economic overview laurence sanders. world economic growth n sustained recovery n usa 4.7% n japan...
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World Economic Growth
Sustained recovery
USA 4.7%
Japan 4.2%
UK 3.7%
Eurozone 2.0%
( second quarter GDP year on year )
The High Growth Economiesgrowth rates
China 9%
India 8%
Russia 7%
Australia 4%
( latest data, year on year)
Commodity Prices Brent Crude ( spot) - $28 / barrel September 2003 $42 / barrel September 2004
Commodity prices lower % of total costs than in previous decades
UK output prices ( August yoy) - 2.6%
Economic Cycles
Typical UK cycle is now 5 /10 years - there are also 25 and 50 year cycles
Slowdown in winter 2001/02
Currently sustained recovery
Strong growth forecast 2005
Return to trend growth in 2006 / 07
UK EconomyOverview
Economic Growth 3.7%
Underlying Inflation (CPI) 1.3%
Average Earnings 3.8%
Unemployment 2.7%(international measure 4.7%)
UK Economy
Gross Domestic Product: £1100 billion
Fourth largest economy in the world
World’s third largest trading nation
Trend Growth: 2.7% per annum
UK EconomyStructure
Gross Domestic Product £1100bn
Service Sector 72% of which financial sector 24%
Industry 27% of which manufacturing 18%
Agriculture 1%
Forecast:the UK economy
2005 2006
Economic Growth 3.0 2.5
Core Inflation 2.0 2.0
Unemployment 4.7 4.9
Average Earnings 4.9 4.6
UK Base Rates
Set by the Monetary Policy Committee:
New Target: CPI
- Consumer Price Index
CPI excludes mortgage interest; rates
CPI target : 2% ( plus / minus 1% )
– HICP target 2.0% + / - 1%
Forecast:UK Base Rates
End 2004 End 2005 End 2006
Base Rate
Forecast5.00% 5.25% 4.75%
Market View 5.00% 5.25% 5.00%
Longer Term Interest Rates
Key driving forces:
International long term rates, notably US
G7 growth rates, especially the USA
G7 inflation prospects
Strong correlation with equities
Period Rate Forecast end 2004 end 2005 end 2006
2 year 5.30% 5.40% 4.70%
5 year 5.40% 5.50% 4.70%
10 year 5.50% 5.50% 4.70%
The UK Housing Marketkey forces
Interest rates - both short and longer tem
Personal Disposable Income:– average earnings
– unemployment
– taxation
Housing supply
The Housing Market andthe UK Economy
New houses built - 2003 180,000
Owner Occupation Ratio over 70%
Forecast Gross Mortgage Lending 2004 £280 billion
Forecast Net Mortgage Lending 2004 £110 billion
House Price Forecast
Average house price ( mortgaged property ): year on year
4Q 2004 4Q 2005 4Q 2006
15.0% 5.0% 5.0%
Barker Review
Additional 120,000 houses a year required for UK house inflation equal EEC average
of CPI plus 1.1% pa ( very optimistic)
Additional 70,000 houses a year reduces UK house inflation to CPI plus 3% pa
( more realistic longer term)
Several years before balance housing supply/ demand
Miles Review
Housing finance industry - in many ways efficient and innovative
Long term fixed rate mortgages intrinsically NOT superior to fixed
No compulsion re fixed rate mortgages
Greater borrower awareness of interest rate risk
Risks to forecasts
US and UK recoveries stall
Geopolitical problems - impact on oil prices
Corporate governance shocks
Deflation - in USA or Eurozone
Conclusion - the optimistic view
Consensus forecast is for stronger growth in 2005 / 2006
Fiscal and monetary policy in G7 geared to long term sustainable recovery
Enlargement of EEC will stimulate European growth
Housing market will be supported by excess of demand over supply, economic recovery and historically low interest rates