Economic Challenges for Business

Economic Challenges for Business

May 2009

Ian McCaffertyChief Economic AdviserCBI

Global recessionGlobal recession

2008 2009

World 3.3 -1.4

Advanced economies 0.7 -4.2

Developing economies:

Africa 5.8 2.9Latin America 5.0 -0.6

China 8.9 5.7India 7.4 3.2

Early 2009: falling off a cliff

• Collapse on world trade; major destocking

• First synchronised downturn for 30 years

• OECD-led, but EMEs not exempt

• 2009:slowest global growth since early

1980s

World GDP growth – by major region

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-30

-20

-10

0

10

20

30

World Trade

ValueVolume

% y/y

Source : IMF

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-20

-15

-10

-5

0

5

10

15

20

Industrial Production% y/y

Advanced economiesWorldEmerging markets

Source : IMF

01-2

008

01-2

008

02-2

008

03-2

008

04-2

008

05-2

008

06-2

008

07-2

008

08-2

008

09-2

008

10-2

008

11-2

008

12-2

008

01-2

009

02-2

009

03-2

009

04-2

009

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Credit crunch: market conditionsCredit crunch: market conditions

• Lehman collapse: a seminal shock

• Interbank lending rates easing a little, but still elevated. Wholesale markets starting to re-open

• Impact of credit support packages?

• Banks: capital adequacy, leverage & capacity

% Market interest rates: UK

3m LIBOR spread over 3m gilt repos

Availability of new credit: past 3 months

SMEs Large Very Large Overall-100

-80

-60

-40

-20

0

20 January February March% balance

01/2

008

01/2

008

02/2

008

03/2

008

04/2

008

05/2

008

06/2

008

07/2

008

08/2

008

09/2

008

09/2

008

10/2

008

11/2

008

12/2

008

01/2

009

02/2

009

03/2

009

04/2

009

05/2

009

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Market interest rates: USA

US 3m LIBOR rateUS 3m LIBOR spread over T Bill

3m LIBOR rate

%

Significant policy responseSignificant policy response

Interest rates%

% of 2008 GDP

2004

2005

2006

2007

2008

0

1

2

3

4

5

6

UK

US

Eurozone

1960

1962

1964

1967

1969

1972

1974

1976

1979

1981

1984

1986

1989

1991

1993

1996

1998

2001

2003

2005

2008

0

400

800

1200

1600

2000

Federal Reserve Monetary Base$ Billion

Source: St Louis Federal Reserve Bank

• Immense policy response

• Liquidity and credit support

• Bank bailouts

• Interest rate reductions

• Move to quantitative easing

• Fiscal stimulus

UK USA Japan Germany Canada Korea0

1

2

3

4

5

6

Total fiscal packages 2008-2010

Source: OECD

Global outlookGlobal outlook

2008 2009 2010

World 3.3 -1.4 2.1

Advanced economies 0.7 -4.2 0.2

Developing economies:

Africa 5.8 2.9 3.7Latin America 5.0 -0.6 3.0

China 8.9 5.7 9.1India 7.4 3.2 6.5

2010: modest recovery

• Less synchronised recovery

• US: early signs of recovery to come

• EU12: sharp recession through 2009

• China and India more resilient than

other emerging economies – less

dependence on trade

• Inflation declining

• Fiscal pressures

• Drag from financial conditions?

• Elevated degree of uncertainty

World GDP growth% yoy

-2

-1

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Forecasts

World GDP growth – by major region

UK: GDP growthUK: GDP growth

CBI forecast

• Sharp falls in Q408 and H109

• Rolling pattern of demand through 2009

• Inventory reductions• Investment cutbacks• Consumption squeeze

• No growth for 8 quarters (6 negative quarters)

• Depth of recession: comparisons with 1980s

2005 2006 2007 2008 2009 2010-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

GDP%q/q

UK: inventory adjustmentUK: inventory adjustment

CBI Industrial Trends Survey

2001 2002 2003 2004 2005 2006 2007 2008 2009-25

-20

-15

-10

-5

0

+5

+10

+15 Volume of stocks

Raw materials Work in progress Finished goods

% balance

2005 2006 2007 2008-1.5

-1

-0.5

0

0.5

1 Inventories% contribution

to GDP

• Sharp loss of confidence: uncertainty and credit constraints

• Production cutbacks leading to sharp change in inventory behaviour

• Interconnectedness of production chains and “just in time” magnify the impact

UK Investment: falling sharply UK Investment: falling sharply

% balance Industrial Trends Survey

Plant and machinery

Buildings

% q/q oyaBusiness Investment

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Residential Investmentq/q ova

Internal finance

External finance Cost of finance

%

-3

-2

-1

0

1

2

3

4

5

2005 2006 2007 2008 2009 2010

UK: Consumer squeezeUK: Consumer squeezeReal disposable income

%q/q oyaCBI forecast

GfK Consumer confidence% balance

Household financial situation – next year

Headline index

General economic situation - next year

CBI forecast4.0

5.0

6.0

7.0

8.0

9.0

10.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% Unemployment rate

1.0

2.0

3.0

4.0

5.0

2004 2005 2006 2007 2008 2009 2010

Average earnings

Inc. bonuses

Exc. bonuses

% 3m/3m oya

-55

-45

-35

-25

-15

-5

5

15

25

2005 2006 2007 2008

-5-4-3-2-1012345

2004 2005 2006 2007 2008 2009 2010

UK: InflationUK: Inflation

Average earnings

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2004 2005 2006 2007 2008 2009

% 3m/3m oya

Inc. bonuses

Exc. bonuses

Consumer prices% m/m oya

RPI

CPI

-10

0

10

20

30

40

-4-202468

1012

2004 2005 2006 2007 2008 2009 2010

Producer prices% m/m oya % m/m oya

Output prices (lhs)

Input prices (rhs)

Commodity pricesJan 2007=100

50

100

150

200

250

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Metals (CRB index)

Food

Oil

2007 2008

UK: Public spending trends & pressuresUK: Public spending trends & pressures

% rise pamoney terms

Spending by department / typenext two years

Real % rise Growth in planned public spending

Past 4.3% real paNow & future real 1.9% pa

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

-4-202468

101214

Public sector borrowing% of GDP CBI forecast

• Dramatic deterioration in fiscal position• Further fiscal stimulus?• Risk to sterling?

UK overviewUK overview

2009: recession• Sharp decline through winter, but worst now past• Credit constraint still a major issue• Confidence fragile• Business investment very weak• Shift in consumer behaviour?• Sterling weakness will help• Fiscal sustainability?

2008 2009 2010

GDP 0.7 -3.9 0.1

Household Consumption 1.4 -3.4 -0.4

Manufacturing output -2.6 -12.0 0.5

Consumer Prices 3.6 1.6 1.6

Unemployment (%) 5.8 8.5 10.2 -5-4-3-2-1012345

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP%y/y

forecasts

-10

-8

-6

-4

-2

0

2

4

6CBI forecasts: GDP components

2009 20102008

Consumption InvestmentGov. spending

%y/y

Global risks and uncertaintiesGlobal risks and uncertainties

• Financial markets: are we past the worst?• Equity markets upbeat• Disorderly exchange rates• Expansion of public debt and sovereign default risk

• How quickly will credit flows recover?• Impact on corporate sector

• Political and policy instability• New US Administration• Developing world economic troubles – political/social unrest?

• Impact on supply chains/resource security?• Globalisation/ protectionism

Inflation or deflation?Inflation or deflation?

Commodity prices

2003

2004

2005

2006

2007

2008

50

100

150

200

250

300

350

400

450

500

Metals (CRB Index)Oil (Brent Crude)Food (Economist index)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-1

0

1

2

3

4

5

CPI Inflation

UKUSAEUROZONE

Jan 2003=100

%

2010: low inflation to persist

• Underlying conditions deflationary

• Spare capacity• Significant policy stimulus

• Exit strategies?

• Central Bank independence?

• Energy and commodity prices?

Economic Challenges for Business

Economic Challenges for Business

USA overviewUSA overview

US Economic Forecasts

2008 2009 2010

GDP 1.1 -3.7 0.3

Household Consumption 0.2 -1.6 1.4

Consumer Prices 3.8 -0.5 1.8

Unemployment (%) 5.8 9.2 10.1

Current Account ($ bn) -652 -435 -540

2009: early signs of recovery to come• Destocking ending• Housing market slowly unwinding• Consumer confidence picking up• New unemployment claims peaking

But...• Pace of recovery?• Long term cost of fiscal & monetary bail-out?

GDP% yoy

-5-4-3-2-101234

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Forecasts

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008

Fed fundsrate

10 year bond yield

Sep Oct Nov DecJan-09Feb Mar

2.00

2.50

3.00

3.50

4.00

4.50%

%

Eurozone overviewEurozone overview

Eurozone Economic Forecasts

2008 2009 2010

GDP 0.7 -3.7 -0.1

Household Consumption 0.5 -2.0 -0.1

Consumer Prices 3.3 0.8 1.0

Unemployment (%) 7.5 9.4 10.5

Current Account (€ bn) -63.2 -50.4 -30.5

2009: sharp recession• Abrupt decline through winter• Destocking• Dramatic drop in business investment• Euro strength hurting exports• ECB less reactive than Fed and BoE• Worst hit: Germany, Ireland, Italy

GDP% yoy

-5-4-3-2-101234

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Forecasts

-6.0

-4.0

-2.0

0.0

2.0

4.0

Germany France Italy Spain Netherlands

GDP growth forecasts for key countries% yoy

2009 20102008

Emerging economies overviewEmerging economies overview

2008 2009 2010

China 9.0 6.5 7.5

India 7.3 4.5 5.6

Russia 5.6 -6.0 0.5

Brazil 5.1 -1.3 2.2

Source: IMF

GDP forecasts for key developing economies Contributions to world real GDP growth

%2008

2007

2009/10: sharp downturn, growth rebalancing• EMEs hit by decline in global industrial activity, collapse in world trade, falls in primary

product prices, and in some cases deteriorating financial conditions

• China and India less affected than other Asian economies, emerging Europe and Latin

America – trade is a smaller share of their economies

• Rebalancing towards domestic demand underway – surplus economies able to

provide serious policy stimulus

China India Russia Brazil USA Japan-5

0

5

10

15

20

25

30

35