1. Green shoots or weeds? Robert Gardner, Head of Macroeconomics

2. Slide 2 What to expect in the next 30 mins: an RBS double-act Robert: A simple framework for thinking about the future An evaluation of the options Our view.... Peter: A closer look at the Nordic region Q&A

3. Slide 3 A simple analytical framework..... Higher Capacity, Higher Trend Growth Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction

4. Slide 4 Four potential scenarios...... Slow Grind Higher Return of Macro Instability Goldilocks Returns Deflation Higher Capacity, Higher Trend Growth Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction

5. Slide 5 The worst outcome....... "Deflation" Very deep downturn then stagnation Deflation No scope for policy normalisation De-leveraging: frustrated Higher Capacity, Higher Trend Growth Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction

6. Slide 6 Disaster Avoided?

7. Slide 7 Not exactly..... Source: Datastream

8. Slide 8 Deflation fears appear to be receding...... Source: Datastream

9. Slide 9 Unprecedented policy action stopped the rot Source: Datastream

10. Slide 10 Key asset markets may have found a bottom.... Source: Datastream

11. Slide 11 Real activity also appears to be stabilising Source: Datastream

12. Slide 12 Goldilocks Returns?

13. Slide 13 Straight from despair to elation? "Goldilocks Returns" "Deflation" Very deep downturn then stagnation Deflation No scope for policy normalisation De-leveraging: frustrated Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction Quick recovery, robust growth Plenty of slack Low inflation Steady Policy Normalisation De-leveraging: quick and smooth

14. Slide 14 Investors seem more convinced of the durability of the upturn Source: Datastream

15. Slide 15 Who said economists weren’t an optimistic bunch? Source: Datastream

16. Slide 16 Unfinished Business

17. Slide 17 Our best guess..... "Slow Grind Higher" Deep downturn, slow recovery Low inflation Gradual policy normalisation De-leveraging: slow and painful "Goldilocks Returns" "Deflation" Very deep downturn (-10%) then stagnation Deflation No scope for policy normalisation De-leveraging: frustrated Higher Capacity, Higher Trend Growth Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction Quick recovery, robust growth, Plenty of slack Low inflation Steady Policy Normalisation De-leveraging: quick and smooth

18. Slide 18 Inventory liquidation brutal, but final demand still lacking Source: Datastream

19. Slide 19 Repairing household balance sheets will take some time Source: Datastream

20. Slide 20 Mechanisms for balance sheet adjustment Asset price growth – difficult for policy to gain traction Inflation – erode the real burden of debt, return of macro instability Widespread default to eliminate debt overhang – financial devastation Debt rescheduling - debt for equity swaps, partial mortgage debt forgiveness Income growth/debt repayment – slow and painful

21. Slide 21 Surplus economies also have to make adjustments Source: Datastream

22. Slide 22 Economic growth – where does it come from?

23. Slide 23 There are lots of headwinds: Labour force growth: Demographic trends will be a drag Pressures to limit immigration won’t help either Productivity growth Lack of investment impacts capital stock Cost of capital across the economy will be higher Fixing public sector balance sheets: crowding out Moving resources across sectors is likely to be costly

24. Slide 24 Blast from the past? "Slow Grind Higher" Deep downturn, slow recovery Low inflation Gradual policy normalisation De-leveraging: slow and painful "Return of Macro Instability" Quick return to growth, No slack, volatile inflation, interest rates Return to “boom-bust” cycle De-leveraging: disorderly "Goldilocks Returns" "Deflation" Very deep downturn (-10%) then stagnation Deflation No scope for policy normalisation De-leveraging: frustrated Higher Capacity, Higher Trend Growth Lower Capacity, Lower Trend Growth High Policy Traction Low Policy Traction Quick recovery, robust growth, Plenty of slack Low inflation Steady Policy Normalisation De-leveraging: quick and smooth

25. Slide 25 The return of macro instability? Source: Datastream

26. Slide 26 Key messages/implications The worst is over, but we’re not out of the woods yet –Balance sheets have to be repaired – no quick fix –Sluggish growth for a protracted period –Policy stimulus likely to remain in place for some time The post crisis world will be different –Trend rates of growth will probably be lower –Taxes will be higher/public spending will be lower –Trade imbalances need to unwind too –Deficit countries – lower consumption, saving higher, higher net exports –Surplus countries – higher consumption, lower saving, lower net exports A tougher environment, but a more sustainable one

27. Slide 27 Questions

28. Slide 28 Cost of Capital is going to be higher.... Source: Datastream

29. Slide 29 Fiscal policy also provided a vital lift... Source: Datastream

30. Slide 30 Return to “normality”? Source: Datastream

31. Slide 31 Legal disclaimer 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.