Economic OutlookChallenges for business

Ian McCaffertyChief Economic AdviserCBI

A divergent and uncertain global recovery

• 2011 Growth pause• Commodity prices, supply chain

disruptions, China slowdown

• The outlook for 2012-13• 1-2-6 world• Critically dependent on avoiding big risks

Jan-

10 Feb Mar Apr

May Ju

n Jul

Aug Sep Oct

Nov Dec

Jan-

11 Feb Mar Apr

May Ju

n Jul

Aug Sep Oct

Nov Dec

Jan-

12 Feb Mar

-20%

0%

20%

40%

60%

80%

HWWI Commodity Price Indices ($)

All Commodities Excl. Energy% yr/yr

2008 2009 2010 2011

-14%

-9%

-4%

1%

6%

120

130

140

150

160

170

180

World Trade Volume

Growth (lhs) Level (rhs)% 3m/3m 2000=100

Q1-10 Q2 Q3 Q4 Q1-11 Q2 Q3 Q4 Q1-12

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Advanced economy growth rates

US Eurozone Japan% q/q (real)

Q1 2012 outturn data only available for the US

Risks: oil and commodity prices

Jan-11Feb Mar Apr May Jun Aug Sep Oct Nov DecJan-12Feb Apr80

85

90

95

100

105

110

115

120

125

130Oil prices$ per barrel

2007 2008 2009 2010 2011 20120

50

100

150

200

250

Food Metals Non-food argiculturals

Non-oil commodity prices2007=100

● Pressure on oil prices: supply concerns arising from political instability in MENA, embargo on Iran, disruptions in South Sudan; risk premium around $20pb

● Market fundamentals tight: some scope for Saudi supply replacement

● Medium-term trend in prices is firm: strong EME demand, alongside constrained supply

● Record sterling and euro prices: close to historical tipping point for economic activity?

Risks: How will the Euro crisis play out?

Jan Feb Mar Apr May0

10

20

30

40

50

60

Periphery Maturing Debt

Greece Portugal Ireland Spain Italy

€bn

Source: Goldman Sachs

Netherlands

Slovakia

Cyprus

Austria

Belgium

Portugal

France

Germany

Italy

Spain

Greece*

0 5 10 15 20 25 30

EBA: Aggregate Capital Shortfalls

€bnSource: European Banking Authority * Greek recap needs based on EU/IMF requirements that exceed EBA standards

• The ECB has bought time

• ECB LTRO: “lender of last resort”, reduced some market risks

• But governments must deliver a systemic solution to the underlying causes of the crisis

• New & rigorous fiscal architecture

• Bank recapitalisation

• Joint debt responsibility

• Supply side reform

• Competitiveness imbalances

• Short to medium-term growth package

• 2012 a testing time

• Sovereign debt rollovers; bank refinancing

• Difficult political climate

Risks: policy error/political shifts

Elections and other political tensions could easily lead to policy error

• French elections (May)

• US elections (November)

• UK coalition tensions (growing)

• Middle East (volatile)

• Rogue states (unpredictable)

Global outlook 2012-132012-2013: Global growth prospects looking up – but dependent on Eurozone outcomes

• Modest recovery in advanced economies:

• US and Japan are sustaining momentum

• Euro area will be weak – prone to strong downside risks

• EMEs will underpin global growth

• Outlook vulnerable to elevated oil prices and developments in the Euro area.

World GDP Growth

  2011 2012 2013

World 3.8 3.3 4.1

Advanced economies: 1.6 1.4 2.3

USA 1.7 2.4 2.7

Euro Area 1.5 -0.4 0.9

Japan -0.7 1.8 2.5

Germany 3.1 0.6 1.7

France 1.7 0.1 1.2

Italy 0.5 -1.6 -0.1

Spain 0.7 -0.9 -0.2

UK 0.7 0.6 2.0

       

Emerging economies: 6.4 5.6 6.4

China 9.2 8.6 8.8

India 7.1 6.1 7.1

Brazil 2.7 3.2 5.0

Russia 4.3 4.3 4.2

Africa 3.5 3.2 4.5

2007 2008 2009 2010 2011 2012 2013-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0Advanced economies Emerging economies

Contributions to world GDP growthpp

Eurozone overview 2012-13

  2011 2012 2013

Euro area 1.5 -0.4 0.9

Germany 3.1 0.6 1.7

France 1.7 0.1 1.2

Italy 0.5 -1.6 -0.1

Spain 0.7 -0.9 -0.2

Greece -6.9 -6.7 -1.8

Latest Euro area growth forecasts2012-2013: Core and periphery diverging

• Modest “recession” underway, but sluggish growth should resume if the crisis remains contained

• Germany to lead the recovery, helped by relatively robust domestic demand

• France, Scandinavia and Austria to regain momentum from H2 2012; deeper downturn in Netherlands

• Austerity tightening in Italy and Spain, worsening the growth outlook; Greece and Portugal in deep recessions

• Headline inflation is falling as energy prices decline – ECB so far cautious about cutting interest rates

• Unemployment set to rise throughout 2012 and into 2013 – despite a continuing fall in Germany

• Impact from disorderly resolution to the euro crisis would be huge

2008 2009 2010 2011

30

35

40

45

50

55

60

Eurozone Purchasing Managers Indices

Overall Services Output Manufacturing50.0 = No Change

2012 set to be another difficult year; some momentum building up through 2013

• H1 2012 “bumping along the bottom”; momentum picking up in H2. Pace of recovery into 2013 crucially dependent on corporate confidence

• Fiscal headwinds/sluggish consumers will constrain domestic demand; some recovery in exports; corporate investment?

• Inflation falling but sticky; unemployment will continue to rise

2004 2005 2006 2007 2008 2009 2010 2011 2012 20131.0

1.4

1.8

2.2

2.6

3.0

2008 2009 2010 2011 2012 2013-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

340

345

350

355

360

365

370Growth (lhs) Level (rhs)

UK overview 2012-13

  2011 (outturn) 2012 2013

GDP 0.7 0.6 2.0

Household Consumption -1.2 0.2 1.6

Manufacturing output 2.0 -0.9 1.8

Consumer Prices 4.5 3.0 2.2

Unemployment (%) 8.1 8.6 8.8

Latest UK Forecast

ILO unemploymentMillions

CBI GDP forecast% q/q

£bn, 2008 prices

CBI forecast

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

20

15

-16

20

16

-17

-2

-1

0

1

2

3

4

5

6

7

UK: fiscal and monetary policy

• Austerity package under pressure• Deficit elimination two years later• Debt peaks at 78%

• Impact on economy

• Annual drag on GDP of ~0.5% points

• Credibility premium delivers looser monetary policy

• Monetary policy to remain accommodative

• Low rates into 2013

• More QE?

• Fiscal policy: sticking to Plan A

• 2012 Budget• Need for Growth Agenda

Growth in planned public spendingReal % rise

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

0.0

2.0

4.0

6.0

8.0

10.0

12.0Public sector net borrowing

Structural Cyclical

% GDP

Chart excludes the impact of the transfer of Royal Mail pension

fund assets in 2012/13

UK: a constrained economy

End of the “Nice Decade”

• Legacy impacts from the financial crisis

• Bank recapitalisation• Consumer deleveraging• Fiscal austerity

• Growth constrained for some time

Source: IMF

Fiscal policy contraction

Monetary policy tightens

Oil shocks

External demand shock

Financial crises

Big 5 financial crises

0 1 2 3 4 5 6 7 8

Output loss % from peakDuration (quarters)

Shocks and Recessions

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

The ‘nice’ decade: world GDP growth & inflation% yoy

UK: rebalancing in a changing world

• UK must shift to a different model of growth

• Investment and net trade• Broader sectoral contributions• Financed by savings not debt

• Against backdrop of global change

• Emerging market growth• Rapid digitalisation• Shifting demographics• Growing resource constraints

Rebalancing GDP growth

Series1-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0.5%

-0.2%

0.4%1.0%

-0.3%

0.9%

1.7%

0.4%

2008

2020

0 1 2 3 4 5 6 7

£1.4tr

£6tr

Compound annual growth: 13%

Disposable income in China rising

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

8

9

10

11

12

13

14

15 Ageing of UK population

Number of people aged 65+

Growth 2.3% p.a.

C

I

G

X-M

C

I

X-M

G

Growth 2.1% p.a.

1997 - 2009 2011 - 2015

Economic OutlookChallenges for business