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18th January 2011
Outlook for the UK Economy:
Returning to normality...
Tom Vosa
Head of Market Economics, Europe, Wholesale Banking
National Australia Bank,
[email protected]
Global macro outlook
2
IMF and NAB forecasts still for solid global growth
GDP growth
percentage change on a year ago
6
World
5
4
3
2
1
0
Advanced
economies
-1
-2
-3
-4
1980
1985
1990
1995
2000
2005
2010
2015
Source: IMF WEO
3
●
From 2004 onwards, global growth picked-up well above its long run average of 3.5% to rates around
5%, its strongest performance since the 1980s.
●
Although the IMF have revised down the growth prospects for the United States, Eurozone and Japan
in light of the global credit crunch, global growth is still forecast to continue above 4.5% from 2013
onwards.
Advanced economies are no longer driving global GDP growth
GDP growth
percentage change on a year ago
10
Emerging and
developing
8
economies
6
4
2
World
0
Advanced
economies
-2
-4
1980
1987
1994
2001
2008
2015
Source: IMF WEO
4
●
Up to 2000, global growth was driven largely by industrialised nations, but the sharp slowdown in
activity following the dotcom bust was followed by the rise in emerging markets.
●
Going forward, industrialised countries will become much less important drivers of global growth.
Emerging markets are leading the way forward
GDP growth
percentage change on a year ago
14
12
Developing
Asia
10
8
6
4
Latin
America
2
0
-2
Sub-Saharan Africa
Middle East &
North Africa
-4
1980
1987
1994
2001
2008
2015
Source: IMF WEO
5
●
But both Africa and the Middle East are expected to post around 5% annual growth, not far from the
6% peaks seen in the early part of last decade.
●
Developing Asia is forecast to grow by over 8% per annum.
Average projected real GDP growth 2010-11
Source: IMF WEO
6
After sharp G10 slowdown in 2009, growth now picking up across the world
Annual average
2007
2008
2009
2010(f)
2011(f)
2012(f)
US
2.1
0.4
-2.4
3.1
2.8
3.2
Japan
2.3
-1.2
-5.1
3.1
2.5
2.5
UK
2.6
0.8
-4.3
1.5
2.1
2.3
eurozone
2.7
0.5
-4.0
1.7
1.7
1.6
Canada
2.5
0.4
-2.7
3.2
2.8
3.0
Australia
4.0
3.1
0.5
3.5
3.7
4.3
New Zealand
3.2
0.0
-1.6
2.8
3.5
3.0
China
11.8
9.5
8.7
10.5
9.1
8.0
India
9.2
7.5
6.8
8.4
7.8
7.3
Latin America
5.4
4
4.1
-2.0
6.5
5.0
4.0
World
5.0
3.0
-1.1
4.6
4.2
4.0
Source: National Australia Bank Research
7
●
China and India grew strongly during the global downturn. Without their contribution, the world
economy would have shrunk more than 2% in 2009
●
Massive fiscal and monetary policy stimulus will see global growth rebound sharply in 2010
●
In both 2010 and 2011, global economic growth should be back above the average of the last 25 years.
UK macro outlook
8
After six tentative months of recovery, the second quarter saw impressive
growth...
UK quarterly GDP growth by sector
Percentage points
2.0
GDP
1.5
1.0
0.5
0.0
-0.5
-1.0
Services
Construction
-1.5
Production
Agriculture
-2.0
-2.5
2004
2005
2006
2007
2008
2009
2010
Source: ONS
9
●
...Which has continued.
●
The recession saw peak to trough output loss of 6.4%.
●
Over 2009 Q4 and 2010 Q1 output increased by 0.7%. But in Q2 it leapt by 1.2%, the fastest quarterly
growth since Q1 2001, before rising by 0.7% in Q3, more than double expectations.
Recent growth rates have been flattered by a huge rebound in
construction
UK quarterly GDP growth by sector
Percentage points
1.5
GDP
1.0
0.5
0.0
-0.5
Services
-1.0
Construction
Production
Agriculture
-1.5
-2.0
-2.5
2007
2008
2009
2010
Source: ONS
10
●
Most sectors saw growth in the third quarter, with manufacturing rising by 1.1% and service sector
growth of 0.5%. Within services government output rose 0.6%.
●
But the figures were pushed higher by the largest rise in construction since 1963 as the sector grew by
4.0%, after growing by 7.0% in Q2. The annual growth rate is now 9.5% -a record.
Growth is slowly easing
UK GDP quarterly production growth
Percentage points
2.0
UK GDP quarterly service growth
Percentage points
1.5
1.0
1.0
0.0
0.5
-1.0
0.0
-2.0
Government and other services
Business services and finance
Transport, storage and communication
Distribution hotels and catering
-0.5
-3.0
-1.0
-4.0
Manufacturing
Mining & quarrying
Electricity gas and water supply
-5.0
-6.0
2007
11
2008
2009
-1.5
-2.0
2010
2007
2008
2009
2010
●
Government spending probably reflected a dash ahead of the General Election.
●
But growth remains broadly-balanced, which suggests that private sector activity will continue, even if
quarterly growth rates ease further.
Worries over strength of underlying private demand persists
Contributions to Quarterly GDP growth
Percentage points
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Net Trade
Stockbuilding
Investment
Government
Consumption
GDP
-2.0
-2.5
-3.0
-3.5
2006
2007
2008
2009
2010
Source: ONS
12
●
Growth in Q4 2009 and Q1 2010 was partially due to an increase in inventories. And they contributed
0.4pp to growth in Q3.
●
Net trade has been extremely disappointing, deducting 0.1pp from Q3 GDP growth. Although surveys
show manufacturing exports rising in the fourth quarter, the economy is still some way from
rebalancing.
Business surveys point to volatility ahead
UK GDP growth and PMIs
Percentage change on a quarter ago
1.5
50 ='breakeven level'
65
1.0
60
0.5
55
50
0.0
45
-0.5
'Whole economy' PMI*
(right-hand scale)
-1.0
35
-1.5
-2.0
-2.5
40
30
GDP growth
(left-hand scale)
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.
13
●
Economy grew by 0.7% in the three months to September, but survey data show a small acceleration
in Q4.
●
But bad weather overstates the strength of activity, especially in construction so we look for growth to
slow to 0.4%-0.5%. But if bad weather has reduced growth, then fears of a double-dip might be
lessened.
The labour market is showing signs of improvement…
Monthly change in claimant count
UK Unemployment Rate
%
9
Thousands
180
8
130
ILO measure
7
6
80
5
4
30
3
2
-20
Claimant count measure
1
-70
0
1997
1999
Source: Reuters Ecowin
14
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
Source: Reuters Ecowin
●
The numbers claiming unemployment benefit fell by 1,200 in November, after a 5,200 dip in October.
●
But the labour market is still soft. 85% of employment creation has been in part-time work and record
amounts of part-time workers want full-time jobs. The ILO measure rose to 7.9% in October.
...After a year of stagnation, wages are drifting higher
UK Average earnings growth
Percentage change on a year earlier
10
8
Total earnings
6
4
Earnings excluding
bonuses
2
0
-2
-4
-6
-8
2001
2003
2005
Source: Office for National Statistics
15
2007
2009
And rebalancing will keep unemployment elevated
UK Employment
8,500
8,000
Thousands
Private sector
(right-hand scale)
24,000
23,000
7,500
22,000
7,000
6,500
Education, health
and public
administration
(left-hand scale)
6,000
21,000
20,000
1990 1993 1996 1999 2002 2005 2008
Source: Office for National Statistics
16
●
At the broadest definition, the number employed in education, health and public administration has
risen by 1.7 million since 1999 to 8.4 million.
●
Just over 1.5 million private sector jobs have been lost since June 2008.
OBR forecasts look sensible
UK employment growth since 1992
Thousands
6,000
5,000
4,000
Private sector
3,000
2,000
1,000
0
-1,000
Public sector
-2,000
1992
1996
2000
2004
2008
2012
2016
Source: Office for National Statistics, Office for Budget Responsibility
17
●
Despite the noise, the OBR forecasts look for general public sector employment to fall by just over
400,000 between 2010/11 and 2015/16.
●
From 1992 to 1998, some 693,000 public sector jobs were lost, so the fall look to be much less
aggressive than unions are complaining about.
But further falls in unemployment look unlikely
Claimant count inflow and outflow rates*
30
Outflows
(left-hand scale)
1.3
1.2
25
1.1
1.0
20
0.9
0.8
15
0.7
Inflows
(right-hand scale)
10
0.6
0.5
19891991199319951997199920012003200520072009
* Monthly inflow rate is expressed as a percentage of the nonclaimant-count working-age population. Monthly outflow rate is
expressed as a percentage of the claimant count.
Source: Office for National Statistics
18
●
The outflow rate is beginning to stabilise (although it remains above the lows seen in early 2009).
●
The inflow rate looks to be stabilising and indeed could be in the very early process of turning.
But who will be getting the available jobs?
UK annual employment growth
UK employment growth since 1997
thousands
2,000
1,800
1,600
UK
1,400
non-UK
1998
2000
2002
Source: Reuters Ecowin
19
2004
2006
2008
2010
change on year;
thousands
500
400
300
200
1,200
100
1,000
-
800
-100
600
-200
400
-300
200
-400
-
-500
United Kingdom
Indian Subcontinent
Australia and New Zealand
Africa
USA
EUA8
EU14
1998
2000
2002
2004
2006
2008
2010
Source: Reuters Ecowin
●
A fall in UK employment since 2007 has been offset by employers seeking to hire foreign nationals.
●
The outflow seen in 2009 more than reversed in the year to September 2010, so even if there is net
job creation in the UK, the benefits might not feed through to regional economies.
Inflation is well above target, but should come down
UK CPI Inflation
percentage change on a year ago
6
Forecast
5
4
3
Headline
2
1
'Core'
0
-1
1998
2000
2002
2004
2006
Source: ONS, National Australia Bank
2008
2010
2012
●
The Bank of England’s job is not being made easy by VAT changes and energy price moves.
●
This is obscuring the underlying trend in inflationary pressure, which should still remain contained given
the large degree of slack in the economy.
20
But the MPC will have to watch expectations carefully
Inflation Expectations
percentage change on a year earlier
5.0
4.5
4.0
You-Gov/Citi 5-10 years
3.5
3.0
BoE/NOP 1-year
2.5
2.0
1.5
1.0
You-Gov/Citi 1-year
0.5
0.0
2000
2002
2004
2006
Source: Bank of England, Citigroup
2008
2010
●
Inflation expectations have been rising sharply as oil and food price increases have fed through.
●
VAT and fuel duty rises are seeing inflation expectations rise higher and it could feed through to wage
demands this year.
21
Talking Points
Access to finance
22
Lending to corporates is still falling
UK M4 Lending growth
Percentage change on a year ago
22
20
M4 lending excluding OFCs
18
M4 lending
16
14
12
10
8
6
4
2
M4 lending to PNFCs
0
-2
M4 lending to
-4
households
-6
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: Bank of England
23
●
At -1.1%yoy , bank lending to the economy is back at its lowest annual growth rate since records
began in 1990.
●
Lending to private non-financial corporates (PNFCs) is actually contracting, an increase in lending to
households has not been enough to offset this.
Banks are weaning themselves off of relying on wholesale markets
UK funding gap
GBP bn
0
-100
-200
-300
-400
-500
-600
-700
-800
UK funding gap between
customer deposits and loans that
has to now relied on wholesale
markets
-900
1997
1999
2001
2003
2005
Source: Bank of England, National Australia Bank
24
2007
2009
●
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 £150bn in 1996 to a peak of £7696billion in October 2008.
●
Even now the gap is around £632 billion, its smallest level since December 2006.
●
But with wholesale funding expensive, banks are reluctant to lend.
Funding conditions will remain extremely tight until 2013
Major UK banks' maturing funding
Funding supported by the SLS
Funding supported by the CGS
Long-term repos with the Bank of England
RMBS
Bonds
£ billion
300
250
200
150
100
50
0
2010
2011
2012
2013
2010-12
Source: Bank of England
●
BoE calculations suggest that UK major banks have around £480 billion of unsecured senior debt,
subordinated debt, covered bonds and securitisations maturable or callable over the period to end 2012.
●
At the same time £165 billion of high quality collateral supplied under the SLS will be repaid.
●
All of the £120 billion in remaining guarantees issued under the CGS will also expire, but banks can roll over
up to one third of their initial limit of CGS drawings until April 2014.
●
So banks need to raise £800 billion or £25 billion per month over the next two and a half years.
25
Bank lending appetite is still depressed...
UK Expected Credit Availability
Balance
35
30
March 09
June 09
Sep 09
December 09
March 10
Jun-10
Sep-10
Dec-10
25
20
15
10
5
0
-5
-10
-15
HouseholdSecured
HouseholdUnsecured
Corporate
Commercial
Real Estate
Source: Bank of England
26
●
The BoE credit conditions survey shows that banks are still reluctant to lend against property and
housing.
●
Loans are still being extended to the corporate sector reflecting bank pledges.
Talking Points
Public sector outlook
27
June ‘Emergency’ Budget saw borrowing plans reduced
Public sector net borrowing
£ billion
200
2010 Budget Report
180
June 2010 Budget
160
140
120
100
80
60
40
20
0
2009-10
28
2010-11
2011-12
2012-13
2013-14
2014-15
●
Deficit now expected to by 1.1% of GDP by 2015, which brings the UK back into balance one year
earlier than laid out in the March Budget.
●
The lower growth assumptions mean that there is more plausibility in the borrowing plans.
The burden is squarely on spending cuts
Government spending and taxation
% of GDP
60.0
50.0
Expenditure
40.0
Revenue
30.0
20.0
10.0
0.0
1965-66
29
1974-75
1982-83
1990-91
1998-99
2006-07
2014-15
Assuming of course that cuts measures are enacted.
30
●
In the short-run fiscal tightening coming from tax increases.
●
Spending measures really only start kicking-in from 2013.
UK regions have different growth speeds
GDP growth 1989-2008
Average annual percentage growth
7
6
5
4
3
2
1
0
Source: ONS
●
31
Southern regions tend to grow faster due to larger population growth.
Different employment patterns
32
Would a smaller public sector boost growth?
Growth public sector trade-off
Public sector share of GDP
50
45
40
35
30
25
y = -13.009x + 100.6
20
15
10
5
0
0
2
4
6
Average annual growth rate
8
Source: Office for National Statistics
●
33
Small public sector is correlated with higher economic growth, so shrinking the state should boost
growth.
Can we rebalance using taxes then?
34
So what will the new normal look like?
35
Taking the long view...
UK GDP growth
percentage change on a year ago
15
10
5
0
-5
-10
-15
1831 1851 1871 1891 1911 1931 1951 1971 1991
Source: Bank of England
36
With lending appetite depressed, mortgages will remain weak
UK Mortgage approvals
Thousands
150
1993-2006 average
130
110
90
70
50
30
1997
37
1999
2001
2003
2005
2007
2009
●
Approvals are running roughly half the pace averaged between 1993 and 2006.
●
With lending capacity still depressed, it is hard to see how this will turn around without securitisation
markets opening.
The housing market may be poised for renewed weakness
RICS house price survey: UK
RICS house price survey
Percent balance
100
Percent balance
100
80
60
60
New Instructions
40
40
20
20
0
0
-20
-20
-40
-40
-60
-60
New Buyer Enquiries
-80
Expected prices
-80
-100
-100
2000
Price changes
80
2002
2004
2006
2008
2010
2000
2002
2004
2006
●
Housing bulls cite the fall in new instructions as supporting the housing market this year.
●
But new buyer enquiries are also much lower.
●
We expect prices to continue to fall this year and next.
38
2008
2010
House prices unlikely to regain earlier highs
House prices in the current and 1990s
recession
100= start of fall in prices
Aug-07
Aug-09
Aug-11
Aug-13
Aug-15
105
105
May 1989-Jan 1998
(Bottom scale)
100
100
95
95
90
90
85
85
80
75
80
August 2007 -date
(Top scale)
75
70
70
65
65
60
60
May-89
May-91
May-93
May-95
May-97
●
The Halifax house price index fell by over 22%, before recovering in recent months.
●
However, the downward trend now seems to be back.
●
In the early 90s recession it took house prices 9 years to regain their previous level. This time looks to be
a lot longer.
39
Indeed, given house prices, sales have been strong
Housing and retail sales
Percentage change on a year ago
30
20
8
Retail sales volumes
(3mma, RHS)
6
4
10
2
0
-10
0
Nationwide house price index
(LHS)
-2
-4
-20
-30
-6
-8
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: Bloomberg
40
●
Despite fears of the impact of VAT increases, it seems that the housing market has done much to
explain the strength of retail sales.
●
Yet looking at the fall in the Nationwide index, the surprise is that sales have not been weaker
Car industry will remain depressed
UK new car registrations
Thousands
600
500
400
300
200
100
0
1990
Source: Bloomberg
41
1994
1998
2002
2006
2010
●
The dip in new car registrations seen this year needs to be put in perspective.
●
From 1990 to 2002, registrations averaged 167,000 per month, so the 200,000+ seen from 2002-2007
are more of an abberation. We doubt that we will see any return to those levels as house prices and
rising mortgage costs prevent mortgage equity withdrawal.
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
●
42
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.
Taking the long view...
Bank Rate
per cent
18
16
14
12
10
8
6
4
2
0
1694
1744
1794
1844
1894
1944
1994
Source: Bank of England
●
The nominal average interest rate between 1694 and December 2010 is 5.0%.
●
So we cannot expect interest rates to remain at current levels, nor should be expect to.
●
The question is how far and how fast...
43
Financial markets are now beginning to price in BoE tightening
UK 3-month interest rates implied by
Per cent
futures contracts
5.0
17-Jan-11
4.5
03-Sep-10
4.0
18-Jun-09
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Mar-09
●
44
Mar-10
Mar-11
Mar-12
Although over the year as a whole, we have seen the timing of the first rate increase progressively
pushed back.
Economy will remain reliant on consumption
Contributions to annual UK GDP growth
Percentage points
6
Investment
Consumption
Government
4
2
0
Net trade
-2
Stockbuilding
-4
GDP
-6
1998
2000
2002
2004
2006
2008
2010
2012
Source: ONS / National Australia Bank
●
Without a big surge in net trade or investment, and with government spending being cut, the economy
will remain reliant on consumption.
●
But this is unlikely to remain large-ticket items. Instead, spending on food and energy will dominate.
45
The Yorkshire Economy
46
Purchasing Managers’ surveys show output decelerated in Q4
Regional PMI's
0 = no change
15
13
Q1 2010
Q2 2010
Q3 2010
Q4 2010
11
9
7
5
3
1
-1
-3
-5
UK
South West
North West
South East
London
N.Ireland
West Midlands
East Midlands
North East
Yorkshire & H'side
Scotland
Wales
Eastern England
47
Source: Markit
Yorkshire domestic demand looks better
Home market sales - manufacturing
Net balance
60
30
20
20
10
0
0
-10
-20
-20
Nb: thick line is UK, thin line is
Yorkshire & The Humber
-30
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
48
Net balance
50
40
40
-40
Home market sales -services
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.
But service sector struggling in exports
Export deliveries - manufacturing
Export deliveries -services
Net balance
50
40
30
20
10
0
-10
-20
-30
-40
Nb: thick line is UK, thin line is
-50
Yorkshire & The Humber
-60
Net balance
40
Nb: thick line is UK, thin line is
Yorkshire & The Humber
30
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: British Chambers of Commerce
●
49
20
10
0
-10
-20
-30
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: British Chambers of Commerce
Export growth remains a little weaker, especially in services, which seems to be lagging
manufacturing anyway.
Goods outperformance clearly seen in HMRC data
Export growth
Percentage change on a year ago
40
30
20
Yorkshire & The
Humber
10
0
-10
United Kingdom
-20
-30
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: HM Revenue and Customs
50
●
HMRC data only cover goods trade, but they show a very sharp fall in exports in the first half of the
year.
●
The slowdown in Q3 is consistent with BCC data, but we hope that Q4 will be better.
Which looks to reflect export direction
Exports by destination (2010 Q3)
Western Europe
Sub-Saharan Africa
North America
Middle East and North Africa
Latin America and Caribbean
United Kingdom
European Union 27
Yorkshire & The Humber
Eastern Europe
Asia & Oceania
0
10
Source: HM Revenue and Customs
●
51
20
30
40
50
60
The region has a slightly weaker exposure to the eurozone, but greater exposure to the faster growing
regions.
RICS house price survey: a regional breakdown
The National Picture
Scotland
10
38
4
52
North
0
53
50
43
rise
same
50
7
North West
0
39
54
46
54
f all
East Midlands
4
37
0
West Midlands
30
5
Yorkshire & The
Humber
2
59
32
70
66
45
50
Wales
8
London
East of England
45
47
6
3
39
South West
52
50
58
South East
44
The housing correction has further to go
Yorkshire housing market indicators
House price expectations
100
80
Yorkshire & The
Humber
80
New instructions
60
60
40
40
20
20
0
0
-20
-20
-40
-40
-80
-80
-100
-100
1999
Source: RICS
53
-60
England & Wales
-60
2001
2003
2005
2007
2009
2000
Source: RICS
New buyer enquiries
2002
●
Expectations already below those seen in England and Wales.
●
And the fall in prices has still not attracted new buyers to the market.
2004
2006
2008
2010
Affordability remains a constraint
All dwellings
(using regional income data)
House price value to income ratios
6
5
4
3
2
1
England
North
North West
Yorkshire & Humber
East Midlands
West Midlands
0
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
54
Yorkshire labour market looks to be stabilising
Employment growth
Percentage change on a year ago
4
Yorkshire & The
Humber
3
2
1
0
-1
United Kingdom
-2
-3
-4
1997
55
1999
2001
2003
2005
2007
2009
Female workers have seen largest improvement
Yorkshire & Humber employment
Thousands
1,150
1,100
Male employment
1,050
1,000
Female employment
950
900
850
800
1996 1998 2000 2002 2004 2006 2008 2010
56
Labour market fundamentals remain weak
Economic activity rate
Employment rate
Per cent
64.5
Per cent
61
United Kingdom
64.0
60
United Kingdom
63.5
59
63.0
62.5
58
62.0
61.5
Yorkshire & The
Humber
61.0
Yorkshire & The
Humber
57
56
60.5
55
60.0
1992
57
1995
1998
2001
2004
2007
2010
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.
2010
Which is why the unemployment rate have been higher through 2010
Unemployment rate
Per cent
12
10
Yorkshire & The
Humber
8
6
United Kingdom
4
2
0
1992
58
1995
1998
2001
2004
2007
2010
Construction employment fell as projects were completed
Yorkshire employment growth
Change on a year ago;
Thousands
100
Services
80
Other
Industries
60
40
20
0
-20
-40
Manufacturing
Construction
-60
1997
59
1999
2001
2003
2005
2007
2009
The housing market seems to explain most of the slowdown
Y&H service sector employment growth
Change on a year ago;
Thousands
30
Change on a year ago;
Thousands
30
25
Real Estate, renting and
business activities
20
Y&H service sector employment growth
20
Hotels & restaurants
15
10
10
5
0
0
-5
-10
Financial
intermediation
-10
-15
-20
Wholesale and retail
trade
-20
-30
-25
1998
●
60
2000
2002
2004
2006
2008
2010
But note the strength of retail sector hiring.
1998
2000
2002
2004
2006
2008
2010
Health and social work still remains the largest single government employer
Y&H service sector employment growth
Change on a year ago;
Thousands
50
40
30
Education
Health and social work
20
10
0
-10
-20
Public adminstration, defence and
compulsory social security
-30
1998
61
2000
2002
2004
2006
2008
2010
Conclusions
62
UK Outlook
Economic
Indicators (%)
GDP growth
CY10(f)
CY11(f)
CY12(f)
-4.9
1.5
2.1
2.3
Unemployment
6.6
7.8
8.0
8.0
7.3
Inflation
3.6
2.2
3.0
2.7
1.9
System
Growth (%)
63
CY09
-0.1
Cash rate
63
CY08
2.0
FY08
0.5
FY09
0.5
FY10(f)
1.5
2.5
FY11(f)
FY12(f)
Housing
8.5
2.2
1.0
2.6
4.7
Consumer
6.6
2.9
-0.1
1.6
2.5
Business
12.7
0.7
-3.2
-2.1
2.2
Total lending
9.8
1.7
-0.6
0.8
3.6
Household deposits
6.3
4.2
5.9
6.4
7.0
 The UK started recovering in the latter half of 2009 –
after experiencing one of the worst recessions of the
postwar period. Although growth was surprisingly
strong in June quarter 2010, we do not expect to see
a very strong recovery in activity.
 There is a good chance that the UK upturn will be
sustained but modestly paced – modest because the
serious fiscal position has required deep cuts in
spending and tax rises to maintain the sovereign
credit rating. The necessary fiscal retrenchment
should slow economic growth in the next few years.
 The UK economy requires a structural re-balancing in
its growth through the next few years – with more
reliance on exports and private investment spending
and less on consumption, government spending and
housing prices. The approx 25% drop in Sterling
should contribute significantly toward that rebalancing
in activity toward traded goods output and investment
 System credit growth should start to grow again next
year as the phase of business sector de-leveraging
draws to an expected close and modest growth in
housing lending resumes. However we expect credit
growth to be subdued compared to the pre-recession
period
 Although system asset quality has worsened with
recession and rising unemployment, it has not fared
as badly as might have been expected and
unemployment has not risen to the extent initially
feared.
Conclusions
●
●
●
●
●
64
The worst is behind us, but it’s hard to see the impressive performance in Q2 being repeated this year.
Having fallen by 4.9% in 2009, we only expect 1.8% growth in 2010 and 2.1% in 2011, a very weak
recovery given the depth of the downturn.
Recoveries from recessions are rarely straight line affairs. We can expect slower growth in the second
half of this year.
Emergency Budget has tightened policy, but real tightening starts from 2013. In the short-term, the
government is using tax increases.
But the recovery faces several headwinds to growth, with households, the banks and the public sector
all needing to deleverage.
●
The new trend of rate growth for the UK economy is likely to be 2.0 - 2.25%; almost half a percentage
point lower than the average over the past decade.
●
Rebalancing the economy requires higher interest rates, weaker spending on large-ticket items sourced
from lower mortgages. Asset prices will not be supportive
●
We believe that interest rate increases will be delayed until May 2011 at the earliest, with Bank Rate
reaching 1.50% by year-end. That leaves us currently in line with consensus estimates.
●
The MPC are aware that aggressive rate increases could push the economy back into recession so
they will not tighten pre-emptively. In the future macro-prudential tools such as capital constraints or
lending targets could be used to constrain asset price inflation, limiting the need for aggressive rate
increases.
●
But it the market believes that the bank is ‘behind the curve’ then the current fall in bond yields will
quickly reverse, providing some upside risk for our forecast that 10-year rates reach 4.50% by Dec2011.
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