Alan Wilson Oxford Economics November 2008 The macroeconomic environment

2 The macroeconomic environment – a summary

3 Key issues The global background How severe a recession in the UK? What structural changes are taking place? Implications for the regional pattern of growth

The Global Background

5 Rising waves of financial stress

6 At the same time, price rises were squeezing incomes

set to be a very tough year

8 Forecast summary

9 Will policy help? – co-ordinated rate cuts

10 Fiscal policy to support demand

11 Medium-term challenge of rebuilding household balance sheets cannot be avoided

The UK Forecast

13 Oxford Economics’ latest UK forecast %September baseline forecast September extended credit crunch November baseline forecast GDP growth CPI inflation Bank rate Probability50%35%?

14 Libor spreads widened post-Lehmans…

15 …and companies starting to feel the pinch

16 House price falls show no sign of slowing…

17 …and equity market sharply lower…

18 …with household wealth losses over £1.3trn

19 …and huge fall in confidence

20 Blue Book shows even lower saving ratio…

21 …and huge swing needed in financial balance

22 UK companies better-placed than rest of EU…

23 …but GDP down more than expected in Q3…

24 …order books collapsing…

25 …and investment intentions cut back sharply

26 Policy stance has changed dramatically… Bank rescue plan: ■£50 billion to recapitalise UK banks, with £37 billion from government. ■A new government-backed company to guarantee new short and medium-term debt issues by banks with maturities up to three years for use in refinancing maturing interbank borrowings. The government expects the take-up of the guarantee to be of the order of £250 billion. ■The Special Liquidity Scheme (SLS) has also been doubled to £200 billion. Cuts in interest rates – down 200bp in two months Prospect of fiscal action: ■Accelerating government investment ■Tax cuts to be announced in the PBR - £10 billion?

27 Tax cuts key to easing saving correction…

28 …which is key uncertainty in forecast

29 Implications of alternative saving ratios %5% saving ratio (November baseline) 7% saving ratio9% saving ratio GDP growth CPI inflation Bank rate

30 Oxford Economics’ forecast

Sectors and Regions

32 Services an ever growing part of the economy

33 …and an ever rising part of employment

34 Finance & business growing within services GVA

35 …though business not finance for jobs employment

36 Finance & business worst hit by recession UK employment change by broad sector (000’s) Source: ONS; Oxford Economics forecasts

37 How are regional economies affected? Type of impactWhere would we expect biggest effect? Financial services industry Where greatest number of jobs are located ConstructionWhere housing starts and office building have been strongest HousingWhere price disequilibria have been greatest ConsumerWhere there are highest real income effects, consumer debts, unemployment impacts PopulationWhere inward migration has been most driven by availability of jobs Second-round effects Where consumer-related industries and services are located; areas that supply most- affected regions

38 More like 1990s than 1980s Impacts on total employment of each ‘recession’ (000’s)

39 The forecast: Southern regions hit hardest by contraction in jobs

40 Services vital to North West economy, too… Note: Other includes agriculture, extraction, utilities, financial services and public admin Share of employment, 2008

41 …and critical to recovery from recession North West employment change by broad sector (000’s)

42 Conclusions Recession seems inevitable for UK and other developed economies. Severity will be affected by scale of consumer retrenchment. But policy now heavily geared to supporting growth, and possible to see upsides as well as downsides to the forecast. Services – and London – most heavily affected by slowdown, but services are also the key to recovery. North West still expected to see appreciable jobs (and population) growth in the medium term.