Andrew Pipe - UKBAA Summit presentation

Instructions on how to use the template

The economic outlookAndrew PipeChief EconomistLloyds Banking Group

A pessimist sees difficulty in every opportunity, an optimist sees opportunity in every difficultyWinston Churchill

2016 Lloyds Banking Group plc and its subsidiariesConfidentialCaveat audiens2Past performance is not a guide to future performancePrediction is very difficultespecially if its about the futureNils Bohr, Nobel laureate in physicsIf I seem unduly clear to you, you must have misunderstood what I said.Alan Greenspan, former Chairman of the US Federal Reserve

2016 Lloyds Banking Group plc and its subsidiariesUncertainty reigns3

20002014035kGlobal deaths from terrorism

2016 Lloyds Banking Group plc and its subsidiariesGlobal growth forecasts serially optimistic4Global real-terms gdp growth, % successive IMF forecasts

2016 Lloyds Banking Group plc and its subsidiariesDemographic change key5

forecastYearly growth in working-age population

2016 Lloyds Banking Group plc and its subsidiariesGrowth expected to stay lower than the pre-crisis norm6IMFs global real-terms gdp growth forecasts,CAGR 2016-21, %

2016 Lloyds Banking Group plc and its subsidiariesCHINA a significant risk to stability of global growth7

Private non-financial sector debt% of gdp

UK02-07US02-07Korea92-97Japan85-90Ireland02-07China10-15

100120140160180200220240

Build up in debt in 6 years leading up to financial crisis

2016 Lloyds Banking Group plc and its subsidiariesMARKETS CONCLUDE Interest rates likely to stay low for long810 year government bond yields%

recessionEZ crisis

2016 Lloyds Banking Group plc and its subsidiariesCentral banks distorting financial markets9Net supply of developed market securities $trnTotal net issuanceCentral Bank asset purchasesNET SUPPLY

2016 Lloyds Banking Group plc and its subsidiariesAsset prices high10

Ratio of UK house prices to annual incomes, by region

SouthEastEastRange of other regionsLondon

2016 Lloyds Banking Group plc and its subsidiariesAsset prices not necessarily overvalued with some exceptions11

Mortgage payment for new buyer, % of average annual household income

LondonSouth EastRange of other regions

2016 Lloyds Banking Group plc and its subsidiariesStill a lot we dont know about the post-referendum world121.Who will be Prime Minister

2. Who will be Chancellor

3. Another referendum

4. An early election

5. The stance of fiscal policy6. When will Article 50 be triggered

7. Another Scottish referendum

8. The Northern Ireland response

9. Collateral damage in Europe

10. The eventual trade deal the UK will strike with the EU

2016 Lloyds Banking Group plc and its subsidiariesThe UK economy so far13

2016 Lloyds Banking Group plc and its subsidiariesPound a barometer of expected degree of structural change14EUWTO rulesEU FTAs pendingEEAEU FTAsSterling trade-weighted exchange rateindex

23rd June

-15%

2016 Lloyds Banking Group plc and its subsidiariesBrexit means brexit? - its politics vs economics15EUWTO rulesEU FTAs pendingEU FTAs

UK red-linesImmigration controlsLeave single marketEU positionSeek sector carve-outsAgainst WTO rulesEU cant allow cherry-pickingRequire full trade agreementNot achievable within 2 yearsMight have to be narrow (nb Canada-EU)Need transition agreementLikely to require surrender of red-lines

Freedom to pursue trade deals unilaterally

Leave customs unionUK response

Either Hard exit, or something that looks like no exit for 5-10 years

2016 Lloyds Banking Group plc and its subsidiaries

Short term impact - consumers16Pay growth vs inflation% change from year earlier

Consensus forecastsPay growthCPI inflation

Real pay squeeze

2016 Lloyds Banking Group plc and its subsidiariesHouseholds under pressure17

Cumulative growth in real-terms disposable income, 2002-2015, working age households

-20%-10%0%10%

020406080100Percentile of income distribution

Before housing costs

After housing costs


Short term impact - businesses18Business investment intentions#std deviations from long-term avg.Exchange rate index (rhs)Trade balance(lhs, inverted)UK trade balance% of gdp (inverted)?

DeficitSurplus

2016 Lloyds Banking Group plc and its subsidiariesLonger term impact- EU exit a cure for Dutch disease?19UK export value-added by industry sector% of total

2016 Lloyds Banking Group plc and its subsidiariesLonger term impact - some sectors under threat20

UK industry sector exposure to EU tariffsDairy productsSugar, confectionaryAnimal productsCereals & relatedFruit, veg, plantsClothingOils, fatsLeather, footwearFish Coffee, Tea, spicesTextilesDrinks, tobaccoWood, paperOther agricultureChemicalsElectrical Transport equip.Other machineryOther manuf.

Metals, minerals

EU MFN tariff, 2014

0%10%20%30%40%

% of sectors exports that go to EU

304050607080

Bubble size = sectors share of total UK exports

2016 Lloyds Banking Group plc and its subsidiariesWhat does it all mean?21Large degree of underlying structural change in the economyRebalancing, with (probably) less financial services and more other services and manufacturingChange is

a threat to some

but an opportunity for others

Strengthening case for improving our infrastructureGreat opportunity for exporting outside the EUwhere competitiveness has improved significantlyPotential job-market challengesreduced supply of low-wage workersneed to pay up to recruit global talent Households under continuing financial pressures


THANK YOU

2016 Lloyds Banking Group plc and its subsidiariesConfidential