March 2010 - Nick Parsons, National Australia Bank
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March 2010 - Nick Parsons, National Australia Bank

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The March first Friday welcomed guest speaker Nick Parsons, Head of Markets Strategy Europe for National Australia Bank Limited, the parent company of both Clydesdale Bank and Yorkshire Bank.

The March first Friday welcomed guest speaker Nick Parsons, Head of Markets Strategy Europe for National Australia Bank Limited, the parent company of both Clydesdale Bank and Yorkshire Bank.

Nick is a regular contributor to CNBC, BBC, SKY and Bloomberg news and is frequently quoted by major newspapers and news agencies. Since 2007 he has been a member of the SKY TV Money Panel which is made up of prominent business figures from across various professions.

Nick’s first Friday address focused on the local and general economy, providing an insight into the macro-economic situation in the UK and its impact on UK companies now and in the foreseeable future.

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March 2010 - Nick Parsons, National Australia Bank Presentation Transcript

  • 1. Welcome to first friday Friday 5th March 2010
  • 2. first friday Mohan de Silva Chief Executive first www.wakefieldfirst.com info@wakefieldfirst.com
  • 3. first friday Mick McKigney Head of Policy & Research first www.wakefieldfirst.com info@wakefieldfirst.com
  • 4. Local Labour Market Unemployment: • January 2010 – 9,409, a rise of 625 (i.e. an increase of 7.1%) since December 2009 • 4.7% - below regional (5.0%) but above national average (4.3%) Vacancies: • January vacancies – 2,509 (a fall of 195 since December 2009) • 6,900 less vacancies than job seekers www.wakefieldfirst.com info@wakefieldfirst.com
  • 5. Unemployment Trends Unemployment Trends 5.5 5.0 Wakefield 4.5 Yorkshire & the Humber %of Unemployed 4.0 Great Britain 3.5 3.0 2.5 2.0 1.5 1.0 5 6 6 6 07 7 -07 08 8 -08 09 9 -09 c -0 r- 0 g-0 c -0 pr- g-0 ec pr- g-0 ec pr- g-0 ec De Ap A u De A Au D A Au D A Au D Source NOMIS, February 2010 www.wakefieldfirst.com info@wakefieldfirst.com
  • 6. Vacancy Trends Wakefield Claimants and Vacancies, 2008-2010 10000 9000 8000 Claimants 7000 Total Vacancies 6000 5000 4000 3000 2000 1000 0 09 10 08 09 8 08 09 09 08 09 8 9 -0 -0 -0 n- n- r- l- l- p- p- v- v- ar ay ay Ju Ju Ma Ja Ja No No Se Se M M M Source: NOMIS, 16th December 2009 www.wakefieldfirst.com info@wakefieldfirst.com
  • 7. Business News TV Bike Launched in Wakefield • Carbon neutral advertising concept • Contains 2 x 45’’ plasma screens, plus audio and Bluetooth capacity • Can access all areas • Designed by Wakefield-based Media Displays www.wakefieldfirst.com info@wakefieldfirst.com
  • 8. Business News Scottish & Southern Energy – major investment plans • Seeking planning permission for a £21M carbon capture R&D plant at Ferrybridge Power station • Construction will begin this summer for completion in 2011 • Planning permission sought for a £350M 108MW multi-fuel Combined Heat & Power facility www.wakefieldfirst.com info@wakefieldfirst.com
  • 9. Business News Future Jobs Fund Creates Employment at Groundwork • Secured a £390,000 bid • 20 young people, who were all claiming JSA, have been employed in various positions including administration, finance and landscaping www.wakefieldfirst.com info@wakefieldfirst.com
  • 10. Business News Tangerine Confectionery Secures Contract Down Under • Supplying Australian supermarkets with Taverners and Sherbet Fountains • Pound’s weakness has presented export opportunities www.wakefieldfirst.com info@wakefieldfirst.com
  • 11. Business News Lightsong Media Group Partnership • Digitally-led music company • Confirmed a licensing agreement with Sunshine HQ Ltd, the Sheffield- based music, media and entertainment provider www.wakefieldfirst.com info@wakefieldfirst.com
  • 12. Business News Redhall Group Sees Healthy Profits • Shares leapt due to a big rise in annual profits and a strong order book Carclo Raises £3.7M • Osset-based plastics and lighting group is raising £3.7M through share placing www.wakefieldfirst.com info@wakefieldfirst.com
  • 13. Developments New Council Office Gets Green Light • Four-storey, 123,000 sq ft office block • Will hold 1,100 people • Work will start in summer • Second phase of Merchant Gate development www.wakefieldfirst.com info@wakefieldfirst.com
  • 14. Developments Major Construction Complete at the Hepworth Wakefield • One of the largest purpose-built galleries outside of London • Will house a learning centre, café, shops and 100- seat auditorium • Expected to open in May 2011 www.wakefieldfirst.com info@wakefieldfirst.com
  • 15. Developments Hospital Takes Shape • £240M Wakefield hospital will take patients this summer • The new £60M Pontefract hospital opened for physiotherapy in January • Both hospitals expected to be fully operational by January 2011 www.wakefieldfirst.com info@wakefieldfirst.com
  • 16. Developments First Phase of Nostell Business Park Complete • £2.2M project • 5 energy efficient office suites created www.wakefieldfirst.com info@wakefieldfirst.com
  • 17. Developments Grand Central’s West Ridings service to King's Cross in full test next month • Crew training in April • First services in May 2010 • Trains will call at Pontefract Monkhill, Wakefield Kirkgate, Doncaster & London www.wakefieldfirst.com info@wakefieldfirst.com
  • 18. Events Let’s Work Together • Tackling Youth Unemployment • 26th March, 11.30am – 2.30pm • Guest panel led by Yvette Cooper MP • Navigation Warehouse, Wakefield • FREE to attend www.wakefieldfirst.com info@wakefieldfirst.com
  • 19. Events Wakefield Goes to MIPIM • 16th – 19th March, Cannes • Part of the Leeds City Region exhibition • Promoting the Region as a location for investment • Guest speaker: Sir Bob Kerslake, Chief Executive of the Homes and Communities Agency www.wakefieldfirst.com info@wakefieldfirst.com
  • 20. first friday welcomes Nick Parsons Head of Markets Strategy National Australia Bank Ltd www.wakefieldfirst.com info@wakefieldfirst.com
  • 21. March 5th 2010 Outlook for the UK Economy: No return to boom from bust ’A Presentation for Yorkshire Bank & First Friday, Wakefield’ Nick Parsons Head of Markets Strategy, Wholesale Markets, UK National Australia Bank, nick.parsons@eu.nabgroup,com
  • 22. The Global Context
  • 23. Global economic growth enjoyed a 5 year boom from 2002-06 Annual percentage change 6 5 4 Average 1980-2006 3 2 1 0 1986 1990 1994 1998 2002 2006 2010 Source: IMF WEO ● From 1986-2006, the global economy grew on average around 3.4% per annum ● Beginning in 2002, growth accelerated and reached a high of 5.1% in 2005. ● The slowdown in 2008 took growth closer to its long-term average.
  • 24. Global economic growth collapsed in 2009 Annual percentage change 6 5 4 3 2 1 0 1986 1990 1994 1998 2002 2006 2010 Source: IMF WEO ● Data released since the onset of the global financial crisis reveal an output decline of unprecedented speed, scale and regional synchronisation for the post-war period. ● Industrial production declined by over 15% from Q3 2008 to Q2 2009. ● Synchronized downturn seen across OECD and emerging market economies.
  • 25. Global economic growth set to rebound in 2010 Annual percentage change 6 5 Forecast 2010 4 3 2 1 0 1986 1990 1994 1998 2002 2006 2010 Source: IMF WEO, NAB ● Massive co-ordinated programme of fiscal and monetary stimulus will bring a return to growth in 2010 ● Though the rebound is impressive, actual growth rate will still be below average of last 25 years. ● Recovery will be led by China and Asia with those Western economies most reliant on debt-financed consumption still struggling to gain traction from domestic demand.
  • 26. Sharp G10 slowdown in 2009 but growth now picking up across the world Annual average 2006 2007 2008 2009(f) 2010(f) 2011(f) US 2.8 2.0 0.5 -2.7 2.1 2.5 Japan 2.1 2.4 -1.2 -5.3 1.6 2.1 UK 2.9 3.0 0.8 -4.3 0.9 2.5 eurozone 2.9 2.6 0.5 -3.9 1.2 1.5 Canada 3.1 2.7 0.4 -2.7 1.8 2.5 Australia 2.5 4.0 2.4 0.5 2.3 3.7 New Zealand 2.0 3.2 0.0 -1.6 2.3 3.3 China 11.0 11.8 9.5 8.2 9.0 9.0 India 9.9 9.2 7.5 5.6 6.2 6.2 Latin America 5.2 5.4 4.1 4 -2.0 3.4 3.8 World 5.0 4.9 2.9 -1.3 3.2 3.5 Source: National Australia Bank ● China and India grew strongly despite global downturn. Without their contribution, world economy would have shrunk more than 2% in 2009 ● Massive fiscal and monetary policy stimulus will see global growth return in 2010 ● By 2011, global economic growth should be back to the average of the last 25 years.
  • 27. Our forecasts for the UK economic recovery in 2010
  • 28. The long run of continuous UK growth came to a dramatic end in 2008 Export and output-led Debt and property-led 1.50 1.00 0.50 0 -0.50 -1.00 -1.50 -2.00 -2.50 -3.00 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 ● The UK enjoyed 63 consecutive quarters of growth which came to an end in Q2 2008. ● The economy then suffered 6 consecutive quarters of negative growth; making it the longest recession in the post-War period. ● Latest figures released February 26th show the economy grew +0.3% in Q4 2009, meaning the recession has technically ended. Source: Datastream
  • 29. Total loss of output worse than either of the last two recessions 0 1 2 3 4 5 6 7 8 0 -1 -2 June 1990 -3 -4 December 1979 -5 -6 March 2008 -7 Source: Datastream ● In 1979-81, output fell 4.9%. In 1990-92 it fell 2.5% and in 2008-09 it has fallen 6.0%. ● Six consecutive quarters of falling output make 2008-09 the longest and deepest post-War recession. ● We believe (and hope) the UK economy may now have hit bottom.
  • 30. Post-recession recovery will be weaker than last two occasions 3.5 1981 3 2.5 1992 2 2009 1.5 1 0.5 0 0 1 2 3 4 5 6 Source: Datastream ● In the first six quarters from 1981, output rose 3.1%. In 1992 it rose 2.0% and from end-2009 we expect an increase of just 1.7% ● So, after the deepest and longest recession, we now expect a weaker recovery than either of the last two.
  • 31. The shape of UK economic recovery 2009-10 Q1 2009 -2.6% Q2 -0.6% Q3 -0.3% Q4 +0.3% Q1 2010 +0.2% Q2 +0.2% Q3 +0.4% Q4 +0.4%
  • 32. A comparison of the last three UK recessions 2 1 June 1990 0 1 2 3 4 5 6 7 8 9 10 11 12 -1 -2 December 1979 March 2008 -3 Source: Datastream/NAB ● The latter stages of both previous recession have been characterised by a mix of positive and negative growth. ● In 1990-92, growth moved negative after what initially looked like recovery
  • 33. Risks around the central forecast 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 -1 -2 -3 Source: Datastream/NAB ● The risk profile around the central forecast is pretty symmetrical, but this is mostly because the forecast itself is so weak. ● Upside risks centre on UK export performance and corporate profitability driving business investment ● Downside risks centre on weak consumption, the ongoing impact of the credit crunch on loan availability and a rapid fiscal adjustment
  • 34. Even the sharp rebound predicted by HMT will not close trend GDP gap 190 180 2.75% trend 170 160 Actual + Treasury 150 Actual + NAB 140 130 120 110 100 00 02 04 06 08 10 12 14 16 18 20 ● The blue line shows where the economy would be if it grew at the ‘old’ trend rate of 2.75% per year ● Recession lasted 6 quarters, but the UK actually ‘lost’ 2 ½ years of output ● On HM Treasury forecasts, growth will not reach previous trend level over the next 10 years ● We assume the trend rate of growth has slipped to around 2.0 -2.25% but fiscal and monetary stimulus will allow the top end of this range to be achieved.
  • 35. UK Household debt is the highest in the world Household debt as a percentage of disposable income % France Germany 200 Italy Japan United Kingdom United States 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: IMF WEO ● UK household debt is highest in the world and also the highest in history ● Debt to income ratio is more than double Italy’s and more than 50% higher than France and Germany
  • 36. UK’s reliance on wholesale markets 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0 -100 -200 -300 -400 GBP bn -500 -600 -700 UK funding gap between customer deposits and loans which has up to now relied on wholesale markets -800 -900 Source: Bank of England, NAB ● Bank of England data on household and non-financial corporation deposit holdings and lending, including lending to individuals shows the widening gap that has until recently been reliant upon wholesale funding. This grew GBP150bn in 1996 to over GBP800bn. ● Money market paralysis rendered this borrowing impossible – hence the credit crunch
  • 37. UK’s reliance on wholesale markets 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0 -100 -200 -300 -400 GBP bn -500 -600 -700 UK funding gap between customer deposits and loans QE 200bn which has up to now relied on wholesale markets -800 -900 Source: Bank of England, NAB ● Bank of England data on household and non-financial corporation deposit holdings and lending, including lending to individuals shows the widening gap that has until recently been reliant upon wholesale funding. This grew from GBP150bn in 1996 to over GBP800bn and stands today at £319bn ● Money market paralysis rendered this borrowing impossible – hence the credit crunch
  • 38. UK’s reliance on wholesale markets 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0 -100 -200 -300 -400 GBP bn -500 SLS 185bn -600 -700 UK funding gap between customer deposits and loans QE 200bn which has up to now relied on wholesale markets -800 -900 Source: Bank of England, NAB ● Bank of England data on household and non-financial corporation deposit holdings and lending, including lending to individuals shows the widening gap that has until recently been reliant upon wholesale funding. This grew from GBP150bn in 1996 to over GBP800bn and stands today at £319bn ● Money market paralysis rendered this borrowing impossible – hence the credit crunch
  • 39. UK’s reliance on wholesale markets 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0 -100 -200 -300 CGS 94bn -400 GBP bn -500 SLS 185bn -600 -700 UK funding gap between customer deposits and loans QE 200bn which has up to now relied on wholesale markets -800 -900 Source: Bank of England, NAB ● Bank of England data on household and non-financial corporation deposit holdings and lending, including lending to individuals shows the widening gap that has until recently been reliant upon wholesale funding. This grew from GBP150bn in 1996 to over GBP800bn and stands today at £319bn ● Money market paralysis rendered this borrowing impossible – hence the credit crunch
  • 40. The UK Official Budget Forecasts
  • 41. HMT Economic forecasts for the next 3 years ● GDP forecast for 2009 has been revised down substantially and is now -4.75%; the worst in any year since the Great Depression ● 2010 forecast is not too far different from ourselves or the consensus estimate ● 2011 forecast might just be achievable, but in our view looks extremely optimistic.
  • 42. HMT forecasts for public sector borrowing (PSBR) ● Despite worries over the scale of net borrowing, the PBR forecasts are almost exactly unchanged from the 2009 Budget ● Total borrowing over the next 5 years is projected to increase by a staggering £706bn.
  • 43. HMT forecasts for debt and deficits as a percentage of GDP ● Government borrowing is expected to reach 12.6% of GDP in 2009-10, falling to 4.4% by 2014 -15 ● The total stock of government debt is forecast to keep growing from 44.0% in 2008-09 to 77.7% in 2014- 15.
  • 44. HMT economic forecasts behind projections for public finances ● Forecasts for 2011 and 2012 are optimistic but not impossible. ● However, forecasts for 2013 and beyond assume not only that the trend rate of growth is left unchanged at 2.75% despite the financial crisis, but that the UK economy grows 0.5% above this level. ● This looks to us highly implausible.
  • 45. UK National Debt (Gross Liabilities of the National Loan Fund) 1000 800 600 400 200 0 1945 1955 1965 1975 1985 1995 2005 2015 ● Total UK debt currently stands around £700bbn. ● UK GDP is around £1,400bn.
  • 46. Forecast for UK National Debt (Gross Liabilities of the National Loan Fund) 1400 1200 1000 800 600 400 200 0 1945 1955 1965 1975 1985 1995 2005 2015 ● Total UK debt will more than double in the next 5 years, even if Treasury projections for GDP growth prove correct. ● This staggering increase in debt has caused S+P to shift it’s rating on UK to “AAA outlook negative”
  • 47. Implications of possible sovereign downgrade
  • 48. Threat of downgrade increases the need for a deficit reduction programme ● A sovereign downgrade would raise the cost of government borrowing and pressure the currency; threatening a vicious circle of rising interest rates and a falling pound. ● There is thus a requirement for a credible medium-term deficit reduction plan which goes beyond “crossing fingers and hoping for growth” ● At its most basic, this will involve raising revenues and reducing government expenditures. ● On the revenue side this means increasing the tax take, both direct and indirect. ● Revenue raising alone cannot make a meaningful impact on the deficit. A 1pc increase in income tax raises £4bn. A 1pc increase in employees National Insurance raises £4bn. A 1pc increase in employers National Insurance raises £5bn. A 1pc increase in VAT raises £5bn. ● On expenditure, the next Government will need to rein back the growth in spending which has risen in real terms by 3% per annum over the past decade. ● Total Government expenditure in fiscal year 2009-10 is £671bn.
  • 49. UK and US fiscal deficits blow out 2 .5 Forecasts 0 .5 -1 .5 CHF -3 .5 CAD AUD -5 .5 % of GDP NZ -7 .5 EMU -9 .5 US -11 .5 -13 .5 UK avg 93 -02 2008 2009 2010 Source: IMF, National Australia Bank 49
  • 50. 10 year European sovereign bond yields 8 7 Greece 6 5 Ireland Portugal 4 UK France Germany 3 2 Aug 09 Sep Oct Nov Dec Jan 10 Source: Datastream ● Greek 10 year bonds now yield 6.59%; 340bp over comparable German bonds ● Germany is trading at 3.19% ● Six months ago, the spread between highest and lowest was just 167bp but market has now become far more discriminating. Portugal has widened significantly over the last week. 50
  • 51. Conclusions
  • 52. Debt reduction will be a painful experience Other than default, there are two ways to reduce debt: ● Cut expenditure, raise taxes and create structural surpluses. – De-leveraging in the banking system feeds through to households then corporates. – With tax revenues falling, government cuts expenditure leading to ‘debt deflation.’ ● Decrease the real value of debt through hyperinflation – Weimar Republic, Zimbabwe show the costs of this. The UK has experienced three major accumulations and run-downs of government debt in its history. ● From 1795 to 1882 debt peaked at 185% of GDP then down to 30% by 1914. – Sharp cuts in military expenditure combined with healthy growth helped generate surpluses. ● From 1913 to 1933 debt rose to 178% of GDP then down to 141% by 1938. – Debt reduction was slow and limited because growth was weak. Abandonment of Gold Standard allowed the pound to depreciate, reducing real interest rates through inflation spurring growth. ● From 1938 to 1946 debt rose to 252% of GDP then down to 43% by 1980. – Debt reduction was rapid die to austerity measures in 1950s and then inflation. But growth quality was poor.
  • 53. Conclusions ● The UK economy has just suffered its worst post-War recession, with GDP falling a cumulative -6.0%. ● Official and survey data show the economy deteriorated at a slower pace in Q2 and Q3 then grew +0.3% in Q4, allowing the recession to be declared over. ● We expect only a very modest recovery in 2010. Indeed, growth in the whole of 2010 is likely to be only 0.9% and the average rate compared with 2009 will be only +0.5%. ● On HM Treasury forecasts, government borrowing is set to increase by £703bn over the next 5 years. ● Global economic recovery and massive UK public deficit will put upward pressure on interest rates and bond yields in the absence of any credible deficit reduction plan. This does not have to be immediately implemented but it does need to be formulated. ● The Bank of England may cut the interest rate paid on commercial bank reserves (currently 0.5%) in an attempt to stimulate lending and to maintain downward pressure on interest rates. ● The fall in sterling means that UK manufacturers have rapidly regained competitiveness, but an absence of overseas demand is still holding back output. ● The new trend of rate growth for the UK economy is likely to be 2.0 - 2.25%; almost half a percentage point lower than the average over the past decade.
  • 54. Disclaimer IMPORTANT NOTICE: So far as the law and the Financial Services Authority Rules allow, National Australia Bank Ltd ("the Bank") disclaims any warranty or representation as to the accuracy or reliability of the information and statements in this Document. The Bank will not be liable (whether in negligence or otherwise) for any loss or damage suffered from relying on this Document. This Document does not purport to contain all relevant information. Recipients should not rely on its contents but should make their own assessment and seek professional advice relevant to their circumstances. The Bank may have proprietary positions in the products described in this Document. This Document is for information purposes only, is not intended as an offer or solicitation, nor is it the intention of the Bank to create legal relations on the basis of the information contained in it. No part of this Document may be reproduced without the prior permission of the Bank. This Document is intended for Investment Professionals (as such term is defined in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2001) and should not be passed to any other person who would be defined as a private customer by the rules of the Financial Services Authority ("FSA") in the UK, or to any person who may not have experience of such matters. Issued by National Australia Bank Limited A.B.N. 12 004 044 937, 88 Wood Street, London EC2V 7QQ. Registered in England BR1924. Head Office: 500 Bourke Street, Melbourne, Victoria. Incorporated with limited liability in the State of Victoria, Australia. Authorised and regulated by the Financial Services Authority in the UK.
  • 55. first friday Q&A Mohan de Silva Chief Executive first www.wakefieldfirst.com info@wakefieldfirst.com
  • 56. first friday Close Margaret Wood Chair first www.wakefieldfirst.com info@wakefieldfirst.com
  • 57. Thank you first friday www.wakefieldfirst.com info@wakefieldfirst.com