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
From credit crunch to global recession
• This has been the worst episode for the global economy since the 1930s
• 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
annual percentage change
Japan’s exports are down by nearly a half
-50
-40
-30
-20
-10
0
10
20
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
%
Source: Thomson Datastream
Japan: value of trade in goods
annual percentage change
Imports
Exports
From credit crunch to global recession
• This has been the worst episode for the global economy since the 1930s
• 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)
Source: Thomson Datastream
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
• Business surveys suggest that economic activity is now contracting at a much slower pace
• 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
• Business surveys suggest that economic activity is now contracting at a much slower pace
• 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
• Bank Rate will be kept close to zero until well into next year
• 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
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
%
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
%
Source: Thomson Datastream
* 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
• Bank Rate will be kept close to zero until well into next year
• 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
The age of austerity
• The recession will soon end, but the recovery will be long and fragile
• 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)
The age of austerity
• The recession will soon end, but the recovery will be long and fragile
• 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