www.pwc.co.uk The UK economy in 2012 and beyond Dr Andrew Sentance Senior Economic Adviser, NHF Leaders Forum London, 20 th February 2012
Key issues Why has growth been disappointing and uneven? What is the new normal for the economy? Prospects for UK in 2012 and beyond Challenges and opportunities for social housing NHF Leaders Forum Slide 2
UK economic growth has disappointed % per annum change in non-oil GDP 6 4 2 0-2 -4-6 -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Previous data Latest data* Trend Note: Average non-oil GDP growth since 2009H1 = 1.7% Source: ONS NHF Leaders Forum Slide 3
...while inflation has been high and volatile % per annum increase in consumer prices index 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: Office for National Statistics Inflation Target Ave 2008-11 Slide 4
World economic growth below trend % per annum change in GDP in G-13 economies* 6 5 4 3 2 1 0-1 -2-3 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 * EU, US and 11 other economies accounting for 85% of world GDP Source: IMF World Economic Outlook Updates NHF Leaders Forum IMF, June 2011 IMF, Jan 2012 Ave 1990-2010 Slide 5
... though a slow start to recovery is not unusual average % per annum change in GDP 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 UK - 80s recovery UK - 90s recovery Advanced economies - 80s Advanced economies - 90s First 3 years 1985/95 onwards* * 1985-88 and 1995-2000 average growth rates Source: ONS and IMF. UK figures show non-oil GDP growth NHF Leaders Forum Slide 6
Emerging market growth has been strong average % per annum change in GDP over first three years of recovery 7 6 5 4 3 2 1 0 UK (exc oil&gas) Advanced economies Emerging and developing economies 1982-84 1992-94 2010-12 Source: ONS and IMF. 2011 and 2012 based on latest IMF, OECD and forecasts NHF Leaders Forum Slide 7
... reflecting the rise of Asia Percentage share of world GDP, current market prices & exchange rates 40% 35% 30% 25% 20% 15% 10% 5% 0% 1980 1990 2000 2010 US EU-27 Asia-pacific G10* * Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand. Source: IMF World Economic Outlook NHF Leaders Forum Slide 8
What is the new normal? UK economic growth in a long-term context Why the old normal won t return Parallels with the 1970s and early 1980s Forces shaping the new normal NHF Leaders Forum Slide 9
Long expansions and their aftermath average % per annum change in UK GDP and consumer spending 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1948-73 1973-82 1982-2007 2007-16* GDP Consumer spending * Based on current consensus forecasts for 2011/12, and assuming trend (2.1%) growth from 2013 Source: ONS and calculations What is the new normal? Slide 10
Forces shaping long expansions Technology and innovation Policy environment Sustained economic growth Private sector expectations Financial regime What is the new normal? Slide 11
Forces underpinning the old normal, 1982-2007 Financial deregulation and liberalisation, broadening access to debt for consumers and businesses New era of globalisation, as China, India, former Soviet bloc and others embrace the market economy Relatively low energy and commodity prices (1985-2005), reinforced by China effect on manufactured prices US the dominant economic power, while European countries pursue closer economic integration Confidence in ability of policy-makers to support growth and of independent central banks to control inflation Rapid innovation and technological advance in IT and communications What is the new normal? Slide 12
The 1970s experience a salutary lesson 25-year long expansion came to an end in the early 1970s The international financial system was seriously disrupted with the end of the Bretton Woods system Energy and commodity prices were high and volatile UK growth 1973-82 averaged less than 1% pa (a lost decade?), inflation was high and economic/financial conditions were volatile Other western economies saw a growth slowdown over this period, with rising unemployment and high inflation 50s/60s full employment policy consensus undermined; lack of confidence and policy errors compounded volatility What is the new normal? Slide 13
Forces shaping the new normal The rise of Asia and other emerging market economies, and associated pressure on supplies of energy and other natural resources The legacy of the financial crisis Structural adjustment in western economies following the long expansion which ended in 2007 Breakdown of pre-2007 policy paradigm and lack of confidence in policy responses What is the new normal? Slide 14
Two phases of the new normal Phase 1: Continuation (through mid-2010s) of current pattern of disappointing growth in western economies, accompanied by financial volatility and high and fluctuating energy and commodity prices Phase 2: A clearer and more sustained growth dynamic emerges, perhaps starting in the second half of this decade. However, this will be based on a different set of technological, regulatory, geopolitical and financial drivers from the forces driving the long expansion which ended in 2007 Businesses and policy-makers need strategies to manage and survive through Phase 1, while building potential opportunities for Phase 2. What is the new normal? Slide 15
UK prospects in 2012 and beyond The global economic environment UK growth and consumer spending Public finances Inflation and interest rate outlook NHF Leaders Forum Slide 16
New normal economic climate: Phase 1 Prolonged period of disappointing GDP and consumer spending growth in western economies, lasting into mid-2010s Asia and some other emerging markets continue to perform strongly and are main engine of global growth Periodic bursts of inflation, driven by energy and commodity price movements, adding to growth volatility High prices for energy and other natural resources Policy-makers struggle to address medium term policy challenges Continuing financial market volatility What is the new normal? Slide 17
Two-speed global economy to continue % per annum change in GDP 10 8 6 4 2 0-2 -4-6 2007 2008 2009 2010 2011 2012 2013 Advanced economies Emerging and developing Source: IMF World Economic Outlook, January 2012 update Slide 18
How concerned are you about the following potential economic and policy threats to your business growth prospects? Not concerned at all Not very concerned 15 th Annual CEO Survey (Sept-Dec 2011) Somewhat concerned Extremely concerned Pulse Survey (January 2012) Inflation 19 38 31 11 Inflation 7 35 42 14 Protectionist tendencies of national governments 22 33 32 12 Protectionist tendencies of national governments 6 37 38 17 Uncertain or volatile economic growth -317 48 32 Uncertain or volatile economic growth 0 10 52 37 Over-regulation 13 30 34 22 Over-regulation 2 27 40 29 Lack of stability in capital markets 10 25 39 25 Lack of stability in capital markets 016 46 35 Exchange rate volatility 13 28 35 23 Exchange rate volatility 220 46 30 Government response to fiscal deficit and debt burden -1023 38 27 Government response to fiscal deficit and debt burden 314 42 38 Bribery and corruption 34 31 19 15 Bribery and corruption 14 35 27 21-100-80-60 -40-20 0 20 40 60 80 100 % Eurozone outcomes Source: Global CEO Survey/Pulse Survey: Base: All respondents (1,258; 444) -100-80 -60-40 -20 0 20 40 60 80 100 % Slide 19
Consumers face a prolonged squeeze % per annum change in GDP and consumer spending 5 4 3 2 1 0-1 -2-3 -4-5 97-07 ave 2008 2009 2010 2011 2012 2013 GDP Consumer spending Source: ONS and latest Office for Budget Responsibility (OBR) forecasts Slide 20
Reducing the deficit a long haul Public sector net borrowing, as % of GDP 12.0 10.0 8.0 6.0 4.0 2.0 0.0 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 Mar-11 Nov-11 Source: Office for Budget Responsibility, November 2011 Slide 21
Services sector may hold back inflation decline % per annum increase in consumer prices index 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Source: Office for National Statistics Goods Services Slide 22
Key issues Why has growth been disappointing and uneven? What is the new normal for the economy? Prospects for UK in 2012 and beyond Challenges and opportunities for social housing NHF Leaders Forum Slide 23
Adjusting to the new normal New Normal Economic Climate Policy and regulatory environment Sector-specific market and structural changes Strategy & planning What is the new normal? Slide 24
Business challenges and opportunities Finding growth opportunities in a low-growth environment Adapting to changing regulatory/policy frameworks Adjusting to structural changes driven by changing financial and consumer climate and emerging new technologies Managing in a world of high/volatile energy and commodity prices Accessing sources of finance in volatile and risk-averse financial markets Attracting and retaining a loyal and productive workforce, and managing employee expectations NHF Leaders Forum Slide 25
Challenges and opportunities for social housing No return to the pre-2008 world for public finances or financial markets Constrained funding and financing environment to remain Upward pressure on demand from difficult social and economic environment Problems for young people and new households accessing the private sector housing market likely to continue Potential to play a larger role in the housing market if new financial structures and models can be developed NHF Leaders Forum Slide 26
Thank you for listening. Any questions? andrew.w.sentance@uk.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Design: ML3-2011-11-22-0836-NB