RBS 2011 Annual Report Download - page 444

442 RBS Group 2011
Economic and monetary environment
When economies are emerging from recessions rooted in high levels of
debt and stresses in the financial system, growth is slower than in the
typical recovery. That was the experience of our major markets in 2011. It
is what we should expect in 2012 and beyond.
In the UK, growth weakened. Total economic activity, as measured by
gross domestic product (GDP), grew by 0.9% compared with 2.1% in
2010. At the start of the year, expectations had been more positive, the
consensus forecast for growth having been 2.1%. Yet the year ended
with the economy contracting.
Unemployment rose sharply, from less than 8% in mid-year to 8.4% in
December. Wage growth was subdued and inflation reduced the
spending power of earnings.
In commercial property, values edged higher, finishing the year up 2%.
Strong performance in prime markets, particularly central London was the
main source of gains. Again, however, momentum slowed towards the
end of the year.
Housing market activity remained subdued. Prices probably fell slightly
although the different measures disagree on the extent of the change.
Against this backdrop, the Bank of England continued its ultra-loose
monetary policy stance. Despite persistently above-target inflation,
interest rates remained unchanged at a record low of 0.5%, the Bank of
England judging elevated inflation to be the result of temporary factors. In
fact, its greater concern was that the weak economy would cause
inflation to be too low and in October, the Monetary Policy Committee
announced that it would increase its asset purchase programme by £75
billion.
In the United States, GDP growth slowed to 1.7% compared with 3.0% in
2010. Unlike the UK, however, growth accelerated as the year
progressed. Unemployment began to fall, although at 8.5% in December
it was high compared with previous recoveries.
Housing remained a drag anchor. Prices fell by around a further 4% and
were almost a third below their peak level. Sales volumes were subdued
and an overhang of properties on which borrowers had defaulted
remained.
Judging that the pace of recovery was too slow to reduce unemployment
sufficiently, the Federal Reserve tried to stimulate the economy in the
third quarter with unconventional measures designed to push down
medium to long-term interest rates. It also said it expected to keep the
Fed Funds rate, its main policy rate, at its current low level at least until
mid-2013.
Ireland emerged from three years of recession. The export sector led
modest growth in the first half of the year, as it benefited from the boost
to competitiveness delivered by falling wages, and stronger demand in
some of Ireland’s main markets. However, the economy appears to have
shrunk again in the second half.
For Ireland, gross national product (GNP) is a better measure of people’s
material well-being. It reflects the income residents receive rather than
the value of the incomes generated in the country, an important
distinction when there is a large foreign-owned sector that remits profits
overseas. GNP fell by an estimated 0.8%.
Unemployment averaged more than 14%. House prices dropped to a
point where they were close to 50% below their peak level at the year
end.
Looming over 2011 and prospects for 2012 was the likelihood that some
euro area governments will not be able to repay in full monies they have
borrowed. Uncertainty about how this problem will be solved damaged
confidence. The policy prescribed for highly indebted countries, fiscal
austerity, made their growth prospects worse because there are no
compensating interest or exchange rate gains in a currency union. By the
end of the year, the euro area was in recession, exacerbating the debt
problem.
Europe’s leaders avoided both a disorderly default and a break-up of the
euro area. However, it will take political will and public support to manage
the immediate risk of defaults and to tackle the root causes of the acute
challenges that have accumulated since the establishment of the single
currency in 1999.
Absent the worst outcome for the euro area - a default that cannot be
contained in one country and its banking system - growth in our main
economies in 2012 will be slow as households and governments continue
to labour under substantial debt burdens.
Additional information continued