Panel remarks at the ECB Forum on Central Banking Sintra Mark - PowerPoint PPT Presentation

Panel remarks at the ECB Forum on Central Banking Sintra Mark Carney Governor of the Bank of England 28 th June 2017

G4 non-residential investment weak since the crisis Percentage changes since 2007 United Kingdom United States 15 Euro area Japan 10 5 0 -5 -10 -15 -20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: Eurostat, ONS, OECD and Bank of England calculations. Notes: The data for the UK, the US and Japan are for private non-residential investment; the data for the euro area include public non-residential investment.

Weakest UK business investment in half a century Indices, peak in GDP = 100 160 2008 150 140 Average of previous recessions 130 120 110 100 90 80 70 60 -20 -16 -12 -8 -4 0 4 8 12 16 20 24 28 32 36 Quarters relative to date when GDP peaked Sources: ONS and Bank calculations. Notes: The chart plots real business investment. The range includes the recessions of 1973, 1979 and 1990.

UK real business investment to GDP ratio is falling Percent of GDP 12 10 8 6 4 2 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Sources: ONS

Investment consistently weaker post crises Cumulative change (per cent) Average financial recession Average normal recession 20 15 10 5 0 0 1 2 3 4 5 -5 Years -10 -15 -20 -25 -30 The chart shows the cumulative change in per capita investment. The grey shaded area shows a 95% confidence interval around the average normal recession. See Jordá, O., Schularick, M. and Taylor, A. (2013)

Capital overhangs being worked off Euro area capital to output ratio UK capital to output ratio Euro area trend capital to output ratio UK trend capital to output ratio Per cent Per cent US capital to output ratio 130 US trend capital to output ratio 340 120 320 110 300 100 280 90 260 80 240 70 220 60 50 200 1995 1999 2003 2007 2011 2015 1995 1999 2003 2007 2011 2015 Sources: BEA, OECD, ONS and Bank calculations.

Zombie firms rising in AEs, falling in the UK ( a) Per cent of firms Per cent of firms 12% 30% 10% 25% 8% 20% UK measure (RHS) (c) 6% 15% Global measure (LHS) (b) 4% 10% 2% 5% 0% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: European Commission, AMECO database; IMF, World Economic Outlook; Datastream Worldscope; The Conference Board; BIS calculations; Bureau van Dijk and Bank calculations. (a) Zombie firms are defined as firms with a ratio of earnings before interest and taxes to interest expenses below one. (b) Sample includes listed firms aged 10 years or more. Shown is the median share across AU, BE, CA, CH, DE, DK, ES, FR, GB, IT, JP, NL, SE and US. (c) Sample includes both publicly listed and private UK firms. Only firms whose turnover reached £1 million in one of the past ten years are included. There are around 17,200 firms per year in the sample.

UK companies facing multiple uncertainties Standard deviations from mean, 2 year centred moving average Geopolitical risk index UK Policy uncertainty UK Economic uncertainty 2.5 Iraq invasion Paris attacks 9/11 2.0 Madrid bombings Gulf war Ukraine/ISIS 1.5 London bombings Kuwait invasion USS Cole bombings 1.0 US bombs Libya 0.5 0.0 -0.5 Transatlantic -1.0 aircraft plot -1.5 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Economic policy and geopolitical uncertainty indices are de-meaned and shown relative to their respective standard deviations. Chart shows two-year centred moving average for each measure. See Uncertainty, the economy and policy - speech by Mark Carney, June 2016 for more details.

Greater uncertainty drives hurdle rates up Option value of waiting (percentage points) 20 18 16 14 12 10 8 6 4 2 0 0 5 10 15 20 25 30 35 40 45 Earnings volatility (percentage points) Notes: the chart shows a simple Black-Scholes model of the required hurdle rate given earnings volatility. For individual firms, the standard variation of annual earnings was around 30 percentage points in the period before the crisis. See ‘Uncertain times’, speech by Ben Broadbent, October 2016.

Hurdle rates for UK businesses remain high Percentage of respondents 40 35 30 25 20 15 10 5 0 <5% 5%-10% 10%-15% 15%-20% 20%+ Source: Bank of England Finance and Investment Decisions Survey.

Diffusion of productivity stalling? GVA per worker, £,000 30 Total Frontier Firms 25 Laggard Firms 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: ‘Productivity Puzzles’, speech by Andy Haldane at the London School of Economics, 20 March 2017, available at http: //www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf.

Investment intentions picking up globally Standard deviations from mean 2 1 0 -1 -2 -3 -4 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 UK US Japan Germany Sources: : BCC, Business Roundtable CEO Survey, CBI, Bank of England, European Commission, Markit and Tankan. Notes: UK and US data are quarterly while the data for Japan and Germany are annual. The data are normalised over the period 2002-17, except for Japan where 2004-17 is used. Investment intentions cover the calendar year for Germany and the fiscal year for Japan. US data cover the next 6 months. The line for the UK shows the average of the BCC, CBI, CIPS and Bank of England Agents’ survey measures of investment intentions. The CBI and the Bank Agents’ survey are intentions over the next 12 months, BCC data are changes to investment plans over the past 3 months and Markit/CIPS data are changes in investment goods orders compared with the previous month.

UK financial system much more resilient Per cent Per cent 20 16 Basel II core Tier 1 weighted average (left-hand scale) 18 14 Basel III common equity Tier 1 weighted average (right- 16 12 hand scale) 14 Basel III definition of capital 10 12 CET1 ratio adjusted for 2016 stress test losses 8 (right hand scale) 10 6 8 4 6 2 4 2 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Sources: PRA regulatory returns, published accounts and Bank calculations. See June 2017 Financial Stability Report for details. Notes: The chart shows major UK banks’ capital ratios as a percentage of their risk -weighted assets.

Corporate bond spreads below historic averages Basis points 3000 Dashed lines: averages since 2000 Sterling 2500 2000 Euro 1500 US dollar 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: Bank of America Merrill Lynch Global Research and Bank calculations. Notes: Option-adjusted spreads. The US dollar series refers to US dollar-denominated bonds issued in the US domestic market, while the sterling and euro series refer to bonds issued in domestic or eurobond markets in the respective currencies.

UK monetary policy trade-off lessening Preferred trade-off if λ =1 4.0 Inflation (%) 3.5 November 2016 Preferred 3.0 trade-off May 2017 February 2017 if λ =0.1 2.5 Output gap (%) 2.0 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 August 2016, August 2016, no stimulus with stimulus 1.0

Mark Carney Governor of the Bank of England 28 th June 2017