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Dr Andrew SentanceFormer MemberMonetary Policy Committee
The global and UK economic outlook
Presentation at Citywire Investment Conference, 1st December 2011
Outline
Why has the global economy slowed?
Resolving the euro area crisis
Key issues shaping the recovery
UK and global economic outlook
World economic growth
* EU, US and 11 other economies accounting for 85% of world GDP
Source: IMF World Economic Outlook Update, June 2011, and OECD Economic Outlook
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
-3-2-10123456
IMF, Jun 2011 OECD, Nov 2011 Ave 1990-2010
% per annum change in GDP in G-13 economies*
The rise of Asia
*: Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.
Source: IMF World Economic Outlook
Percentage share of world GDP, current market prices and exchange rates
0%
5%
10%
15%
20%
25%
30%
35%
40%
1980 1990 2000 2010
US EU-27 Asia-pacific G10 *
Why is global growth slowing?
• Policy tightening in Asia-Pacific in response to inflationary concerns
• Financial volatility and euro area problems affecting business and consumer confidence
• Relatively high inflation squeezing disposable income and consumer spending
• Structural factors continuing to hold back growth in US and other western economies
Global inflation on the rise
% per annum change in consumer prices
Source: The Economist
USEu
ro
China
Japa
n UK
Braz
il CaIn
dia
Russia
Aust
r...
-2
0
2
4
6
8
10
12
Sep-10Sep-11
Forces underpinning global inflation
• End of global disinflationary decade
• Strong growth in late 2000s
• Global stimulus in 2009/10
• Tension from East-West rebalancing
• Assymmetric monetary policy responses
Global disinflation ends in mid-2000s
Source: Office for National Statistics
Jan-97 Jan-02 Jan-07-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
CPI goods Factory gate prices
% per annum change in UK goods prices
Global primary energy consumption
Source: BP Statistical Review 2010
Million tonnes oil equivalent
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
OECD
Non-OECD
Shares of world GDP and population
*: Apac G10: Asia-Pacific G10, including Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.
Source: IMF World Economic Outlook, World Bank and Eurostat.
2010 figures
US, 23%
EU-27, 26% Apac
G10*, 27%
Other, 24%
GDP at market prices
US, 5%
EU-27, 7%
Apac G10*, 46%
Other, 43%
Population
Problems with global monetary policy
• Tailwind of global disinflation is no longer helping to maintain price stability
• Asia and other emerging market economies are strongly growth-oriented
• Other western authorities (especially US and UK) using monetary policy to cushion structural adjustment post-financial crisis
• Energy and commodity price inflation treated as “one-off” or someone else’s problem
• Risk of inflationary bias to global monetary policy
Public debts and deficits compared
% of GDP in 2010
Source: IMF, April 2011 World Economic Outlook
Net debt0
20
40
60
80
100
120
140
64.4 64.8 69.4
117.5
Euro US UK Japan
Gov't deficits0
2
4
6
8
10
12
6.1
10.6 10.4 10.3
Budget deficits in US, UK and euro area
Source: OECD
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
2
4
6
8
10
12
14
UK Euro US
General government borrowing, % of GDP
Fixing the euro “deficit problem”
• High deficit economies to show commitment to the “hard grind” of fiscal consolidation
• Strong medium term fiscal rules and effective mechanism for mutual support
• Clarifying and strengthening role of ECB
• Recapitalising and restructuring banks
• Better communication, co-ordination and market management
Will the euro area break up?
• Likely to make problems worse not better
• Practical, institutional and political issues
• Departing currencies would lack credibility
• Leaving euro would not help weaker economies address structural problems
• Policy “failure” would have severe adverse knock-on impact on all EU economies (including non-euro members such as UK)
UK economic growth
Source: ONS
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-8
-6
-4
-2
0
2
4
6
Previous data Latest data Trend
% per annum change in non-oil GDP
The progress of the UK recovery
• Growth has slowed after initial rebound
• This partly reflects broader global slowdown and fading impact of stimulus measures
• But it is also due to a squeeze on consumers from high inflation, including VAT impact
• Pressures on consumer should ease next year but spending likely to remain subdued
• Global economic situation and resilience of business investment hold key to UK outlook
High inflation squeezing spending
Source: Office for National Statistics
1997MAR 1999FEB 2001JAN 2002DEC2004NOV2006OCT 2008SEP 2010AUG-2
0
2
4
6
8
10
Value Volume Average 97-08
% per annum growth in retail sales (3-month ave)
UK inflation stubbornly above target
Source: Office for National Statistics
1995 Jan 1997 Apr 1999 Jul 2001 Oct 2004 Jan 2006 Apr 2008 Jul 2010 Oct0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Value Target Ave 2008-11
% per annum increase in consumer prices index
Broad-based rise in consumer prices
Source: Office for National Statistics
Food and non-alcoholic beverages
Alcoholic beverages and tobacco
Clothing and footwear
Housing, water and energy
Furniture & household eqpt/maint'ce
Health
Transport
Communication
Recreation and culture
Education
Restaurants and hotels
Miscellaneous goods and services
-2 0 2 4 6 8 10
% annual rise in CPI categories, October 2011
The MPC Inflation Record
Source: Office of National Statistics
Period Target High Low Ave
May 1997 - Dec 2003
RPIX = 2.5% 3.2% 1.5% 2.4%
Jan 2004 - Dec 2007
CPI = 2.0% 3.1% 1.1% 2.0%
Jan 2008 – Sep 2011
CPI = 2.0% 5.2% 1.1% 3.4%
Large official inflation forecast errors
Source: Bank of England
Mean of forecast percentage annual increases in consumer prices
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013
May-09 Nov-09
May-10 Nov-10
May-11 Actual CPI inflation
Why has UK inflation been so high?
• Global inflationary pressures
• Large sterling depreciation
• Persistent services inflation
• Limited impact of spare capacity
• MPC response to financial crisis
The global economy and UK inflation
Global economy
Cost of imports
Demand
Pricing climate
Exchange rate
Domestic demand
Expectations and credibility
UK inflation
Impact of monetary policy
Sterling depreciation since 2007
Rebased to 100 in January 2005
Source: Thompson Datastream and Bank for International Settlements
*: Effective exchange rate
70
75
80
85
90
95
100
105
110
2005 2006 2007 2008 2009 2010 2011
Euro-Sterling exchange rate
Sterling EER *
Average EER *, 97-07
Episodes of Sterling depreciation
Index, base year = 100
Number of years from start of period
Source: Bank for International Settlements
50
60
70
80
90
100
110
0 1 2 3 4 5
1967-1971 1972-1977 1981-1986
1991-1996 2007-2010
Euro/UK inflation differential & exchange rate
Source: Thompson Datastream
*: Euro-Sterling exchange rate is expressed as the deviation from its average over the same period.
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
1997 1999 2001 2003 2005 2007 2009 2011
Euro-area/UK CPI differential (RHS) *
Euro-Sterling exchange rate (LHS) **
Euro/ sterling %
Persistently high UK services inflation
Source: Office for National Statistics
Jan-97 Jan-02 Jan-07-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Goods Services
% per annum change in UK consumer prices
Capacity utilisation in UK economy
Source: Bank of England
Jan-98 Jan-03 Jan-08-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Manufacturing Services
Bank of England Agents’ scores relative to normal
Unemployment in UK recessions
Source: Office for National Statistics, Labour Force Survey
-8 -6 -4 -2 0 2 4 6 8 10 12 14 164
5
6
7
8
9
10
11
12
77Q4-83Q4 88Q2-94Q2 06Q2-11Q3
Unemployment rate, % of labour force
Number of quarters from employment peak
Problems with the MPC
• Emphasis on forecast has allowed the Committee to redefine its own target
• Persistent modelling and forecasting errors, with excessive weight on “output gap” model
• Assymmetric policy response
• “Benign neglect” of sterling and policy of talking down the pound
• Lack of effective scrutiny and accountability
• Perception that inflation target has been downgraded and that growth is now the focus of monetary policy
Key issues shaping the recovery
• Legacy of financial crisis, holding back spending growth in western economies
• The rise of Asia and emergence as a major engine of global growth
• High and volatile energy and commodity prices, leading to bursts of global inflation
• Uncertainty about policy-making and lack of economic leadership fuelling financial volatility and affecting confidence
Outlook for advanced economies
Source: OECD and Office for Budget Responsibility
2011 2012 20130
0.5
1
1.5
2
2.5
3
US UK Euro OECD
% per annum change in GDP
UK GDP and consumer prospects
Source: ONS and Office for Budget Responsibility
2000-08 ave
2009 2010 2011 2012 2013-5
-4
-3
-2
-1
0
1
2
3
4
GDP Consumer spending
% per annum change – latest OBR forecast
Can growth recover in 2012?
• Easing pressure on consumers from fall-back in inflation
• Global growth to pick up as Asian economies recover momentum
• Some resolution of euro area situation and reduction in financial volatility
• Confidence-building measures from policy-makers
• Resilience of UK non-financial private sector
Employment in UK recessions
Source: Office for National Statistics, Labour Force Survey
-8 -6 -4 -2 0 2 4 6 8 10 12 14 1692
94
96
98
100
77Q4-83Q4 88Q2-94Q2 06Q2-11Q3
Index of employment, 100 = cyclical peak
Number of quarters from employment peak
Key conclusions
• Global and UK growth to pick up during 2012 after current weak patch
• Asia-Pacific region the key engine of global growth
• Growth recovery hinges on some resolution of current euro area crisis
• Global inflation to subside in 2012, but inflationary pressures likely to re-emerge as global economy picks up again
• UK inflation unlikely to fall as sharply as MPC expects, aggravating credibility issue