RBS 2012 Annual Report Download - page 501

RBS GROUP 2012
499
Economic and monetary environment
It has been noted before that 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 again in 2012 in the major markets in which the Group
operates.
In the UK, growth weakened. Total economic activity, as measured by
gross domestic product (GDP), was flat compared with growth of 0.9% in
2011. At the start of the year, expectations had been more positive, the
consensus forecast for growth having been 0.5%. Yet the year ended
with the economy contracting.
More positively, unemployment fell, from around 8.3% at the turn of the
year to 7.7% towards its end. That helped to offset the continuing
squeeze on the spending power of earnings as wages grew by less than
inflation.
Housing market activity remained subdued. Prices were broadly stable,
some indices showing a rise and others a fall. Any price increases seem
to have been concentrated in and around London.
The Bank of England continued its ultra-loose monetary policy stance.
Although inflation remained above target, the Bank kept interest rates at
0.5%. In fact, its greater concern was that the weak economy would
cause inflation to be too low and in February and July it increased its
asset purchase programme by £50 billion taking the total value of assets
purchased to £375 billion. The Government’s decision to transfer the
coupon payments from the Asset Purchase Facility to HM Treasury,
which will use these proceeds to reduce the stock of Government debt,
has a similar effect to further quantitative easing.
In July, the Bank of England and HM Treasury launched the Funding for
Lending Scheme (FLS). It is designed to boost lending to households and
non-financial firms. Early indications from the Bank’s Credit Conditions
Survey suggested that the supply of credit had expanded towards the
end of the year.
In the United States, GDP growth was slightly stronger at 2.2% compared
with 1.8% in 2011. Uncertainty about how leaders might resolve
immediate and longer-term fiscal challenges weighed on growth during
much of the year.
There was encouraging news on the job market, where unemployment
had fallen to 7.8% in December, and the housing market, where prices
and construction activity started to rise.
However, concerned that the recovery remained too slow to return
unemployment to rates consistent with its mandate to foster maximum
employment, the Federal Open Market Committee changed policy in two
ways. In September it agreed to increase monetary accommodation by
purchasing mortgage-backed securities at a pace of $40 billion per
month. Second, it announced in December it anticipates the Fed Funds
rate remaining exceptionally low as long as the unemployment rate is
above 6.5%, inflation one to two years ahead is expected to be no more
than 2.5% and inflation expectations are well anchored.
Ireland’s GDP grew by 1.3% in the four quarters to Q3 2012 as the
economy continued its slow recovery from deep recession. The export
sector continued to benefit from the boost to competitiveness delivered
by falling real wages.
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 where there is a large foreign-owned sector that remits profits
overseas. GNP increased by 1.2%.
Unemployment averaged more than 14%. At the end of the year house
prices were 4.5% lower than 12 months earlier and around 50% below
their peak. The rate of decline was slower than at any time since 2008
and there were tentative signs that prices were stabilising.
Entering 2012, the greatest economic concern was how problems related
to sovereign debt in the euro zone would be managed. By agreeing the
outline of a banking union, undertaking to purchase sovereign debt to
push down yields and making progress on fiscal rules, European leaders
and the European Central Bank took some steps that are necessary if an
economic and monetary union is to be sustained. At the end of the year
the probability that some of the worse outcomes would be realised had
fallen although they had not disappeared. Despite this progress, euro
zone GDP contracted and unemployment had risen to almost 12% by
December.