The document discusses the economic outlook and challenges for businesses, highlighting a divergent and uncertain global recovery influenced by various factors including commodity prices, supply chain disruptions, and the eurozone crisis. It indicates that while advanced economies are experiencing modest recovery, emerging market economies are expected to underpin global growth, although risks remain from oil prices and political tensions. The UK faces significant challenges with austerity measures impacting growth and increasing unemployment, requiring a shift towards a new growth model.

1. Economic Outlook
Challenges 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 shifts
Elections and other political
tensions could easily lead to
policy 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 -0.2
pp Contributions to world GDP growth UK 0.7 0.6 2.0
6.0
Advanced economies Emerging economies
5.0
Emerging
4.0 6.4 5.6 6.4
economies:
3.0 China 9.2 8.6 8.8
2.0 India 7.1 6.1 7.1
1.0
Brazil 2.7 3.2 5.0
0.0
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 2012-13
2012 set to be another difficult year; some
momentum 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 & inflation
End 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
14
2020 £6tr
13
12
Compound annual
11
growth: 13% Number of people
2008 £1.4tr 10 aged 65+
9
8
0 2 4 6 8

12. Economic Outlook
Challenges for business