The UK Economy in 2011-12 Bumping along…. Dennis Turner Chief Economist, HSBC Bank plc

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The UK Economy in The UK Economy in 2011-122011-12

Bumping along….Bumping along….

Dennis Turner

Chief Economist, HSBC Bank plc

THE RECESSION IS OVERTHE RECESSION IS OVER

A deep recessionA deep recession

-6.0

-4.0

-2.0

0.0

2.0

4.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%

QUARTERLY

ANNUAL

Long-term average

ALL THE LEVERS PULLEDALL THE LEVERS PULLED

Fiscal policy loosened

Government finances already in deficitGovernment finances already in deficit

-200

-150

-100

-50

0

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-200

-150

-100

-50

0

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

……and then deteriorated rapidlyand then deteriorated rapidly

March 2010 Budget Report

Interest rates fall to historic lows

Lowest interest rates for over 300 yearsLowest interest rates for over 300 years

0

1

2

3

4

5

6

7

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%

And sterling plummeted

Sterling takes a poundingSterling takes a pounding

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2005 2006 2007 2008 2009 2010

$/£

1.00

1.10

1.20

1.30

1.40

1.50

1.60

€/£

A slow recovery is underwayA slow recovery is underway

-6.0

-4.0

-2.0

0.0

2.0

4.0

2006 2007 2008 2009 2010 2011

%

QUARTERLY

ANNUAL

Long-term average

Forecast

RISKSRISKS

Consumers were the driving forceConsumers were the driving force

-3

-2

-1

0

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% C

HA

NG

E

CONSUMER SPENDING RETAIL SALES

But underpinned by borrowingBut underpinned by borrowing

-1

1

3

5

7

9

11

13

15

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

75

85

95

105

115

125

135

145

155

165

INTEREST REPAYMENTS/DISPOSABLE INCOMES(LHS)

DEBT / DISPOSABLE INCOMES(RHS)

%

Consumers are not borrowingConsumers are not borrowing

-8

-4

0

4

8

12

16

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

£ bn

-8

-4

0

4

8

12

16

20

% an

nu

al gro

wth

Housing equity withdrawal (L axis)

Consumer credit (R axis)

But real earnings squeezedBut real earnings squeezed

-3

-2

-1

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average earnings growthConsumer price inflation

Real earnings growth

%

A slower recovery than the last recession A slower recovery than the last recession

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% C

HA

NG

E

CONSUMER

c) Public sector spending cuts

So net debt (as a % of GDP) soaredSo net debt (as a % of GDP) soared

25

30

35

40

45

50

55

60

65

70

75

80

1990 1994 1998 2002 2006 2010 2114

% o

f G

DP

Sustainable Investment Rule

March 2010 Budget

Govt receipts and spending (% of GDP)Govt receipts and spending (% of GDP)

35

40

45

50

55

2009-10 2011-12 2013-14 2015-16

% of

GDP

Budget to be balanced in four yearsBudget to be balanced in four years

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2008/09 2010/11 2012/13 2014/15

% o

f G

DP

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

% o

f GD

P

Emergency Budget June 2010

Budget March 2010

Surplus on current budget:

Debt burden to peak in three years timeDebt burden to peak in three years time

50

55

60

65

70

75

2009/10 2011/12 2013/14 2015/16

% o

f G

DP

50

55

60

65

70

75

% o

f GD

P

Emergency Budget June 2010

Budget March 2010

Public sector net debt:

d) Slow growth in key export markets

In the wrong placesIn the wrong places

0

20

40

60

200820031998

%

0

20

40

60

%

Western Europe

Central & Eastern Europe

BRIC (Brazil, Russia,India, China)

Euro Area southern fringe (Greece, Spain, Italy,Portugal)

Share of UK exports (goods & services):

Euro Area growth forecastEuro Area growth forecast

-6

-4

-2

0

2

4

2009 2010 2011 2012

%

Germany France

Italy Spain

Euro Area

Annual GDP growth:

Euro deficits add to the uncertaintyEuro deficits add to the uncertainty

UK

BelgiumItaly

Greece

Portugal

Ireland

Spain

-15

-12

-9

-6

-3

0

%

-15

-12

-9

-6

-3

0

%

2010 2009Annual deficit as % of GDP:

Tier 3 countriesTier 2 countries

SHORT-TERM OUTLOOKSHORT-TERM OUTLOOK

Slow fragile growthSlow fragile growth

-8

-6

-4

-2

0

2

4

6

8

1988 1991 1994 1997 2000 2003 2006 2009 2012

%

QUARTERLY ANNUAL

LONG TERM AVERAGE

Forecast

Inflation – above targetInflation – above target

-2

-1

0

1

2

3

4

5

6

2009 2010 2011

% c

han

ge

mo

nth

on

mo

nth

CPI RPI

Forecast

Target

Range

Taxes boosting inflationTaxes boosting inflation

0

1

1

2

2

3

3

4

4

5

5

2009 2010 2011

% c

han

ge

mo

nth

on

mo

nth

CPI CPI(Y)

Target

Range

Inflation – likely to easeInflation – likely to ease

-2

-1

0

1

2

3

4

5

6

2009 2010 2011 2012

% c

han

ge

mo

nth

on

mo

nth

CPI RPI

Forecast

Target

Range

And interest rates to stay low for nowAnd interest rates to stay low for now

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

Forecast

THANK YOUTHANK YOU

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