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UK Economy in the Global CrisisRecovery in Sight?
Mark Berrisford-Smith
HSBC Bank plc
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Desperately seeking solutions
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
fore
cast
Source: Bank of England, US Federal Reserve, ECB, HSBC
HSBC
Policy interest rates:
Bank of England
US Federal Reserve
EuropeanCentral Bank
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A world in recession
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From credit crunch to global recession
This has been the worst episode forthe global economy since the 1930s
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The end of the golden years
-8
-6
-4
-2
0
2
4
6
8
10
12
2007 2008 2009 2010
%
USA Eurozone Japan Asia*
World
Source: IMF, HSBC
Annual GDP growth
*excluding Japan
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Asias superpowers falter
-4
-2
0
2
4
6
8
10
12
14
2007 2008 2009 2010
%
China India Malaysia Thailand Korea
Asia (excluding Japan)
Source: IMF, HSBC
Annual GDP growth
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From credit crunch to global recession
This has been the worst episode for theglobal economy since the 1930s
Industrial production and internationaltrade have collapsed
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Falling off a cliff
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
% Germany JapanUK USA
Source: Thomson Datastream
Industrial production
annual percentage change
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A slump in international trade
-10
-8-6
-4
-2
0
2
4
6
8
10
12
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
%
World trade volumes
Source: WTO
annual percentage change
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Japans exports are down by nearly a half
-50
-40
-30
-20
-10
0
10
20
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
%
Source: Thomson Datastream
Japan: value of trade in goods
annual percentage change
Imports
Exports
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From credit crunch to global recession
This has been the worst episode for theglobal economy since the 1930s
Industrial production and international
trade have collapsed
The prospects for recovery hinge onAmerica and China
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Around six million jobs lost
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2004 2005 2006 2007 2008 2009
quarterlygrowth,
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
000s
Employment* (R axis)
GDP (L axis)
Source: BLS, BEA
* Non-farm payrolls, average monthly change
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The US housing market state of collapse
3.5
4.0
4.5
5.0
5.5
6.0
6.5
2002 2003 2004 2005 2006 2007 2008 2009
millions(annu
alized
-20
-15
-10
-5
0
5
10
15
20
%
an
nualchang
Existing home sales (L axis)
House prices - FHFA (R axis)House prices - Case-Shiller (R axis)
Source: Thomson Datastream
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Waiting for the Obama stimulus
-2.5
0.0
2.5
5.0
1998 2000 2002 2004 2006 2008 2010
%
HSBCforecast
Source: BEA, HSBC
USA: annual GDP growth
Long-termaverage
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Surveys point to slower decline
32
38
44
50
56
62
2004 2005 2006 2007 2008 2009
%ba
lance
Manufacturing Services
expansion
contraction
Source: Markit
PMI surveys:
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The Euro Area feet of clay
-5
-4
-3
-2
-1
0
1
2
3
4
2007 2008 2009 2010
%
Germany France Italy Spain
Euro Area
Source: Eurostat, HSBC
Annual GDP growth
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Britain: from age of prosperity to
age of austerity
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The worst is over
Business surveys suggest thateconomic activity is nowcontracting at a much slower pace
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Business surveys glimmers of hope
34
38
42
46
50
54
58
62
66
2003 2004 2005 2006 2007 2008 2009
%b
alance
ManufacturingServices
expansion
contraction
Source: Markit
PMI surveys:
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The worst is over
Business surveys suggest that economicactivity is now contracting at a muchslower pace
Consumer spending isnt quite thedisaster that many predicted
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Consumer spending not quite a disaster
-2
-1
0
1
2
3
4
5
6
7
8
1988 1991 1994 1997 2000 2003 2006 2009
volumeofsales:an
nual%g
rowth
-35
-30
-25
-20
-15
-10
-5
0
5
10
index
(long-run
average
=
-7
)
Retail sales (L axis)
Consumer confidence (R axis)
Source: ONS, Thomson Datastream
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The worst is over
Business surveys suggest that economicactivity is now contracting at a muchslower pace
Consumer spending isnt quite thedisaster that many had predicted
But unemployment has further to rise,and house prices further to fall
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The labour market turning nasty
0.50
0.75
1.00
1.25
1.50
1.75
2004 2005 2006 2007 2008 2009
millions
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
%
Claimant count (L axis)
Unemployment rate (R axis)
Source: ONS
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House prices further to fall
0
20
40
60
80
100
120
140
2001 2002 2003 2004 2005 2006 2007 2008 2009
monthlymortgageapprovals,
000
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
%
Mortgage approvals (L axis)
Prices, annual change (R axis)Prices, 3-month change annualized (R axis)
Source: Bank of England, Halifax
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Strong medicine
Bank Rate will be kept close tozero until well into next year
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Inflation yesterdays story?
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009
annualrat
e,
%
CPI headline rate
Inflation target
'Core' rate
Source: ONS
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What to do when interest rates approach zero
0
1
2
3
4
5
6
7
2004 2005 2006 2007 2008 2009 2010
%
UK Bank Rate
CPI inflation rateHSBC
forecast
Source: Bank of England, ONS
Inflationtarget
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Strong medicine
Bank Rate will be kept close to zerountil well into next year
The MPC believes that the risks fromdoing too much are less than the risksfrom doing too little
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125 billion of QE
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12
14
16
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
%o
fGD
P
0
25
50
75
100
125
150
175
200
225
billion
Monetary base* (R axis)
% of GDP (L axis)
Source: Bank of England, ONS
* Notes and coins in circulation, pluscommercial banks sterling reserves
held at the Bank of England
125bn
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The credit crunch starting to ease
-5
0
5
10
15
20
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
%
Source: Bank of England
Lending tohouseholds
Lending tobusinesses
Annualized growth in outstanding lending
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Narrowing the spreads
0
1
2
3
4
5
6
7
8
9
10
Jul-07 Jan-08 Jul-08 Jan-09
%
Source: Thomson Datastream
* Merrill Lynch UK corporate bonds index** UK benchmark 10-yr govt bonds
Corporate bond yields*
Gilt yields**
3-month Libor
UK Bank Rate
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Strong medicine
Bank Rate will be kept close to zero untilwell into next year
The MPC believes that the risks from
doing too much are less than the risksfrom doing too little
Sterling has weakened, which is helpingto boost the UKs competitiveness
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Sterling takes a pounding
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2005 2006 2007 2008 2009 2010
$/
1.00
1.10
1.20
1.30
1.40
1.50
/
Source: Thomson Datastream; HSBC
Sterling weaker
US dollar / (L axis)
euro / (R axis) HSBC
forecast
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The age of austerity
The recession will soon end, but therecovery will be long and fragile
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A deep recession
-5
-4
-3
-2
-1
0
1
2
3
4
5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
HSBCforecast
Source: ONS
UK: annual GDP growth
Long-termaverage
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The age of austerity
The recession will soon end, but therecovery will be long and fragile
Without radical action it could take thebest part of 20 years before the publicfinances are back to normal
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Breaking the elastic
30
40
50
60
70
80
2000 2002 2004 2006 2008 2010 2012 2014
%o
fGDP
Public sector net debt
forecast
excluding financial sector intervention
forecast
Sustainable Investment Rule
Source: ONS, HM Treasury
HM Treasury forecasts(Budget Report 2009)
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The age of austerity
The recession will soon end, but therecovery will be long and fragile
Without radical action, it could take the
best part of 20 years to return the publicfinances to normal
Credit is likely to remain somewhatrestricted into the medium term
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Mind the gap!
0
100
200
300
400
500
600
700
800
2001 2002 2003 2004 2005 2006 2007 2008
billi
on
Interbank deposits from abroad
Customer funding gap*
Source: Bank of England Financial Stability Report October 2008
* Customer lending less customerfunding, where customer refers to all
non-bank borrowers and depositors
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Closing the gap
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
annualgrowth%
Past growth incustomer lending
Growth ratesrequired to restorecustomer funding
gap to 2003
levels
in three
years
in one
year
Source: Bank of England Financial Stability Report October 2008
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A historical perspective
-6
-5-4
-3
-2
-1
0
1
2
3
4
5
67
8
annualGDP
growth,
%
1972-77 1978-83 1988-93 1998-2003 2007-11
first oilshock second
oil shock
yuppieflu
dotcombust
subprimecontagion
Source: ONS, HSBC
1929-34
The GreatDepression
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