North Hants June 2011

The UK and World Economy: Global boom, domestic gloom ’ A Presentation for clients in Yorkshire’ Nick Parsons Head of Research UK and Europe, Global Head FX Research National Australia Bank, [email_address] June 16-17 th 2011

[object Object],[object Object],[object Object],[object Object],World Source: Bloomberg, National Australia Bank Research 2010 Global economic league table (GDP USD millions) 1 United States 16,106,896 11 India 1,430,020 2 China 5,745,133 12 Spain 1,374,779 3 Japan 5,390,897 13 Australia 1,219,722 4 Germany 3,305,898 14 Mexico 1,004,042 5 France 2,555,439 15 South Korea 986,256 6 United Kingdom 2,258,565 16 Netherlands 770,312 7 Italy 2,036,687 17 Turkey 729,051 8 Brazil 2,023,528 18 Indonesia 695,059 9 Canada 1,563,664 19 Switzerland 522,435 10 Russia 1,476,912 20 Belgium 461,331

Advanced economies are no longer driving global GDP growth ,[object Object],[object Object],[object Object],[object Object],World Source: IMF WEO, National Australia Bank Research - 4 - 2 0 2 4 6 8 10 1980 1987 1994 2001 2008 Emerging and developing economies Advanced economies World GDP growth (% y/y) 2015

Asia and Emerging Markets are driving the global economy ,[object Object],[object Object],[object Object],World Source: Bloomberg, ,National Australia Bank Research 80.0 90.0 100.0 110.0 120.0 130.0 140.0 150.0 160.0 07 08 09 10 Industrial Production (Jan 2007- 100) World Emerging markets Advanced Economies Asia

After sharp G10 slowdown in 2009, growth now picking up across the world ,[object Object],[object Object],[object Object],[object Object],World Source: National Australia Bank Research Annual Average 2007 2008 2009 2010 2011 (f) 2012 (f) US 2.1 0.4 -2.4 3.1 2.8 3.2 Japan 2.3 -1.2 -5.1 3.1 0.0 3.7 UK 2.6 0.8 -4.3 1.4 1.3 1.8 Eurozone 2.7 0.5 -4.0 1.7 2.1 1.8 Canada 2.5 0.4 -2.7 3.2 2.8 3.0 Australia 4.0 3.1 0.5 3.5 2.1 4.4 New Zealand 3.2 0.0 -1.6 2.8 1.4 3.6 China 11.8 9.5 8.7 10.5 9.3 8.2 India 9.2 7.5 6.8 8.4 8.1 7.4 Latin America 5.4 4.1 -2.0 6.5 5.0 4.0 World 5.0 3.0 -1.1 4.6 4.2 4.2

Post-recession recovery has so far been in line with both of the last two ,[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 0 0.5 1 1.5 2 2.5 3 3.5 1 2 3 4 5 6 1981 1992 2009 0 Cumulative increase (%)

A comparison of the last three UK recessions ,[object Object],[object Object],[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research - 3 - 2 - 1 0 1 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 December 1979 June 1990 March 2008 GDP q/q % change

Risks around the central growth forecast ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research GDP q/q % change -3 - 2 - 1 0 1 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Government deficit and debt drag on growth

UK Debt and Deficits relative to other EU members: the starting point ,[object Object],[object Object],[object Object],[object Object],[object Object],United Kingdom Source: European Commission, National Australia Bank Research Maastricht Treaty Limits UK has 3 rd highest deficit/GDP ratio, though total debt is below EU average Gross Debt (% of GDP) 2009 Hungary Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Slovakia Slovenia Spain Sweden UK Euro area Romania - 14.0% - 12.0% - 10.0% - 8.0% - 6.0% - 4.0% - 2.0% 0.0% 0% 20% 40% 60% 80% 100% 120% Fiscal balance (% of GDP) 2009-10 Euro average

UK Debt and Deficits relative to other EU members: the target ,[object Object],[object Object],[object Object],United Kingdom Source: European Commission, National Australia Bank Research

HMT/OBR budget forecasts for public sector borrowing (PSBR) ,[object Object],[object Object],[object Object],United Kingdom Source: HM Treasury, National Australia Bank Research

Peripheral European Bond yields surge as deficits increase ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 2009 2010 2011 0 2 4 6 8 10 12 14 16 18 Ireland UK Greece Germany

UK Consumer Price Inflation on an upward trend for last decade ,[object Object],[object Object],[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50

UK Consumer Price Inflation has been 3% or higher for past 12 months ,[object Object],[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50

UK CPI Forecasts – monthly and annual rates ,[object Object],[object Object],[object Object],[object Object],United Kingdom Source: Office for National Statistics, National Australia Bank Research Item 2009/10 2010/11 monthly annual monthly annual January -0.2% 3.5 +0.1% 4.0 February +0.4% 3.0 +0.8% 4.4 March +0.6% 3.4 +0.3% 4.0 April +0.6% 3.7 +0.8% 4.5 May +0.2% 3.4 +0.3% 4.5 June +0.1% 3.2 +0.1% 4.3 July -0.2% 3.1 -0.2% 4.4 August +0.5% 3.1 +0.3% 4.3 September 0 3.1 +0.2% 4.6 October +0.3% 3.2 +0.3% 4.6 November +0.4% 3.3 +0.1% 4.3 December +0.6% 2.9 +0.5% 3.8

UK employment and unemployment ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 2000 2002 2004 2006 2008 2010 -60 -40 -20 0 20 40 60 80 100 120 140 160 29.5 30.0 30.5 31.0 31.5 32.0 32.5 Total employment (mn, RHS) Monthly change in unemployment

UK average earnings and CPI: the squeeze on real incomes ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -3 -2 -1 0 1 2 3 4 5 6 7 Average earnings CPI

UK consumer confidence recovering but remains fragile ,[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -40 -35 -30 -25 -20 -15 -10 -5 0 5

UK retail sales: slower growth has been a feature of the last decade ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 -4 -2 0 2 4 6 8 10

Stagnant house prices will hit spending through lower equity withdrawal ,[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research - 6 - 4 - 2 0 2 4 6 8 10 - 12 - 8 - 4 0 4 8 12 16 20 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 £ billions % MEW as a % of post - tax income (RHS) MEW

Where RICS (Chartered Surveyors) survey leads, other indices will follow ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research % balance 2005 2006 2007 2008 2009 2010 2011 2012 2013 -20 -15 -10 -5 0 5 10 15 -100 -80 -60 -40 -20 0 20 40 60 % change year on year Halifax Nationwide RICS (RHS)

Mortgage approvals have rebounded from lows but historically still weak ,[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 92 94 96 98 00 02 04 06 08 10 12 20 40 60 80 100 120 140 -20 -10 0 10 20 30 40 % change year on year House Prices (y/y % RHS) Mortgage Approvals 000’s

UK Bank Rate at lowest level in History ,[object Object],[object Object],[object Object],United Kingdom Source: Bank of England, National Australia Bank Research 0 2 4 6 8 10 12 14 16 18 1694 1744 1794 1844 1894 1944 1994 per cent

UK real interest rates at lowest level in more than 20 years ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 88 90 92 94 96 98 00 02 04 06 08 10 -4 -2 0 2 4 6 8 10 CPI – 1y Libor CPI – Bank Rate

Official interest rates and bond yields have risen almost everywhere ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 10 year Bond Yields (bp) Greece 16.74% +1226 Ireland 8.60% +729 Portugal 7.08% +770 Australia 5.17% +121 Spain 5.29% +180 Italy 4.79% +109 US 2.96% +38 Norway 3.34% +54 UK 3.24% +32 Germany 3.01% +92 Official Rates Brazil 12.25% +3.50% India 6.25% +1.25% China 5.56% +0.25% Australia 4.75% +1.75% Norway 2.25% +1.00% Canada 1.00% +0.75% Sweden 1.75% +1.50% Germany 1.00% +0.25% UK 0.50% US 0-0.25%

UK Market interest rates rose sharply off lows, but now largely reversed ,[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research 2009 2010 2011 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 2 year 10 year 5 year

Implied rate for 3m libor on December 2012 short sterling futures ,[object Object],[object Object],[object Object],United Kingdom Source: Datastream, National Australia Bank Research J F M A M J J A S O N D J F M A M J 1.50 2.00 2.50 3.00 3.50 4.00 4.50

Market pricing of rate hike at upcoming BoE MPC Meetings ,[object Object],[object Object],[object Object],United Kingdom Source: Bloomberg, National Australia Bank Research MPC Meeting SONIA rate hike probability (%) Jul 0.54% 16% Aug 0.55% 20% Sep 0.56% 24% Oct 0.60% 40% Nov 0.61% 44% Dec 0.63% 52% Jan 2012 0.68% 72% Feb 0.70% 80% Mar 0.72% 88%

Conclusions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Disclaimer IMPORTANT NOTICE: So far as the law and the Financial Services Authority Rules allow, National Australia Bank Ltd ("the Bank") disclaims any warranty or representation as to the accuracy or reliability of the information and statements in this Document. The Bank will not be liable (whether in negligence or otherwise) for any loss or damage suffered from relying on this Document. This Document does not purport to contain all relevant information. Recipients should not rely on its contents but should make their own assessment and seek professional advice relevant to their circumstances. The Bank may have proprietary positions in the products described in this Document. This Document is for information purposes only, is not intended as an offer or solicitation, nor is it the intention of the Bank to create legal relations on the basis of the information contained in it. No part of this Document may be reproduced without the prior permission of the Bank. This Document is intended for Investment Professionals (as such term is defined in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2001) and should not be passed to any other person who would be defined as a private customer by the rules of the Financial Services Authority ("FSA") in the UK, or to any person who may not have experience of such matters. Issued by National Australia Bank Limited A.B.N. 12 004 044 937, 88 Wood Street, London EC2V 7QQ. Registered in England BR1924. Head Office: 500 Bourke Street, Melbourne, Victoria. Incorporated with limited liability in the State of Victoria, Australia. Authorised and regulated by the Financial Services Authority in the UK.

North Hants June 2011

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