ICAEW chart of the week: Inflation around the world

This week we look at how inflation is racing upwards across the world, with the UK reporting in April one of the highest rates of increase among developed countries.

Bar chart showing inflation rates by G20 country: Russia 17.8%, Nigeria 16.8%, Poland 12.4%, Brazil 12.1%, Netherlands 9.6%, UK 9.0%, Spain 8.3%, USA 8.3%, India 7.8%, Mexico 7.7%, German 7.4%, Canada 6.8%, Italy 6.0%, South Africa 5.9%, France 4.8%, South Korea 4.8%, Indonesia 3.5%, Switzerland 2.5%, Japan 2.4%, Saudia Arabia 2.3%, China 2.1%.

Inflation has increased rapidly over the last year as the world has emerged from the pandemic. A recovery in demand combined with constraints in supply and transportation has driven prices, with myriad factors at play. These include the effects of lockdowns in China (the world’s largest supplier of goods), the devastation caused by the Russian invasion in Ukraine (a major food exporter to Europe, the Middle East and Africa), and the economic sanctions imposed on Russia (one of the world’s largest suppliers of oil and gas).

As the chart shows, the UK currently has – at 9% – the highest reported rate of consumer price inflation in the G7, as measured by the annual change in the consumer prices index (CPI) between April 2021 and April 2022. This compares with 8.3% in the USA, 7.4% in Germany, 6.8% in Canada, 6.0% in Italy, 4.8% in France and 2.4% in Japan. 

The UK’s relatively higher rate partly reflects the big jump in energy prices in April from the rise in the domestic energy price cap, which contrasts with France, for example, where domestic energy price rises have been much lower (thanks in part to state subsidies). The UK inflation rate also hasn’t been helped by falls in the value of sterling, making imported goods and food more expensive.

Other countries shown in the chart include Russia at 17.8%, Nigeria at 16.8%, Poland at 12.4%, Brazil at 12.1%, Netherlands at 9.6%, Spain at 8.3%, India at 7.8%, Mexico at 7.7%, South Africa 5.9%, South Korea at 4.8%, Indonesia at 3.5%, Switzerland at 2.5%, Saudi Arabia at 2.3% and China at 2.1%. For most countries, the rate of inflation is substantially higher than it has been for many years, reflecting just how major a change there has been in a global economy that had become accustomed to relatively stable prices in recent years. 

This is not the case for every country, and the chart excludes three hyperinflationary countries that already had problems with inflation even before the pandemic, led by Venezuela with an inflation rate of 222.3% in April, Turkey with a rate of 70%, and Argentina at 58%.

Policymakers have been alarmed at the prospect of an inflationary cycle as higher prices start to drive higher wages, which in turn will drive even higher prices. For central banks that has meant increasing interest rates to try and dampen demand, while finance ministries have been looking to see how they can protect households from the effect of rising prices, particular on energy, whether that be by intervention to constrain prices, through temporary tax cuts, or through direct or indirect financial support to struggling households.

Here in the UK, both the Bank of England and HM Treasury have been calling for restraint in wage settlements as they seek to head off a further ramp-up in inflation. They hope that inflation will start to moderate later in the year as price rises in the last six months start to drop out of the year-on-year comparison and supply constraints start to ease, for example as oil and gas production is ramped up in the USA, the Middle East and elsewhere to replace Russia as an energy supplier, and as China emerges from its lockdowns.

Despite that, prices are likely to rise further, especially in October when the energy price cap is expected to increase by 40%, following a 54% rise in April. This is likely to force many to make difficult choices as household budgets come under increasing strain.

After all, inflation is much more than the rate of change in an arbitrary index; it has an impact in the real world of diminishing spending power and in eroding the value of savings. 

This chart was originally published by ICAEW.

ICAEW chart of the week: Global population

The ICAEW chart of the week looks at how the estimated global population of almost 8bn people is distributed around the world.

Bubble chart showing estimated global population of 7,995m in 2022: South Asia 1,894m, East Asia 1,671m, South East Asia 682m, Pacific 43m, Africa 1,419, Europe 592m, Middle East 357m, Eurasia 246m, North America 511m, South America 443m and Central America & Caribbean 97m.

UN projections show that the planetary population will reach approximately 7,955m in June this year, a 1.0% increase over the 7,875m estimate for June 2021.

The largest region on our chart is South Asia, which has 1,894m inhabitants, including 1,411m in India, 216m in Pakistan, 173m in Bangladesh, 40m in Afghanistan and 31m in Nepal. This is followed in size by the 1,671m people living in East Asia, including 1,432m in mainland China (currently the most populous country in the world), 126m in Japan, 52m in South Korea and 26m in North Korea.

Africa is the third largest region with 1,419m inhabitants, with 482m living in Eastern Africa (including Ethiopia 118m, Tanzania 67m, Kenya 56m, Uganda 50m, Mozambique 34m and Madagascar 29m), 424m in Western Africa (including Nigeria 217m, Ghana 32m, Côte d’Ivoire 27m and Niger 26m), 254m in Northern Africa (including Egypt 106m, Sudan 46m, Algeria 45m and Morocco 38m), 190m in Middle Africa (including the Democratic Republic of the Congo 95m, Angola 35m and Cameroon 27m), and 69m in Southern Africa (of which 60m are in South Africa).

Excluding Russia and Belarus, Europe has 592m people, including 444m in the 27 countries of the EU (including Germany 83m, France 66m, Italy 59m, Spain 46m and Poland 38m), 68m in the UK and 43m in Ukraine, although these numbers are all before taking account of the several million Ukrainians who have been forced to flee the war and are living temporarily in other countries. 

Eurasia, comprising the Commonwealth of Independent States of Russia, Belarus and the ‘stans’ of central Asia, has 246m inhabitants (including Russia 143m and Uzbekistan 34m), while the Middle East has an estimated 357m people (including Turkey 85m, Iran 85m, Iraq 44m, Saudi Arabia 36m and Yemen 32m.

North America has 511m inhabitants (USA 336m, Mexico 137m, Canada 38m), while 97m live in Central America (52m) and the Caribbean (45m), and 443m live in South America (including Brazil 217m, Colombia 51m, Argentina 46m, Peru 34m and Venezuela 34m).

South East Asia has 682m inhabitants, including 277m in Indonesia, 113m in the Philippines, 100m in Vietnam, 70m in Thailand, 56m in Myanmar and 34m in Malaysia. A further 43m people live in the Pacific region, of which 26m are in Australia. 

Although the rate of global population growth was projected to slow significantly in recent years, from 1.3% a year in 2000 when the population was 6.1bn, to 1.0% a year currently and to a forecast of around 0.7% in 20 years’ time, that still means that the number of people on the planet is expected to grow to around 9.8bn in 2050, placing even greater demands on natural resources than today. 

This highlights just how important achieving net zero and environmental sustainability is to the lives and wellbeing of future generations.

ICAEW chart of the week: G7 economic growth

The latest IMF economic forecasts put the UK at the bottom of the pile in 2023, but our chart this week elevates the UK to fifth place out of seven by looking at average growth for the four years from 2020 to 2023.

Chart presenting economic growth for the G7 in 2020, 2021, 2022, 2023 and the average over four years.

USA: -3.4%, +5.7%, +3.7%, +2.3%, average +2.0%
Canada: -5.2%, +4.6%, +3.9%, +2.8%, average +1.4%
Germany: -4.6%, +2.8%, +2.1%, +2.7%, average +0.7%
France: -8.0%, +7.0%, +2.9%, +1.4%, average +0.7%
UK: -9.3%, +7.4%, +3.7%, +1.2%, average +0.6%
Japan: -4.5%, +1.6%, +2.4%, +2.3%, average +0.4%
Italy: -9.0%, +6.6%, +2.3%, +1.7%, average +0.2%

Recent media reports have contrasted the government’s boast of being the best performing economy in the G7 in 2021 with the latest forecasts from International Monetary Fund (IMF) that suggest the UK economy will be bottom of the same league in 2023. Our chart this week attempts to take a step back and look at the overall picture by illustrative average economic growth by the G7 nations over the four years between 2020 and 2023.

These numbers are based on the IMF’s World Economic Outlook and the accompanying World Economic Outlook Database that were published on 19 April, setting out economic forecasts for the world economy over the next few years.

According to the IMF, the USA is the best performing economy in the G7, with average annual economic growth of +2.0% over the period from 2020 to 2023. An economic contraction of 3.4% in 2020 was more than offset by a rebound of 5.7% in 2021, followed by forecast growth of 3.7% in 2022 and 2.3% in 2023. Canada is not far behind, with an average growth of 1.4% over the four years, comprising respectively -5.2%, +4.6%, +3.9% and +2.8% in 2020, 2021, 2022 and 2023.

Germany and France fare pretty similarly to each other, with Germany projected to experience marginally above 0.7% average growth and France marginally below. The patterns are different, however, with Germany having suffered a less severe economic hit during 2020 followed by moderate growth (-4.6%, +2.8%, +2.1%, 2.7%), while France was hit much harder by the pandemic followed by a much stronger rebound before a return to lower growth in 2023 (-8.0%, +7.0%, +2.9%, +1.4%).

The UK is in fifth place in this league table, but at 0.6% average economic growth over the four years selected this is only slightly less than Germany and France. With an economic contraction in 2020 of 9.3%, the UK suffered more severely from the pandemic than the other members in the G7 (although this is partly because of differences in statistical methodologies) but then saw the biggest rebound in 2021 with growth of 7.4%. Growth this year is forecast by the IMF to be 3.7% before falling to an (unfortunately) more typical level of 1.2% in 2023.

Vying for the wooden spoon are Japan and Italy, with Japan continuing a long period of low growth and a slower recovery from the pandemic than the others to average 0.4% a year (-4.5%, +1.6%, +2.4%, +2.3%). Italy secured the bottom position by virtue of being hit hardest by the pandemic and having less of a rebound than others (-9.0%, +6.6%, +2.3%, +1.7%), a net average growth rate of 0.2% over the four-year period.

For those that follow this particular league table, there is a hope that slightly stronger growth than the IMF has forecast could move the UK up one or two places above France and/or Germany. However, the bigger concern for most of us is about the downside risks to the global and UK economies from the war in Ukraine, rampant inflation, and a global cost of living crisis. These may put back even further any hope of returning the UK and other developed economies to a pre-financial crisis path of moderate economic growth.

This chart was originally published by ICAEW.

ICAEW chart of the week: Europe’s gas supply

Our chart this week looks at Europe’s natural gas supply and its current reliance on Russian gas to keep homes warm, businesses operating and gas-fired power plants generating.

Two-column chart on Europe's supply of natural gas in billion cubic metres (bcm) in 2020.

Gas supply of 494bn, comprising Europe production of 213bcm, imports from Russia 158bcm and other imports of 123bcm.

Gas demand: Germany 94bcm, UK 80bcm, Italy 71bcm, Netherlands 44bcm, France 40bcm, other Western Europe 93bcm, Eastern Europe 72bcm.

Europe’s gas supply in 2020 amounted to 494 billion cubic metres (bcm) of natural gas, comprising 213bcm (43%) of domestic production (principally from the North Sea), 158bcm (32%) imported from Russia, and 123bcm (25%) imported from other sources.

For this purpose, Europe excludes Russia, Belarus and Ukraine and these numbers also don’t take account of movements into and out of gas storage. For reference, 1bc) = 38.2 petajoules (PJ) = 10.6 terawatt hours (TWh) = 36.2trn British Thermal Units (BTU).

The biggest users of gas are Germany, the UK, Italy, Netherlands and France, which consumed approximately 94bcm, 80bcm, 71bcm, 44bcm and 40bcm respectively, together adding up to 329bcm or 67% of the total. Other western European countries consumed 93bcm of gas in 2020, including Spain (32bcm), Belgium (18bcm), Austria (9bcm), Portugal (6bcm), Greece (6bcm), Ireland (5bcm), Norway (5bcm), Switzerland (4bcm) and Denmark (3bcm).

Eastern European countries consumed 72bcm, including Poland (22bcm), Romania (12bcm), Hungary (11bcm), Czechia (9bcm), Slovakia (5bcm) and Bulgaria (3bcm). The Baltic states together consumed 4bcm.

Domestic production of 213bcm includes 116bcm from Norway, 41bcm from the UK and 24bcm from the Netherlands, almost all of which was supplied through a network of pipelines starting under the North Sea. The next largest producer was Romania with 9bcm.

The majority of Russia’s supply (around 140bcm) was sent through pipelines into eastern Europe, Germany and Italy, and from there onto western European countries. The balance of around 18bcm was supplied by tankers filled with liquefied natural gas (LNG).

Some of the remaining imports were also supplied by pipelines, in particular from Algeria, Libya and Turkey, but the majority was purchased as LNG on the world market from suppliers including the USA, Qatar, Kuwait, UAE, Nigeria and Trinidad & Tobago among others.

Removing Russia from the gas supply chain will not be easy, especially as the largest consumer of gas – Germany – has no LNG terminals and currently relies on pipelines for almost all of its gas supply.

Despite that, European leaders are working on plans to do so, with the International Energy Agency (IEA) recently publishing a 10-point plan to reduce Europe’s reliance on Russian gas.

This chart was originally published by ICAEW.

ICAEW chart of the week: Government borrowing rates

Our first chart of 2022 highlights how the cost of government borrowing remains extremely low for most of the 21 largest economies in the world, despite the huge expansion in public debt driven by the pandemic.

Government 10-year bond yields: Germany -0.13%, Switzerland -0.07%, Netherlands 0.00%, Japan 0.09%, France 0.23%, Spain 0.60%, UK 1.08%, Italy 1.23%, Canada 1.59%, USA 1.65%, Australia 1.79%, South Korea 2.38%, China 2.82%, Poland 3.87%, Indonesia 6.38%, India 6.51%, Mexico 8.03%, Russia 8.38%, Brazil 10.73%, Turkey 24.21%.

Our chart of the week illustrates how borrowing costs are still at historically low rates for most of the 21 largest national economies in the world, with negative yields on 10-year government bonds on 5 January 2022 for Germany (-0.13%) and Switzerland (-0.07%), approximately zero for the Netherlands, and yields of sub-2.5% for Japan (0.09%), France (0.23%), Spain (0.60%), the UK (1.08%), Italy (1.23%), Canada (1.59%), the USA (1.65%), Australia (1.79%) and South Korea (2.38%).

This is despite the trillions added to public debt burdens across the world over the past couple of years as a consequence of the pandemic, including the $5trn added to US government debt since March 2020 (up from $17.6trn to $22.6trn owed to external parties) and the more than £500bn borrowed by the UK government (public sector net debt up from £1.8trn to £2.3trn) for example.

Yields in developing economies are higher, although China (2.82%) and Poland (3.87%) can borrow at much lower rates than Indonesia (6.38%), India (6.51%), Mexico (8.03%), Russia (8.37%) and Brazil (10.73%). The outlier is Turkey (24.21%), which is experiencing some difficult economic conditions at the moment. Data was not available for Saudi Arabia, the 19th or 20th largest economy in the world, which has net cash reserves.

With inflation higher than it has been for several years, real borrowing rates are negative for most developed countries, meaning that in theory it would make sense for most countries to continue to borrow as much as they can while funding is so cheap. However, in practice fiscal discipline appears to be reasserting itself, with Germany, for example, planning on returning to a fully balanced budget by the start of next year and the UK targeting a current budget surplus within three years.

For many policymakers, the concern is not so much about how easy it is to borrow today, but the prospect of higher interest rates multiplied by much higher levels of debt eating into spending budgets just as they are looking to invest to grow their economies over the rest of the decade. Despite that, with the pandemic still raging and an emerging cost of living crisis, there may well be a temptation to borrow ‘just one more time’ to support struggling households over what is likely to be a difficult start to 2022.

This chart was originally published by ICAEW.

ICAEW chart of the week: Germany

My chart this week is on Germany, where a new ‘traffic light’ coalition government headed by Chancellor-designate Olaf Scholtz is poised to take charge of Europe’s most prosperous nation.

Map of Germany showing population of 83.2m by state or 'bundesländer': Nordrhein-Westfalen (North Rhine Westphalia) 17.9m, Bayern (Bavaria) 13.1m, Baden-Württemberg 11.1m, Niedersachsen (Lower Saxony) 8.0m, Hessen 6.3m, Rheinland-Pfalz (Rhineland Palatinate) 4.1m, Sachsen (Saxony) 4.1m, Berlin 3.7m, Schleswig-Holstein 2.9m, Brandenburg 2.5m, Sachsen-Anhalt (Saxony-Anhalt) 2.2m, Thüringen 2.1m, Hamburg 1.9m, Mecklenburg-Vorpommern 1.6m, Saarland 1.0m and Bremen 0.7m

With a population of 83.2m and a €3.4tn (£2.9tn) economy, Germany is the largest member of the European Union and the fourth biggest national economy in the world after the USA, China and Japan.

The formal agreement of a red-green-yellow ‘traffic light’ coalition between the centre-left Social Democratic Party (SPD), the Green Party and the liberal Free Democratic Party (FDP) means that Angela Merkel can finally retire as Chancellor to be replaced by SPD-leader Olaf Scholz, the current Vice-Chancellor and Finance Minister in the outgoing ‘Grand Coalition’.

According to the coalition agreement, which is still subject to ratification by the three parties, Olaf Scholtz will become the new Chancellor with the SPD filling six of the 15 federal ministries, the Green party filling five ministries and the FDP filling four. Green co-leaders Annalena Baerbock and Robert Habeck are expected to become Foreign Minister and Economy & Climate Change Minister respectively, while FDP leader Christian Lindner is expected to become Finance Minister.

Despite running the most powerful country in Europe, the new coalition is only responsible for the federal government. As the chart illustrates, Germany has sixteen Bundesländer or federal states, comprising Nordrhein-Westfalen (North Rhine Westphalia) with 17.9m people, Bayern (Bavaria) with 13.1m, Baden-Württemberg with 11.1m, Niedersachsen (Lower Saxony) with 8.0m, Hessen with 6.3m, Rheinland-Pfalz (Rhineland Palatinate) and Sachsen (Saxony) each with 4.1m, the city-state of Berlin with 3.7m, Schleswig-Holstein with 2.9m, Brandenburg with 2.5m, Sachsen-Anhalt (Saxony-Anhalt) with 2.2m, Thüringen with 2.1m, the city-state of Hamburg with 1.9m, Mecklenburg-Vorpommern with 1.6m, Saarland with 1.0m and the city-state of Bremen with 0.7m.

The state governments are also run by coalitions. The now federal opposition Union parties (the Christian Democratic Union and the Bavarian Christian Social Union) lead two- or three-party coalitions in seven states, the SPD lead in seven states, the Greens in one state and Der Linke (the Left) in one state. With a proportional voting system at state and federal levels, coalition government is a way of life in Germany, with parties that are in government in one state being in opposition to each other in others.

Despite being the first three-party coalition at a federal level, with the more complicated negotiations that entails, the coalition agreement has been reached fairly ‘speedily’ by German standards – taking just over two months compared with the six months taken to agree the ‘Grand Coalition’ between the Union parties and the SPD following the last election in September 2017.

The inclusion of the Greens puts climate change at the top of the new government’s priorities, bringing forward the end of coal from 2038 to 2030 for example, while the inclusion of the fiscally prudent FDP will mean limited scope for new government borrowing. Other plans include raising the minimum wage, more defence spending, and legalising cannabis,

To read about the federal budget see my previous ICAEW chart of the week: German federal budget 2022.

This chart was originally published by ICAEW.

ICAEW chart of the week: German federal budget 2022

As Germany heads to the polls this weekend to elect a new federal parliament, the topic of the public finances has moved to centre stage. Our chart this week looks at the federal budget for 2022 and the current plan to sharply reduce the deficit from 2023 onwards.

German federal budget 2022

2021: revenue €307bn + borrowing €240bn = expenditure €488bn + investment €59bn

2022: revenue €343bn + borrowing €100bn = expenditure €391bn + investment €52bn

2023: revenue €398bn + borrowing €5bn = expenditure €352bn + investment €51bn

2024: revenue €396bn + borrowing €12bn = expenditure €357bn + investment €51bn

2025: revenue €396bn + borrowing €12bn = expenditure €357bn + investment €51bn

Source: Bundesministerium der Finanzen: 'Draft 2022 federal budget and fiscal plan to 2025'

The coronavirus pandemic has been accompanied by relaxations in both European and German constitutional limitations on the size of the federal deficit for 2020, 2021 and 2022, with Chancellor Angela Merkel of the Union parties (the Christian Democratic Union (CDU) together with Bavaria’s Christian Social Union (CSU)) and Finance Minister and chancellor-candidate Olaf Scholtz of the Social Democratic Party (SPD) setting out a plan earlier this year to reduce federal borrowing significantly by 2023.

As the #icaewchartoftheweek illustrates, the plan is to continue to run a sizeable deficit of €100bn in 2022 with tax and other revenue of €343bn being offset by €391bn in expenditure and €52bn in investment spending. This is a smaller deficit than the €240bn forecast for the current year (revenue €307bn – expenditure €488bn – investment €59bn) and the €131bn recorded in 2020 (not shown in the chart: revenue €311bn – expenditure €392bn – investment €50bn), both of which contained significant amounts of emergency spending in response to the pandemic. 

The hope is that revenues will recover in 2023 to €398bn at the same time as expenditures and investment return to pre-pandemic levels of €352bn and €51bn respectively to leave only a €5bn shortfall to be covered by borrowing. The forecast deficit for both 2024 and 2025 is €12bn, comprising revenue of €396bn in both years, less expenditure of just under €396bn in 2024 and just over €396bn in 2025 and investment in both years of €51bn. It is important to note that this is the budget for the federal government only and excludes the share of joint taxes going to Germany’s states (Länder) as well as expenditures funded from state and local taxation.

The challenge for the three principal candidates for the chancellorship: Olaf Scholtz of the SPD, Armin Laschet of the Union parties and Annalena Baerbock of the Green party, is in how to make promises to spend more on their respective priorities while maintaining the low levels of borrowing required by the constitution outside of fiscal emergencies. 

Major flooding earlier this year has put climate change at the top of the electoral agenda, with the need to increase investment to achieve net zero a key theme of party platforms. Together with promises to invest more in infrastructure and the need to cover the cost of more people living longer, higher defence spending and other financial commitments, there are significant questions about whether the path to near-budget balance can be achieved. Given the economic uncertainty, the prospect of returning to the pre-pandemic policy of paying down government debt seems unlikely, although that policy helped reduce general government debt from a peak of 82% of GDP in 2010 following the financial crisis. Despite the additional borrowing because of the pandemic, general government debt is still below that level at somewhere in the region of 75% of GDP – putting Germany in a much better fiscal position than many of its European neighbours, including the UK.

One candidate to be the next finance minister is Christian Lindner of the liberal Free Democratic Party (FDP), a possible partner in either a ‘traffic-light coalition’ of SPD (red), Greens (green) and FDP (yellow) or a ‘Jamaica coalition’ of the Union parties (black), Greens (green) and FDP (yellow) although this will of course depend on how the parties perform in the election on Sunday 26 September. Alice Weidel and Tino Chrupalla, joint leaders of the hard-right Alternative for Germany (AfD), and Janine Wissler & Dietmar Bartch, joint leaders of the Left Party (Die Linke), are considered unlikely to find their way into the federal cabinet in most scenarios.

Unlike in the UK, where a new prime minister customarily takes up residence in 10 Downing Street the next day, there is unlikely to be an instant change in national leadership. Chancellor Angela Merkel and most of her existing Union/SPD ‘Grand coalition’ cabinet are likely to stay in caretaker positions for several weeks or potentially months as fresh coalition negotiations between the parties elected to the Bundestag are concluded.

This chart was originally published by ICAEW.

ICAEW chart of the week: G7 economies

Our chart this week illustrates how in representing more than half of the world economy, decisions taken by the G7 can have a significant impact on the entire planet.

The G7 summit hasn’t formally started yet, but Group of Seven (G7) ministers and their guests have already started to meet ahead of the main event next month, albeit subject to quarantine restrictions.

The #icaewchartoftheweek illustrates how important this gathering is by highlighting how the seven major democratic nations and the European Union that together comprise the G7 represent more than half the global economy – and even more than that, once four invited guest nations are included.

Circular 'sunburst' chart showing G7 nations (USA, Japan, Germany, UK, France, Italy and Canada plus remaining EU nations), G7 guest nations (India, South Korea, Australia and a spoke for South Africa) and the rest of the world (China, Russia and Brazil followed by all the rest).

Overall, the G7 economies are forecast by the IMF to generate £35.9tn of economic activity in 2021 at current prices, 54% of forecast global GDP of £66.8tn. This comprises the economies of seven individual member nations: the USA (£16.3tn), Japan (£3.8tn), Germany (£3.1tn), the UK (£2.2tn), France (£2.1tn), Italy (£1.5tn) and Canada (£1.3tn), together with the 24 other EU member states (£5.6tn).

The guests invited to the 47th G7 summit in Cornwall are expected to generate a further £4.9tn or 7% of global GDP in 2021, bringing the total economic activity represented at the summit to £40.8tn or 61% of the total. They are India (£2.2tn), South Korea (£1.3tn), Australia (£1.2tn) and South Africa (£0.2tn).

Not represented at the G7 are China (£12.2tn), Russia (£1.2tn) and Brazil (£1.1tn) and around 160 other nations across the globe (£11.5tn in total).

The G7 summit presents an opportunity for the 11 national leaders and 2 EU representatives involved to shape the direction for much of the world, with discussions expected to range from saving the planet through to transparency in financial and non-financial reporting.

This chart was originally published by ICAEW.

ICAEW chart of the week: The debt of G7 nations

This week’s chart looks at how the pandemic has driven government debt levels higher, a topic that will be on the agenda at the G7 summit in Cornwall in six weeks’ time.

2019 General Government Net / GDP plus forecast change over 2020 and 2021:

Canada 23% + 14% = 37%
Germany 41% +11% = 52%
UK 75% + 22% = 97%
France 89% + 17% = 106%
USA 83% + 26% = 109%
Italy 122% + 22% = 144%
Japan 150% + 22% = 172%

The #icaewchartoftheweek is on the topic of government debt, looking at the indebtedness of the seven nations that comprise the G7 together with the EU. 

The strength (or otherwise) of public finances will underlie many of the discussions at the upcoming G7 summit in Cornwall in June as countries decide how best to deal with the coronavirus pandemic, achieving net-zero carbon and the COP26 goals, strengthening defence and security, and economic recovery. All of these are likely to require significant public investment at a time when public finances have been hit hard from a combination of the financial crisis just over a decade ago and the coronavirus pandemic over the past year.

Perhaps best-placed amongst the G7 are Canada and Germany, with stronger public balance sheets than their peers putting them in a better position to fund public investment. Canada’s general government net debt to GDP ratio (the net debts of the federal government, provincial governments and local authorities combined compared with Canadian GDP) is forecast to increase from 23% at 31 December 2019 to 37% at 31 December 2021, while Germany’s general government net debt to GDP ratio is forecast to increase from 41% to 52% over the same period.

The UK is next with its general government net debt up from 75% of GDP to a forecast 97% of GDP, followed by France with its net debt increasing from 89% in December 2019 to a forecast 106% of GDP for the end of 2021. The USA is expected to overtake France with its major stimulus packages seeing debt rise from 83% as a proportion of GDP to 109% by the end of this year. The biggest ratios within the G7 are Italy, which is expected to increase from 122% to 144%, while Japan is expected to rise from 150% to 172% of GDP.

Not shown on the chart are G7 guest nations this year: Australia (up from 26% to a forecast 49% of GDP) and South Korea (12% to 23%) are both in relatively strong public finance positions, while India (74% to 99%) is in a more challenging fiscal situation.

Despite the differences in debt levels, there will be a commonality amongst all the nations present in needing to find money to deal with increased pressure on public services and social security systems as populations age, for public investment in achieving net zero and in infrastructure more generally, to fund defence in an increasingly unstable global security environment and in economic stimulus to restart economies as they reopen, not to mention the need to replace tax income on fossil fuels as they are eliminated over the coming decades.

The signs are that tax reform will play a larger part in discussions than it may have done previously, with the USA’s suggestion for a minimum corporation tax indicative of a move to limit tax competition between nations and work more collaboratively to capture tax receipts from increasingly mobile global corporations and individuals.

Hence while many of the headlines from the G7 summit are likely to be focused on the heads of government talking about the global response to the coronavirus pandemic, the global security situation and global plans to deliver net zero, the side room containing finance ministers discussing global taxation and global public investment may be just as consequential. 

This chart was originally published by ICAEW.

ICAEW chart of the week: global military spending

19 March 2021: The UK’s Integrated Review is the inspiration for this week’s chart, illustrating the 20 countries around the world that spend the most on their militaries.

Chart showing global military spending in 2019 led by USA (£526bn) and China (£200bn) followed by 18 other countries - see text below the chart for details.

The UK Government launched its Integrated Review of Security, Defence, Development and Foreign Policy on 16 March 2021, setting out a vision for the UK’s place in the world following its departure from the European Union and in the context of increasing international tensions and emerging security threats.

At the core of the Integrated Review is security and defence, and ICAEW’s chart of the week illustrates one aspect of that by looking at military spending around the world. 

The chart shows spending by the top 20 countries, which together comprise in the order of £1.2tn of estimated total military spending of around £1.4tn to £1.5tn globally in 2019 – an almost textbook example of the 80:20 rule in action.

More than a third of the total spend is incurred by just one country – the USA – which spent in the order of £526bn in 2019 converted at current exchange rates. The next biggest were China and India at £200bn and £50bn respectively, although differences in purchasing power mean that they can afford many more soldiers, sailors and aircrew for the same amount of money. This is followed by Saudi Arabia (£45bn), Russia (£41bn), France (£38bn), the UK (£38bn), Germany (£38bn), Japan (£34bn), South Korea (£33bn), Australia (£21bn), Italy (£20bn), Canada (£17bn), Israel (£16bn), Brazil (£14bn), Spain (£13bn), Turkey (£11bn), the Netherlands (£9bn), Iran (£9bn) and Poland (£9bn).

Exchange rates affect the relative orders of many countries in the list, for example between Russia, France, the UK and Germany which can move up or down according to movements in their currencies, while there are a number of caveats over the estimates used given the different structures of armed forces around the world and a lack of transparency in what is included or excluded in defence budgets in many cases.

In addition, the use of in-year military spending does not necessarily translate directly into military strength. Military capabilities built up over many years or in some cases (such as the UK) over many centuries need to be taken into account, as do differing levels of technological development and spending on intelligence services, counter-terrorism and other aspects of security. Despite these various caveats, estimated military spending still provides a useful proxy in understanding the global security landscape and in particular highlights the UK’s position as a major second-tier military power – in the top 10 countries around the world.

Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy sets out some ambitious objectives for security and defence, which it summarises as follows: “Our diplomatic service, armed forces and security and intelligence agencies will be the most innovative and effective for their size in the world, able to keep our citizens safe at home and support our allies and partners globally. They will be characterised by agility, speed of action and digital integration – with a greater emphasis on engaging, training and assisting others. We will remain a nuclear-armed power with global reach and integrated military capabilities across all five operational domains. We will have a dynamic space programme and will be one of the world’s leading democratic cyber powers. Our diplomacy will be underwritten by the credibility of our deterrent and our ability to project power.”

The estimates of military spending used in the chart were taken from the Stockholm International Peace Research Institute (SIPRI)’s Military Expenditure Database, updated to current exchange rates.

This chart was originally published by ICAEW.