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Economic Overview

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Economic Overview Laurence Sanders – PowerPoint PPT presentation

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Title: Economic Overview


1
Economic Overview
  • Laurence Sanders

2
World Economic Growth
  • Sustained recovery
  • USA 4.7
  • Japan 4.2
  • UK 3.7
  • Eurozone 2.0
  • ( second quarter GDP year on year )

3
(No Transcript)
4
The High Growth Economiesgrowth rates
  • China 9
  • India 8
  • Russia 7
  • Australia 4
  • ( latest data, year on year)

5
Commodity Prices
  • Brent Crude ( spot) -
  • 28 / barrel September 2003
  • 42 / barrel September 2004
  • Commodity prices lower of total costs than in
    previous decades
  • UK output prices ( August yoy) - 2.6

6
Economic Cycles
  • Typical UK cycle is now 5 /10 years - there are
    also 25 and 50 year cycles
  • Slowdown in winter 2001/02
  • Currently sustained recovery
  • Strong growth forecast 2005
  • Return to trend growth in 2006 / 07

7
UK Economic Growth 1984 - 2004
8
UK EconomyOverview
  • Economic Growth 3.7
  • Underlying Inflation (CPI) 1.3
  • Average Earnings 3.8
  • Unemployment 2.7
  • (international measure 4.7)

9
UK Economy
  • Gross Domestic Product 1100 billion
  • Fourth largest economy in the world
  • Worlds third largest trading nation
  • Trend Growth 2.7 per annum

10
UK EconomyStructure
  • Gross Domestic Product 1100bn
  • Service Sector 72
  • of which financial sector 24
  • Industry 27
  • of which manufacturing 18
  • Agriculture 1

11
Forecastthe UK economy
2005 2006
Economic Growth 3.0 2.5
Core Inflation 2.0 2.0
Unemployment 4.7 4.9
Average Earnings 4.9 4.6
12
UK Base Rates
  • Set by the Monetary Policy Committee
  • New Target CPI
  • - Consumer Price Index
  • CPI excludes mortgage interest rates
  • CPI target 2 ( plus / minus 1 )

13
UK Base Rate 1997 - 2004
14
ForecastUK Base Rates
End 2004 End 2005 End 2006
Base Rate Forecast 5.00 5.25 4.75
Market View 5.00 5.25 5.00

15
Longer Term Interest Rates
  • Key driving forces
  • International long term rates, notably US
  • G7 growth rates, especially the USA
  • G7 inflation prospects
  • Strong correlation with equities

16
A Comparison of Fixed and Equity Price Movements
17
Period Rate Forecast
  • end 2004 end 2005 end
    2006
  • 2 year 5.30 5.40
    4.70
  • 5 year 5.40 5.50 4.70
  • 10 year 5.50 5.50 4.70

18
The UK Housing Marketkey forces
  • Interest rates - both short and longer tem
  • Personal Disposable Income
  • average earnings
  • unemployment
  • taxation
  • Housing supply

19
The Housing Market andthe UK Economy
  • New houses built - 2003
    180,000
  • Owner Occupation Ratio over 70
  • Forecast Gross Mortgage Lending 2004
    280 billion
  • Forecast Net Mortgage Lending 2004
    110 billion

20
House Price Forecast
  • Average house price ( mortgaged property ) year
    on year

4Q 2004 4Q 2005 4Q 2006
15.0 5.0 5.0
21
Nationwide House Price Index 1996 - 2004
22
Barker Review
  • Additional 120,000 houses a year required for UK
    house inflation equal EEC average
  • of CPI plus 1.1 pa ( very optimistic)
  • Additional 70,000 houses a year reduces UK house
    inflation to CPI plus 3 pa
  • ( more realistic longer term)
  • Several years before balance housing supply/
    demand

23
Miles Review
  • Housing finance industry - in many ways efficient
    and innovative
  • Long term fixed rate mortgages intrinsically NOT
    superior to fixed
  • No compulsion re fixed rate mortgages
  • Greater borrower awareness of interest rate risk

24
Risks to forecasts
  • US and UK recoveries stall
  • Geopolitical problems - impact on oil prices
  • Corporate governance shocks
  • Deflation - in USA or Eurozone

25
Conclusion - the optimistic view
  • Consensus forecast is for stronger growth in 2005
    / 2006
  • Fiscal and monetary policy in G7 geared to long
    term sustainable recovery
  • Enlargement of EEC will stimulate European growth
  • Housing market will be supported by excess of
    demand over supply, economic recovery and
    historically low interest rates
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