Economic Outlook, the UK

6 July 2010

Please direct inquiries, if any, to:

Tina Winther Frandsen, Senior Macroeconomic Analyst
+45 8989 7170
Tina.winther.frandsen@jyskebank.dk
Summary – the UK
• Strong downturn followed by moderate upturn
– The strong downturn is replaced by recovery, but the upturn is still fragile.
– So far, the upturn has been driven by substantial easing of the monetary and fiscal policies.
Th sentiment
The ti t iindicators
di t signal
i l th
thatt growth
th will
ill continue
ti and
d th
the h
housing
i and
d llabour
b markets
k t
are improving. However, the imminent significant tightening of the fiscal policy and the high
debt level of the households adversely affect the growth prospects.
– On the whole, we therefore expect relatively moderate growth at 1.2% this year and at 1.7%
in 2011
2011.

• Consumers and companies are still cautious, but things are looking up
for exports
– High indebtedness, an uncertain job situation and very low wage growth have made
consumers save more and be less inclined to consume. The labour market is improving, and
combined with low interest rates and increasing housing prices, the pressure on the consumers
has eased a bit. However, the fiscal-policy tightening measures are still preponderant.
– We therefore
f expect private consumption to grow at a moderate rate.
– Corporate investment has declined substantially, and the investment ratio is therefore very
low. We assess that investment activity will soon pick up, but growth will presumably be
moderate.
– Given the recovery of the global economy and the currency, which is still weak, things are
looking up for exports.

• The Bank of England will keep interest rates at record low

– We expect the Bank of England to keep interest rates at the record low 0.5% until Q1 2011
despite the dilemma of high inflation.
 The upturn is moderate
• The strong downturn has been replaced by recovery, but the upturn is
still fragile.
• The business trend indicators signal that growth will continue and the housing and
labour markets are improving. However, the imminent significant tightening of the
fiscal policy and the high debt level of the households adversely affect growth.
• On the whole, we expect relatively moderate growth at 1.2% this year and at 1.7% in
2011.
2011
Business trend indicators signal
g
improvement
• The business trend indicators have signaled increasing activity for long.
Notably the manufacturing industry seems to be growing, while the service
sector has 'lost steam'.
 The manufacturing industry in
progress
• In recent months, the industrial production has increased
significantly.
but it is a long way up to the old levels of production.
• We expect that the industrial production will continue to grow.
Consumers are still hesitant
• High indebtedness, an uncertain job situation and very low
wage growth have prompted households to save more and to
reduce private consumption.
• H
However, th
the llabour
b market
k t iis iimproving,
i and
d combined
bi d with
ith llow iinterest
t t rates
t
and the improvement in the housing market, the pressure on the consumers
has eased a bit. The need for fiscal-policy tightening is, however, still
preponderant.
• All in all, we expect private consumption to grow at a moderate rate.
 Stabilisation in the labour market
• The labour market is showing signs of stabilisation. A significant
increase in employment is not just around the corner, because
the workforce has not been reduced nearly so sharply as production.
• As wage growth has fallen markedly at the same time, real wages are in
negative territory at the moment - the impact from the labour market is
therefore still acting as a damper on private consumption.

UK: Average Wages

Wage growth (ex. bonus), 3 month moving average
5,5

5,0

4,5

y/yy, 3 month moving avverage

mln.)
4,0

Number of employed (m
Unemployment in %

3,5

3,0

25
2,5
N

2,0

1,5

1,0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Reuters Ecowin

Modest private-sector lending
• Lending growth has slowed sharply. This indicates that banks
are still reluctant to grant loans, but also that the demand for
loans is low.
• So long
l as aggregate llending
d remains this
h llow, private consumption and
d the
h
housing market will be impeded.
 Improvement in the
housing market
• The stabilisation in the housing market happened faster and
was more convincing than predicted. However, progress cannot
continue unless mortgage lending rises also.
• We do not expect consumers to benefit from rising housing prices to the same
extent as in 2009.
Low investment activity
• Corporate investment has fallen sharply, and the investment
ratio is therefore low.
• We expect that investment activity will soon begin to increase
b growth
but h will
ll probably
b bl still
ll b
be moderate.
d
 Things look up for exports
• In line with the improvement of the global economy, the
prospects for exports are gradually improving and the weakness
of the currency is helping too.
The currency y has appreciated
pp but
it is still weak
Interest rates remain at record
low
• The relatively high inflation rate is a dilemma for the Bank of England,
even though it is still temporary factors to a high extent that
have pushed inflation higher.
• We expect thath inflation
fl will
ll ffall
ll ffrom the
h current llevel,
l and
d combined
b d with
h
significant tightening of the fiscal policy, this will enable the BoE to be
hesitant. Therefore, we still assess that the BoE will keep interest rates at the
record-low
record low 0.5% until February 2011.
Strong consolidation of public
finances
fi
• The recession and the fiscal-policy rescue packages have made
budget
g deficits and the g government debt increase drastically.
y
• Therefore, the government has presented a comprehensive savings plan aimed
to bring the public finances back on a sustainable track. This will put a damper
on the UK growth prospects.
Disclaimer & Disclosure
Jyske Bank is supervised by the Danish Financial Supervisory Authority.
J k Bank's
Jyske B k' analysts
l are subject
bj to the
h recommendations
d i off The
Th Danish
D i h Securities
S i i Dealers
D l
Association on the handling of conflicts of interest within investment banks.
The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank
does not assume any responsibility for the correctness of the material nor for transactions made
on the basis of the information or the estimates of the research report. The estimates and recommendations
off the
th research
h reportt may be
b changed
h d without
ith t notice.
ti Th research
The h reportt is
i ffor the
th personall use off Jyske
J k
Bank's customers and may not be copied. This report is an investment research report.

Conflicts of interest
Jyske Bank has prepared procedures to prevent and preclude conflicts of interest thus ensuring that analyses
are being
b i preparedd in
i an objective
bj ti manner. These
Th procedures
d h
have b
been i
incorporated
t d in
i th
the b
business
i
procedures covering the research activities of Jyske Markets, a business unit of Jyske Bank.
Read more about Jyske Bank's policy on conflicts of interest at www.jyskemarkets.com
Jyske Bank's analysts may not hold positions in the instruments for which they prepare research reports.
Jyske Bank may hold positions and/or have interests in the instruments for which such reports are prepared.
The analysts receive no payment from persons interested in individual research reports.
reports

The first publication date of the research report

See the front page. All prices stated are the latest closing prices before the release of the report, unless
otherwise stated.

Financial models
Jyske Bank uses one or more models based on traditional econometric and financial methods. The data used
are solely data available to the public.

Risk
Ri k
Investment may involve risk, so assessments and recommendations, if any, in this research report may
involve risk. See the research report for an assessment of risk, if any.

Good advice
The future and historical returns estimated in the research report are stated as returns before costs since
returns after costs depend on a number of factors relating to individual customer relations, custodian charges,
volume of trade as well as market-, currency- and product-specific factors.