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UK and global recovery prospectsDr Andrew Sentance Monetary Policy Committee, 2006-2011
Outline
Global growth concerns
Progress of the UK recovery
Economic prospects for UK and Europe
Key messages for business
The global economy – 3 months ago
Percentage annual change in world GDP
Source: June 2011 IMF World Economic Outlook Update
-1
0
1
2
3
4
5
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2000-2008 average IMF forecasts
World economic growth
* EU, US and 11 other economies accounting for 85% of world GDPSource: IMF World Economic Outlook, April 2011, and The Economist
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
-3-2-10123456
IMF, Apr 11 Latest consensusAve 1990-2010
% per annum change in GDP in G-13 economies*
How have forecasts changed?% per annum change in GDP, consensus forecast for 2011
* US, EU and 11 other major economies making up 85% of world GDPSource: The Economist
USEu
roChin
aJap
an UKBra
zil
Canad
aInd
iaRuss
ia
Austr
alia
G-13*
-2
0
2
4
6
8
10
Jan-11 Latest
Prospects for 2012% per annum change in GDP, latest consensus forecast
* US, EU and 11 other major economies making up 85% of world GDPSource: The Economist
USEu
roChin
aJap
an UKBra
zil
Canad
aInd
iaRuss
ia
Austr
alia
G-13*
-2
0
2
4
6
8
10
2011 2012
Why is global growth slowing?
• Policy tightening in Asia-Pacific in response to inflationary concerns
• Temporary disruption from Japanese tsunami/earthquake
• Relatively high inflation squeezing disposable income and consumer spending
• Structural factors continuing to hold back growth in US and other western economies
Global inflation on the rise% per annum change in consumer prices
* US, EU and 11 other major economies making up 85% of world GDPSource: The Economist
US EUChin
aJap
an UKBra
zil CaInd
iaRuss
iaAu
str...
G-13*
-2
0
2
4
6
8
10
12Year agoLatest
The global recovery in context% per annum change in GDP
* US, EU and 11 other major economies making up 85% of world GDPSource: IMF and The Economist
US EU Asia-Pacific World*012345678 1992-94 2010-12 (current forecasts)
UK economic growth
* Weighted average of manufacturing and services output
200020012002200320042005200620072008200920102011-8-6-4-20246
Non-oil GDP Underlying* Trend% per annum change in economic activity
Recession and recoveries compared
Source: Office for National Statistics. Forecasts from Treasury Independent Panel of Forecasters and The Economist. Forecasts and real time data are based on GDP including oil and gas output.
-2 -1 0 1 2 3 49092949698
100102104106
77-83 88-9488-94 Real Time 06-12
Non-oil GDP, Index 100 = cyclical peak
Employment in UK recessions
Source: Office for National Statistics, Labour Force Survey
-8 -6 -4 -2 0 2 4 6 8 10 12 14 1692
94
96
98
100
77Q4-83Q4 88Q2-94Q2 06Q2-11Q2Index of employment, 100 = cyclical peak
Number of quarters from employment peak
Unemployment in UK recessions
Source: Office for National Statistics, Labour Force Survey
-8 -6 -4 -2 0 2 4 6 8 10 12 14 16456789
101112
77Q4-83Q4 88Q2-94Q2 06Q2-11Q2Unemployment rate, % of labour force
Number of quarters from employment peak
UK and Euro area growth
* Excluding oil and gas, for historic data; Source: IMF and ONS, updated with Economist consensus forecasts
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-6
-4
-2
0
2
4
6Euro UK*
% per annum change in GDP
UK and Euro inflation
Source: IMF, updated with Economist consensus forecasts
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
00.5
11.5
22.5
33.5
44.5
5Euro UK Inflation Target
% per annum change in consumer prices index
Large official inflation forecast errors
Source: Bank of England
Mean of forecast percentage annual increases in consumer prices
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013
May-09 Nov-09
May-10 Nov-10
May-11 Actual CPI inflation
Why has UK inflation been so high?
• Global inflationary pressures
• Decline in value of the pound
• Limited effect of spare capacity
• Recovery in demand and favourable pricing climate
Sterling depreciation since 2007
Rebased to 100 in January 2005
Source: Thompson Datastream and Bank for International Settlements
*: Effective exchange rate
70
75
80
85
90
95
100
105
110
2005 2006 2007 2008 2009 2010 2011
Euro-Sterling exchange rate
Sterling EER *
Average EER *, 97-07
Episodes of Sterling depreciation
Index, base year = 100
Number of years from start of period
Source: Bank for International Settlements
50
60
70
80
90
100
110
0 1 2 3 4 5
1967-1971 1972-1977 1981-1986
1991-1996 2007-2010
Services inflation stubbornly high
Source: Office for National Statistics
Jan-97 Jan-02 Jan-07-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%
Goods Services% per annum change in consumer prices
Sustaining growth over the recovery
• Private sector needs to be the engine of growth
• Long-term and consistent plan for deficit reduction
• Monetary policy normalisation – shift from emphasis on stimulus to stability
• Supply-side and structural policies to support business confidence, investment and growth
Prospects for the euro area
• Slowing global growth to hamper export-led growth in Germany and “core” economies
• Fiscal consolidation in peripheral economies also a drag on growth
• Growth “soft patch” likely in late 2011 and early 2012
• All forecasts conditional on orderly resolution of current deficit crisis
Public debts and deficits compared% of GDP in 2010
Source: IMF, April 2011 World Economic Outlook
Net debt0
20
40
60
80
100
120
140
64.4 64.8 69.4
117.5
Euro US UK Japan
Gov't deficits0
2
4
6
8
10
12
6.1
10.6 10.4 10.3
Prospects for the UK economy
• High inflation and VAT rise currently “squeezing out” consumer growth
• Fall-back in inflation next year and stronger wage growth should support consumer spending in 2012
• Growth likely to strengthen during 2012, supported by pick-up in global economy
• Inflation set to remain above target – tough decisions ahead for the MPC
Key messages for business
• Recovery set to continue, with growth rebounding from “soft patch” caused by high inflation
• Asia remains a key engine of growth in world economy, but slow growth (c.2% per annum) likely to be the norm for western economies
• Relatively high inflation – containing upward wage and non-wage cost pressure a continuing issue
• Continued bouts of financial market volatility likely, but limited consequences for UK business
• Euro will survive, but pound likely to remain weak unless MPC policy changes