The economic and property outlook by Roger Bootle
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Accelerating success.
The economic and property outlook
by Roger Bootle
1. Agenda
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
Source: Thomson Datastream
• A slowdown in China?
• The United States faces the cliff.
• Will the Euro survive?
• How can the UK recover?
• The outlook for financial markets.
• The prospects for property.
2. Capital Economics China Activity Proxy and Official GDP (1994 – 2012)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
4
6
8
10
12
14
16
18
01 02 03 04 05 06 07 08 09 10 11 124
6
8
10
12
14
16
18 CE China Activity Proxy (latest = July)
Official GDP (latest = Q2, %)
Sources: CEIC, Thomson Datastream, Capital Economics
3. China Gross Government Debt (% of GDP) (2001 – 2011)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
55
60
65
70
75
55
60
65
70
75
01 02 03 04 05 06 07 08 09 10 11
Source: Capital Economics
4. Chinese Interest Rates (2005 – 2012) (Latest = August)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
5
6
7
8
9
5
6
7
8
9
2005 2006 2007 2008 2009 2010 2011 2012
Average 12m lending rate (CE est.)
Benchmark 12m lending rate
Sources: Thomson Datastream, Capital Economics
5. Chinese GDP (2005 – 2014) (Latest = Q2)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
Sources: CEIC, Thomson Datastream, Capital Economics
0
5
10
15
20
0
5
10
15
20
05 06 07 08 09 10 11 12 13 14
% q/q annualised (seas. adj., our estimates)
% y/y (official)
CE forecasts
2012: 7.6%2013: 8.0%
6. Exports (% of GDP) (2011)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
14
16
Emerging Europe
Emerging Asia
Latin America
MidEast and Africa
Exports to the euro-zone
Exports to the US
Sources: Thomson Datastream, Capital Economics
7. Change in U.S. Non-Farm Payroll Employment (000s) (Latest = August)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
50
100
150
200
250
300
0
50
100
150
200
250
300
Oct-10 Apr-11 Oct-11 Apr-12
Change in Payroll Employment
Three Month Average
Source: Thomson Datastream
8. The “Fiscal Cliff” ($bn)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
Source: Congressional Budget Office
$600
$221
$95
$18$65
$26
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
Total Bush Tax
Cuts
Payroll Tax
Cut
New Health
Taxes
Spending
Cuts
End
Unemploy. Ben.
9. Fiscal Cliff Summary
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
• Most likely scenario is that the “cliff” is averted.
• Fear of cliff contributes to weak growth this year.
• GDP unlikely to grow by more than 2% in 2013.
• Risks to growth lie on downside.
• Medium-term fiscal plan is needed.
10. US GDP (% q/q Annualised) (2009 – 2014) (Latest = Q2)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
-6
-4
-2
0
2
4
6
-6
-4
-2
0
2
4
6
2009 2010 2011 2012 2013 2014
Forecasts2012 = 2.0%
2013 = 2.0%2014 = 2.5%
Sources: Thomson Datastream, Capital Economics
11. U.S. Federal Net Debt (As a % of GDP) (1940 – 2022) (Latest = 2011)
Source: Congressional Budget Office
0
20
40
60
80
100
120
0
20
40
60
80
100
120
1940 1960 1980 2000 2020
CEForecast
12. Euro-zone Economic Sentiment Indicator & GDP Growth (1998 – 2012)
The Economic and Property Outlook By Roger Bootle
-7-6-5-4-3-2-10123456
6065707580859095
100105110115120125
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Euro-zone Economic Sentiment Indicator (LHS)
Euro-zone GDP (% y/y, RHS)
Source: Thomson Datastream
13. GDP (Q1 2008 = 100) (Latest = Q2 2012)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
80
82
84
86
88
90
92
94
96
98
100
80
82
84
86
88
90
92
94
96
98
100
2008 2009 2010 2011 2012
Portugal
Spain
Ireland
Greece
Source: Thomson Datastream
14. The Draghi Game-Changer?
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
• The latest of many attempts!
• Only deals with break-up risk in peripheral bond
yields.
• Peripheral countries have first to seek
assistance from EFSF/ESM.
• That will only come with stiff conditions. Spain
and Italy may find this difficult to accept.
15. The Deeper Politics
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
• Greece is as good as out.
• Euro-scepticism is rising is Germany, Holland,
Austria and Finland.
• Resentment against Germany in southern
Europe.
• Don’t count out the Bundesbank just yet.
16. Average GDP Growth (1999-2011) (% y/y)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Source: Thomson Datastream
17. A Bridge to Nowhere?
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
18. The future of the euro
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
• Badly conceived from the start.
• Requires fiscal and political union.
• This cannot work for the current membership.
• The euro should split into two - north and south.
• More likely, Greece will leave, later followed by
other countries.
19. Market Consequences
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
• Greek euro exit is in the market.
• Afterwards a period of optimism.
• The subsequent crisis would seriously hit
confidence.
• But unlike with the Lehman crisis, there is an
upside – the resumption of growth in Europe.
• The break-up of the euro is part of the solution,
not the problem.
20. GDP (Q1 2008 = 100) (Latest = Q2 2012)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
90
92
94
96
98
100
102
104
90
92
94
96
98
100
102
104
2008 2009 2010 2011 2012
US Germany
France Japan
UK
Source: Thomson Datastream
21. Contributions to Change in Real GDP (By Expenditure Component, %, Q1 2008 – Q1 2012)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
-4
-3
-2
-1
0
1
2
3
4
-4
-3
-2
-1
0
1
2
3
4
H'hold Spend
Gov't Spend
Invest Stocks Net Trade
UK Other G7
Source: Thomson Datastream
22. UK Consumer Confidence and Household Spending(1985 – 2012) (Latest = August)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
-6
-4
-2
0
2
4
6
8
10
-45
-35
-25
-15
-5
5
15
25
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
GfK composite balance of consumer confidence (LHS, adv. 6m)Real household spending (%y/y, RHS)
Source: Thomson Datastream
23. UK GDP (2007 – 2014) (Latest = Q2)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
-4
-3
-2
-1
0
1
2
3
-8
-6
-4
-2
0
2
4
6
07 08 09 10 11 12 13 14
% q/q (RHS)
% y/y (LHS)
Forecasts:2012 = -0.5%
2013 = +0.5%2014 = +1.5%
Forecasts
Sources: Thomson Datastream, Capital Economics
24. Public Sector Net Borrowing (12 Month Rolling Average, £bn, 2008/09 – 2012/13, Latest = July)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
Source: Thomson Datastream
0
20
40
60
80
100
120
140
160
180
0
20
40
60
80
100
120
140
160
180
08/09 09/10 10/11 11/12 12/13
Excluding transfer of Royal Mail
OBR 2012/13
25. Commodity Prices (Jan. 2000 = 100) (2000 – 2012) (Latest = 14th Sep.)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
00 01 02 03 04 05 06 07 08 09 10 11 12
Energy
Industrial Metals
Agriculturals
Source: Thomson Datastream
26. UK Average Earnings (2001-2014) (% y/y) (Latest = July)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
-3
-2
-1
0
1
2
3
4
5
6
7
-3
-2
-1
0
1
2
3
4
5
6
7
01 02 03 04 05 06 07 08 09 10 11 12 13 14
ForecastAverage
Source: Thomson Datastream
27. UK Consumer Price Inflation (%) (2006 – 2014) (Latest = July)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
Sources: Thomson Datastream, Capital Economics
0
1
2
3
4
5
6
0
1
2
3
4
5
6
06 07 08 09 10 11 12 13 14
Headline CPI inflation
Core CPI inflation
2% target
Forecast
28. Capital Economics Rate Expectations (%) (2000 – 2014)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
USEuro-zoneUKJapan
Capital Economics
Forecasts
Sources: Thomson Datastream, Capital Economics
29. UK 20 Year Gilt Yields & CPI Inflation (2000 – 2014)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
00 01 02 03 04 05 06 07 08 09 10 11 12 13 140
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
CPI Inflation (% y/y)
20-year gilt yield (%)Forecasts
Sources: Thomson Datastream, Bloomberg, CE
30. Outstanding Stock of Gilts (£bn) (2000 – 2014)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
250
500
750
1000
1250
1500
0
250
500
750
1000
1250
1500
00 02 04 06 08 10 12 14
Gilts held by the market
Gilts held by the Bank of England
Total gilt stock
Based on £500bn of QE and DMO projections for gilt issuance
Sources: Bank of England, Capital Economics
31. Different Measures of Money Supply (Sep 2011 = 100) (Latest = July)
The Economic and Property Outlook By Roger Bootle
90
100
110
120
130
140
150
160
170
90
100
110
120
130
140
150
160
170
Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12
M0
M4 ex.
Source: Thomson Datastream
32. US PE Ratio (Earnings 10 Year Average) (1881 – 2012) (Latest = August)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
1881 1901 1921 1941 1961 1981 2001
Historical Arithmetic Average = 16.4
Latest = 21.4
Sources: Shiller, Capital Economics
33. UK PE Ratio (Earnings 10 Year Average) (Datastream All Share) (1975 – 2012) (Latest = August)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
5
10
15
20
25
30
0
5
10
15
20
25
30
75 78 81 84 87 90 93 96 99 02 05 08 11
Geometric average since 1975 (14.7)
Latest = 12.0
Source: Thomson Datastream
34. UK All-Property Yields and UK 10-Year Gilt Yields (%) (1989-2014) (Latest = July)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
89 91 93 95 97 99 01 03 05 07 09 11 13
Property initial yields
10-year gilt yields
Forecast
Sources: IPD, Thomson Datastream, Capital Economics
35. UK All-Property Initial Yields Less FTSE All-Share Dividend Yield (%) (1990- 2014)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
1
2
3
4
5
6
0
1
2
3
4
5
6
90 92 94 96 98 00 02 04 06 08 10 12 14
Property more expensive
CE forecastHistorical Average = 3.42
Sources: IPD, Thomson Datastream, Capital Economics
36. Real All-Property Rental Values and Real GDP (% y/y) (1970 - 2015)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Real GDP growth %y/y (LHS)
Real all-property rental values, %y/y (RHS)
CE forecast
Sources: IPD, Capital Economics
37. The Yield Spread Between Prime and Non-Prime Property
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
0
20
40
60
80
100
120
140
160
180
200
0
20
40
60
80
100
120
140
160
180
200
01 02 03 04 05 06 07 08 09 10 11 12
Sources: IPD, Capital Economics
38. Contribution of Rents and Yield Impact to Capital Value Growth (%y/y) (2011-2016)
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
-8
-6
-4
-2
0
2
4
6
-8
-6
-4
-2
0
2
4
6
2011 2012 2013 2014 2015 2016
Impact of rental value growth
Impact of yield movements
CE forecasts
Sources: IPD, Capital Economics
39. Capital Value Growth Forecasts By Main Sector (%y/y) (2012-2016)
The Economic and Property Outlook By Roger Bootle
Source: Capital Economics
-8
-6
-4
-2
0
2
4
-8
-6
-4
-2
0
2
4
2012 2013 2014 2015/16 avg
C.Ldn Offices
All-ofices
Retail
Industrial
40. Conclusions
The Economic and Property Outlook By Roger Bootle The Economic and Property Outlook By Roger Bootle
• Chinese authorities would accept a slowdown to 7.5 –
8%. But any more would be countered by policy.
• The US, euro-zone and UK will continue with austerity
and face a long slog back to prosperity.
• Inflation will fall sharply.
• Interest rates will remain at near-zero for years.
• The euro will not survive in its present form.
• Gilt yields at this level – or lower – for several years.
• Outside the US, equities fair value.
• Property faces a difficult couple of years before
recovering.
Accelerating success.
The economic and property outlook
by Roger Bootle
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