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Economic Overview

Economic Overview. Laurence Sanders. World Economic Growth. Sustained recovery USA 4.7% Japan 4.2% UK 3.7% Eurozone 2.0% ( second quarter GDP year on year ).

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Economic Overview

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  1. Economic Overview Laurence Sanders

  2. World Economic Growth • Sustained recovery • USA 4.7% • Japan 4.2% • UK 3.7% • Eurozone 2.0% ( second quarter GDP year on year )

  3. The High Growth Economiesgrowth rates • China 9% • India 8% • Russia 7% • Australia 4% • ( latest data, year on year)

  4. Commodity Prices • Brent Crude ( spot) - • $28 / barrel September 2003 • $42 / barrel September 2004 • Commodity prices lower % of total costs than in previous decades • UK output prices ( August yoy) - 2.6%

  5. Economic Cycles • Typical UK cycle is now 5 /10 years - there are also 25 and 50 year cycles • Slowdown in winter 2001/02 • Currently sustained recovery • Strong growth forecast 2005 • Return to trend growth in 2006 / 07

  6. UK Economic Growth: 1984 - 2004

  7. UK EconomyOverview • Economic Growth 3.7% • Underlying Inflation (CPI) 1.3% • Average Earnings 3.8% • Unemployment 2.7% (international measure 4.7%)

  8. UK Economy • Gross Domestic Product: £1100 billion • Fourth largest economy in the world • World’s third largest trading nation • Trend Growth: 2.7% per annum

  9. UK EconomyStructure • Gross Domestic Product £1100bn • Service Sector 72% • of which financial sector 24% • Industry 27% • of which manufacturing 18% • Agriculture 1%

  10. Forecast:the UK economy

  11. UK Base Rates • Set by the Monetary Policy Committee: • New Target: CPI - Consumer Price Index CPI excludes mortgage interest; rates • CPI target : 2% ( plus / minus 1% ) • HICP target 2.0% + / - 1%

  12. UK Base Rate: 1997 - 2004

  13. Forecast:UK Base Rates

  14. Longer Term Interest Rates • Key driving forces: • International long term rates, notably US • G7 growth rates, especially the USA • G7 inflation prospects • Strong correlation with equities

  15. A Comparison of Fixed and Equity Price Movements

  16. Period Rate Forecast end 2004 end 2005 end 2006 • 2 year 5.30% 5.40% 4.70% • 5 year 5.40% 5.50% 4.70% • 10 year 5.50% 5.50% 4.70%

  17. The UK Housing Marketkey forces • Interest rates - both short and longer tem • Personal Disposable Income: • average earnings • unemployment • taxation • Housing supply

  18. The Housing Market andthe UK Economy • New houses built - 2003 180,000 • Owner Occupation Ratio over 70% • Forecast Gross Mortgage Lending 2004 £280 billion • Forecast Net Mortgage Lending 2004 £110 billion

  19. House Price Forecast Average house price ( mortgaged property ): year on year

  20. Nationwide House Price Index: 1996 - 2004

  21. Barker Review • Additional 120,000 houses a year required for UK house inflation equal EEC average of CPI plus 1.1% pa ( very optimistic) • Additional 70,000 houses a year reduces UK house inflation to CPI plus 3% pa ( more realistic longer term) • Several years before balance housing supply/ demand

  22. Miles Review • Housing finance industry - in many ways efficient and innovative • Long term fixed rate mortgages intrinsically NOT superior to fixed • No compulsion re fixed rate mortgages • Greater borrower awareness of interest rate risk

  23. Risks to forecasts • US and UK recoveries stall • Geopolitical problems - impact on oil prices • Corporate governance shocks • Deflation - in USA or Eurozone

  24. Conclusion - the optimistic view • Consensus forecast is for stronger growth in 2005 / 2006 • Fiscal and monetary policy in G7 geared to long term sustainable recovery • Enlargement of EEC will stimulate European growth • Housing market will be supported by excess of demand over supply, economic recovery and historically low interest rates

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