UK Economy in the Global Crisis Recovery in Sight?

Mark Berrisford-Smith
HSBC Bank plc

Desperately seeking solutions

7

Policy interest rates:

6 5 4

Bank of England

%
3 2 1

H S B f C o r e c a s t

European Central Bank US Federal Reserve

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bank of England, US Federal Reserve, ECB, HSBC

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

12 10 8 6 4

USA

Eurozone
World

Japan

Asia*

*excluding Japan

% 2
0 -2 -4 -6 -8 2007
Source: IMF, HSBC

Annual GDP growth

2008

2009

2010

Asias superpowers falter

14 12 10 8 6

China

India

Malaysia

Thailand

Korea

Asia (excluding Japan)

% 4
2 0 -2 -4 2007
Source: IMF, HSBC

Annual GDP growth

2008 2009 2010

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

10 5 0 -5 -10

% -15
-20 -25 -30 -35

Germany UK

Japan USA

Industrial production
annual percentage change
Jul-07 Jan-08 Jul-08 Jan-09

-40 Jan-07
Source: Thomson Datastream

A slump in international trade

12 10 8 6 4 2

0 -2 -4 -6 -8 -10 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

World trade volumes

annual percentage change

Source: WTO

Japans exports are down by nearly a half

20 10 0

%
-10 -20 -30 -40

Imports

Japan: value of trade in goods annual percentage change

Jul-07 Jan-08 Jul-08

Exports
Jan-09

-50 Jan-07

Source: Thomson Datastream

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

1.5 1.0 0.5 300 200 100

000s

quarterly growth, %

0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 2004 2005 2006 2007 2008 2009

0 -100 -200

Employment* (R axis) GDP (L axis)

* Non-farm payrolls, average monthly change

-300 -400 -500 -600 -700

Source: BLS, BEA

The US housing market state of collapse

6.5 20 15 10

6.0

millions (annualized)

% annual change

5.5

5 0 -5

5.0

4.5

Existing home sales (L axis)

4.0

-10 -15 -20

House prices - FHFA (R axis) House prices - Case-Shiller (R axis)

2003 2004 2005 2006 2007 2008 2009

3.5 2002

Source: Thomson Datastream

Waiting for the Obama stimulus

5.0

2.5

Long-term average

HSBC forecast

%
0.0

USA: annual GDP growth

-2.5 1998
Source: BEA, HSBC

2000

2002

2004

2006

2008

2010

Surveys point to slower decline

62

PMI surveys:
56

Manufacturing

Services

% balance

expansion
50

contraction
44

38

32 2004
Source: Markit

2005

2006

2007

2008

2009

The Euro Area feet of clay

4 3 2 1 0

Germany

France

Italy
Euro Area

Spain

%
-1 -2 -3 -4 -5 2007
Source: Eurostat, HSBC

Annual GDP growth

2008 2009 2010

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

66

PMI surveys:
62 58 54 50 46 42 38 34

Manufacturing Services

% balance

expansion contraction

2003
Source: Markit

2004

2005

2006

2007

2008

2009

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

Consumer spending not quite a disaster

8 10 5 0 -5 -10 3 -15 2 1 0 -1 -2 1988 -20 -25

volume of sales: annual % growth

7 6 5 4

index (long-run average = -7)

Retail sales (L axis) Consumer confidence (R axis)

1991 1994 1997 2000 2003 2006

-30 -35 2009

Source: ONS, Thomson Datastream

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

The labour market turning nasty

1.75 7.5

1.50

Claimant count (L axis) Unemployment rate (R axis)

7.0 6.5 6.0 % 5.5 5.0

millions

1.25

1.00

0.75 4.5 0.50 2004

Source: ONS

4.0 2005 2006 2007 2008 2009

House prices further to fall

140 35 30 120 100 80 60 40 20 0 2001 25 20 15 10 5 0 -5

monthly mortgage approvals, 000s

Mortgage approvals (L axis) Prices, annual change (R axis) Prices, 3-month change annualized (R axis)
2002 2003 2004 2005 2006 2007 2008 2009

-10 -15 -20 -25

Source: Bank of England, Halifax

Strong medicine

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

Inflation yesterdays story?

5.5 5.0 4.5 4.0

CPI headline rate Inflation target 'Core' rate

annual rate, %

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009
Source: ONS

What to do when interest rates approach zero

7

UK Bank Rate
6 5 4 % 3 2 1 0 2004

CPI inflation rate

HSBC forecast

Inflation target

2005

2006

2007

2008

2009

2010

Source: Bank of England, ONS

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
16 14 12 225

Monetary base* (R axis) % of GDP (L axis)

125bn
* Notes and coins in circulation, plus commercial banks sterling reserves held at the Bank of England

200 175 150

% of GDP

10 8 6 4 2

billion

125 100 75 50 25 0

0 Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Source: Bank of England, ONS

The credit crunch starting to ease

20

15

Lending to businesses
10

%
5

Lending to households

Annualized growth in outstanding lending

-5 Jan-07
Source: Bank of England

Jul-07

Jan-08

Jul-08

Jan-09

Narrowing the spreads

10 9 8 7 6 % 5 4 3 2 1
* Merrill Lynch UK corporate bonds index ** UK benchmark 10-yr govt bonds

Corporate bond yields*

3-month Libor

Gilt yields**

UK Bank Rate

0 Jul-07

Jan-08

Jul-08

Jan-09

Source: Thomson Datastream

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

Sterling takes a pounding

2.10 2.00

1.50

1.40 1.90 1.80 1.30

$/
1.70 1.60

euro / (R axis) US dollar / (L axis)

HSBC forecast

/
1.20

1.10 1.50 1.40

Sterling weaker
1.00

2005

2006

2007

2008

2009

2010

Source: Thomson Datastream; HSBC

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

Long-term average

HSBC forecast

0 -1 -2 -3 -4

UK: annual GDP growth

-5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: ONS

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

80

Public sector net debt

70

forecast excluding financial sector intervention forecast

% of GDP

60

50

40

Sustainable Investment Rule

HM Treasury forecasts (Budget Report 2009)

30

2000

2002

2004

2006

2008

2010

2012

2014

Source: ONS, HM Treasury

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!

800 700 600

Interbank deposits from abroad Customer funding gap*

billion

500 400 300 200 100 0

* Customer lending less customer funding, where customer refers to all non-bank borrowers and depositors

2001

2002

2003

2004

2005

2006

2007

2008

Source: Bank of England Financial Stability Report October 2008

Closing the gap

25

20

annual growth %

15

Growth rates required to restore customer funding gap to 2003 levels

10

Past growth in customer lending

in three years in one year
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-5

Source: Bank of England Financial Stability Report October 2008

A historical perspective
8 7 6

annual GDP growth, %

5 4 3 2 1 0 -1 -2 -3 -4 -5 -6

first oil shock The Great Depression

1929-34 1972-77

second oil shock

yuppie flu

dotcom bust subprime contagion

1978-83

1988-93

1998-2003

2007-11

Source: ONS, HSBC

ABC