UK Next Week’s Agenda and Wrap Up, Apr 29 – May 3 - Headlines for the UK and global economy

- Wrap up

- Next week’s agenda

- Financial overview

- Government bond yields

- Financial forecast

- Chart of the week

- The economy

- News and statements during the week

Helena Trygg, +46 8 701 12 84, hetr01@handelsbanken.se

www.handelsbanken.se/research

26 April, 2013

2

UK

Headlines for the UK and key global highlights

UK

Public finances for the full financial year 2012-2013 showed that public sector net borrowing exluding both Royal Mail

and asset transfers from Asset Purchase Facility (AFP), was GBP 120.6bn, GBP 0.3bn lower than the last financial

year and slightly lower than the OBR estimate from March. Weaker than expected central government receipts and

slightly higher local authority borrowing were offset by lower central government expenditure and lower borrowing by

public corporations.

Retail sales index fell unexpectedly to an eight-month low in April due to lower clothing and home improvement sales.

But more worrying was the fall in total order book balance recorded by the CBI. The CBI Industrial Trend survey

painted a mixed picture, where business and export optimism were more optimistic than last quarter. The monthly

survey was more pessimistic and export orders fell along with volume of output for the next three months in April

compared to the March survey, according to CBI.

First estimate of Q1 GDP was positive news. GDP in Q1 was reported to have increased by 0.3 percent and compared

to Q1 last year, GDP was 0.6 percent. The largest contribution came from the services industry. However, information

content of this first estimate is around 44 percent of the total required for the final output based estimate. Read our

analysis on page 9 and 10 in this publication.

Global

US – In Q1, GDP rose by 2.5 percent in annualised q-o-q terms versus 0.4 percent in Q4 2012. The weaker-than-

expected rate was to large extent driven by high imports and declining national defence spending. We expect GDP to

continue to grow by 2.5-3.0 percent in annualised q-o-q terms for the rest of the year. We are not concerned by the

worse-than-expected incoming data recently and particularly not by the weak non-farm payroll reading in March, which

we believe will bounce back already in April. A sharp recovery of the housing market, stronger exports and an

expansive monetary policy should continue to support the economy and help weather headwinds from an expected

fiscal tightening.

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UK

Wrap Up, April 22 - 25

Monday

No major events

Tuesday

Public finances, Mar 31.3bn (e: 18.0bn, p: -1.6bn)

Public sector net borrowing ex interventions, Mar

15.1bn (e: 15.5bn, p: 5.6bn)

Public sector net borrowing, Mar 16.7bn (e: 13.8bn,

p: 7.2bn)

CBI Trends total orders, Apr -25 (e: -13, p: -15)

CBI trends selling prices, Apr 8 (e: 5, p: 5)

Wednesday

BBA Loans for house purchases, Mar 31.227k (e:

31.4k, p: 30.579k)

CBI Reported sales, Apr-1 (e: 8, p: 0)

Auction of 0 1/8% Index-linked Treasury Gilt 2029

Thursday

GDP Q1, first estimate 0.3/0.6 (e: 0.1/0.4, p: -0.3/0.2)

Index of services, Feb 0.8/0.1 (e: 0.2/-0.1, p: 0.3/-0.3)

Handelsbanken publishes Macro Forecast

Friday

T-bill auction

m-o-m/y-o-y a = Actual e = Estimate p = Prior

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UK

Next week’s agenda, April 29 – May 3

Monday

Hometrack housing survey, Apr (p: 0.3/0.0)

Tuesday

GfK Consumer survey, Apr (e: -26, p: -26)

Net consumer credit, Mar (e: 0.5bn, p: 0.6bn)

Net lending secured on dwellings, Mar (e: 0.6bn, p:

0.9bn)

Mortgage approvals, Mar (e: 52.7k, p: 51.7k)

Money supply M4, Mar (p: -0.5/0.5)

Auction of GBP 500 million 0.375 percent I/L 2062

Bonds

Wednesday

PMI manufacturing, Apr (e: 48.5, p: 48.3)

Nationwide house prices, Apr (e: 0.3/1.3, p: 0.0/0.8)

Thursday

PMI construction, Apr (e: 48.0, p: 47.2)

Friday

PMI services, Apr (e: 52.3, p: 52.4)

Auction of GBP 500 million 27 day bills

Auction of GBP 500 million 90 day bills

Auction of GBP 1 billion 181 day bills

m-o-m/y-o-y a = Actual e = Estimate p = Prior

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UK

Financial overview

6

UK

Government bond yields

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UK

Financial forecast

Policy rates last 3 months 6 months 12 months

USA 0.125 0.125 0.125 0.125

Eurozone 0.75 0.50 0.50 0.50

United Kingdom 0.50 0.50 0.50 0.50

Ten year government bond yields

USA 1.74 1.75 1.80 2.00

Eurozone 1.23 1.30 1.30 1.50

UK government bond yields

2 year 0.25 0.25 0.40 0.60

5 year 0.69 0.70 0.85 0.95

10 year 1.72 1.75 1.90 2.10

UK swaps

2 year 0.58 0.60 0.75 0.90

5 year 0.93 0.90 1.15 1.30

10 year 1.85 1.85 2.05 2.15

FX last 3 months 6 months 12 months

EUR/USD 1.30 1.28 1.23 1.10

EUR/GBP 0.842 0.860 0.840 0.820

GBP/USD 1.54 1.45 1.46 1.34

8

UK

Chart of the Week – UK 5Y CDS unchanged despite downgrade

9

UK

The economy – avoiding a triple dip

Finally – some good news. GDP was 0.3 percent in the

first quarter. The UK economy has avoided a triple dip.

GDP in Q1 compared to Q1 2012 was 0.6 percent.

By far, the largest contribution to the increase came

from services and also, surprisingly, a positive

contribution from the production industry. However,

these increases were partially offset by downward

contributions from the construction and agriculture

industries.

At this stage it is estimated that the information content

of this first estimate is around 44 percent of the total

required for the final output based estimate. Next

publication of second quarter estimate will be published

23 May.

GDP details since the first quarter of 2008 show that

government spending has been the main driver of

growth so far. Private sector domestic demand has

been weak due to tighter credit conditions, high inflation

causing negative real wages, and the ongoing squeeze

from fiscal austerity. As we have said, there will be no

fast rebound for the British economy, despite some

signals suggesting slightly better sentiment in many

sectors.

Looking forward, we have revised our GDP forecast for

the UK to 0.8 percent (earlier 1.0 percent) this year, and

to 1.3 percent 2014 (previous 1.4 percent) and added

our GDP forecast for 2015 to 1.1 percent.

10

UK

New macro forecast - The debt hangover continues

The balancing act between tight fiscal policy and expansionary monetary policy continues. The Chancellor of the Exchequer has stubbornly been holding to the

fiscal austerity plan that was presented in 2010. Even though some stimulus will be implemented in the years ahead, the price paid will be spending cuts within

other areas. The loss of overall production is still approximately 3 percent since the GDP peak and the weak performance is now very clear relative to other

developed countries, with the exception of the eurozone.

However, barometers and indicators in the first quarter pointed to slightly more positive sentiment and household consumption has been surprisingly resilient in the

aftermath of the financial crisis, despite high inflation and fiscal austerity. The sentiment for a rebound is still weak. Recent surveys show that small- and medium-

sized companies are being squeezed by tighter credit conditions. While demand from this sector has increased, actual lending to companies has not, despite the

Funding for Lending Scheme (FLS) being implemented to boost lending. The FLS has not been a success so far. One factor of the slow and modest recovery is

that restricted credit availability to small- and medium-sized companies must ease. Small- and medium-sized companies comprise around 60 percent of all

companies in the UK; the chances of a recovery are skewed to the downside if credits remain muted.

Surprisingly, GDP details since the first quarter of 2008 show that government spending has been the main driver of growth. Private sector domestic demand has

been weak due to tighter credit conditions, high inflation causing negative real wages, and the ongoing squeeze from fiscal austerity. As we have said before, there

will be no fast rebound for the British economy, despite some signals suggesting slightly better sentiment in many sectors. Looking forward, with a stubborn

Chancellor standing by the fiscal austerity programme and with the paradox of government spending being the main growth driver so far, what will be the engine of

GDP ahead?

The puzzling labour market figures continue to raise questions. Employment has continued to increase, albeit on a slow path. Nevertheless, the gap between GDP

and employment has not been wider since early 1990s. The big picture is that while most businesses are experiencing decreasing profits, the number of employees

is increasing. Surprisingly, the age group that has seen a fall in employment is 35-49 years old. We expect the labour market to soften this year and next due to a

slow and stagnating economic performance.

The amount of spare capacity in the economy, the output gap and the growth rate of potential GDP are key judgements in any forecast. Together, they determine

the scope for actual growth as activity returns to a level consistent with maintaining stable inflation in the long term. For now, the amount of spare capacity in the

British economy is rather big. Both the OBR and OECD estimate of the output gap in the UK is approximately 2-2.8 percent. Actual GDP is currently 3 percent

below its 2008 peak. The OECD has also calculated long-term projections for the output gap and says that the UK economy will not return to full employment until

2020. That supports our view of a slow and restrained recovery.

One reason why the manufacturing sector is shrinking is the combination of lower productivity figures and the resulting increase in unit labour costs. Even if output

has performed quite well so far this year, profits within manufacturing companies are decreasing. So, will the services sector lead the economy towards recovery?

Remember that the financial sector was the main driver of growth up until 2007, but it has now decreased and its former growth rates are history.

The monetary policy committee at the Bank of England is divided. Three out of nine members have voted for more QE at the three latest meetings, with Governor

King one of them. Expectations are that the incoming Governor (Mr. Carney, who will start on July 1) will provide more monetary policy stimulus to the faltering

economy. Even inflation increasing above target has not stopped the MPC pressing the “print more money” button in the past. Our view is that if indicators turn

more negative before the summer, the BoE will expand asset purchases in an attempt to bring the UK out of recession.

Read our Macro forecast

11

UK

News and statements during the week

The pound surged to a two-month high against the dollar after a government report showed the

british economy grew more last quarter than analysts forecast, ensuring the nation avoided a triple-dip

recession. Sterling advanced at least 0.4 percent against all 16 of its major counterparts after the Office

for National Statistics said gross domestic product expanded 0.3 percent in the first quarter. The median

forecast of economists in a Bloomberg News survey was for 0.1 percent growth. The Bank of England

next meets on May 8-9 after policy makers were split this month on the need to provide more stimulus to

the economy. UK government bonds declined. (Bloomberg)

The Bank of England has announced plans to expand a lending scheme designed to help

businesses and households. The Funding for Lending Scheme (FLS), due to end in January 2014, will be

extended for another year to 2015. Banks will be given greater incentives to lend to small and medium-

sized businesses, and creditors other than banks will be able to participate. Since its launch in August,

the scheme has been criticised for failing to boost lending. The scheme is supposed to encourage banks

to lend by offering them cheap loans on the condition they pass them on to customers. (http://www.bbc.co.uk/news/business-22275344)

The Fitch credit ratings agency has downgraded the UK to AA+ owing to a weakened economic

outlook. The move, after Moody's downgrade in February, came as Chancellor George Osborne

defended the government's austerity plan. Fitch said its downgrade primarily reflected a weaker

economic and fiscal outlook. Mr Osborne has said his was the "right plan" and that the economy was

"healing". Fitch said its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned

its outlook to "stable", removing the threat of further rate action in the near term. (http://www.bbc.co.uk/news/business-22219382)

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