts85 85 2012: -1.0%80 2013: +0.5% 8075 75 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Sources: Thomson Datastream, Capital Economics
  • 23. 22. Unemployment (ILO Measure) (%) (Latest = Feburary)14 1412 12 Forecast10 108 86 64 42 20 0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Source: Thomson Datastream
  • 24. 23. UK Trade in Goods (£bn, % y/y) (Latest = February)30 3020 2010 10 0 0 1-10 Exports -10-20 Imports -20-30 -30 08 09 10 11 12 Source: Thomson Datastream
  • 25. 24. Destination of UK Goods Exports (As a % of Total) (2011) Rest of world Asia Oil exporters Euro-zoneOther OCED N. America Other Europe Source: Thomson Datastream
  • 26. 25. Sterling TWI & Sterling Export Prices(2000 – 2012) (Jan. 2007 = 100) (Latest = Mar.)130 130 Sterling export prices120 Sterling TWI 120110 110100 10090 9080 8070 70 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Thomson Datastream
  • 27. 26. UK Public Sector Borrowing As a % of GDP (Latest = 2010/11)180 180 OBR Budget 2012 Forecast Including the effect of160 the transfer of Royal 160 CE forecast Mail pension scheme140 140120 120100 10080 8060 6040 4020 20 0 0 05/06 07/08 09/10 11/12 13/14 15/16 Sources: OBR, Capital Economics
  • 28. 27. Net debt as a share of GDP (%) (2000-2017)100 100 CE 90 90 80 OBR Budget 2012 80 70 Forecast 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 00/01 03/04 06/07 09/10 12/13 15/16 Sources: OBR, Capital Economics
  • 29. 28. Commodity Prices (Jan. 2000 = 100) (Latest = 18 Apr)700 700 Energy600 600 Industrial Metals500 500 Agriculturals400 400300 300200 200100 100 0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: Thomson Datastream
  • 30. 29. International Measures of Core Inflation (%) (2004 – 2011) (Latest = March) 4 UK 4 US Euro-zone 3 3 2 2 1 1 0 0 04 05 06 07 08 09 10 11 12 Source: Thomson Datastream
  • 31. 30. UK Average Earnings (2001-2013) (% y/y) (Latest = February)7 7 Forecast6 6 Average5 54 43 32 21 10 0-1 -1-2 -2-3 -3 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Thomson Datastream
  • 32. 31. UK Consumer Price Inflation (%) (Latest = March)6 65 5 Forecasts4 43 32 2 2% target1 10 0 Headline CPI inflation-1 Core CPI inflation -1-2 -2 06 07 08 09 10 11 12 13 Sources: Thomson Datastream, Capital Economics
  • 33. 32. Capital Economics Rate Expectations (%) (2000 – 2013)7 US 7 Euro-zone UK6 Japan 65 5 Capital4 Economics 4 Forecasts3 32 21 10 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Sources: Thomson Datastream, Capital Economics
  • 34. 33. UK 20 year Gilt Yields & CPI Inflation7 CPI Inflation (% y/y) 76 20-year gilt yield (%) 65 54 43 32 21 10 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Sources: Thomson Datastream, Bloomberg, Capital Economics
  • 35. 34. Outstanding Stock of Gilts (£bn)1500 1500 Based on £500bn of QE and1250 DMO projections for gilt issuance 1250 Gilts held by the market1000 1000 Gilts held by the Bank of England750 Total gilt stock 750500 500250 250 0 0 00 02 04 06 08 10 12 Sources: Bank of England, Capital Economics
  • 36. 35. All-Property Initial Yields and 10-Year Government Bond Yields (%) (1989 – 2013) (Latest = March 2012)14 14 Forecast12 1210 108 86 64 4 Property initial yields2 2 10-year gilt yields0 0 89 91 93 95 97 99 01 03 05 07 09 11 13 Sources: IPD, Thomson Datastream, Capital Economics
  • 37. 36. US PE Ratio (Earnings 10 Year Average) (1881 – 2012) (Latest = April)50 5045 4540 Historical Arithmetic Average = 16.4 4035 3530 3025 2520 2015 1510 105 Latest = 22.2 50 01881 1901 1921 1941 1961 1981 2001 Sources: Shiller, Capital Economics
  • 38. 37. UK PE Ratio (Earnings 10 Year Average) (Datastream All Share) (1975 – 2012) (Latest = March) 30 30 Average since 1975 (14.8) 25 25 20 20 15 15 10 10 Latest = 12.6 5 5 0 0 75 78 81 84 87 90 93 96 99 02 05 08 11 Source: Thomson Datastream
  • 39. 38. Developed & Emerging Market Equity Indices (1st Jan. 2011 = 100) (Latest = 20th Apr.) 110 110 105 105 100 100 95 95 90 90 85 85 80 Developed Markets 80 75 Emerging Markets 75 70 70 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Thomson Datastream
  • 40. 39. Why rapid GDP growth doesn’t always mean stronger equity performance• Quoted companies do not reflect economy as a whole.• Lack of transparency.• Higher economic and political risks generally.
  • 41. 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.• Inflation will fall sharply.• Interest rates will remain at near-zero for years.• The euro will not survive in its present form.• More QE if the recovery falters.• Gilt yields at this level – or lower – for several years.• Outside the US, equities fair value.
  • 42. The Economic and Financial Outlook By Roger Bootle