The “New Normal” for the global economy

Andrew Sentance Senior Economic Adviser, PwC Nuffield Health Summit Thursday 7th March 2013

www.pwc.co.uk

PwC

The world economy continues to expand World GDP, US $ trillion

32

61 71

93

0 10 20 30 40 50 60 70 80 90

100

2000 2008 2012 2017

The new normal Slide 2

Source: IMF World Economic Outlook, October 2012

PwC

... but the global recovery is uneven % per annum change in GDP

* based on 6 largest economies

Source: IMF World Economic Outlook, October 2012

-6

-4

-2

0

2

4

6

8

10

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Asia-Pac* EU US

Slide 3 The new normal

PwC

This recovery is different to 80s and 90s average % per annum change in GDP over first three years of recovery

Source: ONS, PwC and IMF. 2012 based on latest IMF and PwC forecasts

Slide 4

0

1

2

3

4

5

6

7

UK (exc oil&gas) Advanced economies Emerging and developing economies

1982-84 1992-94 2010-12

The new normal

PwC

... with Asia-Pacific now the dominant region Percentage share of world GDP, current market prices & exchange rates

0%

5%

10%

15%

20%

25%

30%

35%

40%

1980 1990 2000 2010

US EU-27 Asia-Pacific G10*

The new normal Slide 5

* Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand. Source: IMF World Economic Outlook

PwC

UK economic growth has disappointed % per annum change in output, excluding North Sea oil and gas

* Weighted average of manufacturing and services growth

Note: Average non-oil GDP growth since mid-2009 = 1.3% Source - ONS The new normal

Slide 6

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Non-oil GDP Underlying* Ave GDP growth since 1970

PwC

... while inflation has been high and volatile % per annum increase in UK consumer prices index

Source: Office for National Statistics

Slide 7

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Inflation Target Ave 2008-12

The new normal

PwC

What is the “new normal”?

• 2007/8 marked the end of a long and sustained expansion in UK and other Western economies

• Conditions which supported this period of growth are not set to return quickly

• Prolonged structural readjustment underway in response to financial crisis and East-West rebalancing

• Significant parallels with disappointing growth and volatility of the 1970s and early 1980s

The new normal Slide 8

PwC

A long expansion has come to an end average % per annum change in UK GDP and consumer spending

* Based on PwC forecasts for 2012/3 and Treasury Independent Consensus, 2014-16

Source: ONS, PwC and HM Treasury

The new normal Slide 9

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1948-73 1973-82 1982-2007 2007-16*

GDP Consumer spending

PwC

Pre-2007 growth drivers have been undermined

Sustained growth

Easy money

Cheap imports

Confidence in policy regime

Slide 10 The new normal

PwC

Two phases of the “new normal” • Phase 1:

Disappointing western growth to continue through mid-2010s

Financial volatility persists

High and fluctuating energy and commodity prices

• Phase 2:

Clearer and more sustained growth dynamic emerges

Perhaps starting in the second half of this decade

Different set of growth drivers from pre-2007 long expansion

Businesses, policy-makers and investors need strategies to manage and survive through Phase 1, while building potential opportunities for Phase 2.

Slide 11 The new normal

PwC

Uneven growth outlook across global economy % per annum change in 2013 GDP

12

Source: PwC main scenario for 2013

Russia

Germany

UK

US

Brazil

India

Spain

Canada

Mexico

South Africa Australia

Japan

Italy

Greece

Ireland

France

1.9

2.0

3.6

3.0

-1.1

0.2

0.8

1.1 0.4

-1.2

2.9

6.0

-4.2

2.5

8.0

1.0

3.8

China

The new normal

PwC

Northern Europe is the engine of EU economy % per annum change in GDP

Source: Eurostat and European Commission forecasts

-5 -4 -3 -2 -1 0 1 2 3 4 5

2001 2003 2005 2007 2009 2011 2013

Germany & N Europe France & S Europe UK & Ireland

Slide 13 The new normal

PwC

UK – subdued consumers holding back growth % per annum change in UK GDP and consumer spending

Slide 14

-5

-4

-3

-2

-1

0

1

2

3

4

5

97-07 ave 2008 2009 2010 2011 2012 2013 2014-16

GDP Consumer spending

Source: ONS, Nov 2012 PwC economic forecast and Treasury Independent Review of Forecasts The new normal

PwC

Success drivers in the “new normal”

Repositioning towards Asia/emerging markets Innovation and exploitation of new technology

Understanding market/structural change

Providing strong value proposition to customers

Flexible and adaptable business model

Efficient use of energy/resources

The new normal Slide 15