Transcript Challenges for the UK economy

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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