UK Forecast in Detail 48

Transcription

1 UK in Detail FISCAL POLICY Revised estimates suggest that the government recorded a surplus of just over billion on public sector net borrowing in -, rather than a deficit of. billion as suggested at the time of the Budget in April. However, there was still a public sector net cash requirement of. billion last year, although public sector net debt fell to.% of GDP in March from.% a year earlier. With only three months data available for financial year -, it is too early to draw conclusions about the trend in public finances this year. Public sector net borrowing was. billion over April- June, up from. billion in the same period a year earlier. Public spending is not yet rising as rapidly as implied by the government s spending plans net departmental outlays in Q were % higher than a year earlier. On the revenue side, the fall in company profits over the last year is clearly hitting corporation tax, which in Q was.% lower than a year earlier. However, VAT receipts were up.% over the same period, reflecting the strength of consumer spending. Our forecast assumes that public spending will be close to the totals announced by the Chancellor in % of GDP - Gov't balance (LHS) UK: Maastricht indicators Gov't debt (RHS) % of GDP the Budget and reiterated in July s Comprehensive Spending Review, although some undershooting is likely in the short term as departments struggle to spend all of the funds allocated to them. This implies that the share of public spending in GDP will rise from about 9% in - to % by -. The main risk to these projections comes from pressure on public sector pay, with a danger that much of the extra money made available by the Chancellor will be absorbed in higher costs rather than improving public services. General Government Expenditure ( billion) / / / / / / Final Consumption Investment Transfers to persons Subsidies Debt Interest Other spending Total General Gov't Current and Capital Spending Privatisation proceeds General Government Expenditure Total Managed Expenditure UK in Detail July

2 General Government Receipts ( billion) / / / / / / Taxes on Income Taxes on Expenditure (incl. Business Rates) Community Charge Social Security Debt Interest Other Receipts General Government Receipts The slowdown in economic growth means that government revenues are likely to fall from 9½ % of GDP in - to ¾ % in this financial year. But the tax increases announced by the Chancellor in the Budget, and the forecast pick-up in growth, mean that the tax burden should rise to around % of GDP in -. As a result, we expect public sector borrowing to be about billion this financial year and billion next, close to the Treasury s Budget forecast. Longer-term, tax rises may be necessary, though, both to balance the books and ease EMU membership by offsetting some of the monetary stimulus of adopting European levels of interest rates. UK: Contribution of government consumption and investment to GDP growth % of GDP % of GDP... Average F'cast Government Borrowing ( billion) / / / / / / Current and Capital Spending Current and Capital Receipts General Government Financial Balance (Maastricht measure) Deficit (-)/Surplus(+) Public sector net borrowing* Memo: Treasury projection Public sector net cash requirement* Memo: Treasury projection -... * including windfall tax; public sector cash requirement = PSBR July 9 UK in Detail

3 MONETARY POLICY The dilemmas facing the Monetary Policy Committee have intensified further this year. On the one hand, the weakness of economic growth over the winter, the low level of inflation and the decline in equity markets suggest the need for lower interest rates. On the other hand, the booms in house prices and personal sector borrowing suggest the need for higher interest rates. The Bank of England will be acutely aware that the current situation is very reminiscent of the period after the stockmarket crash in 9. Unfortunately, as in the late 9s, fiscal policy is being loosened, rather than used to restrain demand, and the Bank has no other policy instruments besides the interest rate with which to manage the economy. We would expect concern to avoid the inflationary problems of the late-9s will eventually force interest rates higher. But the MPC will wait until equity markets have at least stabilised and the international environment appears more robust which may well not be until early next year. Another factor that could affect the timing of interest rate moves is the exchange rate. With the dollar out of favour on the foreign exchanges, sterling has been pulled down on its coattails, falling by about % against the euro since the start of April to its lowest since autumn 999. But with sterling at the same time rising about % against the dollar, the fall in the overall effective exchange rate has so far been modest (around %). By itself, such a more is not large enough to prompt the MPC to tighten monetary policy. But it certainly makes it easier for the MPC to raise interest rates without incurring the wrath of exporters. Our forecast assumes sterling falls to euro. ($.) by end- and euro. ($.) by end-, allowing the MPC room to push interest rates up gradually to.%. The recent fall in sterling against the euro has been helpful for those advocating that the UK should join EMU. However, even at., sterling is still some way above most estimates of its equilibrium rate. Our forecast continues to assume that the EMU referendum is delayed until after the next election, given the weakness of the Eurozone economy and concerns about the European Central Bank. But we assume that the UK will join EMU in, at an exchange rate of about euro.. % OEF Three-month interbank rates /Datastream UK: Interest rate expectations US$/ UK: Sterling Euro/ Financial market expect'n UK: Long-term interest rates %. % % 9 UK long-term interest rates German long-term interest rates UK in Detail July

4 PRICES AND WAGES Inflation continues to undershoot its target, with RPIX falling to just.% in June, a whisker away from the level that would require the Governor of the Bank of England to write to the Chancellor to explain why the inflation target had been missed by more than % point. Headline RPI inflation was only.% in June, while inflation on the EU s harmonised measure dropped to just.% - a third of the Eurozone average. The fall in RPIX inflation this year in part reflects lower food prices, with seasonal food prices in June over % down on a year earlier. But there has also been an intensification of price deflation for high street goods. In June, goods prices (excluding food, alcohol, tobacco and petrol) were.% lower than a year earlier. This in turn reflects the intense competition among retailers, especially in the clothing and electronic/audio sectors. In contrast, price inflation for consumer services has been stable this year at around.%. 99= 99= 9 9 UK: Import and producer input prices Import prices Core producer input prices % % Average earnings growth, headline rate UK: Wage inflation Private sector 9 9 There is little in the pipeline pointing to inflation rising above its target over the next few years: - The slowdown in growth over the winter means that there is now an output gap of spare capacity, which will tend to put downward pressure on firms profit margins. - Headline whole economy average earnings growth was.% in the three months to May. Wage inflation may rise over the next few months as the impact of the cut in bonuses over the last year Whole economy UK: Underlying inflation % year % year Services prices Goods prices UK: Pay settlements % %.. Whole economy earnings, 'headline rate' Pay settlements Apr-9 Apr-9 Apr-9 Apr-9 Apr-99 Apr- Apr- Apr- /IRS July UK in Detail

5 drops out of the annual comparison. But pay settlements in the private sector are still running at only.%, down from.% through most of, implying that wage inflation is unlikely to rise above the.% rate the Bank of England considers consistent with the inflation target. - Producer output price inflation remains around zero, while headline input prices in June were.% lower than a year earlier. - Import prices (excluding oil and erratics) in the three months to May were.% down on a year earlier. The main short-term risk to inflation comes from the exchange rate. However, while sterling has fallen against the euro, it has risen against the dollar, which will help reduce the cost of dollar-priced raw materials, such as oil. Moreover, with many foreign companies pricing to market, they may hold their sterling prices and absorb the change in the exchange rate in their profit margins. Our forecast therefore shows RPIX inflation rising only gradually, from.% in Q to.% in Q, and continuing to undershoot its.% target marginally thereafter. Headline RPI inflation is likely to rise more sharply as interest rates increase, to.% at the end of this year and a peak of.% in early. % year % year UK: Prices and earnings Consumer prices Average earnings Producer prices % change UK: Manufacturing earnings and unit labour costs Manufacturing earnings Unit labour costs % change Inflation Indicators Annual % Changes RPI Mortgage Interest Rates/Community Charge Fuel Housing Depreciation Other RPI excl. Mortgage Interest Producer Output Prices Producer Input Prices Average Earnings GDP Deflator (Factor Cost) UK in Detail July

6 ACTIVITY The UK economy virtually stalled over the winter, with GDP rising only.% in both Q and Q. In part, this reflected sharp falls in manufacturing output (down.% and.% respectively) as a result of the global downturn and the collapse in high-tech sectors, such as computers and telecoms. However, service sector output growth slowed to just.% in Q its lowest since 99 as output in the financial and business services sector was hit by the weakness of the equity markets and a slump in spending on advertising, consultancy, etc as companies sought to preserve cash in the wake of the terrorist atrocities on September. There are encouraging signs that growth picked up again in the spring. Manufacturing output rose.% in April and a further.% in May, while the CBI survey shows order books strengthening markedly in June. And the purchasing managers index shows service sector activity strengthening in April and May. However, the purchasing managers indices for both manufacturing and services fell back in June, and there is growing concern about the international economy amid turmoil in equity markets. Our forecast shows GDP growth averaging only.% this year and.% next, well below the Treasury Budget forecast (-½% in, -½% in ). Manufacturing output is forecast to fall.% this year, but rise.% next. In the longer term, we continue to assume trend GDP growth of.% pa, below the Treasury s assumption of ¾ %, reflecting a more cautious view on the scope for improvements in labour market behaviour given the already very low rate of unemployment. % year - - UK: Business confidence and GDP growth GDP growth (LHS) Business confidence (RHS) % balance % balance UK: Confidence in profitability Service sector Manufacturing sector Source: BCC % balance UK: Output % quarter % quarter Manufacturing output GDP Services output % balance % balance Balance of firms reporting order books above normal UK: CBI order books Total Export July UK in Detail

7 % balance % year - UK: CBI output expectations Manufacturing output (RHS ) Output * expectations (LHS ) - * Balance of firms expecting to raise - output over next four months % year % year UK: GDP and manufacturing output Manufacturing output GDP UK: The output gap % % ` United Kingdom Potential GDP and Its Components Average Percentage Growth Potential GDP*.. Employment at NAIRU.. Capital Stock.. Total Factor Productivity.. *ln(potential GDP)=.*ln(Employment at NAIRU) +.*ln(capital Stock)+ln(Total Factor Productivity) Contributions to GDP growth % points Domestic Demand Private Consumption Fixed Investment Gov't Consumption Stockbuilding Net Exports Exports Imports Other GDP UK in Detail July

8 CONSUMER DEMAND There are some suggestions that the UK consumer boom may have eased in the first half of. In particular, overall consumer spending rose only.% in Q, its lowest quarterly increase since 99, although it was still.% higher than a year earlier. And the CBI distributive trades survey suggests that retail sales growth slowed sharply in June. We believe, however, that these data need to be interpreted with caution. The consumer spending figures in Q were distorted by a sharp fall in spending on food. Spending in June may well have been affected by both the Queen s Golden Jubilee and the World Cup. And the CBI survey is not a particularly reliable indicator of the official retail sales figures, which in the three months to May were.9% up on the previous three months and.% up on a year earlier. Moreover, private car registrations remain strong (up 9.9% in Q on a year earlier); consumer credit borrowing in May was.% higher than a year earlier and mortgage equity withdrawal (ie mortgage borrowing for purposes other than house purchase) rose to.% of household disposable income in Q; and M (ie notes and coins in circulation) accelerated to 9.% in June from.% three months earlier. The fundamentals underpinning consumer spending generally remains strong: - While household real incomes fell.% in Q, this followed growth of.% in. - Average earnings are still rising well ahead of inflation on the tax and price index, while employment continues to rise. - Consumer confidence is strong, supported by low unemployment and interest rates. % year, mma % balance Moving averages UK: Retail sales Household goods Retail sales, total UK: Consumer confidence Consumer confidence % year, mma Source: EC / GfK - - % balance % balance % year CBI: Volumes of sales reported (LHS) - UK: CBI distributive trades survey Retail sales (RHS) % year % year - - UK: Narrow money supply M ( month annualised) M July UK in Detail

9 - While falling equity prices have reduced households net financial wealth, strong growth in house prices means that overall wealth remains high by historic standards. - Buoyant housing activity is boosting demand for white and brown goods, which people typically buy when they move home. While there may well be risks for certain groups of households most notably, those on low incomes and the younger age-groups, where debt-income ratios are particularly high and job security tends to be lowest the level of borrowing for the household sector as a whole does not appear to be out of line with international averages. Moreover, while the saving ratio is relatively low in nominal terms, at.% in Q, in inflation-adjusted terms (ie allowing for the impact of inflation on the real value of households assets), it is close to its historic average. And most of the increase in borrowing by households since 99 has been matched by an increase in the acquisition of financial assets, so that increased borrowing has not led to a deterioration in households net worth. % UK: Personal debt and saving ratio Debt-income ratio (RHS) Saving ratio (LHS) UK: Personal sector wealth-income ratio Total % 9 9 Against this background, we expect only a modest slowdown in consumer spending, from.% this year to.% in, which mainly reflects the impact of the increase in interest rates we assume over the next year (to.%) and the tax increases announced by the Chancellor for. As a result, we expect the saving ratio to remain at -%. Net financial wealth Households' Income and Expenditure (Annual percentage changes, unless otherwise specified) Wages and Salaries Personal Disposable Income Real Personal Income Total Consumer Spending o/w Non-Durables Retail Sales Car Registrations Savings Ratio (%) Financial Balance (% of income) UK in Detail July

10 THE HOUSING MARKET The housing market boom continues to gather pace. Both the Halifax and Nationwide report that house price inflation reached almost % in the year to May, with prices rising at an annualised rate of about % on the Halifax index over the last three months. Housing turnover has risen.% in the three months to May compared with the previous three months and is now at its highest since 99 (albeit still around % below its peak in 9). Net mortgage lending increased to. billion in the three months to May from. billion in the previous three months, and the number of mortgage loan applications in May was.9% higher than a year earlier, suggesting that the housing market is likely to strengthen further over the summer. There has been much speculation that a house price bubble is now underway. While there may be some truth in this (especially in some parts of the country), it is worth emphasising that most of the recent rise in house prices can be explained by its traditional drivers ie by the strength of household income growth and the low level of interest rates. Clearly, with interest rates low, housing remains very affordable: mortgage payments accounted for only % of a typical first-time buyers average income in Q. With interest rates forecast to rise only slightly, if at all, and the labour market robust, we expect house prices to continue to rise strongly through this year, increasing by % in the year to Q. But with interest rates expected to rise from late in the year, taxes increasing from spring, household income growth slowing, and households financial wealth undermined by the weakness of the stockmarket, we expect house price inflation to ease to % by end- and only % in. Low interest rates and increasing housing wealth have encouraged a surge in mortgage equity withdrawal, to. billion (.% of disposable income) in Q, according to Bank of England estimates. We expect equity withdrawal to total over billion this year, up from billion in, pushing net mortgage lending up to 9 billion from billion last year. But we expect equity withdrawal to fall as interest rates increase, reducing net mortgage lending to billion in. % year - Nominal Real UK: House prices % year % year % year 's 9 Nationwide UK: House prices DTLR HBOS UK: Housing market activity Turnover Number of applications for house purchase - 's July UK in Detail

11 Loans outstanding to the Household Sector ( billion, end year) Total Mortgage Non-Mortgage () o/w Consumer credit Debt-income ratio () Loans by credit companies and retailers plus bank non-mortgage lending. Regional House Prices (annual percentage changes) Halifax Nationwide Q Q North.9. Yorkshire & Humberside..9 East Midlands..9 East Anglia.9. South East 9.. London.. South West.. West Midlands..9 North West.. Wales.9.9 Scotland.. Source: DETR, Nationwide, Halifax 's UK: Housing starts and orders Orders obtained by contractors for new houses (RHS) Mn (99 prices) Private housing starts (LHS) = House prices/incomes UK: Housing ratios Mortgage interest payments/income 99= F'cast UK in Detail July

12 COMPANY SECTOR The downturn in economic growth, and especially in the high-tech sectors, is hitting company spending hard. Business investment fell.% in Q, its fifth consecutive quarterly fall, to a level.9% below its peak in Q. Investment by manufacturers fell.9% in Q to a level.% down on a year earlier, while investment by private sector services companies dropped % in Q to a level 9.% down on a year ago. Nevertheless, business investment remains.% of GDP (99 prices), which is well above its historic average. The risks are that business investment will continue to fall over the rest of. The net rate of return for manufacturing companies was just.% in Q, only a third of its level in 99. And the rate of return for service sector companies was.% in Q compared with.% in 99. While the private non-financial company sector ran a financial surplus of. billion in Q, this followed a deficit of billion in and companies remain under pressure to repay debt, especially in the wake of recent corporate collapses and accounting scandals. Moreover, the weakness of equity markets means that it is more difficult for firms to raise investment finance. It is not surprising therefore that both the CBI and BCC surveys show firms investment intentions remain weak. Our forecast is for business investment to fall.% in and rise only.% in. While business investment has been falling, other components of investment have risen strongly. In particular, government investment jumped 9.% in Q to a level.% higher than a year earlier. While we are sceptical that departments will be able to organise contracts etc to spend all of the extra funds made available by the Chancellor, we still expect government investment to rise by % this year and ½% in. At the same time, there are increasing signs that house building is at last responding to the strength of demand, and we expect dwellings investment to rise by.% in and.% in. Overall, investment is expected to fall by.% this year before rising.% next. After destocking of million (99 prices) in Q, inventory holding increased by over million in Q. This turnaround in stockbuilding boosted GDP growth in Q by.% points. With the CBI survey suggesting that manufacturers are broadly content with current inventory levels, we expect stockbuilding to rise slightly as output recovers, boosting GDP growth by.% points in as a whole. % balance % balance % of GDP UK: CBI investment intentions CBI: Investment in buildings CBI: Investment in plant and machinery UK: Investment - GDP ratios Business investment Manufacturing investment % of GDP F'cast UK: CBI manufacturers' stocks % balance % balance CBI stocks * balance Average *Balance of firms reporting excessive stocks July 9 UK in Detail

13 Company Finances ( billion) Gross Operating Profits Fixed Investment Financial Balance % of GDP Profit share in GDP The Company Sector and Real Expenditure (Annual percentage changes at 99 prices unless otherwise specified) Total Fixed Investment Business o/w Manufacturing Private Residential Public Stockbuilding (% of GDP) Stock-output ratio (99=) UK: Profitability % % Services Manufacturing UK: Equity prices 9= 9= FTSE All-share index UK in Detail July

14 LABOUR MARKET UK: Unemployment Change on month ('s) Change on month ('s) The labour market has remained robust despite the sharp slowdown in economic growth over the winter. Unemployment on the LFS measure rose to. million (.%) in the period March-May from. million (.9%) a year earlier. But claimant count unemployment has been stable at around.9 million (.%) since last autumn, while employment rose, (.%) between December and March according to the workforce survey, and by 9, (.%) between December-February and March-May according to the Labour Force Survey (LFS). The LFS shows employment, (.%) higher than a year ago Actual Three month moving average The combination of weak output with continued employment growth means that productivity growth has fallen sharply. Measured on a workforce basis, productivity per employee in Q was only.% higher than a year earlier compared with.% at the start of. The slump in manufacturing productivity growth has been even more severe, to -% in Q from.% a year earlier, with productivity particularly weak in the high-tech sectors where output has collapsed over the last year. Productivity performance looks no better on an output per hour worked basis either: across the whole economy, it was only.% higher in Q than a year earlier, while in manufacturing it was down.% over the same period. The recent strength of employment is one reason for thinking that the national accounts may overstate the weakness of GDP over the winter. But any revisions would not alter the general picture of productivity growth well below its historic norm. It appears that, with the labour market very tight, firms have been concerned that, if they shed experienced workers too quickly, then it may be difficult to replace them when the economy picks up again. Combined with the pressure on company finances, this suggests that the pick-up in economic growth we are forecasting over the next months is not likely to be job-rich. We expect employment to rise by only.% in and.% in, implying that productivity growth rises to over % next year. As a result, unemployment is expected to remain close to current levels at around % on the claimant count basis over the next two years. We continue to assume that the NAIRU is % on the claimant count measure of unemployment. Our forecast assumes gradual convergence on this rate in the medium term as employment growth trails growth in the population of working age. UK: Unit labour costs % year % year Whole economy Manufacturing UK: Unemployment and the NAIRU % % Unemployment The NAIRU F'cast July UK in Detail

15 TRADE AND THE BALANCE OF PAYMENTS The UK net trade position continued to deteriorate in early. Exports of goods and services fell.% in volume terms to a level.% lower than a year earlier. With imports rising.9% (albeit still.9% down on a year earlier), net trade reduced GDP growth by.% points in Q, having already reduced GDP by % over the previous six years. But after a weak Q, UK exports recovered strongly through the spring. Exports of goods excluding oil and erratics in April and May were.% higher in volume terms than their Q average, well ahead of the.% increase in imports over the same period. As a result, the visible trade deficit fell to. billion in May, the lowest monthly deficit since September 999. This pick-up in exports reflects both the recovery in global demand especially the end of the sharp destocking by companies that characterised the winter and the end of the severe slump in trade in high-tech sectors. Nevertheless, while the worst of the global downturn is over, world trade (weighted by UK markets) is still expected to rise by only.% in and the hightech sectors are likely to remain weak for the same time. Moreover, the acceleration we see in world trade growth to over % in is by no means assured given the recent turmoil in financial markets and worries about imbalances in the US. 99= 99= 9 UK: Competitiveness Relative export prices Relative unit labour costs F'cast UK: Imports and total final expenditure % year % year Non-oil imports Total final expenditure ` 9 - Our forecast shows exports rising.% in volume terms in, after a fall of.% this year. With imports expected to rise.% this year and.% next, the current account deficit is nevertheless forecast to widen to around billion (.% of GDP) in. Exports of Goods and Services (Annual percent changes at 99 prices unless otherwise specified) Fuels Other goods o/w Manufactured goods Services Total Relative Unit Labour Costs (99=) World Trade UK in Detail July

16 Imports of Goods and Services (Annual percentage changes at 99 prices unless otherwise specified) Fuels Other goods o/w Manufactured Goods Services Total Import Penetration (%) UK: Exports & world trade % year % year World trade F'cast Exports* - *non-fuel goods % of GDP Visibles UK: Current account Invisibles Current account % of GDP Current Account ( billion) Visible Trade Balance (excl Fuels) Fuels Balance Services IPD Transfers Current Account Current Account (% of GDP) July UK in Detail

17 SECTORAL BALANCES The table below shows the pattern of sectoral financial surpluses and deficits. Apart from data errors and omissions, a deficit in one sector should be matched by surpluses elsewhere in the economy % of GDP % of GDP Private sector - Current account UK: Sectoral balances - The company sector ran a financial deficit of billion in, offset by a personal sector surplus of about billion, a government surplus of 9 billion and a current account deficit of over billion. However, the company sector deficit narrowed sharply in Q, to. billion, reflecting lower investment spending, while the government moved into budget deficit Public sector The forecast shows the personal sector remaining in modest surplus over the next few years, but the company sector remaining in substantial deficit and the current account deficit also increasing. The danger is that companies seek to avoid such deficits by sharply reining back investment, particularly given recent falls in equity prices and worries about corporate debt. Similarly, worries about pensions could lead to a rebound in household savings. Such corrections in the private sector financial imbalances would trigger a more pronounced downturn in economic growth over the next year than in our central forecast. % - UK: Personal sector saving and net lending % Savings ratio Net lending Financial Surpluses/Deficits ( billion). Government Sector Personal Sector Company Sector Private Sector (+) Overseas Sector Other, including Balancing Item UK in Detail July