Webinar: Credit crunch China and forward guidance in the UK why does it matter?

Transcription

1 Webinar: Credit crunch China and forward guidance in the UK why does it matter? Simon Thompson, ICAEW Charles Davis, Cebr

2 Making sense of the economic outlook Simon Thompson, Head of Corporate Communications and Media Relations, ICAEW Charles Davis Head of Macroeconomics, Cebr

3 Objectives Update on the global economic outlook - featuring insights from ICAEW s Economic Insight research series on China, South East Asia and the Middle East. Consider why and how much we should be worrying about China s economic situation. Update on the UK economic outlook how sustainable is the uptick in economic growth and which parts of the economy are benefitting most? Assessing Mark Carney s big idea what impact has forward guidance had and how can we gauge its success?

4 Outline 1. Global economic outlook Focus: Greater China 2. The current state of the UK economy 3. UK economic forecast 4. Key policy challenges Forward Guidance Copyright ICAEW Source: ICAEW / Grant Thornton Q Business Confidence Monitor

5 Outline 1. Global economic outlook Focus: Greater China Copyright ICAEW Source: ICAEW / Grant Thornton Q Business Confidence Monitor

6 The rise of the Chinese economy has been incredible over the last 30 years China share of global economy , % of global GDP 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: IMF, Cebr

7 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 Percentage points But Chinese growth has become heavily dependent on investment Relative contributions of sectors to China s GDP growth rate net exports consumption investment Source: National Bureau of Statistics of China, Cebr analysis

8 Fuelled by a rapid expansion in credit creating a considerable shadow banking sector Bank loans and total social financing, four quarter moving average, renminbi billion bank loans, four quarter moving average social financing, four quarter moving average Source: Chinese National Bureau of Statistics, Cebr analysis. Total social financing includes bank loans (both renminbi and foreign currency), trust and entrust loans, bank acceptance bills, corporate bond financing, and other funding sources such as insurance, micro lending and industry funds.

9 Net domestic credit as a percentage of GDP, 2012 China has an extraordinarily high level of credit for its level of development Net domestic credit as a percentage of GDP and GDP per capita 300% 250% Japan 200% Spain UK Hong Kong 150% 100% 50% China Thailand Brazil India South Africa Chile Egypt Turkey Kenya Poland Indonesia Russia Mexico Italy France Germany US 0% 0 10,000 20,000 30,000 40,000 50,000 60,000 GDP per capita, 2012, US$ Source: IMF, World Bank, Cebr

10 Aug-2010 Feb-2011 Aug-2011 Feb-2012 Aug-2012 Feb-2013 Aug-2013 The summer spike in Chinese interbank lending rates was a déjà vu five years after Lehman Bank loans and total social financing, four quarter moving average, renminbi billion 16% 14% 12% 10% 8% 6% 4% 2% 0% 1 Week overnight Source: Macrobond

11 Our best guess is that growth will continue to slow but there are clearly risks around this central forecast China real annual economic growth 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% Forecast Source: IMF, Cebr

12 2007 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 Eurozone emerges from recession but considerable risks and high unemployment in periphery persists Eurozone quarterly real GDP level, trillion euros Source Eurostat

13 Global growth swings towards advanced economies as emerging markets hesitate Share of global GDP growth Source IMF, Cebr analysis. Advanced economies defined as US, Eurozone, UK, Australia, Canada and Japan. Emerging markets defined as Brazil, China, India, Mexico, Russia, Turkey and South Africa.

14 Global growth slowing but expected to pick up slightly in 2014 World real annual economic growth 5% 4% 3% 2% 1% 0% -1% -2% -3% Source Cebr Global Prospects August 2013

15 Outline 2. The current state of the UK economy The current state of the UK economy Copyright ICAEW Source: ICAEW / Grant Thornton Q Business Confidence Monitor

16 Business confidence continues to climb as UK economic recovery gathers momentum ICAEW/Grant Thornton Business Confidence Index

17 Economy expected to grow by 1.0% in Q3 which would be the fastest growth since Q Quarter on quarter real GDP growth, %

18 Turnover growth expectations are up on the same quarter a year ago Turnover, annual percentage change

19 Despite challenging global economic backdrop, businesses believe export growth will pick up Exports, annual percentage change

20 Pick up in confidence is broad-based ICAEW/Grant Thornton Business Confidence Index by sector

21 BUT no sign of an investment-led recovery as capital investment growth still expected to cool over next year Capital investment, annual percentage change

22 Outline 3. UK economic forecast Copyright ICAEW Source: ICAEW / Grant Thornton Q Business Confidence Monitor

23 UK forecast revised up again as economy looks set to achieve fastest growth since 2010 Real GDP annual growth Source : ICAEW Q Economic Forecast

24 Improved outlook means pre-recession peak in economic activity likely to be surpassed in 2014 Real GDP index (2007 = 100) Source : ICAEW Q Economic Forecast

25 But productivity remains way down on pre-crisis peak & some 15% lower than if trend growth in capacity had continued Real GDP per person employed, GBP Source : Cebr

26 BCM showed decline in spare capacity in Q3: implying growth came from higher productivity Share of businesses operating at or below capacity, percentage

27 Hence employment growth is slowing and expected to be constrained by productivity gains & public sector cuts UK employment annual growth Source : ICAEW Q Economic Forecast

28 Implying that unemployment rate will remain elevated and notably above Governor Mark Carney s 7% waypoint UK unemployment rate, annual percentage of economically active population Source : ICAEW Q Economic Forecast

29 Outline 4. Key policy challenges Forward Guidance Copyright ICAEW Source: ICAEW / Grant Thornton Q Business Confidence Monitor

30 The Bank of England s forward guidance policy The Bank of England Monetary Policy Committee intends not to raise Bank Rate from 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, subject to the conditions the following three knockouts not being breached: 1. In the MPC s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target; 2. Medium-term inflation expectations no longer remain sufficiently well anchored; 3. The Financial Policy Committee (FPC) judges that the monetary policy stance poses a significant threat to financial stability that cannot be contained by the substantial range of mitigating policy actions available to the FPC, the Financial Conduct Authority and the Prudential Regulation Authority in a way consistent with their objectives.

31 Has it worked? Some doubts long bond yields have risen notably UK, Government Benchmarks, 10 Year, Yield %

32 Yields at shorter maturities have also picked up but Carney tells us markets are wrong to price in a rate rise sooner

33 While inflation will likely fall back over next year we expect global inflationary pressures to persist Headline UK inflation rate; annual percentage change on the consumer price index

34 And could the Bank seek to cool the simmering housing market recovery? although this is London-led

35 Conclusions Global economy stalling in 2013 with China slowdown a major factor and risk. Big question over the coming months is when and how much monetary policy will be tightened in the US. Our expectation is for a slight pick-up in global growth next year led by advanced economies as the eurozone emerges from recession. In the UK, the picture looks much brighter with a widespread improvement in short-term indicators. On the downside, real incomes are still being squeezed and we haven t yet seen a pick-up in business investment. But it looks like growth will accelerate in 2014 the question is how the economy copes with a) substantial fiscal tightening post-election and b) the potential tightening of monetary policy. Hence, still medium-term caution and risk of a mini-cycle developing.

36 Q & A Session Copyright ICAEW 2013.

37 Latest ICAEW Insight UK ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) /bcm UK Economic Forecast /economicforecast Copyright ICAEW 2013.

38 ICAEW Insight: International Economic Insight: South East Asia Economic Insight: Greater China Economic Insight: Middle East Copyright ICAEW 2013.

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