The winning and losing nations (or Sunrise, Sunset and Serendipity – time to

start dropping BRICs)Sixth Gresham Lecture

Douglas McWilliamsMercers School Memorial Professor of Commerce at Gresham College

Centre for economics and business research ltd

Unit 1, 4 Bath Street, London EC1V 9DXt: 020 7324 2850 f: 020 7324 2855 e: advice@cebr.com w: www.cebr.com

© Centre for economics and business research ltd, 2013 2

To examine which countries are likely to perform relatively better in the changed world and which ones are likely to perform relatively worse

Objective

© Centre for economics and business research ltd, 2013 3

The context – previous lectures in the series

Sunrise and sunset cycles

Time to start dropping BRICs

Sunrise economies

Sunset economies

Serendipity economies

Outlook to 2050

The 2013 Budget

Overview

© Centre for economics and business research ltd, 2013 4

The sunrise cycle

Cheap educated

labour

Export growth

leading to rising GDP

High profits

High investment

Strong productivity

growth

© Centre for economics and business research ltd, 2013 5

The sunset cycle

Costs cannot

compete

Weak exports

leading to weak GDP

Profits squeeze

and loss of tax

Falling investment

Stagnantproductivity

© Centre for economics and business research ltd, 2013 6

The misery cycle

Competitive wage below welfare level

Collapsing employment

and GDP

Escalating deficits

Financial collapse

Higher taxes and reduced

public services

© Centre for economics and business research ltd, 2013 7

Concept has been very helpful in boosting understanding of globalisation process

But increasingly the BRICs economies are becoming too diverse for one category

And it mixes those with internal dynamic growth with those who just got lucky with high energy or mineral prices

At the moment with energy and minerals prices high, both groups have had rapid growth in spending power

But in the future, these prices – though on average rising – will not rise further by as much and energy prices could even drop beyond 2020

Time to start dropping BRICs

© Centre for economics and business research ltd, 2013 8

The world economic league table 2012-2022

Rank, 2012

Rank, 2022 Country

2012 $ GDP

(billions)

2022 $ GDP

(billions)

Change from 2012

2013 $ GDP

(billions)Rank, 2012

Rank, 2022 Country

2012 $ GDP

(billions)

2022 $ GDP

(billions)

Change from 2012

1 1 United States 15,682 23,496 0 16,137 16 10 Indonesia 880 2,568 62 2 China 8,230 19,516 0 8,950 17 16 Turkey 783 1,748 13 3 Japan 5,958 7,375 0 5,947 18 19 Netherlands 773 948 -14 6 Germany 3,399 4,275 -2 3,354 19 18 Saudi Arabia 657 1,063 15 9 France 2,605 3,185 -4 2,540 20 25 Switzerland 632 683 -56 8 United Kingdom 2,443 4,061 -2 2,578 21 22 Sweden 525 775 -17 5 Brazil 2,257 4,389 2 2,470 22 26 Norway 501 661 -48 13 Italy 2,012 2,173 -5 1,925 23 21 Poland 490 826 29 7 Russia 1,954 4,242 2 2,094 24 33 Belgium 484 568 -9

10 4 India 1,819 4,935 6 2,111 25 23 Islamic Republic of Iran 484 771 211 11 Canada 1,818 2,511 0 1,839 26 27 Argentina 475 643 -112 14 Australia 1,541 2,014 -2 1,581 27 20 Taiwan Province of China 475 894 713 17 Spain 1,350 1,385 -4 1,296 28 36 Austria 398 514 -814 15 Mexico 1,178 2,005 -1 1,206 29 30 South Africa 384 629 -115 12 Korea 1,151 2,304 3 1,234 30 24 Thailand 366 695 6

© Centre for economics and business research ltd, 2013 9

China

India

Indonesia

Korea

Mexico

Turkey

Taiwan

Thailand

Nigeria

Sri Lanka

Sunrise economies

© Centre for economics and business research ltd, 2013 10

US

Japan

Europe

Sunset economies

© Centre for economics and business research ltd, 2013 11

Russia

Brazil

Canada

Australia

Saudi Arabia

Serendipity economies

© Centre for economics and business research ltd, 2013 12

Ethnic composition of US population forecast for 2050

2005 2050

Foreign born 12 19

White 67 47

Hispanic 14 29

Black 13 13

Asian 5 9

Source: Pew Research Centre

© Centre for economics and business research ltd, 2013 13

World outlook for GDP for large economiesBillions of US dollars, current prices at market exchange rates

© Centre for economics and business research ltd, 2013 14

Some cuts in current spending (may be more than seems because of need to absorb higher NI charges)

Extra spending on infrastructure

Housing market package

Rise in personal allowance for income tax

Cut in corporation tax

NIC allowance for expanding small businesses

Potential major monetary policy reforms

Revised inflation remit for MPC

The main Budget measures

© Centre for economics and business research ltd, 2013 15

Unrealistic hopes of a quick Eurozone recovery persist

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%2

00

2

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Cebr OBR Budget 2013

Eurozone real gross domestic product, annual percentage change

© Centre for economics and business research ltd, 2013 16

OBR still looks too optimistic on growth in the medium-term

ECONOMIC OUTLOOK

-5

-4

-3

-2

-1

0

1

2

3

4

5

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Cebr OBR Budget 2013

UK real gross domestic product, annual percentage change

© Centre for economics and business research ltd, 2013 17

Borrowing in 2017/18 to be £30 billion higher than forecast by the OBR…

PUBLIC FINANCES

0

20

40

60

80

100

120

140

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

20

16

/17

20

17

/18

Cebr forecast OBR March 2013

Public sector net borrowing, £ billion, financial year

© Centre for economics and business research ltd, 2013 18

… with the debt:GDP ratio rising above 90%

PUBLIC FINANCES

Net debt as a percentage of GDP, fiscal years

70

75

80

85

90

95

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

20

16

/17

20

17

/18

OBR March 2013 Cebr

© Centre for economics and business research ltd, 2013 19

£10,000 personal allowance to boost real disposable income growth

ECONOMIC OUTLOOK

Income tax (£) paid by someone with a gross yearly income of £25,000

2012/13 2013/14 2014/152,800

2,900

3,000

3,100

3,200

3,300

3,400

3,500

© Centre for economics and business research ltd, 2013 20

Corporation tax rate reduced even furtherUK corporation tax - main rate

18%

20%

22%

24%

26%

28%

30%

32%

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

PUBLIC FINANCES

© Centre for economics and business research ltd, 2013 21

Small businesses to benefit from employment allowance

21

Number of enterprises by employment size, 2011, thousands

PUBLIC FINANCES

90

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Zero or 1 2-9 10-250 250+

© Centre for economics and business research ltd, 2013 22

Help to buy scheme launched to support new and existing home purchases

Approvals of loans for home purchases, thousands

PUBLIC FINANCES

© Centre for economics and business research ltd, 2013 23

New MPC remit could pave the way for medium-term interest rate commitments

0

1

2

3

4

5

6

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

De

c-1

6

De

c-1

7

De

c-1

8

Bank of England Bank Rate, percentage

MONETARY POLICY

© Centre for economics and business research ltd, 2013 24

Long term borrowing rates to rise but remain extremely low

0

1

2

3

4

5

6

Q4

20

03

Q4

20

04

Q4

20

05

Q4

20

06

Q4

20

07

Q4

20

08

Q4

20

09

Q4

20

10

Q4

20

11

Q4

20

12

Q4

20

13

Q4

20

14

Q4

20

15

Q4

20

16

Q4

20

17

Q4

20

18

Yield on 10 year government bonds, percentage

MONETARY POLICY

Forecast

The winning and losing nations (or Sunrise, Sunset and Serendipity – time to start dropping BRICs)

Douglas McWilliams, Mercers’ School Memorial Professor of Commerce at Gresham College and Chief Executive of Cebr