Economic Overview

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Economic Overview

• Laurence Sanders

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World Economic Growth

• Sustained recovery
• USA 4.7
• Japan 4.2
• UK 3.7
• Eurozone 2.0
• ( second quarter GDP year on year )

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(No Transcript)
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The High Growth Economiesgrowth rates

• China 9
• India 8
• Russia 7
• Australia 4
• ( latest data, year on year)

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Commodity Prices

• Brent Crude ( spot) -
• 28 / barrel September 2003
• 42 / barrel September 2004
• Commodity prices lower of total costs than in
  previous decades
• UK output prices ( August yoy) - 2.6

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Economic Cycles

• Typical UK cycle is now 5 /10 years - there are
  also 25 and 50 year cycles
• Slowdown in winter 2001/02
• Currently sustained recovery
• Strong growth forecast 2005
• Return to trend growth in 2006 / 07

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UK Economic Growth 1984 - 2004
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UK EconomyOverview

• Economic Growth 3.7
• Underlying Inflation (CPI) 1.3
  
• Average Earnings 3.8
• Unemployment 2.7
• (international measure 4.7)

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UK Economy

• Gross Domestic Product 1100 billion
• Fourth largest economy in the world
• Worlds third largest trading nation
• Trend Growth 2.7 per annum

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UK EconomyStructure

• Gross Domestic Product 1100bn
• Service Sector 72
• of which financial sector 24
• Industry 27
• of which manufacturing 18
• Agriculture 1

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Forecastthe UK economy
2005 2006
Economic Growth 3.0 2.5
Core Inflation 2.0 2.0
Unemployment 4.7 4.9
Average Earnings 4.9 4.6
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UK Base Rates

• Set by the Monetary Policy Committee
• New Target CPI
• - Consumer Price Index
• CPI excludes mortgage interest rates
• CPI target 2 ( plus / minus 1 )

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UK Base Rate 1997 - 2004
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ForecastUK Base Rates
End 2004 End 2005 End 2006
Base Rate Forecast 5.00 5.25 4.75
Market View 5.00 5.25 5.00

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Longer Term Interest Rates

• Key driving forces
• International long term rates, notably US
• G7 growth rates, especially the USA
• G7 inflation prospects
• Strong correlation with equities

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A Comparison of Fixed and Equity Price Movements
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Period Rate Forecast

• end 2004 end 2005 end
  2006
• 2 year 5.30 5.40
  4.70
• 5 year 5.40 5.50 4.70
• 10 year 5.50 5.50 4.70

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The UK Housing Marketkey forces

• Interest rates - both short and longer tem
• Personal Disposable Income
• average earnings
• unemployment
• taxation
• Housing supply

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The Housing Market andthe UK Economy

• New houses built - 2003
  180,000
• Owner Occupation Ratio over 70
• Forecast Gross Mortgage Lending 2004
  280 billion
• Forecast Net Mortgage Lending 2004
  110 billion

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House Price Forecast

• Average house price ( mortgaged property ) year
  on year

4Q 2004 4Q 2005 4Q 2006
15.0 5.0 5.0
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Nationwide House Price Index 1996 - 2004
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Barker Review

• Additional 120,000 houses a year required for UK
  house inflation equal EEC average
• of CPI plus 1.1 pa ( very optimistic)
• Additional 70,000 houses a year reduces UK house
  inflation to CPI plus 3 pa
• ( more realistic longer term)
• Several years before balance housing supply/
  demand

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Miles Review

• Housing finance industry - in many ways efficient
  and innovative
• Long term fixed rate mortgages intrinsically NOT
  superior to fixed
• No compulsion re fixed rate mortgages
• Greater borrower awareness of interest rate risk

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Risks to forecasts

• US and UK recoveries stall
• Geopolitical problems - impact on oil prices
• Corporate governance shocks
• Deflation - in USA or Eurozone

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Conclusion - the optimistic view

• Consensus forecast is for stronger growth in 2005
  / 2006
• Fiscal and monetary policy in G7 geared to long
  term sustainable recovery
• Enlargement of EEC will stimulate European growth
• Housing market will be supported by excess of
  demand over supply, economic recovery and
  historically low interest rates