John Greenwood, Invesco chief economist, says in his latest quartely outlook that the economies of emerging Asia and Latin America will provide the strongest growth.
In the UK the first quarter of 2013 was notable for three significant developments: the downgrade of UK government debt from AAA status by Moody’s on February 22, the further increase in the projected public sector debt ratio (to 85.6% in 2016-17) announced in the Budget on March 20, and the Chancellor’s decision to amend very modestly the remit of the Bank of England’s Monetary Policy Committee. Moody’s downgrade of the UK followed the release of the real GDP figures for 2012 Q4 showing a contraction of 0.3% quarter-on-quarter, confirming the persistent weakness of UK economic performance.
For Moody’s this translated directly into lower tax revenues and therefore higher borrowing requirements in the future. Normally one would expect borrowing costs to rise as a result of such a downgrade, but in this case – like the US in the summer of 2011 – gilt yields actually edged downwards in the week of the announcement, and the main impact as on sterling which fell 6% on a trade-weighted basis over the quarter.
Britain’s macro-economic data continue to present a complicated picture. On the one hand overall GDP remains tagnant with 0.2% growth of PCE in Q4 offset by a decline of 0.4% in gross fixed investment, but on the other hand if net exports are excluded, the rest of the economy (i.e. domestic demand) increased by as much as 1.8% in the year to 2012 Q4. These figures strongly suggest that the main problem for Britain is the weakness of exports – despite the depreciation of Sterling – and especially the economic weakness in Europe which accounts for as much as 40% of Britain’s exports.
Another paradox is the apparent mismatch between the stagnant output and expenditure figures on one side and the relatively buoyant employment figures on the other. Thus despite the fact that real GDP grew by only 0.2% over the
year in 2012, employment increased by 300,000 jobs in 2012, and the OBR expects the creation of another 300,000 jobs in 2013, a growth rate of 1.0%. For every job lost in the public sector, six jobs have been created in the private sector. Moving to the January-March quarter the PMI for services showed a healthy increase to a 5-month high of 51.8, and February retail sales volume showed a strong upturn of 2.1%.
However, with the OBR reducing their growth forecast for 2013 to just 0.6%, the Budget figures showed that progress in reducing the current budget deficit has essentially stalled, with public sector net borrowing (PSNB) adjusted to eliminate one-off factors remaining at around £120 billion for the three financial years 2011/12-2013/14, and declining from 7.9% of GDP only to 7.5%. Subsequent projected declines in the deficit to 2.3% of GDP in 2017-18 depend heavily on the OBR’s forecast of a recovery in economic growth (to 2.3% in 2015 and 2.7% in 2016).
Between the Autumn Statement and the Budget the underlying position of the public finances had deteriorated sharply. Assuming the OBR forecasts are reliable, the cyclically adjusted current budget will now return to surplus in 2017/18 instead of 2016/17, and this means the ratio of government debt to GDP will peak at 85.6% of GDP instead of 79.9% a year earlier. Strategically the Chancellor couldnot ease fiscal policy as this would add to borrowing, yet he could not cut borrowing as this would take demand out of an economy already suffering from weak aggregate demand. The result was a neutral budget where tax cuts (such as an increase in the personal allowance to £10,000, a further reduction in corporation tax, he cancelation of a planned rise in fuel duty, and 1p off a pint of beer) were offset by revenue increases (tougher anti-avoidance measures and increases in national insurance associated with the revised state pension system from 2015-16 onwards). The other key technique was to cut current departmental spending (which is inside the cyclically-adjusted balanced budget target) and increase capital spending (which is outside).
With inflation likely to remain around 2.8% for much of the year and wage growth likely to be weak the scope for a real GDP recovery is inevitably limited. 2013 in Britain is expected to be another year of slow growth and balance sheet repair while waiting for a eurozone recovery.