Economic Trends, a copy of the presentation delivered by Andrew Johnson, Senior Economist at EEF from the CIM East of England Summer Marketing Conference held on 9 June 2011 at ARU, Chelmsford

1. CIM Summer Marketing Conference
UK economic trends and prospects
Andrew Johnson – Senior Economist

2. OVERVIEW
• Recent UK economic history
• Fiscal challenge
• Growth challenge
• Prospects for 2011
• Looking ahead to 2012
• Key risks

3. Recent economic history
In 2008/09 the UK suffered its worst recession in 80 years
• Output declined by 6% (2009q3)
• Between 2008 and 2009 exports declined by
8.6% and imports by 9.1%
• Unemployment increased by 2.8pp to 7.9%
(2010q1)
• The financial system was brought to the brink
of collapse
Sources:
ONS, OECD

4. 19
56
-6%
-4%
-2%
0%
2%
4%
6%
8%
19 Q
60 1
19 Q1
65
19 Q1
Decline in context
70
19 Q1
75
19 Q1
80
1q
19 Q1
85
19 Q1
Recent economic history
90
4q 19 Q1
95
20 Q1
00
20 Q1
05
20 Q1
10
Q
1
Source: ONS

5. Recent economic history
Latest release in GDP growth, % change in output
Source: ONS

6. Recent economic history
Latest BoE Inflation Report (May), CPI fan chart
Source: Bank of England

7. Recent economic history
Manufacturing, % change in output
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
20 2
20 3
20 4
20 1
20 2
20 3
20 4
q1
20 2
20 3
20 4
q1
q
q
q
q
q
q
q
q
q
q
08
08
08
09
09
09
09
10
10
10
10
11
20
20
1q 4q
Source: ONS

8. Fiscal Challenge
Budget 2010, UK structural deficit 2010 c.f. OECD

9. Fiscal Challenge
Budget 2011, Receipts and expenditure as a % of GDP

10. Fiscal Challenge
Fiscal Mandate
• Achieve cyclically-adjusted (structural) balance
by the end of the forecast period (2015/16)
• Public Sector Net Debt (PSND) falling by
2015/16
• OBR to independently judge whether each
budget means >50% chance of meeting targets

11. Growth Challenge
Rebalancing the economy, contributions to growth annual % change
6
4
2
0
-2
-4
-6
-8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Households Government Investment Inventories Net Trade GDP
Source: ONS

12. Growth Challenge
Manufacturers’ concerns with business environment

13. Growth Challenge
Accumulation of barriers to growth
• Level and complexity of tax system
• Stock and flow of regulations
• Atrophy and distortion of financial sector outside of
banks
• Poor supply and reliability of skills
• Uncertainty on climate and energy policy

14. Growth Challenge
What has the government done?
• Bringing down corp tax, canceled Labour’s NI
rise, introduced Office of Tax Simplification
• Red tape challenge
• Business Growth Fund, Project Merlin
• Demand-led skills system
• Climate change and electricity market reforms

15. Growth Challenge
Plan B?
• Shaky growth is leading to
calls, from some, to move to a
‘Plan B’
• Others endorse govt’s fiscal
plans (IMF)
• Even if fiscal plans
unchanged, plenty of room for
action

16. Prospects for 2011
Domestic side of the economy weak, components of GDP q/q % chg
Households Government Inventories
2.5 Investment Trade GDP
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2010q2 2010q3 2010q4 2011q1
Source: ONS

17. Prospects for 2011
Consumption and investment, forecast % chg q/q
3
2.5
2
1.5
1
0.5
0
2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4
Consumption Investment
Source: Oxford Economics

18. Prospects for 2011
Exports growth has been strong
% Domestic Export
40
30
20
10
0
-10
-20
-30
-40
-50
-60
20 2
q4
20 2
20 4
20 2
20 4
20 2
20 4
q2
20 4
q2
20 4
q2
20 4
q2
q
q
q
q
q
q
q
q
q
q
04
04
05
05
06
06
07
07
08
08
09
09
10
10
11
20
20
20
20
20
Source: EEF Business Trends Survey

19. Prospects for 2011
% change in annual output
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2010 2011 2012
Manufacturing Rest of economy GDP
Source: ONS

20. Looking ahead to 2012
Economy still expected to recover
2.5
2
1.5
1
0.5
0
2011 2012
March April May
Source: HM Treasury survey of independent forecasters

21. Looking ahead to 2012
Interest rates start to rise, Bank rate, %
2.5
2
1.5
1
0.5
0
q1
q2
q3
q4
q1
q2
q3
q4
11
11
11
11
12
12
12
12
20
20
20
20
20
20
20
20
Source: Oxford Economics

22. Key risks
Commodity prices

23. Key risks
Export markets
EU (%chg, lhs) Rest of World (%chg, lhs) Total exports (£m, rhs)
20% 74000
15% 72000
70000
10%
68000
5%
66000
0%
64000
-5% 62000
-10% 60000
2010 Q2 2010 Q3 2010 Q4 2011 Q1
Source: ONS, HMRC

24. Key risks
Access to finance, balance of companies reporting increase
(decrease) in availability of credit
5
0
-5
%
-10
-15
-20
2010q1 2010q2 2010q3 2010q4 2011q1 2011q2
All companies Small companies only
Source: EEF