Dr. Andrew Sentance, Chief Economist, British Airways plc
The Changing Structure of Long Term Finance

Power Point Presentation

Finance and property in a changing world economy

Outline

• Setting the scene
• Macroeconomic climate
• Globalisation and integration Demographics
• Implications for finance and property

Paradoxes in a changing world?

• We survived the Asian crisis
• Prices falling but interest rates are rising Valuation of internet companies
• Performance of the US economy/Wall Street
• Stagnation of Germany and Japan
• Roller-coaster ride of oil price
• Failing unemployment despite massive restructuring

Macroeconomic changes

Good News:
• Low inflation
• Sound public finances
• Financial market "discipline"
• Labour market 'flexibility"

Bad News:

• Prices failing in some sectors Asset bubbles
• Cycle has not been abolished
• No growth miracles
• Currency and commodity price instability

Growth in major regions

Real GDP

• % changes on previous year

World inflation trends

• % annual increase in consumer prices

UK inflation outlook

• % annual increase in RPI/RPIX

Real interest rates

• Long-term government bonds, deflated by CPI

What is globalisation?

• Growth of world trade
• The driving forces

Falling cost of communications

• Real cost per unit, 1960= 100

Impact of globalisation:

Globalisation: key effects:

• Growth of trade, especially within regions
• Increasing flows of capital, especially short-term
• Asia/Pacific increasing its market share
• Downward price pressure benefits consumers
• Manufacturing and finance most affected
• Pressure to consolidate and restructure
• Much unexplored potential:
  • Many services not traded
  • EU, US and Japan still trade only around 10% of GDP -
  • Many regulatory barriers remain, especially in services -
  • "Hidden" protectionism and restrictions on investment -
  • Africa, South Asia and "transition" economies

• The changing role of government (1)

• The changing role of government (2)

• Impact of demographic change:
  • Labour force and economic growth
  • Public finances
  • Savings and investment flows
  • Consumer requirements

Implications for property and finance:

• Low inflation and interest rates
• Limited reduction in REAL cost of borrowing
• Risk of asset bubbles. The cycle has not been abolished!
• Scope for diversification of risk across geographical boundaries
• Globalisation of business - pressure for restructuring and scope for relocation
• Watch the regulatory agenda. Regulation is not disappearing, just changing its form!