““Happy LandingHappy Landing””

Not Your Typical SlowdownNot Your Typical Slowdown

Andrew Wilson, Deputy Chief Economist,Andrew Wilson, Deputy Chief Economist,Robert Gardner, Senior Economist, Robert Gardner, Senior Economist,

RBS GroupRBS Group

2

Best 3 years in a generation Best 3 years in a generation for global growthfor global growth…………..

World GDP Growth 1975-2006 (Best 3 year average)

0

1

2

3

4

5

6

79/81 89/91 92/94 01/03 98/00 83/85 73/75 95/97 86/88 76/78 04/06

Aver

age

% g

row

th p

er y

ear

Source: IMF

3

Driven by the liquidity Driven by the liquidity ………….... (hokey pokey?).... (hokey pokey?)

G7 Average interest rates

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006

G7 weighted average US

10 Year average

5 Year average

%

4

Which super hero tells us Which super hero tells us the good times wonthe good times won’’t end?t end?

World GDP growth (%)

0.01.02.03.04.05.06.07.08.0

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006Source: IMF

5

The torch must be passedThe torch must be passed………….to a new generation.to a new generation

6

Soft landing on two wheels?Soft landing on two wheels?

US Real GDP Growth (%)

-2-1012345678

Q1

00

Q3

00

Q1

01

Q3

01

Q1

02

Q3

02

Q1

03

Q3

03

Q1

04

Q3

04

Q1

05

Q3

05

Q1

06

Q3

06

QOQAYOY

Long-Term Trend

7

YouYou’’ve shopped ve shopped …………. but not yet dropped. but not yet dropped

Household Spending/GDP (%)

66

67

68

69

70

71

Q1

95

Q1

96

Q1

97

Q1

98

Q1

99

Q1

00

Q1

01

Q1

02

Q1

03

Q1

04

Q1

05

Q1

06

Extra $3,700 spending a year per

household!

Long Run

8

YouYou’’ve borrowed like thereve borrowed like there’’s no tomorrow.....s no tomorrow.....

-3

2

7

12

17

22

27

1929

1944

1959

1974

1989

2005

-5

5

15

25

35

45

55

Household Savings Rate (LHS)

Real Net Wealth US$Bn (RHS)

9

But the asset boom that But the asset boom that made it possible is ending?made it possible is ending?

US House Price Growth (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2000 2001 2002 2003 2004 2005 2006

QOQA YOY

Source: OFHEO

10

Transition 2: Business pulling more weightTransition 2: Business pulling more weight

11

Capacity is tight = need to investCapacity is tight = need to invest

Source: Datastream

Capacity Utilisation Rate (%)

73

74

75

76

77

78

79

80

81

82

83

2000

2001

2002

2003

2004

2005

2006

Hurricanes

Long Term Average

12

Profits high = incentive to investProfits high = incentive to invest

Profit Share of National Income (%)

6

7

8

9

10

11

12

13

14

15

Q1

60

Q3

62

Q1

65

Q3

67

Q1

70

Q3

72

Q1

75

Q3

77

Q1

80

Q3

82

Q1

85

Q3

87

Q1

90

Q3

92

Q1

95

Q3

97

Q1

00

Q3

02

Q1

05

Long Run Average

13

Money is cheap = means to invest Money is cheap = means to invest

US Yield Curve (%)

4.25

4.50

4.75

5.00

5.25

5.50

FedFunds

12M 2Y 3Y 5Y 10Y 30Y

14

After an investment After an investment ‘‘strikestrike’’–– potential for boompotential for boom

Investment Spending (YOY %)

-25

-20

-15

-10

-5

0

5

10

15

Q2

00

Q4

00

Q2

01

Q4

01

Q2

02

Q4

02

Q2

03

Q4

03

Q2

04

Q4

04

Q2

05

Q4

05

Q2

06

Non-Residential Structures

Equiptment & Software

15

Transition 3: Consumers wonTransition 3: Consumers won’’t disappear t disappear

16

Workers share at all time lowWorkers share at all time low

Wage & Salaries/National Income (%)

5051525354555657585960

Q1

60

Q3

64

Q1

69

Q3

73

Q1

78

Q3

82

Q1

87

Q3

91

Q1

96

Q3

00

Q1

05

Long Run Average

17

Labour market very tight so Labour market very tight so incomes are risingincomes are rising

1.0

2.0

3.0

4.0

5.0

6.0

Jan-

02

Jun-

02

Nov

-02

Apr-0

3

Sep-

03

Feb-

04

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug-

06

Unemployment Rate

Wage Growth YOY

%

18

Less at the pump = more in the pocketLess at the pump = more in the pocket

Source: Datastream

Regular Gasoline Prices ($/Gallon)

1.00

1.50

2.00

2.50

3.00

3.50

2003 2004 2005 2006

Hurricanes

Source: Energy Information Administartion

-25%

19

So what do the transitions mean So what do the transitions mean for interest rates?for interest rates?

Inflation (%)

0.0

1.0

2.0

3.0

4.0

5.0

Sep-

01

Feb-

02

Jul-0

2

Dec

-02

May

-03

Oct

-03

Mar

-04

Aug-

04

Jan-

05

Jun-

05

Nov

-05

Apr-0

6

Sep-

06

Fed's Inflation "Comfort Zone"Core CPI

CPI

20

This far and no further?This far and no further?

Fed Funds Rate (%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1990

1991

1992

1994

1995

1996

1997

1999

2000

2001

2002

2004

2005

%

Neutral Range

21

Conclusion: Not your typical slowdown

22

What can you buy for one US worker?What can you buy for one US worker?

40

34

20

9

8

1.3

1

0 5 10 15 20 25 30 35 40 45

India

China

Turkey

Mexico

Poland

United Kingdom

United States

23

Workers to match 1 AmericanWorkers to match 1 American’’s output?s output?

8

7

6

9

6

2

1

0 5 10 15 20 25 30 35 40 45

India

China

Turkey

Mexico

Poland

United Kingdom

United States

24

The real competitiveness gap The real competitiveness gap ainain’’tt as scaryas scary

5

5

3

1

1

1

1

0 5 10 15 20 25 30 35 40 45

India

China

Turkey

Mexico

Poland

United Kingdom

United States

Output per unit of Labour cost

25

You work harder than all You work harder than all your main competitorsyour main competitors

-2 -2 -3 -5 -5

-19 -21 -22-25 -25

-30 -32 -34

-44 -44-48

-54-60

-50

-40

-30

-20

-10

0

Japa

nSpa

inCan

ada

Austra

liaNew

Zealan

dIre

land

United

Kingdo

mBelg

iumIta

ly

Sweden

Denmark

Switzerl

and

Austria

German

yFran

ceNeth

erlan

dsNorw

ay

Dolly Parton Days workedless than US average

26

Wealthier, harder workingWealthier, harder working…………..and happy!..and happy!

RICHER

HAPPIER

27

The declared goal of your The declared goal of your IndependenceIndependence…………..

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of happiness”

28

Access our reports onlineAccess our reports online

Citizensbank.comwww.citizensbank.com/cs/economic_reports.aspx

Rbs.comwww.rbs.com/economics

Contact useconomics@rbs.co.uk

29

A word from our lawyersA word from our lawyers

This material has been prepared for general information purposes only. Nothing in this material should be construed as providing specific legal, tax or investment advice. This material is distributed on the express understanding that, whilst the information in it is believed to be accurate and reliable, it has not been independently verified by us. We make no representation or warranty (express or implied) of any kind, nor do we accept any responsibility or liability of any kind, with respect to the accuracy or completeness of the information contained in this material. This material has been produced solely for the recipient’s use and should not be reproduced or disclosed to any other person without our consent. Any views, opinions, forecasts, valuations or estimates contained in this material are solely those of Royal Bank of Scotland plc (“RBS”) as at the date of our publication of this material and are subject to change without notice. Each recipient of this material should make his own independent valuation of the relevance and adequacy of the information contained in this material and make such other investigations as he deems necessary, including obtaining independent financial advice, before they take any action based in the information contained in this material. Past performance is not necessarily indicative of future results. RBS accepts no obligation to provide advice or recommendations of any sort and accepts no fiduciary duties to the recipient in relation to any information contained in this material. We do not undertake to update this material. This material is issued by RBS which is authorised and regulated by the Financial Services A u t h o r i t y i n a c c o r d a n c e w i t h t h e r e g u l a t o r y r e g i m e a p p l y i n g t o t h e U K .