ECONOMIC UPDATE. UK focus - a year of slower growth?

Transcription

1 ECONOMIC UPDATE UK focus - a year of slower growth? Professor Trevor Williams, University of Derby & Chair of the IEA s Shadow Monetary Policy Committee (SMPC) MAY 2016

2 UK RECOVERY STEADY THOUGH NOT SPECTACULAR PRE-CRISIS TREND IN GROWTH 2

3 UK OUTPERFORMS MANY OF ITS PEERS QUARTER ON QUARTER YEAR ON YEAR 3

4 ONLY BETTERED BY US AND MATCHED BY GERMANY 4

5 SERVICES DRIVE RECOVERY 5

6 AND HAS DONE FOR SOME TIME 6

7 ACCOUNTING FOR ALL OF THE GROWTH IN Q4 7

8 Manufacturing Source: Office for National Statistics MANUFACTURING BACK IN RECESSION IN Q1 Figure 1: Seasonally adjusted production and manufacturing, December 2013 to March 2016, UK Source: Primarily Monthly Business Survey (Production and Services) - Office for National Statistics 8

9 LEVEL OF OUTPUT IS NO HIGHER THAN IN 1997 Figure 2: Index of production and sub-components, Quarter 1 (Jan to Mar) 1997 to Quarter 1 (Jan to Mar) 2016, UK Source: Primarily Monthly Business Survey (Production and Services) - Office for National Statistics Notes: 9

10 NO SURPRISE NET TRADE IS A DRAG OF GROWTH 5 4 % GDP 3 2 Current account deficit (4 qtr avg) Trade deficit (4 qtr avg)

11 ESPECIALLY AS WORLD TRADE GROWTH IS SO WEAK World Trade, %Ch y/y 25% 20% 15% 10% 5% 0% % -10% -15% -20% -25% 11

12 STERLING S SLIDE MAY EASE PRESSURE ON EXPORTERS & BOOST INFLATION GBPUSD GBPEUR (RHS) Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Source: Bloomberg 12

13 HOUSEHOLD SPENDING DRIVES UK GDP GROWTH Net trade and Capital spending dragged on growth in Q4 13

14 HOUSEHOLDS ARE NOW NET BORROWERS 14

15 NO CREDIT CRISIS AS YET UK Net household lending % year Mortgage lending Consumer credit Total household lending Source : Oxford Economics/Haver Analytics 15

16 TOTAL DEBT IS STUBBORNLY HIGH & A RISK TO RECOVERY? 120 Debt outstanding, % of gdp, sa Nonfinancial Corporations 600 Total domestic Debt Outstanding Households Financial Corporations debt UK: General Government debt Source: Office for National Statistics/Haver Analytics While debt service/disposable income ratios are by and large still manageable due to currently low interest rates, high debt levels - especially as a share of disposable income - have made the UK more vulnerable to adverse developments, such as slow growth, rising interest rates or declining house prices - or a combination of both of these. 16

17 UNDERPINNED BY UNDERSUPPLY House price growth holding up..and so are approvals Source: Office for National Statistics/Haver Analytics While debt service/disposable income ratios are by and large still manageable due to currently low interest rates, high debt levels - especially as a share of disposable income - have made the UK more vulnerable to adverse developments, such as slow growth, rising interest rates or declining house prices - or a combination of both of these. 17

18 THE SAVING RATIO IS FALLING Saving ratio now at lowest level since 1963, when records began in this form 18

19 BUT CORPORATE BALANCE SHEET LOOKING BETTER PNFC financial balance 4QMA, % of GDP 5 32 PNFC deposits 4QMA, % of GDP Source : Haver Analytics Source : Haver Analytics 19

20 POPULATION GROWTH PULLS DOWN GDP PER HEAD SO PRODUCTIVITY MUST BE POOR 20

21 INDDED, PRODUCTIVITY IS ESPCIALLY POOR IN THE UK Labor productivity in mature countries is falling percent y/y, 5-year moving average 5 Germany Japan 4 3 United Kingdom United States Source: OECD, IIF. 21

22 FLIP SIDE IS THAT EMPLOYMENT GROWTH HIGHEST EVER 22

23 RAPID INCREASE IN THOSE IN EMPLOYMENT FROM EU 23

24 BUT PUBLIC SECTOR EMPLOYMENT IS FALLING 24

25 SERVICE (TECH) SECTOR JOBS GROWING FAST Changes in the number of jobs in the UK between December 2014 and December 2015, seasonally adjusted 25

26 PAY GROWTH SLOWING AS ECONOMY SLOWS 26

27 DESPITE LOW UNEMPLOYMENT 27

28 CONSUMER FUNDAMENTALS REMAIN STRONG Real wages, %yr Unemployment rate, % Real wages (3-mth %yr, LHS) Unemployment rate (%, RHS)

29 CONSUMER CONFIDENCE IS HOLDING UP % y/y net balance Consumption (LHS) GfK consumer confidence (RHS)

30 SO A CONTINUED CONSUMER-LED RECOVERY? 2.5 Contributions to GDP growth, %pt Household spending Government spending Investment Net exports GDP 30

31 COULD UNKNOWN UNKNOWNS DERAIL CONSUMPTION? Unexplained Consumer Confidence Sept 11 Iraq Invasion Grexit fears -15 ERM Exit Financial Crisis Dashed lines show one standard deviation 31

32 SHORT-RUN AVERAGE RELATIONSHIP SUGGESTS NOT Annual consumption growth in quarter t+1 10 R² = Confidence shock in quarter t -5 32

33 IT TAKES A LOT TO HIT CONSUMER SPENDING Household Consumption (% y/y) Average over 4Q Before Shock Average over 4Q After Shock -4-5 ERM Sep-11 Iraq Invasion Financial Crisis Grexit Fears 33

34 RISKS FROM THE REST OF THE WORLD? Probability 35% Emerging Markets: Rising contagion from China and Fed U.S.: volatility from Fed exit? 30% 25% China: Bumpy transition to consumption-led growth Financial market volatility: 20% Euro Area: Stagnation and entrenched disinflation Europe still not met its challenge of structural reform 15% Middle East / Ukraine: Crisis escalation? Source: IIF Global Economic Monitor, February

35 POLICY REACTION FUNCTION

36 FISCAL TIGHTENING TO REMAIN A KEY HEADWIND 5 % of GDP PSNB ( ) Debt interest Capital spending Other spending Receipts Welfare Public services spending PSNB ( ) Source: OBR 36

37 PUBLIC SPENDING FALLING TOWARD POST-WAR LOWS AS A SHARE OF OUTPUT % of GDP 65 Current receipts Total managed expenditure Forecast Source: OBR 37

38 MARKET EXPECTS BANK RATE TO REMAIN AT 0.5% UNTIL 2020, WITH SOME PROBABILITY (50%) OF A RATE CUT Bank Rate % History Market Expectations * Derived from money market futures prices Source: Bloomberg/LBCB 38

39 RATE EXPECTATIONS PUSHED OUT G4 rate expectations 39

40 THE NEGATIVE YIELD CLUB IS GROWING fuelling concern about deflation, central banks etc. Japan has joined the club of European countries with negative interest rates, including the Eurozone, Denmark, Sweden and Switzerland. All told, some $7 trillion in government bonds now have negative yields. Source: IIF 40

41 THE IMPACT OF NEGATIVE RATES: POSITIVE OR NEGATIVE? In principle, cutting policy rates into negative territory should boost growth and inflation. But central banks have not communicated these benefits clearly, raising the risk that negative rates do more harm than good. Although markets are rebounding, the sharp falls in equity prices and in particular bank shares since the beginning of the year have led many to claim that negative rates are damaging global economic prospects. Markets have focused on three main concerns. First, negative deposit rates impose a direct financial cost on banks, harming their profitability and thus their willingness to make new loans. These costs are largest in Switzerland, where the interest rate is most negative and applies to a large share of bank reserves. Even so, these costs do not appear to be huge. We estimate that negative policy rates in the four European economies that have applied them are costing the banking sector around 3bn a year. That is a trivial fraction of their assets and is not a gamechanger for their profitability either. Moreover, central banks can reduce the share of reserves subject to negative rates as the BoJ has promised to do in order to alleviate these concerns. Instead, we suspect the larger problem for banks is the (further) decline in long term rates, which reduces their ability to generate profits from lending. However, the key point here is that the looser monetary policy is now, the sooner the economy should return to health, allowing interest rates to rise. The second fear is that the rush to impose negative policy rates is the latest front in a futile currency war. There is some truth to this argument as a weaker exchange rate is a key channel through which negative rates can operate. But there is little evidence that the major central banks are competing to weaken their currencies, and insofar as they are, the result will be looser global monetary policy which should be positive for global growth. Indeed, negative policy rates appear to have contributed to a reduction in borrowing costs for households and firms, as shown for the euro-zone. Perhaps the biggest worry though is that cuts to policy rates have added to the sense that the world economy is slowing sharply and that policymakers are running out of options. Policy loosening has fuelled, rather than soothed, market fears. Indeed it was striking that global bank stocks sold off sharply, partly in response to the decision by Sweden (share of world GDP: 0.4%) to cut policy rates to -0.5%. Central banks themselves are partly to blame for this response because they have repeatedly claimed that policy rates could not be lowered further, only to surprise the markets by cutting rates weeks later. Nonetheless, claims that monetary policy has reached its limits are exaggerated. After all, there is still plenty of scope for further quantitative easing. Overall, we still think that negative policy rates will prove effective in helping to lift growth and inflation. That said, if the latest market turmoil leads to a sustained tightening in financial conditions, the economic consequences could easily outweigh the benefits of slightly lower policy rates. 41

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