The Economic Grand (Inter)National Enrico Longoni RBS Group Economics October 2012
Dec 29, 2015
The Economic Grand (Inter)National
Enrico Longoni
RBS Group Economics
October 2012
Back to recession…UK GDP (GBP bn, 2008 prices)
Source: Office for National Statistics
340
345
350
355
360
365
370
375
2005 2006 2007 2008 2009 2010 2011 2012
Austerity not to be blamed
UK Q2 2012 GDP – output approach (%q/q)
Source: Office for National Statistics
-3.9
-2.6
-0.9
-0.9
-0.1
-0.1
-0.5
0.3
Construction
Agriculture
Production
Manufacturing
Services
Business services & Finance
Government & other
GDP
Worse than the great depression?
90
95
100
105
t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 t+13 t+14 t+15 t+16
Output since start of downturn (= 100)
Great Depression
Great Recession
UK GDP during the Great Depression and the Great Recession (q/q)
Source: Bank of England and Office for National Statistics
UK labour market puzzle
Source: Office for National Statistics
-300
-200
-100
0
100
200
300
400
500
600
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Public Sector Private Sector Cumulative net change
Employment: Private vs Public Sector
Deficit reduction…a long way to go
-5
-4
-3
-2
-1
0
1
10-11 12-13 14-15 16-17
Source: Office for Budget Responsibility
Most of the pain is still to come
75%
27%
88%
66%
88%
94%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All fiscal tightening Tax increases Total spending cuts Investment cuts Benefit cuts Other current spendingcuts
Share of fiscal tightening still to be implemented after April 2012 (%)
Source: The Institute for Fiscal Studies
Corporates to the rescue?
Bureau of Labor Statistics
-5
-4
-3
-2
-1
0
1
2
3
4
5
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Net Surplus of Private Non-Financial Corporations (cumulative % of GDP)
Bernanke to the rescue?
Source: Bureau of Labour Statistics
US labour market
0
50
100
150
200
250
300
Feb-1
1
Mar
-11
Apr-1
1
May
-11
Jun-
11
Jul-1
1
Aug-1
1
Sep-1
1
Oct-11
Nov-1
1
Dec-1
1
Jan-
12
Feb-1
2
Mar
-12
Apr-1
2
May
-12
Jun-
12
Jul-1
2
Aug-1
2
Sep-1
2
(00
0s
)
7
7.5
8
8.5
9
9.5
(%)
Change in non-farm payrolls (lhs) Unemployment rate (rhs)
US approach to fiscal policy
$100
$10,000
$1,000,000
$100,000,000
$1,000,000,000
$1,000,000,000,000
Walking along the “Fiscal Cliff”
A lot could happen
GDP (%y/y) Unemployment (%)
No fiscal cliff 2.5% 8.6
1 Full fiscal cliff -1.0% 10.1
2 75% of cliff -0.1% 9.7
3 Only tax cuts implemented 0.6% 9.4
4 50% of cliff 0.8% 9.3
5 Only spending cuts implemented 1.5% 9.0
6 25% of cliff 1.7% 9.0
Source: Group Economics
Super Mario to the Eurozone rescue?
“…All it takes to save the €…”
Source: Bloomberg & Group Economics
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan Feb Mar Apr Ma Jun Jul Aug Sep
Italy (6.6% - 5.1%)
Spain (7.6% - 6%)
LTROs
OMT announcements
Something’s changed
Contribution to Global GDP Growth (Past and Present)
0%10%20%30%40%50%60%70%80%90%
100%
2001-2008 2010-2011 2012-2016
Advanced Economies Developing and Newly Industrialised Asia Other
Source: Datastream & Group Economics calculations
This slowdown is the start of a structural change
Source: Group Economics calculations
China GDP annual growth
GE forecast
0
2
4
6
8
10
12
14
16
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Still plenty of investment left to go in China
Length of Railway (km)
0 50,000 100,000 150,000 200,000 250,000
China
US
Road Density (km per sqkm)
00.5
11.5
OECD ChinaAverage
EasternChina
CentralChina
WesternChina
Capital Stock ($ trn)
0 10 20 30 40 50
US
China
Underground Transport
0
50
100
Cities with populationover 5 million
Number of those citieswith a subway
UK fiscal policy – Plan A2,B, C
Monetary policy – rates low for how long?
Source: Bank of England & Group Economics calculations
0
1
2
3
4
5
6
7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Feb 2011
Feb2012
Aug 2012
Aug 2011
UK Bank rate and expectations
The UK remains a world leader
Wealthy
Highly skilled workforce
Innovative
8th most competitive economy
7th largest economy
World class education
Attractive for foreign investment
6th largest manufacturer
3rd largest exporter of services
10th largest exporter of goods
AAA rated
UK economic growth in the long run
4.4
4.8
5.2
5.6
6
6.4
1900
1906
1912
1918
1924
1930
1936
1942
1948
1954
1960
1966
1972
1978
1984
1990
1996
2002
2008
Spot the Great Depression
Source: Bank of England; RBS Group Economics
“Great things are not done by impulse,
but by a series of small things brought together."
~Vincent van Gogh~
Thank you and keep in touch!
Internetwww.rbs.com/economics
E-mailwww.rbs.com/economics/registration
Social media@rbs_economics
This material is published by The Royal Bank of Scotland plc (“RBS”) which is authorised and regulated by the Financial Services Authority for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives (“Securities”). It should not be reproduced or disclosed to any other person, without our prior consent.
This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information.
This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information.
A word from our lawyers
Source: ONS
What is happening in the labour market?
Cumulative change in private employment (000s)
-100
0
100
200
300
400
500
600
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2
Employees FT Employees PT Self employ FT Self employ PT
UK growth: the long and winding road
GDP following recessions, start of recession = 100
Source: Datastream and Group Economics calculations
90
95
100
105
110
115
0 1 2 3 4 5 6 7
Years since start of recession
Typical UK recovery Recovery so far RBS forecast
1990s recession/recovery
Current recession/recovery
Fiscal rebalancing: a good start, but still far to go
Net borrowing as % of GDP
0
2
4
6
8
10
12
2001
/02
02/0
303
/04
04/0
505
/06
06/0
707
/08
08/0
909
/10
10/1
1
2011
/12*
12-1
313
/14
14/1
515
/16
16/1
7
OBR forecast
Source: Office for Budget Responsibility
Would a Plan B work?There is some additional debt capacity, but unquantifiable risks
Public sector net debt:GDP, UK forecast & selected countries in 2012
0%
20%
40%
60%
80%
100%
12-13 13-14 14-15 15-16 16-17 Ireland Italy Spain Portugal
Public sector net debt as % of GDP
IMF recommended debt:GDPceiling
Reinhart & Rogoff say growthfalters above this level
Debt:GDP likely unsustainable
High levels of household and public debt constrain growth
Public sector net debt as % of GDP, excluding financial sector interventions
0
10
20
30
40
50
60
70
2003 2005 2007 2009 2011
Household debt as a % of income
80
90
100
110
120
130
140
150
160
170
1990 1995 2000 2005 2010 2015
Source: Datastream & Group Economics calculations
Main economic problem facing the UK
61 5752 53 50 49 49
39 4348 47 50 51 51
Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
The lack of economic growth - we need to spend and lend more to create jobs & keep business going
The size of the debt burden - we need to borrow less & save more to ensure we keep interest rates low
Corporates have the cash….
Government , 8.3%
Financial companies, 1.7%
Non-financial companies, 3.6%
Households, 1.4%
Rest of the World, 1.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Financial deficit Financial surplus
Government Financial companies Non-financial companies Households Rest of the World
Flow of funds financial surplus/deficit 2011 (% of GDP)
Source: Office for National Statistics
Drastic times, drastic measures?
Increase demand (symptom)
Massive fiscal stimulusQE maxLiquidity unbounded“Use it or lose it” deposit
taxPFI v2.0Beg to China
Reduce debt (cause)
(Big) “bad bank”Debt forgivenessFinancial repressionMonetise debtRaise interest ratesOutright default
China’s growth is slowing, should we be worried?
China - Loan Growth and Industrial Production - Y/Y Change
1012141618202224
Apr-10
Jun-
10
Aug-10
Oct-1
0
Dec-1
0
Feb-1
1
Apr-11
Jun-
11
Aug-11
Oct-1
1
Dec-1
1
Feb-1
2
Loan Growth
Industrial Production
Source: Datastream & Group Economics calculations
Emerging markets: huge export opportunity
% share of global GDP
Source: IMF
30%
35%
40%
45%
50%
55%
60%
65%
70%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Developed Economies
Emerging Economies
Source: Datastream & Group Economics calculations
UK export market share & growth
(1)
(6)
(10)
(27)
(2)
(3)
(4)
(5)
(7)(8)(9)
(11) (15)(20)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
-5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
2011 Y/Y growth in exports (%)
Sha
re o
f UK
exp
orts
(%
)
Trade headwinds
Source: IMF
EZ problem markets
Major markets
Emerging markets
Source: Datastream & Group Economics calculations
Exports heading to the wrong places – for now
UK 2010 exports – by destination and growth rates
0
5
10
15
20
25
30
35
40
45
50
EZ US
Canad
a
Switzer
land
China
Russia
Brazil
India
South A
frica
Export growth (%y/y) Market share (%)Source: Office for National Statistics
EZ imbalances, more than fiscal
Unit labour costs: Germany vs. the PIIGS
70
80
90
100
110
120
130
140
150
1995 1997 1999 2001 2003 2005 2007 2009 2011
Germany Italy Greece Spain Portugal Ireland
Source: Datastream & Group Economics calculations