Global & UK Macroeconomic Outlook

5th February 2014

Andrew Goodwin

agoodwin@oxfordeconomics.com

2013 was much better than expected

-4.0

1.8

0.9

0.0

1.0

-6

-5

-4

-3

-2

-1

0

1

2

3

2009 2010 2011 2012 2013

GB13

UK: GDP % year

Source : Oxford Economics

2013 was much better than expected

-4.0

1.8

0.9

0.0

1.0

-5.2

1.71.1

0.3

1.9

-6

-5

-4

-3

-2

-1

0

1

2

3

2009 2010 2011 2012 2013

GB13

GB14

UK: GDP % year

Source : Oxford Economics

PMIs suggest 2013 may have been even better

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 201335

40

45

50

55

60

UK: GDP vs composite PMI% quarter

Source : ONS/CIPS/Markit

% balance

GDP growth (LHS)

Composite PMI (RHS)

The recovery has been horribly unbalanced

-1.0

-0.5

0.0

0.5

1.0

1.5

Consumerspending

Investment Govt.consumption

Inventories Net trade

UK: Contributions to GDP growth, 2013%pts

Source : Oxford Economics

Other

Residential

Business

Where do we go from here?

Limited room for consumers to further reduce the savings ratio…

More confident consumers have been saving less

0

1

2

3

4

5

6

7

8

9

10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Savings ratio% of household disposable income

Source : ONS

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

2007 2008 2009 2010 2011 2012 2013 2014

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

UK: Consumer confidence & unemployment

Confidence, % balance

Source : Gfk NOP / ONS

Consumer confidence(LHS)

Unemployment(RHS)

ILO unemployment rate, % (inverted)

Where do we go from here?

Limited room for consumers to further reduce the savings ratio…

…but prospects for real wages are much improved

Skills shortages will boost wage pressures…

35

40

45

50

55

60

65

70

75

80

85

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: BCC survey - recruitment difficulties% of firms

Source : BCC

Manufacturing

Services

…allowing spending power to steadily improve

-5-4-3-2-101234567

2002 2004 2006 2008 2010 2012 2014 2016

% year

CPI inflation

Source: Oxford Economics

Average earningsForecast

UK: Earnings & inflation

Bank Rate to remain at 0.5% until mid-2015

0

1

2

3

4

5

6

2002 2004 2006 2008 2010 2012 2014 2016 2018

UK: Interest rates%

Source : Oxford Economics

Bank Rate

10-year gilt yield

Forecast

Where do we go from here?

Limited room for consumers to further reduce the savings ratio…

…but prospects for real wages are much improved

Housing should remain supportive without prices entering bubble territory (outside of London)

Rising supply should keep a lid on house prices

150

200

250

300

350

400

450

500

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017-20

-10

0

10

20

30

Source: Oxford Economics

000's

House prices(RHS)

Housing turnover(LHS)

% changeUK: House prices and transactions

F'cast

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Construction orders - new housing£bn, 2005 prices

Source : ONS

Where do we go from here?

Limited room for consumers to further reduce the savings ratio…

…but prospects for real wages are much improved

Housing should remain supportive without prices entering bubble territory (outside of London)

Increasing signs that firms are planning to ramp up investment plans

Firms have continued to add to cash piles…

27

28

29

30

31

32

33

34

35

2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Business investment£bn, 4QMA

Source : ONS

22

23

24

25

26

27

28

29

30

31

2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: PNFC deposits% of GDP, 4QMA

Source : ONS

…but now confidence seems to be improving

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

1996 1998 2000 2002 2004 2006 2008 2010 2012Source: BCC

% balance

UK: Confidence in profitability

Service sector

Manufacturing sector

-40

-30

-20

-10

0

10

20

30

40

1996 1998 2000 2002 2004 2006 2008 2010 2012Source: BCC

% balanceUK: Investment intentions

Service sector

Manufacturing sector

Where do we go from here?

Limited room for consumers to further reduce the savings ratio…

…but prospects for real wages are much improved

Housing should remain supportive without prices entering bubble territory (outside of London)

Increasing signs that firms are planning to ramp up investment plans

Improving global outlook will support stronger export growth

Surveys and official export data have diverged

-50

-40

-30

-20

-10

0

10

20

30

40

1996 1998 2000 2002 2004 2006 2008 2010 2012Source: BCC

% balance

UK: Export orders

Service sector

Manufacturing sector

-20

-15

-10

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012 2013

UK: Non-oil goods exports%3m-on3m, yr ago

Source : ONS

EU

Non-EU

Stronger growth forecast in most markets…

1.9

-0.4

1.7

7.7

2.2

3.1

0.9

1.8

7.3

2.9

-1

0

1

2

3

4

5

6

7

8

US Eurozone Japan China World

2013

2014

World: GDP forecasts% year

Source : Oxford Economics

…so firm pickup in exports is in prospect

-16

-12

-8

-4

0

4

8

12

16

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017Source: Oxford Economics

Exports(non-fuel goods)

World trade

Forecast

UK: Exports & world trade% year

Faster and more balanced growth in prospect

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1997-2007

2012 2013 2014 2015 2016 2017 2018

Consumer spending InvestmentGovt. consumption InventoriesNet trade

UK: Contributions to GDP growth%pts

Source : Oxford Economics

UK forecast summary

2012 2013 2014 2015 2016 2017 2018Domestic Demand 1.2 1.8 2.2 2.2 2.3 2.2 2.2 Private Consumption 1.5 2.2 2.2 2.2 2.3 2.5 2.6 Fixed Investment 0.7 -2.2 6.5 6.3 6.5 5.9 4.3 Stockbuilding (% of GDP) 0.3 0.9 0.6 0.5 0.5 0.5 0.5 Government Consumption 1.6 0.4 0.8 -0.3 -0.9 -1.5 -0.7Exports of Goods and Services 1.1 1.1 3.1 4.0 5.2 5.3 4.6Imports of Goods and Services 3.1 0.8 1.9 3.1 4.0 4.2 3.7GDP 0.3 1.9 2.6 2.4 2.6 2.6 2.5Industrial Production -2.5 0.1 2.8 1.7 1.6 1.5 1.3CPI 2.8 2.6 1.7 1.8 1.7 1.9 2.0Current Balance (% of GDP) -3.7 -3.6 -2.9 -2.3 -1.8 -1.5 -1.2Government Budget (% of GDP) -6.3 -5.5 -5.3 -4.3 -3.2 -2.0 -0.8Short-Term Interest Rates (%) 0.84 0.50 0.53 0.66 1.57 2.61 3.65Long-Term Interest Rates (%) 1.91 2.44 3.11 3.30 3.59 4.01 4.48Exchange Rate (US$ per £) 1.59 1.56 1.57 1.53 1.55 1.53 1.52Exchange Rate (Euro per £) 1.23 1.18 1.21 1.23 1.27 1.27 1.27

Forecast for UK(Annual percentage changes unless specified)

Output gap is large and will close very slowly

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1990 1994 1998 2002 2006 2010 2014 2018

Oxford Economics

OBR

UK: Output gap% of potential output

Source : Oxford Economics, OBR

Risks to the outlook

How will companies respond to the improving outlook?

Will house prices spiral out of control?

Will real wages start to pick up as the recovery continues to gain momentum…

…and what about productivity?

Will the MPC hold its nerve?

Are we underestimating the likely recoveries in advanced economies?

Will the Eurozone avoid deflation?

Alternative scenarios for the UK economy

-8

-6

-4

-2

0

2

4

6

2002 2004 2006 2008 2010 2012 2014 2016 2018

BaselineGolden ageEurozone deflation

UK GDP forecasts for alternative scenarios% year

Source : Oxford Economics

Forecast