« Exchanges at Goldman Sachs

The UK Macro Environment


Kevin Daly, senior European economist in Global Investment Research at Goldman Sachs, discusses factors influencing the growth outlook in the UK, including housing, wages and energy prices.

This podcast was recorded on March 30, 2015.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2015 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges: Goldman Sachs were people from our firm share, their incites on developments currently shaping markets, industries and the global economy objects. Your global had of corporate communications common today will be talking that UK economy, the United Kingdom, is coming off a year of relatively strong economic growth bashing comparison with its appears in the EU. Persistent low inflation remains a risk, however, in what's an election year in the UK to discuss what twenty fifteen has in store for the United Kingdom joined by Kevin Daily. Who is the senior european economies? Goldman Sachs focused on the UK. Kevin walk
to the programme that you take. As he said, the UK traditionally demonstrated grow somewhere between the EU and the? U S, but recently skewed much closer to the latter will hire. So what are the reasons that the UK has been able to drive stronger economic growth in its european counterparts? Uk very interesting situation goes in the seven years of the global financial crisis. Five of those Poland's UK was pretty terrible and then the last two plus here. Yours is being exceptionally good answer this various theories as to why that turn round took place, but for us by far the most convincing, in the sense that it can account both for the under performance and the subsequent outperformance, but also the timing of the transition from one to the other
Was at the Bank of England in the middle of two thousand and twelve? They they swap their focus from quantitative of easing too to creditors into really focusing on improving the provision of credit to to households and businesses by lucky coincidence that also sided with Mario Draghi that the presence of these bees commitment to do quote unquote, whatever it takes to save the the Euro area economy. So he saw a big reduction in risk at that time. So these two factors combined to really improve the provision of credit to the UK economy in and really drove growth both for households and businesses. Thereafter explain that differences you she had between a focus on credit.
focus on pure queuing. The FED did both amid the Feds Curie Programme had a significant credit element in it and in the sense that the FED was also bind mortgage backed securities. Who was helping to drive down the costs of mortgage funding? For U S: households in the UK, under the Queue III programme that existed between two thousand nine and mid two thousand twelve before they swapped to credit easing. They only board. Uk government securities only bought UK guilt or the equivalent of U S, treasuries, some fine and creating liquidity. But UK banks were not liquidity constrained. They had a problem with their funding Carson and that's what credit easing seeks to achieve to help drive down the funding Caso UK banks that they in turn can provide more abundant and cheaper credit to the wider economy. Given that the outlook right now, do you see the UK maintaining its growth rate through the end of this year and what are the risks to the growth picture there?
We continue to be relatively optimistic with three percent growth for this year and next year, relative to a consensus of around two and a half send for both part of the reason. Why were optimistic? Is we in the banking sector in the UK continues to improve credit provision continue to improve, but the new additional factor too. That has been the decline in oil prices, from the middle of two thousand and fourteen onwards. I mean this is for the UK, as it provides a really big stimulus on our estimates. We calculate will boost the level of GDP by around one and a half per cent, so close to three quarters of a per cent on gene people per year over two years, so is the full impact in the lower oil price been felt felt
economy now, is there more to come? No, it takes a while to come through an azure. If I can broaden. The point is that I think one of the reasons for optimism on global growth is the view that oil prices, when you have a big decline, such as we have had in the last six to nine months, almost immediately see those effects on inflation rates, the through petrol prices, gasoline prices people have to pay to the effects inflation through almost straight away, but the effects and growth on scene, typically for three to four quarters before they come through, was household begin to adjust their spending patterns to the fact that petrol prices are lower and so forth. So is our view that it will contribute to stronger growth, both in the U K, also in the in Europe, more broadly and and globally do U S. The impact is typically lessen the you ass, because the
ass. It is now increasingly large oil producer says, is great for U S! Consumer prices minuses in the recycling these, whereas for UK in Europe this is pretty much only passes, but about the workforce. One of the criticisms of the growth and seen me says that hasn't filtered through to the workforce. The UK are employment rates, come down below six percent, but movies are to cease some wage growth this year and beyond. We think one of the very interesting developments in the UK in the last few years is quite how strong and employment growth has been one plus. You say, unemployment have come down and point. It is gone up with. In contrast, the? U aspirin we are now in the UK at a record high employment rate, but that's been combined with very weak wage growth, which is an unusual combination. One more. If you see employment strength, you would expect to see wages relatively strong, and I think there s one nation for
that'll, or we have argued that the explanation for that is that the strength of employment has been driven by big increase in labour supply, so amongst older workers in particular, you ve seen quite substantial changes in rich harm legislation and in the UK and in UK historically are expected to retire at the age of sixty five. You had signal current state pension benefits kicked in those days. They ve change to the rules on than they ve also push back the pension availability so in the UK had a much bigger increase in participation amongst older workers, in particular. So with this big increase in labour supply, you had the combination of strong employment book due to the abundance of labour relatively weak. Wage growth is a com. that we think this year. This is the point where wages now will also begin to accelerate
now that we are at a record high employment rate and and very low unemployment rates. She usually when you see on low employment rates in and strong growth, you expect to see interest rates, move it up. What's carrots down so far and what could change that going forward through part of it is as being that inflation has been so low that bank being in this, isn't inflation target or an explicit inflation target her? Now they don't respond to inflation today. That would be impossible to after look through some of these short term of thanks, They look in the medium term, inflation dynamics and bought inflation, Underlying inflation press in the UK have been very modest and we expect inflation to be close to zero with through this year, due to the impact of lower petrol price in particular, but as unemployment continues to fall and as wages, at least in our forecasts, began to rise and with
relatively strong as we expect. We believe that the next move in interest rates in the UK is gonna be higher call the lower. I don't know if central four cost at least we expect that first rate ride to come in towards the end of this year. We would argue that the rest, Roosevelt for costs that the first rate hike cuz- it's shifted out further, so take place later than we currently expect. Given inflation dynamics have been. Even weaker than we anticipated in the dynamic on the continent as well yeah dynamic, I'm an hour. There are signs that the Euro area is doing better. Now, for some of the reasons that have already talked about the reply to the UK so well, ices, but the Euro area has the additional booster over much weaker exchange rate, which is good for growth, but it is certainly has been. The biggest risk
the UK, and and and remains still, although, as I say, the near term, dynamic in the Euro area is more positive. Political developments there are are still risk both for Euro area and and UK growth. The chancellor released a new budget for the UK in the middle of March. How will that budget impact growth? Projections for the UK doesn't change the pictured all the votes. We think we re pretty limited the opportunities to do that. Much in the budget, so close to election was pretty limited, so this was very much a budget focus on politics rather than one that introduce any substantive economic changes, so the economic implications. The budget are close to zero. We would argue, ah home prices, they were up in the UK a percent last year and
building continues to lag demand and has over the really over the last decade or so. How would you put upward pressure on prices? So what's the state of the market now I know this is been of some concern to both the political classes and that you cannot have policymakers and what increase in home prices mean for the economies all tat you know the UK is is in many senses, scene and- and I think correctly so as being the european economy, that is most likely you ass in terms of its economic policies and so forth and prior to the global financial crisis. The lot of similarities were drawn between the UK is housing, marketing and the? U S is housing market in our view incorrectly, so because this is one area where I think the UK? U S or are very different and and you
you touched on on the reason for that itself, the UK is almost more like the Manhattan housing market, rather than the? U S, housing market, which is a different beast altogether. I was the UK is a relatively small item. Ok, not not quite a small oars, densely populated, there's Manhattan, but nevertheless a small island, highly densely populated, also because of the planning regulations. There is a chronic hunger supply of of housing in the UK to prior to the crisis, have price of a very high in the EU can and Anne, but on what the? U S and remain very high in the UK, mainly because it in the? U S, it was clear that that was usual bubble. I was due to people speculating on future path. Boys gains in UK the high level of prices since more reflected Jeffrey fundamental lack of supply of housing imbalance and yet so, if you, if you, whether you rented or border home, is just very expensive to purchase a place to live in the UK and- and you know,
over time we expect house building to increase but in a while supply remains limited as it does now is our expectation that prices, nationally will remain relatively robust. Thank Heaven. Good company. maybe I'll, be back on after the elections talk about the future. Thank you Jake. That concludes this episode of Exchange, the Goldman Sachs. We hope you join us again next I'm Jake Seaward thanks for listening. This spot gassed was recorded on March Thirtieth, two thousand fifteen. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or
innovation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast, or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity
Transcript generated on 2021-10-15.