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It’s after the election when things get really interesting……

It’s after the election when things get really interesting……. Douglas McWilliams centre for economics and business research ltd 10 May 2010. Objectives. To present and discuss cebr’s forecasts for the economy post election. The world economic background UK prospects The UK fiscal challenge

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It’s after the election when things get really interesting……

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  1. It’s after the election when things get really interesting…… Douglas McWilliams centre for economics and business research ltd 10 May 2010

  2. Objectives • To present and discuss cebr’s forecasts for the economy post election

  3. The world economic background UK prospects The UK fiscal challenge A hung parliament Conclusions Outline

  4. Why has the world economy turned round? • The inbuilt dynamism of the emerging economies • Governments – after trying everything else – eventually prescribed the right medicine • An inventory downturn must eventually run out of steam

  5. Western world has fallen below 50 per cent of world GDP

  6. Comparison of GDP in dollars

  7. World economy rankings

  8. WORLD ECONOMIC OUTLOOK The world economy is bouncing back but will not return to mid 2000s growth World real GDP growth, annual percentage change

  9. Gross domestic product We are much more pessimistic than Mr Darling about likely UK growth post 2010 Real gross domestic product, annual percentage change

  10. Average earnings Earnings growth to hit historic low in 2009 and remain steady Average earnings (incl. bonuses), annual percentage change

  11. Consumer spending and saving Saving highest in 11 years as households pay off debt mountain Household savings ratio, per cent of total household resources and growth in overall household debt, annual percentage change

  12. Consumer spending and saving Consumer recession is over but cautious outlook beyond Christmas bonanza Consumer spending, annual percentage growth

  13. Inflation Inflation rise largely driven by VAT reversal but oil and sterling are risks Consumer price inflation, quarterlyannual percentage change

  14. Interest rates Monetary policy looser for longer to counteract fiscal contraction Bank of England base interest rate, percentage

  15. PUBLIC FINANCES OUTLOOK If you plug in our growth forecasts then borrowing falls very slowly Government surplus on current Budget, £ billion, financial year

  16. PUBLIC FINANCES OUTLOOK If you plug in our growth forecasts then borrowing falls very slowly Government net surplus, £ billion, financial year

  17. Public spending as a share of GDP in the UK has shot up both in absolute terms and compared with other countries Total public outlays as percentage of GDP – source OECD

  18. …and is now higher than in any of the Southern European EU member states…. Total public outlays as percentage of GDP – source OECD

  19. Had there been a small Tory majority… • Expect tough action to deal with the budget deficit before end July • Probably 80-20 split between spending cuts and tax increases • NHS and DFID ring fenced means tougher cuts elsewhere • Action on pay, pensions and public sector charges as well as total spending • 20% VAT + higher excise duties? • Probably some attempt to build consensus but suspect that it will be hard to achieve • ‘Enterprise package’ plus rescinding of part of NI increase • Welfare reform • Education reform

  20. A hung parliament…what we said before the election • Depends on who gets how many seats • Calculations assume Labour and Tories neck and neck and some kind of Lib Lab pact • Bond markets will force fiscal action – probably by showing a market reaction • Could be messy but not necessarily • Assume 60-40 spending cut tax rise split • Not much difference ultimately between scale or timing of moves – major difference from content • Attempt to introduce PR – will the public support it in a referendum?

  21. Exchange rates Likely to be an early forex impact from hung parliament but effects likely to wear off Sterling euro exchange rate

  22. Interest rates If a hung parliament frightens the markets, the MPC may have to raise rates temporarily Bank of England base rate

  23. Interest rates …and the bond market could be especially worried initially Yield on 10 yr UK government gilt

  24. But growth would not be much affected unless there is a severe crisis – sluggish growth on all scenarios Yield on 10 yr UK government gilt

  25. Conclusions • World economy definitely in recovery mode • Multi-speed world recovery; shift from West to East • UK fiscal crisis will have to be addressed, either voluntarily or after pressure from bond and forex markets • £40-60bn of fiscal action required additional to announcements up to and including the March Budget • Tories seem prepared to grasp the nettle and take early action • Suspect that action may be slower with hung parliament • But in the end the main difference likely to be in the tax spending mix

  26. It’s after the election when things get really interesting…… Douglas McWilliams centre for economics and business research ltd dmcwilliams@cebr.com

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