Ian McCafferty, chief economic adviser, CBI

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Presentation made by Ian McCafferty, CBI chief economic adviser at CBI Northern Ireland's May 2009 economic lunch

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Ian McCafferty, chief economic adviser, CBI

  1. 1. Economic Challenges for Business May 2009 Ian McCafferty Chief Economic Adviser CBI
  2. 2. Global recession Early 2009: falling off a cliff World Trade % y/y • Collapse on world trade; major destocking 30 20 • First synchronised downturn for 30 years 10 0 • OECD-led, but EMEs not exempt -10 Value • 2009:slowest global growth since early -20 Volume -30 1980s 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source : IMF % y/y Industrial Production 20 World GDP growth – by major region 15 10 2008 2009 5 World 3.3 -1.4 0 Advanced economies 0.7 -4.2 -5 Developing economies: -10 Advanced economies Africa 5.8 2.9 -15 World Latin America 5.0 -0.6 Emerging markets -20 China 8.9 5.7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 India 7.4 3.2 Source : IMF
  3. 3. Credit crunch: market conditions • Lehman collapse: a seminal shock % Market interest rates: UK • Interbank lending rates easing a little, but 7.00 6.00 still elevated. Wholesale markets starting 3m LIBOR rate 5.00 to re-open 4.00 • Impact of credit support packages? 3.00 3m LIBOR spread over 3m gilt repos 2.00 • Banks: capital adequacy, leverage & 1.00 capacity 0.00 01-2008 02-2008 03-2008 04-2008 05-2008 06-2008 07-2008 08-2008 09-2008 10-2008 11-2008 12-2008 01-2009 02-2009 03-2009 04-2009 05-2009 Availability of new credit: past 3 months % balance 20 January February March Market interest rates: USA 0 % 6.00 -20 5.00 4.00 US 3m LIBOR rate -40 US 3m LIBOR 3.00 spread over T Bill -60 2.00 1.00 -80 0.00 01/2008 02/2008 03/2008 04/2008 05/2008 06/2008 07/2008 08/2008 09/2008 10/2008 11/2008 12/2008 01/2009 02/2009 03/2009 04/2009 05/2009 -100 SMEs Large Very Large Overall
  4. 4. Significant policy response Interest rates • Immense policy response % 6 UK • Liquidity and credit support 5 • Bank bailouts 4 3 • Interest rate reductions 2 Eurozone • Move to quantitative easing 1 US • Fiscal stimulus 0 2004 2005 2006 2007 2008 Total fiscal packages 2008-2010 % of 2008 GDP 6 $ Billion Federal Reserve Monetary Base 5 2000 4 1500 3 1000 2 500 1 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2006 2008 0 UK USA Japan Germany Canada Korea Source: St Louis Federal Reserve Bank Source: OECD
  5. 5. Global outlook World GDP growth 2010: modest recovery % yoy 6 • Less synchronised recovery 5 Forecasts 4 • US: early signs of recovery to come 3 2 • EU12: sharp recession through 2009 1 0 • China and India more resilient than -1 -2 other emerging economies – less 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 dependence on trade World GDP growth – by major region • Inflation declining 2008 2009 2010 • Fiscal pressures World 3.3 -1.4 2.1 Advanced economies 0.7 -4.2 0.2 • Drag from financial conditions? Developing economies: Africa 5.8 2.9 3.7 • Elevated degree of uncertainty Latin America 5.0 -0.6 3.0 China 8.9 5.7 9.1 India 7.4 3.2 6.5
  6. 6. UK: GDP growth %q/q GDP • Sharp falls in Q408 and H109 1.5 1 • Rolling pattern of demand through 0.5 2009 0 • Inventory reductions -0.5 • Investment cutbacks -1 -1.5 • Consumption squeeze -2 CBI forecast • No growth for 8 quarters (6 negative -2.5 2005 2006 2007 2008 2009 2010 quarters) • Depth of recession: comparisons with 1980s
  7. 7. UK: inventory adjustment % balance +15 Volume of stocks +10 +5 • Sharp loss of confidence: 0 -5 uncertainty and credit constraints -10 • Production cutbacks leading to -15 -20 sharp change in inventory behaviour -25 CBI Industrial Trends Survey • Interconnectedness of production chains and “just in time” magnify the Raw materials Work in progress Finished goods impact % contribution to 1 GDP Inventories 0.5 0 -0.5 -1 -1.5 2005 2006 2007 2008
  8. 8. UK Investment: falling sharply % q/q oya Business Investment q/q ova Residential Investment 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 % balance % Industrial Trends Survey Internal finance External finance Cost of finance Buildings Plant and machinery
  9. 9. UK: Consumer squeeze Real disposable income % Unemployment rate %q/q oya 10.0 5 CBI forecast 4 9.0 3 8.0 2 1 7.0 0 6.0 -1 -2 5.0 -3 CBI forecast 2005 2006 2007 2008 2009 2010 4.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GfK Consumer confidence Average earnings % balance % 3m/3m oya 25 Household financial situation – next year 5.0 15 Inc. bonuses 5 4.0 -5 3.0 Exc. bonuses -15 -25 Headline index 2.0 -35 General economic -45 situation - next year 1.0 -55 2004 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008
  10. 10. UK: Inflation % m/m oya Consumer prices Producer prices % m/m oya % m/m oya 5 CPI 4 12 Output 40 3 10 prices 2 (lhs) 30 8 1 6 20 0 4 -1 2 10 -2 RPI Input -3 0 prices 0 -4 -2 (rhs) -5 -4 -10 2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 Jan 2007=100 Commodity prices Average earnings % 3m/3m oya 250 Oil 5.0 4.5 Inc. bonuses 200 Metals (CRB 4.0 150 index) 3.5 3.0 100 2.5 Exc. bonuses Food 2.0 50 1.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 1.0 2004 2005 2006 2007 2008 2009
  11. 11. UK: Public spending trends & pressures Public sector borrowing % of GDP CBI forecast 14 • Dramatic deterioration in fiscal position 12 10 • Further fiscal stimulus? 8 6 • Risk to sterling? 4 2 0 -2 -4 Real % rise Growth in planned public spending Spending by department / type % rise pa next two years money terms Past 4.3% real pa Now & future real 1.9% pa
  12. 12. UK overview %y/y GDP 5 2008 2009 2010 4 GDP 0.7 -3.9 0.1 3 2 Household Consumption 1.4 -3.4 -0.4 1 0 Manufacturing output -2.6 -12.0 0.5 -1 -2 Consumer Prices 3.6 1.6 1.6 -3 -4 Unemployment (%) 5.8 8.5 10.2 -5 forecasts 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2009: recession %y/y • Sharp decline through winter, but worst now past CBI forecasts: GDP components 6 • Credit constraint still a major issue 4 • Confidence fragile 2 0 • Business investment very weak -2 • Shift in consumer behaviour? -4 2008 2009 2010 • Sterling weakness will help -6 -8 • Fiscal sustainability? -10 Consumption Gov. spending Investment
  13. 13. Global risks and uncertainties • Financial markets: are we past the worst? • Equity markets upbeat • Disorderly exchange rates • Expansion of public debt and sovereign default risk • How quickly will credit flows recover? • Impact on corporate sector • Political and policy instability • New US Administration • Developing world economic troubles – political/social unrest? • Impact on supply chains/resource security? • Globalisation/ protectionism
  14. 14. Inflation or deflation? % CPI Inflation 5 4 2010: low inflation to persist 3 2 • Underlying conditions deflationary UK 1 USA • Spare capacity 0 EUROZONE • Significant policy stimulus -1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 • Exit strategies? Jan 2003=100 Commodity prices 500 • Central Bank independence? 450 • Energy and commodity prices? 400 350 Metals (CRB Index) 300 Oil (Brent Crude) Food (Economist index) 250 200 150 100 50 2003 2004 2005 2006 2007 2008
  15. 15. Economic Challenges for Business
  16. 16. USA overview US Economic Forecasts % yoy GDP 4 3 Forecasts 2008 2009 2010 2 GDP 1.1 -3.7 0.3 1 0 Household Consumption 0.2 -1.6 1.4 -1 -2 Consumer Prices 3.8 -0.5 1.8 -3 Unemployment (%) 5.8 9.2 10.1 -4 -5 Current Account ($ bn) -652 -435 -540 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 % 2009: early signs of recovery to come 4.50 10 year bond yield 4.00 • Destocking ending % 3.50 Fed funds 7 3.00 • Housing market slowly unwinding 2.50 rate 6 2.00 • Consumer confidence picking up 5 4 • New unemployment claims peaking 3 But... 2 • Pace of recovery? 1 0 • Long term cost of fiscal & monetary bail-out? 2001 2002 2003 2004 2005 2006 2007 2008
  17. 17. Eurozone overview Eurozone Economic Forecasts % yoy GDP 4 2008 2009 2010 3 2 GDP 0.7 -3.7 -0.1 1 Forecasts 0 Household Consumption 0.5 -2.0 -0.1 -1 Consumer Prices 3.3 0.8 1.0 -2 -3 Unemployment (%) 7.5 9.4 10.5 -4 -5 Current Account (€ bn) -63.2 -50.4 -30.5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2009: sharp recession • Abrupt decline through winter % yoy GDP growth forecasts for key countries 4.0 • Destocking 2008 2009 2010 2.0 • Dramatic drop in business investment • Euro strength hurting exports 0.0 • ECB less reactive than Fed and BoE -2.0 • Worst hit: Germany, Ireland, Italy -4.0 -6.0 Germany France Italy Spain Netherlands
  18. 18. Emerging economies overview GDP forecasts for key developing economies Contributions to world real GDP growth % 2007 2008 2009 2010 35 2008 30 China 9.0 6.5 7.5 25 India 7.3 4.5 5.6 20 Russia 5.6 -6.0 0.5 15 10 Brazil 5.1 -1.3 2.2 5 Source: IMF 0 -5 China India Russia Brazil USA Japan 2009/10: sharp downturn, growth rebalancing • EMEs hit by decline in global industrial activity, collapse in world trade, falls in primary product prices, and in some cases deteriorating financial conditions • China and India less affected than other Asian economies, emerging Europe and Latin America – trade is a smaller share of their economies • Rebalancing towards domestic demand underway – surplus economies able to provide serious policy stimulus

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