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1/12

ECONOMICS RESEARCH UK | 6 April 20

THIS DOCUMENT WAS ORIGINALLY PUBLISHED ON 6 APRIL 2011.

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 10

UK ECONOMIC OUTLOOK

Crunch time for policymakers There is a palpable nervousness about the near-term economic outlook.

Household confidence is low as disposable incomes are being eroded by high

inflation and the governments fiscal austerity measures begin to take effect.

Government demand is due to switch from being supportive of GDP in Q1 to

detracting from it in Q2 (Figure 1). Moreover, we expect the Bank of England to

respond to high inflation by raising the policy rate in Q2.

We believe the fall in GDP in Q4 was a blip rather than a sign of morefundamental weakness, and expect growth to have rebounded in Q1. Even so,

underlying demand momentum remains subdued and we forecast growth of just

1.8% in 2011 as a whole. Even in the medium term we see growth settling at onlyaround 2% per year, well below its long-run average of 2.5%.

The outlook for household demand is especially weak. We expect unemploymentto remain high, limiting growth in pay and generating a second consecutive

annual fall in real disposable income. Although we do not believe that limited

access to bank finance will hinder investment, an investment-led recovery seems

highly unlikely. Goods exports is a bright spot, however, and we expect the

economy to benefit from supportive contributions from net trade.

Inflation is likely to remain well above target throughout 2011, reflectingincreases in indirect taxes and the ongoing effects of high oil prices. We continue

to believe that high inflation will be temporary, and expect it to return close to

target in 2012. However, there is a risk that a persistent adverse shift in theglobal inflation environment leaves the MPC unable or unwilling to engineer the

necessary offsetting weakness in domestic demand, and that above-target

inflation becomes more firmly entrenched.

Figure 1: Fiscal and monetary squeeze expected to start in Q2 11

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

pp q/q

0

1

2

3

4

5

6

7

%Govt. growth contribution

Bank rate, RHS

forecast

Average govt.contribution

Source: Haver Analytics, OBR, Barclays Capital

Chris Crowe

Simon Hayes

Blerina Uruci

www.barcap.com


2/12

Barclays Capital | UK Economic Outlook

15 April 2011 2

Crunch time

Ever since last Junes Budget the question has been raised whether the economy would be

sufficiently strong to withstand the governments fiscal austerity plans. We are about to find

out. The surprise drop in Q4 GDP has added to concerns that the government might be

cutting too far too fast, and household confidence has weakened considerably as the

fiscal adjustment has begun to bite in earnest. Adding to the dismal outlook, persistently

high inflation has not only eroded real incomes, but has led more MPC members to

contemplate tightening policy in spite of still-fragile demand.

Such is the unhappy economic conjuncture, and nervousness about near-term economic

prospects among policymakers, households and companies is palpable. Our expectation

is that the economy will continue to recover but at a lacklustre pace. We believe there is

sufficient momentum in private activity to offset both the contraction in government

demand and moderate increases in interest rates. The demand outlook is subdued,

however, and we expect growth of just 1.8% in 2011 following last-years 1.3% expansion.

Even in the medium term we expect growth to settle at only around 2%, some way below

the economys long-run average rate of 2.5%.

The UKs inflation problem is unlikely to go away in the near future. Pipeline inflationary

pressures show little sign of abating, and we expect CPI inflation to remain around twice the

target rate for the rest of the year. Our central expectation is that it will then fall back close

to the 2% target. However, the global inflation environment appears to have shifted, and

with the MPC hesitant to act there is a risk that above-target inflation becomes more firmly

entrenched in the economy, notwithstanding sluggish demand.

In this article we set out our latest forecasts for GDP growth, inflation and monetary policy.

In addition to our normal quarterly forecasts, which currently extend to Q4 12 (Figure 13),

for the first time we also present our annual forecast to 2015 (Figure 14).

Q4 GDP drop expected to unwind

We estimate that the economy grew by 0.7% q/q in Q1 11, as the impact of the badweather in December on the Q4 outturn was unwound (Figure 2). We anticipate that a

0.6pp q/q contribution came from net trade, thanks to the unwinding of some large erratic

items on the import side in Q4 and continued strong growth in exports. We think that a

bounce-back in consumption demand, following the 0.3% q/q decline in Q4 10, and a

similar recovery in investment, added a further 0.2pp q/q each to overall growth. In

addition, we expect that government consumption made a 0.1pp q/q contribution.

Offsetting these positive forces, we expect some unwinding of the extremely strong

stockbuilding activity during 2010, with lower inventory accumulation subtracting 0.5pp

from q/q growth in Q1.

Our overall estimate for GDP growth in Q1 11 is somewhat stronger than the evidence from

recent business surveys. Our composite PMI points to growth of 0.6% q/q while the BCCsurvey for Q1 maps into growth of just 0.1% q/q. However, these surveys failed to signal

the extent of the weakness in GDP in Q4, and the BCC said its Q1 survey contained a

lingering downward effect from the bad weather in December.

Prospective government cuts

and higher interest rates have

made people nervous about the

economic outlook

We think the economy will

continue to grow, but at a

subdued pace, and we expect

inflation to remain high

We expect GDP to rebound in Q1

as a number of erratic influences

from Q4 unwind


3/12


15 April 2011 3

Consumers wilt under pressure

The outlook for household demand appears very weak. Not only does recent momentum

appear weak consumption is estimated to have grown by just 0.2% y/y in Q4 10 but

households face some severe headwinds. In fact, weak consumer sentiment has been a

major feature of the data in recent months. Consumer confidence indicators began to trend

down in early 2010, and fell further in Q1 11 (Figure 3), and uncertainty about the effects ofthe governments austerity measures seems to have been a key driver. As the implications

of the governments plans become increasingly clear, it is possible that consumer sentiment

will recover. However, it also seems possible that households have not fully factored in the

impact of the proposed measures, in which case we may see further declines in sentiment

in Q2 as job losses and tax increases take effect.

The third GDP release for Q4 10 reported a surprisingly large drop in consumption of 0.3%

q/q, which subtracted around 0.2pp from overall GDP growth. We expect that some of this

weakness reflected the impact of Decembers bad weather, and expect a largely mechanical

recovery in consumption growth to have occurred in Q1. However, we forecast consumption

growth to moderate in Q2, and for growth over 2011 as a whole to be a very weak 0.6%. Over

the medium term we expect consumption growth to accelerate somewhat, reaching around

1.7% in 2015, but still some way below its long-run average of 2.6%.

A key driver of our pessimistic view of consumption is real household income, where we

expect a decline of 0.4% in 2011 following the 0.8% fall in 2010 (Figure 4). Households

have not seen consecutive years of decline in real disposable income since the 1970s.

Although we expect annual household income growth to become positive in 2012, we

anticipate that the rate of growth will remain well below its historical trend as

unemployment stays high, maintaining downwards pressure on wages.

The labour market is likely to be key to the path of consumer spending. As has been well

documented, unemployment did not rise during the recession by anywhere near as much as

might have been expected, given the size of the drop in GDP. However, the corollary is that

we should not expect unemployment to fall rapidly as the economy recovers. In fact, giventhe prospective public sector job cuts, we expect the unemployment rate to remain at

around 8% for the next several years.

Figure 2: Contributions to GDP growth 2010-12 Figure 3: Consumer confidence

-1.0

-0.5

0.0

0.5

1.0

1.5

2010 2011 2012

% q/q Hhld consumption Investment

Stockbuilding Gvt consumption

Net Trade GDP

BarCap

forecasts

0

20

40

60

80

100

120

07 08 09 10 11

Index

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

Nationwide (lhs)

GfK (rhs)

Balance

Source: Haver Analytics, Barclays Capital Source: GfK, Haver Analytics, Barclays Capital

Households face some severe

headwinds and we expect

consumption to be very weak

We expect the unemployment

rate to remain high

for several years


4/12


15 April 2011 4

The planned public sector job cuts are not only material, but contrary to popular belief they

are scheduled to be back-loaded within the governments deficit reduction plan. The latest

forecasts by the Office for Budget Responsibility imply that around 20,000 jobs will be shed

in the current fiscal year, but that this will rise to 90,000 in 2013-14 and 190,000 in 2014-

15. The OBR has downplayed its ability to predict the precise timing of cuts, but this profile

of building public sector job losses explains why we do not forecast the unemployment rate

to decline as GDP growth improves in the medium term.

In fact, we remain concerned that there may be an upside risk to our unemployment profile.

Productivity remains well below pre-crisis levels, particularly in the services sector, which

accounts for more than 80% of total employment. As a result, there is a risk that firms

might decide to shed workers in order to return productivity to closer to pre-crisis levels.

This would push unemployment significantly higher than our current forecast of around

8%. However, so far we have seen few signs of this risk materialising, as surveys of hiring

intentions have shown no marked deterioration.

The housing market outlook is also germane to consumer demand, as both are affected

by household sentiment and because changes in housing wealth appear to be an

important driver of household savings. The recovery in the housing market seen during

the first half of 2010 lost momentum in H2, when prices began to drift downwards

once again. This seemed consistent with the weakening in consumer confidence over

the period. However, there have recently been signs of a renewed pick-up in the

housing market, with the Nationwide house price index registering a couple of months

of unexpected rises and house-builders reporting a surprising strength of interest in

new house purchases. It is too early say whether this is a sign of stronger momentum

or, as seems more likely, normal volatility in the data. We expect the housing market to

stay subdued for the remainder of the year.

Another risk to our consumption forecast is that households could choose to save more.

We currently expect the household savings rate to remain around 5% over the next few

years. However, given that household debt remains high relative to incomes there is an

ongoing risk of an autonomous shift in savings behaviour. Such a shift would materially

weaken our consumption forecast, and therefore the outlook for GDP growth. However, our

base view remains that households will be unwilling to rebuild their savings substantially as

long as real wage growth remains weak.

Figure 4: Real household disposable income Figure 5: Retail sales volumes and values, ex auto fuel

-4

-2

0

2

4

6

8

10

56 60 64 68 72 76 80 84 88 92 96 00 04 08 12

% y/y Forecasts

Avg. 1956-2006

-2.0

-1.5

-1.0

-0.5

0.0

0.51.0

1.5

2.0

2.5

05 05 06 06 07 07 08 08 09 09 10 10 11

% 3m/3m Volumes

Values

Source: Haver Analytics, Barclays Capital Source: Haver Analytics, Barclays Capital

Planned public sector job cuts

are likely to offset private

job creation

If households increase savings

the growth outlook will be

even weaker


5/12


15 April 2011 5

One potentially brighter observation is that although consumer spending has declined in real

terms since 2008, nominal expenditure has increased: at the end of last year household

expenditure was about 3.0% lower than at the start of the recession in real terms, while in

nominal terms it was 6.1% higher. Similarly, the recent retail sales data appear much stronger in

nominal terms than in real terms (Figure 5). This discrepancy which mechanically reflects the

high rate of consumer price inflation has two competing interpretations. The positive spin is

that household demand is more robust than we think, and that if it were not for the rise in VATand higher import prices real spending would have been significantly stronger. The second

interpretation, however, is that households have been slow to adjust their spending as prices

rose, and that real demand will be even weaker in the future. As such, although the strength of

nominal demand may indicate that the consumer outlook is not as downbeat as we think, we are

not yet inclined to take it as an unadulterated positive.

Business investment is a follower, not a leader

Business investment fell by more than a quarter between mid-2008 and the end of 2009,

and remains almost 17% below its peak. There is therefore substantial scope for recovery.

However, firms remain unsure about the strength of future demand, and investment

intentions remain subdued (Figure 6). While manufacturing firms have been performingrelatively strongly on the back of rapid export growth, consumer-facing firms in the services

sector face uncertain trading conditions.

A review of past recoveries shows that investment has typically responded with a lag to the

pick-up in aggregate activity rather than leading it. Figure 7 shows the investment to GDP

ratio in each of the last four recessions relative to its level in the last quarter of the recession.

An investment-led recovery would be characterised by the lines moving decisively into the

north-east quadrant of the chart. This quadrant is, however, almost completely empty.

Concern is often raised that weak bank lending to companies will hold back the recovery.

However, the vast majority of business investment is conducted by large firm that have

substantial access to non-bank sources of finance. Also, historically, business investment

has been closely related to profits growth as retained earnings are also a key source of

finance. Profits growth has been rapid recently as firms have successfully passed on cost

increases, and we expect business investment to recover by around 8% in 2011. More

generally, in the absence of binding financing constraints we would see business

investment as a likely amplifying factor to GDP growth over the next few years.

There is substantial scope for a

recovery in business investment

but we do not expect an

investment-led recovery

Figure 6: Investment intentions remain subdued Figure 7: Investment/GDP, relative to end of recession

-30

-20

-10

0

10

20

30

90 92 94 96 98 00 02 04 06 08 10

% y/y BarCap survey-based estimate

Official estimate

-3

-2

-1

0

1

2

3

4

5

-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12

quarters from end of recession

pp1973-75 1980-81

1990-91 2008-09



6/12


15 April 2011 6

Goods exports strong but net trade otherwise disappointing

The UKs net trade performance has been disappointing. Sterling has been about 25% below

its pre-crisis average in trade-weighted terms since the end of 2008 and yet net trade is

estimated to have subtracted 1pp from GDP growth in 2010. It is important to distinguish,

however, between the behaviour of exports in particular goods exports and that of imports.

Goods export growth has been healthy: export volumes rose by 2.6% q/q in Q4 and by

10.5% y/y. Exports of services have been weaker, up by just 0.4% q/q in Q4 and -1.6% y/y.

This goods-services differential accords with the very different reports emanating from the

manufacturing and service sector surveys, with the former buoyant and the latter subdued.

According to Bank of England estimates, the weakness in services exports relates primarily

to exports of financial services, for which demand has yet to show a significant recovery.

Even so, we expect further firm growth in exports, with growth of close to 9% in 2011,

moderating to around 8% in subsequent years. In the near term this is consistent with

upbeat surveys of export orders while in the medium term it is sustained by our expectation

that global activity will remain solid.

Imports jumped by 3.2% q/q in Q4 10, boosted by an erratic component (aircraft

purchases). We expect a corresponding weakening in imports in Q1 11, leading to a sizableGDP contribution from net trade. More generally, however, import growth was surprisingly

strong throughout 2010, showing little sign that import demand had weakened in response

to higher import prices. The configuration of UK production appears to have made it

difficult or impossible for firms to switch input purchases from overseas to domestic

producers. As domestic demand strengthens which happens only gradually in our

forecast we therefore expect to see import growth picking up, limiting the size of the

overall net trade contribution as the economy recovers.

The government demand squeeze starts

Despite the intense media focus on the effects of government cuts on the economy, the

contribution of government consumption to aggregate demand is not expected to turn

negative until Q4. Government consumption is projected to be a drag on growth for each of

the next four years, however, marking the largest decline since the data began in the 1950s.

As a share of GDP, we project government consumption to drop to 19.6% in 2015, from an

estimated 23.4% in Q1 11, taking it from well above its average over the past 40 years to

significantly below (Figure 8) although still some way above of the low of 17.6% seen in

1998. The projected peak-to-trough fall in the ratio of 4.1pp over six years is larger than the

3.8pp fall over a six-year period in the mid-1990s and the 3.3pp drop over eight years seen

in the 1980s.

The more material effect on GDP in the near term comes from the planned cuts to

government investment. This years cuts in government investment are scheduled to be the

largest in the next five years, and we expect it to fall by nearly 13% in 2011. Although this is

a small component of aggregate demand, typically accounting for only around 2% of GDP,

the size of the drop means the drag on growth is non-negligible, shaving around 0.2-0.3pp

off annual growth this year. Overall, we expect government demand (consumption and

investment) to have made a small positive contribution to growth in Q1, but to make a

negative contribution from this point onwards.

The disappointing net trade

performance reflects weak

services exports and

strong imports

Government demand is due to

switch from being supportive of

demand to subtracting from it


7/12


15 April 2011 7

The inflation problem persists

Inflation was above target for the whole of 2010, and rose to 4.4% y/y in February, driven

largely by rising prices of petrol and food. We expect inflation to close to twice the 2%

target rate until the end of this year, as higher petrol and utility prices and persistently high

services inflation combine with duty increases for alcohol and tobacco (Figure 9). However,

many of the factors underlying the current high rate of inflation the January VAT increaseand other tax changes, higher commodity prices and the delayed impact of the devaluation

of sterling in 2007-08 are expected to drop out of the annual calculation, taking inflation

back closer to target.

Over the medium term we expect that the continued spare capacity in the economy,

combined with the modest series of rate hikes that we expect from Q2 onwards, will exert

downwards pressure on inflation. We expect CPI inflation to return to target by around the

middle of next year, although we expect RPI inflation to fall by less, to around 4%, during

2012, owing to the effect of rising interest rates on mortgage interest costs.

The key risk to this forecast is that inflation expectations, which have been trending

upwards as inflation itself has continually come in ahead of expectations (Figure 10), may

feed into increased wage pressure and pricing behaviour. Although still tentative, there issome evidence that private sector pay settlements have begun to edge upwards (Figure 11)

and business surveys show that firms pricing intentions remain elevated. Should these

developments become more concrete, the MPC can of course respond by tightening policy

more aggressively. However, by this point they would already be behind the curve.

...to the discomfort of the MPC

The policy dilemma facing the MPC is well known: persistent above-target inflation argues

for a tightening in policy but a fragile demand outlook suggests that caution is warranted.

Money market investors expect the MPC to raise Bank Rate by 50bp this year but are

uncertain about timing. At the time of writing, a 25bp rate rise is about 70% priced in for

May and fully priced in for July.

Our hat is hung on a May hike for a number of reasons: We believe that the frequency with

which the MPC has been forced to revise up its inflation forecast has made it increasingly

Figure 8: Government consumption Figure 9: Inflation

16

17

18

19

20

21

22

23

24

55 59 63 67 71 75 79 83 87 91 95 99 03 07 11 15

% GDP

Average

CPI RPI CPI RPI CPI RPI% y/y % y/y % y/y % y/y % y/y % y/y

Jan 10 3.5 3.7 Jan 11 4.0 5.1 Jan 12 2.6 4.2

Feb 10 3.0 3.7 Feb 11 4.4 5.5 Feb 12 2.2 3.8

Mar 10 3.4 4.4 Mar 11 4.1 5.2 Mar 12 2.3 4.0

Apr 10 3.7 5.3 Apr 11 3.9 5.0 Apr 12 2.2 4.0

May 10 3.4 5.1 May 11 4.2 5.2 May 12 2.2 3.9

Jun 10 3.2 5.0 Jun 11 4.2 5.3 Jun 12 2.1 4.0

Jul 10 3.1 4.8 Jul 11 4.4 5.5 Jul 12 1.8 3.7

Aug 10 3.1 4.7 Aug 11 4.3 5.5 Aug 12 1.7 3.6

Sep 10 3.1 4.6 Sep 11 4.7 5.9 Sep 12 1.6 3.6

Oct 10 3.2 4.5 Oct 11 4.5 5.8 Oct 12 1.7 3.7

Nov 10 3.3 4.7 Nov 11 4.2 5.5 Nov 12 1.8 3.9

Dec 10 3.7 4.8 Dec 11 3.4 4.8 Dec 12 1.9 3.9

2010 3.3 4.6 2011 4.2 5.3 2012 2.0 3.8

Oil $ Oil $ Oil $ 111.0112.079.8


We expect CPI inflation to stay

around twice the target rate for

the rest of the year

We expect the MPC to increase

Bank Rate by 25bp in May,

although further weak activity

data may delay tightening


8/12


15 April 2011 8

uncomfortable with its prior view that inflation will fall significantly below target in 2012.

Although many of the causes of the current high rate of inflation are beyond the MPCs

control, the danger is that an environment has been created in which firms believe they can

increase prices at a faster rate either to push through cost increases or to raise margins.

Similarly, there is evidence that some workers are seeking to resist the squeeze in their real

income. Moreover, the fact that the ECB is likely to begin tightening poses risks to UK

inflation via the currency should the MPC remain inactive, and the contrasting behaviour ofthe two central banks provides further ammunition to those who question the MPCs

commitment to the inflation target.

Even so, a May rate hike is far from certain. As noted earlier, recent indicators of household

spending have been weak, and the MPC is likely to be concerned that the extra pressure on

household incomes from higher interest rates might make a bad situation worse. It is easy

to envisage a course for the data that would dissuade a majority of MPC members from

voting for higher rates in May. The markets hesitancy to price fully a May hike therefore

seems appropriate.

Whatever the timing of the first rate increase we believe that volatile data and a subdued

underlying demand outlook mean that interest rates will rise only gradually and in small steps.

We expect Bank Rate to rise to 1.25% by the end of the year and to 2.5% by the end of 2012, and

to reach a neutral level of 4.5% by mid-2014. Although it is possible that rate normalisation is

even more gradual than we forecast, the bigger risk in our view is that rates are increased more

quickly. We think this risk is particularly pronounced in 2012, if growth in the latter part of this

year turns out to be solid and inflation fails to fall as quickly as the MPC expects.

One final concern: the risk of entrenched inflation

Although the MPC has ample scope to tighten monetary policy should the inflation situation

become more worrying, we believe there are reasons for some residual concern about the

medium-term inflation outlook. For much of the period that the Bank of England has been

targeting inflation goods price inflation has been low or negative. This, in turn, largely

reflected a supportive global inflation environment as manufacturing production was

relocated to China, although it was also the result of a strong currency (sterling appreciated

by around 25% in 1996/97, an appreciation that persisted for the following ten years).

Imported inflation was generally negative. Taking goods price inflation as largely

Figure 10: Bank of England inflation expectations survey Figure 11: Wage pressure growing?

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

05 06 07 08 09 10 11

%

1yr

2yr

5yr

0

1

2

3

4

5

6

01 02 03 04 05 06 07 08 09 10 11

% y/y

15

20

25

30

35

40

4550

55

60

65

% bal.

Private Sector Core Earnings

BCC pay pressure (RHS)

REC perm. staff salaries (RHS)

Jan. 11

Source: Bank of England Source: BCC, Haver Analytics

If the recent turnaround in global

inflationary pressures persists,

UK inflation could be higher

for longer


9/12


15 April 2011 9

exogenous, driven by global markets, one might characterise the MPCs actions over this

period as ensuring that domestic demand was sufficiently strong to generate robust

services inflation (Figure 12).

Import price inflation and consumer goods price inflation have turned positive once more. The

recent preponderance of above-target inflation rates could therefore be viewed as the result of a

failure by the MPC to generate weaker inflation in domestic services to compensate for thestrengthening in goods inflation. Indeed, the committees previous actions to support growth

may have embedded excessive inflation expectations in the minds of service sector wage and

price setters, making it all the more difficult to bring inflation down in the sector.

Of course, to some degree this has been deliberate as the factors behind the rise in goods

inflation have largely been viewed by the MPC as one-off factors. However, given the

ongoing strength of global commodity prices, there is reason to believe that we may be

entering a sustained period in which global inflationary forces are more pronounced. If this

is the case, the MPC will need to lean down on domestic demand to weaken services

inflation if the overall inflation rate is to remain on target.

Although this policy prescription is the product of benign logic its implications may be

rather unpleasant. Suppose that consumer goods inflation were to settle at around 2%.

Consumer services inflation would also need to be around 2% for the target to be met.

Consumer services prices tend to evolve at a similar pace to service sector wages, so the

MPC would have to hold services wage inflation at around 2% for a sustained period, about

half of its average pace prior to the recession.

We would question the feasibility of this: the short-term historical relationship between

service sector activity and services wage inflation suggests that the MPC would probably

have to force the sector into recession. As the committee is unable to target services

specifically, having only one interest rate at its disposal, other sectors that are more

sensitive to interest rates such as construction and manufacturing would pay a heavy price

for this adjustment. If the global inflation environment is sufficiently malignant, therefore,

the required adjustment in the domestic economy to keep overall inflation on target mightbe deeply damaging, and politically discomfiting, while failure to act might mean that

above-target inflation becomes embedded in the economy.1

1 See our note Global inflation shift demands an inflation target rethink, 15 March 2011, for more discussion of howthe inflation targeting framework might be adjusted to cope with such a scenario.

Figure 12: Goods and services CPI inflation

-3

-2

-1

0

1

2

3

4

5

6

7

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

% y/yServices

Goods

Source: Haver Analytics, Barclays Capital

The tightening needed to force

domestic services inflation down

may prove politically difficult


10/12


15 April 2011 10

Figure 13: Quarterly Outlook 2010-12

% Change q/q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012

Real GDP 0.2 1.1 0.7 -0.5 0.7 0.6 0.6 0.6 0.6 0.5 0.5 0.5 ... ... ...

Real GDP (saar) 0.8 4.3 2.9 -1.9 2.6 2.2 2.5 2.3 2.5 2.1 2.1 2.0 ... ... ...

Real GDP (y/y) -0.4 1.5 2.5 1.5 2.0 1.5 1.4 2.4 2.4 2.4 2.2 2.2 1.3 1.8 2.3

Private consumption -0.2 0.5 -0.1 -0.3 0.3 0.1 0.3 0.3 0.4 0.4 0.4 0.3 0.6 0.5 1.4

Public consumption 0.5 0.2 -0.5 0.4 0.6 0.3 0.2 -0.3 -0.4 -0.4 -0.4 -0.4 0.8 0.9 -1.0

Investment 3.9 0.1 3.6 -1.8 1.4 1.0 0.9 0.9 1.5 1.5 1.5 1.4 3.0 3.2 5.2

Inventories (q/q cont.) 0.5 0.5 0.6 0.4 -0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.3 0.0

Net exports (q/q cont.) -0.8 0.2 -0.1 -0.5 0.6 0.2 0.2 0.3 0.2 0.1 0.1 0.1 -1.0 0.6 0.8

Nominal GDP 1.9 0.7 1.1 0.5 1.7 1.3 1.2 1.0 1.3 1.2 1.2 1.2 4.2 4.7 4.9

Industrial output 1.1 1.1 0.4 0.7 0.4 0.3 0.3 0.3 0.6 0.7 1.0 1.2 2.0 1.9 2.4

Employment -0.2 0.6 0.6 -0.2 0.3 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.2 0.6 0.5

Unemployment rate % 8.0 7.8 7.7 7.9 7.8 7.8 7.8 7.9 7.8 7.8 7.8 7.8 7.9 7.8 7.8

CPI inflation y/y 3.3 3.4 3.1 3.4 4.1 4.1 4.5 4.0 2.4 2.2 1.7 1.8 3.3 4.2 2.0

Core CPI y/y 2.9 3.0 2.7 2.8 3.2 3.1 3.2 3.1 2.9 3.2 ...

Current account (% GDP) -2.6 -2.1 -2.4 -2.9 -2.3 -2.0 -1.8 -1.5 -1.3 -1.1 -1.0 -0.8 -2.5 -1.9 -1.1

Govt. balance (% GDP)* ... ... ... ... ... ... ... ... ... ... ... ... -9.9 -7.7 -6.1

Bank Rate 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50 2.00 2.50 2.50 0.50 1.25 2.50

* Fiscal year forecasts, 2010 = FY 2010-11

2010 2011 2012 Calendar year average

Source: ONS, Barclays Capital

Figure 14: Annual Outlook 2009-15

Outturn

2009 2010 2011 2012 2013 2014 2015

Output at constant market prices

Gross domestic product (GDP) -4.9 1.3 1.8 2.3 2.0 2.0 2.0

GDP Levels (2009=100) 100.0 101.3 103.1 105.4 107.6 109.7 111.9

Expenditure components of GDP

at constant market pricesHousehold consumption -3.2 0.6 0.5 1.4 1.5 1.6 1.7

Business investment -18.9 2.6 7.8 7.4 6.7 5.7 4.9

General government consumption 1.0 0.8 0.9 -1.0 -1.8 -2.4 -1.9

General government investment 16.9 3.2 -12.7 -8.2 -5.4 -1.8 2.9

Net trade1

0.9 -1.0 0.6 0.8 0.6 0.7 0.6

Inflation

CPI 2.2 3.3 4.2 2.0 1.7 1.8 1.9

RPI -0.5 4.6 5.3 3.8 3.6 3.6 3.5

Labour market

Employment (millions) 29.0 29.0 29.2 29.4 29.5 29.6 29.6

Average earnings2

1.6 1.3 2.2 2.9 3.5 4.5 4.9

ILO unemployment 7.6 7.9 7.8 7.8 7.9 8.1 8.4

Claimant count (millions) 1.53 1.50 1.45 1.46 1.48 1.55 1.62

Memo items (% GDP)

Output gap3

-4.0 -3.0 -2.1 -1.1 -0.7 -0.6 -0.6

PSNB4

11.1 9.9 7.7 6.1 4.5 3.3 2.1

Bank rate (end of period) 0.5 0.5 1.25 2.5 3.5 4.5 4.5

Forecast

Note: 1: contribution to GDP growth, 2: wages and salaries/employment, 3: % potential output, 4: fiscal years; excluding the impact of financial interventions.Source: ONS, Barclays Capital


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