Brexit and the outlook for the UK economy Dr Andrew Sentance CBE - PowerPoint PPT Presentation

Brexit and the outlook for the UK economy Dr Andrew Sentance CBE Former member of Bank of England MPC Senior Economic Adviser, PwC Building Societies Association Conference London, Wednesday 3 rd May 2017

Outline � Global and UK recovery – the story so far � What does Brexit really mean? � Outlook for UK and global economy � Implications for Building Societies

The world economy is expanding World GDP, US $ trillion (current prices) 120 100 100 75 80 66 60 40 33 20 0 2000 2010 2016 2022 ����������� The new normal Slide 3

Global growth close to long-run trend % per annum change in world GDP and consumer prices 7 6 5 4 3 2 1 0 -1 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 GDP growth Inflation 1980-2010 GDP growth trend Source: IMF World Economic Outlook, April 2017 Slide 4

������������������������������������������ ������ �� ������ ��� ��� �������� ��� ��� �������� ��� ������� ������ ���� �� ��� ��� ����� ��� ����� ����� ������ China ��� ���� ��� ��� ����� ���� ��������� ��� ��� ������ ������������������������ ������������ ��� ��� ��� IMF World Economic Outlook, April 2017 Ireland adjusted to reflect domestic economy PwC 5

UK unemployment among lowest in EU Unemployment rate in 10 largest EU economies, % of workforce Spain Italy France Belgium Sweden Austria Poland Netherlands UK Germany Slide 6 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% ����������������

Consumers supported growth in mid-2010s % per annum change in UK GDP and consumer spending 6 4 2 0 -2 -4 -6 2000 2002 2004 2006 2008 2010 2012 2014 2016 GDP Consumer spending 2000-2016 GDP Trend Source: Office for National Statistics Slide 7

… but the times they are a changing % per annum annualised increase in key UK economic indicators 3.5 2014-16 2017Q1* 3 2.5 2 1.5 1 0.5 0 GDP Services Manufacturing Employment Source: Office for National Statistics * Based on most recent 6-months for employment Slide 8

Inflation has caught up with wage growth % annual increase in average wages and consumer prices (CPI) 6 Wage increases Price inflation (CPI) 5 4 3 2 1 0 -1 Source: Office for National Statistics

… causing a sharp consumer slowdown % annual change in volume of retail sales, 3-month moving average 7 Retail sales growth Average since 2011 6 5 4 3 2 1 0 -1 -2 Source: Office for National Statistics

… as a weak pound has squeezed consumers UK effective exchange rate, Jan 2005=100 130 EER 1990-2008 Ave Ave since 2009 120 110 100 90 80 70 Source: Bank of England

UK household saving rate – low and falling % of household disposable income available after deducting consumer spending 15 14 13 12 11 10 9 8 7 6 Household saving fratio Average 1963-2016 5 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 Source: Office for National Statistics Slide 12

UK household debt is edging up again Household financial liabilities as % of disposable income 160% Debt as % of income Average 1987-2003 150% 140% 130% 120% 110% 100% 90% 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Office for National Statistics Slide 13

Economic consequences of UK leaving EU � Economic shock creating investment uncertainty and squeezing consumer spending (short-term) � Impact on trade and investment flows – possible disruption vs new opportunities (long-term) � Negative impact on migration from EU (short-term and long-term) � More regulatory freedom (long-term) � Lower fiscal contributions (long-term) Slide 14

Economic scenarios for UK post-Brexit Index of GDP, 2005 = 100 130 Pre-Brexit Central scenario (FTA) Downside (WTO) Current forecast 125 ��������������������������������� 120 �������������������������������� �!"# ���������������� ��$%" 115 110 105 100 95 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: ONS and PwC Post-Brexit Scenarios, updated for most recent data

“Brexit means Brexit” strategy � Theresa May: key priority is to control immigration � EU regulation to be absorbed into UK law and then repealed or amended in 2020s � Single Market access – but not on current basis � New UK-EU trade agreement likely to be based on ensuring market access for key industries which have already invested heavily in UK (eg cars, financial sector) � Implies a more protectionist/interventionist approach to UK business and industry than we have seen since 1970s � UK will seek to strike trade deals with non-EU countries but these will take a long time to deliver � Government will aim to offset trade/investment downside with other policies (eg Industrial Strategy, tax and spending) Slide 16

Article 50 negotiation – key issues � Payment of exit contribution to EU budget to cover future liabilities (£20-60bn) � People issues: rights of UK/EU citizens and future regime for immigration between UK and EU � Trade in goods and services and access to UK and EU markets for key sectors – especially manufacturing and financial services � Transition or implementation period Slide 17

Post-Brexit world economy in 2030 £trn at 2016 prices and market exchange rates China US EU-27 India Japan Germany UK France Brazil Indonesia Italy South Korea Mexico Russia Canada Spain 0 5 10 15 20 25 30 ��������������������������������������������� ! Slide 18

&�����'��������������������������( ������ �� ������ ��� ��� �������� ��� ��� �������� ��� ������� ������ ��� �� ��� ��� ����� ��� ����� ����� ������ China ��� ��� ��� ��� ����� ���� ��������� ��� ��� ������ �������������������� ������������ ��� ��� ��� PwC April 2016 Global Economy Watch PwC 19

UK economic outlook % per annum growth 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% GDP Consumer spending Source: Office for National Statistics, HM Treasury Consensus and PwC Forecasts

Prospects for UK interest rates � US interest rates now on a gradually rising trajectory � Global economy set fair for reasonably healthy growth in 2017 and 2018, on current forecasts � Despite projected slowdown in UK growth, unemployment rate expected to remain around 5pc, close to “full employment” � Inflation rising – to around 3pc or higher later this year � Household saving rate is falling, debt ratio is rising and house price inflation continues to outpace wage growth � In the absence of a major shock to the world economy, UK rates should follow US policy of gradual rises � 2-3 percent UK Bank Rate remains a reasonable expectation for early 2020s – ie lower than pre-crisis interest rate level Slide 21

Implications for Building Societies • Period of slower UK growth and economic volatility in prospect – with higher inflation and weak £ • Central scenario is this period of weaker growth and higher inflation lasts 1-2 years followed by a return to 2% growth and inflation - a good performance in the “new normal” • Risk of a less satisfactory outcome remains, however, if Brexit discussions with EU do not go well. This could prolong disappointing growth into early 2020s. • Financial services is a key sector potentially affected by Brexit but a mass exodus from UK is most unlikely. UK gov’t will seek to protect other sectors heavily invested in UK – eg car industry • Despite reluctance of MPC, UK interest rates should follow US in process of gradual rises – reaching c.2-3pc in early 2020s Slide 22