Economic Outlook Ross Walker, UK Economist, RBS 27 November 2008

1. Template formatting guidelines available in the Preformatted Slides (from File>New) and at http://cbfmnet.fm.rbsgrp.net/homepages/H95 (FASTCODE: PPU) Economic OutlookRoss Walker, UK Economist, RBS 27 November 2008

2. UK economic growth (GDP) – recession % change q/q & y/y

3. As bad as the early 1990s? It’ll all end in tears

4. UK consumers – a “Wile E. Coyote moment”

5. UK unemployment – to hit decade highs LFS unemployment rate, %

6. UK ‘misery index’ ‘Misery index’ (inflation rate + unemployment rate) vs consumer confidence

7. Household debt – gargantuan Total stock of household debt & debt-servicing burden

8. Policy options – some room for manoeuvre • Fiscal policy: cut taxes, raise public spending • Monetary policy: cut interest rates • Exchange rate: engineer a depreciation of £ • Supply-sidepolicies: eg, deregulate/liberalise market

9. Interest rates BoE Bank Rate & expectations, %

10. Credit crunch – they don’t think it’s all over 3-month £ LIBOR rates minus expected BoE Bank Rate (basis points)

11. Credit Crunch – an alternative view

12. Conclusions • The global economy is in the midst of the most serious financial shock since 1929. • UK economy is in recession – akin to the early-1990s. Financial sector implosion now affecting the real economy. • Central banks and governments have some leeway, but recovery will be lethargic given the structural imbalances in the economy. • Household incomes to remain under pressure as unemployment hits decade highs; some marginal relief from falling inflation. • Medium-term differences (next 10 years vs last 10 years): • More volatile GDP, employment and consumer spending trends. • Less global price deflation. Therefore harder to achieve inflation targets – necessitating slightly higher ‘neutral’ interest rates (looking through cyclical factors). • The era of ultra cheap money / abundant credit is over. • Medium-term tax burden will probably rise, or at least stabilise at current high levels, constraining future spending power.

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