The changing shape of the economic recovery Dr Andrew Sentance PARC Breakfast Meeting London, 29th January 2015
Outline • The “New Normal” economy • Impact of lower oil prices • UK/global economic outlook
• Key implications for business
The world economy is expanding World GDP, US $ trillion (current prices) 120 101
100 82 80 62 60 40
33
20 0 2000
2008
2015
2019
Source: IMF The new normal
Slide 3
Global growth close to long-run trend % per annum change in world GDP and consumer prices 7 6 5 4
3 2 1 0 -1 2000
2002
2004
GDP growth
2006
2008
Inflation
2010
2012
2014
2016
1980-2010 GDP growth trend
Source: IMF World Economic Outlook, January 2015 update Slide 4
‌ but disappointing for the West average % GDP growth in first five years of recovery 6 5 4 3 2 1
0 UK
Advanced economies 1982-86
Source: ONS and IMF
1992-96
2010-14
Emerging and developing economies
The rise and rise of Asia Index of Industrial Production, Jan 1995 = 100 600
Advanced economies
Emerging Asia
Latin America
Africa & Middle East
Central & Eastern Europe
500 400 300 200 100 0 1995 Jan 1997 Jan 1999 Jan 2001 Jan 2003 Jan 2005 Jan 2007 Jan 2009 Jan 2011Jan 2013 Jan
Source: CPB Netherlands Bureau for Economic Policy Analysis
Global price volatility driving inflation % per annum increase in UK consumer prices 7% 6% 5% 4%
3% 2% 1% 0% -1% -2% -3%
Source: Office for National Statistics
Goods
Services
Pre-2007 drivers of western growth Cheap imports Confidence in policy regime
Easy money
Sustained growth
The new normal
Slide 8
What is the “new normal”? •2007/8 marked the end of a long and sustained expansion in UK and other Western economies
•Conditions which supported this period of growth have not returned •Prolonged structural readjustment is underway in response to financial crisis and East-West rebalancing •There are significant parallels with disappointing growth and volatility of the 1970s and early 1980s Slide 9
Two phases of the “New Normal” Current Phase: Continuation (into mid-2010s) of current pattern of disappointing growth in western economies, accompanied by financial volatility and high and fluctuating energy and commodity prices
“Next Growth Phase”: Clearer and more sustained growth dynamic emerges, perhaps starting in the second half of this decade. Likely to be based on a different set of technological, regulatory, geopolitical and financial drivers from the forces shaping the pre-2007 long expansion Businesses, policy-makers and investors need strategies to manage and survive through current phase, while building potential opportunities for the “Next Growth Phase”. Slide 10
GDP in US and Europe since 2000 Index of GDP, 2000 Q1 = 100 135
US
UK
Eurozone
130 125 120 115
110 105 100 95 2000 Q1
2002 Q1
2004 Q1
2006 Q1
2008 Q1
2010 Q1
2012 Q1
2014 Q1
Source: BEA, ONS and Eurostat The new normal Slide 11
Winners and losers since the financial crisis GDP in major Western economies, 2005=100 Canada
France
Germany
Italy
Spain
UK
US
120 115
110 105 100 95 90 2005
2007
2009
Source: IMF, ONS and PwC forecasts for 2014 and 2015
2011
2013
2015
UK economic growth in the “New Normal� % per annum change in non-oil GDP 6.0%
GDP growth
Ave GDP growth since 1970
4.0% 2.0% 0.0%
-2.0% -4.0% -6.0% -8.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: Average GDP growth rate since mid-2009 = 1.75%
Source - ONS
The new normal
Slide 13
New Normal - a return to the Old Normal? % annual change in GDP 4.0% 3.4%
3.5% 3.0%
2.8%
2.2% 2.0%
2.0%
1.0%
2.6% 2.6%
2.4%
2.5%
1.5%
3.1%
Historical average = 2.04% growth
2.1%
2.1%
1.8% 1.9%
1.5%
1.9%
2.0%
1.6%
1.4% 1.0% 0.7%
0.5% 0.0%
Source: Bank of England (1830-1949), ONS(1950-2013) and PwC forecasts The new normal
Slide 14
Impressive UK employment growth Index of employment, 100 = cyclical peak 77Q4-86Q2
104
88Q2-96Q4
06Q2-14Q4
102 100 98
96 94 92 -8
-6
-4
-2
0
2 4 6 8 10 12 14 16 18 Number of quarters from employment peak
20
22
24
26
Note: Private sector employment has risen by about 2.2m (9.3%) since end of 2009 Source: Office for National Statistics, Labour Force Survey The new normal
Slide 15
The real oil price since 1970 $/barrel at 2013 prices 140 Real oil price
1970-2013 average
120 100 80 60 40 20 0 1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
Source: BP Statistical Review of Energy, updated. 2015 is average for January to date The new normal
Slide 16
Oil consumption as share of world GDP % of nominal GDP at current prices & market exchange rates 8% Oil share of GDP
7%
1970-2013 average
6% 5%
4% 3% 2%
*
1% 0% 1970
1974
1978
1982
1986
1990
1994
Source: BP Statistical Review of Energy and IMF. The new normal
1998
2002
2006
2010
2014
*$50/barrel assumed for 2015 Slide 17
Energy/commodity prices highly cyclical % per annum change in energy/commodity prices & World GDP Agric & metals
40
Energy*
World GDP (RH scale)
6
30
5
20
4
10
3
0 2
-10
1
-20 -30
0
-40
-1 2003/4
Source: IMF
2005/6
2007/8
2009
2010/11
2012/13
*Average of oil, gas and coal prices The new normal
Slide 18
Big 3 global oil producers Oil production - million barrels/day 12
US
Russia
Saudi Arabia
11
10 9 8 7 6 2000
2002
2004
Source: BP Statistical Digest of Energy
2006
2008
2010
2012
Note: US, Russia & S Arabia produced 37% of global output in 2013 Slide 19
Why a low oil price helps world economy GDP of 10 largest net oil exporters/importers, $trn 50
Singapore Korea India Japan
45
40 35
China
30 25
Germany, France, Italy & Spain
20 15 10
US
5
Nigeria & Angola Russia
Venezuela Mid East*
0 Net oil importers Sources: US EIA and IMF
Net oil exporters * Iran, Iraq, Saudi, UAE, Kuwait & Qatar
Low inflation fuelling retail sales growth % per annum change in retail sales volumes (exc fuel) 8%
Retail sales exc motor fuel
1988-2013 average
7% 6% 5%
4% 3% 2%
1% 0% -1% -2% -3% 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Office for National Statistics Slide 21
UK growth and inflation after mid-80s oil price fall % annual increase in GDP and RPI
12%
GDP
Retail pices index
10% 8% 6% 4% 2% 0% -2% 1985 Q4
1986 Q4
1987 Q4
1988 Q4
1989 Q4
1990 Q4
Source: ONS The new normal
Slide 22
Global growth in 2015 – latest PwC forecasts
2.9
Canada
Russia
UK
2.5
-5.0
Germany
1.1
Ireland
3.3
Greece
France
US
3.2
1.9
0.8
Japan
Mexico
2.0
3.7
1.2
Italy
Spain
China
0.3
7.2 India
Key
x.x
7.0 = GDP growth in 2015
Brazil
South Africa
1.0 Source: PwC main scenario
Australia
2.6 2.3 Slide 23
Medium-term regional growth differentials % average growth, 2015-19, latest IMF forecasts Developing Asia Sub-Saharan Africa Middle East/North Africa Central & E Europe Latin America
Advanced economies Former Soviet Union
0%
1%
2%
3%
4%
5%
6%
7%
Source: IMF World Economic Outlook Slide 24
Growth in leading EU economies % growth in year to Q3 2014 in 10 largest EU economies Poland UK Sweden Spain Germany Netherlands
Belgium France Austria Italy
-1.0% -0.5% Source: Eurostat
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0% Slide 25
Inflation in leading EU economies % increase in consumer prices, Dec 2014 in 10 largest EU economies Austria UK Sweden France Germany Netherlands
Italy Belgium Poland Spain
-1.5% Source: Eurostat
-1.0%
-0.5%
0.0%
0.5%
1.0% Slide 26
UK economic outlook % per annum growth 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0%
97-07 ave
2008
2009
2010
2011
2012
GDP
Consumer spending
Source: Office for National Statistics and PwC Forecasts
2013
2014
2015 2016-20
Vacancies above pre-crisis peak Total number or reported vacancies, thousands 750
Vacancies
2001-08 average
700 650
600 550 500 450
400 2001 Q2
2003 Q2
2005 Q2
2007 Q2
2009 Q2
2011 Q2
2013 Q2
Source: ONS Labour Market Statistics Slide 28
Rising capacity constraints and skill shortages % manufacturing firms reporting capacity/skills as constraint on output 35
Capacity constraints
30
25 20 15 10 5
0
Source: CBI Industrial Trends Survey
Skill shortages
Market interest rate expectations Expected path of UK, US and euro rates, 2015-2017 2.50
UK
US
Euro
2.00
1.50
1.00
0.50
0.00
-0.50 Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
Apr 16
Jul 16
Oct 16
Jan 17
Apr 17
Jul 17
Oct 17
Source: Bank of England Inflation Report, November 2014 New Normal
Slide 30
Economic implications for 2015 Economic growth - good but not spectacular Very low inflation, but deflation fears exaggerated Skill shortages and wage pressures building
Political uncertainty in UK/Europe Interest rates rising in UK/US, reinforcing £/$ rise vs euro The new normal Slide 31
How should businesses respond? Look for growth opportunities in Asia, Africa and better performing European economies Use technology and innovation to drive competitive advantage Focus on business flexibility and adaptability Prepare for rising interest rate environment Develop strategies for managing in a tighter labour market Slide 32
Andrew’s contact details Twitter: @asentance Blogs: http://pwc.blogs.com/economics_in_business/ and http://andrewsentance.com/the-hawk-talks/
PwC