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The Economic Grand (Inter)National

The Economic Grand (Inter)National. Enrico Longoni RBS Group Economics October 2012. Back to recession…. UK GDP (GBP bn, 2008 prices). Source: Office for National Statistics. Austerity not to be blamed. UK Q2 2012 GDP – output approach (%q/q). Source: Office for National Statistics.

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The Economic Grand (Inter)National

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  1. The Economic Grand (Inter)National Enrico Longoni RBS Group Economics October 2012

  2. Back to recession… UK GDP (GBP bn, 2008 prices) Source: Office for National Statistics

  3. Austerity not to be blamed UK Q2 2012 GDP – output approach (%q/q) Source: Office for National Statistics

  4. Worse than the great depression? UK GDP during the Great Depression and the Great Recession (q/q) Source: Bank of England and Office for National Statistics

  5. UK labour market puzzle Source: Office for National Statistics

  6. Deficit reduction…a long way to go Source: Office for Budget Responsibility

  7. Most of the pain is still to come Share of fiscal tightening still to be implemented after April 2012 (%) 100% 94% 88% 88% 90% 80% 75% 70% 66% 60% 50% 40% 27% 30% 20% 10% 0% All fiscal tightening Tax increases Total spending cuts Investment cuts Benefit cuts Other current spending cuts Source: The Institute for Fiscal Studies

  8. Corporates to the rescue? Bureau of Labor Statistics

  9. Bernanke to the rescue? Source: Bureau of Labour Statistics

  10. US approach to fiscal policy

  11. $100

  12. $10,000

  13. $1,000,000

  14. $100,000,000

  15. $1,000,000,000

  16. $1,000,000,000,000

  17. Walking along the “Fiscal Cliff”

  18. A lot could happen Source: Group Economics

  19. Super Mario to the Eurozone rescue?

  20. “…All it takes to save the €…” Source: Bloomberg & Group Economics

  21. Something’s changed Source: Datastream & Group Economics calculations

  22. This slowdown is the start of a structural change China GDP annual growth GE forecast Source: Group Economics calculations

  23. Still plenty of investment left to go in China

  24. UK fiscal policy – Plan A2,B, C

  25. Monetary policy – rates low for how long? 7 UK Bank rate and expectations 6 5 4 Feb 2011 3 Aug 2011 2 Feb2012 1 Aug 2012 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bank of England & Group Economics calculations

  26. The UK remains a world leader Wealthy 7th largest economy Innovative AAA rated Highly skilled workforce Attractive for foreign investment 10th largest exporter of goods 6th largest manufacturer 3rd largest exporter of services 8th most competitive economy World class education

  27. UK economic growth in the long run 6.4 Spot the Great Depression 6 5.6 5.2 4.8 4.4 1996 2002 2008 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1900 1906 1912 1918 1924 Source: Bank of England; RBS Group Economics

  28. “Great things are not done by impulse,but by a series of small things brought together." ~Vincent van Gogh~

  29. Thank you and keep in touch! Internet www.rbs.com/economics E-mail www.rbs.com/economics/registration Social media @rbs_economics

  30. This material is published by The Royal Bank of Scotland plc (“RBS”) which is authorised and regulated by the Financial Services Authority for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives (“Securities”). It should not be reproduced or disclosed to any other person, without our prior consent. This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information. This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information. A word from our lawyers

  31. What is happening in the labour market? Source: ONS

  32. UK growth: the long and winding road GDP following recessions, start of recession = 100 1990s recession/recovery Current recession/recovery Source: Datastream and Group Economics calculations

  33. Fiscal rebalancing: a good start, but still far to go OBR forecast Source: Office for Budget Responsibility

  34. Would a Plan B work?There is some additional debt capacity, but unquantifiable risks

  35. High levels of household and public debt constrain growth Source: Datastream & Group Economics calculations

  36. Main economic problem facing the UK

  37. Corporates have the cash…. Flow of funds financial surplus/deficit 2011 (% of GDP) Source: Office for National Statistics

  38. Increase demand (symptom) Massive fiscal stimulus QE max Liquidity unbounded “Use it or lose it” deposit tax PFI v2.0 Beg to China Drastic times, drastic measures? Reduce debt (cause) • (Big) “bad bank” • Debt forgiveness • Financial repression • Monetise debt • Raise interest rates • Outright default

  39. China’s growth is slowing, should we be worried? Source: Datastream & Group Economics calculations

  40. Emerging markets: huge export opportunity % share of global GDP Source: Datastream & Group Economics calculations Source: IMF

  41. Trade headwinds Major markets EZ problem markets Emerging markets Source: Datastream & Group Economics calculations Source: IMF

  42. Exports heading to the wrong places – for now UK 2010 exports – by destination and growth rates 50 45 40 35 30 25 20 15 10 5 0 EZ US India Brazil China Russia Canada Switzerland South Africa Market share (%) Export growth (%y/y) Source: Office for National Statistics

  43. EZ imbalances, more than fiscal Unit labour costs: Germany vs. the PIIGS 150 140 130 120 110 100 90 80 70 1995 1997 1999 2001 2003 2005 2007 2009 2011 Germany Italy Greece Spain Portugal Ireland Source: Datastream & Group Economics calculations

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