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Presentation given by the CBI’s chief economic adviser, Ian McCafferty to more than 160 guests at a CBI lunch sponsored by the Bank of Ireland

Presentation given by the CBI’s chief economic adviser, Ian McCafferty to more than 160 guests at a CBI lunch sponsored by the Bank of Ireland

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  • End of “Nice decade”Mid 1990s to mid 2000s extraordinarily benign conditions esp lack of volatilityCauses of stability specific to decade – will not be repeatedMore volatile macro background – currency and fin markets, commodity pricesFinancial recessions are differentIMF studies: Duration x2 (7q v 3-4q); Output loss x2½ (5-6% v 2%)Recovery slower Legacy issues from crisis will constrain growth for some timeBanking risk aversion & recapitalisation Consumer deleveraging Fiscal austerity2% not 3% economy for some years (MK seven lean after seven fat)Need to get used to “new normal”
  • UK must resurrect investment and net trade as twin engines of growthOn a per-capita basis, neither made a contribution to UK GDP growth from 1997 – 2009This will have to change as government and household spending power will continue to be constrained for some time…against backdrop of global changeEmerging market growth – in terms of GDP; household incomes; number of high net worth individuals; proportion of world internet usersRapid digitalisation – more than one mobile phone subscription per person by 2020 (currently 75%); host of new digital servicesShifting demographics – ageing UK population; rapidly urbanising global populationGrowing resource constraints – UK becoming net importer of energy; but opportunities afforded by global awareness of climate changeThese trends are changing current markets and creating new onesStructural changes like the ageing of the UK population will re-shape consumption patterns in the UK – an opportunity for businesses to invest in new products and servicesRapid income growth in emerging markets like China will induce a shift to stronger demand for services like healthcare and education – an opportunity for UK services exports

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  • 1. Economic OutlookChallenges for business Ian McCafferty Chief Economic Adviser CBI
  • 2. A divergent and uncertain global recovery World Trade Volume• 2011 Growth pause % 3m/3m Growth (lhs) Level (rhs) 2000=100 • Commodity prices, supply chain 6% 180 disruptions, China slowdown 170 1% 160• The outlook for 2012-13 -4% 150 • 1-2-6 world 140 • Critically dependent on avoiding big risks -9% 130 -14% 120 2008 2009 2010 2011 Advanced economy growth rates HWWI Commodity Price Indices ($) % yr/yr All Commodities Excl. Energy% q/q (real) US Eurozone Japan 2.0 80% 1.5 60% 1.0 0.5 40% 0.0 20%-0.5-1.0 0%-1.5 -20%-2.0 Q1-10 Q2 Q3 Q4 Q1-11 Q2 Q3 Q4 Q1-12 Q1 2012 outturn data only available for the US
  • 3. Risks: oil and commodity prices $ per barrel Oil prices 130 125● Pressure on oil prices: supply concerns arising 120 from political instability in MENA, embargo on 115 110 Iran, disruptions in South Sudan; risk premium 105 around $20pb 100 95● Market fundamentals tight: some scope for 90 85 Saudi supply replacement 80● Medium-term trend in prices is firm: strong EME demand, alongside constrained supply 2007=100 Non-oil commodity prices● Record sterling and euro prices: close to 250 Food Metals Non-food argiculturals historical tipping point for economic activity? 200 150 100 50 0 2 2 2 2 2 2
  • 4. Risks: How will the Euro crisis play out? Periphery Maturing Debt• The ECB has bought time €bn 60 Greece Portugal Ireland Spain Italy • ECB LTRO: “lender of last Source: Goldman Sachs 50 resort”, reduced some market risks 40• But governments must deliver a 30 systemic solution to the 20 underlying causes of the crisis 10 • New & rigorous fiscal architecture 0 • Bank recapitalisation Jan Feb Mar Apr May • Joint debt responsibility EBA: Aggregate Capital Shortfalls Greece* • Supply side reform Spain • Competitiveness imbalances Italy Germany • Short to medium-term growth France package Portugal Belgium• 2012 a testing time Austria Cyprus • Sovereign debt rollovers; bank Slovakia refinancing Netherla… • Difficult political climate 0 5 10 15 20 25 30 Source: European Banking Authority * Greek recap needs based on EU/IMF requirements that exceed EBA standards €bn
  • 5. Risks: policy error/political shiftsElections and other politicaltensions could easily lead topolicy error• French elections (May)• US elections (November)• UK coalition tensions (growing)• Middle East (volatile)• Rogue states (unpredictable)
  • 6. Global outlook 2012-13 2012-2013: Global growth prospects looking up – but dependent on Eurozone World GDP Growth outcomes 2011 2012 2013 World 3.8 3.3 4.1• Modest recovery in advanced economies: Advanced 1.6 1.4 2.3 • US and Japan are sustaining momentum economies: USA 1.7 2.4 2.7 • Euro area will be weak – prone to strong Euro Area 1.5 -0.4 0.9 downside risks Japan -0.7 1.8 2.5• EMEs will underpin global growth Germany 3.1 0.6 1.7• Outlook vulnerable to elevated oil prices and France 1.7 0.1 1.2 developments in the Euro area. Italy 0.5 -1.6 -0.1 Spain 0.7 -0.9 -0.2pp Contributions to world GDP growth UK 0.7 0.6 2.06.0 Advanced economies Emerging economies5.0 Emerging4.0 6.4 5.6 6.4 economies:3.0 China 9.2 8.6 8.82.0 India 7.1 6.1 7.11.0 Brazil 2.7 3.2 5.00.0 Russia 4.3 4.3 4.2-1.0 Africa 3.5 3.2 4.5-2.0-3.0 2007 2008 2009 2010 2011 2012 2013
  • 7. Eurozone overview 2012-13 2012-2013: Core and periphery diverging Latest Euro area growth forecasts• Modest “recession” underway, but sluggish growth 2011 2012 2013 should resume if the crisis remains contained Euro area 1.5 -0.4 0.9 • Germany to lead the recovery, helped by Germany 3.1 0.6 1.7 relatively robust domestic demand • France, Scandinavia and Austria to regain France 1.7 0.1 1.2 momentum from H2 2012; deeper downturn Italy 0.5 -1.6 -0.1 in Netherlands Spain 0.7 -0.9 -0.2 • Austerity tightening in Italy and Spain, Greece -6.9 -6.7 -1.8 worsening the growth outlook; Greece and Portugal in deep recessions Eurozone Purchasing Managers Indices• Headline inflation is falling as energy prices 50.0 = No Change Overall Services Output Manufacturing 60 decline – ECB so far cautious about cutting interest rates 55• Unemployment set to rise throughout 2012 and 50 into 2013 – despite a continuing fall in Germany 45• Impact from disorderly resolution to the euro crisis 40 would be huge 35 30 2008 2009 2010 2011
  • 8. UK overview 2012-132012 set to be another difficult year; somemomentum building up through 2013 Latest UK Forecast• H1 2012 “bumping along the bottom”; momentum 2011 2012 2013 (outturn) picking up in H2. Pace of recovery into 2013 GDP 0.7 0.6 2.0 crucially dependent on corporate confidence Household Consumption -1.2 0.2 1.6• Fiscal headwinds/sluggish consumers will constrain domestic demand; some recovery in Manufacturing output 2.0 -0.9 1.8 exports; corporate investment? Consumer Prices 4.5 3.0 2.2• Inflation falling but sticky; unemployment will Unemployment (%) 8.1 8.6 8.8 continue to rise CBI GDP forecast £bn, 2008 ILO unemployment% q/q prices Millions 1.5 370 Growth (lhs) Level (rhs) 3.0 CBI forecast 1.0 365 0.5 2.6 360 0.0 2.2-0.5 355-1.0 1.8 350-1.5 1.4 345-2.0 1.0 2… 2… 2… 2… 2… 2… 2… 2… 2… 2…-2.5 340 2008 2009 2010 2011 2012 2013
  • 9. UK: fiscal and monetary policy % GDP Public sector net borrowing• Austerity package under pressure 12.0 Structural Cyclical • Deficit elimination two years later 10.0 • Debt peaks at 78% 8.0 6.0• Impact on economy 4.0 • Annual drag on GDP of ~0.5% points 2.0 • Credibility premium delivers looser 0.0 monetary policy• Monetary policy to remain accommodative • Low rates into 2013 Growth in planned public spending Real % rise • More QE? 7 Chart excludes the impact of the 6 transfer of Royal Mail pension fund assets in 2012/13• Fiscal policy: sticking to Plan A 5 4 • 2012 Budget 3 • Need for Growth Agenda 2 1 0 -1 -2 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
  • 10. UK: a constrained economy The ‘nice’ decade: world GDP growth & inflationEnd of the “Nice Decade” % yoy 6.0 3.0• Legacy impacts from the financial 5.0 2.5 crisis 4.0 2.0 • Bank recapitalisation 3.0 1.5 • Consumer deleveraging • Fiscal austerity 2.0 1.0 1.0 0.5• Growth constrained for some time 0.0 0.0 1995 1997 1999 2001 2003 2005 2007 Shocks and Recessions Big 5 financial crises Financial crises External demand shock Oil shocks Monetary policy tightens Output loss % from peak Duration (quarters) Fiscal policy contraction 0 1 2 3 4 5 6 7 8 Source: IMF
  • 11. UK: rebalancing in a changing world• UK must shift to a different model of growth Rebalancing GDP growth 3.0% • Investment and net trade Growth 2.3% p.a. 2.5% • Broader sectoral contributions Growth 2.1% p.a. • Financed by savings not debt 2.0% 0.4% C 1.7% 1.5% C 0.9%• Against backdrop of global change I 1.0% • Emerging market growth 0.4% • Rapid digitalisation 0.5% I 1.0% X-M 0.5% • Shifting demographics 0.0% G -0.2% • Growing resource constraints -0.3% X-M G -0.5% 1997 - 2009 2011 - 2015 Disposable income in China rising 15 Ageing of UK population 142020 £6tr 13 12 Compound annual 11 growth: 13% Number of people2008 £1.4tr 10 aged 65+ 9 8 0 2 4 6 8
  • 12. Economic OutlookChallenges for business