Euroland woes continuing to weigh? The case
for globalisation of UK trade grows
Neil Parker – RBS Market Strategist
June 2012
1
Contents
1. Growth – Euroland to remain the anchor restraining growth?
2. Interest rate rises – When will we see you again?
3. UK growth – waiting for certainty (and a kick start from the BoE)
4. Euroland – recapitalisations and bailouts remain the focus
5. The US – more QE to follow?
6. FX market forecasts
7. The latest Reuters polls
8. Summary
2
Growth – Euroland to remain the anchor restraining growth?
2010 (A)
GDP
2011 (F)
2012 (F)
2013 (F)
US
3.0
1.7
2.5
2.5
Euroland
Euroland
UK
UK
1.9
1.7
2.1
1.4
1.5
1.6
0.7
1.0
-0.2
-0.2
0.6
1.6
0.8
India
8.6
7.0
6.8
7.3
China
10.4
9.2
8.3
8.4
Japan
4.4
-0.7
1.5
1.5
RBS World
5.0
3.5
3.4
3.8
1.8
Source:RBS
US improvements have slowed, although
surveys are generally pointing towards a
continued economic recovery.
Growth in
Asia is expected to slow somewhat in 2012, but this
slowdown is likely to be modest and brief.
Euroland still has many problems, and efforts to
reduce debt and deficit burdens have proven
unconvincing so far.
3
Interest rate rises – When will we see you again?
Policy Rate (%) - end period
2010 (A)
2011 (F)
2012 (F)
2013 (F)
US
0.1
0.1
0.1
0.1
Euroland
1.0
1.0
0.5
0.5
UK
0.5
0.5
0.5
0.5
India
5.3
8.5
7.8
7.0
China
5.8
6.6
6.8
7.3
Japan
0.1
0.1
0.1
0.3
Source:RBS
Rates in the Western world will be rising no time
soon, but eventually rates will have to move higher
to compensate for all the QE.
UK and Euroland
recently fluffed
their lines in
terms of
monetary
loosening.
China rate view
under review
after recent rate
cut. Shows how
worried they are
re the global
economy.
The UK added more QE (another £50bn in Feb)
which may not be the last bout of easing we see
from the central banks
4
UK growth – waiting for certainty (and a kick start from the BoE?)
2010
2011
2012
2013
%y/y
Consumers' expenditure
1.2
-1.2
0.7
1.3
Government consumption
1.5
0.1
1.0
-1.5
Fixed investment
3.1
-1.2
0.7
5.4
GDP
2.1
0.7
0.2
1.9
UK back in recession
in Q1 ‘12
see column for measure
Unemployment rate (%)
7.9
8.1
8.6
8.7
CPI (%y/y)
3.3
4.5
2.9
1.6
Policy rate (%)
0.5
0.5
0.5
0.5
Recession likely to
prove shallow and
short-lived
Source:RBS
The UK survey data has shown signs of
improvement in recent months, but as yet
this has not fed through into official stats.
The UK economy should see and improvement in the
second half of the year, supported by further monetary
loosening and improving credit conditions.
5
UK growth – the domestic problems remain
Public sector taxation & expenditure (% of GDP)
UK consumer spending neither can, nor
should, shoulder the burden of returning
the UK to growth. Arguments suggesting
that the govt should spend more to lift the
UK out of recession also don’t stack up.
50
Total Managed Expenditure
48
Current receipts
46
44
42
40
38
36
Household debt-to-income, %
34
1990
1995
2000
2005
2010
170
15/16
160
UK Real Household Disposable Income, % y/y
150
9
8
140
7
130
6
5
120
4
110
3
2
100
1
0
90
-1
80
-2
-3
60
65
70
75
80
85
90
95
00
05
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
10
6
Euroland – recapitalisations and bailouts remain the focus
2010
2011
2012
2013
-0.4
-0.6
-1.3
-0.1
0.5
-0.2
1.2
0.7
%y/y
Consumers' expenditure
Government consumption
Fixed investment
GDP
0.9
0.5
-0.7
1.9
0.2
0.0
1.5
1.5
see row for measure
Unemployment rate (%)
CPI (%y/y)
Policy rate (%)
10.1
1.6
1.0
10.2
2.7
1.0
11.0
2.3
0.5
11.3
1.5
0.5
Source:RBS
Spain
Now the problem child of
the euro is the Spanish
economy and notably its
domestic banking situation
(the €100bn bailout of the
banks at the weekend is the
4th bailout to be paid).
7
Our latest forecasts for the
Euro zone economy points
to a contraction this year,
with even the likes of
Germany and France
struggling for momentum
The US – more QE to follow?
2010
2011
2012
2013
%y/y
Consumers' expenditure
2.0
2.2
2.3
2.1
Government consumption
0.7
-2.1
-1.7
-0.2
Business fixed investment
4.4
8.8
5.8
7.7
GDP
3.0
1.7
2.3
2.5
see row for measure
Unemployment rate (%)
9.4
8.5
7.7
7.2
CPI (%y/y)
1.6
3.1
2.3
2.3
Policy rate (%)
0.1
0.1
0.1
0.1
Source: RBS
The US economy has printed the strongest growth
of the big 3 Western economies and that is now
showing through in the form of improving labour
market conditions.
8
But, recent figures suggest
firms are holding back as
concerns regarding the
Euroland economy intensify.
FX forecasts – the latest RBS numbers
2012
Q3
Q4
Q1
2013
Q2
GBP/USD
1.57
1.55
1.52
1.50
1.52
EUR/USD
1.29
1.27
1.24
1.21
1.18
GBP/EUR
1.22
1.22
1.23
1.24
1.29
GBP/JPY
129
127
125
125
128
GBP/PLN
5.29
5.19
5.09
5.02
5.15
GBP/BRL
3.14
2.95
2.89
2.85
2.89
GBP/CNY
9.84
9.67
9.48
9.36
9.48
GBP/INR
84.8
80.6
78.3
76.5
76.0
Q3
GBP/USD – heading nowhere in
the remainder of this year, but
risks to the downside remain if
the UK economy doesn’t pick up.
EUR/USD is also set for
improvement in H2 ’12 but
further woes for the euro remain
whilst the crises persist.
forecasts are end period
Some emerging economies may see their
currencies improve against the GBP, but
greater gains are expected against the
USD.
9
10
1.650
1.659
1.708
1.727
1.597
1.589
1.580
1.571
1.641
0
1.689
1
1.633
2
1.671
3
1.624
4
1.652
5
1.615
6
1.633
7
1.606
1 Year GBP/USD
1.615
1.596
1.577
1.559
1.540
1.35
1.562
1.553
1.75
1.521
source: Reuters
1.503
Min
1.545
1.45
1.484
1.50
1.536
1.55
1.465
Mean
1.527
1.60
1.447
RBS
1.518
1.65
1.509
Max
1.428
1.40
1.501
1.70
1.409
1.391
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
FX markets – Reuters polls: GBP/USD
3 Month GBP/USD
9
8
7
6
5
4
3
2
1
0
11
1.327
1.317
1.348
1.362
1.307
1.333
1.256
1.246
1.236
1.226
1.216
1.206
1.196
1.185
1.297
0
1.319
1
1.287
2
1.304
3
1.277
4
1.290
5
1.267
1 Year GBP/EUR
1.276
1.261
1.247
1.232
1.218
source: Reuters
1.204
1.189
1.00
1.175
Min
1.175
1.15
1.160
1.20
RBS
1.165
Mean
1.146
1.25
1.155
1.30
1.132
1.05
1.145
1.35
1.117
1.10
1.103
1.40
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
FX markets – Reuters polls: GBP/EUR
1.45
3 Month GBP/EUR
Max
9
8
7
6
5
4
3
2
1
0
Summary
• Euroland’s troubles continue to act as a drag on global GDP. A solution to the crisis must be found soon, and
must involve all Euroland authorities first and foremost.
• The US economy began 2012 better than expected with more jobs created and better survey data being the key
standouts. Recent figures have suggested a slowdown in activity (most likely because of euro area uncertainty).
• Both the UK and Euroland economies have had a lacklustre start to 2012, with both seeing output falling or
stalling in Q1 ‘2012, after already having reported declines in growth in Q4 2011.
• Interest rates rises remain off the agenda for all economies. More QE to come?
• The USD should do well against the other majors for a few months yet, but further gains are likely to be
driven by expectations of greater Euroland chaos and crisis (and the knock on to risk appetite and international
trade/financial markets).
• The solution to the global growth problem is not more government debt in the West. Instead, the West
should focus on tapping into the faster growing economies of the BRICs and other Eastern, Middle Eastern and
Latin American economies.
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