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 Q GDP – output approach (%q/q) Source: Office for National Statistics

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

UK labour market puzzle Source: Office for National Statistics

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

Most of the pain is still to come 75% 27% 88% 66% 88% 94% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% All fiscal tighteningTax increasesTotal spending cutsInvestment cutsBenefit cutsOther current spending cuts Share of fiscal tightening still to be implemented after April 2012 (%) Source: The Institute for Fiscal Studies

Corporates to the rescue? Bureau of Labor Statistics

Bernanke to the rescue? Source: Bureau of Labour Statistics

US approach to fiscal policy

$100

$10,000

$1,000,000

$100,000,000

$1,000,000,000

$1,000,000,000,000

Walking along the “Fiscal Cliff”

A lot could happen GDP (%y/y) Unemployment (%) No fiscal cliff2.5%8.6 1Full fiscal cliff-1.0% % of cliff-0.1%9.7 3Only tax cuts implemented0.6% % of cliff0.8%9.3 5 Only spending cuts implemented 1.5% % of cliff1.7%9.0 Source: Group Economics

Super Mario to the Eurozone rescue?

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

Something’s changed Source: Datastream & Group Economics calculations

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

Still plenty of investment left to go in China

UK fiscal policy – Plan A 2,B, C

Monetary policy – rates low for how long? Source: Bank of England & Group Economics calculations Feb 2011 Feb2012 Aug 2012 Aug 2011 UK Bank rate and expectations

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

UK economic growth in the long run Spot the Great Depression Source: Bank of England; RBS Group Economics

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

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Source: ONS What is happening in the labour market?

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

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

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

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

Main economic problem facing the UK

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

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

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

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

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

Exports heading to the wrong places – for now UK 2010 exports – by destination and growth rates EZ US Canada Switzerland China Russia Brazil India South Africa Export growth (%y/y) Market share ( % ) Source: Office for National Statistics

EZ imbalances, more than fiscal Unit labour costs: Germany vs. the PIIGS GermanyItalyGreeceSpainPortugalIreland Source: Datastream & Group Economics calculations