Economics The UK outlook: TINA or Turner?doc. Wells.pdfآ  The UK outlook: TINA or Turner? Simon Wells

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  • The UK outlook: TINA or Turner?

    Simon Wells Chief UK Economist HSBC Bank plc +44 20 7991 6718 simon.wells@hsbcib.com

    Economics

    March 2012

    View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

  • • Weak growth

    • More QE

    • Tighter fiscal squeeze

    Coalition under pressure. Will it choose TINA or Turner?

    UK Outlook: TINA or Turner?

    There

    Is

    No

    Alternative

    TURNER

    or

  • -1.0 -0.5 0.0 0.5 1.0 1.5

    -1.0 -0.5 0.0 0.5 1.0 1.5

    Jan-10 Jul-10 Jan-11 Jul-11

    % Qtr contrib.% Qtr contrib. % Qtr contrib.

    -1.0 -0.5 0.0 0.5 1.0 1.5

    -1.0 -0.5 0.0 0.5 1.0 1.5

    Jan-10 Jul-10 Jan-11 Jul-11

    % Qtr contrib.% Qtr contrib. % Qtr contrib.

    -1.0 -0.5 0.0 0.5 1.0 1.5

    -1.0 -0.5 0.0 0.5 1.0 1.5

    Jan-10 Jul-10 Jan-11 Jul-11

    % Qtr contrib. % Qtr contrib.

    Underlying growth slowing throughout 2011

    Source: Thomson Reuters Datastream, ONS, HSBC

    Underly ing grow th Erratic Ex traction, Energy & construction Headline GDP

  • Inflation outpaced earnings

    Source: Thomson Reuters Datastream, ONS, HSBC

    -6 -4 -2 0 2 4 6 8

    05 06 07 08 09 10 11 12

    -6 -4 -2 0 2 4 6 8

    CPI inflation (LHS) Wage grow th (RHS)

    % Yr % Yr

  • Sterling oil price close to record highs

    Source: Thomson Reuters Datastream, ONS, HSBC

    0

    20

    40

    60

    80

    100

    2000 2002 2004 2006 2008 2010 2012

    0

    20

    40

    60

    80

    100 Brent price in GBP GBP/BBLGBP/BBL

  • Uncertainty weighing on consumer confidence and spending likely to stay restrained

    Source: ONS, GfK

    -10

    -5

    0

    5

    10

    87 90 93 96 99 02 05 08 11

    -55

    -35

    -15

    5

    25

    Consumption grow th (LHS) Gfk Consumer confidence (RHS)

    Index% Yr

  • Firms also reluctant to invest despite available cash and weak recovery in investment

    Source: ONS, HSBC

    20 30 40 50 60 70 80

    95 97 99 01 03 05 07 09 11

    20 30 40 50 60 70 80

    Real inv estment relativ e to pre-crisis trendGBPbn GBPbn

  • Eurozone recession will restrain demand for UK exports

    Source: ONS, HSBC

    Emerging

    Eurozone

    USA Other

    Other Dev eloped

    Share of UK ex ports to w orld, 2010

    Italy

    Ireland Greece

    Other

    Germany

    France

    Spain

    Share of UK ex ports to eurozone, 2010

  • Recent trade performance similar to past experience of large moves in sterling

    Source: ONS, HSBC

    • 20-25% change in sterling gives trade impact on GDP of 2- 3%points

    -1

    0

    1

    2

    3

    T T+4 T+8 T+12 T+16

    -1

    0

    1

    2

    3

    Cumulativ e net trade 96Q1-00Q2 (inv erted) Cumulativ e net trade 92Q3-96Q1 Cumulativ e net trade 07Q4-11Q3

    Cumulativ e contribution to GDP%points %points

  • Unemployment at a 17-year high …

    Source: ONS, HSBC

    ILO unemploy ment rate

    0

    2

    4

    6

    8

    10

    12

    71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

    %%

    Suggests significant slack in labour market

  • But employment resilient given size of fall in output

    Source: ONS, HSBC

    90

    95

    100

    105

    t t+2 t+4 t+6 t+8 t+10 t+12 t+14

    90

    95

    100

    105

    70s 80s 90s 00s

    GDP in UK recessionsIndex Index

    90 92 94 96 98

    100 102

    t t+2 t+4 t+6 t+8 t+10 t+12 t+14

    90 92 94 96 98 100 102

    70s 80s 90s 00s

    Employment in UK recessionsIndex Index

    UK productivity performance has been dismal

  • • Significant spare capacity remains; policy can stay loose

    • No more QE in May, but another £50bn possible in August

    • Take BoE gilt holdings to £375bn by end-2012. Close to the maximum possible under current policy

    Monetary policy response

  • £500bn £325bn

    £125bn £50bn

    £325bn

    Reaching the limits of gilt purchases

    Source: BoE, HSBC

    • Gilts outstanding end 2012: £1300bn • Available for Bank of England to buy: £500bn • Bank of England holdings from existing QE: £325bn • HSBC forecast: £375bn

  • -0.8

    -0.6

    -0.4

    -0.2

    0

    0.2

    Feb 09

    Mar 09

    May 09

    Aug 09

    Nov 09

    Feb 09

    Oct 10

    Feb 12

    -0.8

    -0.6

    -0.4

    -0.2

    0.0

    0.2

    Change in gilt yields to quantiative easing 'new s'

    %%

    Impact of gilt purchases waning

    Source: BoE; HSBC

    Large impact on yields initially

    Similar QE2 impact absent

  • Main channels of gilt purchases

    Waning impact vs 2009

    • Portfolio rebalancing

    • Exchange rate impact } Large effect in 2009, unlikely now

    • Lower expectations of future policy rates

    • Boost to confidence and/or liquidity }

    Little effect in 2009 • Increase commercial bank lending }

  • Govt sector to subtract from GDP growth in 2012

    Source: Thomson Reuters Datastream, HSBC estimates

    -1.0 -0.5 0.0 0.5 1.0 1.5

    -1.0 -0.5 0.0 0.5 1.0 1.5

    1998 2001 2004 2007 2010 2013f 2016f

    % Yr contrib.% Yr contrib. Contribution of gov t spending and

    inv estment to GDP grow th

  • Unprecedented scale of government drag on GDP

    Source: HSBC, Thomson Reuters Datastream

    -1.0

    -0.5 0.0

    0.5 1.0

    1.5

    -1.0

    -0.5 0.0

    0.5 1.0

    1.5

    1959 1969 1979 1989 1999 2009

    % Yr contrib.% Yr contrib. Contribution of gov t spending to GDP

    grow th

  • Long-term fiscal situation dire: debt ratios explode from mid-2020s even if current fiscal targets met

    Source: OBR

    50 60 70 80 90

    100 110

    2010 2020 2030 2040 2050 2060

    50 60 70 80 90 100 110

    Net debt forecasts made in July (LHS) Net debt forecasts made in Nov ember (LHS)

    % of GDP % of GDPOBR forecasts of net debt

  • UK productivity may return to 1980s levels

    Source: ONS, HSBC

    Policymakers’ assume productivity returns to historical trend, which may be too optimistic

    0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

    1969 1977 1985 1993 2001 2009

    0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

    UK productivity grow th (10-year MA)

  • • Uncertainty will weigh on economic activity. Despite uptick in survey indicators, demand will be weak

    • An additional £50bn of QE from BoE on top of existing £325bn

    • Fiscal consolidation to ramp up in 2012 and subtract from GDP. Coalition’s resolve to be tested: pressure to be Turner not TINA

    UK Outlook: TINA or Turner?

  • Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Simon Wells

    Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

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