UK Economic Outlook - PwC UK blogs · 2013-01-17 · 2 • PricewaterhouseCoopers UK Economic...

UK Economic OutlookNovember 2009

Special features:

• How can the public finances be fixed?• UK and regional unemployment prospects• Which are the largest city economies in the world

and how might this change by 2025?

PricewaterhouseCoopers (www.pwc.co.uk) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

Unless otherwise indicated, “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom). PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited.

This report has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this report without obtaining specific professional advice.

No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this report, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

PricewaterhouseCoopers UK Economic Outlook November 2009 • 1

Contents

Section Author Page

I Summary 3

II UK economic prospects Alex Baker/John Hawksworth 7

II.1 Recent developments and the current situation 7

II.2 Economic growth prospects 12

II.3 Prospects for inflation and interest rates 13

II.4 Sectoral and regional prospects 14

II.5 Longer term prospects 14

II.6 Summary and conclusions 15

Box 2.1: How can the public finances be fixed? John Hawksworth 16

Box 2.2: UK and regional unemployment prospects John Hawksworth 18

III Which are the largest city economies in the world and John Hawksworth/ Thomas Hoehn/ how might this change by 2025? Anmol Tiwari 20

III.1 Long-term historic trends in city populations 20

III.2 Data and methodology used to derive city GDP estimates and projections 22

III.3 Urban economy rankings in 2008 (and changes since 2005) 22

III.4 Projected urban economy growth rates and GDP rankings in 2025 24

III.5 Key uncertainties and factors underlying relative city growth rates 26

III.6 Possible impact of de-globalisation scenario on city growth rates 27

III.7 Summary and conclusions 28

Annex A: Data and methodology used to derive city GDP estimates and projections 29

Annex B: Full City GDP rankings for 2008 and 2025 31

Appendices

A Global economic outlook Sajeel Shah 35

B UK economic trends: 1979-2008 40

2 • PricewaterhouseCoopers UK Economic Outlook November 2009

Contacts and services

UK Economic Outlook is produced three times a year by macroeconomists at PricewaterhouseCoopers (PwC). For more information about the technical contentof this report please contact: John Hawksworth ([email protected]).

For enquiries concerning distribution of UK Economic Outlook please contact our Publications Department by e-mail on [email protected] or your usual PricewaterhouseCoopers contact.

We also publish a wide range of international economic briefings exclusively for PwCstaff and clients on our PwC Economic Views portal (www.economics.pwc.com).Please contact your PwC advisor to request access to this service.

We also provide a range of macroeconomic services for clients:• Economic forecasts• Demand analysis• Supply analysis• Location benchmarking• Corporate affairs assistance

For enquiries concerning these services, please contact Yael Selfin on 020 7804 7630or visit www.economics.pwc.com

The PricewaterhouseCoopers LLP economics practice provides a wide range of services covering competition and regulation issues, litigation support, bids and business cases, public policy and project appraisals, financial economics, brand economics, the economics of sustainability, business forecasting and strategy, and macroeconomics.

For more information about these services please visit our website (www.pwc.co.uk/economics) or contact:

Competition policy and regulation,litigation support, financial economics, media and entertainment, health economics, business forecasting and strategy

Tim OgierNick Forrest

Daniel HansonEd Bramley-Harker

020 7804 5207020 7804 5695020 7804 5774020 7804 5684

Energy, utilities and infrastructureOil and gas

Mark HughesMichael Hurley

020 7804 5767020 7804 4465

Environmental economics, climate change and sustainability

Richard GledhillGeoff Lane

Andrew Thurley

020 7804 5026020 7213 4378020 7212 6503

Project appraisal and financing, transport Julian Smith 020 7804 5840

Policy research and evaluation

Impact assessment and benefits appraisal

Public sector research centreCustomer-focused public services

John LakinGraham Cash

David ArmstrongMark Ambler

Mark GrahamNick Jones

Duncan Lampard

020 7213 587202890 41571002890 415716020 7213 15910131 260 4054020 7213 1593020 7213 3390

Regional and local economic development, inward investment

Ray Mills 0191 269 4284

Telecommunications and media Graeme ClarkDavid Lancefield

Alastair MacPhersonRolf Meakin

020 7213 2866020 7213 2263020 7213 4463020 7213 1707


I – Summary

Highlights

• UK GDP is estimated in our main scenario to fall by around 4.75% in 2009, with modest average GDP growth of around 0.75% in 2010 projected in our main scenario.

• Consumer spending is estimated to fall by around 3.25% in real terms in 2009 due to the severe squeeze on consumer spending from high debt levels, tighter credit conditions, falling housing wealth and rising unemployment. We expect real consumer spending to fall by a further 0.25% in 2010 as households seek to reduce their debt burdens and return their savings ratios to more normal levels.

• One of the key factors dampening consumer spending growth in our main scenario is a further projected rise in unemployment to a peak of around 3 million in the second half of 2010. All regions are projected to see rising unemployment over this period.

• Business investment growth is also expected to remain weak, although this should gradually reverse during the course of 2010.

• Destocking made a major contribution to the depth of the recession, but should now have a more positive effect on short-term GDP growth as this process goes into reverse. But this will be only a temporary effect and the question is whether growth can be sustained beyond that point.

• Public spending growth will remain positive in 2009 and 2010, but will need to be cut back sharply in the medium term to bring under control a budget deficit that looks likely to be at or above the Treasury’s £175 billion projection for 2009/10. Significant tax rises are also likely to be needed from 2011 onwards, over and above what the government has already announced.

• Net exports should provide a boost to growth this year and next as the world economy recovers faster than UK domestic demand, helped by the relative weakness of the pound (compared to typical 1996-2007 levels).

• Risks around growth in our main scenario are more balanced than earlier this year, but are still somewhat weighted to the downside. We therefore recommend that businesses should stress test their plans and valuations against an alternative ‘prolonged recession’ scenario in which negative growth continues into 2010. But an upside scenario where growth rebounds to above trend levels by the end of 2010 can also not be ruled out.

• Inflation is projected to be volatile in the short term, but should fall back below target by the end of 2010 given continued excess capacity in the economy. However, there are still considerable uncertainties around this relating to the path of global commodity prices, domestic demand growth and sterling.

• The Bank Rate is assumed to beleft at 0.5% until mid-2010 in our main scenario and to rise only gradually thereafter. We assume that quantitative easing is not unwound in a significant way until 2011 and beyond.

• This issue includes a special article on global city GDP rankings in 2008 and projections to 2025. The latter reveal the growing significance of cities like Shanghai, Beijing, Mumbai, Sao Paulo and Moscow as the centre of economic gravity shifts from the G7 to the emerging markets. It also shows the importance of the big cities: the top 30 in our list accounted for an estimated 18% of total world GDP in 2008.

Recent developments

The UK economy remained in recession during the first nine months of 2009, but the rate of decline slowed in the second and third quarters (see Figure 1.1).

More recent business surveys and data releases point to a modest revival in activity in Q3 2009, led by the services sector, although this contrasts with official GDP estimates. The rate of decline in manufacturing and construction activity has also slowed. Consumer and business confidence has become less negative and the housing market has also shown some tentative signs of recovery, albeit from a low base. Most other major economies have also shown signs of bottoming out according to OECD leading indicators, with China and India in particularly returning to relatively strong growth in the second and third quarters.

However, the extent of the good news should not be exaggerated and to a

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’94’93’92’911990

Figure 1.1 – Quarterly GDP growth

Source: ONS

% change on the previous quarter


plans against the ‘prolonged recession’ scenario shown in Figure 1.2, which envisages a further 1.5% fall in GDP in 2010. This kind of ‘double dip recession’ is not the most likely scenario, but it certainly cannot be entirely ruled out. At the same time, the possibility of a stronger recovery can also not now be ignored given recent relatively more positive data.

are subject to significant margins of uncertainty, as indicated by the alternative GDP growth scenarios shown in Figure 1.2.

Risks to our main scenario for growth are much more balanced than earlier in 2009, but may still be weighted somewhat to the downside. We would therefore recommend that businesses should stress test their

significant extent just reflects the normal operation of the stock cycle: the period of very sharp destocking has run its course, which will lead to an automatic recovery in orders and output levels in the short term, but the question is whether this upturn can be sustained in the face of rising unemployment and still fragile confidence levels. Credit conditions have improved to some degree, but are likely to remain relatively constrained for some time to come. Oil prices have started to rise again, which could also dampen the pace of global recovery.

Governments around the world have introduced fiscal stimulus packages to support monetary policy easing, which was an appropriate policy in the short term although it has pushed budget deficits up to worryingly high levels from a longer term perspective, not least in the UK. The global financial system has stabilised but it will take some years for US and European banks to repair fully the damage to their balance sheets due to the crisis. Nonetheless, the risk of a global financial meltdown seems to have been averted, which has underpinned general positive (if volatile) trends in global equity markets since March.

Future prospects

Our main scenario sees UK GDP falling by around 4.75% in 2009, but with quarter-on-quarter growth edging back into positive territory in the fourth quarter of the year due in large part to the stock cycle effects mentioned above. But there could be a renewed slowdown in quarterly growth in early 2010 after VAT rises back to 17.5% on 1 January next year. Thereafter we would expect a gradual recovery to resume as the effects of past fiscal and monetary loosening feed through, but growth in 2010 is still likely to remain modest at an average of only around 0.75% for the year as a whole. Extrapolating forward, it could be mid-2012 before the level of GDP returns to its pre-recession peak in this scenerio.

As shown in Table 1.1, our main scenario is broadly similar to the latest average independent forecast, but somewhat less optimistic than the Treasury’s Budget forecast. However, both our main scenario and the projections of other forecasters

Table 1.1 – Summary of UK economic prospects

Indicator(% change onprevious year)

HM Treasuryforecasts

(April 2009)

2009 2010 2009 2010 2009 2010

-3.75 to -3.25

-3.25 to -2.75

-11.25 to -10.75

-12.75 to -12.25

1

1 to 1.5

0 to 0.5

-3.25 to -2.75

0.25 to 0.75

1

-4.3

-3.0

-14.5

-10.3

1.7

1.2

0.1

-2.6

1.7

1.8

-4.75

-3.25

-16

-11

1.75

0.75

-0.25

-5

0

1.75

Independentforecasts

(October 2009)

PwCMain scenario

(November 2009)

Source: HM Treasury Budget 2009 and Survey of Independent Forecasts (average values), PwC main scenario projections rounded to the nearest quarter of a percent. Investment refers to total �xed investment.

GDP

Consumerspending

Investment

Manufacturingoutput

CPI (Q4)

-6

-5

-4

-3

-2

-1

0

1

2

3

4

’10Q4

’10Q3

’10Q2

’10Q1

’09Q4

’09Q3

’09Q2

’09Q1

’08Q4

’08Q3

’08Q2

’08Q1

’07Q4

’07Q3

’07Q2

’07Q1

’06Q4

’06Q3

’06Q2

2006Q1

Figure 1.2 – Alternative GDP growth scenarios

Source: ONS, PricewaterhouseCoopers

Year-on-year % growthStrong

recovery

Mainscenario

Prolongedrecession

1000

1500

2000

2500

3000

3500

4000

’10Q4

’10Q3

’10Q2

’10Q1

’09Q4

’09Q3

’09Q2

’09Q1

’08Q4

’08Q3

’08Q2

’08Q1

’07Q4

’07Q3

’07Q2

2007Q1

Figure 1.3 – Alternative unemployment scenarios

Source: ONS Labour Force Survey, PricewaterhouseCoopers

Thousands

Strongrecovery

Mainscenario

Prolongedrecession


combination of additional tax rises and greater real public spending cuts than included in current Treasury plans.

Largest city economies in the world in 2008 and 2025

Cities tend to be ranked in size according to their populations, but to assess the relative size of their economies we also need to take account of their average income per capita levels. Doing this in a consistent and comprehensive way at a global level is challenging, but in Section III below we have pieced together data

Looking further ahead, we would expect the pace of recovery in the UK economy in 2011 and beyond to be held back by the need to get the public finances back under control in the medium term. Public spending will need to be tightly constrained in 2011 and beyond as part of a programme of fiscal austerity, probably also including significant tax rises, that will be needed to bring down the budget deficit. As discussed further in Box 2.1 below, we estimate that a combined additional fiscal tightening of around 1.8% of GDP (around £26 billion per annum at today’s values) could be needed by 2013/14 through some

Consumer spending is projected to fallby around 3.25% in 2009 and by a further 0.25% in real terms in 2010 in our main scenario. This reflects the squeeze on household spending power from continued credit constraints and the expectation in our main scenario that unemployment will continue to rise to a peak of around 3 million in the second half of 2010. As indicated by the alternative scenarios in Figure 1.3 and the more detailed analysis in Box 2.2 below, however, the path taken by unemployment is subject to considerable uncertainty with possible outcomes at the end of 2010 ranging from 2.8 to 3.5 million (on the Labour Force survey measure).

Business investment1 is also likely to remain weak in 2010, reflecting both subdued final demand growth and the continued influence of relatively tight credit conditions, even if these continue to ease over time. Housebuilding is also expected to remain relatively subdued in 2010, even if the worst of the decline in activity in this sector may now have passed.

Net exports are projected to make a positive contribution to GDP growth in 2009 and 2010 in our main scenario. The boost to exports from the fall in the pound since 2007 should help here together with the gradual recovery expected in the US and Euroland economies over the next year. Stronger growth in China and other emerging economies will have less direct benefit to the UK, however, as only a small share of UK exports currently go to these fast-growing markets.

Our main scenario for UK GDP growth would be consistent with inflation (CPI) remaining below target at the end of 2010, although the path of inflation is likely to be volatile in the short run due to the impact of energy price fluctuations and the rise in VAT from 1 January 2010.

In our main scenario, it should be possible for official short-term interest rates to be held at current low levels until mid-2010 with only a gradual rise thereafter. In the medium term, there is a risk that inflation could pick up again as and when the economy recovers, which could eventually cause interest rates to rise quite sharply (perhaps in 2011 or 2012) to pre-empt this risk. But this is not likely to be an issue in the short term.

Table 1.2 – Top 30 urban agglomeration GDP rankings in 2008 and illustrativeprojections to 2025 (using UN definitions and population estimates)

Tokyo

New York

Los Angeles

Chicago

London

Paris

Osaka/Kobe

Mexico City

Philadelphia

Sao Paulo**

Washington DC

Boston

Buenos Aires

Dallas/Fort Worth

Moscow***

Hong Kong

Atlanta

San Francisco/Oakland

Houston

Miami

Seoul

Toronto

Detroit

Seattle

Shanghai

Madrid

Singapore

Sydney

Mumbai (Bombay)****

Rio de Janeiro**

Rank

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

Cities ranked byestimated 2008GDP at PPPs

1479

1406

792

574

565

564

417

390

388

388

375

363

362

338

321

320

304

301

297

292

291

253

253

235

233

230

215

213

209

201

Est. GDPin 2008($bn atPPPs)

Tokyo

New York

Los Angeles

London

Chicago

Sao Paulo

Mexico City

Paris

Shanghai

Buenos Aires

Mumbai (Bombay)

Moscow

Philadelphia

Hong Kong

Washington DC

Osaka/Kobe

Beijing

Boston

Delhi

Dallas/Fort Worth

Guangzhou

Seoul

Atlanta

Rio de Janeiro


Houston

Miami

Istanbul

Toronto

Cairo

Cities ranked byprojected 2025GDP at PPPs

1981

1915

1036

821

817

782

745

741

692

651

594

546

518

506

504

500

499

488

482

454

438

431

412

407

406

400

390

367

352

330

Est. GDPin 2025($bn at

2008 PPPs)

1.7%

1.8%

1.6%

2.2%

2.1%

4.2%

3.9%

1.6%

6.6%

3.5%

6.3%

3.2%

1.7%

2.7%

1.8%

1.1%

6.7%

1.8%

6.4%

1.8%

6.8%

2.3%

1.8%

4.2%

1.8%

1.8%

1.7%

4.2%

2.0%

5.0%

Real GDPgrowth rate

(% pa:2009-2025)

Source: PwC estimates and projections using UN population data and de�nitions (see Section III below for further details of data sources and methodology used). Growth rates in �nal column relate to the

cities ranked by projected GDP in 2025 in the fourth column of the table.

Rising by more than 3 places

1 Business investment is the largest component of total fixed investment, which also includes housebuilding and government investment.


Milan, Madrid and Rome seem likely to slide down the rankings as the emerging mega-city economies of Asia and Latin America rise. Smaller UK cities such as Birmingham, Manchester and Leeds, while continuing to grow at reasonable rates in absolute terms, will also tend to fall down the relative GDP rankings.

Our projections for individual cities are subject to many uncertainties, but our conclusion that the emerging economy cities as a group should increase their relative weight in the global economy seems likely to be robust. But the cities of the established developed economies should see this as more of an opportunity than a threat as it gives opportunities for them to specialise further in those areas (e.g. business and financial services, entertainment and media, fashion, cultural tourism) where they have potential comparative advantages in fast-growing global markets. Competition between cities, as between nations, should not be seen as a zero sum game.

York, Los Angeles, Chicago, London and Paris (using UN definitions). Only seven emerging economy cities are currently in the top 30 (Mexico City, Sao Paulo, Buenos Aires, Moscow, Shanghai, Mumbai and Rio de Janeiro), but our illustrative projections suggest that they will all move up the GDP rankings by 2025 and be joined in the top 30 by fast-growing cities such as Istanbul, Beijing, Guangzhou and Cairo. Tellingly, we expect the largest emerging market cities to grow at a faster rate (between 6%–7% pa) than the cities in advanced economies (ca 2%) leading to cumulative growth of up to nearly 200% for the period under investigation (2008-25). This is in contrast to advanced economy cities whose cumulative growth will be only around 35%.

According to our illustrative projections, London is projected to grow somewhat faster than leading rivals such as Tokyo, New York, and Chicago, moving up from 5th place in 2008 to 4th place by 2025. However, other ‘old Europe’ cities like

from a number of reputable sources (e.g. the OECD, the UN and the World Bank as well as national statistical agencies) to produce a ranking by GDP at Purchasing Power Parity (PPP) exchange rates of the largest 100 urban economies in the world in 2008 (updating our earlier estimates from 2005). The precise rankings are dependent on the definitions and data sources adopted, but looking at GDP gives a much better indication of relative economic size than just looking at population.

Our analysis re-emphasises the economic significance of the world’s largest cities. The top 30 such cities ranked by GDP accounted, according to our estimates, for around 18% of world GDP in 2008 and this share rises to around 30% for the top 100 cities.

At present, as Table 1.2 shows, the mega-cities of the major developed economies continue to lead the global GDP rankings, with the top six in 2008 being Tokyo, New


II – UK Economic prospects

A more detailed analysis of third quarter growth in the services sub-sectors (see Figure 2.2) shows that:

10.4%, while output of the service industries (accounting for around 75% of GDP) fell by 3.8%.

Introduction

In this section we describe recent developments in the UK economy and review future prospects for the economy. The analysis is divided into the following sub-sections:

II.1 Recent developments andthe current situation

II.2 Economic growth prospects

II.3 Prospects for inflation andinterest rates

II.4 Sectoral and regionalprospects

II.5 Longer term prospects

II.6 Summary and conclusions

The analysis is supported as usual by a review of global trends and prospects (Appendix A). Historic trends in selected UK economic indicators are included for reference in Appendix B. Additional analysis on the outlook for the public finances and unemployment is contained in Boxes 2.1 and 2.2 respectively at the end of this section.

II.1 Recent developments and the current situation

Growth of GDP and major industry sectors

UK GDP fell by an estimated 0.4% in Q3 2009 (based on preliminary ONS estimates which may be subject to later changes), which was slightly less than the 0.6% decline in the previous quarter (see Figure 2.1). The year-on-year rate of contraction decreased to 5.2% in Q3 (from 5.5% in Q2 2009).

Industrial production contracted by 0.7% in Q3 2009 relative to the previous quarter, while services contracted by 0.2% over the same period. In the year to Q3 2009, the production industries (accounting for around 18% of GDP) contracted by

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’94’93’92’911990

Figure 2.1 – Quarterly GDP growth

Source: ONS

% change on the previous quarter

% real output growth

-15

-12

-9

-6

-3

0

ConstructionManufacturingTransport& communication

GDPDistribution, hotels& catering

Business andnancial services

Governmentservices

Figure 2.2 – Sectoral growth trends

Source: ONSQuarter to Q3 2009Year to Q3 2009

Index

30

35

40

45

50

55

60

65

70

Jul’09

Jan’09

Jul’08

Jan’08

Jul’07

Jan’07

Jul’06

Jan’06

Jul’05

Jan’05

Jul’04

Jan’04

Jul’03

Jan’03

Jul’02

Jan’02

Jul’01

Jan’01

Jul’00

Jan’00

Jul’99

Jan’99

Jul’98

Jan’98

Jul’97

Jan’97

Figure 2.3 – Purchasing managers’ index of business activity

Source: CIPS/MarkitManufacturingServices


Construction sector output contracted by 1.1% in Q3 2009 relative to Q2 2009 and was down by 13.0% on a year earlier. The CIPS/Markit construction sector PMI fell markedly during 2008 and hit a low of 23.9 in December before recovering to 46.7 in September Housebuilding has continued to be relatively weak, but to a lesser degree in recent months. The subdued corporate real estate market continues to feed through to declining commercial construction activity.

Drivers of GDP growth

Domestic demand contracted by an estimated 6.3% in the year to Q2 2009 (see Figure 2.4). Net exports provided a boost to the overall economy over this period, however, as import growth has slowed by even more than export growth.

a significant decline for what usually is a relatively non-cyclical sector. This may have been caused by sharp falls in demand for energy from commercial customers, particularly in the hard-hit manufacturing and construction sectors, which tend to be relatively energy-intensive.

The CIPS/Markit PMI activity indices for both manufacturing and services have improved since earlier in the year (see Figure 2.3), although the manufacturing index fell back slightly to 49.5 in September from its recent peak of 50.2 in July. The services index reached 55.3 for the same month, which is its highest level since September 2007 and the fifth consecutive month when this service sector activity index has been above the ‘no change’ level of 50. This is encouraging given the critical importance of the services sector for the UK economy.

• The business and financial services sector contracted by 0.1% in Q3 2009 and was down by 4.5% on a year earlier. The latest PwC/CBI financial services survey suggests that financial services sentiment has improved in the third quarter, however, due in part to the significant rise in equity markets since March.

• The distribution, hotels and catering sector contracted by 1% in Q3 2009, although this was a faster rate of decline than in the previous quarter. Relative to a year earlier, output in this sector contracted by 5.3%.

• The transport and communications sector contracted by 0.3% in Q3 2009, with low levels of demand for transport weighing heavily on the sector, and was down by 6.6% on a year earlier.

• The government and other services sectors did not change in Q3 2009 with output in the sector 1.2% lower than a year earlier.

The sectoral breakdown of industrial production reveals that:

• The manufacturing sector contracted by 0.2% in Q3 2009. Manufacturing output in Q3 2009 was 10.6% lower than a year earlier as the sector has been impacted both by falling domestic demand and contracting world trade. Manufacturing output was flat in the three months to August 2009 compared to the previous three months (in August alone, manufacturing output fell sharply compared to July, but monthly data can be erratic so we would not read too much into this unless output continues to fall in subsequent months).

• Output from the mining, oil and gas sector fell by 3.5% in Q3 2009, compared with a second quarter decline of 0.6%. Output in this sector was 10.0% lower in Q3 2009 than a year earlier, reflecting continued reductions in North Sea oil and gas production over this period.

• Output in the utilities sector fell by 0.6% in Q3 2009 and compared to year earlier was down by around 9.6%, which is

Contribution to % year-on-year GDP growth

-8

-6

-4

-2

0

2

4

6

’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’941993

Figure 2.4 – Drivers of growth

Source: ONSDomestic demandNet exports GDP

% change on a year earlier

-20

-15

-10

-5

0

5

10

15

’09’08’07’06’05’04’03’02’01’001999

Figure 2.5 – Domestic demand growth

Source: ONS

InvestmentConsumer spending GDP


a lack of houses being offered for sale, rather than an improvement in market fundamentals.

Total investment in fixed capital contracted by an estimated 5.4% in Q2

for September was 7.3% lower (see Figure 2.9). Prices are now around 10-18% below their peak in summer 2007 according to these indices. However, the apparent recent recovery in house prices may reflect low transaction volumes and

Domestic demand

Consumer spending fell by 0.6% in real terms in Q2 2009 although this represented a less sharp rate of decline than in the previous two quarters. In the year to Q2 2009, real household spending fell by 3.6% (see Figure 2.5) as unemployment rose and access to credit continued to be highly constrained during Q2 2009 (although it seems to have eased a little since then according to the latest Bank of England’s credit conditions survey for the third quarter).

The household savings ratio increased to 5.6% of total available households’ resources in Q2 from 3.9% in Q1 (see Figure 2.6). The recent rise in the savings ratio is expected to continue as householders remain uncertain about their job security and tend to rein in their borrowing (either voluntarily or due to credit constraints imposed by lenders).

Retail sales volume growth has shown signs of improvement in the third quarter, with growth of 2.5% recorded in the year to September 2009 (see Figure 2.7). The corresponding British Retail Consortium survey, however, suggested that the like-for-like value of sales fell by 0.1% in the year to August, implying consumers are shifting spending towards ‘value for money’ brands in response to the squeeze on household finances from the credit crunch.

Consumer confidence, as measured by a PwC/ICM survey looking at households’ expectations of their disposable income growth over the next year, has recovered somewhat since the beginning of 2009, climbing to -9% in July 2009 (see Figure 2.8). However, this still indicates a relatively pessimistic outlook as a result of continued worries about job losses and harder economic times ahead. Other consumer surveys, such as those by GfK and the Nationwide, also suggest further rises in confidence levels in recent months while remaining at relatively low levels in absolute terms.

House price indices from the Halifax and Nationwide have both strengthened in recent months but to differing degrees. The Nationwide house price index was at the same level in September 2009 as a year earlier, while the Halifax index

Household saving as % of total resources

-2-10123456789

1011121314

’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’94’931992

Figure 2.6 – Household savings ratio

Source: ONS

Three month moving average – % change on a year earlier

-2

-1

0

1

2

3

4

5

6

7

8

9

’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’94’931992

Figure 2.7 – Retail sales volume growth

Source: ONS

% net balance expecting increased income

-60

-50

-40

-30

-20

-10

0

Jul’09

May’09

Feb’09

Dec’08

Oct’08

Aug’08

Jun’08

Apr ’08

Figure 2.8 – Household expectations for their disposable income growth over next 12 months

Source: PwC/ICM Research consumer survey


although this was up slightly from a low point of -1.6% in June. While the key factors in the falling CPI inflation rate also contributed to a low RPI inflation rate over recent months, marked declines in mortgage interest payments relative to a year earlier have led to RPI inflation being significantly lower than CPI inflation (see Figure 2.10). But this gap is likely to close over the next 6-12 months and could go into reverse as and when interest rates start to rise again.

Producer input price inflation was -6.5% in the year to September 2009 but this was less negative than the -12.2% in the year to July (see Figure 2.11). Annual producer output price inflation was positive at 0.4% in September 2009, up from -1.3% recorded in July. This shift from deflation to inflation reflects the partial reversal of earlier oil price falls and the effect of the relatively weak pound in pushing up import prices.

The trade deficit in goods and services has been more stable over the past year, with the latest data showing a slight decline in the deficit in August.

Inflation and the labour market

Inflation, as measured by the Consumer Price Index (CPI), fell to an annual rate of 1.1% in September (see Figure 2.10). This largely reflected base effects as earlier domestic energy price rises in September 2008 fell out of the 12 month inflation rate calculation. Core inflation remains somewhat higher despite weak demand, however, which is probably partly due to the influence on import prices of the relative weakness of the pound over the past year when compared to earlier periods.

Annual headline RPI inflation remained in negative territory at -1.4% in September,

2009 relative to the previous quarter. This was the sixth consecutive quarter of declining investment following generally strong growth in 2007. Housing investment has been declining and looks set to remain relatively weak for some time. Business investment contracted sharply by around 10% in Q2 2009.

Public sector investment should be relatively strong in 2009/10 given government plans to bring forward some capital spending from later financial years as part of the fiscal stimulus package announced in the Pre-Budget Report and the Budget. However, this is not likely to be on a sufficient scale to offset more than a relatively small part of the sharp decline in private sector investment over this period.

Real growth in general government consumption expenditure was modestly positive in the second quarter of 2009 and this seems set to continue over the next year based on the plans announced in the latest Budget. However, public spending is likely to be severely constrained after 2010 as discussed further in Box 2.1 opposite.

Inventories fell by an estimated 1.5% of GDP in Q2 2009. This is the third consecutive quarterly drop in stocks but was less than in Q1 and this therefore actually made a small net positive contribution to quarterly GDP growth in Q2. Preliminary stockbuilding estimates are often subject to significant later revision, but if they do prove to be broadly accurate, then the end of this period of rapid destocking could lead to an automatic rebound in quarterly GDP growth. This factor is taken into account in the GDP growth projections discussed in Section II.2 opposite.

The trade deficit and current account balance

The current account deficit increased to £11.4bn in Q1 2009 from £4.1 billion in the previous quarter. The deficit was equivalent to 3.3% of GDP in Q2 2009, over double the 2008 average of 1.6%, but was inflated by a sharp fall in Q2 in net overseas investment income, which always tends to be relatively erratic.


-20

-10

0

10

20

30

40

’09’08’07’06’05’04’03’02’01’00’99’98’97’961995

Figure 2.9 – House price inflation

Source: Nationwide, HalifaxHalifax indexNationwide index

Consumer price index (% change over previous year)

-2

-1

0

1

2

3

4

5

6

Jan’09

Jan’08

Jan’07

Jan’06

Jan’05

Jan’04

Jan’03

Jan’02

Jan’01

Jan’00

Jan’99

Jan’98

Jan’97

Jan’96

Figure 2.10 – Inflation (CPI and RPI)

Source: ONSRPICPI

CPI target (2%)


revenues generally came in below Treasury forecasts. Following the current cyclical downturn, significant fiscal tightening through tax rises and real spending cuts is expected to be required from 2011 onwards (as discussed further in Box 2.1 below).

entirely involving purchases of gilts to inject money into the economy) are discussed further in Section II.3 below.

The public finances continued to deteriorate sharply in the first half of 2009/10 as tax

Latest figures confirm that the labour market has continued to weaken. The claimant count measure of unemployment rose by 20,800 to around 1.63 million in September. The ILO measure of unemployment, which is defined more widely than the claimant count, rose to 7.9% of the labour force in the three months to August 2009 and recorded a 88,000 increase on the previous three months to 2.47 million (although this was a significantly slower rate of increase than in the previous three months). Meanwhile total employment fell by 45,000 over the same period compared to the previous three months. As discussed further in Box 2.2 below, unemployment is expected to rise further over the next year, with continued adverse effects on consumer confidence and spending power over this period, but at a gradually decelerating rate over time.

Unemployment has been on a rising trend across the country, but employment rates remain diverse across regional labour markets. In the three months to August 2009, employment rates were highest in the South East (76.8%), the East (77.3%) and the South West (76.2%), and lowest in Northern Ireland (65.6%), the North East (68.5%) and London (69.2%). The prospects for regional economies are discussed in Section II.4 below.

The pace of average earnings growth, which is closely watched by the Bank of England’s Monetary Policy Committee (MPC) due to its potential impact on price inflation, fell to 1.6% in the year to August 2009 from 2.5% in June (see Figure 2.12). Average earnings excluding bonuses grew by 1.9% in the year to August, but this was still a very subdued rate of increase by historic standards. The economic downturn and the associated further rise in unemployment should help to constrain wage inflation over at least the next year.

Monetary and fiscal policy developments

The MPC cut the official base rate to a historic low of 0.5% in early March, where it has since stayed (see Figure 2.13). Future interest rate prospects and the chances of a further extension of the quantitative easing programme by the Bank of England (which stood at £175 billion at the time of writing, almost


-20

-10

0

10

20

30

40

’09’08’07’06’05’04’03’02’01’00’99’981997

Figure 2.11 – Producer price inflation

Source: ONSOutput pricesInput prices

Three month average – % change on a year earlier

-1

0

1

2

3

4

5

6

7

Apr’09

Oct’08

Apr’08

Oct’07

Apr’07

Oct’06

Apr’06

Oct’05

Apr’05

Oct’04

Apr’04

Oct’03

Apr’03

Oct’02

Apr’02

Oct’01

Apr’01

Oct’00

Apr’00

Oct’99

Apr’99

Oct’98

Apr’98

Oct’97

Apr’97

Oct’96

Figure 2.12 – Average earnings growth (including bonuses)

Source: ONS

MPC reference value = 4.5%

% yield

0

1

2

3

4

5

6

7

8

9

10

Jan’09

Jan’08

Jan’07

Jan’06 Jan

’05Jan’04

Jan’03

Jan’02

Jan’01

Jan’00

Jan’99

Jan’98

Jan’97

Jan’96

Jan’95

Jan’94

Figure 2.13 – Short and long term interest rates

Source: Bank of England10 year government bondOf cial rate


Our main scenario for GDP growth is broadly similar to the latest average independent forecasts (as can be seen by comparing Tables 2.1 and 2.2) and the latest Bank of England central view, but somewhat less optimistic than the Treasury’s Budget forecast.

We also present two alternative growth scenarios, which reflect the uncertainties surrounding our main scenario for the UK economy (see Figure 2.14).

• Our ‘strong recovery’ scenario assumes that financial markets stabilise more quickly and credit constraints on businesses and households ease significantly in the second half of 2009. Together with the effects of rapid restocking and fiscal and monetary loosening, this

16% in 2009, with a further fall of around 5% in 2010 as a whole but a recovery by the end of that year.

• Stockbuilding is expected to have a negative effect on GDP in 2009 as a whole, but with this going into reverse later in 2009 and into 2010. This is a major factor in the economy coming out of recession in our main scenario.

• The contribution of net trade to overall GDP growth is projected to be positive in both 2009 and 2010, given the effect of markedly slower import growth and a gradual boost to exports from the weak pound.

• Unemployment on the Labour Force Survey measure could rise to just over 3 million in 2010 in this scenario (based on the modelling described in Box 2.2 below).

II.2 – Economic growth prospects

Independent forecasts

The October 2009 survey of independent economic forecasts by HM Treasury showed an average projection for real GDP growth of -4.3% in 2009 and 1.2% in 2010 (see Table 2.1).

The Treasury’s 2009 Budget estimates for GDP growth of -3.75 to -3.25% in 2009 and 1% to 1.5% in 2010 appear to be rather optimistic relative to the consensus, but recent more positive data have offered some support for the Treasury’s projections for growth in 2010.

The uncertainty of future prospects at present is reflected in the wide distribution of independent forecasts for UK GDP growth, which range from -0.5% to 2.2% in 2010, and in the alternative scenarios that we present and discuss below.

Alternative UK growth scenarios

Our main scenario for the UK economy, as summarised in Table 2.2, has the following key features:

• Real GDP falls by around 4.75% in 2009 before rising by around 0.75% in 2010; this scenario involves GDP rising from the fourth quarter of 2009 onwards and, after some volatility around the year end due to the effect of the VAT rise from 1 January, mounting a gradual recovery during the course of 2010 (see main scenario in Figure 2.14). Extrapolating forward, however, it should be noted that the level of GDP might not return to its pre-recession peak until mid-2012 in this scenario.

• Real consumer spending is expected to fall by around 3.25% in 2009 and to decline modestly by around 0.25% in 2010 as tight credit conditions, subdued earnings growth and rising unemployment all weigh heavily on household spending.

• Companies will continue to delay or cancel their investment plans in this scenario given uncertainty about the strength of demand. Total investment is therefore expected to drop by around

Table 2.1 – HM Treasury and independent forecasts for the UK economy

Indicators(% real growth)

Actual orlatest

estimates

2008 2009 2010 2009 2010

HM Treasury forecast(April 2009)

Average Independentforecast

(October 2009)

GDP

Manufacturing output

Consumer spending

Fixed investment

Governmentconsumption

Change instockbuilding(contribution to% GDP growth)

Domestic demand

Exports

Imports

Current account(£ billion)

Unemployment (m)claimant count – Q4

Source: ONS for 2008, HM Treasury Budget 2009 and Treasury survey of independent forecasts (October 2009)

0.6

-2.9

0.9

-3.3

2.5

-0.4

0.1

1.0

-0.8

-23.6

1.1

-3.75 to -3.25

-12.75 to -12.25

-3.25 to -2.75

-11.25 to -10.75

4.75

-1

-4 to -3.5

-9 to -8.5

-9.5 to -9

-48.5

n/a

1 to 1.5

0.25 to 0.75

0 to 0.5

-3.25 to -2.75

1

1

0.5 to 1

0.75 to 1.25

-0.75 to -0.25

-51

n/a

-4.3

-10.3

-3.0

-14.5

2.4

-1

-4.9

-10.8

-12.1

-28.2

1.8

1.2

1.7

-0.1

-2.6

1.4

1

0.9

3.1

1.8

-23.3

2.0

Table 2.2 – Main scenario for the UK economy

*Export and import �gures have both been distorted by the effects of missing trader fraud in recent years, so we focus here on net exports, estimates of which are less affected by this distortion.

Source: ONS for historic data to 2008, PwC main scenario for 2009 and 2010(rounded to the nearest quarter of a percentage point to avoid spurious accuracy).

% change unless stated

GDP growth

Consumer spending

Government consumption

Fixed investment

Change in stock-building(% GDP)

Domestic demand

Net exports (% of GDP)*

CPI (%: Q4)

2005

2.2

2.3

2.0

2.4

0

2.1

0

1.9

2.9

1.5

1.6

6.5

0

2.4

0.4

3.0

2.6

2.5

1.2

7.8

0.1

3

-0.6

3.1

0.6

0.9

2.5

-3.3

-0.4

0

0.5

3.9

-4.75

-3.25

2

-16

-1

-5.5

0.75

1.75

0.75

-0.25

2

-5

1

0.5

0.25

1.75

2006 2007 2008 2009 2010


commodity prices and the exchange rate, both of which are very hard to predict.

Figure 2.16 shows illustrative profiles for the official UK short-term interest rate in each of our three scenarios. In our main scenario, base rates remain at their historic low of 0.5% well into 2010 before rising gradually as the economy begins to expand once more and inflation rises. In our strong recovery scenario, base rates

Figure 2.15 shows this main scenario for CPI inflation alongside two alternative scenarios that are consistent with those for growth discussed in Section II.2 above. The prospect of a deflationary period appears to have eased in recent months, but our downside scenario is still characterised by very low inflation. Our strong recovery scenario could involve a revival of inflationary pressures in 2010 and beyond. Inflation will clearly also depend heavily on trends in world

leads to a progressive revival in the UK and global economies from the second half of 2009 onwards. UK GDP would still fall by around 4.5% in 2009 in this scenario due to the downward momentum the economy already has, but this would turn around quite rapidly, with growth averaging around 2.0% in 2010 in this relatively optimistic scenario.

• By contrast, our ‘prolonged recession’ scenario involves further adverse financial shocks affecting the global banking system, leading to even more severe constraints on credit for both businesses and households. This would prompt large cuts in consumer spending and business investment and a sharp increase in company failures and unemployment. A ‘double dip’ recession in the US and Euroland in 2010 would also lead to a further fall in UK export demand in this scenario. The UK economy could shrink by almost 5% in 2009 in this scenario with a further decline of around 1.5% in 2010. A sharply rising budget deficit would also constrain the scope for significant support from fiscal policy in this scenario.

As noted above, both scenarios merit serious consideration in current circumstances, although stress testing against the downside scenario remains particularly important on grounds of prudence.

II.3 – Prospects for inflation and interest rates

As presented in Table 2.3, the average independent forecast is for inflation (on the CPI measure) to remain below its 2% target rate at the end of 2010, although it could be volatile in the short term.

Our main scenario is similar to the consensus view in that we expect headline inflation, as measured by the CPI, to rise temporarily when VAT moves back up to 17.5% on 1 January 2010, before stabilising somewhat below target at the end of next year given continuing excess capacity in the economy, which will tend to depress inflationary pressures for some time to come.

Year-on-year % growth

-6

-5

-4

-3

-2

-1

0

1

2

3

4

’10Q4

’10Q3

’10Q2

’10Q1

’09Q4

’09Q3

’09Q2

’09Q1

’08Q4

’08Q3

’08Q2

’08Q1

’07Q4

’07Q3

’07Q2

’07Q1

’06Q4

’06Q3

’06Q2

2006Q1

Figure 2.14 – Alternative GDP growth scenarios


Strongrecovery

Mainscenario

Prolongedrecession

% CPI in�ation

0

1

2

3

4

5

6

’10’09’08’07’06’05’04’03’02’01’00’991998

Figure 2.15 – Alternative inflation scenarios


*High in�ation scenario is consistent with strong recovery scenario for growth, whilethe low in�ation scenario is consistent with prolonged recession scenario

Highin�ation

Mainscenario

Lowin�ation

MPC target (2%)

Scenarios*

Table 2.3 – Inflation, earnings growth and interest rate projections

Source: HM Treasury Budget 2009 and Treasury survey of independent forecasts (October 2009).

Indicator HM Treasury(April 2009)

2009

Average

Consensus forecasts (October 2009)

Range

2010 2009 2010 2009 2010

CPI (%: Q4)

Earnings growth(% annual average)

BoE of�cial rate(%: Q4)

1

n/a

n/a

1

n/a

n/a

1.8

1.4

0.5

1.8

2.2

1.4

-0.1 to 2.5

0.7 to 3.5

0.5 to 0.5

0.5 to 3.4

-2 to 4.2

0.5 to 2.5


First, average annual UK GDP growth in 2012 and 2013 is still only projected to be around its long-term trend rate of 2.5%, rather than seeing a bounce-back in growth to above trend as has been more common in previous recoveries from recession.

period from 2011 to 2013. These longer term projections are subject to particularly large uncertainties at present, so little attention should be paid to the precise year-by-year figures, but we can note a number of general points from this table.

would be increased more rapidly as soon as the pace of recovery was clear, although this may be too late to prevent a revival of inflationary pressures in this scenario.

In our prolonged recession scenario, however, the Bank of England may need to introduce even greater quantitative easing that is sustained on a longer term basis. Some modest additional quantitative easing above existing plans might also be a feature of our main scenario, but no such further action would be needed in the strong recovery scenario.

II.4 – Sectoral and regional prospects

Figure 2.17 illustrates our main scenario for sectoral output growth in 2009 and 2010. Relatively more cyclical sectors such as manufacturing, construction and distribution, hotels and catering have been worst hit by the recession but should tend to stabilise in 2010, while other services sectors should return to modestly positive growth next year, but still well below pre-crisis growth rates.

Illustrative estimates of regional output growth for 2009 and 2010 in our UK main scenario are shown in Figure 2.18. The projected growth differentials between regions are driven in part by variations in industry structures, although our model also takes account of relative regional growth rates for particular sectors, based on a combination of judgement and extrapolation from historic trends. These estimates are subject to a wider margin of error than are the national projections, not least because regional GDP estimates are much less up-to-date than national data.

All regions are projected to see significant falls in output in 2009 followed by modest recoveries in 2010. The South East and London may tend to lead the recovery to some degree, but in general regional variations are not projected to be large relative to the margins of error on any such projections.

II.5 – Longer term prospects

Table 2.4 summarises the latest long-term average independent forecasts, based on the HM Treasury survey in August for the

% short term interest rates

0

1

2

3

4

5

6

7

8

’10’09’08’07’06’05’04’03’02’01’00’991998

Figure 2.16 – Illustrative short term interest rate scenarios

Source: Bank of England, PwC scenarios

Scenarios

Strongrecovery

Mainscenario

Prolongedrecession

Real growth (%)

-15

-12

-9

-6

-3

0

3

6

ConstructionManufacturingUtilitiesTransport& comms

DistributionGDPBusiness servicesand �nance

Governmentservices

Figure 2.17 – Sector growth profile in PwC main scenario

Source: ONS, PricewaterhouseCoopers20102009

Real annual growth (%)

-6

-5

-4

-3

-2

-1

0

1

2

NorthWestMidlands

NorthWest

EastAnglia

EastMidlands

WalesScotlandYorks &Humbs

SouthEast

SouthWest

LondonN Ireland

Figure 2.18 – Regional growth profile in PwC main scenario

Source: PricewaterhouseCoopers estimates and projections20102009


of 2010, allowing the MPC to keep rates at 0.5% until at least mid-2010 in our main scenario. We would not expect a rapid reversal of monetary loosening after that date given our relatively subdued main scenario for growth.

Risks to UK economic growth are more balanced than they were in early 2009, but downside risks nonetheless remain significant. We recommend that businesses should stress test their plans against a ‘prolonged recession’ scenario in which there is a 5% fall in GDP in 2009 and a further decline of around 1.5% in 2010. This is not the most likely scenario, but it cannot be ruled out at this stage. At the same time, there are also clear upside risks now which could see a more rapid recovery of the economy towards trend in 2010.

In our main scenario, UK GDP is projected to fall by around 4.75% in 2009 followed by a modest and gradual recovery to 0.75% growth in 2010, led by exports and a reversal of recent destocking.

Consumer spending is expected to contract by around 3.25% in 2009 in our main scenario, with a further modest decline of around 0.25% in 2010 as households rebuild their savings. Business investment is also likely to remain relatively weak in the short term as the credit crunch and increased economic uncertainty cause companies to postpone some of their planned investments, but may eventually begin to pick up again later in 2010.

CPI inflation is expected to be volatile in the short term but to be somewhat below its 2% target rate at the end

Second, the consensus forecasts suggest domestic demand will grow at a slightly slower rate than GDP in 2011-13, which is also our view. We would expect consumer spending growth in the medium term to be constrained by both tax rises and a desire to boost savings rates from recent low levels, while public spending will be limited by the need to cut the large budget deficit. Assuming sterling remains relatively weak over the next few years, an export-led recovery seems more plausible.

Third, consumer price inflation (CPI) is expected to settle back to around the government’s 2% target rate in the medium term, with base rates rising back gradually to 4% by 2013, although there is a risk that rates could need to go higher to keep inflation under control given large projected budget deficits.

Due to the high level of uncertainty inherent in macroeconomic forecasting over this longer time horizon, we would recommend considering alternative scenarios in which average GDP growth was, say, 0.5 percentage points higher or lower than the central scenario, and in which inflation and interest rates were, say, around 1 percentage point higher or lower on average.

II.6 – Summary and conclusions

Economic output in the UK contracted further in Q3 2009, but there have been increasing signs of stabilisation from needs business surveys.

Table 2.4 – Long-term independent forecasts for UK economy

*Annual average CPI and RPI in�ation rates for 2009-10 are taken from the August survey, as opposed to Q4 2009 and Q4 2010 in�ation rate forecasts from the October survey as shown in Table 2.3 above.

**Bank of England of�cial rate (annual average rates).

Source: ONS for 2008, HM Treasury survey of independent forecasts (August and October 2009). Note that the average projections for 2011-13 from the August long-term survey are based on a smaller sample of forecasters than the average independent forecasts for

2009-10 from the October survey shown in Tables 2.1 and 2.3 above (see Treasury website for details).

% growthunless stated

2008 2009 2010 2011 2012 2013

GDP

Domestic demand

Consumer prices(CPI)*

Retail prices (RPI)*

Short terminterest rate (%)**

0.6

0.1

3.6

4.7

4.5

-4.3

-4.9

1.7

-1.1

0.6

1.2

0.9

1.6

1.8

0.8

1.9

1.6

1.4

2.2

2.2

2.4

2.3

1.8

2.8

3.5

2.6

2.5

2.2

2.7

4.0


Box 2.1: How can the public finances be fixed?

Option 1 would involve an additional rise in taxes building up to around £26 billion per annum by 2013/14, with public spending plans as in the 2009 Budget. As shown in Table 2.1.1, we estimate that this would imply a cumulative real reduction in departmental (DEL) spending of around 9% in the three years to 2013/14 (or around 13% for other departments if health is protected from real spending cuts). This takes account of Treasury projections of rising social security spending and our own estimates of rising debt interest costs.

Tax and spending options for closing the fiscal gap

Table 2.1.1 outlines three possible tax and spending options for making an additional fiscal tightening of 1.8% of GDP in the three years to 2013/14 (the expected period of the next spending review), although it should be noted that these are only illustrative of the many possible combinations of tax rises and spending restraint that might be used to achieve this objective.

Although there are signs that the recession may be easing, it has taken a heavy toll on the public finances. Latest figures suggest that the budget deficit is likely to be somewhat above the Treasury’s forecast of £175 billion (12.4% of GDP) in 2009/10. Taking into account that our medium-term economic growth projections are somewhat less optimistic than those of the Treasury, we would expect this overshoot to continue into later years (see Figure 2.1.1).

Higher public borrowing has been unavoidable in the short term, but the government needs in its forthcoming Pre-Budget Report to set out a credible plan to put the public finances back on a sustainable footing in the medium term. As discussed in more detail in a separate report published last month1, we estimate that the government will have to tighten fiscal policy by around 3% of GDP by 2015/16, over and above the Budget plans, in order to restore the current budget to balance by that date rather than 2017/18 in the Treasury plans. We believe that this earlier target date is desirable both to mitigate the risk of higher interest rates on UK public debt and also to provide a buffer against the cost of future recessions.

To put us on track to achieve this 2015/16 target, we believe that government should aim for an intermediate target of an additional fiscal tightening of around 1.8% of GDP by 2013/14. This would be equivalent to around £26 billion at today’s values, over and above plans announced in the Budget.

Our analysis of the potential costs of ageing2 also reinforces the case for fiscal consolidation to occur earlier and faster than the Treasury’s Budget projections. This would establish a stronger base position of current budget balance in 2015/16 from which a judgement could be then made as to what further fiscal tightening would be appropriate over the following years in order to provide for the longer term fiscal costs of an ageing population.

0

2

4

6

8

10

12

14

2017/182016/172015/162014/152013/142012/132011/122010/112009/102008/92007/8

Figure 2.1.1 – Treasury and PwC public finance projections

Source: HM Treasury (Budget 2009), PwC main scenario projections

PSNB – Treasury

Structural currentde�cit – PwC

Structural currentde�cit – Treasury

PSNB – PwC main scenario

% of GDP

Illustrative extrapolations

Table 2.1.1 – Alternative tax and public spending scenarios

Source: HM Treasury Budget 2009 for rst three rows in the rst column and for assumptions on public sector net investment, social security benets and other AME spending in all three scenarios; PwC estimates for other rows and columns (including debt interest, although our model projections here are broadly in line with Treasury assumptions).

Option 3:Mix of additional

tax rises and furtherspending cuts

Option 2:No further tax rises

with severespending cuts

Option 1:Tax rises with

spending in linewith Budget plans

% cumulativereal growthin 3 years to2013/14

Current spending

Net investment

Total spending (TME)

– Debt interest

– Social security benets/tax credits

– Other AME

Departmentalspending (DEL)

DEL excludinghealth spending

Additional tax risesby 2013/14

2.0

-43

-0.2

42

4.3

9.6

-9

-13

1.8% of GDP (£26bnat 2009/10 values)

-2.7

-43

-4.4

38

4.3

9.6

-17

-23

None

-0.3

-43

-2.4

40

4.3

9.6

-13

-17

0.9% of GDP (£13bnat 2009/10 values)

1 ‘Dealing with (even more) debt’, PricewaterhouseCoopers, October 2009. This report can be downloaded from our Public Sector Research Centre website at www.psrc-pwc.com.2 ‘Public debt and the costs of ageing’, PricewaterhouseCoopers, May 2009.


pressure on the cost of financing this public debt, although the magnitude of this adjustment is hard to assess precisely since it depends on so many other factors relating to global financial conditions as well as the UK’s own economic and fiscal outlook.

Furthermore, concerns about UK public debt levels could also be reflected in downward pressure on sterling. The potential inflationary effect of this could lead the Monetary Policy Committee (MPC) to keep short-term interest rates higher in the medium term than would otherwise be the case. This could prop up the pound, but the exchange rate may nonetheless be more volatile due to investor sentiment swinging between the attractions of higher short-term interest rates and the longer term downsides of higher public debt levels. Greater volatility in sterling and probably also higher and more variable interest rates would tend to produce a less favourable environment for UK investment and exports.

In summary, a tighter fiscal policy should allow a more accommodative monetary policy stance than would otherwise be the case and this should help to deliver a more balanced and sustainable recovery profile for the UK economy.

and we have previously argued in our response to the Operational Efficiency Programme that government could go further than planned as regards efficiency savings. Indeed, we estimated that it could be feasible to achieve savings of around £11 billion per annum by 2013/14, additional to those included in the Budget 2009 plans (which themselves envisaged savings of £9 billion over this period over and above plans announced up to 2010/11 in the 2008 Pre-Budget Report).

Improved efficiency is, however, necessary but not sufficient. There is a need to revisit the role of government and consider all options, including stopping activity in some areas and de-commissioning services where they are no longer needed.

Alternatives to fiscal tightening likely to be worse

Tough choices will therefore be needed on both tax and spending and this is likely to act as a drag on the pace of recovery in the medium term. Failing to fix the public finances, however, could be even worse. Firstly, continued high budget deficits and a rising ratio of debt to GDP are likely to be associated with upward

Option 2 would involve a cumulative real reduction in departmental spending of around 17% in the three years to 2013/14 (or around 23% for other departments if health is protected from real spending cuts). This would avoid the need for additional tax rises, but the scale of public spending restraint involved would pose a major challenge.

Option 3 would involve sharing the burden of the additional fiscal tightening evenly between tax rises (£13 billion) and real public spending cuts, with total departmental spending down by around 13% in the three years to 2013/14 (or around 17% for other departments if health is protected from real spending cuts).

This third option, or alternatives along broadly similar lines, may be the most realistic, but would still require significant rises in major revenue raisers such as income tax, national insurance, VAT and fuel duties. It would also require a more radical re-shaping of the public sector cost base than currently envisaged.

The challenge will be to cut spending while minimising the damage to frontline services, particularly for the most vulnerable sections of society. Improved efficiency will be part of the solution


Box 2.2: UK and regional unemployment prospects

Looking ahead the model projects that, in our main scenario for GDP growth, the unemployment rate will rise to around 9% by the end of this year. But it will then start to level off, peaking in the second half of 2010 at 9.8% of the labour force, or just over 3 million (see Figure 2.2.3). The unemployment rate would therefore peak at a somewhat lower rate than in the early 1990s recession (10.6% in Q1 1993), despite the current recession being much deeper in terms of the fall in GDP. Indeed the GDP decline to date of 5.5% in the current downturn is similar to that seen in the early 1980s recession when the unemployment rate peaked at 11.9% in Q2 1984, about three years after GDP stopped falling.

• Annual average earnings growth lagged by one quarter; higher earnings growth was, as would be expected, associated with somewhat higher unemployment, but with a lag because companies will typically take some time to adjust their employment levels to wage changes.

As illustrated in Figure 2.2.2, the model tracks the general trend in unemployment rates pretty well3 although it tends to smooth out short-term quarterly variations due to the ‘distributed lag’ structure of the model. The model is particularly good at tracking the rise in unemployment rates since early 2008 (as confirmed also by an ‘out-of-sample forecasting test’ for a model variant estimated on data up to Q4 2007 and then used to project forward unemployment rates after that date).

The UK unemployment rate, on the internationally agreed Labour Force Survey (LFS) measure, has risen from 5.2% in the first quarter of 2008 to 7.8% in the second quarter of 2009 (see Figure 2.2.1). Although there have been some signs that the rate of increase in unemployment has moderated in recent months1, there still seems to be a clear upward trend. This is what would be expected given that unemployment tends to lag behind any recovery in GDP growth, but the key question is how much further unemployment will rise before it reaches its cyclical peak?

Figure 2.2.1 also shows that, although all regions have seen a rise in unemployment rates since Q1 2008, there has been considerable variation across the regions in the rate of increase in the unemployment rate over this period. The West Midlands and the North East, with their relative larger industrial sectors, have seen particularly large increases in unemployment. Interestingly London, despite the exposure of the City to the global financial crisis, has seen a slightly smaller rise in unemployment than the national average over this period. Once again, the question is how far these regional trends will continue in the future.

To address these issues we have developed a simple econometric forecasting model for the UK unemployment rate. Estimated using data for the period from Q1 1991 to Q2 2009, our preferred model has the quarter-on-quarter change in the LFS unemployment rate being determined by:

• Changes in the unemployment rate over the previous four quarters2; the relationship here is positive, indicating that the unemployment rate tends to move in a particular direction for some time;

• Real GDP growth in the current quarter and the previous three quarters; as expected, these effects were negative (i.e. higher GDP growth implied a lower unemployment rate and vice versa), with the largest influence being from GDP growth lagged by one quarter; and

1 Particularly based on the more timely, but less comprehensive, claimant count measure. Even on the LFS measure, however, the Q2 2009 increase of 0.7 percentage points in the UK unemployment rate was down slightly from 0.8 percentage points in Q1 2009. Preliminary estimates for July and August also suggest a further deceleration in the rate of increase in the LFS unemployment rate in Q3.

2 The first and second quarter lags showed the largest positive effects.3 More formally, the R-squared for the equation is 0.71 with a standard error of around 0.15 percentage points in predicting quarterly unemployment rate changes.

-0.6

-0.4

-0.2

-0.0

0.2

0.4

0.6

0.8

1.0

’09Q2

’08Q4

’08Q2

’07Q4

’07Q2

’06Q4

’06Q2

’05Q4

’05Q2

’04Q4

’04Q2

’03Q4

’03Q2

’02Q4

’02Q2

’01Q4

’01Q2

’00Q4

’00Q2

’99Q4

’99Q2

’98Q4

’98Q2

’97Q4

’97Q2

’96Q4

’96Q2

’95Q4

’95Q2

’94Q4

’94Q2

’93Q4

’93Q2

’92Q4

’92Q2

’91Q4

’91Q2

’90Q4

Figure 2.2.2 – Actual vs model estimates of unemployment rate changes

Source: ONS LFS data, PwC model estimatesActualModel

Percentage point change in LFS unemployment rate

0

2

4

6

8

10

12

UKS EastS WestEastN IrelandScotlandE MidsWalesN WestY&HLondonN EastW Mids

Figure 2.2.1 – UK and regional unemployment rate trends

Source: ONS Labour Force Survey (LFS) data

Increase by Q2 2009Q1 2008

% of labour force


Table 2.2.1 – Illustrative main scenario projections for regional unemployment

Source: ONS Labour Force Survey data for Q2 2009; PwC main scenario projections for Q4 2010.

Q2 2009 Change Q2 2009 ChangeQ4 2010Q4 2010

Unemployment levels (000s)

Unemployment rates (% of labour force)

Region

10.6

9.8

8.9

8.8

8.5

7.6

7.3

7.0

6.7

6.5

6.4

5.9

7.8

13.0

12.0

11.0

11.0

10.4

9.4

9.1

9.2

8.7

8.4

8.5

7.8

9.8

+2.4

+2.2

+2.1

+2.2

+1.9

+1.8

+1.8

+2.2

+2.0

+1.9

+2.1

+1.9

+2.0

285

120

359

233

290

108

170

188

54

194

172

263

2435

349

147

442

292

352

134

213

246

70

250

228

347

3070

West Midlands

North East

London

Yorkshire & Humberside

North West

Wales

East Midlands

Scotland

Northern Ireland

East

South West

South East

UK

+64

+27

+83

+59

+62

+26

+43

+58

+16

+56

+56

+84

+635

as illustrative given the uncertainties involved and the possible influence of additional local factors not picked up by the model.

the East Midlands and 2.4 percentage points for the West Midlands. However, as with any such regional projections, these results should only be taken

As Figure 2.2.3 shows, we have also looked at the impact on these unemployment projections of the two alternative GDP growth scenarios outlined in Section II.2 above. In our optimistic scenario, unemployment peaks in Q2 2010 at around 2.9 million and then falls back to around 2.8 million (9% of the labour force) by Q4 2010.

In contrast, our pessimistic scenario sees a continuing upward trend in unemployment throughout 2010, reaching around 3.5 million (11.2%) by Q4 2010. This is not the most likely scenario, however, which is for unemployment to peak at around 3 million in the second half of 2010 as discussed above.

Regional unemployment prospects

We have not estimated independent models for all 12 UK regions, but we have produced some illustrative projections of how the overall trend in UK unemployment in our model might break down by region. These projections are based on:

• Assuming the same functional form for each regional model (so as to ensure consistent results between the regional and national projections);

• Using UK-wide data for quarterly GDP growth and average earnings growth (since timely data are not available for these variables at regional level); and

• Using region-specific unemployment data.

Table 2.2.1 summarises the results of this exercise. All regions are expected to see some further rise in unemployment rates between Q2 2009 and the end of 2010, with the relative rates of increase varying from 1.8 percentage points for Wales and

0

500

1000

1500

2000

2500

3000

3500

4000

’10Q4

’10Q3

’10Q2

’10Q1

’09Q4

’09Q3

’09Q2

’09Q1

’08Q4

’08Q3

’08Q2

’08Q1

’07Q4

’07Q3

’07Q2

2007Q1

Figure 2.2.3 – Alternative UK unemployment scenarios

Source: ONS LFS data, PwC scenarios

Thousands

Strongrecovery

Mainscenario

Prolongedrecession


III – Which are the largest city economies in the world and how might this change by 2025?

largest city economies by GDP in 2008 and 2025 in Annex B.

III.1 Long-term historic trends in city populations

Urbanisation has been one of the major global themes of the past century and all the indications are that major cities will provide an increasing focus for global economic activity over the course of this century. In 1900, there were only 16 cities in the world with more than 1 million inhabitants, mostly in the advanced economies; now there are over 400 such cities according to United Nations (UN) estimates, around three-quarters of which are in low and middle-income countries. In 1950, the rural population of the world was around twice the urban population, but by 2010 the UN estimates that the urban population will be greater and by 2030 it projects a total global urban population of around 5 billion compared to just over 3 billion in rural areas (see Figure 3.1).

Systematic rankings of urban agglomeration populations have been produced by the UN for the period since 1950. Table 3.1 shows the top 30 urban agglomerations by population in 1950, 1990, 2007 and 2025 to illustrate how these rankings have evolved over time and how they are projected to change by 2025. Notable points are that:

• Section III.1 provides a long-term historic perspective on population trends for the largest global cities

• Section III.2 introduces our approach and methodology;

• Section III.3 presents and discusses our estimates of the largest city economies in 2008;

• Section III.4 presents and discusses our illustrative projections for how these rankings might change between 2008 and 2025, with a particular focus on the rise of emerging economy cities;

• Section III.5 highlights the uncertainties surrounding our projections and discusses some of the key factors underlying the relative growth rates of city economies;

• Section III.6 considers the potential impact of an alternative de-globalisation scenario on the growth rates of city economies; and

• Section III.7 summarises and draws conclusions from the analysis.

A more detailed description of the data and methodology used in the analysis to estimate the size of city economies as measured by GDP is provided in Annex A. This is followed by a full listing of our rankings of the

This article updates an article published in our March 2007 UK Economic Outlook1 giving estimates for 2005 and projections to 2020 of the size of the largest 100 city economies in the world. The updated analysis and illustrative projections of GDP for different cities show how the GDP rankings of cities might change by 2025 taking into account the impact of the current economic downturn and the impact of a potential de-globalisation scenario.

Rankings of global cities by population are common, but while population statistics are important, they are only part of the story: leading cities such as London, New York, Paris and Tokyo are major economies in their own right, of a size greater than medium-sized national economies such as Sweden and Switzerland. Cities are also centres of innovation, creativity and culture, as well as focal points for government, finance, business services and corporate headquarters in their respective countries (and sometimes also their regions in the case of financial centres like London in Europe, or political centres like Brussels in the EU). However, data are much less readily available on the overall size of city economies in terms of their total output, particularly outside the OECD countries2.

This analysis fills this gap and provides a significantly different picture from rankings by population, with the advanced economy cities ranking much higher by GDP than by population due to their higher average income levels. Our analysis also allows us to consider how far fast-growing cities in emerging market economies like China, India and Brazil could challenge the dominance of current leading global cities such as New York, Tokyo, Paris and London by 2025.

The discussion below is organised as follows:

1 The present article was written by John Hawksworth, Thomas Hoehn and Anmol Tiwari. It forms part of PricewaterhouseCoopers’ wider research and consultancy programme on city economies.2 Some data are available for selected OECD and non-OECD cities on relative wages and costs of living, but no systematic global data source is readily available for GDP per capita at a city level as far as we are aware.

0

1

2

3

4

5

6

7

205020302010199019701950

Figure 3.1 – Global urban and rural population trends and UN projections

Source: UN

Rural

Urban

Population (billions)


• Tokyo and New York remained the two largest urban agglomerations between 1950 and 2007 (although swapping places after around 1965), although Mexico City and Mumbai had caught up with New York by 2007. By 2025 New York is expected to be in 7th place on a par with Kolkata;

• London was still the third largest cityin 1950, but has slid down the rankings progressively since then to only 26th in 2007 (with its population remaining broadly unchanged between these dates); Manchester and Birmingham were in the top 30 cities in 1950 but would not rank in the top 100 by population now3;

• Other leading European cities seeing sharp declines in their population rankings between 1950 and 2007 include Paris (5th to 20th), Moscow (6th to 18th) and Berlin (from 13th to well outside the top 30), a trend that will continue to 2025 when Paris is expected to rank 27th and Moscow 23rd;

• Conversely, major risers between 1950 and 2007 include Mumbai (18th to 4th), Sao Paulo (24th to 5th) and ‘new entrants’ like Jakarta (23rd in 2007), Dhaka (9th), Karachi (12th) and Lagos (22nd), all of which were well outside the top 30 in 1950;

• Notably, however, the major Chinese cities have not seen such rapid population rises as those in other leading emerging markets; both Shanghai (4th to 7th) and Beijing (10th to 16th), while increasing their populations significantly in absolute terms, have slid down the rankings between 1950 and 2007, particularly in recent decades due to China’s one child policy. Shanghai is expected to continue to slide, dropping to 9th, but Beijing should climb back to 15th;

• Overall, the aggregate population of the top 30 cities is expected to rise from 308 million in 2007 to 391 million in 2025 (+27%).

Population, however, is only one of the factors determining the size of city economies as measured by GDP: the other being average income per capita.

Table 3.1 – Trends in top 30 urban agglomerations by population: 1950-2025

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Urbanization Prospects: The 2007 Revision.

Pop.(m)

1950

12.3

11.3

8.4

6.1

5.4

5.4

5.1

5.0

4.5

4.3

4.1

4.0

3.3

3.1

3.0

2.9

2.9

2.9

2.8

2.6

2.5

2.4

2.4

2.3

2.2

2.1

1.9

1.9

1.9

1.8

1. New York

2. Tokyo

3. London

4. Shanghai

5. Paris

6. Moscow

7. Buenos Aires

8. Chicago

9. Kolkata

10. Beijing

11. Osaka/Kobe

12. Los Angeles

13. Berlin

14. Philadelphia

15. Rio de Janeiro

16. St Petersburg

17. Mexico City

18. Mumbai

19. Detroit

20. Boston

21. Cairo

22. Manchester

23. Tianjin

24. Sao Paulo

25. Birmingham

26. Shenyang

27. Rome

28. Milan

29. San Francisco

30. Barcelona

Pop.(m)

1990

32.5

16.1

15.3

14.8

12.3

11.0

10.9

10.9

10.5

10.5

9.6

9.3

9.1

9.1

8.2

8.2

8.0

7.7

7.7

7.4

7.4

7.1

6.6

6.5

6.4

5.9

5.8

5.8

5.7

5.3

Tokyo

New York

Mexico City

Sao Paulo

Mumbai

Osaka-Kobe

Kolkata

Los Angeles

Seoul

Buenos Aires

Rio de Janeiro

Paris

Cairo

Moscow

Delhi

Shanghai

Manila

London

Jakarta

Chicago

Beijing

Karachi

Istanbul

Dhaka

Tehran

Bangkok

Lima

Tianjin

Hong Kong

Chennai

Pop.(m)

2007

35.7

19.0

19.0

19.0

18.8

15.9

15.0

14.8

13.5

12.8

12.5

12.1

11.9

11.7

11.3

11.1

11.1

10.5

10.1

9.9

9.8

9.5

9.1

9.0

8.8

8.6

8.0

7.9

7.8

7.8

Tokyo

New York

Mexico City

Mumbai

São Paulo

Delhi

Shanghai

Kolkata

Dhaka

Buenos Aires

Los Angeles

Karachi

Cairo

Rio de Janeiro

Osaka-Kobe

Beijing

Manila

Moscow

Istanbul

Paris

Seoul

Lagos

Jakarta

Chicago

Guangzhou

London

Lima

Tehran

Kinshasa

Bogotá

Pro-jectedPop.(m)

2025

36.4

26.4

22.5

22.0

21.4

21.0

20.6

20.6

19.4

19.1

16.8

15.8

15.6

14.8

14.5

13.8

13.7

13.4

12.4

12.1

11.8

11.4

10.5

10.5

10.2

10.1

10.0

9.9

9.8

9.7

Tokyo

Mumbai

Delhi

Dhaka

São Paulo

Mexico City

New York

Kolkata

Shanghai

Karachi

Kinshasa

Lagos

Cairo

Manila

Beijing

Buenos Aires

Los Angeles

Rio de Janeiro

Jakarta

Istanbul

Guangzhou

Osaka-Kobe

Moscow

Lahore

Shenzhen

Chennai

Paris

Chicago

Tehran

Seoul

Rankingin 1950

Rankingin 1990

Rankingin 2007

ProjectedRankingin 2025

Table 3.2 – Data sources for city GDP estimates and projections

Sources for 2025 projectionsSources for 2008 estimatesVariable

Urban area population

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Urbanization Prospects: The 2007 Revision; extrapolated from 2007 to 2008 using 2005 – 2010 average annual growth rate

UN projections to 2025

GDP per capita for OECD urban areas

OECD Competitive Cities report (2006) estimates for 2002, extrapolated forward to 2008 using OECD data for 1995-2002 and IMF for 2005-2008, plus data on the city-national differential where available from individual national statistical of�ces

National projections for GDP per capita growth from PwC World in 2050 model to 2025, with adjustments to re�ect historic differentials between city and national growth where OECD data available (for 44 countries in 1995-2002 period). Further adjustments made to short term growth rates due to recent global economic downturn

GDP per capita for non-OECD countries

Direct estimates from national statistical of�ces where available (e.g. China, Brazil) or adjusted World Bank national data to re�ect typical ratios of GDP per capita in major cities relative to national averages based on comparators with similar characteristics (e.g. cities of similar population in countries with similar income levels). Asian Development Bank data used for some Asian cities

National projections for GDP per capita growth from PwC World in 2050 model to 2025 for countries where available, with other countries being based on closest available comparators, with some judgemental adjustments to re�ect particular national characteristics where appropriate. City GDP per capita growth assumed to be in line with national average for non-OECD countries due to lack of city-level data. Further adjustments made to short term growth rates due to recent global economic downturn

3 Although, as shown in Annex B, Manchester and Birmingham still rank in the top 100 cities by GDP in 2008.


III.2 Data and methodology used to derive city GDP estimates and projections

Our primary estimates of 2008 city output are based on combining UN population estimates for 2008 with estimates of income per capita, as summarised in Table 3.24. For cities from OECD countries, we were able to base our city-level GDP per capita estimates on 2002 data from the OECD’s Competitive Cities report (2006) and then projected these forward to 2008. For non-OECD cities, data are not readily available from a single source. In some cases GDP per capita estimates at city level were available from national sources, but in many cases we were only able to make approximate estimates based on plausible ratios of city to national GDP per capita. As such, the 2008 urban agglomeration GDP estimates should only be taken as broadly indicative of relative economic size for the non-OECD countries. Nonetheless, they provide a much better indication of relative economic size than just looking at population data.

As Table 3.2 also shows, our illustrative projections for city GDP in 2025 combine UN population projections5 with our own estimates of national income per capita growth trends from our previous World in 2050 report6. We have incorporated the short term and long term impacts of the recent global economic downturn on the income per capita growth rates (this has a particularly large downward effect in 2009-10). As illustrated for selected countries in Figure 3.2, these projections show consistently higher income per capita growth in the emerging economies, particularly China and India.

III.3 Urban economy rankings in 2008 (and changes since 2005)

We have used the methodology described above to produce GDP estimates for our 151 candidate urban agglomerations in 20087. As noted above, it should be recognised that these estimates are reliant on the definitions adopted by the UN, and the GDP per capita estimates are subject to significant margins of error for the non-OECD cities. They should, however, be at least broadly accurate in

Table 3.3 – Top 30 urban agglomerations by estimated GDPin 2008 using UN population estimates and definitions

*2008 population estimates were calculated by taking the average annual population growthrate between 2005 and 2010 and applying it to the UN’s 2007 population estimates.

** New data found from national data sources on GDP per capita in allmajor Brazilian Cities including Sao Paulo and Rio de Janeiro.

*** New data found from World Bank on GDP per capita in Moscow (and St. Petersburg in full rankings).**** New data found from national data sources on GDP per capita in Mumbai

(as well as Delhi, Bangalore and Kolkata in full rankings).

Source: UN for population estimates; PricewaterhouseCoopers GDP estimates drawing on data from UN, World Bank, OECD and national sources. Notes above indicate where GDP per capita estimates were

revised signi�cantly since our 2007 study due to new and better data sources being used.

GDP percapita

($k at PPPs)

Population(millions)

Components ofestimated GDP

EstimatedGDP in 2008

($bn at PPPs)*

CityGDP rankin 2008(with 2005rank inbrackets)

1 (1)

2 (2)

3 (3)

4 (4)

5 (6)

6 (5)

7 (7)

8 (8)

9 (9)

10 (19)

11 (10)

12 (11)

13 (13)

14 (12)

15 (25)

16 (14)

17 (16)

18 (15)

19 (17)

20 (18)

21 (20)

22 (21)

23 (22)

24 (24)

25 (32)

26 (23)

27 (36)

28 (26)

29 (37)

30 (30)

Tokyo

New York

Los Angeles

Chicago

London

Paris

Osaka/Kobe

Mexico City

Philadelphia

Sao Paulo**

Washington DC

Boston

Buenos Aires

Dallas/Fort Worth

Moscow***

Hong Kong

Atlanta


Houston

Miami

Seoul

Toronto

Detroit

Seattle

Shanghai

Madrid

Singapore

Sydney

Mumbai (Bombay)****

Rio de Janeiro**

1479

1406

792

574

565

564

417

390

388

388

375

363

362

338

321

320

304

301

297

292

291

253

253

235

233

230

215

213

209

201

35.83

19.18

12.59

9.07

8.59

9.92

11.31

19.18

5.54

19.09

4.38

4.51

12.90

4.86

10.47

7.28

4.58

3.48

4.52

5.65

9.78

5.29

4.13

3.11

15.24

5.64

4.49

4.36

19.35

11.89

41.3

73.3

62.9

63.3

65.8

56.9

36.9

20.4

70.1

20.3

85.5

80.5

28.0

69.5

30.7

44.0

66.4

86.5

65.8

51.6

29.7

47.7

61.1

75.5

15.3

40.8

47.9

48.9

10.8

16.9

0

1

2

3

4

5

6

USCanadaAustraliaGermanyUKFranceJapanItalySpainS. KoreaBrazilMexicoTurkeyRussiaIndiaChina

Figure 3.2 – Projected real GDP per capita growth by country: 2010-25

Source: PwC World in 2050 model

% real GDP per capita growth

4 A more detailed explanation of our methodology can be found in Annex A.5 Earlier UN city population projections were criticised, with good reason as events turned out, by Paul Bairoch (‘Employment and large cities: problems and outlook’, International Labour Review, vol 121, No. 5, Sept-Oct 1982).

However, the UN’s projection methodology has been revised and updated since then, notably to account for the tendency of the largest cities to grow more slowly than smaller cities as diseconomies of scale set in for mega-cities.6 J. Hawksworth & G. Cookson. The World in 2050: Beyond the BRICs: A broader look at emerging market growth prospects? PricewaterhouseCoopers, March 2008. Available to download from http://www.pwc.com/en_GX/gx/

world-2050/pdf/world_2050_brics.pdf 7 A full listing of GDP estimates for the 151 cities covered by our analysis is provided in Annex B.


Mexico City and Sao Paulo are the only emerging economy cities in the top 10 when ranked by GDP but Buenos Aires is not far behind in 13th place and Moscow in 15th. Shanghai and Mumbai have jumped into the top 30 with their strong growth between 2005 and 2008. Moscow has significantly jumped from 25th to 15th since 2005 due to new data being available from the World Bank on the percentage share of Moscow in total Russian GDP. The full list in Annex B shows that there are also a number

estimated GDP significantly higher than national economies such as South Africa, Belgium, Sweden and Switzerland as illustrated in Table 3.4). The most significant changes in top 10 rankings since 2005 have been London climbing ahead of Paris to 5th place and Sao Paulo jumping into 10th place9. The latter is due to new data being found on income per capita for all Brazilian cities. Aside from London and Paris, only two other European cities (Madrid and Moscow) make the top 30.

order of magnitude terms and, as noted above, taking account of income per capita certainly produces a much better indication of the relative size of urban economies than just looking at population data.

Subject to these caveats, Table 3.3 shows our estimates of the size of the top 30 urban agglomerations (on UN definitions) in 2008, ranked by GDP at Purchasing Power Parity (PPP) exchange rates using the methodology described above and in Annex A. The reason for using PPPs rather than market exchange rates is to correct for the currently significant differences in price levels between emerging market and advanced economies, reflecting the relatively low cost of non-traded goods and services in emerging economies (this is expected to be less of an issue by 2025).

It is interesting to note that, in total, our estimates suggest that the largest 100 cities accounted for around 30% of global GDP at PPPs in 2008, with the top 30 cities alone accounting for around 18% of world GDP in that year. This emphasises the concentration of global economic activity in the world’s largest cities.

The most striking point to note is that, while 22 of the top 30 urban areas by population in 2008 were from emerging/developing economies (see Table 3.1 above), only 7 of these emerging economy cities (Mexico City, Sao Paulo, Buenos Aires, Moscow, Shanghai, Mumbai and Rio de Janeiro) were in the top 30 according to our GDP estimates8. This reflects the much higher GDP per capita levels in the major developed economy cities than in the major emerging market cities, as illustrated for a selection of cases in Figure 3.3. Indeed, based on OECD and IMF estimates, 23 of the top 30 cities ranked by GDP per capita at PPPs in 2008 were from the US.

Looking at the top of the 2008 GDP rankings in Table 3.3, Tokyo has retained the top ranking we found for 2005 and is narrowly ahead of New York, with both having economies worth nearly $1.5 trillion in 2008 (broadly similar to national economies such as Spain and Mexico). Los Angeles is still in clear third place with Chicago, London and Paris vying for the next three places (each of which has an

0

10

20

30

40

50

60

70

80

MumbaiShanghaiRio deJaneiro

IstanbulSaoPaulo

MexicoCity

BuenosAires

MoscowOsakaTokyoParisLAChicagoLondonNew York

Figure 3.3 – Estimated GDP per capita in 2008 in selected major cities

Source: PwC estimates based on OECD, World Bank and national data sources

$k at PPPs in 2008

Table 3.4 – Comparison of estimated GDP of largest urban agglomerationswith GDP of selected national economies in 2008

Source: World Bank for national GDP estimates; PwC for urban agglomeration GDP estimates using UN de�nitions (as in Table 3.3 above). These estimates are from different sources and so

will not be fully consistent, but should be broadly comparable in order of magnitude terms

Estimated GDP in 2008 ($bn at PPPs)Country/Urban Agglomeration

Russia

UK

Mexico

Tokyo

Spain

New York

Canada

Los Angeles

Australia

Poland

Chicago

London

Paris

South Africa

Osaka/Kobe

Colombia

Mexico City

Philadelphia

Sao Paulo

Belgium

Sweden

Switzerland

2288

2176

1542

1479

1456

1406

1214

792

763

672

574

565

564

492

417

396

390

388

388

369

345

325

8 This is despite using PPP rather than market exchange rates in order to avoid underestimating the scale of the outputs of the emerging economy cities.9 New data for GDP per capita of Brazilian cities was taken from the following source: http://www.ibge.gov.br/home/estatistica/economia/pibmunicipios/2006/tab01.pdf


of fast-growing emerging economy cities just outside the top 30, including Istanbul (34th), Beijing (38th), Manila (40th), Cairo (42nd), Guangzhou (44th), and Santiago (53rd).

Table 3.5 shows the top 5 cities in 2008 in their respective country income brackets, using the World Bank’s classification10 of countries by income. We can see that Mexico City tops the list of cities in the group of Upper-Middle Income Countries followed closely by Sao Paulo. Shanghai tops the list of cities in Lower-Middle Income Countries followed by Mumbai. Dhaka tops the Low Income Country category followed by Ho Chi Min City. In the next section, we consider how far these and other emerging economy cities might rise up the rankings by 2025.

III.4 Projected urban economy growth rates and GDP rankings in 2025

Rankings by economicsize in 2025

Table 3.6 shows our projections of the top 30 urban economies in 2025 measured by GDP at PPPs (in 2008 US dollars), with the rankings in 2008 shown in the first column for comparison. The full GDP rankings for both years are given in Table 3.10 in Annex B. These are based on UN definitions and population projections.

The largest five urban economies (on UN definitions) remain the same as in 2008, although London overtakes Chicago to move into 4th place. As might be expected, however, the dominant trend is for emerging economy cities to rise up the rankings: Sao Paulo climbs from 10th to 6th, Mexico City rises from 8th to 7th and Buenos Aires from 13th to 10th. The largest climbers within the top 30 are Shanghai (leaping into the top 10 from 25th to 9th) and Mumbai (racing from 29th to 11th). Istanbul (34th to 28th), Beijing (38th to 17th), Delhi (37th to 19th), Guangzhou (44th to 21st) and Cairo (42nd to 30th) are all notable ‘new entries’ in the top 30.

Lower down the list (see Annex), notable ‘climbers’ between 2008 and 2025 include Manila (40th to 33rd), Kolkata (61st to 37th), Bangkok (54th to 44th), Jakarta

Table 3.5 – Top 5 urban agglomerations in different country income bracketsby estimated GDP in 2008 (using UN population estimates and definitions)

Source: PricewaterhouseCoopers GDP estimates drawing on data from UN, World Bank, OECD and national sources

GDP in 2008 ($bn at PPPs)CityMexico CitySao Paulo

Buenos AiresMoscow

Rio de Janeiro

Rank

Top 5 Cities in Upper-Middle Income Countries

12345

390388362321201

GDP in 2008 ($bn at PPPs)City

ShanghaiMumbai

DelhiBeijingManila

Rank

Top 5 Cities in Lower-Middle Income Countries

12345

233209167166149

GDP in 2008 ($bn at PPPs)CityDhaka

Ho Chi Min CityHanoi

YangonChittagong

Rank

Top 5 Cities in Low Income Countries

12345

7858422424

Table 3.6 – Top 30 urban agglomerations by estimated GDPin 2025 using UN population definitions and projections

Source: PricewaterhouseCoopers projections

Average realGDP growth

(% pa: 2008-2025)

Populationin 2025

(millions)

EstimatedGDP in 2025

($bn at 2008 PPPs)

City2025 GDPrank (2008in brackets)

1 (1)

2 (2)

3 (3)

4 (5)

5 (4)

6 (10)

7 (8)

8 (6)

9 (25)

10 (13)

11 (29)

12 (15)

13 (9)

14 (16)

15 (11)

16 (7)

17 (38)

18 (12)

19 (37)

20 (14)

21 (44)

22 (21)

23 (17)

24 (30)

25 (18)

26 (19)

27 (20)

28 (34)

29 (22)

30 (42)

Tokyo

New York

Los Angeles

London

Chicago

Sao Paulo

Mexico City

Paris

Shanghai

Buenos Aires

Mumbai (Bombay)

Moscow

Philadelphia

Hong Kong

Washington DC

Osaka/Kobe

Beijing

Boston

Delhi

Dallas/Fort Worth

Guangzhou

Seoul

Atlanta

Rio de Janeiro


Houston

Miami

Istanbul

Toronto

Cairo

1981

1915

1036

821

817

782

745

741

692

651

594

546

518

506

504

500

499

488

482

454

438

431

412

407

406

400

390

367

352

330

36.40

20.63

13.67

8.62

9.93

21.43

21.01

10.04

19.41

13.77

26.39

10.53

6.13

8.31

4.89

11.37

14.55

5.03

22.50

5.42

11.84

9.74

5.15

13.41

3.90

5.05

6.27

12.10

5.95

15.56

1.7%

1.8%

1.6%

2.2%

2.1%

4.2%

3.9%

1.6%

6.6%

3.5%

6.3%

3.2%

1.7%

2.7%

1.8%

1.1%

6.7%

1.8%

6.4%

1.8%

6.8%

2.3%

1.8%

4.2%

1.8%

1.8%

1.7%

4.2%

2.0%

5.0%

Rising by more than 3 places

10 For the purpose of this calculation, cities are classified as emerging market cities by the countries in which they are based and how the countries are classified by the World Bank according to income levels (see http://go.worldbank.org/D7SN0B8YU0 for further information)


London since the mid-1990s, which we assume to persist (albeit to a lesser degree) in the future. Although the recent global financial crisis severely impacted London’s financial sector in the short run, we believe that London will continue to benefit in the long run from its status as one of the leading global business and financial service centres.

Figure 3.4 provides some further insight on key trends by comparing projected cumulative economic growth rates over the period 2008-25 for the eight largest emerging economy cities and the eight largest advanced economy cities (ranked by estimated GDP in 2008 in each case). Shanghai (197%), Mumbai (185%) and Rio de Janeiro (103%) are projected to achieve particularly impressive economic growth here relative to their fellow ‘mega-cities’, but the other five emerging economy cities are also projected to rack up cumulative GDP growth of around 70-100%, compared to an average of only around 35% for the eight advanced economy mega-cities.

by projected economic growth between 2008 and 2025. As Table 3.8 shows, there are no advanced economies represented in the top 30 fastest growing cities, as compared to 2 from Vietnam (with Hanoi and Ho Chi Min City topping the table), 12 from India (with Surat in 7th), and 9 from China (including Changchun and Guangzhou coming 3rd and 4th respectively).

Indeed, the highest advanced economy cities in the full growth rankings are Dublin in 77th, Hong Kong in 81st place and Singapore in 95th. Auckland (85th), Prague (86th), Lisbon (87th) and Seoul (91st) also score relatively well in the developed economy city growth league. London (94th) also just makes the top 100 and, as shown in Figure 3.4, it ranks higher on growth than the other advanced economy mega-cities such as Los Angeles (141st), New York (118th), Tokyo (131st) and Paris (138th). Manchester, Leeds and Birmingham are further down the list than London, however, reflecting the relatively stronger performance of

(70th to 45th), Tianjin (80th to 47th), Dhaka (77th to 48th), Bangalore (84th to 55th), and Bogota (64th to 58th).

Perhaps equally predictably, the main ‘fallers’ within the top 100 are the cities of ‘old Europe’ like Rome (43rd to 53rd), Milan (46th to 65th), Vienna (50th to 67th) and Berlin (69th to 86th). Within the UK, Birmingham (72nd to 88th) and Manchester (74th to 92nd) slip down the rankings but remain in the top 100, while Leeds is projected to fall from 92nd to 119th. This is not because these cities are stagnating – all three are expected to see their economies grow by around 1.4–2% per annum in real terms over this period; but they cannot hope to keep pace with the fast-growing city economies of the emerging world.

The theme of the rise of emerging markets also comes out from an analysis of the number of cities in the top 50/100 by country in 2008 and 2025, as set out in Table 3.7. We can see that, although there is not that much turnover in the rankings (with just 6 new entries in the top 50 and 9 in the top 100), the emerging economies are the clear gainers. India in particular has 3 of its cities projected to rise into the top 100 between 2008 and 2025, while China has 2 new entries in the top 100 (the other four are from Egypt, Vietnam, Pakistan and Nigeria). European cities are again the main losers here: as well as Leeds, those projected to fall out of the top 100 include Hamburg, Stockholm, Lyon, Turin, Munich and Helsinki.

Another way to illustrate this point is to note that the total estimated GDP of the 80 emerging market cities we considered account for around 30% of the total GDP in 2008 of all the 151 cities. By 2025, however, the projected share of these same 80 cities rises to around 40% of the total (although it is should be noted that some of these 80 cities will have risen out of the emerging markets category in terms of their income levels by 2025).

Rankings by economicgrowth in 2008-25

An even clearer way to see the shifts in global economic weight towards the emerging markets is to look at rankings

Table 3.7 – Number of cities in global top 50/100 by country(GDP rankings using UN population definitions and projections)

Source: PricewaterhouseCoopers estimates and projections (see Annex B for full listings)

Number of cities in 2008 in: Number of cities in 2025 in:Countries

Global top 100Global top 50Global top 100Global top 50

US

Japan

Germany

UK

France

Italy

Canada

Total: G7

Other advanced economies

Total: advanced

China

India

Brazil

Russia

Mexico

Indonesia

Turkey

Total: E7

Other emerging economies

Total: emerging economies

All countries

20

2

0

1

1

2

2

28

8

36

3

2

2

1

1

0

1

10

4

14

50

23

3

3

4

2

3

3

41

20

61

5

6

5

2

3

1

2

24

15

39

100

17

2

0

1

1

0

1

22

8

30

4

3

2

1

1

1

1

13

7

20

50

23

3

1

3

1

2

3

36

16

52

8

9

5

2

3

1

2

30

18

48

100


than larger Asian cities like Bangkok, Manila and Jakarta. Similarly, Dubai has been more successful than Cairo. The same author notes that Mexico City, the largest emerging economy city in the

It should also be noted that economic size, although significant, is not a panacea. As noted by Joel Kotkin13, Singapore has established itself as a global financial centre to a greater extent

III.5 Key uncertainties and factors underlying relative city growth rates

It should be recognised, however, that even though we believe that our general conclusion on the rise of the emerging market economies and cities should be robust, any such growth rankings can only be illustrative for individual cities. Given the objective of providing a comprehensive global ranking, our analysis is necessarily somewhat mechanical and relies both on the UN population projections, which are subject to widening margins of error over time as with any such long-term projections11, and on the assumption that our earlier work on national GDP per capita projections provides a good basis for city-level projections. We also need to acknowledge that economic size as measured by GDP may not fully reflect the level of well-being in a city given it ignores other relevant socio-economic factors (including income inequality, the value of home production, the quality and quantity of leisure time and environmental indicators such as air and water pollution).12

In practice, some cities may do significantly better that their national economies and some may lag behind. Equally, not all of the emerging economies may fulfil the potential identified in our World in 2050 report, whether due to political and/or macroeconomic instability, infrastructure constraints, energy supply problems or environmental crises. Avoiding these pitfalls, both at national and local level, will be critical to the long-term economic success of these cities.

Climate change, for example, may pose significant long-term challenge, particularly to coastal cities in developing economies that may be relatively exposed to more frequent and intense severe weather events such as typhoons and hurricanes, as well as a potential long-term rise in sea levels due to global warming. Some preliminary analysis we have carried out suggests that emerging market coastal cities like Dhaka, Cairo, Karachi, Lagos, Tianjin and Porto Alegre could be particularly exposed to any early adverse effects from climate change. There are huge uncertainties here as to the scale and timing of any such effects and the extent to which mitigating action could be taking in time to avoid serious consequences.

Table 3.8 – Top 30 urban agglomerations by projected average realGDP growth in 2008-25 (using UN population definitions and projections)

Source: PricewaterhouseCoopers projections using UN population de�nitions

City

Hanoi

Ho Chi Min City

Changchun

Guangzhou

Addis Ababa

Xian

Surat

Beijing

Jaipur

Lucknow

Chengdu

Shenyang

Kanpur

Shanghai

Tianjin

Pune

Chongqing

Ahmedabad

Kabul

Bangalore

Hyderabad

Dar es Salaam

Chennai (Madras)

Delhi

Lagos

Nairobi

Kolkata (Calcutta)

Mumbai (Bombay)

Chittagong

Kinshasha

Country

Vietnam

Vietnam

China

China

Ethiopia

China

India

China

India

India

China

China

India

China

China

India

China

India

Afghanistan

India

India

Tanzania

India

India

Nigeria

Kenya

India

India

Bangladesh

Democratic Republic of Congo

Average realGDP growth in 2008-25

(% per annum)

7.0%

7.0%

6.9%

6.8%

6.8%

6.7%

6.7%

6.7%

6.7%

6.6%

6.6%

6.6%

6.6%

6.6%

6.6%

6.6%

6.6%

6.5%

6.5%

6.5%

6.5%

6.5%

6.5%

6.4%

6.4%

6.4%

6.4%

6.3%

6.3%

6.3%

Growthrank

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

0

50

100

150

200

Osaka

Paris

LA

Philadelphia

Tokyo

New York

Chicago

London

Moscow

BuenosAires

MexicoCity

SaoPaulo

Istanbul

Rio deJaneiro

Mumbai

Shanghai

Figure 3.4 – Cumulative projected GDP growth to 2025 for mega-cities

Source: PwC analysisTop 8 emerging economy and Top 8 advanced economy cities

% cumulative real GDP growth: 2008-25

11 In addition to the earlier research by Bairoch (1982) cited above, this point is also explored in some detail in a more recent paper by Barry Cohen (‘Urban Growth in Developing Countries: A Review of Current Trends anda Caution Regarding Existing Forecasts’, World Development, vol 32, no 1, pp 23-51, 2004).

12 See http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf13 J. Kotkin, The City: A Global History (Pheonix: London, 2005). Similar arguments on the potential disbenefits of greater city size beyond some threshold were set out by Bairoch (1982, op. cit).


In this scenario an assumed rise in global protectionism, notably by the US and the EU, leads to generally slower world economic growth with particularly severe adverse effects on emerging economies, which typically rely heavily on cross-border trade and investment flows to realise their growth potential (as shown by the experience of the Asian tigers

III.6 Possible impact of de-globalisation scenario on city growth ratesTo explore further the uncertainties surrounding our projections, we have considered one particular alternative scenario which could impact the growth of some cities significantly: de-globalisation.

world based on our analysis, is burdened by problems of crime, congestion and pollution that make smaller but faster-growing cities like Monterrey and Guadalajara more attractive to entrepreneurs and ambitious workers.

Within the developed world, it seems clear that the most successful cities will be those that have comparative advantages in intangible business, financial and consumer services that are not so easily emulated by the rising stars of China, India or Brazil. Prominent examples include the continued pre-eminence of London, New York and Tokyo in global financial services, or of Los Angeles in the media and entertainment sector, but it also applies to smaller but possibly faster growing cities that specialise in new technologies where distance is not an issue and the most talented individuals are looking for a better quality of life than the mega-cities can offer. The comparatively rapid projected growth rates (by developed country standards) of cities such as Atlanta, Dublin, Stockholm and Seattle reflect these kinds of more qualitative factors.

More formally, our projections show a negative correlation between initial economic size (GDP) and subsequent projected growth, but this is very much driven by lower initial GDP per capita in emerging economies (see Figure 3.5, which shows a significant but non-linear relationship). After correcting for differences in initial GDP per capita, regression analysis does not indicate any statistically significant relationship between initial population levels and subsequent projected GDP growth14. These are only projections, of course, so this is a feature of our analysis that may or may not be borne out by actual experience. Without time series of historic GDP for a sufficient range of cities we are unfortunately not able to test these relationships using actual data.

It is also important to note that, while cities may compete for inward investment in some respects, they are also important trading partners for each other to the extent that they specialise in different areas of economic activity. A larger global market can still be of great potential benefit to those ‘old Europe’ cities even if the latter are likely to slide down the relative GDP rankings.

0 20 40 60 80 1000

2

4

6

8

10

12

Figure 3.5 – Projected urban area GDP growth vs initial GDP per capita

GDP per capita in 2008 ($k PPPs)

Average annual GDP growth (% pa: 2008-25)

Source: PwC analysis

Table 3.9 – Impact of de-globalisation scenario on projected GDP rankingsof selected cities in 2025 (using UN definitions and population estimates)

*Relative to baseline projections for 2025

Source: Illustrative PwC projection

Percentage change inprojected 2025 GDP

Change in rank*

De-globalisation scenario results

New 2025 rank

City

Shanghai

Mumbai (Bombay)

Rio de Janeiro

Manila

Cairo

Guangzhou

Bangkok

Jakarta

Dhaka

Karachi

Tianjin

Chennai (Madras)

Porto Alegre

Ho Chi Min City

Ahmedabad

Alexandria

Hanoi

Lahore

Surat

Lagos

Chengdu

Casablanca

Changchun

Chittagong

Lucknow

9

11

27

36

34

25

45

47

57

64

52

66

88

69

81

95

86

101

96

104

106

129

120

134

133

–

–

-3

-3

-4

-4

-1

-2

-9

-7

-5

-6

-3

-5

-4

-2

-4

-4

-1

-5

-6

-4

-7

-8

-5

-9.2%

-9.2%

-4.7%

-9.2%

-9.2%

-9.2%

-9.3%

-9.2%

-13.6%

-9.3%

-9.2%

-9.2%

-4.7%

-13.4%

-9.2%

-9.2%

-13.4%

-9.3%

-9.2%

-9.2%

-9.2%

-9.3%

-9.2%

-13.6%

-9.2%

14 In fact, cities with larger populations have, after allowing for differences in initial GDP per capita levels, slightly higher projected growth rates in our model, but not to a statistically significant degree (t-statistic = 1.1).


2008 being Tokyo, New York, Los Angeles, Chicago, London and Paris (using UN definitions). Only seven emerging economy cities are currently in the top 30 (Mexico City, Sao Paulo, Buenos Aires, Moscow, Shanghai, Mumbai and Rio de Janeiro), but our illustrative projections suggest that they will all move up the GDP rankings by 2025 and be joined in the top 30 by fast-growing cities such as Istanbul, Beijing, Guangzhou and Cairo. Tellingly, we expect the largest emerging market cities to grow at a faster rate (between 6%-7% pa) than the cities in advanced economies (ca 2%) leading to cumulative growth of up to almost 200% for the period under investigation 2008-2025. This is in contrast to advanced economy cities whose cumulative growth will be only around 35%.

According to our illustrative projections, London is projected to grow somewhat faster than leading rivals such as Tokyo, New York, and Chicago, moving up from 5th place in 2008 to 4th place by 2025. However, other ‘old Europe’ cities like Milan, Madrid and Rome seem likely to slide down the rankings as the emerging mega-city economies of Asia and Latin America rise. Smaller UK cities such as Birmingham, Manchester and Leeds, while continuing to grow at reasonable rates in absolute terms, will also tend to fall down the relative GDP rankings.

Our projections for individual cities are subject to many uncertainties, but our conclusion that the emerging economy cities as a group should increase their relative weight in the global economy seems likely to be robust even in our de-globalisation scenario. But the cities of the established developed economies should see this as more of an opportunity than a threat as it gives opportunities for them to specialise further in those areas (e.g. business and financial services, entertainment and media, fashion, cultural tourism) where they have potential comparative advantages in fast-growing global markets. Competition between cities, as between nations, should not be seen as a zero sum game.

cities that might fall in the rankings in our de-globalisation scenario could include Guangzhou (21st to 25th), Cairo (30th to 34th), Tianjin (47th to 52nd), Chennai (60th to 66th) and Ahmedabad (77th to 81st).

Of course, these results are only illustrative, but they do indicate the importance of maintaining free flows of trade and investment if emerging economy cities are to realise their full potential. Nonetheless, even in our de-globalisation scenario, there is still a tendency for emerging economy cities to rise up our GDP rankings between 2008 and 2025, even if not to the same extent as in our baseline projections.

III.7 Summary and conclusions

Cities tend to be ranked in size according to their populations, but to assess the relative size of their economies we also need to take account of their average income per capita levels. Doing this in a consistent and comprehensive way at a global level is challenging, but we have pieced together data from a number of reputable sources (e.g. the OECD, the UN and the World Bank as well as national statistical agencies) to produce a ranking by GDP at Purchasing Power Parity (PPP) exchange rates of the largest 100 urban economies in the world in 2008 (updating our earlier estimates from 2005). The precise rankings are dependent on the definitions and data sources adopted, but looking at GDP gives a much better indication of relative economic size than just looking at population.

Our analysis re-emphasises the economic significance of the world’s largest cities. The top 30 such cities ranked by GDP accounted, according to our estimates, for around 18% of world GDP in 2008 and this share rises to around 30% for the top 100 cities.

At present, the mega-cities of the major developed economies continue to lead the global GDP rankings, with the top six in

since 1970, China since 1980 or India since the early 1990s). In this setting, the growths of emerging economy cities will be affected by not only their income group classification but also how heavily they rely on trade for growth in the future.

In order to determine how this de-globalisation scenario might affect specific cities, we first categorised the cities using the World Bank’s classification of their countries by income. We then applied a de-globalisation growth factor from 2015 onwards. If a city fell under the low income bracket, its growth rates were assumed to be reduced to a larger extent compared to a city in the high income bracket that could rely more on mature domestic markets to sustain a reasonable level of growth (although still lower than in our baseline projections). These income-related growth adjustments are necessarily judgemental, but are broadly in line with what would be expected based on the academic literature on the effect of cross-border trade and investment on economic growth, at least in directional terms.

The results of this scenario are summarised in Table 3.9 for 25 selected cities. The biggest drop in rankings was by Dhaka from 48th to 57th; its projected GDP in 2025 fell by almost 14% relative to our baseline scenario. Growth in Dhaka has been especially strong in the finance, manufacturing, telecommunications and tourism sectors, all of which would be potentially vulnerable in a de-globalisation scenario (e.g. due to less outsourcing of factories and call centres to low cost locations such as Dhaka).

Many other emerging economy cities would also be likely to be relatively badly hit in a de-globalisation scenario. Shanghai and Mumbai, for example, could see their projected GDP in 2025 reduced by just under 10%. Karachi could fall in the rankings from 57th to 64th place, with its projected GDP in 2025 also decreasing by close to 10% compared to our baseline projections. Ho Chi Min City and Hanoi could both see their projected GDP in 2025 fall by more than 13%. Other notable


Annex A: Data and methodology used to derive city GDP estimates and projections

and services produced in each urban agglomeration more accurately. Using current market exchange rates instead would tend to understate the scale of the outputs of goods and services produced by emerging economy cities, particularly estimates of City GDP in 2008. By 2025 we can expect the increase in productivity in emerging markets to raise both GDP per capita and the real exchange rate, thus closing at least partially the gap between GDP estimates based on PPP exchange rates and market exchange rates.

As outlined in Section III.2 above, our primary estimates of city output are based on combining UN population estimates for 2008 with estimates of income per capita, The population estimates for 2008 are interpolated by using the 2007 UN population estimates and applying the average annual population growth rate between 2007 and 2010. For the OECD countries, we began with the city-level GDP per capita estimates for 2002 in the OECD’s Competitive Cities report (2006) and then projected these forward to 2008 based on national GDP per capita growth over this period plus an adjustment to reflect the observed city-national GDP per capita growth differential in 1995-2002 for OECD cities for which these historic data were available (in other cases, unadjusted national growth data were used). The 2005 estimates were further extrapolated to 2008 using national income per capita growth rates from the IMF World Economic Outlook database.

For non-OECD cities, data are not readily available from a single source. In some cases (e.g. China, Brazil) GDP per capita estimates at city level were available from national sources, but in many cases we were only able to make approximate estimates based on plausible ratios of city to national GDP per capita (the latter sourced from the World Bank) based on comparisons with cities at similar income levels for which direct income per capita estimates were available17. As such, the 2008 urban agglomeration GDP estimates should only be taken as

it appears that the UN adopts narrower definitions than Brinkhoff, which tends to make the UN estimates correspond more closely to what might generally be considered to be a city, as opposed to a cluster of closely-related cities or towns. But there is no ‘right’ answer here, so it is important to recognise that our GDP rankings are sensitive to the particular definitions used.

To establish our list of candidate urban agglomerations to be ranked in the global top 100 by economic size in either 2008 or 2025, we first included all urban agglomerations (using UN definitions) with a population of more than 3 million in 2008 (115 areas in total). We then added:

• Other urban agglomerations projected to be in the top 100 by population in 2025 using UN projections; and

• Other OECD urban agglomerations with populations over 1 million, as covered by the OECD report on Competitive Cities (2006).

This procedure gave a total of 151 candidate urban agglomerations for further analysis. Based on a review of our results, we are confident that this should cover all urban agglomerations (on UN definitions) likely to rank in the top 100 by GDP in 2008, and probably also in 2025 (although the latter is obviously subject to more uncertainty). Table 3.10 in Annex B shows results for all of the cities, although it should be noted that we cannot be sure that these are the largest 151 city economies given that our aim was just to identify the top 100.

We chose to use GDP at Purchasing Power Parity (PPP) exchange rates as our measure of economic size. The reason for using PPPs rather than market exchange rates is to correct for differences in price levels between economies, which are due in particular to the relatively low cost of non-traded goods and services in emerging economies. By using PPPs, we can compare the volume of goods

We describe below how we have gone about producing GDP estimates and projections for the leading cities in the world.

The first question to be addressed in any study of this kind is: how should you define a city? While national boundaries are clear and change relatively rarely, city definitions differ significantly across countries and evolve over time as the city expands and absorbs surrounding neighbourhoods. For the purposes of this study we have generally adopted UN definitions15 of ‘urban agglomerations’ (for short, these are sometimes also referred to below as ‘urban economies’ or just as ‘cities’ where the context makes this appropriate), but it should be recognised that the UN population estimates rely on information provided by national statistical agencies and are therefore not based on fully standardised definitions across countries.

To explore the effect of adopting alternative definitions, we also considered the impact on our 2008 GDP estimates of using an alternative set of urban agglomeration population estimates compiled by Professor Thomas Brinkhoff (see his website at www.citypopulation.de for details) that also provide global coverage and have been used in a number of previous studies16. However, 27 of the top 30 cities were the same using the Brinkhoff data as in our analysis using the UN urban population data (from its 2007 World Urbanization Prospects report). Given these broadly comparable results, the UN data were selected as our primary source because they have the advantage of providing both a time series of historic data by city/urban area back to 1950 and population projections to 2025 for individual cities/urban areas. We also used UN national population projections in deriving our national GDP per capita projections, so it was more consistent to use UN data here than the Brinkhoff estimates, which include some historic estimates back to 1970 but not forward projections. In the majority of cases where they differ,

15 The UN defines an urban agglomeration’s population as follows: ‘The de facto population contained within the contours of a contiguous territory inhabited at urban density levels without regard to administrative boundaries. It usually incorporates the population in a city or town plus that in the sub-urban areas lying outside of but being adjacent to the city boundaries’ (http://esa.un.org/unup/index.asp?panel=6)

16 The other alternative we considered was to use the OECD definition of metropolitan areas from their recent report on ‘Competitive Cities’ (2006). But, unlike the UN data and the Brinkhoff estimates, this would not have covered non-OECD countries and also did not provide historic and projected population estimates on a consistent basis.

17 Typically, these ratios are in the range from 1.5 to 3, with higher values tending to be observed in the lowest income countries where urban-rural income differentials are particularly large.


were available, we assumed that differences between national and urban GDP per capita growth rates in 2008-25 were half those in 1995-2002. This was based on the assumption that historic growth differentials would be gradually eroded over time, since otherwise there would be implausibly rapid or slow growth of the major cities relative to their economies as a whole. For all the other urban agglomerations, including non-OECD cities, we assumed (in the absence of other data) that their income per capita growth would be in line with national average projections. This is, in fact, in line with the average historic trend for the OECD cities for which data are available18. In practice, of course, income per capita growth rates will vary more than this at city level, but we have no readily available data on which to predict such variations.

the income per capita growth rates (this has a particularly large downward effect in 2009-10). As illustrated for selected countries in Figure 3.2 above, these projections show consistently higher income per capita growth in the emerging economies, particularly China and India. It is notable here that US GDP per capita growth is projected to be slower than that in the other major economies. This is due to the assumption in our model that other countries will tend to catch up gradually with initially higher economy-wide labour productivity levels in the US. It should be noted, however, that after taking account of its higher projected population growth (including immigration), overall US GDP growth is nonetheless projected to be higher than in any of the other G6 countries.

For the OECD urban agglomerations where historic income growth trends

broadly indicative of relative economic size for the non-OECD countries. Nonetheless, they provide a much better indication of relative economic size than just looking at population data. For most of the non-OECD cities, we extrapolated the 2005 GDP per capita estimates to 2008 using national income per capita growth rates from IMF. However, for some cities such as Bogota, Moscow, Mumbai and Sao Paulo, new data were found on income per capita and used to calculate 2008 GDP city estimates.

As Table 3.2 in the main text shows, our illustrative projections for city GDP in 2025 combine UN population projections with our own estimates of national income per capita growth trends from our previous World in 2050 report (see earlier footnote 6 for reference). We then incorporated the short term and long term impacts of the recent global economic downturn on

18 It should be noted here that, particularly for smaller economies, the largest cities may play a dominant role in their overall national economies, so one would not expect a large divergence between income growth in these cities and the average for their economies as a whole.


Annex B: Full City GDP rankings for 2008 and 2025

rates between 2008 and 2025 and a ranking by these growth rates. Both of these latter two columns refer to the cities ranked by projected GDP in 2025 rather than in 2008 (i.e. the list of cities in the fifth column rather than the second column in Table 3.10).

claiming that these are the largest 151 city economies in the world, just that these should encompass the top 100 ranked by GDP in both 2008 and 2025, which was our primary focus here.

The final two columns show projected average real GDP growth

Table 3.10 below sets out in full our urban agglomeration GDP rankings and estimates/projections for 2008 and 2025 (using UN population estimates and urban agglomeration definitions). The table includes all 151 candidate cities that we have considered, although it should be noted that we are not

Table 3.10 – Full listing of urban agglomeration GDP rankings in 2005 and illustrativeprojection to 2025 (using UN definitions and population estimates)

Tokyo

New York

Los Angeles

Chicago

London

Paris

Osaka/Kobe

Mexico City

Philadelphia

Sao Paulo

Washington DC

Boston

Buenos Aires

Dallas/Fort Worth

Moscow

Hong Kong

Atlanta


Houston

Miami

Seoul

Toronto

Detroit

Seattle

Shanghai

Madrid

Singapore

Sydney

Mumbai (Bombay)

Rio de Janeiro

Phoenix

Minneapolis

San Diego

Istanbul

2008Rank

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34


1479

1406

792

574

565

564

417

390

388

388

375

363

362

338

321

320

304

301

297

292

291

253

253

235

233

230

215

213

209

201

200

194

191

182

Est. GDP in 2008($bn at PPPs)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

2025Rank

Tokyo

New York

Los Angeles

London

Chicago

Sao Paulo

Mexico City

Paris

Shanghai

Buenos Aires

Mumbai (Bombay)

Moscow

Philadelphia

Hong Kong

Washington DC

Osaka/Kobe

Beijing

Boston

Delhi

Dallas/Fort Worth

Guangzhou

Seoul

Atlanta

Rio de Janeiro


Houston

Miami

Istanbul

Toronto

Cairo

Detroit

Madrid

Metro Manila

Seattle


1981

1915

1036

821

817

782

745

741

692

651

594

546

518

506

504

500

499

488

482

454

438

431

412

407

406

400

390

367

352

330

327

325

325

319

Est. GDP in 2025($bn at 2005 PPPs)

1.7%

1.8%

1.6%

2.2%

2.1%

4.2%

3.9%

1.6%

6.6%

3.5%

6.3%

3.2%

1.7%

2.7%

1.8%

1.1%

6.7%

1.8%

6.4%

1.8%

6.8%

2.3%

1.8%

4.2%

1.8%

1.8%

1.7%

4.2%

2.0%

5.0%

1.5%

2.1%

4.7%

1.8%

Real GDP growth rate(% pa: 2008-25)

131

118

141

94

97

51

62

138

14

74

28

79

133

81

126

151

8

129

24

127

4

91

123

48

124

125

132

50

106

42

143

99

43

121

GDP growth ranking(out of 151)



Barcelona

Melbourne

Delhi

Beijing

Denver

Metro Manila

Montreal

Cairo

Rome

Guangzhou

Baltimore

Milan

Tehran

St Louis

Tampa/St Petersburg

Vienna

Tel Aviv-Jaffa

Busan

Santiago

Bangkok

Cleveland

Brasilia

Portland

Johannesburg

Lima

Riyadh

Kolkata (Calcutta)

Cape Town

Monterrey

Bogota

Pittsburgh

Lisbon

Athens

Vancouver

Berlin

Jakarta

St Petersburg

Birmingham

Fukuoka

Manchester

Brussels

Guadalajara

Dhaka

Karachi

Hamburg

2008Rank

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79


177

172

167

166

165

149

148

145

144

143

137

136

127

126

123

122

122

121

120

119

112

110

110

110

109

107

104

103

102

100

99

98

96

95

95

92

91

90

88

85

83

81

78

78

74


35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

2025Rank

Singapore

Sydney

Kolkata (Calcutta)

Phoenix

Minneapolis

San Diego

Tehran

Barcelona

Melbourne

Bangkok

Jakarta

Denver

Tianjin

Dhaka

Riyadh

Lima

Brasilia

Santiago

Rome

Montreal

Bangalore

Johannesburg

Karachi

Bogota

Tel Aviv-Jaffa

Chennai (Madras)

Monterrey

Baltimore

Cape Town

Ho Chi Min City

Milan

Busan

Vienna

St Louis

Hyderabad

Chongqing

Tampa/St Petersburg

Cleveland

Portland

Guadalajara

St Petersburg

Lisbon

Ahmedabad

Jiddah

Athens


312

298

298

271

265

260

252

248

245

241

231

226

218

215

214

213

210

207

203

203

203

198

193

192

191

191

188

187

183

181

178

177

175

172

170

170

168

153

152

150

149

149

145

143

142


2.2%

2.0%

6.4%

1.8%

1.8%

1.8%

4.1%

2.0%

2.1%

4.2%

5.5%

1.9%

6.6%

6.2%

4.2%

4.0%

3.9%

3.3%

2.1%

1.9%

6.5%

3.5%

5.5%

3.9%

2.7%

6.5%

3.7%

1.8%

3.5%

7.0%

1.6%

2.2%

2.1%

1.8%

6.5%

6.6%

1.8%

1.9%

1.9%

3.6%

3.0%

2.5%

6.5%

4.1%

2.4%


95

103

27

120

119

122

55

102

98

49

37

113

15

33

53

57

63

78

100

110

20

73

38

60

83

23

66

116

75

2

139

93

96

117

21

17

115

114

109

68

80

87

18

54

90




Tianjin

Jiddah

Stockholm

Lyon

Bangalore

Warsaw

Turin

Chennai (Madras)

Porto Alegre

Munich

Belo Horizonte

Dublin

Leeds

Hyderabad

Ankara

Ho Chi Min City

Helsinki

Chongqing

Auckland

East Rand

Budapest

Zurich

Wuhan

Naples

Medellin

Ahmedabad

Prague

Copenhagen

Pune

Amsterdam

Rotterdam

Alexandria

Algiers

Curitiba

Shenyang

Daegu

Hanoi

Izmir

Puebla

Caracas

Oslo

Lahore

Cologne-Bonn

Surat

Lagos

2008Rank

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124


74

72

70

69

69

68

68

66

66

64

61

61

60

58

58

58

58

57

55

54

53

52

52

51

50

49

49

49

48

47

46

46

45

44

44

43

42

42

42

41

40

40

39

36

35


80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

2025Rank

Pune

Pittsburgh

Hanoi

Vancouver

Shenyang

Porto Alegre

Berlin

Fukuoka

Birmingham

Belo Horizonte

Ankara

Brussels

Manchester

Alexandria

Warsaw

Surat

Dublin

Lahore

Wuhan

Lagos

Chengdu

East Rand

Lyon

Medellin

Algiers

Stockholm

Xian

Luanda

Hamburg

Turin

Khartoum

Auckland

Curitiba

Changchun

Izmir

Munich

Budapest

Helsinki

Puebla

Leeds

Kanpur

Prague

Zurich

Caracas

Jaipur


142

136

134

133

132

118

117

117

114

112

111

109

108

108

107

107

106

102

102

101

100

98

97

97

96

95

93

93

93

89

86

84

83

81

81

81

80

79

78

78

76

75

73

72

71


6.6%

1.9%

7.0%

2.0%

6.6%

3.5%

1.3%

1.7%

1.4%

3.6%

3.9%

1.6%

1.4%

5.2%

2.7%

6.7%

3.3%

5.6%

4.1%

6.4%

6.6%

3.6%

2.0%

4.0%

4.6%

1.9%

6.7%

6.3%

1.3%

1.6%

5.5%

2.5%

3.8%

6.9%

4.0%

1.4%

2.4%

1.9%

3.8%

1.5%

6.6%

2.5%

1.9%

3.4%

6.7%


16

112

1

105

12

72

150

134

147

69

61

137

146

40

82

7

77

36

56

25

11

71

104

58

45

111

6

31

149

140

39

85

64

3

59

148

88

108

65

144

13

86

107

76

9




Source: PricewaterhouseCoopers estimates and projections using UN urban agglomerations de�nitions and population estimates.

Recife

Khartoum

Chengdu

Lille

Casablanca

Luanda

Xian

Changchun

Kanpur

Fortaleza

Yangon

Baghdad

Jaipur

Chittagong

Lucknow

Bandung

Kinshasha

Faisalabad

Kabul

Krakow

Abidjan

Addis Ababa

Nairobi

Pyongyang

Salvador

Kano

Dar es Salaam

2008Rank

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151


35

35

33

33

33

33

31

26

26

25

24

24

24

24

22

21

17

14

14

13

13

12

12

11

10

9

8


125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

2025Rank

Casablanca

Chittagong

Naples

Lucknow

Copenhagen

Daegu

Amsterdam

Recife

Rotterdam

Oslo

Baghdad

Bandung

Yangon

Cologne-Bonn

Kinshasha

Lille

Fortaleza

Kabul

Faisalabad

Addis Ababa

Nairobi

Abidjan

Kano

Dar es Salaam

Salvador

Krakow

Pyongyang


68

67

67

66

65

64

63

63

61

60

56

54

53

49

48

47

46

41

37

37

33

28

25

24

21

21

14


4.3%

6.3%

1.6%

6.6%

1.6%

2.4%

1.8%

3.6%

1.7%

2.3%

5.0%

5.8%

4.7%

1.5%

6.3%

2.0%

3.6%

6.5%

5.7%

6.8%

6.4%

4.5%

6.2%

6.5%

4.2%

2.6%

1.5%


47

29

136

10

135

89

128

70

130

92

41

34

44

145

30

101

67

19

35

5

26

46

32

22

52

84

142



Appendix A – Global Economic Outlook

however, which will require a lengthy period of fiscal consolidation through tax rises and/or public spending cuts in the medium term, which will tend to retard the pace of recovery in economies such as the US and the UK in 2011 and beyond.

Fiscal policy has been loosened significantly throughout the world this year, with many major economies (although not the UK) continuing this fiscal stimulus into 2010. This will leave large budget deficits in many countries,

This appendix reviews recent developments and assesses short-term prospects for the major global economies other than the UK. We consider first the overall global scene, and then look in turn at North America, Europe, the Asia Pacific region and Latin America (see Table A.1 for a summary of recent and projected growth and inflation for the countries covered). To give an overview of the importance of each economy in the global market, its estimated share of total world GDP in 2008 (at average market exchange rates) is also shown in the table.

Global Overview

Global economic growth in 2004-7 was generally above its long-term trend of around 3.2% per annum (using market exchange rate weights)1 but then fell sharply in 2008 and early 2009 (see Figure A.1) as a result of the global financial crisis and an associated very sharp drop in world trade in Q4 2008 in particular.

The global economy has shown signs of recovery more recently, however, led by a strong rebound in China and India in Q2 2009. Germany, France and Japan also saw a return to modestly positive growth in the second quarter, while the pace of decline slowed in the US and UK. Nonetheless the pace of the recovery in most developed economies remains slow with private consumption and investment generally remaining weak.

One of the key drivers of the fledgling recovery is the unprecedented monetary stimulus implemented by central banks, which has taken the form both of record-low interest rates and of direct liquidity injections through quantitative easing.There have been fears from some commentators that such actions could eventually create significant inflationary pressures, but the extent of the spare capacity and unemployment created by the recession suggest that this is unlikely to be a major risk in the short run. Central banks are therefore generally well-placed to keep supporting the recovery over the next year through a relatively relaxed monetary stance.

Table A.1 – Global economic prospects

Source: National statistical of�ces or IMF for 2008 data; PricewaterhouseCoopers main scenario for 2009-10; IMF for GDP shares (at market exchange rates) in 2008.

Country Share ofWorld GDP

(%:2008)

23.1

2.5

6.2

4.5

4.8

3.9

2.7

1.5

7.8

6.8

2.0

1.7

1.5

2.9

1.3

0.9

0.4

0.3

2.7

1.8

0.5

2008

1.1

0.6

1.3

0.6

0.4

-1.0

1.2

2.1

-0.7

9.0

7.5

2.3

2.2

5.6

1.1

5.0

3.2

0.6

5.1

1.4

6.8

GDP growth (%)

-2.2

-2.3

-5.0

-4.7

-2.2

-5.1

-3.8

-4.2

-5.8

8.3

6.5

0.4

-2.1

-7.2

-6.0

0.9

-4.1

-6.5

-0.1

-7.3

-2.8

2010

2.4

2.6

1.3

0.7

1.2

0.2

-0.7

0.3

1.4

9.6

7.5

1.4

2.7

3.6

3.0

2.0

1.2

-0.7

4.1

3.0

1.9

2008

3.8

2.4

2.8

3.6

3.2

3.5

4.1

2.2

1.4

5.9

9.1

4.4

4.7

14.1

10.4

4.2

6.3

6.0

6.1

5.1

8.6

Consumer price inflation (%)

-0.4

0.3

0.3

2.1

0.1

0.7

-0.2

0.9

-1.3

-0.5

2.2

1.6

2.3

11.4

6.0

3.8

1.2

4.3

4.5

4.4

6.0

USA

Canada

Germany

UK

France

Italy

Spain

Netherlands

Japan

China

India

Australia

South Korea

Russia

Turkey

Poland

Czech Republic

Hungary

Brazil

Mexico

Argentina

201020092009

2.0

1.7

1.0

1.9

1.2

1.4

1.5

0.9

-0.6

2.2

5.2

2.2

2.4

8.5

6.2

2.5

1.9

4.4

3.5

3.8

7.5

-3

-2

-1

0

1

2

3

4

5

6

7

’10’08’06’04’02’00’98’96’94’92’90’88’86’84’82’80’78’76’74’721970

Figure A.1 – World GDP growth

Source: World Bank up to 1997, IMF for 1998-2010 (using market exchange rates to aggregate world GDP)

Long-run average = 3.2%

Forecast

Real growth (%)

1 Average growth would be significantly higher using GDP at purchasing power parity (PPP) exchange rates, which give much greater weight to the relatively rapidly growing emerging markets such as China and India. On this alternative basis, the IMF estimates world GDP growth to have been 5.2% in 2007 and 3% in 2008, and forecasts growth of -1.1% in 2009 and 3.1% in 2010. However, from the perspective of assessing the total size and growth of global markets for Western companies operating in hard currencies, GDP growth using market exchange rate weights is more immediately relevant.


The latest Purchasing Managers’ Indices (PMI) for both the services and manufacturing sector have also shown modest rises in activity, which has led to hopes of a modest recovery starting in the latter part of 2009. This is also our main

uncertain whether this trend will continue as unemployment rises and home foreclosures increase, but it may be a sign that the worst is over for the US housing market, which would also be important for the stabilisation of the banking system in the US and internationally.

The recent upward trend in commodity prices (such as the price of oil, as shown in Figure A.2) could also dampen the pace of global recovery to some degree, although it should be noted that higher prices are themselves a signal of expected economic recovery boosting demand for these commodities.

Reflecting the gradually improving conditions around the world, our main scenario projects that global GDP will contract by around 2.5% in 2009 but then rebound to growth of around 2.5% in 2010. This scenario assumes that the current credit squeeze will gradually ease and that destocking will begin to reverse, while monetary and fiscal policy will remain generally supportive of growth in most major economies over the next year. But growth in 2010 will still be some way below its long-term trend and there are considerable uncertainties around this main scenario both at global and individual country level.

Growth prospects for the main world regions under our main scenario are summarised in Figure A.3, showing that the Asia-Pacific region, led by China and India, is expected to lead the global recovery in 2010. We discuss these projections in more detail below, first considering North America and then looking in turn at Europe, Asia Pacific and Latin America.

North America

The US economy contracted for the fourth successive quarter in Q2 2009 (see Figure A.4), reflecting continued falls in business investment and a further decline in inventories. Unemployment has also continued to rise, reaching 9.8% in September, which was its highest level since the early 1980s. Consumer confidence and spending has also remained relatively subdued given these adverse labour market trends.

On the more positive side, preliminary data showed a rise in US GDP in Q3 as shown in Figure A.4 and there have also been indications that the house price decline is bottoming out, with the Case/Schiller 20-city composite index 13.3% lower in August than a year earlier, as compared to a decline of 15.4% in the year to June. It is

0102030405060708090

100110120130140150

’09’07’05’03’01’99’97’95’93’91’89’87’85’83’811979

Figure A.2 – Nominal oil price trends

Source: St. Louis Fed (monthly data)

West Texas Intermediate ($ per barrel)

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Western EuropeNorth AmericaLatin AmericaEastern EuropeAsia Paci�c

200920082007 2010

Figure A.3 – Growth prospects for the main world regions

Source: PwC estimates and main scenario for 2009-10

Annual % growth

-8

-6

-4

-2

0

2

4

6

8

10

’09’08’07’06’05’04’03’02’01’00’991998

Figure A.4 – US GDP growth

Source: BEA

% change from preceding period (annualised)


therefore for the French economy to return to growth of around 1% in 2010, similar to that for Germany (but after a much less marked fall in GDP in France than in Germany in 2009).

The Italian economy has not yet come out of recession, but the rate of quarter-on-quarter GDP decline eased significantly to just 0.5% in Q2 2009, compared to a decline of 2.7% in the first quarter. The economic climate in Italy is expected to remain relatively subdued in the short term, however, with recent sharp declines in investment likely to have a negative impact upon the future production capacity of the economy. In our main scenario we project Italian GDP to decline by around 5% in 2009 and be broadly flat in 2010.

The pace of the decline in output also eased in Spain in Q2 2009, but it remains relatively severely affected with GDP contracting by 1.1% in Q2 relative to Q1, when it fell by 1.6 %. There was a slight positive contribution to growth from net exports, but this was more than offset by a large fall in domestic demand. The labour market has weakened significantly, with the unemployment rate having risen to 18.9% in August 2009. The bursting of Spain’s earlier property bubble coupled with expected contraction in investment activity suggests that the Spanish economic recovery will lag behind those in Germany and France, with our main

The German economy expanded by 0.3% quarter-on-quarter (q-o-q) in Q2 2009, signalling that Europe’s largest economy is no longer in technical recession. Consumer spending increased by 0.7% q-o-q, reflecting falling consumer prices and measures introduced as part of the fiscal stimulus package, such as the car scrappage scheme. Investment by businesses also increased slightly compared to the previous quarter, while net exports contributed the biggest boost to GDP growth although this was due to a sharp decline in imports in Q2 2009 rather than a recovery in export volumes. Overall, our main scenario is for German GDP to contract by 5.6% in 2009 and return to growth of around 1% in 2010.

The French economy emerged from recession in the second quarter of 2009, posting growth of 0.3% following a contraction of 1.4% in Q1 2009. As with Germany, net exports provided a significant boost to overall economic growth but again this was due to weak imports rather than strong exports. Despite the combination of rising unemployment and apparently subdued consumer confidence according to survey results, French consumer spending grew by 0.3% in Q2 2009, the fifth consecutive quarterly expansion. The Purchasing Managers’ Index for both services and manufacturing also both signalled a modest expansion of activity in September. Our main scenario is

scenario, with growth expected to pick up gradually to just over 2% on average in 2010, although this would still be below the trend rate of growth for the US economy, which is generally estimated at around 3% per annum.

The Canadian economy contracted for the third successive quarter in Q2 2009, but the pace of the downturn eased somewhat with private consumption expanding by 0.4% quarter-on-quarter, boosted by higher motor vehicle sales and a rebound in housing sales. The Canadian dollar has appreciated strongly against the US dollar in recent months, which has contributed to the sluggish performance of the country’s export sectors. The most likely outlook for the economy is for a gradual recovery in 2010, but this remains highly dependent on trends in the US.

Europe

The Euroland2 recession eased considerably in Q2 2009 as GDP contracted by just 0.2% relative to the previous quarter, in which it had fallen by 2.5%. Unemployment is still rising and both investment and exports have remained weak, but earlier declines in industrial production have started to ease off as destocking runs its course.

Falling inflation (to -0.3% in the year to September) has allowed a switch in the focus of monetary policy over the past year to supporting economic growth. Despite this, the ECB has been relatively cautious in its policy response compared to the US Federal Reserve and the Bank of England, with ECB interest rates still at 1% and relatively modest use of quantitative easing compared to these other two central banks.

The combination of the strong euro and cautious monetary policies are likely to dampen the recovery in Euroland. In view of this, our main scenario is for Euroland GDP to contract by around 4% in 2009, with only very modest growth averaging around 0.5% in 2010 (see Table A.2). Relative inflexibility in Euroland labour markets may constrain the pace of recovery in the longer term as will the need to tackle rising budget deficits in many European countries.

Table A.2 – Outlook for European GDP growth (%)

Source: Eurostat for 2008 data, PricewaterhouseCoopers main

scenario for 2009 and 2010.

Country/region 2008 PwC main scenario

2009 2010

1.3

0.4

-1.0

1.2

2.1

0.7

0.6

-0.2

1.6

0.7

5.0

3.2

0.6

-5.0

-2.2

-5.2

-3.8

-4.2

-4.1

-4.7

-4.7

-1.5

-4.0

0.1

-4.0

-6.5

1.3

1.2

0.1

-0.7

-0.3

0.6

0.7

1.1

0.8

0.7

1.4

1.2

-0.7

Germany

France

Italy

Spain

Netherlands

Euroland

UK

Sweden

Switzerland

Western Europe

Poland

Czech Republic

Hungary

2 ‘Euroland’ consists of the 16 countries that are now using the euro: Belgium, Germany, Finland, Ireland, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Slovenia, Slovakia, Cyprus and Malta.


Australian economic growth accelerated in Q2 2009 with the economy expanding by 0.6% quarter-on-quarter (q-o-q) compared to growth of 0.4% in the previous quarter. Australian consumer spending remained resilient growing by 0.8% q-o-q and this combined with an expansion in investment activity to drive Australian economic growth. Buoyed by the resilience of the economy, the Reserve Bank of Australia (RBA) raised interest rates in early October by 25 basis points to 3.25%, making Australia the first major developed economy to begin reversing the monetary loosening of the past year. We expect Australian GDP to expand by a relatively modest amount in 2009, with stronger growth in 2010.

Latin America

Growth in the Latin American economies is likely to be negative in 2009 after a relatively strong performance for much of 2008 prior to the intensification of the global financial crisis last September. Improving conditions in global financial and commodity markets should, however, help the region’s economies to recover in 2010 so long as the global economic upturn also continues.

The Brazilian economy expanded by 1.9% quarter-on-quarter in Q2 2009, signalling that the country has exited what appears to have been a relatively brief recession. There was a sharp rise in exports in Q2 and relatively strong household spending growth. Brazilian industrial production has also returned to positive growth since the start of 2009. Government tax breaks on

that Beijing’s mammoth fiscal stimulus package, launched towards the end of 2008, has had the desired effect. In addition, a surge in bank lending in the period helped to boost economic activity. However, there are some signs that the impact of Beijing’s fiscal stimulus is beginning to weaken with demand indicators such as fixed asset investment growth decelerating in July.

Continued negative inflation in the consumer and producer price indices in the year to July suggests that there is little pressure for the central bank to tighten current loose monetary policy conditions, although there could be concerns about asset price bubbles building up. Since it has ample room for further domestic growth, however, China should weather the downturn relatively well, with growth of around 8% in 2009 and 9% or more in 2010 in our main scenario.

The Indian economy has also been relatively robust, showing a 6.1% year-on-year growth rate in Q2 2009. Improving financial conditions and strong domestic demand have helped offset a fall in export volumes. However, the country has been hit by the weakest rainfall since 1972 with drought conditions being experienced in several of the country’s districts. The resulting fall in agricultural production may contribute to a rise in food prices which could also lead to higher inflation.

Nonetheless India, together with China, should lead the global recovery over the next year, reinforcing the longer term shift in the global economic centre of gravity towards these two emerging giants.

scenario being for a further decline in Spanish GDP of around 0.5% in 2010.

The economies of Central Europe have been severely hit by the effects of the global financial crisis since last autumn and the subsequent ‘flight to safety’ of international capital. Relatively fragile banking sectors have dampened the outlook for countries including Russia, Romania and Hungary. Due to the prevalence of foreign currency denominated borrowing in these economies, credit conditions are likely to remain tight despite cuts in official interest rates.

Total GDP in the region, including Russia and Turkey, is projected to decline by an average of around 5% in 2009. Within the region, however, the picture is very varied, with Poland appearing likely to weather the storm relatively well, while the three Baltic states are all projected to see double digit contractions in GDP this year. Russian GDP is also set to fall sharply in 2009 due to earlier falls in oil and gas prices, but could pick up again in 2010 if the recovery in energy prices is sustained.

Asia Pacific

The Japanese economy returned to growth in Q2 2009 with GDP increasing by 0.6% compared to the previous quarter (see Figure A.5 where the data are shown in annualised form). Growth was boosted by a revival in export volumes and the effects of the government’s fiscal stimulus package. However, concerns remain over whether the recovery is sustainable, particularly as Japanese domestic demand remains weak.

While consumer confidence has rebounded somewhat from its all time low in December 2008, the outlook for unemployment remains poor and this will continue to dampen consumer spending. As such, the Japanese economy is expected to see a contraction of more than 6.5% this year with only modest growth projected for 2010.

Chinese economic growth, in contrast, has seen a much stronger rebound from a relatively brief period of decline in late 2008 and early 2009. During the third quarter China’s economy grew by 8.9% year-on-year. The results indicate

-15

-10

-5

0

5

10

2009Q1

2008Q1

2007Q1

2006Q1

2005Q1

2004Q1

2003Q1

2002Q1

2001Q1

Figure A.5 – Japanese GDP growth

Source: Japanese Cabinet Of�ce

% change from preceding period (annualised)


is its key market. The outbreak of swine flu further depressed economic activity in Q2 2009 as several workplaces were closed in an effort to contain the virus. We expect a decline in GDP of over 7% this year, with a modest recovery possible in 2010 if the US economy recovers as projected in our main scenario, but with considerable uncertainty surrounding these projections for Mexico at present.

outlook from countries such as Brazil and China should provide a boost to Argentina’s export sector looking ahead, but we would expect a more modest recovery in 2010 in Argentina than in Brazil.

The recession in the US has had significant repercussions for economic growth in Mexico, particularly in the manufacturing sector for which the US

a range of goods including cars, major appliances and construction materials have helped to boost output as firms have moved to restock inventories. After being relatively flat in 2009 as a whole, we expect Brazilian GDP growth to resume in 2010 at a relatively strong rate.

In contrast, the Argentine economy continued to contract during the second quarter of 2009. The improved economic


Appendix B – UK economic trends: 1979–2008

Annual GDP growth Household Manufacturing Inflation 3 Month Current PSNB* averages expenditure output (RPIX) interest rate account (% of GDP) growth growth (% annual balance average) (% of GDP)

1979 2.6 4.7 -0.2 12.6 13.7 -0.5 4.7

1980 -2.1 0.0 -8.6 16.9 16.6 0.8 4.3

1981 -1.4 0.0 -6.1 12.2 13.9 1.9 3.4

1982 1.9 0.7 -0.1 8.5 12.3 0.8 2.6

1983 3.5 4.1 2.1 5.2 10.1 0.4 3.4

1984 2.6 2.1 3.7 4.5 10.0 -0.4 3.7

1985 3.6 3.7 2.9 5.2 12.2 -0.2 2.8

1986 4.0 6.5 1.4 3.6 10.9 -0.9 2.2

1987 4.6 5.4 4.8 3.7 9.7 -1.7 1.5

1988 5.0 7.6 7.3 4.6 10.4 -4.1 -0.8

1989 2.2 3.4 4.0 5.9 13.9 -4.9 -0.8

1990 0.8 0.8 -0.1 8.1 14.8 -3.8 0.7

1991 -1.4 -1.6 -5.0 6.7 11.5 -1.8 3.0

1992 0.2 0.5 -0.1 4.7 9.6 -2.1 6.5

1993 2.2 2.6 1.5 3 5.9 -1.9 7.8

1994 4.3 2.8 4.7 2.3 5.5 -1.0 6.6

1995 3.0 1.8 1.5 2.9 6.7 -1.2 5.3

1996 2.9 4.0 0.8 3 6.0 -0.8 3.7

1997 3.3 3.8 1.8 2.8 6.8 -0.1 1.9

1998 3.6 4.2 0.7 2.6 7.3 -0.4 -0.1

1999 3.5 5.4 1.0 2.3 5.4 -2.4 -1.3

2000 3.9 4.5 2.2 2.1 6.1 -2.6 -1.7

2001 2.5 3.2 -1.3 2.1 5.0 -2.1 -0.8

2002 2.1 3.7 2.2 2.2 4.0 -1.7 1.8

2003 2.8 3.1 -0.3 2.8 3.7 -1.6 3.0

2004 3.0 3.2 2.2 2.2 4.6 -2.1 3.1

2005 2.2 2.3 -0.2 2.3 4.7 -2.6 3.3

2006 2.9 1.5 1.6 2.9 4.8 -3.3 2.3

2007 2.6 2.5 0.6 3.2 6.0 -2.7 2.4

2008 0.6 0.9 -2.9 4.3 5.5 -1.6 4.5

Average over economic cycles**

1979-89 2.4 3.5 1.0 7.5 12.0 -0.8 2.5

1989-2000 2.4 2.6 0.8 3.8 7.7 -1.9 2.6

2000-2007 2.5 2.9 0.3 2.5 4.9 -2.2 1.7

*Public Sector Net Borrowing (calendar years), ** peak-to-peak for GDP relative to trend.

Source: ONS, Bank of England

pwc.co.uk/economics© 2009 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. 20026 (11/09).

UK Economic Outlook - PwC UK blogs · 2013-01-17 · 2 • PricewaterhouseCoopers UK Economic...

Documents

Transcript of UK Economic Outlook - PwC UK blogs · 2013-01-17 · 2 • PricewaterhouseCoopers UK Economic...