 |
| Ross Walker, Senior UK Economist at RBS |
They will not be fixed soon. Household debt is too high, the current account deficit is bloated, the fiscal deficit is one of the largest in the developed world and the financial sector is weak. And the question remains over when corporates will start unleashing their sizeable cash reserves. Levels of investment spending remain 3 per cent lower than during crisis-hit 2009.
Given these underlying weaknesses, a tripledip recession seemed the most likely course for the UK at the end of 2012. Twelve months later, the economy is instead set for its fastest growth since the financial crisis – up from 1.4 per cent over the last year to 2.7 per cent in 2014.
The main lesson for economic forecasters in 2013 was that short-term momentum can trump deeper issues and that momentum will gather speed into 2014.
An increasingly solid labour market should underpin rising household income and an upturn in household borrowing. Policies aiding the housing sector will add weight to the recovery. The Bank of England will play its part by keeping policy accommodative. The bank rate will almost certainly remain at 0.5 per cent.
But neither this lax monetary policy nor releveraging by households are obvious ingredients for a medium-term rebalancing of demand or stabilisation of the financial sector. For all the talk of an “export-led recovery”, net trade will at best be neutral and the current account deficit will narrow only marginally. Many of the hard decisions needed to cut the fiscal deficit are likely to be delayed beyond the 2015 general election.
“Recovery 2014” will be largely a story of quantity rather than quality as the UK relies on a rebuilding of consumer debt and a build-up of unsecured credit and mortgage debt. A year ago British households were reducing unsecured debts. Today, unsecured borrowing exceeds income growth.
This should raise concerns about the recovery’s durability. Debt servicing appears sustainable for now, but households will be stretched when the Bank of England starts to unwind its extraordinary monetary policy.
Rates are unlikely to rise until mid-2015 once unemployment crosses the Bank of England’s 7 per cent threshold – probably early that year. The Bank’s monetary inactivism increases the risk that policy remains too loose for too long, given the dangers of an unsustainable build-up in household debt.
Immediately, however, the biggest risk to the economy comes from a potential relapse in either Europe or America.
The coming year will also see political risk resurface. Scotland’s referendum on independence will dominate the headlines but with a likely ‘No’ vote it is the European elections in May 2014 that could prove more volatile for sterling and gilts.
A strong showing by the UK Independence Party would increase the pressure on the Labour Party to follow the Conservatives and commit to a referendum on Britain’s EU membership. The low esteem with which the British currently seem to hold European institutions means there is a serious prospect they will vote to leave.
The implications of the Scottish and European ballots will barely have been digested before the May 2015 general election comes into view. Our experience ahead of the 2010 election is a reminder of how jittery sterling markets can become ahead of an uncertain vote. 2015 looks equally uncertain.
2014 Projections
Growth accelerates to 2.7 per cent from 1.4 per cent in 2013
Unemployment falls to 7.2 per cent from 7.7 per cent (reaching 7 per cent by early 2015)
Fiscal deficit at GBP105 billion (6.4 per cent of GDP) in 2013-14 and GBP90 billion in 2014-15
Current account deficit narrows to 3.4 per cent of GDP from 3.8 per cent
National debt hits 82 per cent of GDP from 79 per cent in 2013
BoE bank rate on hold at 0.5 per cent (first rise in Q3 2015
Disclaimer
This communication has been prepared by The Royal Bank of Scotland N.V., The Royal Bank of Scotland plc or an affiliated entity (‘RBS’). This material should be regarded as a marketing communication and has not been prepared in accordance with the legal and regulatory requirements to promote the independence of research and may have been produced in conjunction with the RBS trading desks that trade as principal in the instruments mentioned herein.
This commentary is therefore not independent from the proprietary interests of RBS, which may conflict with your interests. Opinions expressed may differ from the opinions expressed by other divisions of RBS including our investment research department. This material includes references to securities and related derivatives that the firm’s trading desk may make a market in, and in which it is likely as principal to have a long or short position at any time, including possibly a position that was accumulated on the basis of this analysis material prior to its dissemination. Trading desks may also have or take positions inconsistent with this material. This material may have been made available to other clients of RBS before it has been made available to you and regulatory restrictions on RBS dealing in any financial instruments mentioned at any time before is distributed to you do not apply. This document has been prepared for information purposes only. This document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained herein and RBS and each of their respective affiliates disclaim all liability for any use you or any other party may make of the contents of this document. This document is current as of the indicated date and the contents of this document are subject to change without notice. RBS does not accept any obligation to any recipient to update or correct any such information.
Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. RBS makes no representation and gives no advice in respect of any tax, legal or accounting matters in any applicable jurisdiction. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and make such other investigations as you deem necessary, including obtaining independent financial advice, before participating in any transaction in respect of the securities referred to in this document. This document is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The information contained herein is proprietary to RBS and is being provided to selected recipients and may not be given (in whole or in part) or otherwise distributed to any other third party without the prior written consent of RBS. RBS and its respective affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. This marketing communication is intended for distribution only to major institutional investors as defined in Rule 15a-6(a)(2) of the U.S. Securities Act 1934 (excluding documents produced by our affiliates within the U.S.). Any U.S. recipient wanting further information or to effect any transaction related to this trade idea must contact RBS Securities Inc., 600 Washington Boulevard, Stamford, CT, USA. Telephone: +1 203 897 2700. In Singapore, this marketing communication is intended for distribution only to institutional investors (as defined in Section 4A(1) of the Securities and Futures Act (Cap. 289) of Singapore). In Hong Kong, this marketing communication is intended for distribution only to Professional Investors (as defined in Schedule 1 of the Securities and Futures Ordinance of Hong Kong). Issuers mentioned in any material may be investment banking clients of RBS Securities Inc. and RBS Securities Inc. may have provided in the past, and may provide in the future, financing, advice, and securitization and underwriting services to these clients in connection with which it has received or will receive compensation. Accordingly, information included in or excluded from this material is not independent from the proprietary interests of RBS Securities, Inc., which may conflict with your interests. For further information relating to materials provided by RBS, please view our RBSMarketplace Terms and Conditions: RBSM Terms and Conditions.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal Bank of Scotland N.V., established in Amsterdam, The Netherlands. Registered with the Chamber of Commerce in The Netherlands, No. 33002587. Authorised by De Nederlandsche Bank N.V. and regulated by the Authority for the Financial Markets in The Netherlands.
The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.
Copyright © 2013 The Royal Bank of Scotland plc. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without The Royal Bank of Scotland plc’s prior express consent.
Copyright © 2013 RBS Securities Inc. All rights reserved. RBS Securities Inc. member FINRA (http://www. finra.org) / SIPC (http://www.sipc.org), is a subsidiary of The Royal Bank of Scotland plc. RBS is the marketing name for the securities business of RBS Securities Inc.