The recovery and your business

Mark Smyth, RBS Group Economics

April 2010

Slide 2

A return (of sorts) to positive growth

GDP growth (q/q)

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009

Source: ONS

Slide 3

In the local economy too

PMI survey (business activity)

30

35

40

45

50

55

60

65

2006 2007 2008 2009 2010

UK West Midlands

Growth

Contraction

Source: Markit

Slide 4Slide 4

However, we’ve got a lot of ground to recover

300

305

310

315

320

325

330

335

340

20052006

20072008

2009

£bil

lio

ns

UK GDP (real, quarterly, 2005 prices)Source: ONS

Slide 5

The property price correction

Property prices (index, peak =100)

30

40

50

60

70

80

90

100

110

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Commercial property prices House pricesSource: Nationwide, IPD

Slide 6

Growth prospects depend on who can spend

Consumers50% of demand

Investment15% of demand

Government15% of demand

Exports20% of demand

Slide 7

The rise in household debt …

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2000 2000 2009 Q3 2009 Q3

£tril

lion

Household income Secured debt Unsecured debt

Source: Bank of England

Slide 8

… leads to a need to save more

£96Long-runaverage

Q1 2008

Q3 2009

Income Spend

£104

£93

£4

-£4

£7

Save

Slide 9

Employment – tough, but not as tough as before

92

94

96

98

100

102

104

106

t

t+4

t+8

t+12

t+16

t+20

t+24

t+28

t+32

t+36

t+40

t+44

UK Employment levels (Index, Start of recession = 100)

1979 1990

2008

Current Position

Source: ONS

Slide 10

But labour market softness = weak wage growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

Average Earnings (% y/y)

Source: ONS

Slide 11

Profits not hit as hard as might have been expected

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

2008 to date 1990s 1980s

Decline in UK Non-oil Non Financial Trading Profits from peak (%, Real Terms, Deflated using GDP deflator)

Source: ONS

Slide 12

But investment likely to remain subdued

Capacity Utilisation Rates (%)

70

72

74

76

78

80

82

84

86

88

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Source: ONS

Slide 13

The public finances are under pressure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Net

deb

t to

GD

P r

atio

Net debt Financial interventions Treasury forecast (exc. interventions)

Source: HM Treasury

Slide 14

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 15

Sterling weakness should boost exports

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Euro per £

$ per £

Source: Thomson Datastream

Slide 16

But requires a rebalance to faster growing markets

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

China India Brazil Russia USA Euro zone

GD

P g

row

th

2010 2011

Source: IMF

Slide 17

A sluggish recovery

90

95

100

105

110

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

100 = Q2 1992 100 = Q1 2008

3 yrs

5 yrs

1990s recession

Current recession

Index of real GDP, 100 = start of recession

Source: ONS, RBS Group Economics

Slide 18

With inflation below its target level

0.0

1.0

2.0

3.0

4.0

5.0

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

CPI Inflation (%)

Forecast

MPC Target

Source: ONS, RBS Group Economics

Slide 19

Base rates – slow to move, but don’t get caught out...

0

1

2

3

4

5

Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014

Short-term rates (%)

Base Case

Futures

Source: RBS Group Economics

Slide 20

Relative growth rates in our central forecast

Above average

Manufacturing

Construction

Average

Business services

Retail & wholesale

Below average

Hotels & restaurants

Health & education

Reg

ion

sS

ecto

rs

London

Eastern England

East Midlands

North West

South East

West Midlands

Yorks & Hum

Scotland

South West

North East

Wales

Northern Ireland

Slide 21

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 UKSource: ONS

Slide 22

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 23

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 24

Keep in touch

Slide 25

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