1. Economic Overview Laurence Sanders

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

4. The High Growth Economies growth rates n China 9% n India 8% n Russia 7% n Australia 4% n ( latest data, year on year)

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

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

7. UK Economic Growth: 1984 - 2004

8. UK Economy Overview n Economic Growth3.7% n Underlying Inflation (CPI)1.3% n Average Earnings3.8% n Unemployment2.7% (international measure4.7%)

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

10. UK Economy Structure n Gross Domestic Product £1100bn n Service Sector72%  of which financial sector24% n Industry27%  of which manufacturing 18% n Agriculture1%

11. Forecast: the UK economy 20052006 Economic Growth3.02.5 Core Inflation2.0 Unemployment4.74.9 Average Earnings4.94.6

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

13. UK Base Rate: 1997 - 2004

14. Forecast: UK Base Rates End 2004End 2005End 2006 Base Rate Forecast 5.00%5.25%4.75% Market View5.00%5.25%5.00%

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

16. A Comparison of Fixed and Equity Price Movements

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

18. The UK Housing Market key forces n Interest rates - both short and longer tem n Personal Disposable Income: –average earnings –unemployment –taxation n Housing supply

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

20. House Price Forecast Average house price ( mortgaged property ): year on year 4Q 20044Q 20054Q 2006 15.0%5.0%

21. Nationwide House Price Index: 1996 - 2004

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

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

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

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