The degree of uncertainty around the baseline scenario is higher than usual. In particular, we know virtually nothing about the depth and the synchronism of the world recession, as well as on the response of the global policy. This recession was more serious than we anticipated, and the medium-term challenges facing the United Kingdom, will lead to a relapse. Our bottom-up forecasting involves the transformation of some of the closed circles in the “virtuous circle”. The impact caused the welfare of households, provokes an increase in the labor market. Since 2010. this will lead to increased domestic demand without increasing inflation. Descending projection assumes that the sharp increase in savings will cause a slowdown in consumer spending in all areas. Given the early signs of recovery, we anticipate that in the 2 quarter GDP growth will be insignificant, but in 3 and 4 consecutive quarters will be modest (though not fast) growth. In our view, the forecasts that growth in Britain will begin only in the 4 th quarter or early in 2010. Too pessimistic.

Some signs of recovery

We have already seen the first signs of recovery: improving consumer and business confidence, a sharp rise in the index PMI and the real signs of life in the devastated housing markets of Great Britain.

Britain took the good position for a rapid exit from the crisis

After a sharp drop in GDP in the quarter, we expect 1 (slight) positive growth in 2009. (although recent data on low-volume industrial production increased a slight risk of recession). Prospects for a rapid withdrawal of the British recession due to the following:

1) A strong depreciation of the pound in the past: can we talk about a restoration of trade-weighted pound, but that about 20% lower than July 2007. Apparently, the trade deficit has stabilized and is slowly beginning to be corrected after a decade of increases. Real GDP growth at the expense of net exports for five consecutive quarters of a neutral or positive.

2) Payment of interest by households: High levels of household debt, although it is a problem for the UK in the medium term, together with a large number of people that have mortgages with floating rates, means that lower interest rates, in general, helped households.

3) The cycle of movement of stocks: The fall in GDP is due and the situation of stocks in five of the last six quarters. To ensure the growth needed to reduce the amount of stock. We think that the impact of stock to GDP growth during the remainder of 2009 will be either neutral or positive. Synchronous and rapid onset of a recession, for example, can be attributed to the use of such methods of production that involve performance of work “just in time.” Therefore, it can be assumed that the restoration and the subsequent resumption of stock will be as rapid.

4) Waiver of reducing the VAT rate: It is planned that, on 1 January 2010. standard VAT rate will be increased from 15 to 17.5%. This can lead to a temporary shift in consumer spending at the end of this year, which would to some extent contribute to an increase in such costs. Of course, such a measure could slow growth in early 2010.

Medium-term challenges

Despite the recession, the UK has a long way to ensure the long-awaited restoration and maintenance of loans to households (and in the banking sector). As in some other major economies of the vast implications of the package of incentives to encourage the emergence of globally increasing the risk of inflation, the need for fiscal tightening since the recession and the prospects for taking the hard decisions in regard to monetary (and financial) policy.

• Restoring the balance: Speaking of rebuilding the British economy, people tend to imply the removal of the current account deficit, due to relatively low levels of household savings. It is the transition to an economy in which the financial sector and the consumer is playing an equally significant role in the economy, a more important role for the manufacturing sector, business investment and exports. A strong depreciation of the pound, which happened in the past two years, should significantly contribute to the restoration. Also limiting the size of the UK financial sector could help regulate the banking sector. Households are likely to increase savings in subsequent years.
Any significant rebalancing involves changes in the British economy, and now the country was undergoing such a change in the near future, the Bank of England will probably not want to stand in the way of such a recovery.

• Reducing the proportion of borrowed capital: British households were still buried in debts, and the British banking system is still far from full recovery. British households may want to reduce over time the tax burden, and banks are likely to want to reduce the deficit financing (loans – deposits).

For savings and debt repayment by households needed incentives:

1) Households with high debt and, therefore, very sensitive to changes in interest rates. However, it is less important than the stable rates, the easing of lending conditions and a surplus in the labor market. The credit crisis has shaken the faith of households in the fact that all this will continue in the future. 2), it is unlikely that the cost of housing will grow enough to contribute to the increased well-being. 3) The volume of lending are likely to remain small. 4) The levels of negative equity are likely to be those of high and 2009/10g. Banks need a long time to reduce the volume of lending, as well as between consumer loans and consumer deposits, there is a structural imbalance, which over time should be less noticeable. The report on financial stability (Financial Stability Report), published by the Bank of England, reflected this disparity that exists for some time. The report also states, and deficit financing in the amount of consumers 800 billion pounds for major UK lenders. In addition, the funding gap remains, and the banks continue to use the securities guaranteed by the Government.

• Policy changes: Discount rate is at a minimum level since the founding of the Bank of England at 1694g. And, according to the Ministry of Finance, the level of net public sector debt as a percentage of GDP, which is almost twice the previous “limit” set ” sufficient investment rule “(sustainable investment rule). We are unaware of the depth and matching the global recession, particularly given the retaliatory measures taken worldwide. As a result, politicians have to make difficult decisions, given the general uncertainty. Of course, in the future need to tighten monetary and fiscal policies (subject to certain sight restoration), but is difficult to assess the timing and magnitude. And should the likelihood of serious political mistakes than before.

Unstable growth, and vulnerability

What could cause all of these medium-term problems? In spite of that, that fall back into a deep recession, it is unlikely they are (as already planned activities, such as the Olympic Games 2012g. In London) will likely continue to increase the volatility of growth in the coming years. What it will be higher than during the decade preceding the credit crunch. This can be attributed (at least) the following two factors:

1) change the expectations of households and firms: Is it possible, the Bank of England had no illusions about the ability to infinitely “great stability” (eg, first described King as chairman in October 2003.), But households and companies are forced to change their expectations. Recent events could seriously hurt their feelings. If here to add the loss of faith in the possibility of politicians (and credit) to alleviate the situation, economic agents may themselves take actions that will strengthen the cyclical fluctuations in the background of economic instability. For example, companies and households can reduce the cost / investment to increase reserves in the event of economic downturn, rather than take a little longer, or simply to take no action.

2) The reserves, reinforcing cyclical fluctuations: rather than act as a buffer for the business cycle, changes in inventories can enhance fluctuations. We continue to believe that recovery will be insignificant, while it can still be very volatile.

However, the increase in spending in 2010 and beyond is likely to be sluggish, as the coming dramatic change in the behavior of consumers, the main element of which will be striving to save. Aggressive rejection of households from borrowing and the gradual stabilization of the situation over the next few years will ensure that costs will rise slowly proceeds. As a result, the rate of personal savings during that period is likely to grow to 7-10%. Such long-term increase, of course, is a positive factor, but the time is set very badly. The increase will not be as significant to or faster to ensure funding for the huge U.S. budget deficit. And reduced consumer spending United States is hardly offset by a more substantial overall growth in consumption abroad, which will soon be enough to ensure the restoration of equilibrium in the global economy.

Do not pay too much attention to short-term factors. Short-term changes in savings rates, measured in terms of national income and product – a poor indicator of consumer behavior – the data can be distorted and, consequently, are subject to significant changes. Pokzaateli over the past 18 months are clear podvterzhdeniem: the impact of recession on revenues and expenditures, as well as multiple changes in tax rates and transformation approach to the problems caused by economic recession, defined the bumpy road to savings. However, after adjustment for these policy changes, the recent increase in savings rate seems to be incompatible with the assumption that the denial of consumer debt leads to a drastic change in consumer behavior. For example, a refund of taxes in 2008 resulted in an increase in savings rate to over 4% in May of that year, however, after adjustment for these returns (using the calculations of the Bureau of Economic Analysis, and all other things being equal), savings rate fell below zero because consumers do not want to part with their traditional way of life. The situation changed last summer, when the decline in property prices and growing credit crisis triggered a decrease in consumer spending that exceeds the rate of decline in income. In the first five months of 2009, excluding one-time impact of social benefits and additional income, measured rate of personal savings rose to 150 bp When adjusting to account for these factors, the final settlement in 2008, as well as cuts in taxes and transfers within the framework of the 2009 package of incentives, savings rate, as a whole, this year has remained stable and amounted to 4%. In the next few months, the measured savings rate is likely to temporarily drop to 4% on the background of the gradual recovery of consumption and self-destruction of some temporary factors.

In order to evaluate the fundamental changes in consumer behavior, without regard to temporary factors, a commonly used model in which the recorded data on the impact of economic indicators. These models are inherently inaccurate, and the backlog of causal factors it is difficult to assess. Yet, according to the best of them, loss of household in the amount of approximately $ 14 billion, compared with the maximum level of wealth, made two years ago, may have contributed to an increase in savings rates over the past year at 3-4 PM to about 4% – roughly in line with our adjusted saving rates. This is the main reason that tax cuts were not spent in full. The process of rejection of consumer loans, apparently, is in accordance with the schedule, although still located in the very beginning. Household debt service ratio, ie Household interest payments and principal amount of debt in relation to disposable income in the 1 st quarter of this year fell by 75 bp and amounted to 13.5% compared to the two-year maximum, and consumer loans continued to decline. In May, the volume of lending fell by 1.8% over the previous year, a record decline since the economic downturn of 1991.

But the process of non-borrowed funds has only just begun. It depends on the rate of economic growth, house prices and interest rates. It is estimated that by the beginning of 2011, debt service relative to disposable income could decline by another 200 bp and reach 11.5% – this is the basic prediction of the pace of non-borrowed funds. This is consistent with the reduction of debt to income, which is 80-100%, 25-30 PM Consumers will begin to slowly adjust the allocation of its resources, adapting to new conditions, only when they reconcile with the need to rebuild their balance sheets and make more savings. Of course, part of the savings regime is voluntary, but do not forget the growing tendency to deprive the rights of foreclosure on the mortgage – this leads to cancellation of loans and is a fairly painful procedure. Growth rate of credit losses and the impact of this process in the economy are likely to become a major factor in determining the final result.

Cyclical risks exacerbate the impact of non-borrowed funds to the consumer: Employment and earnings continue to decline. A weak employment report for June will not be the last, as evidenced by an increase in the number of repeated applications for unemployment benefits. For example, the rate of open vacancies of private companies has increased in May this year, according to our index of business conditions, the company also increased the planned number of new jobs. Nonetheless, housing prices continue to fall, and the recent ending of the moratorium on the deprivation of the right to redeem the mortgage (in force since February this year) can lead to an increase of free housing (although in California the 90-day moratorium came into force on 14 June). The situation with the availability of credit is improving, albeit rather slowly. Automotive in May to raise the average rate of “credit value” to its previous range of 90%. With respect to mortgage loans, the initial payment is much higher than three or four years ago, reflecting the expectation of further decline in housing prices. Increased energy prices fell sharply, but it has already led to a reduction in discretionary income this spring for approximately $ 50 billion Refinancing mortgage could resume if the decline in interest rates will continue, but the latter as expected by all to the purchasing power was significantly lower than forecasts.

The yield on the U.S. government. Bonds is in the range. Against this backdrop, we expect the yield on the U.S. government. bonds will keep the area from 3% to 3.75%, although by the end of the year could increase to 4% or slightly more. New weakening economy and the consequent decline of interest in risky assets could lead to a reduction in yield for the state. U.S. bonds, especially when reducing inflation fears. However, the increase in yield on 10-year bonds at 70 bp and lowering the point of break-even inflation rate by 50 bp, may reduce the likelihood of this scenario. Upcoming changes in fiscal policy is likely to only exacerbate the uncertainty. New weakening economy would lead to a new debate on the need for additional measures of financial incentives, while improving the economic situation, cut them on the vine.