UK Economy in the Global Crisis – Recovery in Sight? Mark Berrisford-Smith HSBC Bank plc

UK Economy in the Global Crisis – Recovery in Sight?

Mark Berrisford-Smith

HSBC Bank plc

Desperately seeking solutions

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

forecast

Source: Bank of England, US Federal Reserve, ECB, HSBC

HSBC

Policy interest rates:

Bank of England

US Federal Reserve

European Central Bank

A world in recession …

From credit crunch to global recession

• This has been the worst episode for the global economy since the 1930s

The end of the golden years

-8

-6

-4

-2

0

2

4

6

8

10

12

2007 2008 2009 2010

%

USA Eurozone Japan Asia*

World

Source: IMF, HSBC

Annual GDP growth

*excluding Japan

Asia’s superpowers falter

-4

-2

0

2

4

6

8

10

12

14

2007 2008 2009 2010

%

China India Malaysia Thailand Korea

Asia (excluding Japan)

Source: IMF, HSBC

Annual GDP growth



• Industrial production and international trade have collapsed

Falling off a cliff

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

%Germany Japan

UK USA

Source: Thomson Datastream

Industrial production

annual percentage change

A slump in international trade

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

%

World trade volumes

Source: WTO


Japan’s exports are down by nearly a half

-50

-40

-30

-20

-10

0

10

20


%


Japan: value of trade in goods


Imports

Exports



• Industrial production and international trade have collapsed

• The prospects for recovery hinge on America and China

Around six million jobs lost

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2004 2005 2006 2007 2008 2009

qu

art

erly

gro

wth

, %

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

00

0s

Employment* (R axis)

GDP (L axis)

Source: BLS, BEA

* Non-farm payrolls, average monthly change

The US housing market – state of collapse

3.5

4.0

4.5

5.0

5.5

6.0

6.5

2002 2003 2004 2005 2006 2007 2008 2009

mill

ion

s (a

nn

ua

lize

d)

-20

-15

-10

-5

0

5

10

15

20

% a

nn

ua

l cha

ng

e

Existing home sales (L axis)

House prices - FHFA (R axis)

House prices - Case-Shiller (R axis)


Waiting for the Obama stimulus

-2.5

0.0

2.5

5.0

1998 2000 2002 2004 2006 2008 2010

%

HSBC forecast

Source: BEA, HSBC

USA: annual GDP growth

Long-term average

Surveys point to slower decline

32

38

44

50

56

62

2004 2005 2006 2007 2008 2009

% b

alan

ce

Manufacturing Services

expansion

contraction

Source: Markit

PMI surveys:

The Euro Area – feet of clay

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2008 2009 2010

%

Germany France Italy Spain

Euro Area

Source: Eurostat, HSBC

Annual GDP growth

Britain: from age of prosperity to

age of austerity

The worst is over

• Business surveys suggest that economic activity is now contracting at a much slower pace

Business surveys – glimmers of hope

34

38

42

46

50

54

58

62

66

2003 2004 2005 2006 2007 2008 2009

% b

alan

ce

ManufacturingServices

expansion

contraction

Source: Markit

PMI surveys:

The worst is over


• Consumer spending isn’t quite the disaster that many predicted

Consumer spending – not quite a disaster

-2

-1

0

1

2

3

4

5

6

7

8

1988 1991 1994 1997 2000 2003 2006 2009

volu

me

of s

ales

: a

nnua

l % g

row

th

-35

-30

-25

-20

-15

-10

-5

0

5

10

index (long-run average = -7)

Retail sales (L axis)Consumer confidence (R axis)

Source: ONS, Thomson Datastream

The worst is over


• Consumer spending isn’t quite the disaster that many had predicted

• But unemployment has further to rise, and house prices further to fall

The labour market – turning nasty

0.50

0.75

1.00

1.25

1.50

1.75

2004 2005 2006 2007 2008 2009

mill

ion

s

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

%

Claimant count (L axis)

Unemployment rate (R axis)

Source: ONS

House prices – further to fall

0

20

40

60

80

100

120

140

2001 2002 2003 2004 2005 2006 2007 2008 2009

mo

nth

ly m

ort

ga

ge

ap

pro

vals

, 00

0s

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

%

Mortgage approvals (L axis)

Prices, annual change (R axis)Prices, 3-month change annualized (R axis)

Source: Bank of England, Halifax

Strong medicine

• Bank Rate will be kept close to zero until well into next year

Inflation – yesterday’s story?

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009

annu

al r

ate,

%

CPI headline rate

Inflation target

'Core' rate

Source: ONS

What to do when interest rates approach zero

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010

%

UK Bank Rate

CPI inflation rateHSBC

forecast

Source: Bank of England, ONS

Inflation target

Strong medicine


• The MPC believes that the risks from doing too much are less than the risks from doing too little

£125 billion of QE

0

2

4

6

8

10

12

14

16

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09

% o

f G

DP

0

25

50

75

100

125

150

175

200

225

£ billion

Monetary base* (R axis)

% of GDP (L axis)

Source: Bank of England, ONS

* Notes and coins in circulation, plus commercial banks’ sterling reserves held at the Bank of England

£125bn

The credit crunch – starting to ease

-5

0

5

10

15

20


%

Source: Bank of England

Lending to households

Lending to businesses

Annualized growth in outstanding lending

Narrowing the spreads

0

1

2

3

4

5

6

7

8

9

10

Jul-07 Jan-08 Jul-08 Jan-09

%


* Merrill Lynch UK corporate bonds index** UK benchmark 10-yr govt bonds

Corporate bond yields*

Gilt yields**

3-month Libor

UK Bank Rate

Strong medicine


• The MPC believes that the risks from doing too much are less than the risks from doing too little

• Sterling has weakened, which is helping to boost the UK’s competitiveness

Sterling 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

€/£

Source: Thomson Datastream; HSBC

Sterling weaker

US dollar / £ (L axis)

euro / £ (R axis) HSBC

forecast

The age of austerity

• The recession will soon end, but the recovery will be long and fragile

A deep recession

-5

-4

-3

-2

-1

0

1

2

3

4

5

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

%

HSBC forecast

Source: ONS

UK: annual GDP growth

Long-term average



• Without radical action it could take the best part of 20 years before the public finances are back to ‘normal’

Breaking the elastic

30

40

50

60

70

80

2000 2002 2004 2006 2008 2010 2012 2014

% o

f G

DP

Public sector net debt

forecast

excluding financial sector intervention

forecast

Sustainable Investment Rule

Source: ONS, HM Treasury

HM Treasury forecasts(Budget Report 2009)



• Without radical action, it could take the best part of 20 years to return the public finances to ‘normal’

• Credit is likely to remain somewhat restricted into the medium term

Mind the gap!

0

100

200

300

400

500

600

700

800

2001 2002 2003 2004 2005 2006 2007 2008

£ bi

llion

Interbank deposits from abroad

Customer funding gap*

Source: Bank of England Financial Stability Report October 2008

* Customer lending less customer funding, where ‘customer’ refers to all non-bank borrowers and depositors

Closing the gap

-5

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

annu

al g

row

th %

Past growth incustomer lending

Growth rates required to restore customer funding

gap to 2003 levels…

… in three years

… in one year

Source: Bank of England Financial Stability Report October 2008

A historical perspective

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

annu

al G

DP

gro

wth

, %

1972-77 1978-83 1988-93 1998-2003 2007-11

first oil shock second

oil shock

yuppie flu

dotcom bust

subprime contagion

Source: ONS, HSBC

1929-34

The Great Depression

Documents

UK Economy in the Global Crisis – Recovery in Sight? Mark Berrisford-Smith HSBC Bank plc