citywire 011211
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Dr Andrew SentanceFormer MemberMonetary Policy Committee
The global and UK economic outlook
Presentation at Citywire Investment Conference, 1st December 2011
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Outline
Why has the global economy slowed?
Resolving the euro area crisis
Key issues shaping the recovery
UK and global economic outlook
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World economic growth
* EU, US and 11 other economies accounting for 85% of world GDP
Source: IMF World Economic Outlook Update, June 2011, and OECD Economic Outlook
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
-3-2-10123456
IMF, Jun 2011 OECD, Nov 2011 Ave 1990-2010
% per annum change in GDP in G-13 economies*
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The rise of Asia
*: Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.
Source: IMF World Economic Outlook
Percentage share of world GDP, current market prices and exchange rates
0%
5%
10%
15%
20%
25%
30%
35%
40%
1980 1990 2000 2010
US EU-27 Asia-pacific G10 *
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Why is global growth slowing?
• Policy tightening in Asia-Pacific in response to inflationary concerns
• Financial volatility and euro area problems affecting business and consumer confidence
• Relatively high inflation squeezing disposable income and consumer spending
• Structural factors continuing to hold back growth in US and other western economies
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Global inflation on the rise
% per annum change in consumer prices
Source: The Economist
USEu
ro
China
Japa
n UK
Braz
il CaIn
dia
Russia
Aust
r...
-2
0
2
4
6
8
10
12
Sep-10Sep-11
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Forces underpinning global inflation
• End of global disinflationary decade
• Strong growth in late 2000s
• Global stimulus in 2009/10
• Tension from East-West rebalancing
• Assymmetric monetary policy responses
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Global disinflation ends in mid-2000s
Source: Office for National Statistics
Jan-97 Jan-02 Jan-07-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
CPI goods Factory gate prices
% per annum change in UK goods prices
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Global primary energy consumption
Source: BP Statistical Review 2010
Million tonnes oil equivalent
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
OECD
Non-OECD
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Shares of world GDP and population
*: Apac G10: Asia-Pacific G10, including Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.
Source: IMF World Economic Outlook, World Bank and Eurostat.
2010 figures
US, 23%
EU-27, 26% Apac
G10*, 27%
Other, 24%
GDP at market prices
US, 5%
EU-27, 7%
Apac G10*, 46%
Other, 43%
Population
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Problems with global monetary policy
• Tailwind of global disinflation is no longer helping to maintain price stability
• Asia and other emerging market economies are strongly growth-oriented
• Other western authorities (especially US and UK) using monetary policy to cushion structural adjustment post-financial crisis
• Energy and commodity price inflation treated as “one-off” or someone else’s problem
• Risk of inflationary bias to global monetary policy
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Public debts and deficits compared
% of GDP in 2010
Source: IMF, April 2011 World Economic Outlook
Net debt0
20
40
60
80
100
120
140
64.4 64.8 69.4
117.5
Euro US UK Japan
Gov't deficits0
2
4
6
8
10
12
6.1
10.6 10.4 10.3
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Budget deficits in US, UK and euro area
Source: OECD
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
2
4
6
8
10
12
14
UK Euro US
General government borrowing, % of GDP
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Fixing the euro “deficit problem”
• High deficit economies to show commitment to the “hard grind” of fiscal consolidation
• Strong medium term fiscal rules and effective mechanism for mutual support
• Clarifying and strengthening role of ECB
• Recapitalising and restructuring banks
• Better communication, co-ordination and market management
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Will the euro area break up?
• Likely to make problems worse not better
• Practical, institutional and political issues
• Departing currencies would lack credibility
• Leaving euro would not help weaker economies address structural problems
• Policy “failure” would have severe adverse knock-on impact on all EU economies (including non-euro members such as UK)
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UK economic growth
Source: ONS
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-8
-6
-4
-2
0
2
4
6
Previous data Latest data Trend
% per annum change in non-oil GDP
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The progress of the UK recovery
• Growth has slowed after initial rebound
• This partly reflects broader global slowdown and fading impact of stimulus measures
• But it is also due to a squeeze on consumers from high inflation, including VAT impact
• Pressures on consumer should ease next year but spending likely to remain subdued
• Global economic situation and resilience of business investment hold key to UK outlook
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High inflation squeezing spending
Source: Office for National Statistics
1997MAR 1999FEB 2001JAN 2002DEC2004NOV2006OCT 2008SEP 2010AUG-2
0
2
4
6
8
10
Value Volume Average 97-08
% per annum growth in retail sales (3-month ave)
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UK inflation stubbornly above target
Source: Office for National Statistics
1995 Jan 1997 Apr 1999 Jul 2001 Oct 2004 Jan 2006 Apr 2008 Jul 2010 Oct0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Value Target Ave 2008-11
% per annum increase in consumer prices index
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Broad-based rise in consumer prices
Source: Office for National Statistics
Food and non-alcoholic beverages
Alcoholic beverages and tobacco
Clothing and footwear
Housing, water and energy
Furniture & household eqpt/maint'ce
Health
Transport
Communication
Recreation and culture
Education
Restaurants and hotels
Miscellaneous goods and services
-2 0 2 4 6 8 10
% annual rise in CPI categories, October 2011
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The MPC Inflation Record
Source: Office of National Statistics
Period Target High Low Ave
May 1997 - Dec 2003
RPIX = 2.5% 3.2% 1.5% 2.4%
Jan 2004 - Dec 2007
CPI = 2.0% 3.1% 1.1% 2.0%
Jan 2008 – Sep 2011
CPI = 2.0% 5.2% 1.1% 3.4%
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Large official inflation forecast errors
Source: Bank of England
Mean of forecast percentage annual increases in consumer prices
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013
May-09 Nov-09
May-10 Nov-10
May-11 Actual CPI inflation
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Why has UK inflation been so high?
• Global inflationary pressures
• Large sterling depreciation
• Persistent services inflation
• Limited impact of spare capacity
• MPC response to financial crisis
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The global economy and UK inflation
Global economy
Cost of imports
Demand
Pricing climate
Exchange rate
Domestic demand
Expectations and credibility
UK inflation
Impact of monetary policy
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Sterling depreciation since 2007
Rebased to 100 in January 2005
Source: Thompson Datastream and Bank for International Settlements
*: Effective exchange rate
70
75
80
85
90
95
100
105
110
2005 2006 2007 2008 2009 2010 2011
Euro-Sterling exchange rate
Sterling EER *
Average EER *, 97-07
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Episodes of Sterling depreciation
Index, base year = 100
Number of years from start of period
Source: Bank for International Settlements
50
60
70
80
90
100
110
0 1 2 3 4 5
1967-1971 1972-1977 1981-1986
1991-1996 2007-2010
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Euro/UK inflation differential & exchange rate
Source: Thompson Datastream
*: Euro-Sterling exchange rate is expressed as the deviation from its average over the same period.
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
1997 1999 2001 2003 2005 2007 2009 2011
Euro-area/UK CPI differential (RHS) *
Euro-Sterling exchange rate (LHS) **
Euro/ sterling %
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Persistently high UK services inflation
Source: Office for National Statistics
Jan-97 Jan-02 Jan-07-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Goods Services
% per annum change in UK consumer prices
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Capacity utilisation in UK economy
Source: Bank of England
Jan-98 Jan-03 Jan-08-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Manufacturing Services
Bank of England Agents’ scores relative to normal
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Unemployment in UK recessions
Source: Office for National Statistics, Labour Force Survey
-8 -6 -4 -2 0 2 4 6 8 10 12 14 164
5
6
7
8
9
10
11
12
77Q4-83Q4 88Q2-94Q2 06Q2-11Q3
Unemployment rate, % of labour force
Number of quarters from employment peak
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Problems with the MPC
• Emphasis on forecast has allowed the Committee to redefine its own target
• Persistent modelling and forecasting errors, with excessive weight on “output gap” model
• Assymmetric policy response
• “Benign neglect” of sterling and policy of talking down the pound
• Lack of effective scrutiny and accountability
• Perception that inflation target has been downgraded and that growth is now the focus of monetary policy
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Key issues shaping the recovery
• Legacy of financial crisis, holding back spending growth in western economies
• The rise of Asia and emergence as a major engine of global growth
• High and volatile energy and commodity prices, leading to bursts of global inflation
• Uncertainty about policy-making and lack of economic leadership fuelling financial volatility and affecting confidence
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Outlook for advanced economies
Source: OECD and Office for Budget Responsibility
2011 2012 20130
0.5
1
1.5
2
2.5
3
US UK Euro OECD
% per annum change in GDP
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UK GDP and consumer prospects
Source: ONS and Office for Budget Responsibility
2000-08 ave
2009 2010 2011 2012 2013-5
-4
-3
-2
-1
0
1
2
3
4
GDP Consumer spending
% per annum change – latest OBR forecast
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Can growth recover in 2012?
• Easing pressure on consumers from fall-back in inflation
• Global growth to pick up as Asian economies recover momentum
• Some resolution of euro area situation and reduction in financial volatility
• Confidence-building measures from policy-makers
• Resilience of UK non-financial private sector
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Employment in UK recessions
Source: Office for National Statistics, Labour Force Survey
-8 -6 -4 -2 0 2 4 6 8 10 12 14 1692
94
96
98
100
77Q4-83Q4 88Q2-94Q2 06Q2-11Q3
Index of employment, 100 = cyclical peak
Number of quarters from employment peak
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Key conclusions
• Global and UK growth to pick up during 2012 after current weak patch
• Asia-Pacific region the key engine of global growth
• Growth recovery hinges on some resolution of current euro area crisis
• Global inflation to subside in 2012, but inflationary pressures likely to re-emerge as global economy picks up again
• UK inflation unlikely to fall as sharply as MPC expects, aggravating credibility issue