The UK and healthcare – what challenges

lie ahead?

Neil Parker – NatWest Markets FX Market Strategist

February 2018

This presentation was delivered on 8th February 2018, not for onward distribution

The views expressed within this presentation are those of Neil Parker, Market

Strategist, Desk Strategy, which is a part of the NatWest Markets business.

This is not Independent Research, as defined by the Financial Conduct Authority.

This material should be regarded as a marketing communication and may have

been produced in conjunction with the NatWest Markets trading desks that trade

as principal in the instruments mentioned herein.

All data is as at 18th January 2018.

Contents

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• Global growth – UK growth slow, but global growth picking up

• Interest rates - rising

• Inflation – stubbornly above target

• Disposable incomes – squeezed

• Labour supply – worsening migration stats and a lack of domestic supply

• Demographics – an ageing population and a falling birth rate, not an ideal combination

• Brexit – still posing risks

• Housing market – prices still mostly rising

• Government spending on welfare – increasing in nominal and real terms

Global growth – UK growth slow, but global growth picking up

3

$millions

World 75,845,109

East Asia & Pacific 22,480,428

Europe & Central Asia 20,273,841

Euro Area 11,934,057

United Kingdom 2,647,899

Latin America & Carribean 5,299,866

Middle East & North Africa 3,144,798

North America 20,160,296

South Asia 2,892,481

Sub-Saharan Africa 1,512,596

figures are from 2015 or 2014

source: World Bank World Development Indicators database – December 2017

The global economy’s size by region

2016 2017f 2018f

US 1.5 2.2 2.3

Euroland 1.8 2.1 1.9Euroland

UK 1.8 1.7 1.5UK

India 6.7 6.8 6.5

China 7.1 6.7 7.4

Japan 1.0 1.5 0.7

World 3.2 3.6 3.7

GDP

Source: IMF World Economic Outlook, Oct 2017

4

%

Month/yearSource: Datastream

US Fed Funds Rate, %

UK BoE Bank Rate, %

EA ECB Refi Rate, %

Interest rates - rising

First hike in a decade

Inflation – stubbornly above target (and high in comparison terms)

5

Source: Thomson Reuters Datastream

UK consumer price index (CPI) (%y/y)

• UK CPI inflation currently stands at 3% y/y (Dec) - a

full percentage point above target.

• In comparison US CPI is 2.1% y/y (Dec), Euroland

CPI is 1.4% (Dec), Canada is 2.1% (Nov), China is

1.8% (Dec) and Japan is 0.6% (Nov).

• The fall in the GBP’s value is unwinding from the

calculation (in terms of higher import costs), but

domestic inflation may be replacing it.

• Stubbornly high (above target) inflation in the UK

could force the Bank of England’s hand on monetary

policy.

Disposable incomes – squeezed

6

UK household disposable income (%q/q)

Source: Thomson Reuters Datastream

• UK household disposable incomes have

been squeezed over recent quarters.

• A combination of factors, including inflation

and taxation (indirect) are likely responsible.

• Will wage inflation rise above CPI/RPI

inflation rates?

• What will the government’s response to lower

borrowing/higher VAT rates be?

Labour markets – tightening with lower rates of net inward migration

7

Source: ONS, Thomson Reuters Datastream, NatWest Markets

• Could this mean higher wage inflation?

Demographics – an ageing population and a reduced fertility rates (not an ideal

combination)

8

UK Female life expectancy (in years)

UK Male life expectancy (in years)

Source: World Bank – World Development Indicators Database, Dec 2017

UK total fertility rate (births per woman) UK life expectancy

29-Mar UK trigger Article 50

29-Apr EU Summit on UK's EU exit

08-Jun

19-Jun

24-Sep

15-Oct

Q4 UK Budget

19-20 Oct

14-16 Dec

Q1 2018

04-Mar-18

end Q3 2018 Conclusion of negotiations?

29-Mar-19 UK to leave EU

UK general election (hung parliament -

Conservatives largest party)

Formal negotiations begin between

UK/EU

Council of Europe meeting (not enough

progress made)

Italian general election to be held no later

than this

German general election (CDU win, but

coalition needed - talks ongoing)

Austrian general election (Coalition talks

ongoing)

Council of Europe meeting (phase 2

negotiations agreed)

Phase 2 of negotiations to begin

Brexit – still posing risks

9

The Brexit negotiations are

following this approach:

1) Negotiations on the UK-EU

split + Negotiations on the bill

for that split, based on the

UK’s financial pre-

commitments.

2) Negotiations on transitional

trade arrangements.

3) Negotiations on a future

agreement on trade.

Housing market – prices still climbing (mostly)

10

Source: Nationwide house price index – Dec 2017

UK Nationwide house price index (%y/y)

Government spending on welfare – increasing in nominal and real terms

11

State pension as a % of Total Managed Expenditure

Fiscal Year

Source: Office for Budget Responsibility, NatWest Markets

• Total managed expenditure (TME) in the UK stood at £772.4bn at the end of FY 2016/17.

• Of that, welfare spending was £216.9bn (or roughly 30% over all the money the government spends).

• If you roll into that the NHS spending (£119.1bn in 2016/17), then spending on welfare and the NHS accounts for 43.5% of TME, and is rising.

• Recent figures on receipts are encouraging (in terms of narrowing the deficit), but there is still a c£50bn gap between receipts and spending.

Summary

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• UK growth may have troughed and EUR growth may have plateaued.

• We expect the UK inflation rate to drop back as imported price pressures subside (but

it currently remains stubbornly above target.

• Labour markets are tight, and migration is down. Productivity needs to rise.

• The UK monetary policy tightening cycle is likely to see two further tightenings this

year.

• Brexit timescales are very tight.

• Global growth could provide some significant positive investment shocks, especially

in a price/cost sensitive environment.

• The pressures on healthcare (from an ageing population and restrictions on

government resources) present risks, and opportunities.

Disclaimer

13

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Version 12.10.2017