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 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

8. Corporates to the rescue? Bureau of Labor Statistics

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

11. US approach to fiscal policy

12. $100

13. $10,000

14. $1,000,000

15. $100,000,000

16. $1,000,000,000

17. $1,000,000,000,000

18. Walking along the “Fiscal Cliff”

19. A lot could happen GDP (%y/y) Unemployment (%) No fiscal cliff2.5%8.6 1Full fiscal cliff-1.0%10.1 275% of cliff-0.1%9.7 3Only tax cuts implemented0.6%9.4 450% of cliff0.8%9.3 5 Only spending cuts implemented 1.5%9.0 625% of cliff1.7%9.0 Source: Group Economics

21. Super Mario to the Eurozone rescue?

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

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

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

26. Still plenty of investment left to go in China

28. UK fiscal policy – Plan A 2,B, C

29. Monetary policy – rates low for how long? Source: Bank of England & Group Economics calculations 0 1 2 3 4 5 6 7 2000200120022003200420052006200720082009201020112012201320142015 Feb 2011 Feb2012 Aug 2012 Aug 2011 UK Bank rate and expectations

31. 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

32. UK economic growth in the long run 4.4 4.8 5.2 5.6 6 6.4 19001906191219181924 19301936194219481954196019661972197819841990 199620022008 Spot the Great Depression Source: Bank of England; RBS Group Economics

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

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

39. 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

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

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

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

43. Main economic problem facing the UK

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

45. 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

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

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

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

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

50. EZ imbalances, more than fiscal Unit labour costs: Germany vs. the PIIGS 70 80 90 100 110 120 130 140 150 199519971999200120032005200720092011 GermanyItalyGreeceSpainPortugalIreland Source: Datastream & Group Economics calculations