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