The document summarizes the economic outlook and challenges facing the coming economic cycle. It notes that recoveries from financial crises tend to be slow, productivity and corporate profits are recovering but bank lending remains constrained, and governments face large budget deficits and rising debt levels. Inflation risks are balanced between commodity price pressures and spare economic capacity. The UK recovery is strengthening but will remain uneven, with exports supported by a weaker pound but consumer spending and business investment facing headwinds. Public finances deteriorated sharply and fiscal austerity is needed. The UK outlook forecasts sluggish growth over 2010-2011 as unemployment peaks later in 2010.

1. Economic Outlook:
Challenges of the coming cycle
Ian McCafferty
Chief Economic Adviser
CBI

2. The shape of the recovery?
• Pattern of recovery Shocks and Recessions
• U, V, W, √ ? Big 5 financial crises
Financial crises
• Financial recessions External demand shock
linger Oil shocks
• Impact of the financial crisis Monetary policy tightens Output loss % from peak
on long term performance Duration (quarters)
Fiscal policy contraction
• Desynchronised recovery 0 1 2 3 4 5 6 7 8
Source: IMF
% yoy World GDP growth & inflation Rebound from Recession
GDP
6.0 3.0
5.0 2.5
4.0 2.0 ?
3.0 1.5
2.0 1.0
1.0 0.5
0.0 0.0
1995 1997 1999 2001 2003 2005 2007

3. The coming cycle: access to finance
Bank Lending to Private Sector Productivity
%yoy
% yoy
US UK Eurozone
20 Eurozone UK USA 6
5
15
4
3
10
2
5 1
0
0 -1
-2
-5 -3
-4
-10 -5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
%yoy
Corporate Profitability
• Flow of capital from banks still constrained 40
UK US Eurozone
30
• Productivity recovering, and corporate 20
profits being rebuilt 10
0
-10
-20
-30
2001 2002 2003 2004 2005 2006 2007 2008 2009

4. The coming cycle: fiscal challenge
• Large structural budget deficits Structural Budget Deficits in 2010
% GDP
0
• Dramatic increase in govt debt issuance -1
• Concerns over crowding out -2
-3
• Upward pressure on yields -4
-5
-6
• Downgrades and defaults? -7
-8
• Impact on the euro? -9
UK US Japan France Germany
Source: IMF
Net Interest Payments
Government Debt Issuance
% of Fiscal Revenue USD Trillions
16 4.0
2007
14 3.5
2008
12 3.0
2009
2007
10 2.5
2014 2010
8 2.0
6 1.5
4 1.0
2 0.5
0.0
0
OECD North America Eurozone
UK USA Germany
Source: IMF Source: OECD

5. The coming cycle: inflation or deflation?
• Underlying conditions deflationary % yoy CPI Inflation
• Spare capacity – output gaps 6.0 UK US Eurozone
• High unemployment holding down wages 5.0
4.0
• Some inflation concerns in LDCs (India, 3.0
Russia, Turkey) but not widespread 2.0
1.0
• But higher energy and metals prices 0.0
• Policy error? or intention? -1.0
-2.0
• Central Bank independence -3.0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Commodity prices (2003=100) Output Gaps
% of potential GDP
500 Food Metals Oil 3 UK US Eurozone
450 2
400
1
350
0
300
-1
250
-2
200
150 -3
100 -4
50 -5
0 -6
Source: IMF

6. Global outlook 2010-2011
2010-2011: strengthening, but
% yoy World GDP Growth
unbalanced growth
Forecasts
• Recession over, but global economy short of
full health
• Less synchronised recovery
• G3 constrained by legacies of credit
crunch
• EMEs picking up rapidly
Risks/potential weaknesses
• Elevated degree of uncertainty
• Structural imbalances pose threats to World GDP Growth – by Major Region
sustainability of recovery
• Coordinated fiscal tightening 2009 2010 2011
World -0.9 3.7 4.3
• Sovereign debt risk
Advanced economies -3.0 2.1 2.5
• Economic nationalism Developing economies:
• Raw material prices Africa 2.7 3.5 5.0
Latin America -0.5 3.8 4.5
• Financial market volatility China 8.7 9.6 9.2
India 6.7 7.3 8.8

7. Improving UK economic news
% qoq UK GDP
CBI forecast
• Two quarters of positive GDP
• Inventory cycle turning
• Confidence improving
• Housing market stabilised
• Prospects for Q2 look good
• Improving export orders
• Industrial production picking up
• Consumer spending improving % balance Volume of stocks
+15
+10
• Outlook into 2011? +5
0
-5
-10
-15
-20
CBI Industrial Trends Survey
-25
-30
-35
Raw materials Work in progress Finished goods

8. UK: Exports
2010: positive contribution % qoq oya UK exports % q/q oya
• Global economy recovering
Services (rhs)
• Unsynchronised recovery
• EMEs picking up rapidly
• EU12: already emerging from
recession Goods (lhs)
• US: bottoming out
• Weaker sterling will help competitiveness
Manufacturing export orders Jan Sterling EER
2005=100
% balance
110
105
100
95
90
85
80
CBI Industrial Trends Survey 75
70
2004 2005 2006 2007 2008 2009 2010

9. UK: Consumer spending constrained
Consumer spending Savings ratio
%qoq %
11.0
CBI forecast
CBI forecast 9.0
7.0
5.0
3.0
1.0
-1.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
% balance GfK Consumer confidence % Unemployment rate
9.0
8.5
8.0
7.5
CBI Forecast
7.0
6.5
6.0
5.5
5.0
4.5
4.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

10. UK: Investment headwinds
% qoq oya Business investment % qoq oya Residential investment
Constraints on investment Industrial Trends Survey –
% % balance
investment intentions

11. UK public finances
• Dramatic deterioration in fiscal position Public sector net borrowing
% of GDP Structural Cyclical
• 2010-11: spending up to 48%, taxes 14
down to 35% of GDP 12
10
• Structural deficit to hit 9% of GDP 8
6
• UK debt to double to 80% by 2014 4
• Political uncertainty; sovereign debt rating 2
0
at risk; risk to sterling? -2
• Fiscal austerity to come
*figures from 2015/16 onwards are CBI estimates
Growth in planned public spending Net debt
% GDP
Real % rise
Past 4.2% real pa 90.0
Now & future real 1.2% pa 80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2009/10
2014/15
1974/75
1979/80
1984/85
1989/90
1994/95
1999/00
2004/05

12. UK Inflation & Monetary Policy
• CPI inflation forecast to be below target %yoy Consumer prices
by end of 2010 and throughout 2011
• Risks of higher energy and commodity
prices
• Price pressures vs spare capacity
• Monetary policy likely to remain easy
• Unwinding of QE: when and how?
%yoy Output Price of Manufactured Goods £ Billion Reserve Balances at BoE
180
12.0
160
10.0
140
8.0 120
6.0 100
4.0 80
60
2.0
40
0.0 20
-2.0 0
2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Source: Haver Analytics

13. UK overview 2010-11
% yoy
UK GDP
2009 2010 2011
Forecasts
GDP -4.9 1.0 2.5
Household Consumption -3.1 0.7 1.9
Manufacturing output -10.5 1.4 2.3
Consumer Prices 2.2 2.4 1.6
Unemployment (%) 7.6 8.5 8.3
2010/11: Recovery to be sluggish Comparison of recessions and recoveries
Cumulative GDP %
• Few obvious sources of domestic demand change from peak
growth in near term
• Business investment weak
• Fiscal austerity
• Shift in consumer behaviour?
• Sterling weakness to boost exports
• Credit constraints still a concern
• Firmer growth rates after unemployment
peaks in autumn Time in quarters, peak GDP = 1

14. Economic Outlook
Ian McCafferty
Chief Economic Adviser
CBI