UK Economy in the Global Crisis Recovery in Sight

1
UK Economy in the Global Crisis Recovery in
Sight?

• Mark Berrisford-Smith
• HSBC Bank plc

2
Desperately seeking solutions
Policy interest rates
HSBC
forecast
Bank of England
European Central Bank
US Federal Reserve
Source Bank of England, US Federal Reserve,
ECB, HSBC
3
A world in recession
4
From credit crunch to global recession

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

5
The end of the golden years
World
excluding Japan
Annual GDP growth
Source IMF, HSBC
6
Asias superpowers falter
Asia (excluding Japan)
Annual GDP growth
Source IMF, HSBC
7
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

8
Falling off a cliff
Industrial production annual percentage change
Source Thomson Datastream
9
A slump in international trade
annual percentage change
Source WTO
10
Japans exports are down by nearly a half
Imports
Japan value of trade in goods annual
percentage change
Exports
Source Thomson Datastream
11
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

12
Around six million jobs lost
Non-farm payrolls, average monthly change
Source BLS, BEA
13
The US housing market state of collapse
Source Thomson Datastream
14
Waiting for the Obama stimulus
HSBC forecast
Long-term average
USA annual GDP growth
Source BEA, HSBC
15
Surveys point to slower decline
PMI surveys
expansion
contraction
Source Markit
16
The Euro Area feet of clay
Euro Area
Annual GDP growth
Source Eurostat, HSBC
17
Britain from age of prosperity to age of
austerity
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The worst is over

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

19
Business surveys glimmers of hope
PMI surveys
expansion
contraction
Source Markit
20
The worst is over

• Business surveys suggest that economic activity
  is now contracting at a much slower pace
• Consumer spending isnt quite the disaster that
  many predicted

21
Consumer spending not quite a disaster
Source ONS, Thomson Datastream
22
The worst is over

• Business surveys suggest that economic activity
  is now contracting at a much slower pace
• Consumer spending isnt quite the disaster that
  many had predicted
• But unemployment has further to rise, and house
  prices further to fall

23
The labour market turning nasty
Source ONS
24
House prices further to fall
Source Bank of England, Halifax
25
Strong medicine

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

26
Inflation yesterdays story?
Source ONS
27
What to do when interest rates approach zero
HSBC forecast
Inflation target
Source Bank of England, ONS
28
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

29
125 billion of QE
125bn
Notes and coins in circulation, plus commercial
banks sterling reserves held at the Bank of
England
Source Bank of England, ONS
30
The credit crunch starting to ease
Lending to businesses
Lending to households
Annualized growth in outstanding lending
Source Bank of England
31
Narrowing the spreads
Corporate bond yields
3-month Libor
Gilt yields
UK Bank Rate
Merrill Lynch UK corporate bonds index UK
benchmark 10-yr govt bonds
Source Thomson Datastream
32
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 UKs competitiveness

33
Sterling takes a pounding
euro / (R axis)
HSBC forecast
US dollar / (L axis)
Sterling weaker
Source Thomson Datastream HSBC
34
The age of austerity

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

35
A deep recession
HSBC forecast
Long-term average
UK annual GDP growth
Source ONS
36
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

37
Breaking the elastic
Sustainable Investment Rule
HM Treasury forecasts (Budget Report 2009)
Source ONS, HM Treasury
38
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

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Mind the gap!
Customer lending less customer funding, where
customer refers to all non-bank borrowers and
depositors
Source Bank of England Financial Stability
Report October 2008
40
Closing the gap
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
41
A historical perspective
dotcom bust
first oil shock
yuppie flu
second oil shock
The Great Depression
subprime contagion
1972-77
1978-83
1988-93
1998-2003
2007-11
1929-34
Source ONS, HSBC
42
ABC