uk ahead of elections: political uncertainties, long- …...uk ahead of elections, second quarter...

Second Quarter 2015

UK ahead of elections: political uncertainties, long-term challenges

UK Ahead of Elections, Second Quarter 2015

Main messages

1

2

All parties are polling well short of a majority

The mix of fiscal and monetary policy could not be very different under

alternative governments…

… and will progressively tighten over the next parliament

Strong but slowing growth in 2015-16, but increasing concerns on the impact

of political uncertainties on activity

Several issues will shape the UK economy in the long term: The status in

EU, policies to increase productivity growth and competitiveness and policy

towards immigration

3

4

5


Section 1

Election prospects

Section 2

Economic prospects and policy proposals

Section 3

Long term issues and policies

Index


All parties are polling well short of a majority

Parliament election forecast: Projected number of seats, low and high Source: www.electionforecast.co.uk; 6 May 2015

281266

52

268

17

326

0

50

100

150

200

250

300

350

Conse

rvative

s

La

bo

ur

SN

P

Lib

era

l D

em

ocra

ts

DU

P

Oth

er

0

10

20

30

40

50

60

70

Labour Conservatives

With no possible two party coallition LibDem only

SNP only DUP or LibDem

LibDem or SNP Any one of three or more parties

Majority

Probability of governments after election Source: www.electionforecast.co.uk; 6 May 2015

Even natural coalitions (Con+LibDem or Lab+SNP) could fall short of a majority

A distinct possibility is minority government with bills passed on case-by-case basis

http://www.electionforecast.co.uk/

http://www.electionforecast.co.uk/


Section 1

Election prospects

Section 2


Section 3


Index


Drivers of growth

Slowdown in EM and China

Uncertainty on public policies

Low productivity

Sterling pound appreciation. Other CB’s monetary policy Oil price shock is positive as it is

mostly supply-driven

Strong labour market and consumer confidence

Eurozone momentum

Still supportive economic policies in 2015…

… but tighten tightening in coming years


The economic momentum is easing somewhat

Confidence indicators provide mixed signals (strong PMI’s, but EC confidence is slowing)

GDP growth in 1Q15 slows sharply to 0.3% QoQ, driven by weak services

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Ma

r-1

0

Jun-1

0

Sep

-10

Dec-1

0

Ma

r-1

1

Jun-1

1

Sep

-11

Dec-1

1

Ma

r-1

2

Jun-1

2

Sep

-12

Dec-1

2

Ma

r-1

3

Jun-1

3

Sep

-13

Dec-1

3

Ma

r-1

4

Jun-1

4

Sep

-14

Dec-1

4

Ma

r-1

5

ESI Industry Consumer Services

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Q2

-13

Q3

-13

Q4

-13

Q1

-14

Q2

-14

Q3

-14

Q4

-14

Q1

-15

Agriculture Production Construction Services GDP (% QoQ)

GDP contributions to the QoQ percentage change Source: ONS and BBVA Research

European Commission confidence survey (standardised) Source: Eurooean Commission and BBVA Research


Strong job creation and incipient wage increases…

Job creation relatively strong, with composition changes towards more

productive workers

Incipient signs of wage increases, and upward pressures in the pipeline

Earnings growth and vacancy ratio Vacancy ratio: number of unemployed people per vacancy Source: ONS and BBVA Research

Employment (% QoQ) Source: Eurooean Commission and BBVA Research

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

Employees Full-time Employees Part-time

Self-employed Full-time Self-employed Part-time

Total Employment

-4

-3

-2

-1

0

1

2

-4

-2

0

2

4

6

8

Ja

n-0

5

Jun-0

5

No

v-0

5

Ap

r-0

6

Se

p-0

6

Fe

b-0

7

Ju

l-0

7

De

c-0

7

Ma

y-0

8

Oct-

08

Ma

r-0

9

Au

g-0

9

Ja

n-1

0

Ju

n-1

0

No

v-1

0

Apr-

11

Se

p-1

1

Fe

b-1

2

Ju

l-1

2

De

c-1

2

Ma

y-1

3

Oct-

13

Ma

r-1

4

Au

g-1

4

Jan-1

5

Average weekly earnings private sector (3m/y)

Vacancy ration (annual difference inverted, RHS)


… along with very low inflation that should boost household’s real incomes

Sharp decline in inflation due to the fall in oil prices and the appreciation of the pound

Households’ diposable income is increasing, while strong confidence results

in a low saving ratio

Households’ disposable income and savings Source: ONS and BBVA Research

Inflation and its components (y-o-y) Source: ONS and BBVA Research

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-1

4

Fe

b-1

4

Ma

r-1

4

Apr-

14

Ma

y-14

Jun-1

4

Jul-1

4

Aug

-14

Sep

-14

Oct-

14

Nov-1

4

Dec-1

4

Jan-1

5

Fe

b-1

5

Ma

r-1

5

Energy Unprocessed food

Services Nonenergy industrial goods

Processed food Other

0

2

4

6

8

10

12

14

-3

-2

-1

0

1

2

3

4

5

Q1

-05

Q3

-05

Q1

-06

Q3

-06

Q1

-07

Q3

-07

Q1

-08

Q3

-08

Q1

-09

Q3

-09

Q1

-10

Q3

-10

Q1

-11

Q3

-11

Q1

-12

Q3

-12

Q1

-13

Q3

-13

Q1

-14

Q3

-14

Real household disposable income (% YoY)

Saving ratio (%, RHS)

2-quarters m. average real HH disposable income


Productivity remains very low, increasing BoE’s concerns about future price pressures

Produtivity fails to take off… … while spare capacity is being absorbed

Output and unemployment gap (%) Source: OECD

Productivity (% YoY) Source: ONS and BBVA Research

-8

-6

-4

-2

0

2

4

6

Q1

-96

Q4

-96

Q3

-97

Q2

-98

Q1

-99

Q4

-99

Q3

-00

Q2

-01

Q1

-02

Q4

-02

Q3

-03

Q2

-04

Q1

-05

Q4

-05

Q3

-06

Q2

-07

Q1

-08

Q4

-08

Q3

-09

Q2

-10

Q1

-11

Q4

-11

Q3

-12

Q2

-13

Q1

-14

Q4

-14

Prodution

Employment (inverted sign)

Productivity

Average productity before 2008 crisis

-5

-4

-3

-2

-1

0

1

2

3

4

5

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

Output gap Unemployment gap


Demand prospects, reducing spare capacity, along with easing financial conditions should boost investment

Capacity utilization above historical average, while new orders increase

Very low interest rates support credit demand, but deleveraging continues

-60

-50

-40

-30

-20

-10

0

10

20

30

70

75

80

85

Ma

r-0

7

Aug

-07

Jan-0

8

Jun-0

8

Nov-0

8

Apr-

09

Sep

-09

Fe

b-1

0

Jul-1

0

Dec-1

0

Ma

y-11

Oct-

11

Ma

r-1

2

Aug

-12

Jan-1

3

Jun-1

3

Nov-1

3

Apr-

14

Sep

-14

Fe

b-1

5

Capacity utilization New orders (RHS)

350

370

390

410

430

450

470

490

-15

-10

-5

0

5

10

15

20

Sep

-11

Nov-1

1

Jan-1

2

Ma

r-1

2

Ma

y-12

Jul-1

2

Sep

-12

Nov-1

2

Jan-1

3

Ma

r-1

3

Ma

y-13

Jul-1

3

Sep

-13

Nov-1

3

Jan-1

4

Ma

r-1

4

Ma

y-14

Jul-1

4

Sep

-14

Nov-1

4

Jan-1

5

Lending (sa, % 3m/3m) Repayments (sa, % 3m/3m)

Stock credit (GBP bn, RHS)

Capacity utilization and new orders Source: European Commission and BBVA Research

Non-financial corporations: lending, repayments and credit stock Source: BoE and BBVA Research


Export prospects improve despite the sharp appreciation of the pound

The eurozone recovery more than offsets slowing growth in emerging countries

Real appreciation of the pound despite depreciation vs de the USD

Exchange rates Source: ONS and BBVA Research

Exports to EU and non-EU countries (% QoQ) Source: ONS and BBVA Research

-25

-20

-15

-10

-5

0

5

10

15

Q1

-05

Q3

-05

Q1

-06

Q3

-06

Q1

-07

Q3

-07

Q1

-08

Q3-0

8

Q1

-09

Q3

-09

Q1

-10

Q3

-10

Q1

-11

Q3

-11

Q1

-12

Q3

-12

Q1-1

3

Q3

-13

Q1

-14

Q3

-14

EU Non-EU Total

60

70

80

90

100

110

120

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Ma

r-0

5

Au

g-0

5

Ja

n-0

6

Ju

n-0

6

No

v-0

6

Apr-

07

Se

p-0

7

Fe

b-0

8

Ju

l-0

8

De

c-0

8

Ma

y-0

9

Oct-

09

Ma

r-1

0

Au

g-1

0

Ja

n-1

1

Ju

n-1

1

No

v-1

1

Ap

r-1

2

Se

p-1

2

Fe

b-1

3

Jul-1

3

De

c-1

3

Ma

y-1

4

Oct-

14

Ma

r-1

5

EUR/GBP USD/GBP EER (RHS)


Projections: Strong growth in 2015-16, but slowing due to lower support from fiscal and monetary policy

2013 2014 2015 (f) 2016 (f)

Activity

REAL GDP (% YoY) 1.7 2.8 2.5 2.3

Private consumption 1.7 2.5 2.4 2.2

Public consumption -0.3 1.7 0.2 -0.4

Investment 3.4 7.8 4.5 5.6

Domestic demand (contr. %) 1.7 3.3 2.3 2.2

Exports 1.5 0.6 4.9 5.0

Imports 1.4 2.2 4.0 4.4

Net exports (contr. %) 0.0 -0.5 0.2 0.1

External sector

Current account balance (% GDP) -4.5 -5.5 -5.1 -4.8

Public finances

General Govt. Balance (% GDP) -5.7 -5.7 -4.4 -3.4

Prices

CPI, % avg. 2.6 1.5 0.3 1.7

Strong domestic demand will continue to be the main support for growth…

… while net exports will again make a small positive contribution

Domestic demand, the pace of inflation and the impact of Fed decisions on the

pound will determine the date of the first hike of BoE Bank Rate (we expect 1Q16)

Projections of main variables (%) Source: BBVA Research


Accommodative monetary policy, but a slow tightening cycle is in the pipeline

0

1

2

3

4

5

6

Jan-0

7

Jun-0

7

Nov-0

7

Apr-

08

Sep

-08

Fe

b-0

9

Jul-0

9

Dec-0

9

Ma

y-10

Oct-

10

Ma

r-1

1

Aug

-11

Jan-1

2

Jun-1

2

Nov-1

2

Apr-

13

Sep

-13

Fe

b-1

4

Jul-1

4

Dec-1

4

Ma

y-15

Oct-

15

Fed QE ECB QE BoE QE Fed ECB BoE

GBP200bn GBP75bn + GBP50bn + GBP50bn

Impact of asset

purchases of 1% of

GDP

US GDP: 0.1/ 0.6pp

US CPI: 0.3/0.6pp

UK GDP: 0.1/ 0.2pp

UK CPI: 0.1/0.3pp

* Full implementation Source: ECB , Weale et all. March 2015, and BBVA Research

QE as % of GDP

US: 24.4%

UK: 20.9%

Eurozone: 10.9%*

Monetary policy stance: offical interest rate and QE programmes Source: OECD and BBVA Research

QE size and its impact on growth and inflation


Soft and gradual fiscal consolidation after the strong fiscal impulse over the 2008 crisis

Fiscal impulse in 2008-9 and consolidation upto 2014 (pp) Source: OECD and BBVA Research

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Eurozone UK US

Impulse Consolidation

Cumulated GDP change (%) Source: Eurostat, ONS, BEA and BBVA Research

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

2008-09 2010-14

Eurozone UK US


All parties plan further austerity…

Conservative Labour LibDem

Fiscal rules Overall budget surplus by the

end of next parliament

Surplus on current budget

(excluding capital account) by the end

of next paliament

Surplus on cyclical-adjusted

current budget by 2017-18

Personal taxes

Raise personal tax free

allowance to £12,500 by 2020-21

and ensure no-one earning less

than £50,000 is paying tax at the

40% rate

Reintroduce 10% starting rate of

income tax

Increase top rate from 45% to 50%

Abolish married couple’s tax

allowance

Raise personal tax free

allovance to £12,500 by 2020-21

Increase capital gains tax

Wealth taxes

Raise inheritance tax threshold

to ensure inheritance tax only

payd by “rich”

Introduce a “mansion tax” on homes

valued above £2m (aiming to raise

£1.2bn)

Introduce a “mansion tax” on

homes valued above £2m,

collected through additional tax

layers (aiming to raise £1.7bn)

Corporate taxes Clapdown on tax avoidance

(aiming at raising £5bn)

Reverse cut in coportation tax from

21% to 20%. Use proceeds to reverse

rise in business rates planned for April

2015 and freeze rates in 2016

Clampdown on tax avoidance

(aiming at raising £6bn)

Government

spending

Raise £1.2bn through welfare

savings, meaning smaller

departamental cuts than those

currently assumed

Increase spending on the NHS Spend £8bn a year on NHS

Source: Oxford Economics


… especially next year to meet the fiscal mandate (zero deficit in 2017-18 or 2018-19); but at different paths

Public deficit plans including net investment (%GDP) Source: IFS and BBVA Research

Cyclically-adjusted current budget deficit plans Source: IFS and BBVA Research

-1

0

1

2

3

4

5

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Cons Lab LibDem SNP

-2

-1

0

1

2

3

4

5

Fiscalmandate

Cons Lab LibDem SNP

Cyclical-adjusted current bugdet deficit

2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20


Public debt reduction, as the commitment to the supplementary target puts a brake on investment spending

Public sector net debt (% of GDP) Source: IFS

0

10

20

30

40

50

60

70

80

90

100

20

07-0

8

20

08-0

9

20

09-1

0

20

10-1

1

20

11-1

2

20

12-1

3

20

13-1

4

20

14-1

5

20

15-1

6

20

16-1

7

20

17-1

8

20

18-1

9

20

19-2

0

20

20-2

1

20

21-2

2

20

22-2

3

20

23-2

4

20

24-2

5

20

25-2

6

20

26-2

7

20

27-2

8

20

28-2

9

20

29-3

0

20

30-3

1

Conservatives; 0% annual borrowing post 2019-20Labour; 1.4% annual borrowing post 2019-20LibDem; 1% annual borrowing post 2019-20SNP; 1.4% annual borrowing post 2019-20

Public sector net investment at around 1.5% of GDP under all parties’ plans

Differences stem from how to finance public investment, or Conservatives want

to have no borrowing at all

All-time low bond yields could be used to finance public investment (long-run effects)


Section 1

Election prospects

Section 2


Section 3


Index


Looking beyond the crisis: the recovery has been poor in productivity growth

GDP per working age population (2000=100) Source: IMF, OECD and BBVA Research

Growth of Labour productivity, real GDP and total hours worked, 1997-2014 Source: The Conference Board Total Economy Database and BBVA Research

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

97

-06

07

-12

20

11

20

12

20

13

20

14

97

-06

07

-12

20

11

20

12

20

13

20

14

97

-06

07

-12

20

11

20

12

20

13

20

14

Eurozone UK US

Labor productivity Total hours worked Real GDP

100

110

120

130

140

150

160

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

UK US Japan Germany


Imbalances have yet to be corrected: appreciated currency, high current account and public deficits

-4-3-2-1012345

Public Debt (% GDP)

Public Deficit (% GDP)

Private Debt (% GDP)

Change on private credit (%GDP)

Housing market

Unemployment RateCurrent Account (% GDP)

Net InternationalInvestment Position (%

GDP)

Real Effective ExchangeRate (%)

Market share loss

Unit Labour Costs growth

Year 2014

Mean EA

Reino Unido

Below limits


Conservative Labour LibDem

Employment

Create two million new jobs

in order to achieve full

employment.

Provide three million new

apprenticeship positions.

Improve tax competitiveness.

Create one million “green”

jobs by 2030.

Raise national minimum wage

to £8 per hour.

Ban “exploitative” zero hours

contracts. Create more public

sector apprenticeships.

Expand apprenticeships and

develop national colleges for

vocational skills.

EU Hold referendum on Britain’s

renegotiated EU membership

by end of 2017

Enhance the UK’s influence in

a reformed Europe.

Reform of the EU bugdet, and

a shift away from agriculture

spending.

Remain in the EU.

Hold an in/out referendum if

there is a plan for “material

transfer of sovereignty” from

the UK.

Immigration

Migrants to wait four years

before they can claim certain

benefits or social housing.

No out-of-work benefits for

migrants or child benefit for

dependants living outside UK

Negotiate reform of EU

freedom of movement rules.

Reintroduce exit checks to

count cross-border flows.

Longer waiting periods for

out-of-work benefits.

Make welfare system more

contribution based.

Stop Child Benefit from being

sent abroad

Restore full entry and exit

border checks.

End indefinite detention for

immigration purposes.

Phase out child benefit for

children living outside the UK

Different policies on three key long-term issues

Source: Commerzbank


The EU referendum threatens to change the relationship with Europe (and the rest of world)

Exports share by region Source: ONS and BBVA Research

55.044.4

5.8

6.9

4.1

4.8

0

10

20

30

40

50

60

70

80

90

100

1998-00 2011-13

EA EU-EA

Western Europe - EU North America

Other OECD countries Oil exporting countries

Rest of the world

The EU remains as the main trading partner


In a context of loss competitiveness

Current account (% of GDP) Source: ONS and BBVA Research

-6

-5

-4

-3

-2

-1

0

1

2

3

4

19

70

19

74

19

78

19

82

19

86

19

90

19

94

19

98

20

02

20

06

20

10

20

14

Trade goods and services Income

Transfers Current account

FR

UK

CAN

JP

IT

USA

FINSWE

GR

DEN

PT

AT

IRL

GER

SP

NL

-30

-20

-10

0

10

20

30

-45 -40 -35 -30 -25 -20 -15 -10 -5 0

Ch

an

ge in

rela

tive e

xp

ort

pri

ces

Change in world export market share

World export shares and REERs (% 1999-2011) Source: Correa-López and Doménech (2012)

The UK has lost a large market share over the fisrt decade of the century

The current account has deteriorated recently due to the reversal of the income

account


Reversing open attitude towards immigration would reduce potential output growth

Projected population (% YoY) Source: Eurostat and BBVA Research

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

19

61

-70

19

71

-80

19

81

-90

19

91

-00

20

01

-10

20

11

-20

20

21

-30

20

31

-40

20

41

-50

20

51

-60

20

61

-70

20

71

-80

Observed Main scenario No migration

More than a half (54%) of the increase of population in 1991-2012 was due to the

direct contribution of migration

Any declines in the wages and employment of UK-born workers in the

short run can be offset by rising wages and employment in the long run

The fiscal impact of migration in 2007-2009 was positive (+0.46% of GDP, according to

the OECD, above the average)

Source: The Migration Observatory at the University of Oxford and OECD

Second Quarter 2015

UK ahead of elections: political uncertainties, long-term challenges

uk ahead of elections: political uncertainties, long- …...uk ahead of elections, second quarter...

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