UK Economy: Where do we go from here?

1. UK Economy: Where do we go from here? Robert Gardner, Head of Macroeconomics

2. What to expect in the next 30 mins: • Taking stock: • A simple framework for thinking about the future • Where we are and where we are heading (......probably) • What does it mean for businesses? • Demand conditions at home and abroad • Pricing power • Interest rates • Q&A

3. A simple analytical framework..... High Policy Traction Higher Capacity, Lower Capacity, Higher Trend Growth Lower Trend Growth Low Policy Traction

4. Our central forecast High Policy Traction "Return of Macro Instability" "Goldilocks Returns" • Quick return to growth, • No slack, volatile inflation, interest rates • Return to “boom-bust” cycle • De-leveraging: disorderly • Quick recovery, robust growth, • Plenty of slack • Low inflation • Steady Policy Normalisation • De-leveraging: quick and smooth Higher Capacity, Lower Capacity, Higher Trend Growth Lower Trend Growth "Slow Grind Higher" "Deflation" • Deep downturn, slow recovery • Low inflation • Gradual policy normalisation • De-leveraging: slow and painful • Very deep downturn (-10%) then stagnation • Deflation • No scope for policy normalisation • De-leveraging: frustrated Low Policy Traction

5. Slow grind higher..... Source: ONS, RBS Group Economics

6. Demand conditions

7. The hit to households was enormous Source: Thomson Datastream

8. Repairing balance sheets won’t be quick or painless Source: ONS, RBS Group Economics

9. Labour market – tough, but not as tough as before Source: ONS, RBS Group Economics

10. Back to balance? Source: ONS, RBS Group Economics

11. Re-stocking likely to provide something of a lift.... Source: ONS

12. Capex likely to remain subdued Source: CBI

13. Good news for exporters: global demand prospects are brighter Source: Consensus Economics (March 2010 Survey)

14. A competitive exchange rate will also help..... Source: Thomson Datastream, RBS Group Economics

15. When households/firms are fixed, there’s still work to do... Source: HM Treasury

16. Pricing Power & Margins

17. Weak demand points to a lack of pricing power CPI Inflation (%) 5.0 Forecast 4.0 3.0 2.0 MPC Target 1.0 0.0 2011 2012 2004 2005 2006 2007 2008 2009 2010 Source: ONS, RBS Group Economics

18. Margins under pressure? Exchange rates, commodities Source: Thomson Datastream

19. Labour market softness = weak wage growth Source: ONS

20. Profits haven’t been hit as hard as you might have expected Source: ONS

21. Productivity trends are not encouraging.... Source: ONS, US Bureau of Labor Statistics

22. Interest rates

23. Base rates – slow to move, but don’t get caught out... Source: Bloomberg, RBS Group Economics

24. Interest rate sensitivity may be increasing..... Source: Bank of England

25. In summary: tough but more sustainable • Need to repair balance sheets drives our forecast • Gradual recovery expected - a “slow grind higher” • Demand conditions: likely to be tough • Households, business, public sector all under pressure • Export potential – especially to emerging markets • Pricing power: restricted for most • Weak demand = reduced bargaining power • Sterling, commodities - potential for margin pressure • 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

26. Keep in touch

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