The economic outlook

Transcription

1 The economic outlook Andrew McLaughlin RBS Group Presentation overview Our long-standing view of the recovery Do we have an inflation problem the MPC s dilemma The Government s economic strategy What it means for you

2 We expected a U-shaped recovery Strong demand Return of macro instability W Goldilocks Returns V Weak supply Strong supply Current position Slow Grind Higher U Deflation L Weak demand The recent recession in context 3 Banking-led recessions Great Depression Duration in years 2 1 Normal recessions Recent recession Output loss as a % of national income

3 UK monetary policy at a crossroads A 9-man committee split 4 ways Below-trend growth vs. above-target inflation Do we have an inflation problem? 6 5 Headline inflation 4 3 Inflation % Ex. VAT and other indirect taxes

4 Is inflation finding its way into wage settlements? Average earnings index (% growth) How much spare capacity is there? Index of real GDP (2005 Q1=100) Trend (OBR)

5 Households: proceed with caution Average secured debt to income, by income (%) 300% 250% 200% 150% 100% 50% 0% 285% 271% 231% 201% 151% 136% 27K 35K 45K 62.5K 87.5K 125K Emergency rate settings adjusted gradually Bank Rate (%) Forecast

6 Government s economic strategy Tighten fiscal policy to help keep monetary policy loose Allow time and support for households to rebuild financial strength Remove corporate sector fears on tax and longterm interest rates Hope that companies spend/invest their surpluses Government s economic strategy in a picture 10% Companies Financial surplus/deficit (% of GDP) 5% 0% -5% -10% -15% Rest of the World Households Government

7 Corporates have deleveraged 70 Net % of CFOs saying balance sheets are Over-leveraged Under-leveraged The capex story so far: a strong rebound from a deep recession Index (start of recession in 100) Recent recession Early 1980s Early 1990s t - 2 t t + 2 t + 4 t + 6 t + 8 t + 10 t + 12 t + 14 t + 16 Current forecast

8 Investment intentions: good but not great Investment intentions Investors want to see companies invest, or else want the money back What investors want to happen to free cash flow Capex Return to shareholders Balance sheet improvement

9 Conclusions We think we are half-way through a U-shaped 5-6 year adjustment Worry about inflation if you see it in wages or believe the true level of spare capacity is minimal Worry about short term growth if you think companies will not invest their surpluses Worry about long term growth if their shareholders take the surpluses and invest them elsewhere A shift from U to W would be terrible for the real economy but something of a boom for restructuring practitioners The economic outlook and its implications for business recovery Derek Sach Royal Bank of Scotland

10 Global Restructuring Trend - As seen from a Bank s Perspective UK Portfolio Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Americas Portfolio Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 EMEA Portfolio Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Asia Portfolio Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Different Regional Trends

11 Large Corporates UK and US Large Corporates vs SMEs Portfolio values in the US and UK decreased substantially last 2 years US case numbers decreased Conversely UK case numbers slightly increased mix change SMEs UK portfolio almost doubled in case numbers and value last 2 years US also increased but less pronounced Implications for Business Recovery - The Insolvency Lag 1990s -- Total Company Liquidations -- All Corporate Insolvencies -- Total Individual Insolvencies 1980s Recession Total 1980s 1980s -- Total Company Liquidations -- Total Individual Insolvencies Recession Total Source - R3 The Insolvency Lag Risks for 2010

12 Implications for Business Recovery GDP - a Global Perspective Nominal GDP - IMF 2010 Country GDP (USDm) Nominal GDP as % of World GDP Pop. as % of World Pop. Nominal GDP as % of E.U. GDP World 61,963, % 100.0% 384.7% European Union 16,106, % 7.2% 100.0% United States 14,624, % 4.5% 90.8% China 5,745, % 19.4% 35.7% Japan 5,390, % 1.9% 33.5% Germany 3,305, % 1.2% 20.5% France 2,555, % 1.0% 15.9% United Kingdom 2,258, % 0.9% 14.0% Spain 1,374, % 0.7% 8.5% Greece 305, % 0.2% 1.9% Portugal 223, % 0.2% 1.4% Ireland 204, % 0.1% 1.3% Decision Making at Company Level Viability? NO YES Insolvency Changes needed to be viable Can it be done? NO YES Exit Action

13 A Flooring Company, Midlands Commercial flooring contractor and installer operating throughout the UK 2008 EBITDA 4.2m 2010 EBITDA 0.9m 7.5m of bank lending; 4.9m of VC loan notes; 3.4m of MD loan notes Bank faced a potential 6.5m write-off if no restructure agreed; 42 employees would loose their jobs Restructuring Actions & Result VC agreed to write-off loan notes, and equity stake reduced from 33% to 5% MD agreed to write-off loan notes RBS agreed to write-off 2m in a debt-for-equity swap 20% equity stake All parties agreed to share the pain and support the business through the downturn Business well-run but overleveraged when recession took hold If business returns to pre-recession profits (expected), RBS will recover write-off in full through equity stake.

14 Haulage Firm, Scotland Haulage firm employing approx 60 employees Operating losses and negative cashflow as fuel costs escalated and a major contract was lost 4.8m of bank lending EBITDA declined 34% 2008 to 2009 leading to negative cashflow and inability to meet liabilities Restructuring Actions & Result Significant operational de-gearing and business refocus: relocation of main site to leased premises, closed depots, reconfiguration of warehouses, sale of surplus vehicles, review of all customer contracts Lower turnover but higher profitability business Short term capital holiday until company stabilised Company fully supported throughout Facilities can now be serviced and company is de-gearing

15 Keep in touch Internet Social Disclaimer This material is published by The Royal Bank of Scotland plc ( RBS ) which is authorised and regulated by the Financial Services Authority for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives ( Securities ). It should not be reproduced or disclosed to any other person, without our prior consent. This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information. This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information.