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UK Economic Outlook
July 2017
www.pwc.co.uk/economics
PwC
Global outlook
UK economic trends and prospects
UK housing market outlook
‘Nowcasting’ current GDP growth
Contents
1
2
3
2
July 2017UK Economic Outlook
4
PwC
Global growth in 2017 should be slightly stronger than in 2016
Source: PwC main scenario
Key
= % GDP growth in 2017
Global (MER) 2.9%
Global (PPP) 3.4%
Eurozone 1.6%
3
July 2017UK Economic Outlook
France
1.5
Mexico
1.5
US
2.2
Spain
2.3
UK
1.5Germany
1.5
Canada
2.0
Russia
1.1
Greece
1.6
Italy
1.0Japan
1.0
South Africa
0.9Brazil
0.4
Australia
2.7
China
6.5India
7.3
Ireland
3.6
Country
x.x
UK economic trends and prospects
PwC
Growth in UK services has been strong since the recession, but manufacturing and construction have lagged behind
Source: ONS
5
July 2017UK Economic Outlook
70
75
80
85
90
95
100
105
110
115
120
2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3
Index (Q1 2007 = 100)
Figure 2.1: Sectoral output and GDP trends
Services GDP Manufacturing Construction
Services
GDP
Manufacturing
Construction
PwC
Growth in consumer spending and the services sector slowed in Q1 2017, contributing to weaker GDP growth
Source: ONS
6
July 2017UK Economic Outlook
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
Q1 Q2 Q3 Q4 Q1
2016 2017
% c
hange o
n p
revio
us q
uart
er
Figure 2.2: Trends in GDP, consumer spending and the services sector
GDP Consumer expenditure Services
PwC
Relatively strong post-Brexit trends in the services and manufacturing sectors have tailed off in recent months
Source: Markit/CIPS
7
July 2017UK Economic Outlook
30
35
40
45
50
55
60
65
2007 JAN 2008 JAN 2009 JAN 2010 JAN 2011 JAN 2012 JAN 2013 JAN 2014 JAN 2015 JAN 2016 JAN 2017 JAN
Figure 2.3: Purchasing Managers’ Indices of business activity
Above 50 indicates
Services
Manufacturing
Downward blipafter Brexit
vote
PwC
Concerns about Brexit have left sterling weak against the dollar and euro, pushing up UK import prices and inflation
Source: Bank of England
8
July 2017UK Economic Outlook
1.000
1.100
1.200
1.300
1.400
1.500
1.600
2016JAN
2016FEB
2016MAR
2016APR
2016MAY
2016JUN
2016JUL
2016AUG
2016SEP
2016SEP
2016OCT
2016NOV
2016DEC
2017NOV
2017MAR
2017MAR
2017MAY
2017JUN
Figure 2.4: US dollar and euro exchange rates against the pound
USD/£
EUR/£
PwC
Low levels of unemployment no longer pushing up UK wage growth due to low unionisation and a more flexible workforce
Source: Markit/CIPS
9
July 2017UK Economic Outlook
-5%
0%
5%
10%
15%
20%
25%
30%
35%
2% 4% 6% 8% 10% 12%
No
min
al
wag
e g
row
th
Unemployment rate
Figure 2.5: UK Phillips Curve shifts and flattens over time
1971-1992 1993-2007 2008-2016 Linear (1971-1992) Linear (1993-2007) Linear (2008-2016)
PwC
UK growth is likely to ease in 2017-18 due to Brexit-related uncertainty and slowing consumer spending growth
Source: ONS, PwC scenarios
Strong growth
Main scenario
Mild recession
10
July 2017UK Economic Outlook
-8%
-6%
-4%
-2%
0%
2%
4%
2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1
Figure 2.6: Alternative UK GDP growth scenarios Projections
PwC
London growth has slowed but remains above UK average -all regions projected to have positive but modest growth
Source: PwC analysis
11
July 2017UK Economic Outlook
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
London England South East South West UK EastMidlands
East Anglia North West North East Wales Yorkshire &Humberside
Scotland WestMidlands
N Ireland
Figure 2.7: PwC main scenario for output growth by region in 2017 and 2018
2017 2018
PwC
UK inflation heading above 3% later this year in our main scenario – but considerable uncertainties remain
High
inflation
Main
scenario
Low
inflation
Source: ONS, PwC scenarios
12
July 2017UK Economic Outlook
0%
1%
2%
3%
4%
5%
2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1
% change on a year earlier
Figure 2.8: Alternative UK inflation (CPI) scenarios
Inflation target = 2%
Projections
PwC
Real earnings growth is projected to remain negative as inflation picks up and wage growth stays subdued
Source: ONS, PwC analysis
13
July 2017UK Economic Outlook
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
% change p.a.
Figure 2.9: CPI inflation vs average earnings growth
CPI
Earnings
Projections
Real squeeze
PwC
Summary: UK economic trends and prospects
3
We project that London could remain the fastest growing UK region in 2017-18, but its pace of expansion is expected to slow significantly from earlier rapid rates. Other regions are projected to see average real growth in 2017-18 of around 1-1.5%, but we do not predict negative growth in any region in our main scenario.
1The UK economy grew by 2% in the year to Q1 2017, but the quarterly rate fell to 0.2%, primarily as a result of a softening in consumer spending and services growth.
2In our main scenario, we project UK growth to slow to 1.5% in 2017 and 1.4% in 2018. The UK would avoid recession in this scenario, although risks to growth are still weighted somewhat to the downside given the uncertainties associated with Brexit.
4Wage growth continues to be subdued despite the lowest unemployment rate since 1975. This suggests that the traditionally negative relationship between these two variables, as described in the Phillips Curve, may have broken down.
14
July 2017UK Economic Outlook
5Consumer price inflation is likely to rise above 3% later this year. This continues to be driven by the exchange rate depreciation since the Brexit vote, although this effect could start to fade later in 2018 if wage growth remains subdued.
UK Economic Outlook
PwC 15
July 2017
UK housing market outlook
UK Economic Outlook
PwC 16
July 2017
Our latest analysis of the UK housing outlook covers:
1. Recent housing market developments
2. The outlook for UK and regional house prices: updated projections to 2025
3. The impact of government housebuilding targets on these projections
4. Local housing market trends
UK Economic Outlook
UK Economic Outlook
PwC 17
July 2017
House price inflation did not react to Brexit as quickly as some expected, but has shown signs of slowing during 2017
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Mar06
Mar07
Mar08
Mar09
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15
Mar16
Mar17
Year
-on
-yea
r %
ch
ange
EU
referendum
Figure 3.1. Annual rate of house price inflation
Source: ONS
UK Economic Outlook
PwC 18
July 2017
Transaction volumes appear to have suffered more from Brexit, but these effects are compounded by other factors such as stamp duty reform
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Mar06
Mar07
Mar08
Mar09
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15
Mar16
Mar17
EU
referendum
Stamp duty
reform effective
Figure 3.3. Annual growth in UK housing transactions
Source: ONS
UK Economic Outlook
PwC 19
July 2017
In our main scenario, we project house prices to rise at a modest rate of 3.7% in 2017, but to continue to outstrip earnings growth in the medium term, averaging around 4%
-10%
-5%
0%
5%
10%
15%
20%
2000 2002 2004 2006 2008 2010 2012 2014 2017 2019 2021 2023 2025
% c
han
ge
on y
ear
earlie
r
Figure 3.4. UK house price inflation main scenario projection
Source: ONS house price index historical data, PwC projections
UK Economic Outlook
PwC 20
July 2017
An increase in housebuilding in line with government targets would be welcome, but might only reduce the average UK house price by around £5,000 in 2025
Table 3.3. UK house prices – the potential impact
of increase supply
Current trends would project 216,000 new homes a year by
2020. Increasing that to 250,000 a year would increase housing stock growth from 0.9% to 1.1% a year.
Government housebuilding targets: “a million homes by 2020 and half a million more by 2022”
Source: PwC analysis using the ONS house price index and DCLG new supply of housing
UK Economic Outlook
PwC 21
July 2017
We project that London’s house price growth will slow down significantly, to below the UK average, while the East and other southern English regions will remain stronger
0%
1%
2%
3%
4%
5%
6%
East ofEngland
Yorkshireand TheHumber
SouthWest
WestMidlands
London NorthWest
SouthEast
NorthEast
EastMidlands
Wales Scotland NorthernIreland
2017 2018
UK average 2017
UK average 2018
Figure 3.5. Projected house price inflation in UK regions 2017 and 2018
Source: PwC analysis based on ONS house price index
UK Economic Outlook
PwC 22
July 2017
In our low scenario, a more severe impact from Brexit on earnings growth and tighter credit conditions could see house price inflation average only around 1% in the medium term, but there are also upside possibilities
-10%
-5%
0%
5%
10%
15%
20%
2000 2002 2004 2006 2008 2010 2012 2014 2017 2019 2021 2023 2025
Baseline scenario High scenario Low scenario
Figure 3.6. Alternative UK house price inflation scenarios
Source: PwC analysis based on ONS house price index
UK Economic Outlook
PwC 23
July 2017
A quarter of all UK local authorities still have house prices below their pre-crisis 2007 peaks, with the sharpest shortfall being seen in Northern Ireland and the North East
Figure 3.7. Local authority areas where
house prices are still below pre-crisis peak
levels in 2007
Source: ONS/Land Registry; PwC analysis
UK Economic Outlook
PwC 24
July 2017
Since 2014, there has been a marked shift in the pattern of house price growth within the capital, as the outer boroughs saw much larger rises than their inner London boroughs
Figure 3.8. Relative cumulative house price
rises in London boroughs (2007-2014)
Figure 3.9. Relative cumulative house price
rises in London boroughs (2014-2017)
Source: ONS/Land Registry; PwC analysis
UK Economic Outlook
PwC 25
July 2017
The challenging affordability outlook in London has also seen housing demand, and therefore prices, grow faster in the commuter belt since the start of 2016
Figure 3.11. The fastest growing commuter towns and cities by house price growth (2016-2017)
Source: ONS/Land Registry; PwC analysis
UK Economic Outlook
PwC 26
July 2017
Summary: UK housing market prospects
1House prices in the UK were not impacted by the Brexit vote as quickly as some expected, but has weakened in early 2017. Transaction volumes appear to have suffered more, but these effects were compounded by other factors such as stamp duty reform.
3Whilst increasing homebuilding to the government’s target of 250,000 a year is welcome and might restrict future house price growth slightly, it is unlikely to provide a quick fix to the affordability problem given many past decades of under-supply.
2
We anticipate that the slowdown in the housing market will continue for the rest of 2017, yielding annual house price growth of only around 3.7%, down from 7% in 2016. This could be felt the hardest in London, where we project house price rises to slow to below the UK average in 2017-18.
4
There has been a structural shift in London’s housing market over the past few years as house price growth has moved outwards from the centre in light of growing unaffordability and stamp duty reform. We expect this trend to continue, with commuter belts around London seeing stronger house price growth than the capital.
UK Economic Outlook
PwC 27
July 2017
‘Nowcasting’ current GDP growth
UK Economic Outlook
PwC 28
July 2017
The ONS releases a preliminary estimate of GDP growth around a month after the end of each quarter….
Time
Month 1 Month 2 Month 3
Quarter ONS preliminary estimate of GDP
Month 4
Lag
Figure 4.1. Timeline of the preliminary ONS GDP data release
Source: ONS, PwC
UK Economic Outlook
PwC 29
July 2017
…and these preliminary ONS estimates are often revised significantly before the final estimate, though these revisions have declined since the 2008-9 crisis
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Q1
199
2
Q3
199
2
Q1
199
3
Q3
199
3
Q1
199
4
Q3
199
4
Q1
199
5
Q3
199
5
Q1
199
6
Q3
199
6
Q1
199
7
Q3
199
7
Q1
199
8
Q3
199
8
Q1
199
9
Q3
199
9
Q1
200
0
Q3
200
0
Q1
200
1
Q3
200
1
Q1
200
2
Q3
200
2
Q1
200
3
Q3
200
3
Q1
200
4
Q3
200
4
Q1
200
5
Q3
200
5
Q1
200
6
Q3
200
6
Q1
200
7
Q3
200
7
Q1
200
8
Q3
200
8
Q1
200
9
Q3
200
9
Q1
201
0
Q3
201
0
Q1
201
1
Q3
201
1
Q1
201
2
Q3
201
2
Q1
201
3
Q3
201
3
Q1
201
4
Q3
201
4
Q1
201
5
Q3
201
5
Q1
201
6
Q3
201
6
Ab
solu
te s
ize
of re
vis
ion (
% Q
oQ
gro
wth
)
Pre-crisis
average:
0.36%
Post-crisis average:
0.19%
2008-9 average 0.61%
Figure 4.2. The absolute size of revisions to UK GDP growth
Source: ONS, PwC
UK Economic Outlook
PwC 30
July 2017
Central banks and others have developed ‘nowcasts’ as more timely estimates of current GDP growth
Figure 4.3. Performance of UK nowcasting models
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
NIESR, 2009 (2001Q2 - 08Q4) Mitchell, 2009 (2001Q2 - 08Q4) ONS preliminary estimate(2001Q2-08Q4)
Bank of England, 2014 (2004Q1-13Q4)
RM
SE (
% Q
oQ
)
Relative to final GDP Relative to
preliminary GDP
Source: Mitchell (2009), Bank of England (2017), ONS, PwC
UK Economic Outlook
PwC 32
July 2017
2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017Q1
ONS Services index ONS Industrial production index ONS Construction index
ONS Retail sales index Nationwide House Price Index ONS Manufacturing Index
1
2
3
4
5
Sector output indices are strong predictors of GDP, but including other indicators, such as house prices, materially improves our ability to nowcast movements in GDP
Figure 4.5. Top 5 variables that impact our nowcasts over the past 4 years
Source: PwC
UK Economic Outlook
PwC 33
July 2017
Our nowcast suggests that GDP growth in Q2 2017 will continue to be sluggish at around 0.3% (QoQ)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
Q12017
Q22017
GD
P g
row
th (
% Q
oQ
)
Nowcast
Figure 4.6. UK GDP growth (% Q-on-Q) Q2 2013 – Q2 2017
Source: ONS, PwC
UK Economic Outlook
PwC 34
July 2017
This is driven by somewhat stronger growth in the services sector than in Q1 2017, offset by weaker production and construction sectors and house prices
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
ONS Servicesindex
ONS Industrialproduction
index
ONS RetailSales index
ONSNationwidehouse price
index
ONSConstruction
index
All othervariables
Q2 2017Nowcast
GD
P g
row
th (
% Q
oQ
)
+0.35% -0.06%
+0.02% -0.03%
-0.06%+0.03% +0.25%
Figure 4.7. A decomposition of our Q2 2017 GDP growth nowcast
Source: PwC
UK Economic Outlook
PwC 35
July 2017
Summary: Nowcasting current GDP growth
1Businesses and policy makers need to keep a constant watch on the UK economy, but the preliminary ONS estimate of GDP growth is released with a significant lag after the end of each quarter. This creates the need for more timely indicators of current economic activity.
3
To provide a more timely estimate of GDP in the UK we have built our own nowcastingmodel utilising machine learning techniques. Our analysis shows that sector output indices are strong predictors of GDP growth, but the inclusion of other indicators, such as house prices, materially improves our ability to predict movements in GDP.
2Nowcasting models can meet this need by utilising frequently released information to assess current economic activity. They are used across the globe, most notably by central banks including the Bank of England.
4
Our nowcasting model suggests that GDP growth in the second quarter of 2017 will continue to be sluggish at around 0.3% relative to the previous quarter. This is up very slightly from the ONS estimate of 0.2% in the first quarter of 2017 due to somewhat stronger growth in the services sector, offsetting weakness in the production and construction sectors. This suggests that the first half of 2017 will be the weakest six month period for UK GDP growth since 2012 during the Eurozone crisis.
Contacts for more information about this report
John Hawksworth (chief economist) – [email protected] / 0207 213 1650
Richard Snook (housing) – [email protected] / 0207 212 1195
Jonathan Gillham (nowcasting) – [email protected] / 0207 804 1902
Lucy Rimmington (economist) – [email protected] / 0207 804 5778
Jamie Durham (economist) – [email protected] / 0207 804 6898
Sam Hinds, Hugh Dance and George Mason also made important contributions to the report, as did Andrew Sentance, our senior economic adviser.
For more information on our Economics services or to access the full report, please see our website at:
http://www.pwc.co.uk/economics
http://www.pwc.co.uk/ukeo
This publication has been prepared for general guidance on matters of interest only, and does
not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained
in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its
members, employees and agents do not accept or assume any liability, responsibility or duty of
care for any consequences of you or anyone else acting, or refraining to act, in reliance on the
information contained in this publication or for any decision based on it.
© 2017 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to
the UK member firm, and may sometimes refer to the PwC network. Each member firm is a
separate legal entity. Please see www.pwc.com/structure for further details.