Economic Update – January 2017 Roger Martin-Fagg – Behavioural Economist
Mainstream vv Behavioural Economists Economic man
Emotional man
Rational
Instinctive
20%
80%
System 2
System 1 Daniel Kahneman Thinking fast, Thinking slow 2011
80% of the time humans make choices based on System 1. ANCHORING: we use the first bit of information to make subsequent judgements RULE OF THUMB: a rough and ready workable approach based on little or no information CONFIRMATION BIAS: we seek out information which confirms our beliefs. 2/3 of Americans obtain their news from social media; Facebook, WhatsApp and Twitter create groups of like minded people which leads to herding.
Brexit Trump Italian referendum French President Dutch elections in March All the consequence of system 1 thinking
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) 50-90% produced by businesses employing fewer than 200 people in most countries. Circa 57% in UK.
SHORT RUN ECONOMIC ACTIVITY is driven by the flow of spending
MONEY 95% manufactured by commercial banks
X
multiplied by
VELOCITY
=
NOMINAL GDP
Determined by interest rates, the media, the weather, house prices but above all CONFIDENCE
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 2.5% growth in GDP and 3% inflation end 2017
16
Bank of England
Since 1982 in the UK the share of wages in added has fallen by 4 percentage points
Share of wages fell 5 percentage points in the USA
The pensions budget is ÂŁ156 bn, 21% of Govt spend and rising rapidly
The UK: big bulge of oldies over next 20 years: we need more young workers
this maintains our workforce
2016
COIB forecast 224,000 new recruits needed over next 3 years
40% of London construction labour force is from o’seas
Mortgage approvals for house purchase and housing transactions picked up in November 2016
Sources: Bank of England and HM Revenue and Customs. (a)
Number of residential property transactions for values of ÂŁ40,000 or above.
The UK current account
The goods and services trade deficit is around 36Bn pa The primary income is the net of dividends and rents received and paid from abroad, salaries repatriated deficit 18Bn pa The secondary income is transfers e.g. o’seas aid(£12Bn) pensions and winter fuel allowance to Spain membership of the EU(£13Bn), military bases abroad etc deficit 25Bn We need around 79Bn financing pa
The trade deficit in goods averages 10Bn a month, the surplus on services averages 7Bn per month
44% of UK financial exports are to the EU 35% of all insurance exports are to the EU Passporting rights will be replaced by equivalence: the EU will grant free access if the regulation in the country of origin is deemed of equal standard Our banking rules our tougher than the EU and solvency 2(insurance capital adequacy) is a global standard It will take a lot of time to agree but should be granted
UK trade with the EU as a % of total trade
The balance of trade in goods with biggest trade partners November 2016
Balance of Trade in services Q3 2016
Secondary income: transfers such as o’seas aid(12Bn) charitable donations, winter fuel allowance and pensions to Spain
A snap shot of the B of P 2015-16 Goods
(120)
Services
84
Primary
(18)
Secondary
(25)
Trading Account deficit
(79)
We need to attract ÂŁ79Bn a year in the form of inward investment to finance the deficit
Commercial Real Estate fell sharply first half 2016
long term Investment inflow
At least 30Bn pa of financing inflow
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:
weak pound
higher inflation
decline in affordability house prices fall recession
Real wages decline end 2017
17
18
UK Real GDP Scenarios
per 4% annum 3%
Soft Brexit ruled out Jan 17 2.5%
2% 1%
inflation and interest rates rise above expectations end 2018
WTO deal
2013 2014 2015 2016 2017 2018 2019 20202021
-1%
The situation at beginning of 2017 The UK purchasing power has dropped 20% 30% of our GDP is spent on imports Every 10% fall in sterling adds 1% to core inflation within 18 months Consumers are having a final fling (most of the growth in unsecured lending is car purchase) The Government is going for hard Brexit
The EU is the largest economy in the world . GDP per head of â‚Ź25 000 for its 500 million consumers. The EU is the world's largest trading block. The EU is the world's largest trader of manufactured goods and services. The EU is the top trading partner for 80 countries.
We are going for Hard Brexit If we cannot do a special deal we trade with the EU and the rest of the World under WTO rules The WTO currently has 164 members which between them are responsible for 95% of world trade. It is a negotiating forum for its members to create international trade rules, and to oversee how they put the rules into practice WTO membership consists of a balance of negotiated ‘rights’ (e.g. the right to be able to export to other countries) and ‘obligations’ (e.g. to limit restrictions on imports)
The EU currently has 600 trade negotiators who work on our behalf Deals exit with 50 countries, and talks are underway with another 30 According to the head of WTO the UK cannot simply ‘cut and paste’ the terms of its current membership (as part of the EU) and carry those terms over. At least some of these schedules will need to be rewritten, because leaving the EU will affect the EU’s own commitments to other WTO members
The UK’s new WTO terms of membership (its schedules) might need to be unanimously agreed by all 164 WTO members
The UK has a relatively strong diplomatic position, with a large network and aid budget, and good representation in many international organisations. It will be able to call in favours. Some aspects of the UK’s WTO terms of membership (its schedules) which could be agreed quickly include most of those covering trade in industrial goods. If the UK is happy to continue offering the 49 Least-Developed Countries (LDCs) duty and quota free access to its markets for all products except arms, as the EU already does, these countries may not oppose UK proposals.
The UK’s current WTO schedules (which apply to all EU members) specify tariff levels for more than five thousand categories of goods. From apples to zinc oxide.
Each of these agreements could, in principle, need to be re-visited and renegotiated, depending on policy decisions taken by the UK Government and the attitude taken by other countries. If the EU offers tariff free access to the UK it must offer the same to WTO members
BUT It is likely sterling will weaken to $1.10 (in order to finance our payments deficit) and inflation will be rising in 2018 by 5% Then interest rates will have to rise to circa 3-4% The recession will then begin in 2019 as house price inflation stalls and consumer spending collapses As at Nov 2017 UK plc purchasing power has fallen 20%
Exchange rates next 2 years Weak Euro, Strong Dollar Sterling? Depends on negotiations Difficult=weaken Going well=strengthen Averages for next 2 years. ÂŁ-$ 1.25 ÂŁ-Euro 1.20
Conclusion Currently the economy is performing well: real growth +2.3% But slow down beginning mid-2018 Recession or no recession will depend on the value of sterling weaker sterling=less growth Long run interest rates up 1% by 2018 and Bank rate will follow The Prime Minister cannot control markets nor the attitude of 27 EU member states
The threat to the EU that we become a low tax haven cannot be delivered
current budget deficit is ÂŁ80Bn 1p on the basic rate raises ÂŁ5Bn
You cannot control the outcome of the negotiations but you can ensure your business is DISTINCTIVE and COMPELLING
The Value Proposition weasel word free, simple, emotional value defined Ethos ( attitude and aspiration)
Distinctive
Compelling
Physical value eg delivery on time and to spec agreeable price easy to do business with etc
Emotional value eg the product or service improves the clients workplace, quality of work life, increases well-being etc
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