The economic and property outlook by Roger Bootle

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)


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)


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)


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)


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)


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


7. Change in U.S. Non-Farm Payroll Employment (000s) (Latest = August)


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


8. The “Fiscal Cliff” ($bn)


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


• 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)


-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%


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)


13. GDP (Q1 2008 = 100) (Latest = Q2 2012)


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


14. The Draghi Game-Changer?


• 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


• 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)


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


17. A Bridge to Nowhere?


18. The future of the euro


• 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


• 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)


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


21. Contributions to Change in Real GDP (By Expenditure Component, %, Q1 2008 – Q1 2012)


-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


22. UK Consumer Confidence and Household Spending(1985 – 2012) (Latest = August)


-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)


23. UK GDP (2007 – 2014) (Latest = Q2)


-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


24. Public Sector Net Borrowing (12 Month Rolling Average, £bn, 2008/09 – 2012/13, Latest = July)



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.)


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


26. UK Average Earnings (2001-2014) (% y/y) (Latest = July)


-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


27. UK Consumer Price Inflation (%) (2006 – 2014) (Latest = July)



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)


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


29. UK 20 Year Gilt Yields & CPI Inflation (2000 – 2014)


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)


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)


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.


32. US PE Ratio (Earnings 10 Year Average) (1881 – 2012) (Latest = August)


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)


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


34. UK All-Property Yields and UK 10-Year Gilt Yields (%) (1989-2014) (Latest = July)


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)


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)


-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


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


38. Contribution of Rents and Yield Impact to Capital Value Growth (%y/y) (2011-2016)


-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


39. Capital Value Growth Forecasts By Main Sector (%y/y) (2012-2016)


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


• 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

The economic and property outlook by Roger Bootle

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