CIM Summer Marketing Conference
UK economic trends and prospects
Andrew Johnson – Senior Economist
OVERVIEW
• Recent UK economic history
• Fiscal challenge
• Growth challenge
• Prospects for 2011• Prospects for 2011
• Looking ahead to 2012
• Key risks
Recent economic historyIn 2008/09 the UK suffered its worst recession in 80 years
• Output declined by 6% (2009q3)
• Between 2008 and 2009 exports declined by 8.6% and imports by 9.1%
• Unemployment increased by 2.8pp to 7.9%
Sources: ONS, OECD
• Unemployment increased by 2.8pp to 7.9% (2010q1)
• The financial system was brought to the brink of collapse
Recent economic historyDecline in context
0%
2%
4%
6%
8%
Source: ONS
-6%
-4%
-2%
1956
Q1
1960
Q1
1965
Q1
1970
Q1
1975
Q1
1980
Q1
1985
Q1
1990
Q1
1995
Q1
2000
Q1
2005
Q1
2010
Q1
1q 4q
Recent economic historyLatest release in GDP growth, % change in output
Source: ONS
Recent economic historyLatest BoE Inflation Report (May), CPI fan chart
Source: Bank of England
Recent economic historyManufacturing, % change in output
-6%-4%-2%0%2%4%6%
Source: ONS
-14%-12%-10%
-8%-6%
2008
q220
08q3
2008
q420
09q1
2009
q220
09q3
2009
q420
10q1
2010
q220
10q3
2010
q420
11q1
1q 4q
Fiscal ChallengeBudget 2010, UK structural deficit 2010 c.f. OECD
Fiscal ChallengeBudget 2011, Receipts and expenditure as a % of GDP
Fiscal ChallengeFiscal Mandate
• Achieve cyclically-adjusted (structural) balance by the end of the forecast period (2015/16)
• Public Sector Net Debt (PSND) falling by 2015/162015/16
• OBR to independently judge whether each budget means >50% chance of meeting targets
Growth ChallengeRebalancing the economy, contributions to growth annual % change
0
2
4
6
-8
-6
-4
-2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Households Government Investment Inventories Net Trade GDP
Source: ONS
Growth ChallengeManufacturers’ concerns with business environment
Growth ChallengeAccumulation of barriers to growth
• Level and complexity of tax system
• Stock and flow of regulations
• Atrophy and distortion of financial sector outside of
banksbanks
• Poor supply and reliability of skills
• Uncertainty on climate and energy policy
Growth ChallengeWhat has the government done?
• Bringing down corp tax, canceled Labour’s NI
rise, introduced Office of Tax Simplification
• Red tape challenge
• Business Growth Fund, Project Merlin• Business Growth Fund, Project Merlin
• Demand-led skills system
• Climate change and electricity market reforms
Growth ChallengePlan B?
• Shaky growth is leading to
calls, from some, to move to a
‘Plan B’
• Others endorse govt’s fiscal • Others endorse govt’s fiscal
plans (IMF)
• Even if fiscal plans
unchanged, plenty of room for
action
Prospects for 2011Domestic side of the economy weak, components of GDP q/q % chg
0.5
1.0
1.5
2.0
2.5
Households Government Inventories
Investment Trade GDP
-2.0
-1.5
-1.0
-0.5
0.0
0.5
2010q2 2010q3 2010q4 2011q1
Source: ONS
Prospects for 2011Consumption and investment, forecast % chg q/q
1.5
2
2.5
3
Source: Oxford Economics
0
0.5
1
2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4
Consumption Investment
Prospects for 2011Exports growth has been strong
-10
0
10
20
30
40Domestic Export%
-60
-50
-40
-30
-20
-10
2004
q220
04q4
2005
q220
05q4
2006
q220
06q4
2007
q220
07q4
2008
q220
08q4
2009
q220
09q4
2010
q220
10q4
2011
q2
Source: EEF Business Trends Survey
Prospects for 2011% change in annual output
2.0
2.5
3.0
3.5
4.0
0.0
0.5
1.0
1.5
2.0
2010 2011 2012
Manufacturing Rest of economy GDP
Source: ONS
Looking ahead to 2012Economy still expected to recover
1
1.5
2
2.5
Source: HM Treasury survey of independent forecasters
0
0.5
1
2011 2012
March April May
Looking ahead to 2012Interest rates start to rise, Bank rate, %
1.5
2
2.5
0
0.5
1
2011
q1
2011
q2
2011
q3
2011
q4
2012
q1
2012
q2
2012
q3
2012
q4
Source: Oxford Economics
Key risksCommodity prices
Key risksExport markets
10%
15%
20%
70000
72000
74000
EU (%chg, lhs) Rest of World (%chg, lhs) Total exports (£m, rhs)
-10%
-5%
0%
5%
2010 Q2 2010 Q3 2010 Q4 2011 Q1
60000
62000
64000
66000
68000
Source: ONS, HMRC
Key risksAccess to finance, balance of companies reporting increase
(decrease) in availability of credit
-5
0
5%
-20
-15
-10
2010q1 2010q2 2010q3 2010q4 2011q1 2011q2
%
All companies Small companies only
Source: EEF
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