AUG 06 Danske UKOutlook

8/9/2019 AUG 06 Danske UKOutlook

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UK outlook: British upswing running out of steam06 August 2010

John HydeskovSenior Anal stPhone +45 4512 84 97Mobile +45 20 12 24 [email protected]/research

www.danskeresearch.com

ans e esearc


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British upswing running out of steam

British upswing running out of steam summary- , -

British GDP has advanced for three consecutive quarters after plummeting in 2008-09. However,

OECDs leading indicator for UK has fallen in the past two months, indicating that the economic upswingis losing steam.

Perception of the overall economic situation is also worsening. The output gap has not been closed and

spare capacity remains.

Retail sales are getting weaker trend in disposable income is declining. Consumer sentiment isdeteriorating business confidence is fading.

We expect only a slow recovery the robust Q2 numbers were a one-off affair. Exports, private

. ,

government projections.

Danske Markets Forecasts - United Kingdom

2008 2009 2010 2011 3M 6M 12M

Real GDP (y/y %) -0.1 -4.9 1.1 1.8 EUR/GBP 0.84 0.85 0.82

CPI (y/y %) 3.6 2.2 2.9 2.3 GBP/USD 1.49 1.41 1.55

Unemployment (y/y %) 5.6 7.5 8.0 7.6 GBP/DKK 8.86 8.75 9.09

External balance Interest rates

Current account (% of GDP) -1.6 -1.1 -1.7 -1.3 Central bank rate (%) 0.5 0.5 0.5

www.danskeresearch.com 2

. . .Budget (% of GDP) -2.7 -8.9 -10.5 -7.8 2Y note (%) 1.2 1.6 2.4

10Y note (%) 3.8 4.0 4.3

Source: Danske Markets


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UK rates to stay low harsh (but needed) austerity measures -housin market ettin weaker bankin sector still fra ile- for details, see slides 11-18

Despite undertaking massive quantitative easing and having bought roughly 25% of outstanding Gilts, the

BoE is considering applying even more monetary stimulus . The MPC has considered arguments in favour.

We believe BoE communication will remain soft throughout the year and do not see rates being raised before H2 2011 at the earliest. A fragile

economy, inflation only briefly overshooting BoEs target and the outlook for severe fiscal tightening are crowding out monetary normalisation.

The new Conservative/Lib Dem government managed to calm financial markets with harsh austerity

measures, intended to curb Britains soaring debt burden. Public de icit is declining but rom an alarmingly

high level. Government spending will no longer add to economic growth.

Addressing the unsustainable budget deficit is correct. The UK budget is still not on a sustainable path as underlying assumptions on economic

growth are too optimistic, in our view. Risk of a credit rating downgrade due to a bleak economic outlook is still present, but has fallen.

The housing market is again showing signs of weakness; prices are falling again, sales are low, buyer

interest is dropping and mortgage approvals remain subdued.

We think the housing market is shifting to a lower gear once again. Exceptionally low rates for a long period have not been able to secure a robust

upswing. Tighter fiscal policy means lower disposable income. A declining proportion of the Brits sees now as a good time to buy a major asset.

The banking sector is still dependent on government aid despite recovering somewhat. Q2 results have

been strong and prospects would be satisfactory were current financial conditions to continue, which is

unlikely. Lending remains subdued and assessment of overall business situation and profitability outlook is


. The financial sector is the key to Britains recovery, having accounted for almost 15% of economic growth in the good old days. We regard the

outlook for the British banks as uncertain but believe the Government will be supportive of the sector. A full recovery of UK banks will likely

coincide with a stronger pound.

3


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EUR/GBP outlook: Pound will not continue its winning streak

Sterling has performed strongly against the euro

over the past three months (+5%).

Our short-term model indicates that sterling has

fallen too much and EUR/GBP will adjust higher

mainly due to movements in relative rates.

BoEs rhetoric is soft and the MPC is considering anew round of QE clearly GBP negative.

Fleeing from (Southern) European debt, investors

.

has never been a safe haven with its alarmingly

high public deficit and dependency on the financial

sector.cent

cent

M&A flows have been positive for the pound so far

but not likely to continue with bleak economic

prospects.

per

per


. , .0.82 at 12M.

4


5/20


6/20


UK GDP components almost all well below trend!



7/20


Bank of England Agents survey: Improvement - but slack in



8/20


UK retail and car sales showing signs of weakness



9/20


Worrying signals from consumer sentiment general



10/20


PMIs have peaked but are still indicating expansion for now



11/20

Harsh austerity measures introduced to curb debt burden

The Conservative/Lib Dem government presented harshausterity measures in June well received by financialmarkets and credit rating agencies

However, the UK still runs a sizeable budget deficit.



12/20

Harsh austerity measures introduced to curb debt burden

UK debt position is deteriorating fast but budget deficit has-

Who owns the UK debt?



13/20

Is BoE done with quantitative easing?

Both headline and core CPIs are higher than preferred



14/20

Is BoE done with quantitative easing?

BoE: Winner of the quantitative easing competition



15/20

Housing market shifting to lower gear

UK housing market in a historical context: Another round of



16/20


House prices are falling again mortgage approvals,



17/20


House price expectations not ballistic despite record-low

Bank Market value (bn) Assets (bn)

As of 7 July 2010 As of 31 Dec 2008

HSBC 107.42 1736Barclays 38.56 2320

Llo ds Bankin Grou 34.56 1195

Standard Chartered 32.96 299

Royal Bank of Scotland

Group 23.68 2508

Co-operative Bank 39


(RBS)'s ordinary shares, however the bank itself remains nominally independent of the

Government.

The UK Government owns a controlling stake of 43% of the Lloyds Banking Group, with the

bank remaining in the private sector.


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When will the UK financial sector recover former glory?

Recovery in the UK banking sector has begun



19/20

GBP outlook

GBP: Overbought on the short horizon but undervalued on

EUR/GBP vs. 2Y swap spread

0.00

0.251.00

EUR/GBP %

-1.25

-1.00

-0.75

-0.50

-0.25

0.80

0.85

0.90

.

>



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