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UK economic outlook Dimensions of debt conference 30 March 2017

Yael Selfin KPMG Chief Economist

UK outlook

The most immediate change since Brexit has been the fall in Sterling exchange rate Sterling exchange rate 110

2.2

105 2.0

1.8 95 90

1.6

USD/EUR

Index, 2005=100

100

85 1.4 80 1.2 75 70 1.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Effective exchange rate (LHS)

USD per (RHS)

EUR per GBP (RHS) Source: Bank of England

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

3

FTSE 100 8,000

FTSE 100

7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Financial Times



4

Performance is driven by external exposure Performance of KPMG indices since the Brexit vote 130

24% 1.85 125

1.75

KPMG Non-UK50

115

1.65 110 1.55 105 100

US$/GBP

KPMG INDICES

120

1.45

95

-6%

KPMG UK50

90

1.35

-16% 1.25

85

USD to GBP 80 23-Jun

1.15 11-Jul

29-Jul

16-Aug

03-Sep

21-Sep

09-Oct

27-Oct

14-Nov

02-Dec

20-Dec

07-Jan

25-Jan

Source: Data from Bloomberg, Capital IQ and Thomson Reuters Datastream, KPMG analysis.



5

Removing the exchange rate effect changes the picture Performance of KPMG indices since the Brexit vote, rebased in USD 110

KPMG INDICES US$

105

270

4%

100 220

95 90

170

FTSE ALL WORLD US$

7%

85 80

120

75 70 23-Jun

-21% 70 14-Jul

04-Aug

25-Aug

KPMG UK50 $

15-Sep

06-Oct

27-Oct

17-Nov

KPMG Non-UK50 $

08-Dec

29-Dec

19-Jan

FTSE all world $

Source: Data from Bloomberg, Capital IQ and Thomson Reuters Datastream, KPMG analysis.



6

Labour market Unemployment rate and regular pay

6

9 8

5

4

6 5

3 4 2

3 2

Regular pay (LHS)

1

Unemployment rate, %

YoY % change in earnings

7

Unemployment rate (RHS)

1

0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: ONS



7

Unemployment by region Unemployment rate % UK average

7 6 5 4 3 2 1 0

Source: ONS, January 2017



8

Bank of England rates and bond yields UK key interest rates 7 10 Year Bond Yield (%) 3 Month Interbank Lending rate (%)

Annual interest rate, %

6

Official Bank Rate (%)

5

4

3

2

1

0 1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Source: Bank of England



9

Inflation is expected to remain high Consumer Price Index inflation

Forecast 6

Year on year change, %

5

4

3

2

1

0

-1

Source: ONS, KPMG projections



10

Outlook for the UK economy Annual GDP growth scenarios 4 3 Upside

Annual GDP growth, %

2

Main

1

Downside

0

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

-1 -2 -3 -4 -5

Source: ONS, KPMG projections



11

Brexit impact on sectors Sector exposure to EU labour and EU exports 100

Food and drink manufacturing

90

Transport and storage services

Non-food consumer goods manufacturing

80

Exposure to EU labour index

Hotels and restaurants 70

Pharmaceuticals and Biotech

Business services Construction

60

Oil and Gas

Extraction industries Wholesale and retail trade

Metals

50

Agriculture

Automotive manufacturing

Utilities

40

Industrial products Banking

Leisure services

30

IT, media and telecoms 20

10 Insurance 0 0

10

20

30

40

50

60

70

80

90

100

Exposure to EU trade index

Source: ONS data, KPMG calculations. The size of the bubble represents the size of the sector as measured by GVA compared to UK total.



12

Brexit under different scenarios Brexit sector barometers Hard Brexit Food and drink manufacturing Metals Oil and Gas Automotive manufacturing Pharmaceuticals and Biotech Non-food consumer goods manufacturing Industrial products Transport and storage services Hotels and restaurants Business services Agriculture Banking Extraction industries IT, media and telecoms Wholesale and retail trade Utilities Leisure services Construction Insurance

78 64 64 62 61 59 58 52 52 51 49 47 46 42 41 35 34 29 26

Free trade Food and drink manufacturing Hotels and restaurants Pharmaceuticals and Biotech Non-food consumer goods manufacturing Transport and storage services Oil and Gas Metals Business services Automotive manufacturing Industrial products Agriculture Extraction industries Wholesale and retail trade Construction Banking IT, media and telecoms Utilities Leisure services Insurance

94 64 59 57 56 56 54 53 53 50 50 48 46 45 42 41 41 32 10

Free labour Metals Oil and Gas Automotive manufacturing Industrial products Pharmaceuticals and Biotech Food and drink manufacturing Non-food consumer goods manufacturing Banking Business services Agriculture Transport and storage services Extraction industries IT, media and telecoms Insurance Hotels and restaurants Wholesale and retail trade Leisure services Utilities Construction

74 72 71 65 63 62 61 52 49 49 48 45 44 41 39 37 35 30 13

Source: KPMG analysis



13

UK private sector debt UK lending to individuals 1,600 1,520

1,391

UK lending to individuals, £bn

1,400 1,200 1,000 800 600 400 200 0




14

Household debt as a share of income Household debt as a share of disposable income, % 170 158

Share of disposabe income, %

160 150 140

136

130

120 110 100 90 80 1999

2001

2003

2005

2007

2009

2011

2013

2015 Source: ONS



15

UK consumer spending UK household income and consumption balance in 2015-16 Quarterly nominal growth rate, %

Quarterly growth rate of household income and consumption 1.6%

Consumption growth rate

Gross income growth rate

1.4% 1.2% 1.0% 0.8% 0.6%

0.4% 0.2% 0.0% Q2-15

Q3-15

Q4-15

Q1-16

Q2-16

Q3-16

Growth rate of consumption not matched by growth rate of income leading to an increase in debt stock

Percentage points of quarterly grwoth rate, %

Difference between income and consumption growth rates 0.8% 0.6% 0.4% 0.2% 0.0% -0.2%

-0.4% -0.6% -0.8% -1.0% Q2-15

Q3-15

Q4-15

Q1-16

Q2-16

Q3-16 Source: ONS, KPMG calculations



16

Saving ratio UK household saving ratio

Share of household disposable income, %

14% 11.5%

12%

10%

8% 5.6%

6% 5% 4%

2%

0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: ONS



17

Saving ratio I UK household saving ratio excluding adjustment for net pension fund equity

Share of Household disposable income, %

6%

5%

5% 4% 3% 2%

2%

1% 0% -1% -2% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: ONS, data are presented as 4-quarter moving averages The adjustment for the change in the net equity of households in pension fund reserves is equal to the total value of the actual social contributions payable into private funded pension schemes plus the total value of contribution supplements payable out of the property income attributed to insurance policy holders (i.e., holders of pension rights) minus the value of the associated service charges minus the total value of the pensions paid out as social insurance benefits by private funded pension schemes; this adjustment is designed to ensure that the balance of pension contributions over pension receipts (i.e., of “transfers” payable over “transfers” receivable) does not enter into household saving.



18

UK mortgage debt

Mortgage market Mortgage loans approvals

20,000 House purchase

Mortgage approvals, £mn

18,000

Remortgaging

16,000

Other mortgages

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017




20

Mortgages for house purchase Share of first time and buy-to-let buyers in new mortgages, %

Share of new mortgages, %

25

20

15

10 First-time buyers 5 Buy-to-let

0 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016




21

House prices Average house price by region 600,000

London

500,000

South East

Average house price, £

East 400,000

South West West Midlands East Midlands

300,000

North West Yorkshire and The Humber Wales

200,000

Scotland Northern Ireland North East

100,000

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: ONS © 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


22

Housing supply Quarterly number of permanent dwellings starting construction 60,000

50,000

Housing starts

40,000

30,000

20,000

10,000

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 England

Wales

Scotland

Northern Ireland Source: ONS



23

Sustainability of housing market Ratio of median house price and median income in England and Wales

Ratio of median income to median house price

14 London South East East of England South West East Midlands West Midlands Wales Yorkshire and the Humber North West North East

12

10

8

6

4

2

0

Source: ONS © 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


24

House price affordability varies by region House price to earnings ratio, first time buyers

Gross house price to earnings ratio

12

UK long term average

10 8 6 4

2 0

Source: Nationwide 2016 Q4



25

Mortgage rates Average UK mortgage interest rates, %

9

Interest rate, %

8 7 6 5 Standard Variable Rate 4

Fixed Rate 10YR Base Tracker Rate

3

Fixed Rate 5YR 2

Fixed Rate 3YR Fixed Rate 2YR

1

Official Bank Rate 0




26

House price affordability for first time buyers Mortgage payments as % of take home pay for first time buyers 80%

Mortgage payments as % of mean take home pay

70% 60% 50%

UK long-term average

40% 30% 20% 10%

0%

Source: Nationwide 2016 Q3



27

Mortgages in arrears Total balance of mortgages in arrears, £mn 50,000 43,572

45,000

Mortgage balance in arreasrs, £mn

40,000 35,000 30,000 25,000 20,000 17,163

15,000 10,000 5,000 0 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016




28

UK consumer credit

Volume of outstanding consumer credit Total amount outstanding of consumer credit in the UK 250,000

Total outstanding consumer debt, £mn

200,000

150,000

100,000

50,000

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017




30

Composition of consumer debt Total amount outstanding of consumer debt in the UK 180,000

Total outstanding debts, excluding student loans, £mn

160,000 140,000 120,000 100,000 80,000 60,000 40,000

Other lending

20,000

Credit card lending

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017




31

Interest rates Average quoted interest rates

Average interest rate, %

25

20

Overdraft, Banks/Bldg Soc

15 Credit Cards, Banks/Bldg Soc 10 Personal Loan: 10,000 Pounds, Banks/Bldg Soc

5

Bank of England policy rate

0




32

Repayment expectations OBR forecasts for household incomes have been revised down

Real growth in gross disposable Household income, %

3

2.5 2015 November

2 2017 March 1.5

1

0.5

0 2016

2017

2018

2019

2020

Source: OBR



33

Insolvencies UK total number of insolvencies 45,000

42,565

40,000

Total number

35,000 30,000 25,000

26,085

20,000 15,000 10,000 5,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: The Insolvency Service



34

Student loans Total volume outstanding of student loans 100,000

Total amount outstanding, £mn

90,000 80,000 70,000 60,000 50,000 40,000 30,000

20,000 10,000 0




35

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