TheThe UK Economy : UK Economy : How Long, How Deep?How Long, How Deep?

Dennis TurnerHSBC Bank plc

Presentation for Best Western Hotels GB

Celtic Manor, 8th February 2010

FIRST RECESSION FOR 16 FIRST RECESSION FOR 16 YEARSYEARS

Sustained GDP growth

-3

-2

-1

0

1

2

3

4

5

6

7

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

QUARTERLY ANNUAL

LONG TERM AVERAGE

BUT THE WRONG SORT OF BUT THE WRONG SORT OF GROWTHGROWTH

Consumers the driving force

-3

-2

-1

0

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% C

HA

NG

E

CONSUMER SPENDING RETAIL SALES

But underpinned by borrowing

-1

1

3

5

7

9

11

13

15

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

75

85

95

105

115

125

135

145

155

165

INTEREST REPAYMENTS/DISPOSABLE INCOMES(LHS)

DEBT / DISPOSABLE INCOMES(RHS)

%

The public sector has made a comeback

-4

-3

-2

-1

0

1

2

3

4

5

6

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

SPENDING % CHANGE GDP % CHANGE

But government finances weakened

-5

0

5

10

15

20

1999/00 2001/02 2003/04 2005/06

20

25

30

35

40

45

% o

f G

DP %

of G

DP

CURRENT REVENUE (Right hand scale)

CURRENT EXPENDITURE (Right hand scale)

SURPLUS/DEFICIT (Left hand scale)

WHERE TO FROM HERE?WHERE TO FROM HERE?

Consumers under pressureConsumers under pressure

A slower recovery than the last recession

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

% C

HA

NG

E

CONSUMER Forecast

Because record levels of personal debt,

0

300

600

900

1200

1500

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

£ bn

OUTSTANDING MORTGAGE DEBT OTHER CONSUMER DEBT

a rising tax burden and

30

35

40

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

% o

f G

DP

subdued earnings growth, hit by

0

1

2

3

4

5

6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Earnings growth

%

rising energy and food prices

-10

-5

0

5

10

15

20

25

30

2005 2006 2007 2008 2009

Earnings growth

Food

Energy

%

Unemployment also dampens spending

1.0

1.5

2.0

2.5

2005 2006 2007 2008 2009

mil

lio

ns

4

5

6

7

8

% o

f wo

rkforce

Number of unemployed (L axis)

Unemployment rate (R axis)

An investment-led recovery?

Robust corporate profitability

0

2

4

6

8

10

12

14

16

18

20

2001 2002 2003 2004 2005 2006 2007 2008

NE

T R

AT

E O

F R

ET

UR

N %

Column 1 MANUFACTURING SERVICE SECTOR

Key PMI surveys went south

25

35

45

55

65

2006 2007 2008 2009

% b

alan

ce

Manufacturing

Services

Construction

expansion

contraction

A sluggish investment outlook

-20

-15

-10

-5

0

5

10

15

20

25

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

% C

HA

NG

E

INVESTMENT

Forecast

GROWTH WEAKENEDGROWTH WEAKENED

A deep recession

-6.0

-4.0

-2.0

0.0

2.0

4.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

QUARTERLY

ANNUAL

Long-term average

Forecast

ALL THE LEVERS ARE BEING ALL THE LEVERS ARE BEING PULLEDPULLED

Government finances already in deficit

-100

-80

-60

-40

-20

0

20

40

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Now deficits set to continue rising

-200

-150

-100

-50

0

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

2009 Pre-Budget Report

Investment rule no longer sustainable

28

31

34

37

40

43

46

2001 2002 2003 2004 2005 2006 2007 2008

% o

f G

DP

PUBLIC SECTOR NET DEBT

EXCLUDING NORTHERN ROCK

Sustainable Investment Rule

Net debt to soar

25

30

35

40

45

50

55

60

65

70

75

80

1990 1994 1998 2002 2006 2010

% o

f G

DP

Sustainable Investment Rule

2009 Budget

Interest rates fall to historic lows

Price pressures eased

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

2002 2003 2004 2005 2006 2007 2008 2009

%

- - RPIXRPIX

- - CPICPI

which created room for interest rate cuts

0

1

2

3

4

5

6

7

2002 2003 2004 2005 2006 2007 2008 2009

%

And sterling is sliding

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

$/£

1.00

1.10

1.20

1.30

1.40

1.50

1.60

€/£

US dollar / £ (L axis)

euro / £ (R axis)

BUT………BUT………

Credit supply a drag on activity

The funding gap

0

100

200

300

400

500

600

700

800

2001 2002 2003 2004 2005 2006 2007 2008

£ b

illio

n

Customer funding gap*

Financial market turmoil is a major risk

0

1

2

3

4

5

6

7

Jan-07 Jul-07 Jan-08 Jul-08

inte

rest

rat

e, %

UK BANK RATE 3-MONTH LIBOR

The nuclear option used

An injection of £200bn via QE

0

3

6

9

12

15

Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10

% o

f G

DP

0

50

100

150

200

£ billio

n

Stock of holdings (R axis)

% of GDP (L axis)

The medicine is working

0

1

2

3

4

5

6

7

Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010

inte

rest

rat

e, %

3-month Libor(L axis)

UK Bank Rate(L axis)

The slow thaw

0

1

2

3

4

5

6

7

8

9

Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010

inte

rest

rat

e, %

0

20

40

60

80

100

120

140

160

180

basis p

oin

ts

3-month Libor (L axis)

UK Bank Rate (L axis)

Margin, Libor over Bank Rate

Lending – a mixed picture

-10

-5

0

5

10

15

20

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09

%

-10

-5

0

5

10

15

20

25

%

Lending to households

Lending to businesses

Annualized growth in outstanding lending

Straws in the wind

De-stocking nearly over

-10

-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009

STOCKBUILDING

CHANGE IN GDP

£ b

illio

n

Key PMI surveys starting to turn

25

35

45

55

65

2006 2007 2008 2009

% b

alan

ce

Manufacturing

Services

Construction

expansion

contraction

Housing market – signs of renewed life

-30

-20

-10

0

10

20

30

40

2001 2002 2003 2004 2005 2006 2007 2008 2009

%

0

40

80

120

160

mo

nth

ly mo

rtgag

e app

rovals, 000s

Mortgage approvals (R axis)

House prices, annual change (L axis)

rising

falling

House prices:

Recovery underway in 2010

A slow recovery is underway

-6.0

-4.0

-2.0

0.0

2.0

4.0

2006 2007 2008 2009 2010

%

QUARTERLY

ANNUAL

Long-term average

Forecast

Inflation to jump – but temporarilyInflation to jump – but temporarily

-2

-1

0

1

2

3

4

5

6

2007 2008 2009 2010

% c

han

ge

mo

nth

on

mo

nth CPI RPI

Forecast

Target

Range

And interest rates start to turn

0

1

2

3

4

5

6

7

2002 2003 2004 2005 2006 2007 2008 2009 2010

%

But real interest rates still negativeBut real interest rates still negative

0

1

2

3

4

5

6

7

2007 2008 2009 2010

%

0

1

2

3

4

5

6

7

%

UK Bank Rate Inflation

Forecast

Positive real interest rates

Negative real interest rates

Sterling – still opportunities for exporters

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2005 2006 2007 2008 2009 2010

$/£

1.0

1.1

1.2

1.3

1.4

1.5

1.6

€/£

Sterling weaker

US dollar / £ (L axis)

euro / £ (R axis)

Forecast

THE POST-RECESSION THE POST-RECESSION AGENDAAGENDA

Where will growth come from?

-10

-5

0

5

10

15

20

25

30

35

40

45

1993-2000 2001-2007

Industrial production (19)

Transport and comms (8)

Construction (6)

Distribution, etc. (15)

Property & business (24)

Financial Services (3)

Public services (24)

THANK YOUTHANK YOU