NOVEMBER 2015 The Economic Outlook Roger Martin-Fagg Behavioural Economist
THE DEFINITION OF VALUE ADDED SALES REVENUE minus ALL PAID INVOICES equals WAGES AND SALARIES PROFIT AFTER TAX AND INTEREST plus This is Nominal Gross Domestic Product (GDP) 65% produced by businesses employing less than 200 people
SHORT RUN ECONOMIC ACTIVITY is driven by the flow of spending multiplied by NOMINAL GDP MONEY VELOCITY equals Det ermined by 95% int erest rat es, t he manufactured by media, t he commercial weat her and banks house prices M4 Banks manufacture money when they make a loan(bank credit) and can destroy money when a loan is paid down.
UK Real GDP Quarterly Growth Q2 Q3 Source: ONS
UK Nominal average weekly earnings growing at 3% Real post tax income growing at 2.9% Source:ONS
The UK tax and benefits system is highly redistributive The current objective is to raise incomes before tax and reduce benefits
Strong growth in Retail as a whole
Weather and sport effects!
Tough trading environment for food producers
Food price deflation for past two years
Significant upturn in business investment growth (a)(b) Source: Bank of England (a) Chained-volume measures. Contributions may not sum to total due to rounding and seasonal adjustment. Contributions prior to 2011 are indicative estimates. (b) Figures in parentheses are shares in total business investment in 2011. (c) Total business investment growth, with the impact of the transfer of nuclear reactors from the public corporation sector to central government in 2005 Q2 removed.
There is plenty of money about 80% of bank lending for property 12 Excess liquidity creates house price booms: Interest rates need to rise now
Windfall payouts Since Jan 2011 an average of £400m a month has been paid out by banks for mis-selling financial products Average payout £7k In total 20Bn so far. Another 8Bn expected to be paid over next two years. 47,000 have withdrawn up to 30k Average £15k Since the change in pension legislation 137 people have withdrawn in excess of £250k each
Average House Price England and Wales % change year on year 8 6 4 2 0 2 4 2010 2011 2012 2013 2014 2015 2016 Source: Land Registry
Net migration has supported labour supply Source: ONS International Passenger Survey. Source: Bank of England Rolling four-quarter data. Data are half- yearly up to December 2011, and quarterly thereafter. (a)
Recent employment growth has been more concentrated among the lower skilled, low wage employees. Sources: Labour Force Survey and Bank calculations. Uses the Standard Occupational Classification (SOC) 2000. Seasonally adjusted by Bank staff. (a) (b) Includes elementary occupations, plant machine operatives, sales and customer services. Source: Bank of England (c) Change in total employment less changes in employment in high and low-skilled occupations. (d) Includes managers, professional and associate professional and technical occupations.
The UK Economy is performing well driven by strong consumer demand and rising investment spending 0.5% increase in base rate in February 2016: will not derail growth overall but may cause a short pause in Q2 before rebound in Q3 What are the risks to sustained growth?
Risk 1 A doubling in the price of oil Current evidence suggests $50-60 will remain until end 2016. But M.E. politics drives sudden, big price shifts. Impossible to predict.
OIL price shocks increase the probability of a recession to 90% within 18 months Oil price down Oil price down Oil price down 2x 2x 2x Oil price Oil price Oil price up up up 2x 2x Oil price 2.5x up 2.2x
Risk 2 The export of products below cost from China SOE eg steel: causing insolvencies and unemployment in the UK and the West
Risk 3 A growing perception that the UK will vote to leave the EU The UK is No 2 recipient of global overseas investment It pays for our trade deficit If the markets believe there will a vote to leave there will be a sterling crisis.
Europe The largest single market on earth, 46% of UK exports Large scale money creation by the central bank is working Spain,Ireland growing strongly All others now out of recession (except Greece) $50,000 per capita cf to China at $9000
The UK Balance of Payments Any negative current balance must be financed by net overseas investment in the UK circa 90Bn pa
UK Forecast for 2016 Real GDP 2.6% CPI 1.1% Consumer spend: value 5%, volume 3.5% Employees earnings 5% Average house prices 5%
Money Supply and bank credit in the Eurozone. Eurozone banks destroyed around 500Bn from 2012. QE now is creating 80Bn a month. 7% 13 15
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