UK ahead of elections: political uncertainties, longterm challenges Second Quarter 215
UK Ahead of Elections, Second Quarter 215 Main messages 1 2 3 4 5 All parties are polling well short of a majority The mix of fiscal and monetary policy could not be very different under alternative governments and will progressively tighten over the next parliament Strong but slowing growth in 215-16, but increasing concerns on the impact of political uncertainties on activity Several issues will shape the UK economy in the long term: The status in EU, policies to increase productivity growth and competitiveness and policy towards immigration Page 2
UK Ahead of Elections, Second Quarter 215 Index Section 1 Election prospects Section 2 Economic prospects and policy proposals Section 3 Long term issues and policies Page 3
Conservatives Labour SNP Liberal Democrats DUP Other UK Ahead of Elections, Second Quarter 215 All parties are polling well short of a majority Even natural coalitions (Con+LibDem or Lab+SNP) could fall short of a majority A distinct possibility is minority government with bills passed on case-by-case basis Parliament election forecast: Projected number of seats, low and high Source: www.electionforecast.co.uk; 6 May 215 35 3 25 2 15 281 266 326 Probability of governments after election Source: www.electionforecast.co.uk; 6 May 215 7 6 5 4 3 1 5 52 26 8 17 2 1 Labour With no possible two party coallition SNP only LibDem or SNP Majority Conservatives LibDem only DUP or LibDem Any one of three or more parties Page 4
UK Ahead of Elections, Second Quarter 215 Index Section 1 Election prospects Section 2 Economic prospects and policy proposals Section 3 Long term issues and policies Page 5
UK Ahead of Elections, Second Quarter 215 Drivers of growth Oil price shock is positive as it is mostly supply-driven Sterling pound appreciation. Other CB s monetary policy Still supportive economic policies in 215 Low productivity Strong labour market and consumer confidence but tighten tightening in coming years Uncertainty on public policies Eurozone momentum Slowdown in EM and China Page 6
Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 UK Ahead of Elections, Second Quarter 215 The economic momentum is easing somewhat Confidence indicators provide mixed signals (strong PMI s, but EC confidence is slowing) GDP growth in 1Q15 slows sharply to.3% QoQ, driven by weak services European Commission confidence survey (standardised) Source: Eurooean Commission and BBVA Research 2.5 2. 1.5 1..5. -.5-1. -1.5-2. GDP contributions to the QoQ percentage change Source: ONS and BBVA Research 1..8.6.4.2. -2.5 -.2 ESI Industry Consumer Services Agriculture Production Construction Services GDP (% QoQ) Page 7
Jan-5 Jun-5 Nov-5 Apr-6 Sep-6 Feb-7 Jul-7 Dec-7 May-8 Oct-8 Mar-9 Aug-9 Jan-1 Jun-1 Nov-1 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 UK Ahead of Elections, Second Quarter 215 Strong job creation and incipient wage increases Job creation relatively strong, with composition changes towards more productive workers Incipient signs of wage increases, and upward pressures in the pipeline Employment (% QoQ) Source: Eurooean Commission and BBVA Research 1..8 Earnings growth and vacancy ratio Vacancy ratio: number of unemployed people per vacancy Source: ONS and BBVA Research 8 6 2 1.6 4.4.2 2-1 -2. -.2-2 -3 -.4 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14-4 -4 Employees Full-time Self-employed Full-time Total Employment Employees Part-time Self-employed Part-time Average weekly earnings private sector (3m/y) Vacancy ration (annual difference inverted, RHS) Page 8
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Q1-5 Q3-5 Q1-6 Q3-6 Q1-7 Q3-7 Q1-8 Q3-8 Q1-9 Q3-9 Q1-1 Q3-1 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 Q1-14 Q3-14 UK Ahead of Elections, Second Quarter 215 along with very low inflation that should boost household s real incomes Sharp decline in inflation due to the fall in oil prices and the appreciation of the pound Households diposable income is increasing, while strong confidence results in a low saving ratio Inflation and its components (y-o-y) Source: ONS and BBVA Research 2.5 Households disposable income and savings Source: ONS and BBVA Research 5 14 2. 4 12 1.5 1..5. 3 2 1 1 8 6 -.5-1 4-1. -1.5-2 -3 2-quarters m. average real HH disposable income 2 Energy Services Processed food Unprocessed food Nonenergy industrial goods Other Real household disposable income (% YoY) Saving ratio (%, RHS) Page 9
1985 1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 Q1-96 Q4-96 Q3-97 Q2-98 Q1-99 Q4-99 Q3- Q2-1 Q1-2 Q4-2 Q3-3 Q2-4 Q1-5 Q4-5 Q3-6 Q2-7 Q1-8 Q4-8 Q3-9 Q2-1 Q1-11 Q4-11 Q3-12 Q2-13 Q1-14 Q4-14 UK Ahead of Elections, Second Quarter 215 Productivity remains very low, increasing BoE s concerns about future price pressures Produtivity fails to take off while spare capacity is being absorbed Productivity (% YoY) Source: ONS and BBVA Research 6 4 2-2 -4-6 -8 Output and unemployment gap (%) Source: OECD 5 4 3 2 1-1 -2-3 -4 Prodution Employment (inverted sign) Productivity Average productity before 28 crisis -5 Output gap Unemployment gap Page 1
Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 UK Ahead of Elections, Second Quarter 215 Demand prospects, reducing spare capacity, along with easing financial conditions should boost investment Capacity utilization above historical average, while new orders increase Very low interest rates support credit demand, but deleveraging continues Capacity utilization and new orders Source: European Commission and BBVA Research 85 3 Non-financial corporations: lending, repayments and credit stock Source: BoE and BBVA Research 2 49 2 15 47 8 1-1 1 5 45 43-2 41 75-3 -5 39-4 -1 37 7-5 -6-15 35 Capacity utilization New orders (RHS) Lending (sa, % 3m/3m) Stock credit (GBP bn, RHS) Repayments (sa, % 3m/3m) Page 11
Q1-5 Q3-5 Q1-6 Q3-6 Q1-7 Q3-7 Q1-8 Q3-8 Q1-9 Q3-9 Q1-1 Q3-1 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 Q1-14 Q3-14 Mar-5 Aug-5 Jan-6 Jun-6 Nov-6 Apr-7 Sep-7 Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar-1 Aug-1 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 UK Ahead of Elections, Second Quarter 215 Export prospects improve despite the sharp appreciation of the pound The eurozone recovery more than offsets slowing growth in emerging countries Real appreciation of the pound despite depreciation vs de the USD Exports to EU and non-eu countries (% QoQ) Source: ONS and BBVA Research 15 1 5-5 Exchange rates Source: ONS and BBVA Research 2.2 2. 1.8 1.6 12 11 1 9-1 -15-2 -25 1.4 1.2 1. 8 7 6 EU Non-EU Total EUR/GBP USD/GBP EER (RHS) Page 12
UK Ahead of Elections, Second Quarter 215 Projections: Strong growth in 215-16, but slowing due to lower support from fiscal and monetary policy Projections of main variables (%) Source: BBVA Research 213 214 215 (f) 216 (f) Activity REAL GDP (% YoY) 1.7 2.8 2.5 2.3 Private consumption 1.7 2.5 2.4 2.2 Public consumption -.3 1.7.2 -.4 Investment 3.4 7.8 4.5 5.6 Domestic demand (contr. %) 1.7 3.3 2.3 2.2 Exports 1.5.6 4.9 5. Imports 1.4 2.2 4. 4.4 Net exports (contr. %). -.5.2.1 External sector Current account balance (% GDP) -4.5-5.5-5.1-4.8 Public finances General Govt. Balance (% GDP) -5.7-5.7-4.4-3.4 Prices CPI, % avg. 2.6 1.5.3 1.7 Strong domestic demand will continue to be the main support for growth while net exports will again make a small positive contribution Domestic demand, the pace of inflation and the impact of Fed decisions on the pound will determine the date of the first hike of BoE Bank Rate (we expect 1Q16) Page 13
Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 May-1 Oct-1 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 UK Ahead of Elections, Second Quarter 215 Accommodative monetary policy, but a slow tightening cycle is in the pipeline Monetary policy stance: offical interest rate and QE programmes Source: OECD and BBVA Research QE size and its impact on growth and inflation 6 GBP2bn GBP75bn + GBP5bn + GBP5bn US: 24.4% 5 QE as % of GDP UK: 2.9% 4 3 Eurozone: 1.9%* 2 US GDP:.1/.6pp 1 Fed QE ECB QE BoE QE Fed ECB BoE Impact of asset purchases of 1% of GDP US CPI:.3/.6pp UK GDP:.1/.2pp UK CPI:.1/.3pp * Full implementation Source: ECB, Weale et all. March 215, and BBVA Research Page 14
UK Ahead of Elections, Second Quarter 215 Soft and gradual fiscal consolidation after the strong fiscal impulse over the 28 crisis Fiscal impulse in 28-9 and consolidation upto 214 (pp) Source: OECD and BBVA Research 7. 6. 5. 4. 3. 2. 1.. Eurozone UK US Cumulated GDP change (%) Source: Eurostat, ONS, BEA and BBVA Research 12 11 1 9 8 7 6 5 4 3 2 1-1 -2-3 -4-5 28-9 21-14 Impulse Consolidation Eurozone UK US Page 15
UK Ahead of Elections, Second Quarter 215 All parties plan further austerity Conservative Labour LibDem Fiscal rules Overall budget surplus by the end of next parliament Surplus on current budget (excluding capital account) by the end of next paliament Surplus on cyclical-adjusted current budget by 217-18 Personal taxes Raise personal tax free allowance to 12,5 by 22-21 and ensure no-one earning less than 5, is paying tax at the 4% rate Reintroduce 1% starting rate of income tax Increase top rate from 45% to 5% Abolish married couple s tax allowance Raise personal tax free allovance to 12,5 by 22-21 Increase capital gains tax Wealth taxes Raise inheritance tax threshold to ensure inheritance tax only payd by rich Introduce a mansion tax on homes valued above 2m (aiming to raise 1.2bn) Introduce a mansion tax on homes valued above 2m, collected through additional tax layers (aiming to raise 1.7bn) Corporate taxes Clapdown on tax avoidance (aiming at raising 5bn) Reverse cut in coportation tax from 21% to 2%. Use proceeds to reverse rise in business rates planned for April 215 and freeze rates in 216 Clampdown on tax avoidance (aiming at raising 6bn) Government spending Raise 1.2bn through welfare savings, meaning smaller departamental cuts than those currently assumed Increase spending on the NHS Spend 8bn a year on NHS Source: Oxford Economics Page 16
UK Ahead of Elections, Second Quarter 215 especially next year to meet the fiscal mandate (zero deficit in 217-18 or 218-19); but at different paths Public deficit plans including net investment (%GDP) Source: IFS and BBVA Research 5 4 3 2 1 Cyclically-adjusted current budget deficit plans Source: IFS and BBVA Research 5 4 3 2 1-1 -1 214-15 215-16 216-17 217-18 218-19 219-2 Cons Lab LibDem SNP -2 Fiscal mandate Cons Lab LibDem SNP Cyclical-adjusted current bugdet deficit 213-14 214-15 215-16 216-17 217-18 218-19 219-2 Page 17
27-8 28-9 29-1 21-11 211-12 212-13 213-14 214-15 215-16 216-17 217-18 218-19 219-2 22-21 221-22 222-23 223-24 224-25 225-26 226-27 227-28 228-29 229-3 23-31 UK Ahead of Elections, Second Quarter 215 Public debt reduction, as the commitment to the supplementary target puts a brake on investment spending Public sector net debt (% of GDP) Source: IFS 1 9 8 7 6 5 4 3 2 1 Conservatives; % annual borrowing post 219-2 Labour; 1.4% annual borrowing post 219-2 LibDem; 1% annual borrowing post 219-2 SNP; 1.4% annual borrowing post 219-2 Public sector net investment at around 1.5% of GDP under all parties plans Differences stem from how to finance public investment, or Conservatives want to have no borrowing at all All-time low bond yields could be used to finance public investment (long-run effects) Page 18
UK Ahead of Elections, Second Quarter 215 Index Section 1 Election prospects Section 2 Economic prospects and policy proposals Section 3 Long term issues and policies Page 19
97-6 7-12 211 212 213 214 97-6 7-12 211 212 213 214 97-6 7-12 211 212 213 214 UK Ahead of Elections, Second Quarter 215 Looking beyond the crisis: the recovery has been poor in productivity growth GDP per working age population (2=1) Source: IMF, OECD and BBVA Research 16 15 14 13 12 11 Growth of Labour productivity, real GDP and total hours worked, 1997-214 Source: The Conference Board Total Economy Database and BBVA Research 3.5 3. 2.5 2. 1.5 1..5. -.5-1. -1.5-2. -2.5 1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 UK US Japan Germany Eurozone UK US Labor productivity Total hours worked Real GDP Page 2
UK Ahead of Elections, Second Quarter 215 Imbalances have yet to be corrected: appreciated currency, high current account and public deficits Year 214 Unit Labour Costs growth Market share loss Real Effective Exchange Rate (%) Public Debt (% GDP) 5 4 3 2-1 1-2Below -3limits -4 Public Deficit (% GDP) Private Debt (% GDP) Change on private credit (% GDP) Net International Investment Position (% GDP) Current Account (% GDP) Housing market Unemployment Rate Mean EA Reino Unido Page 21
Different policies on three key long-term issues UK Ahead of Elections, Second Quarter 215 Conservative Labour LibDem Employment Create two million new jobs in order to achieve full employment. Provide three million new apprenticeship positions. Improve tax competitiveness. Create one million green jobs by 23. Raise national minimum wage to 8 per hour. Ban exploitative zero hours contracts. Create more public sector apprenticeships. Expand apprenticeships and develop national colleges for vocational skills. EU Hold referendum on Britain s renegotiated EU membership by end of 217 Enhance the UK s influence in a reformed Europe. Reform of the EU bugdet, and a shift away from agriculture spending. Remain in the EU. Hold an in/out referendum if there is a plan for material transfer of sovereignty from the UK. Immigration Migrants to wait four years before they can claim certain benefits or social housing. No out-of-work benefits for migrants or child benefit for dependants living outside UK Negotiate reform of EU freedom of movement rules. Reintroduce exit checks to count cross-border flows. Longer waiting periods for out-of-work benefits. Make welfare system more contribution based. Stop Child Benefit from being sent abroad Restore full entry and exit border checks. End indefinite detention for immigration purposes. Phase out child benefit for children living outside the UK Source: Commerzbank Page 22
UK Ahead of Elections, Second Quarter 215 The EU referendum threatens to change the relationship with Europe (and the rest of world) Exports share by region Source: ONS and BBVA Research 1 9 8 7 6 5 4 3 2 1 4.1 5.8 4.8 6.9 55. 44.4 1998-211-13 The EU remains as the main trading partner EA Western Europe - EU Other OECD countries Rest of the world EU-EA North America Oil exporting countries Page 23
197 1974 1978 1982 1986 199 1994 1998 22 26 21 214 Change in relative export prices UK Ahead of Elections, Second Quarter 215 In a context of loss competitiveness The UK has lost a large market share over the fisrt decade of the century World export shares and REERs (% 1999-211) Source: Correa-López and Doménech (212) CAN 3 Current account (% of GDP) Source: ONS and BBVA Research 4 3 The current account has deteriorated recently due to the reversal of the income account FR UK JP IT USA FIN GR DEN PT SWE AT IRL GER SP NL 2 1-1 -2 2 1-1 -2-3 -4-5 -6-45 -4-35 -3-25 -2-15 -1-5 -3 Trade goods and services Transfers Income Current account Change in world export market share Page 24
1961-7 1971-8 1981-9 1991-21-1 211-2 221-3 231-4 241-5 251-6 261-7 271-8 UK Ahead of Elections, Second Quarter 215 Reversing open attitude towards immigration would reduce potential output growth More than a half (54%) of the increase of population in 1991-212 was due to the direct contribution of migration Any declines in the wages and employment of UK-born workers in the short run can be offset by rising wages and employment in the long run Projected population (% YoY) Source: Eurostat and BBVA Research.8.7.6.5.4.3.2.1 The fiscal impact of migration in 27-29 was positive (+.46% of GDP, according to the OECD, above the average). -.1 -.2 Source: The Migration Observatory at the University of Oxford and OECD Observed Main scenario No migration Page 25
UK ahead of elections: political uncertainties, longterm challenges Second Quarter 215