65
Outlook for the UK Economy: No return to Boom and Bust... 19 th January 2010 Tom Vosa Head of Market Economics, Europe, Wholesale Banking National Australia Bank, [email protected]
| Date post: | 03-Jan-2016 |
| Category: |
Documents |
| Upload: | wayne-paul |
| View: | 31 times |
| Download: | 3 times |
Outlook for the UK Economy:No return to Boom and Bust...
19th January 2010
Tom VosaHead of Market Economics, Europe, Wholesale BankingNational Australia Bank,[email protected]
2
UK macro outlook
3
UK is now the only G20 country still in recession
● Not all countries suffered a recession during the global economic downturn
● China, India, Australia and Saudi Arabia all avoided two consecutive quarters of negative growth
● The table shows latest quarter’s GDP figures
● Cumulative increase in GDP since each country’s respective trough would be greater than shown
Source: Bloomberg
-1 0 1 2 3 4
UKArgentina
Australia
South Africa
Turkey
France
Japan
EU
India
Canada
Italy
US
Germany
Saudi Arabia
Russia
Brazil
China
Mexico
South Korea
Indonesia
4
The fall in UK output is greatest in G7 after Japan
● The fall in output was greatest in the big exporting nations, Japan and Germany
● They are now showing signs of life as global trade comes back on line
● That leaves the UK as the only economy still in recession, at least according to official data
Source: Bloomberg, National Australia Bank
90
92
94
96
98
100
102
1 2 3 4 5 6 7 8
Output over the recession
United States
Germany
France
UK
Japan
Eurozone
5
Even when the economy grows there should be plenty of slack
● In 1979-81, output fell 4.9%. In 1990-92 it fell 2.5% and in 2008-09 it has fallen 6.0%.
● Even on the Bank of England’s optimistic forecasts they will be plenty of excess capacity for many years
● That should mean inflation won’t be problem for several years yet
300
310
320
330
340
350
360
370
380
390
2005 2006 2007 2008 2009 2010 2011 2012
UK GDP Scenarios
Continuation of previous trend
BoE forecasts
NAB forecasts
£bn
300
310
320
330
340
350
360
370
380
390
2005 2006 2007 2008 2009 2010 2011 2012
UK GDP 'Lost Output'
Continuation of previous trend
NAB forecasts
£bn
£500billion
6
But business surveys point to a return to growth in Q4
● Survey evidence suggests that we should see some growth in the fourth quarter. Though the surveys were not a good guide to Q3.
● But with the recovery now on the way, what shape will it take?
20
25
30
35
40
45
50
55
60
65
70
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1995 1997 1999 2001 2003 2005 2007 2009
UK GDP growth and PMIsPercentage change on a quarter ago 50 ='breakeven level'
GDP growth(left-hand scale)
'Whole economy' PMI*(right-hand scale)
* Constructed using the CIPS manufacturing and services PMIs, weighting both for their share of national income.
7
Challenges for the UK economy in 2010 and beyond
Can momentum be sustained?
Can banks provide enough credit?
Paying off the debt: Household
Paying off the debt: Government
8
Challenges for the UK economy
Can momentum be sustained?
Can banks provide enough credit?
Paying off the debt: Household
Paying off the debt: Government
9
Currently the destocking cycle is providing a cyclical boost
Source: ONS
● Revisions to Q2 GDP left the economy falling by 0.2% against a preliminary estimate of a 0.4% fall.
● Although destocking again detracted from growth in Q2, the size is much less than in earlier quarters.
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2006 2007 2008 2009
Net Trade Stockbuilding
Investment Government
Consumption GDP
Contributions to Quarterly GDP growthpp
10
11
12
13
14
15
16
1989 1992 1995 1998 2001 2004 2007
UK Stock-output ratio %
10
But it is likely to prove short-lived
● The unanticipated increase in stocks looks to be over.
● However, stock cycles typically last only 6-9 months and can’t be relied on to deliver growth over the cycle.
11
...and schemes such as car scrapage won’t last forever
● The car scheme has been very successful at boosting sales, though a large part of that goes on imports.
● But even with the extra £100million it is unlikely to last until the original February deadline.
● The scheme may have boosted consumer spending by 0.5% in Q3, though some of that went on imports.
-60
-40
-20
0
20
40
60
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
New vehicle registrations
Source: SMMT
% oya
12
The shape of UK economic recovery 2009-10?
Q1 2009 -2.4%
Q2 -0.6%
Q3 -0.2%
Q4 +0.5%
Q1 2010 +0.2%
Q2 +0.2%
Q3 +0.3%
Q4 +0.4%
13
Challenges for the UK economy
Can momentum be sustained?
Can banks provide enough credit?
Paying off the debt: Household
Paying off the debt: Government
0
200
400
600
800
1000
1200
United States
United Kingdom
Euro Area Other Mature Europe
Asia
Realised and Expected Writedowns or Loss Provisions for Banks ($billions)
Expected additional writedowns: 2009Q2 10Q4
Realized writedowns: 2007Q2 - 09Q2
14
Banks’ balance sheets are still under great pressure
Source: IMF
● The IMF estimates that total write-downs over the 2007-2010 will be around £2.8billion
● Despite around $1.1 billion of capital injections there is still a hole in balance sheets that needs filling.
15
Banks are weaning themselves off of relying on wholesale markets
● Bank of England data on household and non-financial corporation deposit holdings and lending, including lending to individuals shows the widening gap that has until recently been reliant upon wholesale funding. This has grown from GBP150bn in 1996 to a peak of £769 billion in October 2008.
● Even now the gap is around £700 billion, its smallest level since September 2007.
● Money market paralysis has rendered this borrowing impossible – hence the credit crunch
Source: Bank of England, National Australia Bank
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
1997 1999 2001 2003 2005 2007 2009
UK funding gap between customer deposits and loans that has to now relied on wholesale markets
GBP bnUK funding gap
16
Bank lending appetite is still depressed...
● The BoE credit conditions survey shows that banks are restricting credit to UK households.
● Real estate lending is now contracting further, with standards tightening again.
-50
-40
-30
-20
-10
0
10
20
30
40
Household-Secured
Household-Unsecured
Corporate Commercial Real Estate
September 08 Dec-08
March 09 June 09
Sep 09 December 09
UK Expected Credit Availability
Source: Bank of England
Balance
17
Challenges for the UK economy
Can momentum be sustained?
Can banks provide enough credit?
Paying off the debt: Household
Paying off the debt: Government
18
UK economy over-reliant on consumption
● Consumption accounts for some 70% of UK GDP, with around 60% of that from retail sales
● This fact leaves the UK particularly vulnerable in the current downturn with the credit creation process in decline and asset prices slumping.
-8
-6
-4
-2
0
2
4
6
8
1979 1983 1987 1991 1995 1999 2003 2007
Net trade GDP
Contributions to annual UK GDP growthPercentage points
Net tradeStockbuilding
Governmentconsumption
Investment
Privateconsumption
19
And houses are no longer ATM machines
● After a decade of withdrawals, home owners injected £34 billion of equity into the housing market in the last 18 months.
● That represents around 3.0% fall in disposable income, reducing the ability to consume further.
Source: Bank of England
-6
-4
-2
0
2
4
6
8
10
-12
-8
-4
0
4
8
12
16
20
1970197419781982198619901994199820022006
UK Mortgage Equity Withdrawal£ billions %
MEW as a %age of post-tax income (RHS)
MEW (LHS)
20
The labour market will also weigh on spending
● The numbers claiming unemployment benefit fell by 6,300 in November. That is the first fall in 21 months, though at this stage further rises in unemployment look likely.
● At 7.9% the ILO measure already shows the highest unemployment rate since November 1996 and we expect it to rise further in 2010.
Source: Reuters Ecowin Source: Reuters Ecowin
-70
-20
30
80
130
180
1997 1999 2001 2003 2005 2007 2009
Monthly change in claimant countThousands
0
1
2
3
4
5
6
7
8
9
1997 1999 2001 2003 2005 2007 2009
UK Unemployment Rate%
Claimant count measure
ILO measure
21
But volumes are not the only problem
Source: Office for National Statistics
● The increase in UK unemployment comes against a background of shorter working hours, which will also weigh on aggregate income.
● The fall in full-time hours worked reflects the introduction of 4-day working weeks.
14.0
14.2
14.4
14.6
14.8
15.0
15.2
15.4
15.6
15.8
16.0
35.5
36.0
36.5
37.0
37.5
38.0
38.5
39.0
1992 1994 1996 1998 2000 2002 2004 2006 2008
Full time(left-hand scale)Part time
(right-hand scale)
Weekly hours of work
22
...and earnings growth isn’t helping
-2
-1
0
1
2
3
4
5
6
7
1995 1997 1999 2001 2003 2005 2007 2009
Percentage change on a year earlierUK Average earnings growth
Earnings excluding bonuses
Total earnings
23
Challenges for the UK economy
Can momentum be sustained?
Can banks provide enough credit?
Paying off the debt: Household
Paying off the debt: Government
24
Public sector debt expected to peak just short of 80% of GDP
● We still think that the government remains optimistic on borrowing.
0
20
40
60
80
100
120
140
160
180
200
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
2009 Budget Forecast
National Australia Bank
Public sector net borrowing £ billion
25
35
45
55
65
75
1979-80 1985-86 1991-92 1997-98 2003-04 2009-10
UK General government debtPer cent of GDP
New LabourConservative
Net debt
25
The final level of net debt in UK will not be too far ahead of other G7 nations, but the speed of deterioration is a worry
0
20
40
60
80
100
120
140
160
1980 1985 1990 1995 2000 2005 2010
Canada
France
Germany
Italy
Japan
United Kingdom
United States
Net Public Debt as a percentage of GDP in the G7
26
UK Policy tightening starts in earnest from 2011
● Households bear the brunt of this adjustment through higher NICs.
● Businesses also suffer from higher employer contributions.
● Despite the rhetoric, tax avoidance measures are an increasingly smaller amount of revenue.
-6000 -4000 -2000 0 2000 4000 6000 8000 10000
2009-10
2010-11
2011-12
2012-13
Net Impact of Budget and PBR 2009 policy measures
Total
Anti-tax avoidance
Households
Business
Other
Property
Environmental
27
Where to cut?
Welfare and Pensions189bn
Education 88bn
Debt Interest 28bn
Housing/Environment 29bn
Others 122bn
Transport 23bn
Law and Order 35bn
Defence 38bn
Health 119bn
28
Where to tax?
Source: HM Treasury PBR Nov 2008
Change family element of CTC by £100 550 560 570Change all main allowances by 10% 5,100 6,850 6,750
Change all main allowances by 1% 540 720 680Change basic rate limit by 10% 1,500 2,500 2,450Change basic rate limit by 1% 160 280 270Change all personal allowances by 10% 3550 4250 4300Change all personal allowances by 1% 360 430 410Change personal allowance by £100 530 650 620Change higher rate by 1p 880 1450 1400
Change basic rate by 1p 4,100 4,900 5,000
2011-122010-11
Change Savings rate by 1p 80 120 160
2009-10
Change child element of CTC by £100 740 750 750
29
Where to tax?
Source: HM Treasury PBR Nov 2008
Change NI employer threshold by £2/w 290 295 305
Change NI employee threshold by £2/w 245 245 255
Change employer rate by 1% 4,950 5,200 5,500
Change additional rate of NI by 1% 950 1,000 1,100
Change main employee rate of NI by 1% 3,900 4,100 4,300
Change inheritance tax threshold by £5,000 15 30 30
Change inheritance tax rate by 1% 20 45 45
Change main rate of Corporation Tax 1% 600 1,000 1,150
2011-122010-11
Change small company Corporation Tax 1% 15 450 650
2009-10
30
Where to tax?
Source: HM Treasury PBR Nov 2008
Change 3pc stamp duty band 300 540 780
Change 1pc stamp duty band 530 920 1,140
Change Insurance Premium tax 355 485 505
Change higher rate of VAT 4,600 4,800 5,000
Change reduced rate of VAT 250 260 270
Vehicle Excise Duty £120 60 65 65
Diesel per litre (50.35p) 150 150 160
Petrol per litre (50.35p) 120 110 110
Tobacco Duty (£3.49) 10 10 10
Spirits Duty (£5.98) 5 5 5
Wine Duty (£1.46) 25 25 25
2011-122010-11
Beer and Cider Duty (36p) 35 40 40
2009-10
Change 4pc stamp duty band 710 930 1,170
31
Implications for the outlook for rates
32
UK policy rates have fallen to historic lows
● At 0.5%, Bank Rate is at its lowest level since the Bank of England was formed in 1694.
0
5
10
15
20
25
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
MPC Process'New' Monetary Arrangements
ERM
UK inflation and official interest rates
MonetaryTargeting
DM 'Shadowing'
Annual rise in RPIX
Official interest rates
0
50,000
100,000
150,000
200,000
250,000
2006 2007 2008 2009 2010
Monthly average of sterling reserve bank liabilities £ million
UK bank reserves
Implied MPC path
33
and the BoE has been printing money
● And that is not all that the MPC have done.
● ‘Quantitative Easing’ sees them purchasing government and corporate bonds, crediting the reserve accounts of banks.
● The hope is that these reserves slowly bleed into the real economy, boosting lending, asset prices, and enabling companies to raise debt. So far, the gap between the implied path and reserves is £66.9bn.
Source: Bank of England and National Australia Bank estimates
34
Both these measures have pulled interest rates lower
● Especially short-term rates over the past year.
● But BoE gilt purchases have pulled rates lower across the yield curve.
Source: Bank of England
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.5 3.0 5.5 8.0 10.5 13.0 15.5 18.0 20.5 23.0
14 Jan 10
13 Feb 09
23 Jan 09
Nb: Shaded area shows extreme ranges over past year
UK nominal yield curve Per cent
35
What influences interest rates?
● The level of interest rates reflects several factors:
● Short-dated yields (below 3 years) are generally determined by interest rate expectations.
● Medium-dated yields (3-10 years) are driven by the economic cycle.
● Longer-dated yields are driven by inflation expectations.
● Other factors include the MPC’s current QE policy, but also perceptions of the UK government’s ability to pay (Sovereign credit risk).
36
Financial markets are now beginning to price in BoE tightening
● Although over the year as a whole, we have seen the timing of the first rate increase progressively pushed back.
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Mar-09 Mar-10 Mar-11
15-Jan-10
01-Jan-10
18-Jun-09
UK 3-month interest rates implied by futures contracts Per cent
37
Stock markets point to higher rates
● To the degree to which equity markets reflect view of the economic cycle, you could argue that 3-year yields have lagged the improvement in economic prospects (due to QE).
● So a sharp rise in shorter dated yields is extremely possible.
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
1997 2000 2003 2006 2009
1984 =1000Per cent
3-year bond yields (LHS)
FTSE-100 index (RHS)
UK equity markets and bond yields
38
That might reflect the increase in sovereign credit risk in the UK
● There seems to be some relationship between the slope of the curve and government borrowing.
● If so, then the PBR forecasts suggest that the curve could remain much steeper than markets would anticipate.
-4
-2
0
2
4
6
8
10
12
14
-280-240-200-160-120-80-4004080120160200240280320360400
1994 1996 1998 2000 2002 2004 2006 2008 2010
basis points
UK 30 minus 2-year spread
Slope of curve(right-hand scale)
Public Sector Net Borrowing(inverted scale; LHS)
per cent of GDP
39
Due in part to inflationary fears re-emerging
● 10-year breakeven rates show the level of inflation expected on average over a 10-year constant horizon.
● After a sharp fall in expectations in 2009, the emerging recovery trend and fears about government debt issuance has seen inflation expectations edge higher.
● Only in the eurozone does the ECB’s hawkishness see expectations remain broadly unchanged.
-2
-1
0
1
2
3
4
5
2007 2008 2009 2010
Per cent
United Kingdom
France
United States
International 10 year break-even inflation rates
40
Long-dated gilts will also come under pressure
● Long-dated gilts comprise 35.1% of the total debt stock, making them the largest component in the government’s portfolio.
Long (15+ years)
Medium (7-15 years)
Short (3-7 years)
Ultra-Short (0-3 years)
Undated
Gilt and Treasury bill portfolio maturity
41
Markets are getting nervous about a sovereign downgrade
10 year CDS Rates
● Although levels are not back to 2009 highs, the gap between UK and Germany is widening as markets fret as to whether the UK will maintain its sovereign rating.
● Although Ratings Agencies have confirmed that they are not looking for a downgrade this side of a General Election, the lack of consolidation in the PBR means that a sovereign downgrade is looking more likely.
42
Which may intensify as the General Election approaches.UK opinion polls since January 2009
● Conservative lead is narrowing and is now in single digits for first time since December 2008
● Labour support has risen 6 points since the Summer low of 25%
● Opinion poll lead, if sustained, points to a Conservative majority around 20 seats or fewer
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
May05
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec09
Con
Lab
Lib
Other
Source: ICM/The Guardian
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
3m 6m 1y 2y 2y 4y 5y 6y 7y 8y 9y 10y15y20y30y
UK swap curve per cent
1 Jan 2009
15 Jan 2010
30 Jun 2009
43
So longer dated yields will continue to rise
● Looking at the UK swap curve, rates in December from 6 years out were already higher than seen in January.
● As QE unwinds (as early as February) and the curve climbs higher, we will see higher rates across the board.
Source: Bloomberg
44
The Yorkshire Economy
45
● Yorkshire and the Humber was the first region to slip into
negative GVA growth in 2008q1. The diversified economy
has fared a little better than the North East and North West
regions in recent quarters, however.
● Manufacturing sectors, ranging from food processing to
specially engineering seems to have fared a little better.
● But Q3 data suggests that the construction sector continues
to struggle.
● Although manufacturing exports have received a small lift so
far, tourism –focused around North Yorkshire –enjoyed a
strong Q3 with annual visitor numbers, total spending and
occupancy rates all up.
● Financial and Business Services grew until 2008 Q3. Job
creation was above the UK average since 2007, but has
since fallen back. The region remains vulnerable to any
employment shake-out from the merger of UK banks.
● Falling government spending will also impact on public
sector activity, which has hitherto remained extremely
supportive.
Recession spreads
46
Purchasing Managers’ surveys show output accelerated in Q4
-20
-15
-10
-5
0
5
10
15
Eastern E
ngland
Wales
Scotland
Yorkshire & H
'side
North E
ast
East M
idlands
West M
idlands
N.Ireland
London
South E
ast
North W
est
South W
est
UK
Q3 2008 Q4 2008 Q1 2009
Q2 2009 Q3 2009 Q4 2009
0 = no change
Source: Markit
Regional PMI's
-40
-30
-20
-10
0
10
20
30
40
50
2002 2003 2004 2005 2006 2007 2008 2009 2010
Net balanceHome market sales -services
Nb: thick line is UK, thin line is Yorkshire & The Humber
-60
-40
-20
0
20
40
60
2002 2003 2004 2005 2006 2007 2008 2009 2010
Net balanceHome market sales - manufacturing
Nb: thick line is UK, thin line is Yorkshire & The Humber
47
Although domestic demand looks better
● The BCC surveys show that after sharp falls in activity through 2008, sales are now beginning to increase.
● Note that manufacturing activity is running well ahead of services and that Yorkshire is also outperforming the UK average.
Source: British Chambers of Commerce Source: British Chambers of Commerce
-30
-20
-10
0
10
20
30
40
2002 2003 2004 2005 2006 2007 2008 2009 2010
Net balanceExport deliveries -services
Nb: thick line is UK, thin line is Yorkshire & The Humber
48
Key problem seems to be exports
● Export growth remains a little weaker, especially in manufacturing.
● Service sector seems to be doing rather better.
Source: British Chambers of Commerce Source: British Chambers of Commerce
-40
-30
-20
-10
0
10
20
30
40
50
2002 2003 2004 2005 2006 2007 2008 2009 2010
Net balanceExport deliveries - manufacturing
Nb: thick line is UK, thin line is Yorkshire & The Humber
-30
-20
-10
0
10
20
30
40
2002 2003 2004 2005 2006 2007 2008 2009
Percentage change on a year agoExport growth
Yorkshire & The Humber
United Kingdom
49
And recent data would support that view
Source: HM Revenue and Customs
● HMRC data only cover goods trade, but they show a very sharp fall in exports in the first half of the year.
● The lack of bounce in Q3 is consistent with BCC data, but we hope that Q4 will be better.
30
64
5
66
27
7
5739
3
21
73
6
15
74
11
4
85
11
16
61
22
40
54
6
1
83
16
17
64
19
23
63
14
50
RICS house price survey: a regional breakdown
South EastSouth West
London
Scotland
Wales
North
North West
East of England
Yorkshire & The Humber
West Midlands
East Midlands
35
55
10
The National Picture
risesamefall
-100
-80
-60
-40
-20
0
20
40
60
80
100
1999 2001 2003 2005 2007 2009
House price expectations
Yorkshire & The Humber
England & Wales
-100
-80
-60
-40
-20
0
20
40
60
80
20002001200220032004200520062007200820092010
New buyer enquiries
New instructions
Yorkshire housing market indicators
51
Source: RICS Source: RICS
The housing rally could prove short-lived
● Price expectations are already easing.
● And the increase in prices has brought forward new sellers even as new buyer enquiries started to fade.
52
Affordability has worsened and will continue to do so as rates rise
0
1
2
3
4
5
6
1992 1994 1996 1998 2000 2002 2004 2006 2008
England North
North West Yorkshire & Humber
East Midlands West Midlands
All dwellings(using regional income data)
House price value to income ratios
53
Employment growth has slowed sharply in Yorkshire…
-4
-3
-2
-1
0
1
2
3
4
1999 2001 2003 2005 2007 2009
Percentage change on a year agoEmployment growth
United Kingdom
Yorkshire & The Humber
54
With employment amongst males falling the most
800
850
900
950
1,000
1,050
1,100
1,150
1,200
1997 1999 2001 2003 2005 2007 2009
ThousandsYorkshire & Humber employment
Male employment
Female employment
55
Labour market fundamentals remain weak
● The economic activity rate remains well below the UK average, as does the employment rate.
● So the labour market is smaller and less are employed, which will weigh on consumer spending.
60.0
60.5
61.0
61.5
62.0
62.5
63.0
63.5
64.0
64.5
1992 1995 1998 2001 2004 2007
United Kingdom
Yorkshire & The Humber
Per centEconomic activity rate
55
56
57
58
59
60
61
1992 1995 1998 2001 2004 2007
United Kingdom
Yorkshire & The Humber
Per centEmployment rate
56
Which is why the unemployment rate is slightly higher
0
2
4
6
8
10
12
1992 1995 1998 2001 2004 2007
United Kingdom
Per centUnemployment rate
Yorkshire & The Humber
57
Service sector employment is leading the slowdown
-80
-60
-40
-20
0
20
40
60
1997 1999 2001 2003 2005 2007 2009
Yorkshire employment growthChange on a year ago;
Thousands
Services
Manufacturing
OtherIndustries
Construction
58
The housing market seems to explain most of the slowdown
-30
-20
-10
0
10
20
30
1998 2000 2002 2004 2006 2008
Y&H service sector employment growthChange on a year ago;
ThousandsReal Estate, renting and business activities
Financial intermediation
-25
-15
-5
5
15
25
1998 2000 2002 2004 2006 2008
Y&H service sector employment growthChange on a year ago;
Thousands
Hotels & restaurants
Wholesale and retail trade
59
Health and social work still remains the largest single government employer
-15
-10
-5
0
5
10
15
20
25
30
1998 2000 2002 2004 2006 2008
Y&H service sector employment growthChange on a year ago;
ThousandsEducation
Public adminstration, defence and compulsory social security
Health and social work
60
Sharp down-turn in output in 2009
● Having fallen into recession earlier than rest of the UK economy,
regional GVA will expand in 2010 marginally faster than the
national average.
● A pickup in domestic activity in addition to the already-
recovering major eurozone economies will provide a short- term
boost to the important and diverse manufacturing sector that
supports production across entire industrial supply chains.
● All three sub-sectors of private services – Distribution, Hotels &
Catering, Transport & Communications and Financial &
Business Services – are expected to see expansion gaining
momentum in 2011 although growth will be below the long term
historical level.
● Owing to a large structural deficit in national finances, it is no
longer a matter of if there will be spending cut but when and by
how much? The largest cuts will be focused on administrative
positions, with the health sector least likely to be affected. The
Yorkshire and Humber region, with Civil Service jobs comprising
1.8% of total employment (versus 2.03% for English regions) is
relatively well placed.
● Total employment fell by 2.2% in 2009; the muted pace of job
creation expected in the longer term means that employment
growth is unlikely to return to its average historic rate in the
region or in the UK..
City benchmarker
● Leeds, the largest economic centre in Yorkshire & the Humber,
has enjoyed strong growth in the past two decades. It is now one
of the largest financial and legal centres in the UK outside
London while sectors such as retail, call centres and media have
also thrived.
● Despite recent strong growth, there remains much disparity in
incomes. Several wards in central Leeds are deprived although
regeneration efforts have had some positive impact. Current key
schemes cover East and South East Leeds, Aire Valley, South
Leeds, Leeds/Bradford Corridor and West Leeds Gateway.
● Leeds has excellent road and rail links; the M1 and A1 provide
links to the South and North, while the M62 connects Leeds to
Liverpool and Hull. Leeds Bradford International Airport has direct
daily flights to national and international hubs while the Humber
ports are accessible via the motorway network.
● Leeds has a thriving consumer sector; it has a wide range of
shopping centres while attractions such as Leeds Art Gallery,
Opera North and Northern Ballet Theatre attract over 1.5m
visitors to the city annually.
● The UK Cities Monitor 2008 ranks Leeds as the 4th best UK city
to do business in and the highest in terms of value for money of
office space.
● Leeds will perform about the same as Bradford but growth will
slow compared to historical rates.
62
Conclusions: UK
● The worst is behind us, but any sudden increase in growth is due to the stock cycle and other time limited policy measures. It seems too early to call a firm recovery trend just yet.
● Output is likely to fall by 4.6% this year and only grow by 0.9% in 2010. ● The recovery will be extremely uneven, we expect to see a ‘W’-shape, with
decent growth in the fourth quarter of this year then weakening in the first half of 2010 as any consumption bought forward ahead of the VAT increase disappears.
● That will be the peak of uncertainty as it might look as if policy measures have failed –rates are at zero, government has no room for further fiscal measures.
● Quantitative Easing looks to be working, but the link between Bank Rate and borrowing costs looks to be impaired. Monetary tightening will come from the market. Interest rates could stay lower than thought.
● Government borrowing is set to increase by £703bn over the next 5 years. Fiscal consolidation will have to accelerate after the General Election if the UK is to escape a sovereign downgrade. Spending cuts will be even larger than the Budget forecasts suggest. Whole programmes will have to be scrapped.
● Tax increases look likely to help narrow the deficit, but only increases in VAT and the basic rate of tax rise anywhere near the £30 billion needed...
● By 2010 growth will get back towards trend, but growth could struggle to rise above 2% thereafter.
63
Conclusions
● From all perspectives it is hard to believe that interest rates will not be increasing in the months ahead.
● We have already seen longer-dated yields rise and the twinned pressure of inflationary expectations as well as fearts about a possible sovereign downgrade will only put on more pressure.
● As will the government’s large borrowing projections in the next few years.● A sterling debt crisis would see a spike in yields, but looks unlikely for now.
● The turning in the economic cycle in the fourth quarter has yet to feed through to 3-year yields, but that probably reflects the impact of QE for now.
● But with QE due to end as early as February (unless the MPC extend it), yields could easily spike higher. The current level of the FTSE alone would suggest a 200bps upward move.
● More importantly, although we would expect curve flattening, the combination of policy measures implemented during this recession means that the curve could remain just as steep, with rates moving up across the board.
● Although we believe that the market is overstating the likelihood of MPC tightening, we still see upward pressure on rates and the decision on whether to extend QE in February will be crucial in determining the speed that rates move higher.
64
Disclaimer
ANALYST DISCLAIMER: The person or persons named as the author's) of this report hereby certify that the views expressed in the research report accurately reflect their personal views about the subject securities and issuers and other subject matters discussed. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. Research analysts responsible for this report receive compensation based upon, among other factors, the overall profitability of the Markets Division which is part of the Institutional Markets & Services division of National Australia Bank Limited, a member of the National Australia Bank Group (the “National”). The views of the author's) do not necessarily reflect the views of the National and are subject to change without notice. The National may receive fees for banking services provided to an issuer of securities mentioned in this report. The National, its affiliates and their respective officers, and employees, including persons involved in the preparation or issuance of this report (subject to the policies of the National), may also from time to time maintain a long or short position in, or purchase or sell a position in, hold or act as advisors, brokers or commercial bankers in relation to the securities (or related securities and financial instruments), of companies mentioned in this report. The National or its affiliates may engage in these transactions in a manner that is inconsistent with or contrary to any recommendations made in this report.
AUSTRALIAN DISCLAIMER: National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related bodies and any officer, employee, agent, adviser or contractor thereof (“National”)) does not warrant or represent that the information, recommendations, opinions or conclusions contained in this document (“Information”) is accurate, reliable, complete or current. The Information has been prepared for dissemination to professional investors for information purposes only and any statements as to past performance do not represent future performance. The Information does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. In all cases, anyone proposing to rely on or use the Information should independently verify and check the accuracy, completeness, reliability and suitability of the Information and should obtain independent and specific advice from appropriate professionals or experts. The Information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. To the extent permissible by law, the National shall not be liable for any errors, omissions, defects or misrepresentations in the Information or for any loss or damage suffered by persons who use or rely on such Information (including by reason of negligence, negligent misstatement or otherwise). If any law prohibits the exclusion of such liability, the National limits its liability to the re-supply of the Information, provided that such limitation is permitted by law and is fair and reasonable. The National, its affiliates and employees may hold a position or act as a price maker in the financial instruments of any issuer discussed within this document or act as an underwriter, placement agent, adviser or lender to such issuer. The Information is governed by, and is to be construed in accordance with, the laws in force in the State of Victoria, Australia, and any dispute or claim arising from, or in connection with, the Information is subject to the non-exclusive jurisdiction of the courts of that State.
UK DISCLAIMER: So far as the law and the FSA Rules allow, National Australia Bank Limited (“the Bank”) disclaims any warranty or representation as to the accuracy or reliability of the information and statements in this document. The Bank will not be liable (whether in negligence or otherwise) for any loss or damage suffered from relying on this document. This document does not purport to contain all relevant information. Recipients should not rely on its contents but should make their own assessment and seek professional advice relevant to their circumstances. The Bank may have proprietary positions in the products described in this document. This document is for information purposes only, is not intended as an offer or solicitation nor is it the intention of the Bank to create legal relations on the basis of the information contained in it. No part of this document may be reproduced without the prior permission of the Bank. This document is intended for Investment Professionals (as such term is defined in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2001) and should not be passed to any other person who would be defined as a private customer by the rules of the Financial Services Authority (“FSA”) in the UK or to any person who may not have experience of such matters. Issued by National Australia Bank Limited A.C.N. 004 044 937, 88 Wood Street, London EC2V 7QQ. Registered in England BR1924. Head Office: 500 Bourke Street, Melbourne, Victoria. Incorporated with limited liability in the state of Victoria, Australia. Regulated by the FSA in the UK.
U.S DISCLAIMER: This information has been prepared by National Australia Bank or one of its affiliates or subsidiaries (collectively, “NAB”). If it is distributed in the United States, such distribution is by nabCapital Securities, LLC which accepts responsibility for its contents. Any U.S. person receiving this information wishes further information or desires to effect transactions in the securities described herein should call or write to nabCapital Securities, LLC, 28th Floor, 245 Park Avenue, New York, NY 10167 (or call (877) 377-5480). The information contained herein has been obtained from, and any opinions herein are based upon sources believed to be reliable and no guarantees, representations or warranties are made as to its accuracy, completeness or suitability for any purpose. Any opinions or estimates expressed in this information is our current opinion as of the date of this report and is subject to change without notice. The principals of nabCapital Securities, LLC or NAB and/or its affiliates may have a long or short position or may transact in the securities referred to herein or hold or transact derivative instruments, including options, warrants or rights with securities, or may act as a market maker in the securities discussed herein and may sell such securities to or buy from customers on a principal basis. This material is not intended as an offer or solicitation for the purchase or sale of the securities described herein or for any other action. It is intended for the information of clients only and is not for publication in the press or elsewhere.
65
Sign up for a wide range of topical research on the
economy and markets at:
www.cbmarkets.co.ukwww.ybmarkets.co.uk
Research
