anaerobic digestion - a banker's perspective (mike rowe - ifs)

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  • Anaerobic Digestion a Bankers PerspectiveMike Rowe Senior Partner Partner Exeter IFS

  • 2UK Economy: The Road to Hell?

    David Tinsley

    UK Economist

    nabCapital, London

    David.tinsley@eu.nabgroup.com

    October 20th 2008

  • 3Two years of slower global growth ahead

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    1980 1984 1988 1992 1996 2000 2004 2008 2 012

    W o rld G D P g ro w th A nnua l pe rc en tage c hange

    (1980-2006 av e ra ge )

    From 2004 onwards, global growth picked-up well above its long run average of 3.5% to rates around 5%, its strongest performance since the 1980s.

    Although the IMF have revised down the growth prospects for the United States, eurozone and Japan in light of the global credit crunch, global growth is still expected to dip below its long-run average, slowing from 3.9% in 2008 to 3.0% in 2009 before recovering in 2010.

    Source: IMF WEO

  • 4The credit crunch is still ongoing

    Source: Bloomberg

    Recent developments suggest that we are now at the end of the beginning as banks are actively forced to deleverage in order to remain in business

    Further consolidation looks inevitable.

    Money markets remain stressed and it now seems that quarter-ends are causing more problems despite central bank liquidity injections.

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    02-Ju l-07 10-Oc t-07 18-Jan-08 27-A pr -08 05-A ug-08

    T h re e -m o n th c re d it s p re a dPer c en t

    Un ite d State s

    Un ite d Kin g d o m

    e u r o z o n e

    re la tiv e to 3-month ov ern ight index ed s w ap ra te

  • 5Important though to keep the overall size in perspective

    Source: IMF Global Financial Stability Review (October 2008)

    Although the most recent estimates put total financial losses at up to $1.4 trillion, as a percentage of GDP, this is much smaller than the Asian crisis or indeed the Japanese banking crisis of the 1990s.

    It is also geographically much more widely spread.

  • 6In response, central banks are now easing

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    1995 1997 1999 2001 2003 2005 2007

    Per c en tC e n tra l b a n k p o lic y ra te s

    EC B r e p o r a te

    Fe d fu n d s r a te

    UK b as e r a te

    Bo J ta r g e t r a te

    Source: Bloomberg

    Central banks engaged in co-ordinated rate cuts, easing by 50bps.

    Attempts to reduce the cost of money are now running alongside attempts to increase its quantity.

    Previous history suggests that central banks are happy to create steep yield curves to recapitalise the banking system as well as other methods.

  • 7Surviving the recession: the bad the ugly and thegood

  • 8The Bad : The UK economy has stalled

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    1997 1999 2001 2003 2005 2007

    U K G D P g ro w th Perc entage c hange on per iod

    Ye ar -o n -ye ar

    Qu ar te r -o n -q u ar te r t r e n d

    There was no growth in the second quarter, with an annual rate of 1.4%. Growth in Q1 was just 0.3%.

    If trend growth is 0.7% per quarter then we have already had a year of below trend growth.

  • 9The Ugly: So the consumer is very unhappy

    Sources: GfK.

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    1982 1986 1990 1994 1998 2002 2006

    G fK U K C o n s u m e r C o n fid e n c e

    The July GfK measure of consumer confidence fell to lowest level since 1990.

    The recovery since then has been marginal and probably reflects some boost from falling oil prices.

  • 10

    The Good: The current slowdown will be the most severe this century

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    M ar ch 2001

    Ju n e 2004

    Ju n e 2008?

    Number o f quar ters o f s low dow n

    U K d o w n tu rn s GDP grow th on a quar te r ago

    But it will remain modest compared with the output losses seen in the early 1980s and 1990s.

    After a brief fall, growth should start to resume back towards trend.

  • 11

    The Good: But inflation should ease rapidly in the coming months

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    1998 2000 2002 2004 2006 2008 2010

    perc en tage c hange on a y ea r agoU K C P I In fla tio n

    Forec as t

    Sourc e : nabCap ita l

    He ad lin e

    'C o r e '

    CPI inflation hit 5.2% in September. But from here it should decline sharply.

    Weakening activity should see underlying inflation ease and allow rate cuts.

  • 12

    The Good and any reversal in libor spreads would add to the stimulus

    Source: Bloomberg

    Looking at the spread between inter-bank rates and the Bank of England base rate, we see the long-term average has been below 20 basis points

    But since last summer the spread has ballooned, and remains elevated.

    Should market tensions ease, credit costs could fall extremely sharply.

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    1993 1995 1997 1999 2001 2003 2005 2007

    T h re e -m o n th L ib o r m in u s B a n k R a tebas is po in ts

    1997-Ju l 07 ave r ag e

    'C r e d it cr u n ch ' ave r ag e

  • 13

    The Good: Previous episodes of financial stress suggest that spreads can fall back very quickly

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    C re d it S p re a d :3 -m o n th lib o r le s s B a n k R a te bas is po in ts

    Sourc e : Bank o f Eng land

    The current stresses and strains are not unprecedented.

    Back in September 1981, the spread widened to 288bps before easing by to 38 by end of March 1982.

    A similar retracement would be the equivalent of a 75bps rate cut on top of any additional cuts in Bank Rate by the MPC.

  • 14

    The Good: So the economy should be growing just below trend in 2010

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    1998 2000 2002 2004 2006 2008 2010

    Pr iv a te Cons umption GDP

    C o n trib u tio n s to a n n u a l U K G D P g ro w th Perc en tage po in ts

    Ne t t r ad eSto ck b u ild in g

    Go ve r n m e n tco n s u m p t io n

    In ve s tm e n t

    Even by 2010, consumption will still be close to levels seen this year.

    Government spending and investment will support growth in the meanwhile.

    But how plausible is this?

  • 15

    The Good: UK labour market fundamentals are different

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    th o u s a n d sU K e m p lo y m e n t g ro w th s in c e 1 9 9 7

    UK

    n o n - UK

    Source: Office for National Statistics

    Most of the 3 million+ jobs created since 1997 have gone to non-UK sources.

    Most are economic migrants who would be expected to return to their countries of origin in the event of job losses.

    So the rise in the UK claimant count will be much less than in the 1990s.

  • 16

    The Good: Eastern European workers have become the fastest growing sector

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    Un ited K ingdomInd ian Subc ontinen tA us tra lia and New Z ea landA f r ic aUSAEUA 8EU14

    c hange on y ear ;thous ands

    U K a n n u a l e m p lo y m e n t g ro w th

    Source: Office for National Statistics

    Accession 8 countries now account for 508,000 jobs, back in 2004 there were just 76,000 employees.

    Most tend to be concentrated in construction, leisure and tourist sectors all of which are more likely to be adversely affected by the consumer downturn.

    So we could see half a million jobs lost in the UK with little increase in the UK claimant count rate as migrant workers are not eligible to claim it.

  • 17

    The Good: Government spending will support growth as the private sector stagnates

    Government spending will continue to boost growth this year and next.

    Investment grows by 11.5%yoy in 2008-09 before stabilising at around 6%. That suggests that it should contribute to GDP growth this year.

    Net investment rates have also been very strong in 2007-08 and 2008-09. The slowdown in later years is another reason to remain suspicious of HMT growth forecasts.

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    1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11

    Perc entage c hange on a y ear agoT o ta l m an ag ed exp en d itu re( in c as h terms )

    Bu d g e t 2007

    Bu d g e t 2008

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    1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11

    Perc en tage c hange on a y ear agoG ro s s p u b lic in v e s tm en t( in c as h te rms )

    Bu d g e t 2008

    Bu d g e t 2007

    Bu d g e t 2007

  • 18

    Though public finances are the biggest constraint on extra Government intervention

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    2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

    Capita l In jec tionsnabCap ita l f o rec as t2008 Budget Treas ury Forec as t

    P