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The recovery and your business
Mark Smyth, RBS Group Economics
April 2010
A return (of sorts) to positive growth
GDP growth (q/q)
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%
Q1 2008
Source: ONS
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Slide 2
In the local economy too
PMI survey (business activity)
65
Growth
60
55
50
45
40
Contraction
35
30
2006
2007
2008
UK
Source: Markit
2009
2010
West Midlands
Slide 3
However, we’ve got a lot of ground to recover
340
335
£billions
330
325
320
315
310
305
300
05
20
06
20
07
20
08
20
09
20
UK GDP (real, quarterly, 2005 prices)
Source: ONS
Slide 4
The property price correction
Property prices (index, peak =100)
110
100
90
80
70
60
50
40
30
2000
2001
Source: Nationwide, IPD
2002
2003
2004
2005
Commercial property prices
2006
2007
House prices
2008
2009
2010
Slide 5
Growth prospects depend on who can spend
Consumers
50% of demand
Investment
15% of demand
Government
15% of demand
Exports
20% of demand
Slide 6
The rise in household debt …
1.60
1.40
1.20
£trillion
1.00
0.80
0.60
0.40
0.20
0.00
2000
2000
Household income
Source: Bank of England
2009 Q3
Secured debt
2009 Q3
Unsecured debt
Slide 7
… leads to a need to save more
Income
Spend
Save
Long-run
average
£96
£4
Q1 2008
£104
-£4
Q3 2009
£93
£7
Slide 8
Employment – tough, but not as tough as before
UK Employment levels
(Index, Start of recession = 100)
106
104
Current Position
1979
102
1990
2008
100
98
96
94
t+44
t+40
t+36
t+32
t+28
t+24
t+20
t+16
t+8
t+12
Source: ONS
t+4
t
92
Slide 9
But labour market softness = weak wage growth
6.0
Average Earnings (% y/y)
5.0
4.0
3.0
2.0
1.0
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: ONS
Slide 10
Profits not hit as hard as might have been expected
Decline in UK Non-oil Non Financial Trading Profits from peak
(%, Real Terms, Deflated using GDP deflator)
2008 to date
1990s
1980s
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
Source: ONS
Slide 11
But investment likely to remain subdued
88
Capacity Utilisation Rates (%)
86
84
82
80
78
76
74
72
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
Source: ONS
1985
70
Slide 12
The public finances are under pressure
90%
80%
Net debt to GDP ratio
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net debt
Source: HM Treasury
Financial interventions
Treasury forecast (exc. interventions)
Slide 13
With future strains on public spending
“... the crisis has dealt a permanent hit to the Exchequer costing around
6½ per cent of national income ...
Over the course of next parliament, we know that the strain will be taken
primarily by public spending.”
Slide 14
Sterling weakness should boost exports
2.20
2.00
1.80
$ per £
1.60
1.40
Euro per £
1.20
1.00
2000 2001
Source: Thomson Datastream
2002 2003
2004
2005 2006
2007 2008
2009
2010
Slide 15
But requires a rebalance to faster growing markets
10%
9%
8%
GDP growth
7%
6%
5%
4%
3%
2%
1%
0%
China
India
Brazil
2010
Source: IMF
Russia
USA
Euro zone
2011
Slide 16
A sluggish recovery
Index of real GDP, 100 = start of recession
110
1990s recession
105
3 yrs
100
5 yrs
95
Current recession
90
1
2
3
4
5
6
7
8
9
100 = Q2 1992
Source: ONS, RBS Group Economics
10 11 12 13 14 15 16 17 18 19 20
100 = Q1 2008
Slide 17
With inflation below its target level
CPI Inflation (%)
5.0
Forecast
4.0
3.0
2.0
MPC Target
1.0
Source: ONS, RBS Group Economics
2012
2011
2010
2009
2008
2007
2006
2005
2004
0.0
Slide 18
Base rates – slow to move, but don’t get caught out...
Short-term rates (%)
5
Base Case
4
Futures
3
2
1
0
Q1 2010
Q1 2011
Source: RBS Group Economics
Q1 2012
Q1 2013
Q1 2014
Slide 19
Regions
Sectors
Relative growth rates in our central forecast
Above average
Average
Below average
Manufacturing
Business services
Hotels & restaurants
Construction
Retail & wholesale
Health & education
London
South East
South West
Eastern England
West Midlands
North East
East Midlands
Yorks & Hum
Wales
North West
Scotland
Northern Ireland
Slide 20
Spot the difference: sector breakdown in the West Mids
Share of total GVA in 2007
0%
5%
10%
15%
20%
25%
Extraction, etc
Manufacturing
Construction
Wholesale & retail
Hotels & restaurants
Transport, storage & communication
Financial intermediation
Business & property services
Public admin & defence
Health & education
Other
West Midlands
Source: ONS
UK
Slide 21
What about longer-term growth
Labour force growth (c.0.7% per annum):
• Demographic trends
• Immigration
Productivity growth (c.2.1% per annum):
• Investment
• Cost of capital
• Fixing private and public sector balance sheets
• Cost of moving resources across sectors
Slide 22
Key messages
The worst is over, but we’re not out of the woods yet
– Economic outlook remains uncertain with both up and downside risks
– Demand conditions: likely to be tough
Structural drags will inhibit the speed of recovery
– Cost of capital likely to be higher
– Balance sheets have to be repaired – no quick fix
Export potential, especially to emerging markets
Weak Pricing power
– Weak demand = reduced bargaining power
– But it cuts both ways – suppliers and wage costs
Policy: central banks deliberately behind the curve
– But long rates likely to move first – don’t get caught out
Slide 23
Keep in touch
Slide 24
Legal disclaimer
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