Legal & General Investment Management UK economic prospects Association of Consulting Actuaries, 31 st Jan 2019 James Carrick, Global Economist Chris Jeffery, Asset Allocation Strategist Intended for professional clients only. Not to be distributed to retail clients. LGIM REF: MA0076
Signposts for the UK economy Stay in the EU (via 2nd referendum) No Deal Norway (via Article 50 extension) Withdrawal Agreement General Election 1
Spot the odd one out Growth has picked up everywhere in 2017/18 except the UK 3.0 GDP growth (2017-18, 1% per % per annum) annum ≈ 2.0 £40bn over two years ≈ 1.0 £350mn per week GDP growth (2014-16, % per annum) 0.0 0.0 1.0 2.0 3.0 2 Source: IMF
Growing Brexit uncertainty weighing on investment 3 Source: Bank of England
320 is the magic number in parliament Composition of House of No deal is easily the least popular option Commons Theresa May’s deal*: No Deal: rejected by 230 votes only 80-140 Conservatives* 316 83 supporters, Labour* 254 clearly opposed 2 nd referendum: 223 by over 400 current support SNP 35 162 MPs 68 around 160 votes, Lib Dems 11 271 204 but could change DUP 10 dramatically if Independents 8 Labour policy evolves again Sinn Fein 7 434 68 409 Plaid Cymru 4 Green Party 1 EEA+ or 488 permanent Speakers 4 Customs Union: Total 650 145 least unpopular option with * Excluding speaker and three deputies For Undecided/Unclear Against large group of undecided 4 Source: House of Commons Library, LGIM calculations * Numbers include 2 tellers on each side who are not included in the official totals
In hindsight do you think Britain was right or wrong to leave the EU? What would a second referendum bring? 60% % 50% 40% 30% 20% 10% 0% -10% Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Right - Wrong Right Wrong Source: Yougov 5
Play your cards right… 2 nd referendum General Election Next general Labour as largest in 2019 before Brexit election in 2019 party after GE 38% 35% 43% 49% 6 Source: Betfair, 17 th Jan 2019
An introduction to Corbynomics Extra spending commitments: • Council housebuilding programme £50bn - £90bn • Extra NHS funding • Infrastructure per annum • Abolition of tuition fees Cost to Nationalisation public • Energy sector £50bn - £100bn • Rail • Water • Postal Higher taxation commitment: • Increased corporation tax £30bn - £50bn • Increased taxes on higher earners • Increased capital gains tax per annum • Cost to Increased inheritance tax private Regulation £15bn - £20bn • sector Higher minimum wage • Ban zero hours contracts per annum • Double length of paternity leave 7 Source: LGIM
Under extreme circumstances, what is BoE independence worth? “The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances” BoE = independence 8 Source: Bank of England Act (1998)
Notes from a Small Island GDP (2017) $3 trn EU EU Wor orld ld UK UK $17 trn $80 trn 9 Source: IMF
When will the cycle end? US expansions since 1900 Cycle length (months) 0 20 40 60 80 100 120 140 Dec-00 Aug-04 Jun-08 Jan-12 Dec-14 Mar-19 Expansion starting in … Jul-21 Jul-24 Nov-27 Mar-33 Jun-38 Oct-45 Oct-49 May-54 Apr-58 Feb-61 Nov-70 Mar-75 ? Jul-80 Nov-82 Mar-91 Nov-01 Jun-09 Post-WW2 average 10 Source: NBER
The gambler’s fallacy 10 years is not a ceiling What’s the probability of 9 25% of post-war DM consecutive BLACK spins? expansions have (18/37) 9 = 0.15% (1 in 655) lasted more than a decade Given 9 consecutive BLACK spins, what’s the probability of one more? Australia is currently in the midst of a 26 18/37 = 49% year economic expansion 11 Source: LGIM
How close are we to the end of the cycle? US recession indicator heatmap 1989 2000 2007 2015 2016 2017 2018 2019 2020 In order of importance this cycle 1 yr before recession Inflation Senior loan officer survey Output gap Inventories Profit margins Wages Oil prices Corporate financing gap Corporate debt servicing Yield Curve Household net lending Household debt servicing Public sector deficit and debt levels Excessive investment Private sector debt levels Jobless claims Unemployment Credit growth All fine Housing Neutral Household net worth to income Watch out 12 Source: LGIM, Bloomberg, NBER as at November 2018.
Key factor: how much slack left in the US? 68 % 66 64 62 60 US participation rate is: 58 • 3% below the UK • 3% below Germany 56 • 4% below Canada 54 52 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Smoothed US labour participation rate 13 Source: Macrobond, OECD
Demographics – Population Pyramid Scheme Running out of workers! Western Europe Population Pyramids 2015 2050 1980 14 Source: UN WPP 2015
Who needs high immigration? US population outlook EU population outlook 560,000 450,000 Thousands Thousands 540,000 400,000 520,000 350,000 500,000 480,000 300,000 460,000 250,000 440,000 200,000 420,000 400,000 150,000 1965 1975 1985 1995 2005 2015 2025 2035 2045 1965 1975 1985 1995 2005 2015 2025 2035 2045 Population Population Population projection: zero immigration Population projection: zero immigration Population projection: median estimate Population projection: median estimate 15 Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, DVD Edition.
Tax and spend Middle aged taxpayers fund children and pensioners Tax receipts and public spending by age, £000s 35 30 Welfare spending Non-welfare spending Taxes 25 20 15 10 5 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 16 Source: LGIM, Macrobond, OBR
Public finances under pressure Lower taxes and higher health/pension costs to boost deficit Cumulative impact on public finances (% of GDP) from ageing 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 -4.0 2015 2020 2025 2030 2035 2040 2045 2050 17 Source: OBR, LGIM estimates. As at 31 August 2007.
Global growth… we’ve never had it so good? 18 Source: IMF, Maddisson Project Database, LGIM
In the last three decades, globalisation has been shorthand for the rise of China Contributions to global GDP growth (%) 1.5 % IMF forecasts to 2023 1.0 0.5 0.0 -0.5 -1.0 1991 1996 2001 2006 2011 2016 2021 China USA 19
China: still has a lot of catching up to do 2018 ≈ 1990 ≈ 1987 ≈ 1970 ≈ 1940 20
Globalisation = urbanisation 2030 2015 Tokyo 37 Tokyo 38 Delhi 36 Delhi 26 Shanghai 31 Shanghai 24 Mumbai 28 São Paulo 21 Beijing 28 Mumbai 21 Dhaka 27 Mexico City 21 Karachi 25 Beijing 20 Cairo 25 Osaka 20 Lagos 24 Cairo 19 Mexico City 24 New York 19 São Paulo 23 Dhaka 18 Kinshasa 20 Karachi 17 Osaka 20 Buenos Aires 15 New York 20 Kolkata 15 Kolkata 19 Istanbul 14 Guangzhou 18 Population (million) Population (million) 21 Source: UN Urbanisation Prospects, 2014
Global warming… Massive changes needed to limit global temperature rise 22 Source: https://commons.wikimedia.org/wiki/File:Global_Warming_Predictions.png
Disruption from falling solar/battery prices Trend decline in prices due to technological improvement 23 Source: Bloomberg New Energy Finance
Disruption from falling data storage prices Will the robots destroy all the jobs? Nand Flash = SD card, DRAM = computer memory Price of storage and memory costs through the years 10,000,000,000 Disk DRAM 1,000,000,000 Nand Flash 100,000,000 10,000,000 1,000,000 100,000 10,000 1,000 100 10 1 65 70 75 80 85 90 95 00 05 10 15 0 0 24 Source: https://www.computerworld.com/article/3182207/data-storage/cw50-data-storage-goes-from-1m-to-2-cents-per-gigabyte.html
Global inequality has fallen due to rise of China But developed market middle class has suffered EM middle class 3.0% 2.5% Annualised real income growth 2.0% The global 1.5% “elite” 1.0% 0.5% 0.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 99% Percentiles of the global income distribution DM middle class 25 Source: “Global Income Distribution: From the fall of the Berlin Wall to the Great Recession” Lakner and Milanovic, World Bank Economic Review, September 2015
26 Source: BBC
Political risks across OECD a product of populism 27
In summary … • Brexit is baffling • Bank of England independence cannot be taken for granted • Expansions don’t die of old age • Is the US running out of workers ? • Demographic decline particularly troubling in Western Europe • Rise of China has supported global growth but brings two main challenges: (1) Resource constraints (2) Populism • Technology is the answer to (1), but (2) is a much harder threat to tackle 28
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