UK Prospects af Presentatiot n by er Bill Robinson 17th November 2016 Brexit and Trump

Transcription

1 UK Prospects after Presentation by Bill Robinson 17th November 2016

2 Overview The global background The political shocks: Brexit and Trump The exchange rate, inflation and interest rates Outlook for the UK Impact of Brexit on trade 2

3 Overview The global background The political shocks: Brexit and Trump The exchange rate, inflation and interest rates Outlook for the UK Impact of Brexit on trade 3

4 The balance of economic power shifted from Advanced to Developing countries just before the Great Recession GDP levels in the major country groups: history and forecast ($ billions at purchasing power parity) 140, , ,000 World Advanced EU Developing Former Soviet Emerging and developing Asia 80,000 60,000 40,000 20, Source: IMF 4

5 Emerging Asia (China and India) have been stand-out performers, former Soviet Union most troubled recently GDP growth in the major country groups: history and forecast (indices, 2000=100) World Advanced 350 EU 300 Developing Former Soviet 250 Emerging and developing Asia Source: IMF 5

6 But growth is still expected to pick up next year in US and Canada. Because of Brexit UK growth slows GDP: history and forecast for US, Canada and UK (growth rate, per cent per annum) Canada United Kingdom United States Source: IMF 6

7 Growth in Germany, France and Italy has been slower than in the Anglosphere, but now catching up GDP: history and forecast for Germany, France and Italy (growth rate, per cent per annum) France Germany Italy Source: IMF 7

8 Japan has not had to contend with a Eurozone crisis, but has had similarly weak growth well below France GDP: history and forecast (growth rate, per cent per annum) France Japan Source: IMF 8

9 Italy has been in decline for a decade now, while Spain appears to have (just about) turned a corner GDP: history and forecast for Italy and Spain 1800 (growth rate, per cent per annum) Greece Source: Ireland 2012 Italy 2013 Portugal Spain IMF 9

10 The crisis is over in Ireland, ongoing in Greece and Portugal GDP: history and forecast for Greece, Portugal and Ireland (growth rate, per cent per annum) Greece Source: Ireland 2012 Italy 2013 Portugal Spain IMF 10

11 Since the crisis the so-called BRICs have divided into two groups Brazil and Russia still in recession GDP: history and forecast for China, India, Russia and Brazil (growth rate, per cent per annum) China Source: India Brazil Russia IMF 11

12 IMF expects 1.8% growth in Advanced Economies next year estimates steadily revised down over past year Source: IMF 12

13 A year ago serious worries emerged about a too-rapid slowdown in China.. China (annual growth rate, per cent per annum) 13

14 ..based on falling commodity prices, but these turned a corner this year as China did better than expected Commodity Prices (indices, 2005=100) All Source: Non fuel IMF 14

15 Oil prices have also been recovering, and both these developments suggest healthy global economic activity Oil price (West Texas Intermediate, $ per barrel) Source: BP 15

16 Overview The global background: older downside risks have diminished but not disappeared this year The political shocks: Brexit and Trump: The exchange rate, inflation and interest rates Outlook for the UK Impact of Brexit on trade 16

17 Brexit happened because two groups of voters had been ignored for too long Left Social policy Economic policy Right 1980 E.g. in favour of gay marriage E.g. against gay marriage E.g. more government spending can create jobs E.g. balance budget and let free market create jobs Old Labour Conservative 17

18 In the 1990s New Labour won power by effectively adopting Conservative economic policies Left Social policy Right 1995 E.g. in favour of gay marriage Ne w Economic policy E.g. against gay marriage La bo ur E.g. more government spending can create jobs E.g. balance budget and let free market create jobs Old Labour Conservative 18

19 In the 2000s the Conservative won power by effectively adopting New Labour social policies Left Social policy Economic policy Right 2005 Ne E.g. in favour of gay w E.g. against gay marriage marriage La bo m ur od / C er o ni ns se er rs va E.g. more government E.g. balancet budget and i e jobs spending can create jobs let free marketvcreate Old Labour Conservative 19

20 In 2016 those disenfranchised by the new consensus combined to defeat the establishment on Brexit Left Social policy Economic policy Right 2016 Ne E.g. in favour of gay w E.g. against gay marriage marriage La bo e m ur v od / C a er Leo ni ns e se er t o rs va V E.g. more government E.g. balancet budget and i e jobs spending can create jobs let free marketvcreate Old Labour Conservative 20

21 Mrs May s policy response: move Right on social policy and Left on economic policy (less Austerity) Left E.g. in favour of gay marriage E.g. against gay marriage at er v ons /C rs our nise Lab der mo Economic policy 2016 w Ne Social policy Right e t o V E.g. more government e v a Le Old Labour Conservative i ve spending can create jobs E.g. balance budget and let free market create jobs 21

22 Consequences of the political upheaval The Notting Hill set (Cameron, Osborne, Gove) are all out of power Theresa May shows signs of pursuing policies that are: more right-wing socially (immigration, grammar schools) more left-wing economically (end of austerity, more public investment) Negotiation of Brexit terms will require a quid pro quo for Getting permission to do some trade deals with non-eu trade partners (possible only if the UK leaves the Customs Union) Getting some control over immigration Hence net effect of Brexit could be some arguably healthy north-south re-balancing 22

23 UK industrial production has, since 1997, declined relative to GDP by more than in other leading nations Industrial production as share of GDP (per cent) France Germany Italy 2007 Japan UK USA Source: ONS,OECD 23

24 Industrial and manufacturing production are still below their pre-crisis peak, while GDP is now well above UK GDP and Industrial Production (volume indices 1997 =100, sa) Manufacturing Total IoP GDP 24

25 Industrial production has not grown since 1997 and mining has shrunk by more than a half UK GDP and Industrial Production (volume indices 1997 =100, sa) Mining & quarrying Manufacturing Water & waste management Total IoP GDP

26 These changes have hit the North especially hard as evidenced by house prices Regional house price to income ratios for first time buyers (ratio) Northern Yorks & H North West UK Source: Nationwide, ONS 26

27 Consequences of the political upheaval The Notting Hill set (Cameron, Osborne, Gove) are all out of power Theresa May shows signs of pursuing policies that are: more right-wing socially (immigration, grammar schools) more left-wing economically (end of austerity, more public investment) Negotiation of Brexit terms will require a quid pro quo for Getting permission to do some trade deals with non-eu trade partners (possible only if the UK leaves the Customs Union) Getting some control over immigration Hence net effect of Brexit could be some arguably healthy north-south re-balancing Lower exchange rate good for Northern manufacturing Loss of passport bad for London 27

28 In the US the economic policy split is on trade and immigration. The social policy split is similar to UK Social policy Economic policy Democrat Republican Urban values Feminism Rural values Protection Controlled immigration Free trade Free immigration Democrat Republican 28

29 The Democrats pursued TTIP, abandoning their traditional blue collar supporters. They also espoused urban values Social policy Democrat Republican Urban values Rural values O ba Economic policy m a/ Cl in to n Protection Controlled immigration Free trade Free immigration Democrat Republican 29

30 Trump won by promising protectionism and control over border and an end to political correctness Social policy Democrat Republican Urban values Rural values O ba Economic policy m m u r a T p Protection Controlled immigration Free trade Free immigration Democrat Republican 30

31 Economic implications of Brexit and Trump UK: Easier fiscal policy and more infrastructure investment More inflation Higher long bond rates Protectionism: tariffs on UK exports to (and imports from) EU Lower exchange rate Loss of passport for financial services US: Easier fiscal policy and more infrastructure investment More inflation Higher long bond rates Protectionism: tariffs on China, Mexico 31

32 Overview The global background: downside risks have diminished but not disappeared this year The political shocks: Brexit and Trump: marks a turning point in the policy environment The exchange rate, inflation and interest rates Outlook for the UK Impact of Brexit on trade 32

33 The most solid economic change since Brexit is in the sterling exchange rate Sterling exchange rate ((effective exchange rate index, 2005=100) 110 Great Recession ERM exit Brexit effect index Source: Bank of England 33

34 Brexit worries have lowered sterling by 18% this year in three distinct phases Sterling exchange rate ((effective exchange rate index, 2005=100) 95 Pre-referendum pricing in possibility of Brexit vote 23rd June 90 Hard Brexit worries begin Source: Bank of England 34

35 This is likely to prove permanent as UK s current account deficit is the largest in its history UK current account balance (% of GDP) Abolition of exchange controls Fixed exchange rates Floating exchange rates Source: ONS, The Pink Book 2015, 1.1 Summary of Balance of Payments: Balances (net credits less net debits) 35

36 It has been easily financed up to now by capital inflows, which may dwindle post-brexit, weakening sterling Net Inward Foreign Direct Investment ( billion) Rest of world net inward FDI USA net inward FDI EU net inward FDI Source: ONS, Inward Foreign Direct Investment (FDI) Involving UK Companies, 2011/ 2013/

37 For most of 2014 and 2015 the sterling exchange rate rose steadily Sterling exchange rate ((effective exchange rate index, 2005=100) index Source: Bank of England 37

38 And during this period nobody paid much attention to the possibility of Brexit.. Number of Google searches on Brexit Source: Google 38

39 But as soon as people started to worry about Brexit Number of Google searches on Brexit Source: Google 39

40 the sterling exchange rate, Sterling exchange rate ((effective exchange rate index, 2005=100) index Source: Bank of England 40

41 dropped, guided by polling data suggesting a Leave vote in the referendum, Sterling exchange rate ((effective exchange rate index, 2005=100) index Source: Bank of England 41

42 When the referendum result came in and Brexit became a fact rather than a forecast, sterling fell even further Sterling exchange rate ((effective exchange rate index, 2005=100) index Source: Bank of England 42

43 The resumption of QE announced by the Bank in August is a further factor keeping sterling weak Bank of England balance sheet in billion Source: Bank of England 43

44 Producer input price inflation has risen sharply recently, reflecting the lower exchange rate Manufacturing output and input prices ((annual percentage change) Output prices Input prices All manufactured products Source: Materials and fuels purchased ONS 44

45 This will bring inflation back to 2% some time next year according to the Bank s latest forecast Source: Bank of England, November Inflation Report 45

46 Real government borrowing costs, short and long, are still negative, but now more likely to rise than fall.. UK Interest rates and inflation ((per cent) yr gilts Source: 3mth TBs RPI X Bank of England 46

47 ..because the long bond market has started to worry about higher inflation in the UK 47

48 Overview The global background: downside risks have diminished but not disappeared this year The political shocks: Brexit and Trump: marks a turning point in the policy environment The exchange rate, inflation and interest rates: starting to rise from historically low levels Outlook for the UK Impact of Brexit on trade 48

49 Weaker pound should boost exports unless Eurozone suffers another downturn but could hit consumers Sterling exchange rate index and manufacturing production ((index 2005= index Source: Mfg index Bank of England and ONS 49

50 Rising inflation will largely erode real income growth unless wage growth accelerates Source: Bank of England, August Inflation Report 50

51 ..which is not impossible profit margins are healthy and the Living Wage is coming into force Source: Bank of England, August Inflation Report 51

52 Low borrowing costs are helping new car registrations to go on growing year on year post-brexit August New Car Registrations since 2000 (number of vehicles) Source: SMMT 52

53 Real retail sales continue to outpace real wages as they have for 15 years The old normal Recession 140 Recovery Retail sales Real wages Source: ONS 53

54 ..driven by a falling savings ratio which has added some 6% to consumer spending since 2010 Household savings ratio (savings as a percentage of household disposable income) Source: ONS 54

55 Consumer confidence remains high, having recovered from post-brexit shock Consumer confidence ((GfK NOP survey balances) Source: ONS, Trading Economics 55

56 UK house prices are nearly back to pre-crisis levels relative to income London prices well above House price to income ratios for first time buyers London UK Source: Nationwide, ONS 56

57 But despite high house prices, interest rates are low, so people can still afford the mortgage Mortgage payments as share of mean take home pay (per cent) 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% UK Linear (UK) Source: Nationwide, ONS 57

58 The Bank forecast for 2016 is revised up to 2.2%, for 2017 revised up to 1.4% from 0.8% Source: Bank of England 58

59 However, the Bank pays little attention to the growth in the money supply, which is telling a different story Broad money supply (M4 excluding intermediate OFCs, annual percentage change) Source: Bank of England 59

60 Broad money is growing significantly faster than prices for the first time in six years Broad money supply and inflation (Sterling M4 and Retail Price Index, annual percentage change) Dotcom boom and bust Lawson boom and bust Housing boom and bust 5.00 Bank capital requirements increased - (5.00) M4 RPI Source: Bank of England, ONS 60

61 The initial post-referendum gloom about 2017 growth prospects appears to be slowly evaporating 61

62 A longer term worry is the absence, since 2007, of productivity growth Output per hour worked (index 2012=100) Source: ONS 62

63 ..which for 6 years has repeatedly failed to deliver the upturn expected by the OBR Source: Office for Budget Responsibility 63

64 Key changes in the UK outlook compared with the prebrexit forecasts Exchange rate s 15-20% lower Inflation rising towards 2 per cent because of higher import costs Better prospects for exports and manufacturing Brexit uncertainty deeply damaging to business investment Real incomes and consumer spending will be hit unless wages rise Negative real interest rates still helping spending on durables Long term worries over low productivity Resumption of real broad money growth may spring a positive surprise 64

65 Overview The global background: downside risks have diminished but not disappeared this year The political shocks: Brexit and Trump: marks a turning point in the policy environment The exchange rate, inflation and interest rates: starting to rise from historically low levels Outlook for the UK: prospects hit by investment uncertainty and erosion of real incomes by inflation but not that hard Effect of Brexit on trade 65

66 What does Brexit means Brexit mean? Political take back control 1. Re-assert the sovereignty of Parliament in making UK law 2. Re-assert the sovereignty of UK Courts Economic take back control 3. Over our borders (freedom to control immigration) 4. Over the EU budget (freedom to spend the 18bn contribution to the EU budget on our own priorities) 5. Over our trade policy (freedom to do our own trade deals with countries outside EU) 66

67 What does Brexit means Brexit mean? The constraints Political take back control 1. Re-assert the sovereignty of Parliament in making UK law 2. Re-assert the sovereignty of UK Courts Economic take back control 3. Over our borders (freedom to control immigration) The Single Market requires free movement of people 4. Over the EU budget (freedom to spend the 18bn contribution to the EU budget on our own priorities) 5. Over our trade policy (freedom to do our own trade deals with countries outside EU) 67

68 What does Brexit means Brexit mean? The constraints Political take back control 1. Re-assert the sovereignty of Parliament in making UK law 2. Re-assert the sovereignty of UK Courts Economic take back control 3. Over our borders (freedom to control immigration) The Single Market requires free movement of people 4. Over the EU budget (freedom to spend the 18bn contribution to the EU budget on our own priorities) The net figure is 8.5bn 5. Over our trade policy (freedom to do our own trade deals with countries outside EU) 68

69 What does Brexit means Brexit mean? The constraints Political take back control 1. Re-assert the sovereignty of Parliament in making UK law 2. Re-assert the sovereignty of UK Courts Economic take back control 3. Over our borders (freedom to control immigration) The Single Market requires free movement of people 4. Over the EU budget (freedom to spend the 18bn contribution to the EU budget on our own priorities) The net figure is 8.5bn 5. Over our trade policy (freedom to do our own trade deals with countries outside EU) The Customs Union absolutely forbids it 69

70 There are four components of the Single Market Free movement of goods (Customs Union) Free movement of services Free movement of capital Free movement of labour 70

71 If we want to take back control of immigration we will be out of the Single Market in labour Free movement of goods (Customs Union) Free movement of services Free movement of capital No free movement of labour 71

72 The likely consequence is that we will be forced out of the Single Market in services (e.g. no banking passport ) Free movement of goods (Customs Union) No free movement of services Free movement of capital No free movement of labour This has been described as hard Brexit/ 72

73 If we also want to do our own trade (in goods) deals with third countries, we will have to leave the Customs Union But there is a harder Brexit. No free movement of goods (Customs Union) No free movement of services It would be bad for the UK and bad for the EU Free movement of capital No free movement of labour It could happen but is preventable by political action 73

74 If we leave the Customs Union, the Common External Tariff 74

75 If we leave the Customs Union, the Common External Tariff, which applies to imports from outside EU 75

76 Will certainly apply to UK exports to the EU, and probably also to UK imports from the EU 76

77 The Common External Tariff is an array of 135 different tariffs applied to over 15,000 different commodities Common External Tariff: import duty rates (per cent) Tobacco Food and drink (up to 70%) Metal goods Oil Chemicals and plastics Clothes Clothing materials Glass, ceramics Cars and lorries 5.00 Iron & steel 0.00 NB there are 11,158 tariffs on this chart, each represented by a (very thin) vertical line. The labels are only a very rough guide to the commodity categories, further information available from KPMG on request 77

78 UK exports of goods to the EU account for 47% of total goods exports UK trade in goods and services with EU and non-eu countries bn Imports Exports Balance EU Non EU EU Non EU Goods Services Source: ONS Balance of Payments Pink Book 78

79 UK exports are concentrated in relatively few destination countries, mainly close European neighbours UK exports to destination shown as percent of total exports 100.0% 90.0% 50% in top 6 70% in top 14 80% in top 21 90% in top % 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% USA Germany Netherlands France Ireland China Belgium Spain Switzerland Italy Hong South Saudi Kong Korea Japan Arabia Sweden India Canada Australia Singapore Poland Turkey Norway Russia Denmark SouthBrazil Africa Czechia Austria Malaysia Mexico Finland Thailand Hungary Portugal Taiwan Israel Egypt Romania New Greece Pakistan Zealand Morocco Indonesia Chile Slovakia Philippines Colombia Malta Cyprus Bulgaria Argentina Ukraine Lithuania Iceland Uruguay Estonia Latvia Venezuela Slovenia Luxembourg Serbia Croatia Iran Source: ONS Balance of Payments Pink Book 79

80 Plotting UK exports against GDP of destination shows how well we do in EU compared with countries outside the EU.. UK exports against GDP of destination country (exports, million on vertical axis, GDP, US$ billion on horizontal axis) 50,000 US 45,000 40,000 35,000 Germany 30,000 25,000 Exports in Ireland million Fitted trend line France 20,000 15,000 Netherlands China 10,000 Japan 5, ,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Source: ONS and World Economic Outlook database 80

81 This is even more striking when we take a detailed look at the medium sized and smaller destination countries 20,000 Ireland Netherlands 15,000 Belgium 10,000 Spain Switzerland Hong Kong 5,000 Singapore Sweden Saudi Arabia Korea Canada Turkey Poland Norway South Africa Argentina Taiwan - Italy Australia Mexico 1,000 India Russia Brazil Indonesia 1,500 2,000 2,500 Source: ONS and World Economic Outlook database 81

82 Exports to US plus China come to 60bn, less than half the 134bn to EU after which returns diminish rapidly UK exports outside the EU by destination ( billion) USA China Arabian Switzerland Hong South Gulf Saudi Kong Korea Arabia Japan India Other Canada Australia Singapore Turkey Norway Russia South Other Africa Brazil M iddle Other M alaysia East M Thailand exico Taiwan Other Israel OtherOther Europe Egypt Central New North America Zealand Other Africa Pakistan M orocco Indonesia Philippines Chile Colombia Argentina Ukraine Uruguay Venezuela Serbia Iran Other Belarus Albania Liechtenstein M ontenegro Source:Other ONS 82

83 Negotiating FTAs with 20 countries, to which UK exports 114bn of goods, could not offset loss of exports to EU Source: ONS 83

84 New research from the National Institute shows large potential long term reduction in UK exports to Europe Loss of exports to EU if Customs Union becomes Free Trade Agreement ( per cent, long term effect) Source: National Institute for Economic and Social Research 84

85 Long run losses from leaving Customs Union likely to outweigh gains from FTAs outside Europe UK exports, baseline and long run losses on leaving Customs Union ( billion) Source: ONS and NIESR 85

86 Overview The global economy: downside risks have diminished but not disappeared this year The political shocks: Brexit and Trump: marks a turning point in the policy environment The exchange rate, inflation and interest rates: starting to rise from historically low levels Outlook for the UK: prospects hit by investment uncertainty and erosion of real incomes by inflation Effect of Brexit on trade: could be bad unless we succeed in staying inside the Customs Union 86

87 Thank you