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UK Economy: Where do we go from here? Robert Gardner, Head of Macroeconomics
Slide 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
Slide 3 A simple analytical framework..... Higher Capacity, Higher Trend Growth Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction
Slide 4 Our central forecast "Slow Grind Higher" Deep downturn, slow recovery Low inflation Gradual policy normalisation De-leveraging: slow and painful "Return of Macro Instability" Quick return to growth, No slack, volatile inflation, interest rates Return to “boom-bust” cycle De-leveraging: disorderly "Goldilocks Returns" "Deflation" Very deep downturn (-10%) then stagnation Deflation No scope for policy normalisation De-leveraging: frustrated Higher Capacity, Higher Trend Growth Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction Quick recovery, robust growth, Plenty of slack Low inflation Steady Policy Normalisation De-leveraging: quick and smooth
Slide 5 Slow grind higher..... Source: ONS, RBS Group Economics
Slide 6 Demand conditions
Slide 7 The hit to households was enormous Source: Thomson Datastream
Slide 8 Repairing balance sheets won’t be quick or painless Source: ONS, RBS Group Economics
Slide 9 Labour market – tough, but not as tough as before Source: ONS, RBS Group Economics
Slide 10 Back to balance? Source: ONS, RBS Group Economics
Slide 11 Re-stocking likely to provide something of a lift.... Source: ONS
Slide 12 Capex likely to remain subdued Source: CBI
Slide 13 Good news for exporters: global demand prospects are brighter Source: Consensus Economics (March 2010 Survey)
Slide 14 A competitive exchange rate will also help..... Source: Thomson Datastream, RBS Group Economics
Slide 15 When households/firms are fixed, there’s still work to do... Source: HM Treasury
Slide 16 Pricing Power & Margins
Slide 17 Weak demand points to a lack of pricing power 0.0 1.0 2.0 3.0 4.0 5.0 2004200520062007200820092010 20112012 CPI Inflation (%) Forecast MPC Target Source: ONS, RBS Group Economics
Slide 18 Margins under pressure? Exchange rates, commodities Source: Thomson Datastream
Slide 19 Labour market softness = weak wage growth Source: ONS
Slide 20 Profits haven’t been hit as hard as you might have expected Source: ONS
Slide 21 Productivity trends are not encouraging.... Source: ONS, US Bureau of Labor Statistics
Slide 22 Interest rates
Slide 23 Base rates – slow to move, but don’t get caught out... Source: Bloomberg, RBS Group Economics
Slide 24 Interest rate sensitivity may be increasing..... Source: Bank of England
Slide 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
Slide 26 Keep in touch
Slide 27 A word from our lawyers This material is published by The Royal Bank of Scotland plc (“RBS”) which is authorised and regulated by the Financial Services Authority for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives (“Securities”). It should not be reproduced or disclosed to any other person, without our prior consent. This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information. This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information.
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