Global Economic Outlook: From Fiscal Cliff to Rushcliffe in 15 minutes

16th January 2013

Tom Rogers

Lead Economist, Oxford Economics

trogers@oxfordeconomics.com

Overview

� External environment showing signs of stabilisation…if not

quite yet recovery. So 2013 will be another tough year for UK

exporters.

� Firms will hold back on investment, despite ever-growing cash

piles. Jobs growth likely to slow, but with some pickup in wage

growth supporting consumer demand.

� Risks to inflation to upside in short term and downside in

medium term. MPC’s policy measures look like supporting

housing market in 2013.

� UK regional divide in economic prospects – but not entirely a

North-South story. Other factors matter too.

3

US households in good financial shape

8

10

12

14

16

18

20

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Source: FRB

Household debt service ratio

US : Household debt measures

Household financial obligations

% of disposable income

…and banks lending to business

4

-25

-20

-15

-10

-5

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012

US & Eurozone: Corporate loan growth% year

Source : Oxford Economics/Haver Analytics

US commercial & industrial loans

US loans inc. commercial real estate

Eurozone loans to PNFCs

Imminent risk of € breakup reduced…

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1-Jul-10 28-Dec-10 26-Jun-11 23-Dec-11 20-Jun-12 17-Dec-12

Weighted average peripheral bond spread% spread over German bunds

Source : Oxford Economics/ Haver Analytics

…but more austerity to go

Discretionary fiscal tightening, 2013-2015

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Germany Italy France Belgium Spain Ireland Greece

Source : Oxford Economics/Haver Analytics

Percent of GDP

…unemployment will restrain consumption

0

5

10

15

20

25

30

2004 2006 2008 2010 2012 2014 2016

Eurozone: Unemployment Rate%

Source : Oxford Economics/Haver Analytics

Greece

Portugal

Spain

Eurozone

…some way to go to restore competitiveness

80

90

100

110

120

130

140

150

160

2000 2002 2004 2006 2008 2010 2012 2014

2000=100

Source: Oxford Economics

Unit labour costs

France

Germany

Italy

Greece

Spain

Forecast

…and banks will struggle with bad debt for some time

0

2

4

6

8

10

12

14

16

2007 2009 2011 2013 2015

% total loans

Source : Oxford Economics/World Bank

Italy

Eurozone

Forecast

Spain

Eurozone Non-performing bank loans

So a “lost decade” likely in medium-term

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010 2012 2014 2016 2018 2020 2022

Eurozone GDP growth% year

Source : Oxford Economics/Haver Analytics

1998-2007 average

Forecast

11

Oxford Economics baseline forecast

2011 2012 2013 2014

Av

2015-17

US 1.8 2.2 2.3 3.1 3.0

Japan -0.5 2.0 0.5 1.5 1.7

Eurozone 1.5 -0.4 -0.2 1.0 1.5

of which:

Germany 3.1 1.0 0.8 1.7 1.6

France 1.7 0.0 0.2 1.1 1.3

Italy 0.6 -2.1 -1.2 0.3 1.2

UK 0.9 0.1 1.0 2.1 2.5

China 9.3 7.7 8.3 9.0 8.0

India 7.5 5.3 6.0 7.6 7.8

Other Asia 3.8 2.7 3.9 4.9 5.0

Mexico 3.9 3.9 3.7 4.9 4.2

Brazil 2.7 1.0 3.9 4.9 4.5

Other Latin America 7.0 4.4 2.6 4.1 4.1

Eastern Europe 3.7 2.8 2.1 3.6 4.1

MENA 5.1 3.2 4.6 5.1 5.0

World 2.9 2.3 2.4 3.5 3.8

World (PPP) 3.6 3.0 3.5 4.2 4.4

World GDP Growth% Change on Previous Year

UK outlook - summary

� Spare capacity within firms will limit job creation in 2013

� Firms still loathe to invest, despite ever-growing cash piles

� Inflation above target in 2013, below target in medium term

� MPC has sparked signs of life the mortgage market

� But house prices unlikely to take off in 2013

� Southern regions fare best, with some interesting localised

differences

Flat GDP and strong employment growth…

28.7

28.8

28.9

29.0

29.1

29.2

29.3

29.4

29.5

29.6

29.7

2008 2009 2010 2011 2012

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

UK: Labour marketEmployment (000s)

Source : Haver Analytics

Employment

(LHS)

Unemployment (000s)

Unemployment

(RHS)

…leaves us with spare capacity within firms

75

80

85

90

95

100

105

110

115

120

1995 1997 1999 2001 2003 2005 2007 2009 2011

UK: Output per worker2009=100

Source : Haver Analytics

Actual

Pre-recession trend

14%

…so limited scope for further job creation

2

3

4

5

6

7

8

9

2000 2002 2004 2006 2008 2010 2012 2014 2016

%

Claimant count

ILO

UK: Unemployment

Forecast

Source: Oxford Economics

Implies only a gradual recovery in consumer spending

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2004 2006 2008 2010 2012 2014 2016

UK real consumer spending% change on year ago

Source : Oxford Economics/Haver Analytics

Forecast

Firms still reluctant to invest

-5

-4

-3

-2

-1

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012

UK:BoE agents' survey: Investment intentions % balance

Source : Haver Analytics

Manufacturing

Services

…despite having plenty of cash

-2

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012

UK: PNFC financial balance

% of GDP, 4QMA

Source : Haver Analytics

Inflation below target in medium term

0

1

2

3

4

5

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% year

2% target

CPI inflation

UK: Inflation relative to target

Source: Oxford Economics

Forecast

…Lending for “Business” should kick start mortgage lending

-20

-10

0

10

20

30

40

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2010 2011 2012 2013

UK: Mortgage availability

Source : Bank of England Credit Conditions Survey

% balance : loosening (+) / tightening (-)

*The single datapoints represent 3 month

forecasts, while the columns represent actual data

…but further modest house price falls likely

-15

-10

-5

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012 2014

150

200

250

300

350

400

450

500

UK: House prices & transactionsPrices (% year)

Source : Oxford Economics

Prices

(LHS)

Transactions (RHS)

F'cast

Transactions (000s)

UK forecast

2011 2012 2013 2014 2015 2016Domestic Demand -0.6 1.0 1.4 1.8 2.1 2.1

Private Consumption -1.3 0.9 1.2 2.0 2.4 2.8

Fixed Investment -2.9 0.0 2.8 5.6 5.5 4.8

Stockbuilding (% of GDP) 0.4 0.1 0.4 0.4 0.4 0.4

Government Consumption -0.1 2.8 -0.3 -1.4 -1.2 -2.1

Exports of Goods and Services 4.6 -0.5 2.1 4.7 4.8 4.7

Imports of Goods and Services 0.5 2.3 3.0 3.8 3.7 3.5

GDP 0.9 0.1 1.0 2.1 2.4 2.5

Industrial Production -0.8 -2.3 -0.9 1.2 1.1 0.9

CPI 4.5 2.8 2.3 1.7 1.6 1.6

Current Balance (% of GDP) -1.3 -3.6 -3.3 -3.1 -2.9 -2.5

Government Budget (% of GDP) -7.9 -6.5 -5.9 -5.5 -4.4 -3.3

Short-Term Interest Rates (%) 0.9 0.8 0.5 0.5 0.5 0.7

Long-Term Interest Rates (%) 3.1 1.9 1.9 2.2 2.5 3.0

Exchange Rate (US$ per £) 1.6 1.6 1.6 1.5 1.5 1.5

Exchange Rate (Euro per £) 1.2 1.2 1.2 1.3 1.3 1.3

Forecast for UK

(Annual percentage changes unless specified)

Regional prospects divided

0

1

2

3

4

5

6

7

8

SE SW EE L EM S W NW WM YH NE N

Unemployment rates around UK regions, 2013Percent of labour force

Source : Oxford Economics/Haver Analytics

Regional prospects divided

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

L SE SW EE WM EM YH NW NI S W NE

Average GVA growth 2013-15Percent on year ago

Source : Oxford Economics/Haver Analytics

But not entirely a North-South story