The macroeconomic context of the UK

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The macroeconomic context of the UK
Erik Britton Oxford Economic Forecasting
www.oef.com

• June 2004
• Tel [phone]
• Email ebritton_at_oef.co.uk

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Overview

• Robust global recovery now in place
• Why did growth slow after 2000?
• Why was the downturn in the UK so modest by
  historic standards?
• What is now driving the UK recovery?
• What could go wrong?
• Implications for manufacturing

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World GDP Growth
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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why did growth slow after 2000?

• Downturn in the global economy
• Higher oil prices
• Collapse in the new economy
• Collapse in equity prices
• Uncertainty created by 911, Iraq war etc
• High pound particularly vs euro
• Retrenchment by UK companies
• Excess investment during high-tech boom
• Sharp fall in profitability
• High corporate debt
• Special factors eg foot mouth

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Why was the downturn so muted?

• A global recession coupled with sharp
  retrenchment by companies would historically have
  triggered a deep UK recession. But the slowdown
  in growth post-2000 was very modest. Why?
• Big boost to government spending coincided with
  downturn in private demand
• Low interest rates supported consumer spending
  and the housing market, offsetting impact of
  falling equity prices

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Why was the downturn so muted?

• A global recession coupled with sharp
  retrenchment by companies would historically have
  triggered a deep UK recession. But the slowdown
  in growth post-2000 was very modest. Why?
• Big boost to government spending coincided with
  downturn in private demand
• Low interest rates supported consumer spending
  and the housing market, offsetting impact of
  falling equity prices

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Why was the downturn so muted?

• A global recession coupled with sharp
  retrenchment by companies would historically have
  triggered a deep UK recession. But the slowdown
  in growth post-2000 was very modest. Why?
• Big boost to government spending coincided with
  downturn in private demand
• Low interest rates supported consumer spending
  and the housing market, offsetting impact of
  falling equity prices

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What is now driving the recovery?

• Recovery in the global economy
• Continued loose macro policy
• Recovery in company finances
• Buoyant consumer demand

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LEVEL AND CONTRIBUTION TO IMPORT
GROWTH OF VARIOUS AREAS, 2002-05
1,400
300
Contribution to import growth,
Import levels, 2002
2002-05 (hundred bill. )
(hundr. billion l.h.sc.)
1,200
250
1,000
200
800
150
600
100
400
50
200
0
0
USA
Eurozone
Japan
UK
China

USA
Eurozone
Japan
UK
China
Excluding intra-Eurozone trade.
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What is now driving the recovery?

• Recovery in the global economy
• Continued loose macro policy
• Recovery in company finances
• Buoyant consumer demand

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What is now driving the recovery?

• Recovery in the global economy
• Continued loose macro policy
• Recovery in company finances
• Buoyant consumer demand

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What is now driving the recovery?

• Recovery in the global economy
• Continued loose macro policy
• Recovery in company finances
• Buoyant consumer demand

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Risks

• Geopolitical risks
• Continued consumer and housing boom
• Housing and debt bust
• High oil prices
• Renewed wage inflation
• Global imbalances

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Impact of 10 house price fall
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Risks

• Geopolitical risks
• Continued consumer and housing boom
• Housing and debt bust
• High oil prices
• Renewed wage inflation
• Global imbalances

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Risks

• Geopolitical risks
• Continued consumer and housing boom
• Housing and debt bust
• High oil prices
• Renewed wage inflation
• Global imbalances

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Risks

• Geopolitical risks
• Continued consumer and housing boom
• Housing and debt bust
• High oil prices
• Renewed wage inflation
• Global imbalances

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Implications for manufacturing
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Conclusions

• Both the global economy and UK economies are
  recovering strongly
• Prospects look good but there are clear risks,
  notably from the housing market
• While activity is strengthening, two-speed
  economy likely to remain a feature of the UK over
  the next few years as over the last few