Transcript Title

UK Economy
Will 2013 be the Turning Point?
Bill Farrant
Managing Director
Santander Global Banking & Markets
EMFEC Annual Conference
14th March 2013
United Kingdom
2
Agenda
1.
UK Growth, Deficit & Inflation
2.
BoE Policy & Bank Funding
3.
Sterling
4.
The Eurozone & the US
3
Growth and Fiscal Consolidation
Key factors acting on growth
 Fiscal consolidation will remain a drag on
the government expenditure component of
GDP.
 Consumer spending is likely to remain
constrained by: 1) Core unemployment; 2)
High inflation which reduces real spending
power; 3) Household deleveraging.
 Protracted slow growth in the Eurozone inhibiting exports to one of our largest
trading partners.
Fiscal consolidation*
35
Tax
Spending
30
25
(£bn)
20
15
10
5
0
2010-11
2011-12
2012-13
2013-14
* Versus position at the Nov 2009 PBR
2014-15
2015-16
 Another sharp rise in oil and commodity
prices could act like a tax on consumption
again
 Expectations of falling inflation boosting
real earnings are waning
 Q4 2012 GDP at minus 0.3% (fallback
post-Olympics)
 Q1 2013 estimates are more positive.possibly as high as +0.4%
Source: HMT
 The risks to growth remain substantial.
The Chancellor has already said that he is
constrained on his ability to either cut taxes
or lift spending. This makes it hard to see
how he can act as a catalyst for growth.
-3-
4
The Public Finances had a poor 2012
Year to date change in tax revenue, expenditure & borrowing (GBPbn)
6
6
4
4
2
2
0
0
 Tax receipts overall rose
 But weak growth meant that current expenditure rose more
 Growth, or the lack of, continues to frustrate the government’s
fiscal ambitions
-4-
Estimated change in
underlying borrowing
Local authorities & Public
Corporations
Adjusted Net Investment
Total Current Expenditure
Other expenditure
Source: OBR, ONS, Thomson Reuters Datastream, Santander GBM.
Net Social Benefits
Social Contributions
Corporation Tax
Income Tax & CGT
Other taxes on production
VAT receipts
-2
Interest Payments
8
Total Current Receipts
8
-2
5
…but such slippage is now a well established trend
Evolution of OBR forecasts for 2014/15 revenue & expenditure
710
40.0%
700
39.5%
690
39.0%
680
38.5%
670
38.0%
660
650
37.5%
640
37.0%
Jun 2010
Nov 2010
Mar 2011
Current Receipts GBP bn (LHS)
Current Receipts as a % GDP (RHS)
Nov 2011
Mar 2012
Current expenditure GBP bn (LHS)
Current expenditure as a % GDP (RHS)
Source: OBR, ONS, Thomson Reuters Datastream, Santander GBM.
 The rise in borrowing in 2012/13 reflects weaker than expected
growth
 Chancellor’s extension of austerity – due more to trend growth
concerns than the cycle
-5-
6
Agenda
1.
UK Growth, Deficit & Inflation
2.
BoE Policy & Bank Funding
3.
Sterling
4.
The Eurozone & the US
7
BoE: Inflation – just when you thought it was safe
• The BoE’s central view for CPI
may once again prove too
optimistic.
• Danger of CPI exceeding 3%
• New BoE Governor (Mark
Carney) may be a free thinker but
his first action may be a letter to
the Chancellor
• CPI will not fall below the 2%
target in 2013.
 CPI came down more than expected during the early part of 2012. But recent numbers
have been disappointing (Jan CPI at 2.7%) and inflation is likely to remain high in 2013
 Commodity prices have risen; oil on geopolitical issues and food due to the weather.
 A sharp rise in tuition fees as the new university charging structure came in.
 Another round of utility bill hikes around 10%. RPI “+” increases in rail fares.
-7-
8
BoE: Is QE finished?
• While initial rounds of QE were
important to grow the UK’s
monetary base, there are
questions over how effective
successive rounds have been.
There is certainly a sense of
diminishing returns.
Cumulative BoE gilt purchases
400,000
350,000
300,000
• Within the MPC there is a clear
split on whether more QE is
necessary
with
Dale
in
particular, vocal about the
inflationary risks of more QE.
200,000
150,000
100,000
50,000
l-0
9
Se
p09
N
ov
-0
9
Ja
n10
M
ar
-1
0
M
ay
-1
0
Ju
l-1
0
Se
p10
N
ov
-1
0
Ja
n11
M
ar
-1
1
M
ay
-1
1
Ju
l-1
1
Se
p11
N
ov
-1
1
Ja
n12
M
ar
-1
2
M
ay
-1
2
Ju
l-1
2
Ju
M
ar
-0
9
ay
-0
9
-
M
(£mn)
250,000
• The current £50bn tranche of asset purchases ran to
November 2012. Took the total QE deployed to £375bn.
• With economic growth still seen relatively flat we look for
the Bank to keep the door open
• The release of the £35bn QE “profit” back to the Treasury
is an example of a more creative thought
-8-
• There are practical limits to the
size of QE. A total of £375bn
Gilts have been bought - this is
out of a conventional gilt stock
that the BoE can buy of c.
£650bn.
• Some QE
March 2013
Gilts
mature
in
9
BoE: QE Ended - Gilt Issuance will weigh on the market
BoE buying vs issuance
Overseas and bank buying of gilts
35,000
25,000
30,000
25,000
Conventional
Issuance
Total purchases
20,000
15,000
10,000
5,000
£mn
20,000
15,000
-
-5,000
-10,000
10,000
-15,000
-20,000
nAp 09
rJ u 09
lO 09
ct
Ja 09
nAp 10
rJ u 10
lO 10
ct
Ja 10
nAp 11
rJ u 11
lO 11
ct
Ja 11
nAp 12
rJ u 12
lO 12
ct
-1
2
-
Ja
Bank
28
-F
eb
30 -10
-A
p
30 r-10
-J
un
-1
31
0
-A
ug
31 -10
-O
c
31 t-10
-D
ec
-1
28
0
-F
eb
1
30
-A 1
p
30 r-11
-J
un
-1
30
1
-A
ug
1
31
-O 1
c
31 t-11
-D
ec
-1
28
1
-F
eb
1
30
-A 2
pr
12
30
-J
un
31
12
-A
ug
31 -12
-O
ct12
£mn
5,000
Foreign
Source: BoE
Source: BoE & Santander
 During the peak of QE operations buying by the BoE (red line left chart) would outweigh
conventional issuance (grey bars). No more BoE buying = higher yields.
 Compounding the problem, overseas buyers have greatly curtailed purchases during
2012. With bank liquidity buffers now being reduced, the banking sector has also been
a net seller of gilts in 2012 after having aggressively accumulated them during the
previous few years.
10
Gilt Yields look too low
 We remain bearish on gilts and expect yields to
rise. There are several drivers behind this:
improved activity data and sticky inflation data
should mean no more QE.
Services sentiment and gilts diverge
30
7.0
20
6.0
10
0
5.0
-20
4.0
-30
3.0
-40
-50
-60
2.0
EC UK Services sent
3F2Y (rhs)
-70
1.0
Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec00
01
02
04
05
06
07
09
10
11
12
Source: Bloomberg & European Commission
(%)
-10
 The EC services sentiment indicator was a
decent guide to market levels up until the crisis
(Chart). The initial adjustment lower in forward
rates was slow as the steepening of the curve
restrained the move lower in the forwards.
 Since then the forward rates have fallen further
than justified by fundamentals and have
remained stubbornly low.
 This is a reflection of changed perceptions
towards the BoE. It is clear that the Bank wants
a prolonged period of above trend growth to
close the output gap before tightening policy
but it does raise the risk that yields may revert
to more normal levels.
11
Risk Appetite is recovering
10Y gilts vs Euro area CDS
Jan-11 Mar-11 Jun-11 Aug-11 Oct-11 Jan-12 Mar-12 Jun-12 Aug-12Nov-12
100
4.00
5.5
3.75
5.0
3.5
3.00
2.75
2.50
250
2.25
2.00
GDP weighted CDS
1.75
10Y (rhs)
1.50
QE1
3.0
(%)
200
10Y (%)
4.0
3.25
300
Since 2007
4.5
3.50
150
(inverted bp)
Gilt yields low relative to equities
2.5
QE2
2.0
QE3
1.5
Red dots post QE3
1.0
1500
2000
2500
All Share
1.25
Gilts cheap
1.6
Source: Bloomberg & Santander
1.4
ratio (10Y gilt/div yield)
 Gilts have benefited from their safe haven status
but while market concerns over Euro area have
eased, gilts have not responded in a linear
manner.
3500
2
1.8
350
3000
1.2
1
0.8
0.6
0.4
Gilts rich
0.2
Jul-12
Jan-13
Jul-11
Jan-12
Jul-10
Jan-11
Jul-09
Jan-10
Jul-08
Jan-09
Jul-07
On a yield basis, gilts
look rich vs equities
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
Jul-04
Jan-05
Jul-03
Jan-04
Jul-02
Jan-03
 Likewise, the rise in value of other risk assets
suggest that gilt yields should have corrected
higher – this has not happened to a significant
degree.
Jan-02
0
Source: Bloomberg & FTSE
12
BoE – To ease or not to ease
 There has been speculation that the BoE may cut Bank Rate
again and BoE’s Tucker has postulated negative interest rates.
 We do not think the MPC will – it undermines the argument
that QE is the equivalent of Rate Cuts.
 The BoE have to be sure that a cut in UKBR will also cut
banks’ funding costs and thereby be passed on to the wider
economy.
Forecast: Bank
Rate is expected
to remain at 0.5%
into Q3 2014,
rising to 1.5% by
end 2014 and 2.5%
end 2015.
 The BoE has been averse to cuts as it thinks that it will
negatively impact smaller banks – reducing their income but
not necessarily their funding costs.
Alternatives
 The Funding for Lending Scheme
 The Extended Collateral Term Repo operation
These are intended to reduce bank sector funding costs so that banks will then be able
to lower the rates charged to households and businesses.
- 12 -
13
BoE Policy: Funding for Lending Scheme
 The FLS is designed to incentivise banks to
boost lending to UK households & businesses.
 It is open to institutions with access to the BoE’s
DWF.
Collateral
 It provides financing for an extended period at
below market rates. There is a direct link
between the quantity and the price of the funds
available.
The FLS has the same collateral list as the
DWF. Collateral can be moved from the DWF
or ECTR pre-positioned pools for use in the
FLS Collateral Pool
FLS Details
• 9M bills are lent in exchange for eligible collateral
• 4-year term from date of drawdown
• Draw-downs permitted 1-Aug-2012 to 31 Jan-2014.
• Repayments permitted at any time.
• Participants in an FLS Group may borrow in aggregate up to the Borrowing Allowance for the FLS
Group. Where the Borrowing Allowance = (5% of base stock of loans as at end Jun-2012)+(certified
cumulative net lending since 30-Jun-2012)
• Fee: if net lending is positive = 25bp per annum; if net lending is negative fee increases linearly
from 25bp to 150bp if lending falls by 5% or more. Additional fee is not determined until the end of
the Reference period.
- 13 -
14
Agenda
1.
UK Growth, Deficit & Inflation
2.
BoE Policy & Bank Funding
3.
Sterling
4.
The Eurozone & the US
15
Exports have certainly failed to justify the hype
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-1
Yr
0
Q2 2007 (-25% )
+1
Yr
+2
Yrs
+3
Yrs
Q4 1992 (-15% )
+4
Yrs
+5
Yrs
Q1 1996 (+25% )
Source: ONS, Thomson Reuters Datastream, Santander GBM.
 Re-balancing of economic growth still only half-complete
 Exports to Non-EU now just ahead of EU bloc
 The big depreciation in trade weighted sterling has only had a modest impact
on net exports, adding less than 1% to GDP.
- 15 -
Cumulative GDP impact, % pt
Cumulative GDP impact, % pt
Large movements in trade-weighted sterling & net trade effect
4
16
Sterling has already weakened…but could weaken further
Sterling looks cheap in historical terms
110
105
100
95
Average = 94.41
90
Reverting to mean?
85
80
75
Trade weighted Sterling
70
Or permanent
decline?
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
 Sterling is already at historical lows. Unsurprisingly, therefore, most long-term fair-value
techniques; PPP, current account flows and productivity suggest GBP is fairly or undervalued
 Further weakness may yet be justified. Political risks are rising in the UK whilst they are
falling in the Eurozone. Markets are looking for a bet and it might be against Sterling
17
Agenda
1.
UK Growth, Deficit & Inflation
2.
BoE Policy & Bank Funding
3.
Sterling
4.
The Eurozone & the US
18
All in it together – EMU risks should continue to weigh on the EUR
% of outstanding public debt
40
“One for all and all for one”
35
30
25
20
15
10
5
0
Greece
Ireland
Germany's holding of public debt
Portugal
Spain
French holding of public debt
Italy
Source: Bloomberg, Santander
 Cross-ownership of debt and assets makes an EMU break-up very unlikely
 Greece, Portugal and Ireland should be better off staying in EMU and benefiting from support
packages
 Closer co-operation on fiscal matters implies a stronger union going forward and a catalyst
for reform
19
Eurzone growth is low & divergent and will continue to be so
Peripheral Eurozone over-reliant on Germany
German trade balance excluding Eurozone
EUR bn
10
Eurozone trade balance excluding Germany
Total Eurozone trade balance
5
0
-5
-10
-15
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Source: Bloomberg, Santander
 Euro zone growth and productivity tend to underperform the US, favouring a lower EUR/USD
 Fiscal cuts add to problem and sparked the wave of downgrades.
 Banks depositing funds with ECB implies less lending – although this seems to be reversing
20
Some Good News from the US
 US Economy has stabilised (2% growth) and avoided the curse of the
double-dip recession.
 University of Michigan Confidence survey still printing above70.
 Chicago PMI at 52 – dipped late 2012 but picking up again. Still in +ve
territory
 Inflation pressures subdued and retail sales remain robust
 Banking sector off the front pages
 Construction spending rising
 Existing home sales strong – linked to low long term interest rates
 Non-Farm Payrolls at +150,000 per month
21
Some Good News from the US - Housing
NAHB Index and housing starts
(delayed 3 months,.annualized, million)
2500
Inventory of unsold homes (million)
80
2000
1000
11.5
60
10.5
Housing starts, delayed 3 month (LHS)
0
8.5
7.5
30
6.5
10
NAHB index (RHS)
9.5
40
20
500
12.5
70
50
1500
13.5
5.5
4.5
3.5
00
0
01
02
03
04
05
06
07
08
09
10
11
• Both transactional and price indicators
bouncing back
•
•
Homebuilders confidence at highest
since May 2006
Existing home prices rise - up 11.1%,
fastest pace since November 2005
Inventories at 7-year lows
• Definite support to personal spending
•
02
03
04
05
06
07
08
09
10
11
12
12
Existing home prices (% y/y)
Source: Bloomberg, Santander
•
01
More people’s mortgages leave negative
equity, accessing cheaper refinancing
20
15
10
5
0
-5
-10
-15
-20
2004
2005
2006
2007
2008
2009
2010
2011
2012
22
The Long Road back to pre-crisis normal
Real per capita GDP levels: systemic and
borderline cases in advanced economies 2007-11
• In average post WWII systemic crisis,
it took 4.5 years to get back to precrisis per capita GDP level
• In 14 Great Depression cases, it took
on average 10 years
• It takes extremely long for
unemployment to go back to pre-crisis
levels
•
•
Sources: C. Reinhart & K. Rogoff, “This time is different, again? The
US five years after the onset of subprime ” IMF, October 2012
For US, it took 12 years in 1907, 14
years in 1893 and 1929
For other post WWII episodes, in 2/3
of cases unemployment had not
returned to pre-crisis levels in a
decade
24
Disclaimer
Important information:
This presentation was prepared by Santander Investment and the
content herein is of a strictly confidential nature. This presentation
cannot be reproduced, distributed or published by the recipient or
used for any purpose whatsoever without the prior written
consent of Santander Investment. Although the information
contained in this presentation was obtained from sources
considered reliable, Santander Investment cannot guarantee the
accuracy and truth of the same. The opinions presented herein
represent those of Santander Investment at the present time, and
are, therefore, subject to amendment and alteration. Santander
Investment is not responsible for any direct losses or reduced
profits that may result from the use of the information contained
herein.
© SANTANDER GROUP. ALL RIGHTS RESERVED.
SANTANDER
PRESENTE EN MAS DE 40 PAISES