UK Next Week’s Agenda and Wrap Up, Nov 18 - 22 - Headlines for the UK economy and global highlights

- Wrap up

- Next week’s agenda

- Financial overview

- Government bond yields

- Financial forecast

- Chart of the week

- The economy

- News and statements during the week

Helena Trygg, +46 8 701 12 84, hetr01@handelsbanken.se

www.handelsbanken.se/research

15 Nov, 2013

2

UK

Headlines for the UK and key global highlights UK

Consumer prices were reported at 2.2 percent in October compared with the same period a year ago. The largest contributions to the fall in the

rate came from the transport (notably motor fuels) and education (tuition fees) sectors. Within the transport sector, the main downward

contribution came from prices for motor fuels, with reports of price cuts at many of the major supermarket chains on the back of decreases in

wholesale prices. There were also notable downward contributions from air fares and prices for second-hand cars. The other main consumer

price indices moved in a similar fashion. The downward contribution came principally from UK and EU student tuition fees, where the impact on

the CPI from the rise in the cap for tuition fees introduced last year for new UK and EU students in England was smaller this year than in 2012.

The smaller impact was due to many students already paying the higher rate of fees. In addition, there were more modest price increases for

part-time and postgraduate fees compared to last year. There may be upward pressure on inflation as Britain’s largest energy suppliers raise

their prices by about 10 percent within the next two months.

Labour market statistics showed another month of stronger data. The percentage of people aged between 16 and 64 who were in work during

July to September 2013 (the employment rate) was 71.8 percent, which is lower than before the 2008-09 downturn. In March to May 2008, the

employment rate peaked at 73.0 percent. It then fell as the economic downturn impacted the labour market to reach a trough of 70.2 percent for

July to September 2011.There are now 29.95 million people in employment. The unemployment rate decreased to 7.6 percent, with 2.47 million

unemployed people aged 16 and over. Between September and October, the number of people claiming Jobseeker’s Allowance (JSA) fell by

41,700 to reach 1.31 million, the lowest figure since January 2009.

The Inflation Report published on Wednesday was quite optimistic, even if there is still some slack in the economy. Governor Carney began

his opening remarks by saying: “Inflation is now as low as it has been since 2009. Jobs are being created at a rate of 60,000 per month. The

economy is growing at its fastest pace in six years. For the first time in a long time, you don’t have to be an optimist to see the glass as half full.

The recovery has finally taken hold.”

Retail sales surprised on the downside, showing that consumers spent less money in October than in September. Retail sales were reported to

have decreased by 0.6 percent in October; ex fuel, sales were down 0.6 percent. The reading was in line with the CBI survey, published on

October 28, that highlighted that reported sales fell significantly in October. The warmer than usual weather puts pressure on winter clothing

sales. Food sales dropped for the third consecutive month, as did household goods sales, a bit surprising as the pick up in housing market

activity should support sales within that area. Hopefully, consumers may surprise on the upside as Christmas is approaching.

Global

GDP figures for the euro area showed a relapse in Q3 growth. GDP growth stood at 0.1 percent q-o-q in Q3, a slowdown compared to the

somewhat surprisingly "big" increase of 0.3 percent in Q2. One has to recall that the slowdown is partly due to extraordinary circumstances

lifting Q2 GDP, including unusually cold weather in Q1. So at this point we do not fear that we stand with one foot in a new recession. This has

also been suggested by continued moderate increases in various surveys heading into the fourth quarter. Conversely, the growth level

underlines that talk of a recovery in the euro area has to be tempered with it being very small and fragile in nature. We expect growth to remain

modestly positive in Q4. Thus, there is still no prospect of a recovery strong enough to radically change the prospects for continued high

unemployment and dampen recent growing worries about disinflation in particular, which the ECB responded to with a rate cut a week ago.

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UK

Wrap Up, November 11 - 15 Monday

No major events

Tuesday

RICS house price balance, Oct 57 (e: 58, p: 53)

CPI, Oct 0.1/2.2 (e: 0.3/2.5, p: 0.4/2.7)

CPI core, Oct /1.7 (e: /2.0, p: /2.2)

PPI input prices, Oct -0.6/-0.3 (e: -0.6/0.1, p: -1.0/0.9)

PPI output, Oct -0.3/0.8 (e: 0.0/1.0, p: 0.0/1.2)

PPI output core, Oct 0.1/0.9 (e: 0.1/0.6, p: 0.0/0.8)

RPI, Oct 0.0/2.6 (e: 0.4/3.0, p: 0.4/3.2)

RPI ex mortgage interest payments, Oct /2.7 (e: /3.0, p: /3.2)

ONS house prices, Sept /3.8 (p: /3.7)

Wednesday

ILO unemployment rate, Sep 7.6 (e: 7.6, p: 7.7)

Claimant count rate, Oct 3.9 (e: 3.9, p: 4.0)

Jobless claims change, Oct -41.7k (e: -30.6k, p: -44.7k)

Employment change 3m/3m, Sep 177k (e: 115k, p: 155k)

Average weekly earnings, Sep /0.7 (e: /0.7, p: /0.8)

Weekly earnings ex bonus, Sep /0.8 (e: /0.9, p: /0.8)

Bank of England Inflation Report

Auction of 4¼% Treasury Stock 2036

Thursday

Retail sales ex auto, Oct -0-6/2.3 (e: -0.1/3.2, p: 0.7/2.8)

Retail sales, Oct -0.7/1.8 (e: 0.1/3.1, p: 0.6/2.2)

Friday

No major events

m-o-m/y-o-y a = Actual e = Estimate p = Prior

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UK

Next week’s agenda, November 18 - 22

Monday

Rightmove house prices, Nov (p: 2.8/3.8)

Tuesday

Auction of 2¼% Treasury Gilt 2023

Wednesday

Bank of England minutes

Thursday

Public finances, Oct (p: -0.6bn)

Public sector net borrowng, Oct (e: 4.9bn, p:

9.4bn)

Public sector net borrowing ex interventions,

Oct (e: 7.3bn, p: 11.1bn)

CBI Trends total orders, Nov (e: 0, p: -4)

CBI Trends selling prices, Nov (p: -2)

Auction of new conventional gilt maturing on 2

2 July 2019

Friday

No major events

m-o-m/y-o-y a = Actual e = Estimate p = Prior

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UK

Financial overview

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UK

Government bond yields

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UK

Financial forecast

Policy rates last 3 months 6 months 12 months

USA 0.125 0.125 0.125 0.250

Eurozone 0.25 0.25 0.25 0.25

United Kingdom 0.50 0.50 0.50 0.50

Ten year government bond yields

USA 2.69 2.75 2.80 3.00

Eurozone 1.70 1.80 1.80 1.80

UK government bond yields

2 year 0.42 0.40 0.50 0.70

5 year 1.49 1.60 1.70 2.00

10 year 2.74 2.70 2.80 3.00

UK swaps

2 year 0.81 0.80 0.90 1.10

5 year 1.74 1.80 1.90 2.20

10 year 2.72 2.70 2.80 3.00

FX last 3 months 6 months 12 months

EUR/USD 1.35 1.34 1.25 1.10

EUR/GBP 0.837 0.835 0.830 0.820

GBP/USD 1.61 1.60 1.51 1.34

Sources: Handelsbanken Capital Markets and Macrobond

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UK

Chart of the Week – sterling and FTSE 100

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UK

The economy: employment and economic growth Since the first quarter in 2008 up until the second quarter of 2013, the UK’s

total population has increased by almost 4 percent while the number of

employed Britons has increased by approximately 1 percent. During

the same period, GDP has decreased by 2.5 percent. The gap between

GDP and employment is now the largest since the early 1990s.

Employment is increasing at a faster pace than actual economic growth.

However, job growth has not quite kept up with the increase in population

and the labour force’s structure has changed since the financial crisis of

2008-09. Employees with a tertiary education have been better able to keep

their jobs compared to employees with only primary educations. Actual

hours worked have increased by 1.5 percent, outperforming the

employment increase.

These labour market figures are puzzling, as productivity growth does not

show the same pattern. Overall labour productivity growth for the whole

economy has actually decreased since Q1 2008, leaving us with the

question: what do workers actually do? Labour productivity, as measured

by output per hour, shows that all sectors are producing less now than in

Q1 2008.

Employment and actual hours worked have increased while GDP has

decreased: this means that GDP is stagnating. The total gross operating

surplus is also decreasing as a consequence. Details reveal that the private

financial sector is the sector most hurt by this trend, with surpluses

turning into deficits by a staggering 45 percent since Q1 2008. The only

sector that showed a surplus in Q2 2013 was the non-financial public

sector. The situation where employment increases faster than economic

growth is of course not sustainable. The national accounts show a

depressed future for companies while the stock exchange continues to

thrive. The FTSE 100 has increased by 5 percent since January 1, 2008,

which is quite contradictory to decreasing profits.

This leads us again to the question of where the economy is going from

here. More people have jobs, at a lower real wage, working more hours

but producing less. Will employment growth decrease or stop, or will

economic growth continue on the rebound path? The most likely scenario is

that economic growth will continue and, for now, it seems as though the

national accounts statistics are miscalculated.

10

UK

The economy: Bank of England Inflation Report At the Bank of England’s press conference on Wednesday when

the Inflation Report was released, the central bank raised its

GDP forecast from 1.4 percent to 1.6 percent for this year and

from 2.5 percent to 2.8 percent for 2014. It also said the

unemployment rate could fall to 7 percent as early as next year.

Governor Mark Carney has previously said (when introducing

the Forward Guidance in August) that the BoE will not consider

raising interest rates until the jobless rate falls to 7 percent or

below but stressed the fact that when the unemployment

threshold is reached, the central bank has to consider if a hike

is appropriate at that time.

However, the Governor had a positive tone on the UK's

economic outlook, saying that the recovery had "taken hold".

"For the first time in a long time, you do not have to be an

optimist to see the glass is half full," he said at the press

conference, continuing that “It is welcome that the economy is

growing again, but a return to growth is not yet a return to

normality. Nearly one million more people are out of work than

in the years before the financial crisis. Many others in part-time

work would prefer to be working full time. Real wages are not yet

increasing. And the economy remains 2.5 percent smaller than it

was in 2008. A strong and sustained recovery is needed to put

people back in work and use up the slack in the economy. A

sustained recovery requires a revival of business investment.”

Overall, the tone from the Governor was more optimistic than at

the latest press conference in August, as the prospects for an

economic recovery look better . But as long as the eurozone

struggles with weak credit expansion due both to low supply and

low demand, high unemployment and problems in the banking

sector will dampen prospect for a fast recovery in the UK. For

now, better and more positive overall sentiment prevails than

in a long time.

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UK

News and statements during the week

Bank of England policymaker David Miles said interest rates are not the best weapon against a buildup of risks in the

housing market and should only be used when other tools have been exhausted. “Monetary policy can be retained as a ‘last line

of defense’ against risks to financial stability,” Miles said in Dallas yesterday. “Policy instruments more precisely targeted at the

housing market can be helpful in dealing with situations where the level of interest rates that might be best suited to the wider

economic situation is not the same as the rate that might be needed to stabilize the housing market.” Britain’s strengthening

property market, in part supported by government stimulus, has stoked concerns that a bubble is forming. While the BOE’s

Monetary Policy Committee has said it will keep its key interest rate at a record low of 0.5 percent until unemployment falls to 7

percent, its pledge is conditional on financial stability not being threatened. Miles, speaking at a conference hosted by the Federal

Reserve Bank of Dallas, said the problem with using monetary policy to stabilize the housing market would be “acute” if property

was overheating while the wider economy wasn’t and inflation was low. “Variations in interest rates that central banks can control

are rather a blunt instrument,” he said. “Indeed the impact on assets other than houses, and the effects on borrowing and

spending unrelated to housing, may well be far greater than the impact on housing.” (Bloomberg)

Bank of England Governor Mark Carney signaled that officials may consider raising interest rates sooner than they previously

forecast as the UK economy recovers “robustly” and inflation slows. The jobless rate is more likely than not to reach the 7 percent

threshold, when the BOE might start thinking about increasing borrowing costs from a record-low 0.5 percent, in the third quarter

of 2015, the central bank said in its quarterly Inflation Report today. It previously didn’t see that happening until the second quarter

of 2016. “You don’t have to be an optimist to see the glass as half full,” Carney told reporters at a press conference in London.

“The recovery has finally taken hold.” (Bloomberg)

Two major lenders have reported a strong uptake in the first month of the government's extended Help to Buy mortgage

guarantee scheme. Royal Bank of Scotland (RBS) and Halifax said they had received a total of 2,384 applications, potentially

worth GBP 365million in mortgages. The scheme is designed to encourage lenders to offer mortgages with deposits as low as 5

percent. But critics are concerned it could help to create a UK housing bubble. RBS and its subsidiary NatWest, and Halifax -

owned by Lloyds Banking Group - are among the few lenders to offer mortgages under the government's extended scheme.

HSBC and Barclays are planning to offer such mortgages in the future, but Nationwide, the UK's second largest lender, has not

yet made a decision. The first phase of Help to Buy was launched in April, but only provided help to first-time buyers buying new-

build homes. The extended scheme applies to all buyers and all types of homes, up to a value of GBP600,000. Under this part of

the scheme, up to 15 percent of the value of the loan will be guaranteed by the Treasury. RBS said it had so-far approved 169 of

its 1,075 applications, and five customers had already completed their purchases. It said the majority of applications had come

from young couples with a joint salary of less than £50,000. The average price of the property being bought was GBP 167,565. (http://www.bbc.co.uk/news/business-24892649)

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