Roger Martin-Fagg Behavioural Economist ECONOMIC UPDATE
Sponsored by
Mainstream vv Behavioural Economists
Economic man
Emotional man
Rational
Instinctive
20%
80%
System 2
System 1 Daniel Kahneman Thinking fast, Thinking slow 2011
Entrepreneurship: The triumph of will over rational thought
Brunel was told this bridge would never stay up in 1836!
All modern economies experience positive feedback loops and are inherently unstable The systemic response is driven by human emotion Almost impossible to predict
It is best to be broadly right, rather than precisely wrong!
THE DEFINITION OF VALUE ADDED SALES REVENUE subtract ALL PAID INVOICES
= PROFIT AFTER TAX AND INTEREST
+
WAGES AND SALARIES
This is Nominal Gross Domestic Product (GDP) 65-90% produced by businesses employing fewer than 200 people in most countries.
SHORT RUN ECONOMIC ACTIVITY is driven by the flow of spending
MONEY 95% manufactured by commercial banks
X
multiplied by
VELOCITY Determined by interest rates, the media, the weather, house prices but above all CONFIDENCE
=
NOMINAL GDP
Banks manufacture money when they make a loan(bank credit)and can destroy money when a loan is paid down.
UK broad money growth consistent with 2.0% growth in GDP and 1.5% inflation
16
Bank of England
UK focussed company share prices have fallen significantly
Sources: Bloomberg, Thomson Reuters Datastream and Bank calculations. (a) Companies are categorised using annual financial accounts data on their geographic revenue breakdown. UK domestically focused companies are defined as those generating at least 70% of their revenues in the United Kingdom.
Mortgage approvals for house purchase and housing transactions
Sources: Bank of England and HM Revenue and Customs. (a) Number of residential property transactions for values of ÂŁ40,000 or above.
Global 10 year money at record lows
Sources: Bloomberg and Bank calculations. (a) Zero-coupon instantaneous forward rates derived from government bond prices. (b) An estimate based on French and German government bond prices.
RICS housing market indicators suggest market softening
Source: Royal Institution of Chartered Surveyors. (a) Net percentage balance of respondents reporting that they expect prices to rise over the next three months.
Low interest rates maintain affordability
UK household debt to income
UK House sales volumes
London av. price nearly 4 times NE
ÂŁ129,750
5.3x av salary
ÂŁ484,716 15x
House prices drive perceived wealth and spending
Sources: Halifax/Markit, Nationwide, ONS and Bank calculations. (a) House prices are an average of the Halifax and Nationwide measures. Nationwide house price data have been seasonally adjusted by Bank staff. (b) Chained-volume measure. Includes non-profit institutions serving households. Data available up to 2016 Q1.
The next 3 years economic performance will be determined by the Balance of Payments
A structural deficit has to be financed by stable long run capital inflows
Brexit puts these at risk
The wider current account deficit since mid-2011 has mainly been due to falling returns on overseas investments. Currently a record deficit. It requires 28Bn of financing per quarter
Commercial real estate is a long term capital inflow
Sources: The Property Archive and Bank calculations. (a) Data are non seasonally adjusted.
Big bulge of oldies over next 20 years: we need young workers
If we take net immigration down below 130,000 per annum the retirement age will have to go to 70 asap The pensions budget is ÂŁ156 bn, 21% of Govt spend and rising rapidly
Net migration has supported labour supply: we need 130,000 pa to compensate for ageing population. 377 of which 282 non-EU
16
Source: Bank of England Source: ONS International Passenger Survey. (a) Rolling four-quarter data. Data are half-yearly up to December 2011, and quarterly thereafter.
The Economic reality of the UK Since 1985 our balance of payments deficit has been financed by stable long term inward investment, 50% from EU companies If this investment falls away the following will happen: weaker currency higher inflation higher interest rates lower growth
UK Real GDP forecast per annum
4%
remain
3%
2.5% 2%
inflation and interest rates
WTO deal
rise above expectations
1% 2013
-1%
2014
2015
2016
2017
2018
2019
2020 2021
Conclusions There will not be a repeat of 2008 Oil will stay around $50 The UK will grow at 2.2% until 2019 but may experience a mild recession in 2020 The Eurozone should progress with Ireland and Spain outperforming the average of 1.8% Money will never be cheaper
Average house prices will grow around 3-5% London top end prices will be determined by the exchange rate: a further weakening will prevent a crash UK Housebuilders will enjoy good returns as they draw down their 600,000 plot land bank The risk is beyond 2019 with average house price falls in prospect and controlled immigration reducing labour supply
Sponsored by