CIM Summer Marketing Conference

UK economic trends and prospects

Andrew Johnson – Senior Economist

OVERVIEW

• Recent UK economic history

• Fiscal challenge

• Growth challenge

• Prospects for 2011• Prospects for 2011

• Looking ahead to 2012

• Key risks

Recent economic historyIn 2008/09 the UK suffered its worst recession in 80 years

• Output declined by 6% (2009q3)

• Between 2008 and 2009 exports declined by 8.6% and imports by 9.1%

• Unemployment increased by 2.8pp to 7.9%

Sources: ONS, OECD

• Unemployment increased by 2.8pp to 7.9% (2010q1)

• The financial system was brought to the brink of collapse

Recent economic historyDecline in context

0%

2%

4%

6%

8%

Source: ONS

-6%

-4%

-2%

1956

Q1

1960

Q1

1965

Q1

1970

Q1

1975

Q1

1980

Q1

1985

Q1

1990

Q1

1995

Q1

2000

Q1

2005

Q1

2010

Q1

1q 4q

Recent economic historyLatest release in GDP growth, % change in output

Source: ONS

Recent economic historyLatest BoE Inflation Report (May), CPI fan chart

Source: Bank of England

Recent economic historyManufacturing, % change in output

-6%-4%-2%0%2%4%6%

Source: ONS

-14%-12%-10%

-8%-6%

2008

q220

08q3

2008

q420

09q1

2009

q220

09q3

2009

q420

10q1

2010

q220

10q3

2010

q420

11q1

1q 4q

Fiscal ChallengeBudget 2010, UK structural deficit 2010 c.f. OECD

Fiscal ChallengeBudget 2011, Receipts and expenditure as a % of GDP

Fiscal ChallengeFiscal Mandate

• Achieve cyclically-adjusted (structural) balance by the end of the forecast period (2015/16)

• Public Sector Net Debt (PSND) falling by 2015/162015/16

• OBR to independently judge whether each budget means >50% chance of meeting targets

Growth ChallengeRebalancing the economy, contributions to growth annual % change

0

2

4

6

-8

-6

-4

-2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Households Government Investment Inventories Net Trade GDP

Source: ONS

Growth ChallengeManufacturers’ concerns with business environment

Growth ChallengeAccumulation of barriers to growth

• Level and complexity of tax system

• Stock and flow of regulations

• Atrophy and distortion of financial sector outside of

banksbanks

• Poor supply and reliability of skills

• Uncertainty on climate and energy policy

Growth ChallengeWhat has the government done?

• Bringing down corp tax, canceled Labour’s NI

rise, introduced Office of Tax Simplification

• Red tape challenge

• Business Growth Fund, Project Merlin• Business Growth Fund, Project Merlin

• Demand-led skills system

• Climate change and electricity market reforms

Growth ChallengePlan B?

• Shaky growth is leading to

calls, from some, to move to a

‘Plan B’

• Others endorse govt’s fiscal • Others endorse govt’s fiscal

plans (IMF)

• Even if fiscal plans

unchanged, plenty of room for

action

Prospects for 2011Domestic side of the economy weak, components of GDP q/q % chg

0.5

1.0

1.5

2.0

2.5

Households Government Inventories

Investment Trade GDP

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2010q2 2010q3 2010q4 2011q1

Source: ONS

Prospects for 2011Consumption and investment, forecast % chg q/q

1.5

2

2.5

3

Source: Oxford Economics

0

0.5

1

2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4

Consumption Investment

Prospects for 2011Exports growth has been strong

-10

0

10

20

30

40Domestic Export%

-60

-50

-40

-30

-20

-10

2004

q220

04q4

2005

q220

05q4

2006

q220

06q4

2007

q220

07q4

2008

q220

08q4

2009

q220

09q4

2010

q220

10q4

2011

q2

Source: EEF Business Trends Survey

Prospects for 2011% change in annual output

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2010 2011 2012

Manufacturing Rest of economy GDP

Source: ONS

Looking ahead to 2012Economy still expected to recover

1

1.5

2

2.5

Source: HM Treasury survey of independent forecasters

0

0.5

1

2011 2012

March April May

Looking ahead to 2012Interest rates start to rise, Bank rate, %

1.5

2

2.5

0

0.5

1

2011

q1

2011

q2

2011

q3

2011

q4

2012

q1

2012

q2

2012

q3

2012

q4

Source: Oxford Economics

Key risksCommodity prices

Key risksExport markets

10%

15%

20%

70000

72000

74000

EU (%chg, lhs) Rest of World (%chg, lhs) Total exports (£m, rhs)

-10%

-5%

0%

5%

2010 Q2 2010 Q3 2010 Q4 2011 Q1

60000

62000

64000

66000

68000

Source: ONS, HMRC

Key risksAccess to finance, balance of companies reporting increase

(decrease) in availability of credit

-5

0

5%

-20

-15

-10

2010q1 2010q2 2010q3 2010q4 2011q1 2011q2

%

All companies Small companies only

Source: EEF