Geoff Riley Head of Economics, Eton College Co-Founder of
Green Shootsor Heading for a slump?
Outline of today s presentation Recession winners and losers Recession -causes and policy responses When will recession end? Prospects for the North East economy
Recession Winner or Loser? Example Seed and fertiliser shops Steel producers DVD home delivery services Chocolate Private healthcare Sales on ebay Sales in pizza restaurants Home coffee-makers Membership at fitness clubs Lipstick manufacturers Sales Up or Down? UP DOWN UP UP DOWN DOWN DOWN UP DOWN UP
What went wrong? Housing bubble burst Financial crisis Large fall in asset prices Fallout from higher oil & food prices Collapse in business & consumer confidence Steep decline in world trade and investment
Property and share values slumped s 200000 180000 160000 140000 120000 100000 80000 7000 6000 UK House Prices FTSE 100 and Average UK House Prices FTSE 100 index (bottom pane) Average UK house price (top pane) FTSE 100 Index 200000 180000 160000 140000 120000 100000 80000 7000 6000 Index 5000 5000 4000 4000 3000 00 01 02 03 04 05 06 07 08 09 3000 Source: Reuters EcoWin
Spike in oil prices generated inflation 150 140 130 120 110 100 World Crude Oil Price - US Dollars Per Barrel US dollars 150 140 130 120 110 100 US dollars per barre el 90 80 70 60 50 90 80 70 60 50 40 30 20 10 40 30 20 10 0 Jan May Sep Jan 05 May Sep Jan 06 May Sep Jan 07 May Sep Jan 08 May 09 Sep Source: Reuters EcoWin 0
Job insecurity prompted spending cull 80 Unemployment Expectations Net % balance of people expecting higher unemployment in the next year 80 70 70 60 60 50 50 Net balance 40 30 20 40 30 20 10 10 0 0-10 -10-20 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09-20 Source: Reuters EcoWin
Sentiment drives consumption 10 Consumer Confidence % balance of responses - are you more or less optimistic about prospects for the economy? 10 5 5 0 0-5 -5-10 -10 Index -15-15 -20-20 -25-25 -30-30 -35-35 -40 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09-40 Source: Reuters EcoWin
During this recession... So far Biggest fall in output since the 1930s Over a million jobs lost More than 1 million NEETs Collapse in business investment spending Inflation in the UK is now negative
Biggest fall in GDP since 1930s 6 5 4 3 2 1 The Economic Cycle - Growth in UK National Output Annual percentage change in GDP at constant prices 6 5 4 3 2 1 Percent 0-1 -2-3 -4-5 -6 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 0-1 -2-3 -4-5 -6 Source: UK Statistics Commission
Unemployment will continue to rise 12.0 UK Economic Growth and Unemployment Annual percentage change in GDP at constant prices, percentage unemployed 12.0 10.0 10.0 8.0 Unemployment (% of the labour force) 8.0 6.0 6.0 4.0 4.0 Percent 2.0 0.0 2.0 0.0-2.0-4.0 Real GDP (Annual % Change) -2.0-4.0-6.0-6.0-8.0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10-8.0 Source: UK Statistics Commission
How to get out of this mess?
The Policy Response to Recession Deep cuts in interest rates Quantitative easing ( 175bn+) Bank bail outs and state ownership Incentives e.g. VAT cut and the car scrappage scheme Huge rise in government borrowing Depreciation of Pound e.g. against Euro and US dollar
Bank of England cut interest rates Percent
Percent But who pays the base rate?
Cash for clunkers has had an effect cent Perc
Big Risks Lie Ahead Huge debt problem personal and public High unemployment Risks of deflation UK is exposed to rising oil and food prices Bounce back in house prices is dangerous
Still much debt left to repay Insolvencies and Consumer Debt Outstanding Individual insolvencies, seasonally adjusted Insolvencies 30000 27500 25000 22500 20000 17500 15000 12500 10000 7500 5000 250 225 200 Personal Insolvencies (number per quarter) Outstanding Consumer Credit bn 30000 27500 25000 22500 20000 17500 15000 12500 10000 7500 5000 250 225 200 (billions) 175 150 125 175 150 125 billions 100 75 100 75 97 98 99 00 01 02 03 04 05 06 07 08 09 Source: Reuters EcoWin
The fiscal position is dire 55.0 UK Government Spending and Taxation Measured as a percentage of national income (09-10 is a forecast from the OECD) 55.0 52.5 52.5 50.0 50.0 Per cent of GDP 47.5 45.0 42.5 Government Spending 47.5 45.0 42.5 40.0 Total Tax Revenue 40.0 37.5 37.5 35.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 35.0 Source: OECD World Economic Outlook
Debt mountain no free lunch % of GDP 90 80 70 60 50 40 30 Gross Government Debt (% of GDP) UK Government Borrowing and Debt Budget balance and gross government debt as a % of GDP 90 80 70 60 50 40 30 5.0 2.5 Annual government budget balance Budget surplus 5.0 2.5 0.0 0.0 % of GDP -2.5-5.0-7.5 Budget deficit -2.5-5.0-7.5-10.0-10.0-12.5-12.5 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: OECD World Economic Outlook
Deflationary threats persist 6.0 Retail Price and Consumer Price Inflation in the UK Annual percentage change in the retail price index and CPI 6.0 5.0 4.0 All items retail price index (RPI) 5.0 4.0 3.0 3.0 Percent 2.0 2.0 1.0 1.0 0.0 Consumer price index 0.0-1.0-1.0-2.0 97 98 99 00 01 02 03 04 05 06 07 08 09 10-2.0 Source: UK Statistics Commission
Beware deflation Falling prices are good news for consumers why should we worry?
Beware deflation Debts are harder to pay off Businesses make less profit Pressure on wages to fall We postpone spending
The Optimists Recessions create opportunities Cheaper pound will help exports People will save more Fresh growth will be (a) Balanced( exports and investment) (b) Greener Sustainable (because of a and b)
When will recession reallyend? When European economy picks up speed When banks have repaired their own finances When businesses start hiring When consumer confidence recovers sufficiently
Prospects for the North East
Tyneside s structural problems One child in four in relative poverty Highest regional unemployment Lowest investment in transport per head of pop Smallest stock of businesses in UK 24% of households have no one in work 60% of jobs are in the public sector Huge economic divide withinthe NE
Loss of industrial jobs has hit NE hard Regional Unemployment Rates Claimant Count Measure, % of the labour force 13 13 12 12 11 North East 11 10 10 9 9 8 8 GBP 7 6 5 London 7 6 5 4 4 3 2 South East 3 2 1 1 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 0 Regional Claimant count rate % : North East Regional Claimant count rate % : South East Regional Claimant count rate % : London Source: ONS
Less of a housing slump this time 350000 United Kingdom House Prices Average house price, seasonally adjusted, s 350000 300000 300000 250000 250000 200000 200000 GBP 150000 150000 100000 100000 50000 50000 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 0 London, all properties, average price North, all properties, average price United Kingdom, all properties, average price Source: Reuters EcoWin
Reasons to be cheerful Celebrate world class businesses Sage business management software Kilfrost - a world leader in aviation de-icing technology SMD, CDC Marine and Tomkins sea bed engineering 1/3 rd of all UK pharmaceutical output is in North East Biofuels Corp - world's largest bio-diesel plant at Seal Smith Electric Vehicles biggest manufacturer of electric vehicles in the world, based in Washington Top class research universities in Newcastle and Durham Only region which exports more per head than it imports
A Greener Road to NE Recovery? Renewable Energy Digital Media Life Sciences Auto Electronics
At the foot of recession?
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