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TheThe UK Economy : UK Economy : How Long, How Deep?How Long, How Deep?
Dennis TurnerHSBC Bank plc
Presentation for Best Western Hotels GB
Celtic Manor, 8th February 2010
FIRST RECESSION FOR 16 FIRST RECESSION FOR 16 YEARSYEARS
Sustained GDP growth
-3
-2
-1
0
1
2
3
4
5
6
7
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
%
QUARTERLY ANNUAL
LONG TERM AVERAGE
BUT THE WRONG SORT OF BUT THE WRONG SORT OF GROWTHGROWTH
Consumers 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 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)
%
The public sector has made a comeback
-4
-3
-2
-1
0
1
2
3
4
5
6
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
SPENDING % CHANGE GDP % CHANGE
But government finances weakened
-5
0
5
10
15
20
1999/00 2001/02 2003/04 2005/06
20
25
30
35
40
45
% o
f G
DP %
of G
DP
CURRENT REVENUE (Right hand scale)
CURRENT EXPENDITURE (Right hand scale)
SURPLUS/DEFICIT (Left hand scale)
WHERE TO FROM HERE?WHERE TO FROM HERE?
Consumers under pressureConsumers under pressure
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
% C
HA
NG
E
CONSUMER Forecast
Because record levels of personal debt,
0
300
600
900
1200
1500
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
£ bn
OUTSTANDING MORTGAGE DEBT OTHER CONSUMER DEBT
a rising tax burden and
30
35
40
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
% o
f G
DP
subdued earnings growth, hit by
0
1
2
3
4
5
6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Earnings growth
%
rising energy and food prices
-10
-5
0
5
10
15
20
25
30
2005 2006 2007 2008 2009
Earnings growth
Food
Energy
%
Unemployment also dampens spending
1.0
1.5
2.0
2.5
2005 2006 2007 2008 2009
mil
lio
ns
4
5
6
7
8
% o
f wo
rkforce
Number of unemployed (L axis)
Unemployment rate (R axis)
An investment-led recovery?
Robust corporate profitability
0
2
4
6
8
10
12
14
16
18
20
2001 2002 2003 2004 2005 2006 2007 2008
NE
T R
AT
E O
F R
ET
UR
N %
Column 1 MANUFACTURING SERVICE SECTOR
Key PMI surveys went south
25
35
45
55
65
2006 2007 2008 2009
% b
alan
ce
Manufacturing
Services
Construction
expansion
contraction
A sluggish investment outlook
-20
-15
-10
-5
0
5
10
15
20
25
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
% C
HA
NG
E
INVESTMENT
Forecast
GROWTH WEAKENEDGROWTH WEAKENED
A 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
%
QUARTERLY
ANNUAL
Long-term average
Forecast
ALL THE LEVERS ARE BEING ALL THE LEVERS ARE BEING PULLEDPULLED
Government finances already in deficit
-100
-80
-60
-40
-20
0
20
40
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Now deficits set to continue rising
-200
-150
-100
-50
0
50
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2009 Pre-Budget Report
Investment rule no longer sustainable
28
31
34
37
40
43
46
2001 2002 2003 2004 2005 2006 2007 2008
% o
f G
DP
PUBLIC SECTOR NET DEBT
EXCLUDING NORTHERN ROCK
Sustainable Investment Rule
Net debt to soar
25
30
35
40
45
50
55
60
65
70
75
80
1990 1994 1998 2002 2006 2010
% o
f G
DP
Sustainable Investment Rule
2009 Budget
Interest rates fall to historic lows
Price pressures eased
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2002 2003 2004 2005 2006 2007 2008 2009
%
- - RPIXRPIX
- - CPICPI
which created room for interest rate cuts
0
1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009
%
And sterling is sliding
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
$/£
1.00
1.10
1.20
1.30
1.40
1.50
1.60
€/£
US dollar / £ (L axis)
euro / £ (R axis)
BUT………BUT………
Credit supply a drag on activity
The funding gap
0
100
200
300
400
500
600
700
800
2001 2002 2003 2004 2005 2006 2007 2008
£ b
illio
n
Customer funding gap*
Financial market turmoil is a major risk
0
1
2
3
4
5
6
7
Jan-07 Jul-07 Jan-08 Jul-08
inte
rest
rat
e, %
UK BANK RATE 3-MONTH LIBOR
The nuclear option used
An injection of £200bn via QE
0
3
6
9
12
15
Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10
% o
f G
DP
0
50
100
150
200
£ billio
n
Stock of holdings (R axis)
% of GDP (L axis)
The medicine is working
0
1
2
3
4
5
6
7
Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010
inte
rest
rat
e, %
3-month Libor(L axis)
UK Bank Rate(L axis)
The slow thaw
0
1
2
3
4
5
6
7
8
9
Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010
inte
rest
rat
e, %
0
20
40
60
80
100
120
140
160
180
basis p
oin
ts
3-month Libor (L axis)
UK Bank Rate (L axis)
Margin, Libor over Bank Rate
Lending – a mixed picture
-10
-5
0
5
10
15
20
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09
%
-10
-5
0
5
10
15
20
25
%
Lending to households
Lending to businesses
Annualized growth in outstanding lending
Straws in the wind
De-stocking nearly over
-10
-8
-6
-4
-2
0
2
4
6
2006 2007 2008 2009
STOCKBUILDING
CHANGE IN GDP
£ b
illio
n
Key PMI surveys starting to turn
25
35
45
55
65
2006 2007 2008 2009
% b
alan
ce
Manufacturing
Services
Construction
expansion
contraction
Housing market – signs of renewed life
-30
-20
-10
0
10
20
30
40
2001 2002 2003 2004 2005 2006 2007 2008 2009
%
0
40
80
120
160
mo
nth
ly mo
rtgag
e app
rovals, 000s
Mortgage approvals (R axis)
House prices, annual change (L axis)
rising
falling
House prices:
Recovery underway in 2010
A slow recovery is underway
-6.0
-4.0
-2.0
0.0
2.0
4.0
2006 2007 2008 2009 2010
%
QUARTERLY
ANNUAL
Long-term average
Forecast
Inflation to jump – but temporarilyInflation to jump – but temporarily
-2
-1
0
1
2
3
4
5
6
2007 2008 2009 2010
% c
han
ge
mo
nth
on
mo
nth CPI RPI
Forecast
Target
Range
And interest rates start to turn
0
1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010
%
But real interest rates still negativeBut real interest rates still negative
0
1
2
3
4
5
6
7
2007 2008 2009 2010
%
0
1
2
3
4
5
6
7
%
UK Bank Rate Inflation
Forecast
Positive real interest rates
Negative real interest rates
Sterling – still opportunities for exporters
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2005 2006 2007 2008 2009 2010
$/£
1.0
1.1
1.2
1.3
1.4
1.5
1.6
€/£
Sterling weaker
US dollar / £ (L axis)
euro / £ (R axis)
Forecast
THE POST-RECESSION THE POST-RECESSION AGENDAAGENDA
Where will growth come from?
-10
-5
0
5
10
15
20
25
30
35
40
45
1993-2000 2001-2007
Industrial production (19)
Transport and comms (8)
Construction (6)
Distribution, etc. (15)
Property & business (24)
Financial Services (3)
Public services (24)
THANK YOUTHANK YOU