INVESTORS AND DEVELOPERS IN UK REAL ESTATE
BRITISH
GRI2011
Deutsche Bank
UK Economics:
A bumpy ride
British GRI Conference, 11 May 2011
George Buckley, Chief UK Economist
george.buckley@db.com +44 20 7545 1372
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covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 007/05/2010
A volatile and disappointing recovery
The UK recovery has been disappointing, compared to both the past
and other G7 countries; history has proved that rebounds often
happen, but that recoveries are volatile (as Q4 2010/Q1 2011 illustrate)
102
6
GDP levels, peak = 100
100
Average growth (% yoy) in GDP in the two
years following the last annual fall
5
98
4
LR avg
96
3
94
CAN
GER
JAP
US
92
90
2
FRA
ITA
UK
1
2006
2007
2008
2009
2010
2011
1832
1837
1842
1847
1850
1867
1879
1885
1893
1900
1903
1908
1921
1926
1931
1947
1975
1981
1991
0
88
Sources: Haver Analytics, ONS, Bank of England, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
2
The downside risks to our growth forecasts
6
4
5
4
High debt & weak household incomes pose
key downside risks to the outlook
3
3
2
1
0
2
-1
175
150
Household liabiliies, % nominal disposable
income (2008 figures)
IDS pay settlements, % yoy (rhs)
-3
Levels
125
RPI headline, % yoy (lhs)
-2
1
2004
pp change since 97
100
4.5
75
4.0
50
3.5
25
3.0
2006
2008
2010
Real GDP growth (% yoy), advanced
economies 1790-2009, by govt debt
brackets (% of GDP) - Reinhart & Rogoff
Mean
2.5
0
Median
2.0
-25
IT
GE
FR
JP
US
CA
UK
1.5
1.0
0.5
0.0
Below 30%
30-60%
60-90%
90% & above
Sources: OECD, Reinhart & Rogoff (2010), ONS, IDS, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
3
The key upside risks to our growth forecasts
The stimulus – rates, QE and sterling – has been huge, and the drag
on GDP growth from credit should dissipate going forward
105
6
5
100
4
95
3
90
2
6
4
8
Forecast based on unchanged net lending
and 1% qoq nominal GDP growth
6
2
4
0
2
0
-2
0
-1
-4
Credit impulse (net
lending/GDP, yoy change (lhs)
-2
-6
Real GDP, % yoy (rhs)
-4
1
85
80
75
Sterling trade weighted (lhs)
Real trade weighted (lhs)
Official interest rates % (rhs)
Real official interest rates % (rhs)
-2
-3
70
1999
-4
2001
2003
2005
2007
Income
Pay down debt
Left to spend
2009
Year 1
£100
£40
£60
2011
Year 2
£100
£20
£80
-8
Both series 2qma
-6
1988 1991 1994 1997 2000 2003 2006 2009
Spending up a third, but
we are still “de-leveraging”
Sources: Bank of England, ONS, Haver Analytics, JP Morgan, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
4
Inflation surprises
Just over a year ago the BoE had been expecting that inflation would
fall below 1% in the first quarter of 2011. Commodity prices, the
impact of lower sterling and tax rises have proved them wrong
4
4.5
Latest core inflation
reading, % yoy
4.0
3
Evolution of Consensus Forecasts
for UK CPI inflation, %
3.5
2
3.0
2010
2.5
1
2011
2.0
0
1.5
-1
1.0
UK
CAN
EUR
US
SWI
JPN
2010
2011
Sources: Haver Analytics, ONS, Consensus Economics, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
5
Explaining sticky inflation: price level effects
£ commodity prices (lhs)
Headline input prices (lhs)
Headline output prices (rhs)
CPI (rhs)
50
There have been a number of external,
exogenous, one-off price level effects that
have pushed inflation higher: in particular,
sterling, commodity prices & taxes
40
30
10
8
6
20
10
4
0
2
-10
0
-20
8
Core goods
Services
Overall CPI
CPI inflation, % yoy
6
-30
-2
% yoy rates
-40
-4
2001
4
2003
2005
2007
2009
2011
6
Rates of inflation, % yoy
2
5
CPI ex indirect taxes
0
4
-2
CPI headline
3
-4
2
1997
1999
2001
2003
2005
2007
2009
2011
1
0
2004
2005
2006
2007
2008
2009
2010
2011
Sources: ONS, Haver Analytics, Bloomberg, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
6
What role is the output gap playing?
There is a lot of variation between estimates of the output gap.
Even if we were certain of the size of the output gap, it may
impart less downward pressure on inflation than in the past
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
30
Inverted
axis
40
50
60
70
OECD output gap, % (lhs)
IMF output gap, % (lhs)
CBI % firms below capacity, % (rhs)
1980
1985
1990
1995
2000
2005
80
90
2010
Openness (X+M as % of GDP)
65
60
55
50
45
40
35
30
25
20
15
10
5
0
1960
1970
1980
1990
UK
US
2000
2010
Sources: IMF, OECD, CBI, ONS, Haver Analytics, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
7
Inflation expectations: questions about credibility
BoE Governor Mervyn King has argued that price level effects
should be accommodated, but that second round effects – higher
inflation expectations and wage pressures – should not
2.75
Consensus Forecasts, projections for
inflation 6-10 years ahead, % yoy
(as at October each year)
350
7
Factiva search hits for 'BoE' &
'credibility' & 'inflation' (lhs)
300
6
CPI inflation % yoy (rhs)
2.50
UK
Euro
2.25
2.00
1.75
2005
2006
2007
2008
2009
2010
2011
250
5
200
4
150
3
100
2
50
1
0
0
2008
2009
2010
2011
Sources: Factiva, Consensus Economics, ONS, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
8
Nominal house price fall forecast for 2011
120
+164%
Real UK house prices
2005 Q1 = 100
100
Whether it’s compared to past history or other
countries, the downward correction to house
prices does not look to have run its course yet
-16%
80
+100%
60
+73%
40
20
105
+30%
-34%
-31%
-14%
0
Real house prices (peak=100)
100
1970 1975 1980 1985 1990 1995 2000 2005 2010
95
Late 1980s/early
1990s adjustment
90
250
US (S&P Case Shiller)
UK (Halifax)
85
Current
adjustment
80
200
75
150
70
65
31%
Months after/before peak
100
60
-12
0
12
24
36
48
60
72
Real house price indices, 1987=100
50
1987 1990 1993 1996 1999 2002 2005 2008
Sources: Halifax, Nationwide, ONS, S&P Case-Shiller, BEA, DCLG, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
9
Average affordability is not an encouraging sign
50
Mortgage repayments/disposable income ratio, %
40
Long-run
average
30
20
10
1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
Sources: CML, DCLG, ONS, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
10
Coalition plans to reduce the deficit
12
Deficit outturns and OBR forecasts
Bars are structural, line is total, % of GDP
10
Latest plans are for the coalition government
to cut the structural deficit from 8.9% to 0.5%
of GDP over the parliament - a significant
acceleration relative to the previous
government’s deficit reduction programme
Fcast
8
6
4
2
0
8
50
7
45
6
40
5
35
4
UK
Spain
Ireland
Italy
Portugal
15-16
11-12
07-08
03-04
99-00
95-96
91-92
87-88
83-84
79-80
71-72
55
75-76
-2
Total government
outlays, % of GDP
60
Spreads to bunds
(10Y govvies, % )
3
AUSL
JPN
US
CAN
SPA
GER
POR
GRE
EUR
UK
ITA
AUS
BEL
FRA
30
2
1
0
-1
2008
2009
2010
2011
Sources: OECD, HM Treasury, OBR, ONS, Bloomberg, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
11
The outlook for government spending
4
Real government spending is expected to fall
by 1.3% per year on average from 2011-15.
The direct effect of this will be to knock 0.8pp
off the annual rate of GDP growth. Nominal
spending, however, does not fall in any year
of the forecast horizon
OBR forecasts
(average
2011- 15 =
-1.3% )
3
2
1
0
-1
-2
8
6
Cyclically adjusted primary balance, % GDP
GDP % yoy
Real government spending, % yoy
(average 2000-10 = +2.2% )
-3
2000
2002 2004
2006 2008 2010
2012 2014
4
2
775
0
750
Total managed expenditure, £bn
-2
-4
-6
Average growth
1982-1983 = 3.0%
Average growth
1994-1999 = 3.5%
-8
725
700
675
-10
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
650
625
Grey lines are previous forecasts in
2009 & 2010; dark blue line Mar 2011
600
Sources: OECD, HM Treasury, OBR, ONS, Deutsche Bank
08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
12
DB: Rates to rise in August, but risks of further delay
Justifying an early move
Why waiting might be better
• The recovery continues
• Recovery has been muted
• Headline and core inflation shockingly high
• Euro area/commodities/N Africa/Japan risks
• Inflation expectations have risen
• Risks of fiscal-induced double-dip
• Policy is at “emergency” setting
• Inflation could fall more quickly
60
0.50
Avg hike level
0.25
55
1.125
SONIA rates at BoE
meeting dates, % (grey
shaded bars show when
rate hikes are fully
priced)
1.000
0.00
-0.25
50
Avg cut level
45
-0.50
0.750
-0.75
0.625
-1.00
40
-1.50
35
-1.75
2000
2002
2004
2006
2008
0.500
-1.25
Whole economy PMI (lhs)
Rate changes, % (rhs)
1998
0.875
2010
0.375
0.250
M
J
J
A
S
O
N
D
J
F
M
A
M
J
Sources: Bank of England, Markit, Bloomberg, ICAP, Deutsche Bank
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
13
The End
Questions?
Deutsche Bank
George Buckley (george.buckley@db.com, +44 20 7545 1372), Economics Research, Global Markets. May 2011
14
INVESTORS AND DEVELOPERS IN UK REAL ESTATE
BRITISH
GRI2011