The UK outlook: TINA or Turner? Simon Wells Chief UK Economist HSBC Bank plc +44 20 7991 6718 [email protected]Economics March 2012 View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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The UK outlook: TINA or Turner?
Simon Wells Chief UK Economist HSBC Bank plc +44 20 7991 6718 [email protected]
Economics
March 2012
View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
• Weak growth
• More QE
• Tighter fiscal squeeze
Coalition under pressure. Will it choose TINA or Turner?
UK Outlook: TINA or Turner?
There
Is
No
Alternative
TURNER
or
-1.0-0.50.00.51.01.5
-1.0-0.50.00.51.01.5
Jan-10 Jul-10 Jan-11 Jul-11
% Qtr contrib.% Qtr contrib. % Qtr contrib.
-1.0-0.50.00.51.01.5
-1.0-0.50.00.51.01.5
Jan-10 Jul-10 Jan-11 Jul-11
% Qtr contrib.% Qtr contrib. % Qtr contrib.
-1.0-0.50.00.51.01.5
-1.0-0.50.00.51.01.5
Jan-10 Jul-10 Jan-11 Jul-11
% Qtr contrib. % Qtr contrib.
Underlying growth slowing throughout 2011
Source: Thomson Reuters Datastream, ONS, HSBC
Underly ing grow th Erratic Ex traction, Energy & construction Headline GDP
Inflation outpaced earnings
Source: Thomson Reuters Datastream, ONS, HSBC
-6-4-202468
05 06 07 08 09 10 11 12
-6-4-202468
CPI inflation (LHS) Wage grow th (RHS)
% Yr % Yr
Sterling oil price close to record highs
Source: Thomson Reuters Datastream, ONS, HSBC
0
20
40
60
80
100
2000 2002 2004 2006 2008 2010 2012
0
20
40
60
80
100Brent price in GBP GBP/BBLGBP/BBL
Uncertainty weighing on consumer confidence and spending likely to stay restrained
But employment resilient given size of fall in output
Source: ONS, HSBC
90
95
100
105
t t+2 t+4 t+6 t+8 t+10 t+12 t+14
90
95
100
105
70s 80s 90s 00s
GDP in UK recessionsIndex Index
9092949698
100102
t t+2 t+4 t+6 t+8 t+10 t+12 t+14
9092949698100102
70s 80s 90s 00s
Employment in UK recessionsIndex Index
UK productivity performance has been dismal
• Significant spare capacity remains; policy can stay loose
• No more QE in May, but another £50bn possible in August
• Take BoE gilt holdings to £375bn by end-2012. Close to the maximum possible under current policy
Monetary policy response
£500bn£325bn
£125bn£50bn
£325bn
Reaching the limits of gilt purchases
Source: BoE, HSBC
• Gilts outstanding end 2012: £1300bn • Available for Bank of England to buy: £500bn • Bank of England holdings from existing QE: £325bn • HSBC forecast: £375bn
-0.8
-0.6
-0.4
-0.2
0
0.2
Feb09
Mar09
May09
Aug09
Nov09
Feb09
Oct10
Feb12
-0.8
-0.6
-0.4
-0.2
0.0
0.2
Change in gilt yields to quantiative easing 'new s'
%%
Impact of gilt purchases waning
Source: BoE; HSBC
Large impact on yields initially
Similar QE2 impact absent
Main channels of gilt purchases
Waning impact vs 2009
• Portfolio rebalancing
• Exchange rate impact }Large effect in 2009, unlikely now
• Lower expectations of future policy rates
• Boost to confidence and/or liquidity }
Little effect in 2009 • Increase commercial bank lending }
% Yr contrib.% Yr contrib.Contribution of gov t spending and
inv estment to GDP grow th
Unprecedented scale of government drag on GDP
Source: HSBC, Thomson Reuters Datastream
-1.0
-0.50.0
0.51.0
1.5
-1.0
-0.50.0
0.51.0
1.5
1959 1969 1979 1989 1999 2009
% Yr contrib.% Yr contrib.Contribution of gov t spending to GDP
grow th
Long-term fiscal situation dire: debt ratios explode from mid-2020s even if current fiscal targets met
Source: OBR
5060708090
100110
2010 2020 2030 2040 2050 2060
5060708090100110
Net debt forecasts made in July (LHS)Net debt forecasts made in Nov ember (LHS)
% of GDP % of GDPOBR forecasts of net debt
UK productivity may return to 1980s levels
Source: ONS, HSBC
Policymakers’ assume productivity returns to historical trend, which may be too optimistic
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%
1969 1977 1985 1993 2001 2009
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%
UK productivity grow th (10-year MA)
• Uncertainty will weigh on economic activity. Despite uptick in survey indicators, demand will be weak
• An additional £50bn of QE from BoE on top of existing £325bn
• Fiscal consolidation to ramp up in 2012 and subtract from GDP. Coalition’s resolve to be tested: pressure to be Turner not TINA
UK Outlook: TINA or Turner?
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