www.pwc.co.uk/economics UK Economic Outlook July 2018
Contents 1 2 3 4 Global outlook UK economic prospects UK housing market outlook Impact of AI and related technologies on jobs in the UK UK Economic Outlook March 2018 2
Global outlook
Global growth will accelerate in 2018 with support from most major economies Canada 2.0 Ireland 4.6 UK 1.3 Germany 2.4 Russia 1.8 US 2.9 France 2.2 Greece 2.0 Mexico 2.1 Global (MER) 3.4% Global (PPP) 3.9% Eurozone 2.3% Spain 2.8 Italy 1.3 India 7.4 China 6.5 Japan 1.0 Australia 2.9 Key Country x.x = % Real GDP growth in 2018 Source: main scenario UK Economic Outlook Brazil 2.5 South Africa 1.3 March 2018 4
Global growth should also remain strong in 2019, though US could slow as interest rates rise Canada 1.9 Ireland 3.3 UK 1.6 Germany 2.1 Russia 1.7 US 2.5 France 1.9 Greece 2.1 Mexico 2.2 Global (MER) 3.2% Global (PPP) 3.8% Eurozone 2.0% Spain 2.4 Italy 1.1 India 7.6 China 6.3 Japan 0.8 Australia 3.0 Key Country x.x = % Real GDP growth in 2019 South Africa 1.5 Brazil 2.7 Source: main scenario UK Economic Outlook March 2018 5
UK economic prospects
The services sector has driven the recovery from the financial crisis, while manufacturing and construction have been weaker and more volatile 130 120 Services 110 Index (Q1 2007 = 100) 100 90 GDP Construction Manufacturing 80 70 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 Services GDP Manufacturing Construction Source: ONS UK Economic Outlook March 2018 7
GDP growth moderated in 2017 due primarily to slower growth in consumer spending and services sector output 1.4% 1.2% % change on previous quarter 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2017 2018 GDP Consumer expenditure Services Source: ONS UK Economic Outlook March 2018 8
Manufacturing PMI shows relatively strong growth, but services PMI has moderated from levels seen in 2014-15 65 60 Above 50 indicates rising activity levels Manufacturing 55 50 Services 45 40 35 30 2007 JAN 2008 MAY 2009 SEP 2011 JAN 2012 MAY 2013 SEP 2015 JAN 2016 MAY 2017 SEP Services Manufacturing Source: Markit/CIPS UK Economic Outlook March 2018 9
Sterling has lost some ground against the US dollar in 2018, and remained weak versus the euro 1.6 1.5 USD/ 1.4 1.3 1.2 1.1 1.0 2016 JAN 2016 FEB 2016 MAR 2016 APR 2016 MAY 2016 JUN 2016 JUL 2016 AUG 2016 SEP 2016 SEP 2016 OCT 2016 NOV 2016 DEC 2017 NOV 2017 MAR 2017 MAR 2017 MAY 2017 JUN EUR/ 2017 JUL 2017 AUG 2017 AUG 2017 SEP 2017 OCT 2017 NOV 2017 DEC 2018 JAN 2018 FEB 2018 MAR 2018 MAY 2018 JUNE Source: Bank of England US Dollar Euro UK Economic Outlook March 2018 10
The economy has created a record number of jobs in recent years, but productivity growth has been subdued since the financial crisis, depressing real wage growth 110 Employment 105 Index (2008 Q1 = 100) 100 95 Productivity 90 85 2000 Q1 2000 Q4 2001 Q3 2002 Q2 2003 Q1 2003 Q4 2004 Q3 2005 Q2 2006 Q1 2006 Q4 2007 Q3 2008 Q2 2009 Q1 2009 Q4 2010 Q3 2011 Q2 2012 Q1 2012 Q4 2013 Q3 2014 Q2 2015 Q1 2015 Q4 2016 Q3 2017 Q2 2018 Q1 Productivity (per worker) Employment Source: ONS UK Economic Outlook March 2018 11
Economic growth will remain modest in 2018-19 with considerable Brexit-related uncertainty around our main scenario 4% Projections 2% 0% -2% -4% -6% -8% 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 Main scenario Slow growth Strong growth Source: ONS, scenarios UK Economic Outlook March 2018 12
Growth projected to be similar across most regions, though Northern Ireland, Scotland and the North East may lag behind. London is no longer clearly leading the pack. 2.0% 1.8% 2018 2019 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% South East London East Midlands South West UK East West Midlands North West Wales Yorks & Humber North East Scotland N. Ireland Source: analysis
In our main scenario we expect UK inflation to return to the target rate of 2% by the end of 2019 5% Projections 4% % change on a year earlier 3% 2% Inflation target = 2% 1% 0% 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 High inflation Main scenario Low inflation Inflation target Source: ONS, scenarios UK Economic Outlook March 2018 14
Average earnings have started to grow faster than prices again, but real earnings growth remains modest by precrisis standards 5.0% Projections 4.0% CPI % change p.a. 3.0% 2.0% Real squeeze Earnings 1.0% 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 CPI Average weekly earnings (excl bonus) Source: ONS, Analysis UK Economic Outlook March 2018 15
Summary: UK economic prospects and policy implications 1 2 3 In our main scenario, we project UK growth to continue at moderate rates of around 1.3% in 2018 and 1.6% in 2019 Europe and the rest of the world economy have strengthened, but the UK will lag behind in 2018-19 due to the drag on domestic demand from Brexit-related uncertainty. Rising interest rates in the US could also dampen global growth. A key factor behind the UK slowdown has been subdued consumer spending growth and we expect this to continue in 2018-19. Real incomes have been squeezed by higher inflation, and there are limits to how much further borrowing can rise to fund spending. 4 Real wage growth should return to modestly positive territory in 2019, but the boost to growth will be offset by slower jobs growth in that year. 5 The Bank of England is expected to continue with gradual interest rates rises over the next two years, but the Chancellor may ease fiscal policy somewhat in his Autumn Budget, in particular to help to fund the increased spending on the NHS announced in June. UK Economic Outlook March 2018 16
UK housing market outlook
Average house price inflation remained fairly steady in 2017, but a further weakening in price growth has occurred in early 2018 15% 10% 5% Year-on-year price change % 0% -5% -10% Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18-15% -20% Source: ONS, Land Registry
The share of fixed-rate mortgages has increased significantly since 2010, which will delay the squeeze on household budgets from any future interest rate rises 100% 70% Type of mortgage as share of new mortgages 90% 80% 70% 60% 50% 40% 30% 20% 10% 50% 94% Fixed rate mortgages as share of total outstanding 60% 50% 40% 30% 20% 10% 0% 2010 2017 Fixed Discounted Tracker Capped SVR 0% 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 Source: Council of mortgage lenders
UK house price growth is projected to remain relatively steady at around 3% in our main scenario, but there are significant uncertainties around this projection 20% 15% 10% Year-on-year change 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025-5% -10% -15% High scenario Low scenario Main Scenario Source: ONS, analysis
The house price-to-earnings ratio rose rapidly in 2013-17, but is projected to be more stable over the next few years (although remaining high by historical standards) House price to earnings ratio Source: ONS, analysis Note: Earnings are annualised average weekly earnings for the whole UK economy 9 8 7 6 5 4 3 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Projection 2025
House price inflation is projected to be positive in 2018-19 for most regions, but prices may fall back in London 6% 5% 4% Year-on-year change 3% 2% 1% 0% -1% West Midlands Region Scotland East Midlands South West East of England Yorkshire and The Humber Northern Ireland North West Wales South East North East London -2% 2018 2019 Source: analysis
Growth in the number of new dwellings has returned to a similar level as prior to the financial crisis 300,000 600,000 Net change from previous years 250,000 200,000 150,000 100,000 50,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 500,000 400,000 300,000 200,000 100,000 Change in population from previous year -50,000 0 New build completions Net conversions Net change of use Net other gains Demolitions Adjustment to Census 2011 Net additional dwellings Population Source: ONS, DCLG, analysis Note: Data for change in dwellings by component is only available from 2006.
House price inflation varied considerably across England in 2001-16, with London local authorities seeing the fastest house price increases over this period Source: ONS and Land Registry, analysis Note: analysis covers period 2001-2016.
Local authorities with excess housing demand growth also tended to experience larger house price rises in 2001-16 240% 220% Price growth (2001-2016) 200% 180% 160% 140% 120% 100% -10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% Excess demand 2001-2016 Linear (2001-2016) Source: ONS, DCLG, analysis Note: We exclude excess demand groups with fewer than two observations.
The relationship between excess demand and house price growth has changed over time, becoming positive in 2006-11 and stronger since 2011 120% 100% 80% Price growth 60% 40% 20% 0% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% -20% Demand - Supply imbalance 2001-2006 2006-2011 2011-2016 Linear (2001-2006) Linear (2006-2011) Linear (2011-2016) Source: ONS, DCLG, analysis
Population grew faster than housing stock in around half of local authorities in England, and in 85% of those in London 14% 12% Chane in household stock 10% 8% 6% 4% 2% 0% 0% 2% 4% 6% 8% 10% 12% 14% Change in population South East East of England London Rest of England Source: ONS, DCLG, analysis
Housebuilding needs to be focused in areas of population growth, and 110,000 additional homes were needed in London in 2011-16 to match growth in demand Local Authority (London) Excess demand Price Growth Housing shortfall Tower Hamlets 12% 60% 12,500 City of Westminster 10% 63% 11,500 Camden 9% 38% 9,000 Islington 8% 56% 7,500 Kingston upon Thames 8% 60% 5,000 London (including all boroughs) 3% 61% 110,000 Local Authority (rest of England) Excess demand Price Growth Housing Shortfall Exeter 5% 18% 3,000 Guildford 5% 37% 3,000 Oxford 5% 45% 3,000 Runnymede 5% 42% 2,000 Manchester 5% 23% 10,000 Source: analysis of ONS and DCLG data (numbers rounded to nearest percent or thousand) Note: City of London is excluded UK Economic Outlook March 2018 28
The UK has experienced the slowest growth in the number of houses per household of similar international economies 1.3 1.2 Houses per household 1.1 1 0.9 0.8 0.7 0.6 Norway United Kingdom Australia New Zealand United States of America 1990 2000 2010 2015 Finland Switzerland Ireland Source: ONS, analysis Note: We have assumed a constant household size to derive the number of households, using the latest household size figures from the UN. Over a longer period of time, average household size can change, though generally not by that much for mature advanced economies. ONS data shows, for example, that average household size in the UK has remained at around 2.4 since 1996.
Population growth rates in England are projected to decline, which could reduce pressure on house supply but does not eliminate the need for new homes given past under-supply 600,000 500,000 Source: ONS, analysis 400,000 300,000 200,000 100,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 High - Low Population projection Population (Principal) 2024 2025 2026 2027 2028 2029 2030
Summary: UK housing market outlook 1 2 3 4 5 UK house price growth remained relatively resilient in 2017 despite a weakening economic backdrop, but has shown signs of moderating during the first half of 2018, particularly in London. We project a further softening of house price growth to around 3% in 2018 and we expect this to continue at a similar average rate in the medium term to 2025. This implies that the average UK house price would rise from 221,000 in 2017 to around 285,000 by 2025. We expect that most regions will experience moderate house price growth in 2018 broadly similar to the UK average, except for London, where we project that house prices could drop by nearly 2% compared with 2017. Our local analysis suggests a clear link between lack of new housing supply, relative to population growth, and local house price growth since 2011. The lack of new housing supply relative to population growth has been particularly marked in London. We estimate that around 110,000 additional homes would need to have been built between 2011 and 2016 to keep up with population growth. UK Economic Outlook March 2018 31
Impact of AI and related technologies on jobs in the UK
We have weighed up the potential for AI to replace jobs (the displacement effect ) against the ability for AI to create jobs (through the income effect ) Displacement effect: humans lose jobs to AI/robots AI/robots become more costeffective than humans AI/robots save firms money, so firms lower prices Income effect: Lower prices increases real income and spending Firms hire more workers to produce the additional output Source: Note: our broad approach here is similar to that adopted for the US in a report by Oxford Economics and Cisco on The AI Paradox (December 2017). But the details are different as our key input assumptions derive from proprietary research and because their analysis assumes the net effect on jobs is zero, whereas we do not impose this constraint. AI is defined broadly here to include related technologies such as robotics, driverless vehicles, drones and other forms of smart automation. UK Economic Outlook July 2018 33
We estimate that around 20% of existing UK jobs could be automated by 2037, but this could vary from around 5% to almost 40% across sectors Transportation and storage Manufacturing Wholesale and retail trade Financial and insurance activities Administrative and support service activities Public administration and defence All sectors Information and communication Professional, scientific and technical activities Accommodation and food service activities Construction Other sectors Human health and social work activities Education 0% 10% 20% 30% 40% 50% 60% 70% Jobs estimated to actually be displaced Jobs at potential risk of displacement Source: analysis using data from the OECD PIAAC survey UK Economic Outlook July 2018 34
We estimate that AI and related technologies could also create an additional 20% of jobs by 2037, but this could vary across sectors from below 10% to nearly 35% Human health and social work activities Professional, scientific and technical activities UK Economic Outlook Information and communication Wholesale and retail trade Administrative and support service activities Accommodation and food service activities All sectors Financial and insurance activities Transportation and storage Other sectors Construction Education Manufacturing Public administration and defence Source: analysis 0% 5% 10% 15% 20% 25% 30% 35% 40% Note: In our Sizing the Prize report we estimated that AI and related technologies could boost UK GDP by around 10% by 2030. For this article we have converted this value into jobs numbers by, first, projecting UK output (GVA) growth by industry sector over the next 20 years, and second, estimating the proportion of GVA growth that is attributable to AI (as implied by estimates in our Sizing the Prize report). We assume here that the projected increase in jobs due to the income effect will be the same as the projected increase in GVA since productivity effects are captured through the displacement effect. July 2018 35
The net effect of AI on jobs by 2037 is estimated to be broadly neutral: c.20% displacement vs c.20% creation Net effect of AI on jobs (000s) Net effect of AI on jobs (%) +7.2m Income effect +20% Income effect +0.2m Net effect 0% Net effect -7.0m Displacement effect -20% Displacement effect Source: analysis UK Economic Outlook July 2018 36
The healthcare sector is estimated to see significant net job gains from AI, while other sectors such as transport and manufacturing could see net job losses 0% Income effect 0% 5% 10% 15% 20% 25% 30% 35% 40% -5% -10% Education Net job gains Human health and social work activities Displacement effect -15% -20% -25% -30% -35% -40% Construction Public administration and defence; compulsory social security Manufacturing Net job losses Other sectors Financial and insurance activities Transportation and storage Accommodation and food service activities Information and communication Administrative and support service activities Wholesale and retail trade; repair of motor vehicles and motorcycles Professional, scientific and technical activities -45% Source: analysis UK Economic Outlook July 2018 37
The estimated net effect of AI on jobs by industry sector implies a small positive impact in London (c.2%) and marginally negative impacts in the North and Midlands based on differences in their industry structures Source: analysis Note: The relatively small regional differences are what we would expect given that we are only looking at the effect of variations in industry structure across regions. In practice, there will also be variations due to other task characteristics of jobs within a particular sector that vary by region UK Economic Outlook July 2018 38
Although our central estimate is that the net jobs impact of AI will be broadly neutral, our two alternative scenarios illustrate the uncertainties around any such estimates Net effect of AI on jobs in each scenario (000s) Net effect of AI on jobs in each scenario (%) +3.7m Optimistic +11% Optimistic +0.2m Central 0% Central -3.3m Pessimistic -9% Pessimistic Source: analysis UK Economic Outlook July 2018 39
Government has an important role in steering the economy towards a more optimistic scenario in relation to AI Mitigating job displacement Government should invest more in developing STEAM* skills that will be most useful to people in this increasingly automated world Government should continue to work with business, unions and educational providers to establish a national retraining programme for workers displaced by new technologies Government should strengthen the safety net for those who find it hard to adjust to technological changes Maximising job creation Place-based industrial strategy should target job creation Government should implement its AI strategy in full Government should promote effective competition to ensure that productivity gains from AI are passed through to consumers *STEAM = science, technology, engineering, arts & design, and maths UK Economic Outlook July 2018 40
Summary: Net impact of AI and related technologies on jobs in the UK 1 2 3 4 5 AI and related technologies such as robotics, drones and driverless vehicles could displace many jobs formerly done by humans, but they will also create many additional jobs as productivity and real incomes rise and new and better products are developed. We estimate that these countervailing displacement and income effects are likely to broadly balance each other out over the next 20 years in the UK, with the share of existing jobs displaced by AI (c.20%) likely to be approximately equal to the additional jobs that are created (c.20%). The sectors that we estimate will see the largest net increase in jobs in the long run due to AI include health (+22%), professional, scientific and technical services (+16%) and education (+6%). The sectors estimated to see the largest net decrease in jobs due to AI include manufacturing (-25%), transport (-22%) and public administration (-18%). Based on differences in industry structure alone, our projections do not imply large variations by region, with just a small net job gain in London offset by small net losses in the North and Midlands. But other factors could lead to larger regional variations than captured by our analysis. Our central estimate is that the net effect of AI on jobs will be broadly neutral, but there are many uncertain factors that could tip the balance towards more optimistic or pessimistic scenarios. We identify some policy areas where action could help to maximise the benefits and/or mitigate the costs in terms of impacts from AI on jobs. UK Economic Outlook March 2018 41
Contacts for more information about this report John Hawksworth (Chief Economist) john.c.hawksworth@pwc.com Richard Snook (Senior Economist, Housing) richard.snook@pwc.com Jamie Durham (Economist, Housing) jamie.durham@pwc.com Yuval Fertig (Economist, Impact of AI on jobs) yuval.fertig@pwc.com For more information on our Economics services, or to access the full report, please see our website at: http://www.pwc.co.uk/economics http://www.pwc.co.uk/ukeo 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. 2018 PricewaterhouseCoopers LLP. All rights reserved. In this document, "" refers to the UK member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.