This presentation was delivered on 8 th February 2018, not for onward distribution The UK and healthcare what challenges lie ahead? Neil Parker NatWest Markets FX Market Strategist February 2018 The views expressed within this presentation are those of Neil Parker, Market Strategist, Desk Strategy, which is a part of the NatWest Markets business. This is not Independent Research, as defined by the Financial Conduct Authority. This material should be regarded as a marketing communication and may have been produced in conjunction with the NatWest Markets trading desks that trade as principal in the instruments mentioned herein. All data is as at 18 th January 2018.
Contents Global growth UK growth slow, but global growth picking up Interest rates - rising Inflation stubbornly above target Disposable incomes squeezed Labour supply worsening migration stats and a lack of domestic supply Demographics an ageing population and a falling birth rate, not an ideal combination Brexit still posing risks Housing market prices still mostly rising Government spending on welfare increasing in nominal and real terms 2
Global growth UK growth slow, but global growth picking up GDP 2016 2017f 2018f US 1.5 2.2 2.3 Euroland 1.8 2.1 1.9 Euroland UK 1.8 1.7 1.5 UK India 6.7 6.8 6.5 China 7.1 6.7 7.4 Japan 1.0 1.5 0.7 World 3.2 3.6 3.7 Source: IMF World Econom ic Outlook, Oct 2017 The global economy s size by region $millions World 75,845,109 East Asia & Pacific 22,480,428 Europe & Central Asia 20,273,841 Euro Area 11,934,057 United Kingdom 2,647,899 Latin America & Carribean 5,299,866 Middle East & North Africa 3,144,798 North America 20,160,296 South Asia 2,892,481 Sub-Saharan Africa 1,512,596 figures are from 2015 or 2014 source: World Bank World Development Indicators database December 2017 3
Interest rates - rising US Fed Funds Rate, % UK BoE Bank Rate, % EA ECB Refi Rate, % % First hike in a decade Month/year Source: Datastream 4
Inflation stubbornly above target (and high in comparison terms) UK consumer price index (CPI) (%y/y) UK CPI inflation currently stands at 3% y/y (Dec) - a full percentage point above target. In comparison US CPI is 2.1% y/y (Dec), Euroland CPI is 1.4% (Dec), Canada is 2.1% (Nov), China is 1.8% (Dec) and Japan is 0.6% (Nov). The fall in the GBP s value is unwinding from the calculation (in terms of higher import costs), but domestic inflation may be replacing it. Stubbornly high (above target) inflation in the UK could force the Bank of England s hand on monetary policy. Source: Thomson Reuters Datastream 5
Disposable incomes squeezed UK household disposable income (%q/q) UK household disposable incomes have been squeezed over recent quarters. A combination of factors, including inflation and taxation (indirect) are likely responsible. Will wage inflation rise above CPI/RPI inflation rates? What will the government s response to lower borrowing/higher VAT rates be? Source: Thomson Reuters Datastream 6
Labour markets tightening with lower rates of net inward migration Source: ONS, Thomson Reuters Datastream, NatWest Markets Could this mean higher wage inflation? 7
Demographics an ageing population and a reduced fertility rates (not an ideal combination) UK life expectancy UK total fertility rate (births per woman) UK Female life expectancy (in years) UK Male life expectancy (in years) Source: World Bank World Development Indicators Database, Dec 2017 8
Brexit still posing risks 29-Mar UK trigger Article 50 29-Apr 08-Jun 19-Jun 24-Sep EU Summit on UK's EU exit UK general election (hung parliament - Conservatives largest party) Formal negotiations begin between UK/EU German general election (CDU win, but coalition needed - talks ongoing) The Brexit negotiations are following this approach: 1) Negotiations on the UK-EU split + Negotiations on the bill for that split, based on the UK s financial precommitments. 15-Oct Q4 19-20 Oct 14-16 Dec Q1 2018 04-Mar-18 end Q3 2018 29-Mar-19 Austrian general election (Coalition talks ongoing) UK Budget Council of Europe meeting (not enough progress made) Council of Europe meeting (phase 2 negotiations agreed) Phase 2 of negotiations to begin Italian general election to be held no later than this Conclusion of negotiations? UK to leave EU 9 2) Negotiations on transitional trade arrangements. 3) Negotiations on a future agreement on trade.
Housing market prices still climbing (mostly) UK Nationwide house price index (%y/y) Source: Nationwide house price index Dec 2017 10
Government spending on welfare increasing in nominal and real terms State pension as a % of Total Managed Expenditure Total managed expenditure (TME) in the UK stood at 772.4bn at the end of FY 2016/17. Of that, welfare spending was 216.9bn (or roughly 30% over all the money the government spends). If you roll into that the NHS spending ( 119.1bn in 2016/17), then spending on welfare and the NHS accounts for 43.5% of TME, and is rising. Recent figures on receipts are encouraging (in terms of narrowing the deficit), but there is still a c 50bn gap between receipts and spending. Fiscal Year Source: Office for Budget Responsibility, NatWest Markets 11
Summary UK growth may have troughed and EUR growth may have plateaued. We expect the UK inflation rate to drop back as imported price pressures subside (but it currently remains stubbornly above target. Labour markets are tight, and migration is down. Productivity needs to rise. The UK monetary policy tightening cycle is likely to see two further tightenings this year. Brexit timescales are very tight. Global growth could provide some significant positive investment shocks, especially in a price/cost sensitive environment. The pressures on healthcare (from an ageing population and restrictions on government resources) present risks, and opportunities. 12
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