Webinar: Credit crunch China and forward guidance in the UK why does it matter? Simon Thompson, ICAEW Charles Davis, Cebr
Making sense of the economic outlook Simon Thompson, Head of Corporate Communications and Media Relations, ICAEW Charles Davis Head of Macroeconomics, Cebr
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?
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 2013. Source: ICAEW / Grant Thornton Q4 2011 Business Confidence Monitor
Outline 1. Global economic outlook Focus: Greater China Copyright ICAEW 2013. Source: ICAEW / Grant Thornton Q4 2011 Business Confidence Monitor
The rise of the Chinese economy has been incredible over the last 30 years China share of global economy 1950-2008, % of global GDP 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: IMF, Cebr
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 12 10 8 6 4 2 0-2 -4-6 net exports consumption investment Source: National Bureau of Statistics of China, Cebr analysis
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 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 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.
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
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
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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
2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 Eurozone emerges from recession but considerable risks and high unemployment in periphery persists Eurozone quarterly real GDP level, trillion euros 1.98 1.96 1.94 1.92 1.9 1.88 1.86 1.84 1.82 1.8 Source Eurostat
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.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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
Outline 2. The current state of the UK economy The current state of the UK economy Copyright ICAEW 2013. Source: ICAEW / Grant Thornton Q4 2011 Business Confidence Monitor
Business confidence continues to climb as UK economic recovery gathers momentum ICAEW/Grant Thornton Business Confidence Index
Economy expected to grow by 1.0% in Q3 which would be the fastest growth since Q2 2010 Quarter on quarter real GDP growth, %
Turnover growth expectations are up on the same quarter a year ago Turnover, annual percentage change
Despite challenging global economic backdrop, businesses believe export growth will pick up Exports, annual percentage change
Pick up in confidence is broad-based ICAEW/Grant Thornton Business Confidence Index by sector
BUT no sign of an investment-led recovery as capital investment growth still expected to cool over next year Capital investment, annual percentage change
Outline 3. UK economic forecast Copyright ICAEW 2013. Source: ICAEW / Grant Thornton Q4 2011 Business Confidence Monitor
UK forecast revised up again as economy looks set to achieve fastest growth since 2010 Real GDP annual growth Source : ICAEW Q3 2013 Economic Forecast
Improved outlook means pre-recession peak in economic activity likely to be surpassed in 2014 Real GDP index (2007 = 100) Source : ICAEW Q3 2013 Economic Forecast
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
BCM showed decline in spare capacity in Q3: implying growth came from higher productivity Share of businesses operating at or below capacity, percentage
Hence employment growth is slowing and expected to be constrained by productivity gains & public sector cuts UK employment annual growth Source : ICAEW Q3 2013 Economic Forecast
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 Q3 2013 Economic Forecast
Outline 4. Key policy challenges Forward Guidance Copyright ICAEW 2013. Source: ICAEW / Grant Thornton Q4 2011 Business Confidence Monitor
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.
Has it worked? Some doubts long bond yields have risen notably UK, Government Benchmarks, 10 Year, Yield %
Yields at shorter maturities have also picked up but Carney tells us markets are wrong to price in a rate rise sooner
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
And could the Bank seek to cool the simmering housing market recovery? although this is London-led
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.
Q & A Session Copyright ICAEW 2013.
Latest ICAEW Insight UK ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) /bcm UK Economic Forecast /economicforecast Copyright ICAEW 2013.
ICAEW Insight: International Economic Insight: South East Asia Economic Insight: Greater China Economic Insight: Middle East Copyright ICAEW 2013.
ICAEW Faculties /faculties Special Interest Groups /sigs Member Services Business: /business Practice: /practice Library and Information Services: /library ICAEW events /events Thought leadership /thoughtleadership News and alerts /news Copyright ICAEW 2013.
A world leader of the accountancy and finance profession