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19th January 2010 Outlook for the UK Economy: No return to Boom and Bust... Tom Vosa Head of Market Economics, Europe, Wholesale Banking National Australia Bank, [email protected] UK macro outlook 2 UK is now the only G20 country still in recession Indonesia South Korea Mexico China Brazil Russia Saudi Arabia Germany US Italy Canada India EU Japan France Turkey South Africa Australia Argentina UK -1 Source: Bloomberg 3 0 1 2 3 4 ● Not all countries suffered a recession during the global economic downturn ● China, India, Australia and Saudi Arabia all avoided two consecutive quarters of negative growth ● The table shows latest quarter’s GDP figures ● Cumulative increase in GDP since each country’s respective trough would be greater than shown The fall in UK output is greatest in G7 after Japan Output over the recession 102 100 98 United States 96 Germany France 94 UK 92 Japan Eurozone 90 1 2 3 4 5 6 7 8 Source: Bloomberg, National Australia Bank ● The fall in output was greatest in the big exporting nations, Japan and Germany ● They are now showing signs of life as global trade comes back on line ● That leaves the UK as the only economy still in recession, at least according to official data 4 Even when the economy grows there should be plenty of slack UK GDP Scenarios £bn UK GDP 'Lost Output' 390 390 380 380 370 370 Continuation of previous trend Continuation of previous trend BoE forecasts £bn 360 360 350 350 £500billion 340 340 330 330 320 320 NAB forecasts NAB forecasts 2005 2006 2007 2008 2009 2010 2011 2012 310 310 300 300 2005 2006 2007 2008 2009 2010 2011 2012 ● In 1979-81, output fell 4.9%. In 1990-92 it fell 2.5% and in 2008-09 it has fallen 6.0%. ● Even on the Bank of England’s optimistic forecasts they will be plenty of excess capacity for many years ● That should mean inflation won’t be problem for several years yet 5 But business surveys point to a return to growth in Q4 UK GDP growth and PMIs Percentage change on a quarter ago 1.5 50 ='breakeven level' 70 65 1.0 60 0.5 55 0.0 50 -0.5 45 -1.0 40 -1.5 -2.0 'Whole economy' PMI* (right-hand scale) GDP growth (left-hand scale) -2.5 35 30 25 20 1995 1997 1999 2001 2003 2005 2007 2009 * Constructed using the CIPS manufacturing and services PMIs, weighting both for their share of national income. 6 ● Survey evidence suggests that we should see some growth in the fourth quarter. Though the surveys were not a good guide to Q3. ● But with the recovery now on the way, what shape will it take? Challenges for the UK economy in 2010 and beyond Can momentum be sustained? Can banks provide enough credit? Paying off the debt: Household Paying off the debt: Government 7 Challenges for the UK economy Can momentum be sustained? Can banks provide enough credit? Paying off the debt: Household Paying off the debt: Government 8 Currently the destocking cycle is providing a cyclical boost Contributions to Quarterly GDP growth pp 1.5 1.0 0.5 0.0 -0.5 -1.0 Net Trade Stockbuilding Investment Government Consumption GDP -1.5 -2.0 -2.5 2006 2007 2008 2009 Source: ONS 9 ● Revisions to Q2 GDP left the economy falling by 0.2% against a preliminary estimate of a 0.4% fall. ● Although destocking again detracted from growth in Q2, the size is much less than in earlier quarters. But it is likely to prove short-lived UK Stock-output ratio % 16 15 14 13 12 11 10 1989 10 1992 1995 1998 2001 2004 2007 ● The unanticipated increase in stocks looks to be over. ● However, stock cycles typically last only 6-9 months and can’t be relied on to deliver growth over the cycle. ...and schemes such as car scrapage won’t last forever New vehicle registrations % oya 80 60 40 20 0 -20 -40 -60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: SMMT 11 ● The car scheme has been very successful at boosting sales, though a large part of that goes on imports. ● But even with the extra £100million it is unlikely to last until the original February deadline. ● The scheme may have boosted consumer spending by 0.5% in Q3, though some of that went on imports. The shape of UK economic recovery 2009-10? 12 Q1 2009 -2.4% Q2 -0.6% Q3 -0.2% Q4 +0.5% Q1 2010 +0.2% Q2 +0.2% Q3 +0.3% Q4 +0.4% Challenges for the UK economy Can momentum be sustained? Can banks provide enough credit? Paying off the debt: Household Paying off the debt: Government 13 Banks’ balance sheets are still under great pressure Realised and Expected Writedowns or Loss Provisions for Banks ($billions) Expected additional writedowns: 2009Q2 10Q4 Realized writedowns: 2007Q2 - 09Q2 1200 1000 800 600 400 200 0 United States Source: IMF 14 United Kingdom Euro Area Other Mature Europe Asia ● The IMF estimates that total write-downs over the 2007-2010 will be around £2.8billion ● Despite around $1.1 billion of capital injections there is still a hole in balance sheets that needs filling. Banks are weaning themselves off of relying on wholesale markets UK funding gap GBP bn 0 -100 -200 -300 -400 -500 UK funding gap between customer deposits and loans that has to now relied on wholesale markets -600 -700 -800 -900 1997 1999 2001 2003 2005 2007 2009 Source: Bank of England, National Australia Bank 15 ● Bank of England data on household and non-financial corporation deposit holdings and lending, including lending to individuals shows the widening gap that has until recently been reliant upon wholesale funding. This has grown from GBP150bn in 1996 to a peak of £769 billion in October 2008. ● Even now the gap is around £700 billion, its smallest level since September 2007. ● Money market paralysis has rendered this borrowing impossible – hence the credit crunch Bank lending appetite is still depressed... UK Expected Credit Availability Balance 40 September 08 Dec-08 March 09 June 09 30 Sep 09 December 09 20 10 0 -10 -20 -30 -40 -50 HouseholdSecured HouseholdUnsecured Corporate Commercial Real Estate Source: Bank of England 16 ● The BoE credit conditions survey shows that banks are restricting credit to UK households. ● Real estate lending is now contracting further, with standards tightening again. Challenges for the UK economy Can momentum be sustained? Can banks provide enough credit? Paying off the debt: Household Paying off the debt: Government 17 UK economy over-reliant on consumption Contributions to annual UK GDP growth Percentage points 8 Government consumption 6 Investment 4 2 0 -2 Private consumption -4 Stockbuilding Net trade -6 -8 1979 1983 1987 1991 1995 1999 2003 2007 Net trade 18 GDP ● Consumption accounts for some 70% of UK GDP, with around 60% of that from retail sales ● This fact leaves the UK particularly vulnerable in the current downturn with the credit creation process in decline and asset prices slumping. And houses are no longer ATM machines UK Mortgage Equity Withdrawal £ billions 20 MEW as a %age of post-tax income (RHS) % 10 16 8 12 6 8 4 4 2 0 0 -4 MEW (LHS) -2 -8 -4 -12 -6 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 Source: Bank of England ● After a decade of withdrawals, home owners injected £34 billion of equity into the housing market in the last 18 months. ● That represents around 3.0% fall in disposable income, reducing the ability to consume further. 19 The labour market will also weigh on spending Monthly change in claimant count Thousands 180 UK Unemployment Rate % 9 8 130 ILO measure 7 6 80 5 4 30 3 -20 2 Claimant count measure 1 -70 1997 1999 2001 Source: Reuters Ecowin 20 2003 2005 2007 2009 0 1997 1999 2001 2003 2005 2007 2009 Source: Reuters Ecowin ● The numbers claiming unemployment benefit fell by 6,300 in November. That is the first fall in 21 months, though at this stage further rises in unemployment look likely. ● At 7.9% the ILO measure already shows the highest unemployment rate since November 1996 and we expect it to rise further in 2010. But volumes are not the only problem Weekly hours of work 39.0 16.0 15.8 38.5 15.6 38.0 15.4 15.2 37.5 15.0 37.0 36.5 14.8 Part time (right-hand scale) Full time (left-hand scale) 36.0 35.5 14.6 14.4 14.2 14.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: Office for National Statistics ● The increase in UK unemployment comes against a background of shorter working hours, which will also weigh on aggregate income. ● The fall in full-time hours worked reflects the introduction of 4-day working weeks. 21 ...and earnings growth isn’t helping UK Average earnings growth Total earnings Percentage change on a year earlier 7 6 5 4 3 Earnings excluding bonuses 2 1 0 -1 -2 1995 22 1997 1999 2001 2003 2005 2007 2009 Challenges for the UK economy Can momentum be sustained? Can banks provide enough credit? Paying off the debt: Household Paying off the debt: Government 23 Public sector debt expected to peak just short of 80% of GDP Public sector net borrowing £ billion UK 200 2009 Budget Forecast 180 National Australia Bank General government debt Per cent of GDP 75 160 140 Conservative New Labour 65 120 55 100 80 45 60 40 35 20 Net debt 0 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 ● 24 25 1979-80 1985-86 1991-92 1997-98 2003-04 2009-10 We still think that the government remains optimistic on borrowing. The final level of net debt in UK will not be too far ahead of other G7 nations, but the speed of deterioration is a worry Net Public Debt as a percentage of GDP in the G7 160 Canada 140 France 120 Germany 100 80 Italy 60 Japan 40 United Kingdom 20 United States 0 1980 25 1985 1990 1995 2000 2005 2010 UK Policy tightening starts in earnest from 2011 Net Impact of Budget and PBR 2009 policy measures Total Other 2009-10 Environmental 2010-11 2011-12 Anti-tax avoidance 2012-13 Property Business Households -6000 -4000 -2000 0 2000 4000 6000 8000 10000 ● Households bear the brunt of this adjustment through higher NICs. ● Businesses also suffer from higher employer contributions. ● Despite the rhetoric, tax avoidance measures are an increasingly smaller amount of revenue. 26 Where to cut? Health 119bn Welfare and Pensions 189bn Defence 38bn Law and Order 35bn Transport 23bn Education 88bn Others 122bn Debt Interest 28bn Housing/Environment 29bn 27 Where to tax? 2009-10 2010-11 2011-12 Change Savings rate by 1p 80 120 160 Change basic rate by 1p 4,100 4,900 5,000 Change higher rate by 1p Change personal allowance by £100 Change all personal allowances by 1% Change all personal allowances by 10% Change basic rate limit by 1% Change basic rate limit by 10% Change all main allowances by 1% Change all main allowances by 10% Change family element of CTC by £100 Change child element of CTC by £100 880 530 360 3550 160 1,500 540 5,100 550 740 1450 650 430 4250 280 2,500 720 6,850 560 750 1400 620 410 4300 270 2,450 680 6,750 570 750 Source: HM Treasury PBR Nov 2008 28 Where to tax? 2009-10 2010-11 2011-12 Change small company Corporation Tax 1% 15 450 650 Change main rate of Corporation Tax 1% 600 1,000 1,150 Change inheritance tax rate by 1% 20 45 45 Change inheritance tax threshold by £5,000 15 30 30 Change main employee rate of NI by 1% 3,900 4,100 4,300 Change additional rate of NI by 1% 950 1,000 1,100 Change employer rate by 1% 4,950 5,200 5,500 Change NI employee threshold by £2/w 245 245 255 Change NI employer threshold by £2/w 290 295 305 Source: HM Treasury PBR Nov 2008 29 Where to tax? 2009-10 2010-11 2011-12 Beer and Cider Duty (36p) 35 40 40 Wine Duty (£1.46) 25 25 25 Spirits Duty (£5.98) 5 5 5 Tobacco Duty (£3.49) 10 10 10 Petrol per litre (50.35p) 120 110 110 Diesel per litre (50.35p) 150 150 160 Vehicle Excise Duty £120 60 65 65 Change reduced rate of VAT 250 260 270 Change higher rate of VAT 4,600 4,800 5,000 Change Insurance Premium tax 355 485 505 Change 1pc stamp duty band 530 920 1,140 Change 3pc stamp duty band Change 4pc stamp duty band 300 710 540 930 780 1,170 Source: HM Treasury PBR Nov 2008 30 Implications for the outlook for rates 31 UK policy rates have fallen to historic lows UK inflation and official interest rates Monetary Targeting 25 DM ERM 'New' Monetary 'Shadowing' Arrangements MPC Process 20 15 Official interest rates 10 5 Annual rise in RPIX 0 1979 ● 32 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 At 0.5%, Bank Rate is at its lowest level since the Bank of England was formed in 1694. and the BoE has been printing money Monthly average of sterling reserve bank liabilities £ million 250,000 Implied MPC path 200,000 150,000 100,000 UK bank reserves 50,000 0 2006 2007 2008 2009 2010 Source: Bank of England and National Australia Bank estimates 33 ● And that is not all that the MPC have done. ● ‘Quantitative Easing’ sees them purchasing government and corporate bonds, crediting the reserve accounts of banks. ● The hope is that these reserves slowly bleed into the real economy, boosting lending, asset prices, and enabling companies to raise debt. So far, the gap between the implied path and reserves is £66.9bn. Both these measures have pulled interest rates lower UK nominal yield curve Per cent 6.0 5.0 4.0 3.0 2.0 14 Jan 10 13 Feb 09 1.0 23 Jan 09 0.0 0.5 3.0 5.5 8.0 10.5 13.0 15.5 18.0 20.5 23.0 Nb: Shaded area shows extreme ranges over past year Source: Bank of England ● Especially short-term rates over the past year. ● But BoE gilt purchases have pulled rates lower across the yield curve. 34 What influences interest rates? ● The level of interest rates reflects several factors: ● Short-dated yields (below 3 years) are generally determined by interest rate expectations. ● Medium-dated yields (3-10 years) are driven by the economic cycle. ● Longer-dated yields are driven by inflation expectations. ● Other factors include the MPC’s current QE policy, but also perceptions of the UK government’s ability to pay (Sovereign credit risk). 35 Financial markets are now beginning to price in BoE tightening UK 3-month interest rates implied by Per cent futures contracts 5.0 4.5 4.0 3.5 3.0 2.5 2.0 15-Jan-10 01-Jan-10 18-Jun-09 1.5 1.0 0.5 Mar-09 ● 36 Mar-10 Mar-11 Although over the year as a whole, we have seen the timing of the first rate increase progressively pushed back. Stock markets point to higher rates UK equity markets and bond yields Per cent 8.0 1984 =1000 7500 FTSE-100 index (RHS) 7.0 7000 6500 6.0 6000 5.0 5500 4.0 5000 3.0 4500 2.0 1.0 4000 3-year bond yields (LHS) 3500 0.0 1997 37 3000 2000 2003 2006 2009 ● To the degree to which equity markets reflect view of the economic cycle, you could argue that 3-year yields have lagged the improvement in economic prospects (due to QE). ● So a sharp rise in shorter dated yields is extremely possible. That might reflect the increase in sovereign credit risk in the UK UK 30 minus 2-year spread per cent of GDP 14 Public Sector Net Borrowing 12 (inverted scale; LHS) 10 8 6 4 2 0 -2 -4 Slope of curve (right-hand scale) basis points 400 360 320 280 240 200 160 120 80 40 0 -40 -80 -120 -160 -200 -240 -280 1994 1996 1998 2000 2002 2004 2006 2008 2010 38 ● There seems to be some relationship between the slope of the curve and government borrowing. ● If so, then the PBR forecasts suggest that the curve could remain much steeper than markets would anticipate. Due in part to inflationary fears re-emerging International 10 year break-even inflation rates Per cent 5 United Kingdom 4 3 2 1 France 0 United States -1 -2 2007 39 2008 2009 2010 ● 10-year breakeven rates show the level of inflation expected on average over a 10-year constant horizon. ● After a sharp fall in expectations in 2009, the emerging recovery trend and fears about government debt issuance has seen inflation expectations edge higher. ● Only in the eurozone does the ECB’s hawkishness see expectations remain broadly unchanged. Long-dated gilts will also come under pressure Gilt and Treasury bill portfolio maturity Long (15+ years) Medium (7-15 years) Short (3-7 years) Ultra-Short (0-3 years) Undated ● 40 Long-dated gilts comprise 35.1% of the total debt stock, making them the largest component in the government’s portfolio. Markets are getting nervous about a sovereign downgrade 10 year CDS Rates ● Although levels are not back to 2009 highs, the gap between UK and Germany is widening as markets fret as to whether the UK will maintain its sovereign rating. ● Although Ratings Agencies have confirmed that they are not looking for a downgrade this side of a General Election, the lack of consolidation in the PBR means that a sovereign downgrade is looking more likely. 41 Which may intensify as the General Election approaches. UK opinion polls since January 2009 50% 45% Con 40% 35% Lab 30% 25% 20% Lib 15% Other 10% 5% 0% May 05 Jan 09 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: ICM/The Guardian ● Conservative lead is narrowing and is now in single digits for first time since December 2008 ● Labour support has risen 6 points since the Summer low of 25% ● Opinion poll lead, if sustained, points to a Conservative majority around 20 seats or fewer 42 So longer dated yields will continue to rise per cent 5.0 UK swap curve 30 Jun 2009 4.5 4.0 3.5 1 Jan 2009 15 Jan 2010 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3m 6m 1y 2y 2y 4y 5y 6y 7y 8y 9y 10y15y20y30y Source: Bloomberg ● Looking at the UK swap curve, rates in December from 6 years out were already higher than seen in January. ● As QE unwinds (as early as February) and the curve climbs higher, we will see higher rates across the board. 43 The Yorkshire Economy 44 Recession spreads ● Yorkshire and the Humber was the first region to slip into negative GVA growth in 2008q1. The diversified economy has fared a little better than the North East and North West regions in recent quarters, however. ● Manufacturing sectors, ranging from food processing to specially engineering seems to have fared a little better. ● But Q3 data suggests that the construction sector continues to struggle. ● Although manufacturing exports have received a small lift so far, tourism –focused around North Yorkshire –enjoyed a strong Q3 with annual visitor numbers, total spending and occupancy rates all up. ● Financial and Business Services grew until 2008 Q3. Job creation was above the UK average since 2007, but has since fallen back. The region remains vulnerable to any employment shake-out from the merger of UK banks. ● Falling government spending will also impact on public sector activity, which has hitherto remained extremely supportive. 45 Purchasing Managers’ surveys show output accelerated in Q4 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Regional PMI's 0 = no change 15 10 5 0 -5 -10 -15 -20 UK South West North West South East London N.Ireland West Midlands East Midlands North East Yorkshire & H'side Scotland Wales Eastern England 46 Source: Markit Although domestic demand looks better Home market sales - manufacturing Net balance 60 Home market sales services Net balance 50 40 40 30 20 20 10 0 0 -10 -20 Nb: thick line is UK, thin line is Yorkshire & The Humber -40 -20 Nb: thick line is UK, thin line is Yorkshire & The Humber -40 -60 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: British Chambers of Commerce 47 -30 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: British Chambers of Commerce ● The BCC surveys show that after sharp falls in activity through 2008, sales are now beginning to increase. ● Note that manufacturing activity is running well ahead of services and that Yorkshire is also outperforming the UK average. Key problem seems to be exports Export deliveries - manufacturing Net balance 50 Export deliveries -services Net balance 40 30 40 30 20 20 10 10 0 0 -10 -10 -20 Nb: thick line is UK, thin line is Yorkshire & The Humber -30 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: British Chambers of Commerce 48 Nb: thick line is UK, thin line is Yorkshire & The Humber -20 -30 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: British Chambers of Commerce ● Export growth remains a little weaker, especially in manufacturing. ● Service sector seems to be doing rather better. And recent data would support that view Export growth Percentage change on a year ago 40 30 Yorkshire & The Humber 20 10 0 United Kingdom -10 -20 -30 2002 2003 2004 2005 2006 2007 2008 2009 Source: HM Revenue and Customs 49 ● HMRC data only cover goods trade, but they show a very sharp fall in exports in the first half of the year. ● The lack of bounce in Q3 is consistent with BCC data, but we hope that Q4 will be better. RICS house price survey: a regional breakdown The National Picture Scotland 6 21 73 10 North 35 16 1 Yorkshire & The Humber 17 83 55 rise same fall 6 19 40 North West 54 64 14 West Midlands 23 East Midlands 1 1 16 22 63 11 4 61 7 4 7 Wales 1 5 85 London East of England 27 66 3 5 30 39 South West 50 57 64 South East The housing rally could prove short-lived House price expectations 100 Yorkshire & The Humber Yorkshire housing market indicators 80 80 New instructions 60 60 40 40 20 20 0 0 England & Wales -20 -20 -40 -40 -60 1999 2001 2003 2005 2007 2009 Source: RICS 51 New buyer enquiries -60 -80 -80 -100 -100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: RICS ● Price expectations are already easing. ● And the increase in prices has brought forward new sellers even as new buyer enquiries started to fade. Affordability has worsened and will continue to do so as rates rise House price value to income ratios 6 (using regional income data) All dwellings 5 4 3 England North North West Yorkshire & Humber East Midlands West Midlands 2 1 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 52 Employment growth has slowed sharply in Yorkshire… Employment growth Percentage change on a year ago 4 United Kingdom Yorkshire & The Humber 3 2 1 0 -1 -2 -3 -4 1999 53 2001 2003 2005 2007 2009 With employment amongst males falling the most Yorkshire & Humber employment Thousands 1,200 Male employment 1,150 1,100 1,050 1,000 Female employment 950 900 850 800 1997 54 1999 2001 2003 2005 2007 2009 Labour market fundamentals remain weak Employment rate Economic activity rate Per cent 64.5 Per cent 61 United Kingdom 64.0 60 United Kingdom 63.5 63.0 59 62.5 58 62.0 61.5 Yorkshire & The Humber 57 Yorkshire & The Humber 61.0 56 60.5 60.0 1992 55 1995 1998 2001 2004 2007 55 1992 1995 1998 2001 2004 2007 ● The economic activity rate remains well below the UK average, as does the employment rate. ● So the labour market is smaller and less are employed, which will weigh on consumer spending. Which is why the unemployment rate is slightly higher Unemployment rate Per cent 12 10 Yorkshire & The Humber 8 6 United Kingdom 4 2 0 1992 56 1995 1998 2001 2004 2007 Service sector employment is leading the slowdown Yorkshire employment growth Change on a year ago; Thousands 60 Services Other Industries 40 20 0 -20 Construction -40 -60 Manufacturing -80 1997 57 1999 2001 2003 2005 2007 2009 The housing market seems to explain most of the slowdown Y&H service sector employment growth Y&H service sector employment growth Change on a year ago; Thousands Real Estate, renting and 30 business activities Change on a year ago; Thousands 25 20 Hotels & restaurants 15 10 5 0 Financial intermediation -5 -10 Wholesale and retail trade -20 -15 -25 -30 1998 58 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008 Health and social work still remains the largest single government employer Y&H service sector employment growth Change on a year ago; Thousands 30 Education Health and social work 25 20 15 10 5 0 -5 Public adminstration, defence and compulsory social security -10 -15 1998 59 2000 2002 2004 2006 2008 Sharp down-turn in output in 2009 ● Having fallen into recession earlier than rest of the UK economy, regional GVA will expand in 2010 marginally faster than the national average. ● A pickup in domestic activity in addition to the alreadyrecovering major eurozone economies will provide a short- term boost to the important and diverse manufacturing sector that supports production across entire industrial supply chains. ● All three sub-sectors of private services – Distribution, Hotels & Catering, Transport & Communications and Financial & Business Services – are expected to see expansion gaining momentum in 2011 although growth will be below the long term historical level. ● Owing to a large structural deficit in national finances, it is no longer a matter of if there will be spending cut but when and by how much? The largest cuts will be focused on administrative positions, with the health sector least likely to be affected. The Yorkshire and Humber region, with Civil Service jobs comprising 1.8% of total employment (versus 2.03% for English regions) is relatively well placed. ● Total employment fell by 2.2% in 2009; the muted pace of job creation expected in the longer term means that employment growth is unlikely to return to its average historic rate in the region or in the UK.. 60 City benchmarker ● Leeds, the largest economic centre in Yorkshire & the Humber, has enjoyed strong growth in the past two decades. It is now one of the largest financial and legal centres in the UK outside London while sectors such as retail, call centres and media have also thrived. ● Despite recent strong growth, there remains much disparity in incomes. Several wards in central Leeds are deprived although regeneration efforts have had some positive impact. Current key schemes cover East and South East Leeds, Aire Valley, South Leeds, Leeds/Bradford Corridor and West Leeds Gateway. ● Leeds has excellent road and rail links; the M1 and A1 provide links to the South and North, while the M62 connects Leeds to Liverpool and Hull. Leeds Bradford International Airport has direct daily flights to national and international hubs while the Humber ports are accessible via the motorway network. ● Leeds has a thriving consumer sector; it has a wide range of shopping centres while attractions such as Leeds Art Gallery, Opera North and Northern Ballet Theatre attract over 1.5m visitors to the city annually. ● The UK Cities Monitor 2008 ranks Leeds as the 4th best UK city to do business in and the highest in terms of value for money of office space. ● Leeds will perform about the same as Bradford but growth will slow compared to historical rates. Conclusions: UK ● ● ● ● ● ● ● ● 62 The worst is behind us, but any sudden increase in growth is due to the stock cycle and other time limited policy measures. It seems too early to call a firm recovery trend just yet. Output is likely to fall by 4.6% this year and only grow by 0.9% in 2010. The recovery will be extremely uneven, we expect to see a ‘W’-shape, with decent growth in the fourth quarter of this year then weakening in the first half of 2010 as any consumption bought forward ahead of the VAT increase disappears. That will be the peak of uncertainty as it might look as if policy measures have failed –rates are at zero, government has no room for further fiscal measures. Quantitative Easing looks to be working, but the link between Bank Rate and borrowing costs looks to be impaired. Monetary tightening will come from the market. Interest rates could stay lower than thought. Government borrowing is set to increase by £703bn over the next 5 years. Fiscal consolidation will have to accelerate after the General Election if the UK is to escape a sovereign downgrade. Spending cuts will be even larger than the Budget forecasts suggest. Whole programmes will have to be scrapped. Tax increases look likely to help narrow the deficit, but only increases in VAT and the basic rate of tax rise anywhere near the £30 billion needed... By 2010 growth will get back towards trend, but growth could struggle to rise above 2% thereafter. Conclusions ● ● ● ● 63 From all perspectives it is hard to believe that interest rates will not be increasing in the months ahead. We have already seen longer-dated yields rise and the twinned pressure of inflationary expectations as well as fearts about a possible sovereign downgrade will only put on more pressure. As will the government’s large borrowing projections in the next few years. A sterling debt crisis would see a spike in yields, but looks unlikely for now. ● The turning in the economic cycle in the fourth quarter has yet to feed through to 3-year yields, but that probably reflects the impact of QE for now. ● But with QE due to end as early as February (unless the MPC extend it), yields could easily spike higher. The current level of the FTSE alone would suggest a 200bps upward move. ● More importantly, although we would expect curve flattening, the combination of policy measures implemented during this recession means that the curve could remain just as steep, with rates moving up across the board. ● Although we believe that the market is overstating the likelihood of MPC tightening, we still see upward pressure on rates and the decision on whether to extend QE in February will be crucial in determining the speed that rates move higher. 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