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

2. 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

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

4. 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

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

6. Slide 6 Demand conditions

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

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

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

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

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

12. Slide 12 Capex likely to remain subdued Source: CBI

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

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

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

16. Slide 16 Pricing Power & Margins

17. 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

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

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

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

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

22. Slide 22 Interest rates

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

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

25. 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

26. Slide 26 Keep in touch

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