by fathom consulting at the on 2nd august 2016 · cushions the blow. the depreciation means that...

A selection of charts presented by Fathom Consulting at the UK Economic Outlook Seminar on 2nd August 2016

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Selected charts

All commentary and opinion is that of Fathom Consulting and any views expressed are not those of Thomson Reuters. The full set of charts presented are available in Thomson Reuters Eikon along with many of the data sources.

Fathom Consulting UK Economic Outlook

3 Available on Thomson Reuters Eikon

Growth summary

• We are forecasting a slowdown in growth this year, across both the advanced and the emerging economies.

• In our central scenario, there is a recovery next year, but only outside of Europe.

Overview of Fathom growth forecasts

2015 2016 2017

GDP – Year over year %

Brexit mainly hits the UK

Brexit leads to growing isolation

Brexit mainly hits the UK

Brexit leads to growing isolation

Global 2.6 (3.1) 1.9 (2.5) 1.5 (2.3) 2.6 (3.1) 0.6 (1.5)

Advanced Economies

2.0 1.4 1.1 1.4 -0.7

United States 2.4 1.8 1.7 2.1 0.4

EA 1.9 1.0 0.4 0.8 -2.4

Japan 0.6 0.3 0.2 0.6 -1.6

United Kingdom 2.2 1.6 1.5 0.6 -0.9

Emerging Markets

3.1 (4.0) 2.3 (3.4) 1.9 (3.2) 3.5 (4.4) 1.6 (3.1)

(Using official Chinese GDP)


• UK productivity growth has averaged 0.9% per annum since the depths of the crisis – half its historic average.

• This, together with dwindling unemployment, a low saving rate and a record current account deficit meant that recent rates of growth could not be sustained.

• A slowdown was already inevitable. Then along came Brexit.

UK slowdown was already inevitable

UK productivity

Output per hour, 2008 Q1=100

Source: Thomson Reuters Datastream / Fathom Consulting

UK unemployment

Labour Force Survey, all aged 16+, per cent


UK saving rate

Per cent of disposable income



Brexit means a higher risk premium...

• Uncertainty in the UK economy will remain elevated for years to come.

• In this environment, investors will require increased compensation – we estimated that the risk premium on sterling assets could increase by as much as 200 basis points.

• In turn, that would knock around 30% off UK equities – on that basis, the declines to date have been small.

• Increased uncertainty means:

– A higher hurdle rate for investment

– More precautionary saving

• Both of these will depress aggregate demand.

UK equity prices

Index, 23/06/2016 = 100



… and a (much) weaker currency

• Last year, the UK ‘borrowed’ 5.4% of its annual income from the rest of the world. That was the largest peacetime deficit for at least 200 years.

• The UK is, as Governor Carney puts it, ‘relying on the kindness of strangers’.

• Sterling fell more than 6% on an effective basis on Brexit day – more than double the fall seen on Black Wednesday. It could fall much further from here, if the ‘Brexit’ vote opens the trapdoor under sterling.

2010199019701950193019101890187018501830

UK annual current account balance

Per cent of GDP


Sterling effective exchange rate

Index, 100 = day before sterling event


UK consumer confidence

Z score, situation over the next twelve months



Strong Q2 data a statistical curiosity?

• The preliminary estimate of growth in 2016 Q2 came in at 0.6% – in line with our own forecast.

• But given the outcome of the referendum, this could prove to be little more than a statistical curiosity.

• The fall in the confidence of UK households about their own financial situation last months was the sharpest since July 2008, in the teeth of the ‘Great Recession’.

Survey-based and official data that will cast light on the UK economy post-referendum

Date of publication*

Release Period

28/07/2016

29/07/2016

01/08/2016

02/08/2016

03/08/2016

04/08/2016

04/08/2016

10/08/2016

16/08/2016

19/08/2016

18/08/2016

25/08/2016

26/08/2016

Nationwide Housing Prices

Gfk Consumer Confidence

Markit/CIPS Manufacturing PMI

Markit/CIPS Construction PMI

Markit/CIPS UK Services PMI

MPC Policy Meeting

New Vehicles Registration

BoE Agents’ Summary of Business Conditions

CPI Inflation

CBI Industrial Trends

Retail Sales

CBI/Grant Thornton Service Sector Survey

Nationwide Housing Prices

July

July

July

July

July

August

July

August

July

August

July

Q3

August

* Where dates of publication are available, the first date in the publication window has been used.


• In our central scenario, a recession is avoided – just. A further 10% fall in sterling cushions the blow. The depreciation means that inflation climbs sharply over the next twelve months, moving into letter-writing territory.

• In our risk scenario, the negative shock to demand is larger, and there is less of an offset from a weaker pound. The pick-up in inflation is much smaller here.

Slower growth and higher inflation

UK GDP

Four-quarter percentage changes


UK inflation




Higher rates ruled out until the early 2020s

• Following a speech by Governor Carney in early July promising a package of measures, the MPC unexpectedly sat on its hands at the mid-July meeting.

• Most members now expect a loosening in August, but it is unclear what form that will take.

• We see a good chance of more QE. This may involve an element of ‘anti twist’. There is a chance, too, of corporate bond purchases.

• In our central scenario, there is one further cut in Bank Rate before the end of the year. Though it is possible that the MPC has decided – rightly in our view – that there is little to be gained from pushing Bank Rate even lower.

UK ten-year government bond yield

Per cent


UK policy rate expectations

Per cent



Even so, housing valuations to be tested

• Our UK housing market model suggests that current valuations are sustainable, but only if key drivers stay broadly where they were at the start of the year.

– So no increase in interest rates, no reduction in the supply of credit, no increase in the risk premium demanded by investors, and no economic wobbles.

• We find that just 10% of the 70% rise in the house-price-to-income ratio since 2000 reflects tighter supply. The vast majority reflects the move towards near-zero interest rates.

• The Bank of England is rightly concerned that, with so many buy-to-let investors in the market, any correction may be rapid.

Uk house price to income ratio

Ratio


Buy-to-let mortgage

Share of BTL+FTB, per cent



Price falls on the cards

• ‘Optimistic’ takes our central forecast for income growth, but with no increase in risk premia, and no tightening of mortgage supply.

• ‘Central’ is as above, but with a 100 basis point increase in the risk premium on residential property.

• ‘Pessimistic’ has our risk forecast for income growth, a 200 basis point increase in the risk premium on residential property, and tighter mortgage supply.

UK house prices



UK housing market and home-builder equities

Twelve-month percentage changes


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by fathom consulting at the on 2nd august 2016 · cushions the blow. the depreciation means that...

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