uk economic outlook€¦ · 2007 q3 2008 q3 2009 q3 2010 q3 2011 q3 2012 q3 2013 q3 2014 q3 2015 q3...

UK Economic Outlook

July 2017

www.pwc.co.uk/economics

PwC

Global outlook

UK economic trends and prospects

UK housing market outlook

‘Nowcasting’ current GDP growth

Contents

1

2

3

2

July 2017UK Economic Outlook

4

PwC

Global growth in 2017 should be slightly stronger than in 2016

Source: PwC main scenario

Key

= % GDP growth in 2017

Global (MER) 2.9%

Global (PPP) 3.4%

Eurozone 1.6%

3


France

1.5

Mexico

1.5

US

2.2

Spain

2.3

UK

1.5Germany

1.5

Canada

2.0

Russia

1.1

Greece

1.6

Italy

1.0Japan

1.0

South Africa

0.9Brazil

0.4

Australia

2.7

China

6.5India

7.3

Ireland

3.6

Country

x.x

UK economic trends and prospects

PwC

Growth in UK services has been strong since the recession, but manufacturing and construction have lagged behind

Source: ONS

5


70

75

80

85

90

95

100

105

110

115

120

2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3

Index (Q1 2007 = 100)

Figure 2.1: Sectoral output and GDP trends

Services GDP Manufacturing Construction

Services

GDP

Manufacturing

Construction

PwC

Growth in consumer spending and the services sector slowed in Q1 2017, contributing to weaker GDP growth

Source: ONS

6


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

Q1 Q2 Q3 Q4 Q1

2016 2017

% c

hange o

n p

revio

us q

uart

er

Figure 2.2: Trends in GDP, consumer spending and the services sector

GDP Consumer expenditure Services

PwC

Relatively strong post-Brexit trends in the services and manufacturing sectors have tailed off in recent months

Source: Markit/CIPS

7


30

35

40

45

50

55

60

65

2007 JAN 2008 JAN 2009 JAN 2010 JAN 2011 JAN 2012 JAN 2013 JAN 2014 JAN 2015 JAN 2016 JAN 2017 JAN

Figure 2.3: Purchasing Managers’ Indices of business activity

Above 50 indicates

Services

Manufacturing

Downward blipafter Brexit

vote

PwC

Concerns about Brexit have left sterling weak against the dollar and euro, pushing up UK import prices and inflation

Source: Bank of England

8


1.000

1.100

1.200

1.300

1.400

1.500

1.600

2016JAN

2016FEB

2016MAR

2016APR

2016MAY

2016JUN

2016JUL

2016AUG

2016SEP

2016SEP

2016OCT

2016NOV

2016DEC

2017NOV

2017MAR

2017MAR

2017MAY

2017JUN

Figure 2.4: US dollar and euro exchange rates against the pound

USD/£

EUR/£

PwC

Low levels of unemployment no longer pushing up UK wage growth due to low unionisation and a more flexible workforce

Source: Markit/CIPS

9


-5%

0%

5%

10%

15%

20%

25%

30%

35%

2% 4% 6% 8% 10% 12%

No

min

al

wag

e g

row

th

Unemployment rate

Figure 2.5: UK Phillips Curve shifts and flattens over time

1971-1992 1993-2007 2008-2016 Linear (1971-1992) Linear (1993-2007) Linear (2008-2016)

PwC

UK growth is likely to ease in 2017-18 due to Brexit-related uncertainty and slowing consumer spending growth

Source: ONS, PwC scenarios

Strong growth

Main scenario

Mild recession

10


-8%

-6%

-4%

-2%

0%

2%

4%

2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1

Figure 2.6: Alternative UK GDP growth scenarios Projections

PwC

London growth has slowed but remains above UK average -all regions projected to have positive but modest growth

Source: PwC analysis

11


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

London England South East South West UK EastMidlands

East Anglia North West North East Wales Yorkshire &Humberside

Scotland WestMidlands

N Ireland

Figure 2.7: PwC main scenario for output growth by region in 2017 and 2018

2017 2018

PwC

UK inflation heading above 3% later this year in our main scenario – but considerable uncertainties remain

High

inflation

Main

scenario

Low

inflation

Source: ONS, PwC scenarios

12


0%

1%

2%

3%

4%

5%

2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1

% change on a year earlier

Figure 2.8: Alternative UK inflation (CPI) scenarios

Inflation target = 2%

Projections

PwC

Real earnings growth is projected to remain negative as inflation picks up and wage growth stays subdued

Source: ONS, PwC analysis

13


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

% change p.a.

Figure 2.9: CPI inflation vs average earnings growth

CPI

Earnings

Projections

Real squeeze

PwC

Summary: UK economic trends and prospects

3

We project that London could remain the fastest growing UK region in 2017-18, but its pace of expansion is expected to slow significantly from earlier rapid rates. Other regions are projected to see average real growth in 2017-18 of around 1-1.5%, but we do not predict negative growth in any region in our main scenario.

1The UK economy grew by 2% in the year to Q1 2017, but the quarterly rate fell to 0.2%, primarily as a result of a softening in consumer spending and services growth.

2In our main scenario, we project UK growth to slow to 1.5% in 2017 and 1.4% in 2018. The UK would avoid recession in this scenario, although risks to growth are still weighted somewhat to the downside given the uncertainties associated with Brexit.

4Wage growth continues to be subdued despite the lowest unemployment rate since 1975. This suggests that the traditionally negative relationship between these two variables, as described in the Phillips Curve, may have broken down.

14


5Consumer price inflation is likely to rise above 3% later this year. This continues to be driven by the exchange rate depreciation since the Brexit vote, although this effect could start to fade later in 2018 if wage growth remains subdued.

UK Economic Outlook

PwC 15

July 2017

UK housing market outlook

UK Economic Outlook

PwC 16

July 2017

Our latest analysis of the UK housing outlook covers:

1. Recent housing market developments

2. The outlook for UK and regional house prices: updated projections to 2025

3. The impact of government housebuilding targets on these projections

4. Local housing market trends

UK Economic Outlook

UK Economic Outlook

PwC 17

July 2017

House price inflation did not react to Brexit as quickly as some expected, but has shown signs of slowing during 2017

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Mar06

Mar07

Mar08

Mar09

Mar10

Mar11

Mar12

Mar13

Mar14

Mar15

Mar16

Mar17

Year

-on

-yea

r %

ch

ange

EU

referendum

Figure 3.1. Annual rate of house price inflation

Source: ONS

UK Economic Outlook

PwC 18

July 2017

Transaction volumes appear to have suffered more from Brexit, but these effects are compounded by other factors such as stamp duty reform

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Mar06

Mar07

Mar08

Mar09

Mar10

Mar11

Mar12

Mar13

Mar14

Mar15

Mar16

Mar17

EU

referendum

Stamp duty

reform effective

Figure 3.3. Annual growth in UK housing transactions

Source: ONS

UK Economic Outlook

PwC 19

July 2017

In our main scenario, we project house prices to rise at a modest rate of 3.7% in 2017, but to continue to outstrip earnings growth in the medium term, averaging around 4%

-10%

-5%

0%

5%

10%

15%

20%

2000 2002 2004 2006 2008 2010 2012 2014 2017 2019 2021 2023 2025

% c

han

ge

on y

ear

earlie

r

Figure 3.4. UK house price inflation main scenario projection

Source: ONS house price index historical data, PwC projections

UK Economic Outlook

PwC 20

July 2017

An increase in housebuilding in line with government targets would be welcome, but might only reduce the average UK house price by around £5,000 in 2025

Table 3.3. UK house prices – the potential impact

of increase supply

Current trends would project 216,000 new homes a year by

2020. Increasing that to 250,000 a year would increase housing stock growth from 0.9% to 1.1% a year.

Government housebuilding targets: “a million homes by 2020 and half a million more by 2022”

Source: PwC analysis using the ONS house price index and DCLG new supply of housing

UK Economic Outlook

PwC 21

July 2017

We project that London’s house price growth will slow down significantly, to below the UK average, while the East and other southern English regions will remain stronger

0%

1%

2%

3%

4%

5%

6%

East ofEngland

Yorkshireand TheHumber

SouthWest

WestMidlands

London NorthWest

SouthEast

NorthEast

EastMidlands

Wales Scotland NorthernIreland

2017 2018

UK average 2017

UK average 2018

Figure 3.5. Projected house price inflation in UK regions 2017 and 2018

Source: PwC analysis based on ONS house price index

UK Economic Outlook

PwC 22

July 2017

In our low scenario, a more severe impact from Brexit on earnings growth and tighter credit conditions could see house price inflation average only around 1% in the medium term, but there are also upside possibilities

-10%

-5%

0%

5%

10%

15%

20%

2000 2002 2004 2006 2008 2010 2012 2014 2017 2019 2021 2023 2025

Baseline scenario High scenario Low scenario

Figure 3.6. Alternative UK house price inflation scenarios

Source: PwC analysis based on ONS house price index

UK Economic Outlook

PwC 23

July 2017

A quarter of all UK local authorities still have house prices below their pre-crisis 2007 peaks, with the sharpest shortfall being seen in Northern Ireland and the North East

Figure 3.7. Local authority areas where

house prices are still below pre-crisis peak

levels in 2007

Source: ONS/Land Registry; PwC analysis

UK Economic Outlook

PwC 24

July 2017

Since 2014, there has been a marked shift in the pattern of house price growth within the capital, as the outer boroughs saw much larger rises than their inner London boroughs

Figure 3.8. Relative cumulative house price

rises in London boroughs (2007-2014)

Figure 3.9. Relative cumulative house price

rises in London boroughs (2014-2017)


UK Economic Outlook

PwC 25

July 2017

The challenging affordability outlook in London has also seen housing demand, and therefore prices, grow faster in the commuter belt since the start of 2016

Figure 3.11. The fastest growing commuter towns and cities by house price growth (2016-2017)


UK Economic Outlook

PwC 26

July 2017

Summary: UK housing market prospects

1House prices in the UK were not impacted by the Brexit vote as quickly as some expected, but has weakened in early 2017. Transaction volumes appear to have suffered more, but these effects were compounded by other factors such as stamp duty reform.

3Whilst increasing homebuilding to the government’s target of 250,000 a year is welcome and might restrict future house price growth slightly, it is unlikely to provide a quick fix to the affordability problem given many past decades of under-supply.

2

We anticipate that the slowdown in the housing market will continue for the rest of 2017, yielding annual house price growth of only around 3.7%, down from 7% in 2016. This could be felt the hardest in London, where we project house price rises to slow to below the UK average in 2017-18.

4

There has been a structural shift in London’s housing market over the past few years as house price growth has moved outwards from the centre in light of growing unaffordability and stamp duty reform. We expect this trend to continue, with commuter belts around London seeing stronger house price growth than the capital.

UK Economic Outlook

PwC 27

July 2017

‘Nowcasting’ current GDP growth

UK Economic Outlook

PwC 28

July 2017

The ONS releases a preliminary estimate of GDP growth around a month after the end of each quarter….

Time

Month 1 Month 2 Month 3

Quarter ONS preliminary estimate of GDP

Month 4

Lag

Figure 4.1. Timeline of the preliminary ONS GDP data release

Source: ONS, PwC

UK Economic Outlook

PwC 29

July 2017

…and these preliminary ONS estimates are often revised significantly before the final estimate, though these revisions have declined since the 2008-9 crisis

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Q1

199

2

Q3

199

2

Q1

199

3

Q3

199

3

Q1

199

4

Q3

199

4

Q1

199

5

Q3

199

5

Q1

199

6

Q3

199

6

Q1

199

7

Q3

199

7

Q1

199

8

Q3

199

8

Q1

199

9

Q3

199

9

Q1

200

0

Q3

200

0

Q1

200

1

Q3

200

1

Q1

200

2

Q3

200

2

Q1

200

3

Q3

200

3

Q1

200

4

Q3

200

4

Q1

200

5

Q3

200

5

Q1

200

6

Q3

200

6

Q1

200

7

Q3

200

7

Q1

200

8

Q3

200

8

Q1

200

9

Q3

200

9

Q1

201

0

Q3

201

0

Q1

201

1

Q3

201

1

Q1

201

2

Q3

201

2

Q1

201

3

Q3

201

3

Q1

201

4

Q3

201

4

Q1

201

5

Q3

201

5

Q1

201

6

Q3

201

6

Ab

solu

te s

ize

of re

vis

ion (

% Q

oQ

gro

wth

)

Pre-crisis

average:

0.36%

Post-crisis average:

0.19%

2008-9 average 0.61%

Figure 4.2. The absolute size of revisions to UK GDP growth

Source: ONS, PwC

UK Economic Outlook

PwC 30

July 2017

Central banks and others have developed ‘nowcasts’ as more timely estimates of current GDP growth

Figure 4.3. Performance of UK nowcasting models

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

NIESR, 2009 (2001Q2 - 08Q4) Mitchell, 2009 (2001Q2 - 08Q4) ONS preliminary estimate(2001Q2-08Q4)

Bank of England, 2014 (2004Q1-13Q4)

RM

SE (

% Q

oQ

)

Relative to final GDP Relative to

preliminary GDP

Source: Mitchell (2009), Bank of England (2017), ONS, PwC

UK Economic Outlook

PwC 32

July 2017

2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017Q1

ONS Services index ONS Industrial production index ONS Construction index

ONS Retail sales index Nationwide House Price Index ONS Manufacturing Index

1

2

3

4

5

Sector output indices are strong predictors of GDP, but including other indicators, such as house prices, materially improves our ability to nowcast movements in GDP

Figure 4.5. Top 5 variables that impact our nowcasts over the past 4 years

Source: PwC

UK Economic Outlook

PwC 33

July 2017

Our nowcast suggests that GDP growth in Q2 2017 will continue to be sluggish at around 0.3% (QoQ)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

GD

P g

row

th (

% Q

oQ

)

Nowcast

Figure 4.6. UK GDP growth (% Q-on-Q) Q2 2013 – Q2 2017

Source: ONS, PwC

UK Economic Outlook

PwC 34

July 2017

This is driven by somewhat stronger growth in the services sector than in Q1 2017, offset by weaker production and construction sectors and house prices

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

ONS Servicesindex

ONS Industrialproduction

index

ONS RetailSales index

ONSNationwidehouse price

index

ONSConstruction

index

All othervariables

Q2 2017Nowcast

GD

P g

row

th (

% Q

oQ

)

+0.35% -0.06%

+0.02% -0.03%

-0.06%+0.03% +0.25%

Figure 4.7. A decomposition of our Q2 2017 GDP growth nowcast

Source: PwC

UK Economic Outlook

PwC 35

July 2017

Summary: Nowcasting current GDP growth

1Businesses and policy makers need to keep a constant watch on the UK economy, but the preliminary ONS estimate of GDP growth is released with a significant lag after the end of each quarter. This creates the need for more timely indicators of current economic activity.

3

To provide a more timely estimate of GDP in the UK we have built our own nowcastingmodel utilising machine learning techniques. Our analysis shows that sector output indices are strong predictors of GDP growth, but the inclusion of other indicators, such as house prices, materially improves our ability to predict movements in GDP.

2Nowcasting models can meet this need by utilising frequently released information to assess current economic activity. They are used across the globe, most notably by central banks including the Bank of England.

4

Our nowcasting model suggests that GDP growth in the second quarter of 2017 will continue to be sluggish at around 0.3% relative to the previous quarter. This is up very slightly from the ONS estimate of 0.2% in the first quarter of 2017 due to somewhat stronger growth in the services sector, offsetting weakness in the production and construction sectors. This suggests that the first half of 2017 will be the weakest six month period for UK GDP growth since 2012 during the Eurozone crisis.

Contacts for more information about this report

John Hawksworth (chief economist) – [email protected] / 0207 213 1650

Richard Snook (housing) – [email protected] / 0207 212 1195

Jonathan Gillham (nowcasting) – [email protected] / 0207 804 1902

Lucy Rimmington (economist) – [email protected] / 0207 804 5778

Jamie Durham (economist) – [email protected] / 0207 804 6898

Sam Hinds, Hugh Dance and George Mason also made important contributions to the report, as did Andrew Sentance, our senior economic adviser.

For more information on our Economics services or to access the full report, please see our website at:

http://www.pwc.co.uk/economics

http://www.pwc.co.uk/ukeo

This publication has been prepared for general guidance on matters of interest only, and does

not constitute professional advice. You should not act upon the information contained in this

publication without obtaining specific professional advice. No representation or warranty

(express or implied) is given as to the accuracy or completeness of the information contained

in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its

members, employees and agents do not accept or assume any liability, responsibility or duty of

care for any consequences of you or anyone else acting, or refraining to act, in reliance on the

information contained in this publication or for any decision based on it.

© 2017 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to

the UK member firm, and may sometimes refer to the PwC network. Each member firm is a

separate legal entity. Please see www.pwc.com/structure for further details.

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