CBI economic outlook: challenges of the coming cycle
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The document summarizes the economic outlook and challenges facing the coming economic cycle. It notes that recoveries from financial crises tend to be slow, productivity and corporate profits are recovering but bank lending remains constrained, and governments face large budget deficits and rising debt levels. Inflation risks are balanced between commodity price pressures and spare economic capacity. The UK recovery is strengthening but will remain uneven, with exports supported by a weaker pound but consumer spending and business investment facing headwinds. Public finances deteriorated sharply and fiscal austerity is needed. The UK outlook forecasts sluggish growth over 2010-2011 as unemployment peaks later in 2010.
CBI economic outlook: challenges of the coming cycle
- 1. Economic Outlook: Challenges of the coming cycle Ian McCafferty Chief Economic Adviser CBI
- 2. The shape of the recovery? • Pattern of recovery Shocks and Recessions • U, V, W, √ ? Big 5 financial crises Financial crises • Financial recessions External demand shock linger Oil shocks • Impact of the financial crisis Monetary policy tightens Output loss % from peak on long term performance Duration (quarters) Fiscal policy contraction • Desynchronised recovery 0 1 2 3 4 5 6 7 8 Source: IMF % yoy World GDP growth & inflation Rebound from Recession GDP 6.0 3.0 5.0 2.5 4.0 2.0 ? 3.0 1.5 2.0 1.0 1.0 0.5 0.0 0.0 1995 1997 1999 2001 2003 2005 2007
- 3. The coming cycle: access to finance Bank Lending to Private Sector Productivity %yoy % yoy US UK Eurozone 20 Eurozone UK USA 6 5 15 4 3 10 2 5 1 0 0 -1 -2 -5 -3 -4 -10 -5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 %yoy Corporate Profitability • Flow of capital from banks still constrained 40 UK US Eurozone 30 • Productivity recovering, and corporate 20 profits being rebuilt 10 0 -10 -20 -30 2001 2002 2003 2004 2005 2006 2007 2008 2009
- 4. The coming cycle: fiscal challenge • Large structural budget deficits Structural Budget Deficits in 2010 % GDP 0 • Dramatic increase in govt debt issuance -1 • Concerns over crowding out -2 -3 • Upward pressure on yields -4 -5 -6 • Downgrades and defaults? -7 -8 • Impact on the euro? -9 UK US Japan France Germany Source: IMF Net Interest Payments Government Debt Issuance % of Fiscal Revenue USD Trillions 16 4.0 2007 14 3.5 2008 12 3.0 2009 2007 10 2.5 2014 2010 8 2.0 6 1.5 4 1.0 2 0.5 0.0 0 OECD North America Eurozone UK USA Germany Source: IMF Source: OECD
- 5. The coming cycle: inflation or deflation? • Underlying conditions deflationary % yoy CPI Inflation • Spare capacity – output gaps 6.0 UK US Eurozone • High unemployment holding down wages 5.0 4.0 • Some inflation concerns in LDCs (India, 3.0 Russia, Turkey) but not widespread 2.0 1.0 • But higher energy and metals prices 0.0 • Policy error? or intention? -1.0 -2.0 • Central Bank independence -3.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Commodity prices (2003=100) Output Gaps % of potential GDP 500 Food Metals Oil 3 UK US Eurozone 450 2 400 1 350 0 300 -1 250 -2 200 150 -3 100 -4 50 -5 0 -6 Source: IMF
- 6. Global outlook 2010-2011 2010-2011: strengthening, but % yoy World GDP Growth unbalanced growth Forecasts • Recession over, but global economy short of full health • Less synchronised recovery • G3 constrained by legacies of credit crunch • EMEs picking up rapidly Risks/potential weaknesses • Elevated degree of uncertainty • Structural imbalances pose threats to World GDP Growth – by Major Region sustainability of recovery • Coordinated fiscal tightening 2009 2010 2011 World -0.9 3.7 4.3 • Sovereign debt risk Advanced economies -3.0 2.1 2.5 • Economic nationalism Developing economies: • Raw material prices Africa 2.7 3.5 5.0 Latin America -0.5 3.8 4.5 • Financial market volatility China 8.7 9.6 9.2 India 6.7 7.3 8.8
- 7. Improving UK economic news % qoq UK GDP CBI forecast • Two quarters of positive GDP • Inventory cycle turning • Confidence improving • Housing market stabilised • Prospects for Q2 look good • Improving export orders • Industrial production picking up • Consumer spending improving % balance Volume of stocks +15 +10 • Outlook into 2011? +5 0 -5 -10 -15 -20 CBI Industrial Trends Survey -25 -30 -35 Raw materials Work in progress Finished goods
- 8. UK: Exports 2010: positive contribution % qoq oya UK exports % q/q oya • Global economy recovering Services (rhs) • Unsynchronised recovery • EMEs picking up rapidly • EU12: already emerging from recession Goods (lhs) • US: bottoming out • Weaker sterling will help competitiveness Manufacturing export orders Jan Sterling EER 2005=100 % balance 110 105 100 95 90 85 80 CBI Industrial Trends Survey 75 70 2004 2005 2006 2007 2008 2009 2010
- 9. UK: Consumer spending constrained Consumer spending Savings ratio %qoq % 11.0 CBI forecast CBI forecast 9.0 7.0 5.0 3.0 1.0 -1.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 % balance GfK Consumer confidence % Unemployment rate 9.0 8.5 8.0 7.5 CBI Forecast 7.0 6.5 6.0 5.5 5.0 4.5 4.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
- 10. UK: Investment headwinds % qoq oya Business investment % qoq oya Residential investment Constraints on investment Industrial Trends Survey – % % balance investment intentions
- 11. UK public finances • Dramatic deterioration in fiscal position Public sector net borrowing % of GDP Structural Cyclical • 2010-11: spending up to 48%, taxes 14 down to 35% of GDP 12 10 • Structural deficit to hit 9% of GDP 8 6 • UK debt to double to 80% by 2014 4 • Political uncertainty; sovereign debt rating 2 0 at risk; risk to sterling? -2 • Fiscal austerity to come *figures from 2015/16 onwards are CBI estimates Growth in planned public spending Net debt % GDP Real % rise Past 4.2% real pa 90.0 Now & future real 1.2% pa 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2009/10 2014/15 1974/75 1979/80 1984/85 1989/90 1994/95 1999/00 2004/05
- 12. UK Inflation & Monetary Policy • CPI inflation forecast to be below target %yoy Consumer prices by end of 2010 and throughout 2011 • Risks of higher energy and commodity prices • Price pressures vs spare capacity • Monetary policy likely to remain easy • Unwinding of QE: when and how? %yoy Output Price of Manufactured Goods £ Billion Reserve Balances at BoE 180 12.0 160 10.0 140 8.0 120 6.0 100 4.0 80 60 2.0 40 0.0 20 -2.0 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Source: Haver Analytics
- 13. UK overview 2010-11 % yoy UK GDP 2009 2010 2011 Forecasts GDP -4.9 1.0 2.5 Household Consumption -3.1 0.7 1.9 Manufacturing output -10.5 1.4 2.3 Consumer Prices 2.2 2.4 1.6 Unemployment (%) 7.6 8.5 8.3 2010/11: Recovery to be sluggish Comparison of recessions and recoveries Cumulative GDP % • Few obvious sources of domestic demand change from peak growth in near term • Business investment weak • Fiscal austerity • Shift in consumer behaviour? • Sterling weakness to boost exports • Credit constraints still a concern • Firmer growth rates after unemployment peaks in autumn Time in quarters, peak GDP = 1
- 14. Economic Outlook Ian McCafferty Chief Economic Adviser CBI