The recovery - where/what will lead it? - November 2011 Neil Parker - RBS Market Strategist - The Manufacturer
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The recovery – where/what will lead it?
Neil Parker – RBS Market Strategist
November 2011
1Contents
1. Where’s the growth?
2. Where’s growth likely to be (what might 2020 look like?)
3. Exporting - rebalancing
4. The manufacturing/services mix
5. Exchange rate/interest rate forecasts
6. Regionally speaking
7. Summary of our expectations
2Where’s the growth?
GDP (% y/y)
2009 (A) 2010 (A) 2011 (F) 2012 (F)
US -3.5 3.0 1.7 2.0
Euroland -4.2 1.7 1.6 -0.2
UK -4.4 1.8 0.8 1.1
India
}
6.8 8.7 7.2 7.4
Asia is leading the
China 9.1 10.3 9.4 9.0 charge towards
recovery
Japan -6.3 4.0 -0.5 2.4
RBS World -0.9 5.0 3.7 3.7
Source:RBS
The economic power base is shifting
rapidly from West to East. Growth in Euroland in particular has a growth
Asia, Latin America, the Middle East and problem, with Germany and France
parts of Eastern Europe are the driving unable to compensate for the PIIGS
forces behind global activity. recessions.
The UK, Euroland and US are weighed
down by debt and deficit issues, and a
general overleveraging in the personal
and corporate sectors.
3Where’s growth likely to be (what might 2020 look like?)
GDP ($bn)/country/economy rankings by estimated GDP ($bn)
Canada Russia Export heat
UK map
2010: 1574 (8th) 2010: 1480 (9th)
2010: 2246 (5th)
2020: 9th 2020: 8th
2020: 7th
Euroland
2010: 12149 (2nd)
2020: 3rd
Japan
2010: 5497 (4th)
US
2020: 4th
2010: 14527 (1st)
2020: 1st
Brazil India China
2010: 2088 (6th) 2010: 1729 (7th) 2010: 5879 (3rd)
2020: 6th 2020: 5th 2020: 2nd
source: RBS
4Exporting - rebalancing
50
• The UK has seen export
40
volumes expanding more
rapidly than import volumes,
30 but so far that has been
mitigated by adverse currency
moves.
20
• Export volumes have grown
10 most substantially in Far Eastern
countries, albeit from a low
base.
0
• The engines of growth for the
-10
future means that the UK
should focus attention onto
Asia & Latin America.
-20
• However, Europe and the US
will remain large export markets
-30
2002 2003 2004 2005 2006 2007 2008 2009 2010 (too big to be ignored).
UK EXPORT VOLUMES (GOODS, %y/y)
UK IMPORT VOLUMES (GOODS, %y/y)
Source: T homson Reuters Datastream
5Changing the mix – services versus industry
8
6
Some progress has been
made, but the industrial side of
4 the economy has struggled
recently.
2
0
Changing the mix between
-2 industry and services means
greater focus/support from
banks & government (and a
-4 competitive exchange rate).
-6
-8
The current focus on heavy
engineering, technology, green
-10 energy and exports should
drive employment.
-12
98 99 00 01 02 03 04 05 06 07 08 09 10 11
UK industrial production (%y/y)
UK s ervic es output (%y/y) Source: Datastream
6Exchange rates/interest rates
2011 2012
Q4 Q1 Q2 Q3 Q4
• The GBP is set for some weakness heading into year end (against
GBP/USD 1.55 1.54 1.62 1.65 1.70 the USD), but strength in 2012 as risk appetite returns.
EUR/USD 1.33 1.31 1.36 1.38 1.41
• Asian currencies (CNY, INR & JPY) are generally likely to
GBP/EUR 1.17 1.18 1.19 1.20 1.21 weaken slightly against the GBP over the 2nd half of 2012.
GBP/JPY 121 117 118 124 124 • The risks on the EUR are for a generally weaker currency,
GBP/CNY 9.8 9.7 10.1 10.2 10.4 since the sovereign debt issues may take far longer to resolve
than markets think.
GBP/INR 77.5 74.7 77.8 77.6 79.9
GBP/BRL 2.64 2.62 2.75 2.81 2.89
Policy Rate (%) - end period
forecasts are end period
2009 (A) 2010 (A) 2011 (F) 2012 (F)
Source: RBS
US 0.1 0.1 0.1 0.1
Euroland 1.0 1.0 1.3 1.0
• Global interest rates are headed higher in 2012, albeit modestly. UK 0.5 0.5 0.5 0.5
• Western interest rates are set to remain on hold (or move lower India 3.3 5.3 6.8 6.8
in EUR’s case) as growth is forecasted to remain below trend. China 5.3 5.8 6.6 7.1
• UK & US central banks could do more QE if they deem it Japan 0.1 0.1 0.1 0.1
necessary to foster faster economic growth.. RBS World 2.4 2.7 3.1 3.3
Source: RBS
7The regions – more differences than similarities
• The UK economy was still recording expansion in
output in September (although things seem to have
slowed in October).
• The North West was, in the last month, growing
above the national average.
• The performance of the East of England,
Scotland, Wales and Northern Ireland are the
biggest drag on overall activity levels.
• Levels of activity are insufficient to prompt
significant employment growth that mitigates for
job losses in the public sector.
Source: Markit
8Summary of our expectations
• Growth in the global economy will continue to be led by the regions of Asia, Eastern Europe, Latin
America and the Middle East.
• The strength of growth in these regions is expected to persist with rapid expansion in China, India, Brazil
and Russia likely to bring these economies to ever greater importance in the global economy.
• As a consequence growth in exports to these regions is imperative, but such growth will need to be
preceded by a greater depth of understanding of these markets, including where any potential barriers to trade
may lie.
• Any change in the balance of the UK economy may need to be led by specific incentives supporting
investment in manufacturing, including educational support.
• Interest rates are heading nowhere in the West, but higher in the East.
• The pound may strengthen modestly against the USD & EUR, but this is likely to come only in H2 ’12, and is
predicated on forecasts for stronger UK growth.
• The North West is well placed to grow in 2012, with a heavier emphasis on manufacturing than the
South.
9Disclaimer
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