Research

Fabrice Montagne
Chief UK and Senior European Economist
+44 (0)20 7773 3277
fabrice.montagne@barclays.com
Barclays, UK

Andrzej Szczepaniak
UK Economist
+44 (0)20 3555 6824
andrzej.szczepaniak@barclays.com
Barclays, UK

Sit tight and keep calm

UK Economics
May 2017
Summary of UK views
Q1 17 GDP marks beginning of slowdown
Macroeconomic outlook: Activity has slowed in Q1 17 and we expect it to slow further in the course of this year driven
by slower consumption growth, as households face a real pay squeeze due to higher inflation while the savings rate is
near historic lows. We see growth at 1.5% this year and 1.3% in 2018 after 1.8% in 2016.
Surveys: Confidence started the year on the soft side and PMIs are now below historical averages, illustrating caution
by companies as Brexit talks are about to start. While service sector slows in line with consumers, manufacturing enjoys
fresh momentum on a lower currency, but even there we believe the upside is limited.
Inflation: On the back of sharp depreciation in GBP, we expect inflation to peak at 3.1% in May/June and average 2.7%
in 2017 and 2.2% in 2018. In the absence of a medium-term driver such as wage inflation, we expect the overshoot to
be temporary only and inflation to fall back and stabilize around 2%, supported by core inflation.
Labour market: As a result of the slowdown, we expect job creation to slow and even turn negative in the course of
2017, pushing unemployment to 5.3% in 2018 from 4.7% currently. However, given the unprecedented build-up in zero
hour and self-employed contracts, businesses might use the flexibility of precarious jobs first before laying off.
Fiscal policy: The governments new fiscal targets allow fiscal policy to be less restrictive but the austerity stance
beyond 2018 remains, as the government intends to reduce the structural deficit by about 1% per year in 2018 and
2019. We believe only half of that will be delivered, leaving the deficit just around 2.0% in 2019/20.
Monetary policy: Past chatter of a rate hike earlier this week, market expectations have materially receded and are
now just about trending upwards. With Q1 GDP way lower than expected by the BoE in its February IR alongside
possible cooling in consumer credit, we expect the BoE to stay on hold over our forecast horizon.
Brexit: The EU continues to display remarkable unity and resolution by approving the presidents negotiation guidelines
without a blink and even toughening its opening stance. Meanwhile, the start of the campaign for the general election
materially increased headline noise and blurred (hardened) PM Mays initial Brexit stance.
General Election: Local elections, held on 4 May, confirmed the Conservatives position of strength ahead of the
general elections (8 June). According to current polls, PM May is set to extend her majority in the lower chamber.

2 10 May 2017
Macroeconomic outlook
Real pay squeeze to intensify in the course of 2017
Investment to bear the brunt of the adjustment, followed by consumption
Growth remained resilient following the referendum on strong pp yy contributions Forecasts
5
private consumption, but started to ease early this year. We
4
expect further slowing as inflation peaks in the course of 2017.
3
Most of the slowdown this year is expected to come from
2
consumption, as higher inflation without wage growth squeezes
real pay. Elevated job precariousness might also start to bite as 1
the economy slows. 0

Investment growth is not expected to be a material driver but -1

should remain less than optimal given high levels of uncertainty. -2
13 14 15 16 17 18 19
The external sector is expected to continue to enjoy the Private consumption GFCF Change in stocks
positive effects of the currency depreciation at least in the ST. Net trade balance Govt consumption Real GDP, % y/y
Source: ONS, Barclays Research

UK Snapshot
2016 2017 2018 Calendar year average
% change q/q Q1 Q2 Q3 Q4E Q1E Q2E Q3 E Q4 E Q1 E Q2 E Q3 E Q4 E 2015 2016E 2017E 2018E
Real GDP 0.2 0.6 0.5 0.7 0.3 0.2 0.1 0.2 0.4 0.5 0.4 0.4
Real GDP (y/y) 1.6 1.7 2.0 1.9 2.1 1.7 1.3 0.8 0.9 1.2 1.5 1.7 2.2 1.8 1.5 1.3
Private consumption 0.7 0.7 0.7 0.7 0.5 0.4 0.1 0.0 0.1 0.2 0.2 0.2 2.4 2.8 1.9 0.6
Public consumption 0.4 0.2 -0.1 0.0 0.3 0.5 0.5 0.5 0.5 0.4 0.5 0.5 1.3 0.8 1.0 1.8
Investment 0.0 0.2 0.6 0.1 -0.7 -0.5 -0.3 0.2 0.7 0.7 0.7 0.7 3.4 0.5 -0.6 1.7
Inventories (pp) -0.2 -0.1 0.2 -0.3 0.0 0.0 -0.1 -0.1 0.1 0.1 0.1 0.0 -0.2 -0.5 -0.2 0.2
Net exports (pp) -1.1 0.3 -1.4 1.7 0.1 -0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 -0.4 0.7 0.2
Employment 31.6 31.8 31.8 31.8 31.8 31.8 31.8 31.7 31.7 31.6 31.6 31.6 31.3 31.7 31.8 31.6
Unemployment rate % 5.1 4.9 4.8 4.8 4.9 4.9 4.9 5.1 5.2 5.3 5.4 5.6 5.4 4.9 4.9 5.4
CPI inflation (y/y) 0.3 0.4 0.7 1.2 2.1 2.9 3.0 2.9 2.6 2.2 1.9 1.9 0.0 0.7 2.7 2.2
Bank Rate
Source: (EOP)
Barclays Research 0.50 0.50 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 0.25 0.25 0.25
Source: ONS, Barclays Research

3 10 May 2017
 Macroeconomic outlook: Consensus forecasts
Consensus upgrading growth forecasts since October
2017 GDP Forecasts 2017 Inflation Forecasts
2.50 3.0
2.25 2.8
2.00 2.6
1.75 2.4
1.50 2.2
1.25 2.0
1.00 1.8
0.75 1.6
0.50 1.4
0.25 1.2
0.00 1.0
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17
Consensus (Monthly Survey) CCF - Replacement Basis Consensus (Monthly Survey) CCF - Replacement Basis
Source: Consensus Forecast, Barclays Research Source: Consensus Forecast, Barclays Research

2017 GDP Forecast distribution 2017 Inflation Forecast distribution

70% -1 SD Mean +1 SD -1 SD Mean +1 SD
10 Apr-17 50% 10 Apr-17
60%
13 Mar-17 13 Mar-17
50% 40%
Frequency
Frequency

40% 30%

30%
20%
20%
10%
10%
0%
0%
1.75-2 2-2.25 2.25-2.5 2.5-2.75 2.75-3 3-3.25 3.25-3.5
0.5-1 1-1.5 1.5-2 2-2.5 2.5-3
2017 GDP growth distribution 2017 inflation distribution
Source: Consensus Forecast, Barclays Research Source: Consensus Forecast, Barclays Research

4 10 May 2017
Key Themes

Key themes

1. Brexit update: Sit tight and keep calm

2. Policy mix: Prolonged status quo

3. Core Inflation back with a bang

4. Labour market: Why wage growth will not be an issue for the BoE

5. Investment: A longer-than-anticipated lag

Chart book

6. Barclays forecasts

7. Chart pack of economic indicators

5 10 May 2017
 Theme 1: Brexit update
Preparing for talks to begin

6 10 May 2017
Theme 1: Brexit Sit tight and keep calm
Snap elections first (8 June): PM May leads campaign to increase her majority
According to polls, the Conservatives are
likely to improve their existing position as
Labour is losing support; we believe that a
larger majority would provide the PM greater
political latitude and reduce the likelihood of
crashing out of the EU.
Will it cost the UK time in the negotiations?
We dont think so. The EU27 are set to finalize
the ECs negotiating mandate on 23 June,
leaving sufficient time for the new government
to take office. From there, the new parliament
will be able to oversee the entire Brexit process
including the initial two years followed by a
Risks:
1. The SNP is likely to campaign on a
renewed independence platform and claim
the results as a mandate for a new
referendum.
2. The chance that the polls are completely
wrong and that the election results weaken
the PMs position.
Conservatives ahead in the opinion polls
45%
40%

possible three-year transition. 35%

30%

Will it increase uncertainty? Not if it pushes 25%

20%
political parties to spell out in more detail what 15%
they believe a UK exit from the EU should look 10%

like. Uncertainty could rise, though, if the 5%

0%
elections result in a hung Parliament or a Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17
Con Lab UKIP Lib Dem SNP Others
change of government, which current polls
Note: Rolling six month average. Source: ICM, YouGov, ComRes, Opinium, GfK, Ipsos MORI,
suggest is very unlikely. Survation, BMG, TNS, Barclays Research

7 10 May 2017
Theme 1: Brexit Sit tight and keep calm
European Council opening stance
Core principles: adequate balance between rights and
obligations; intention to conduct negotiation with
transparency and as a single package.
It will not compromise on the founding principles (no
cherry picking) and will use a phased approach:
withdrawal (1st phase), LT partnership (2nd phase)
transition (3rd phase) .
In the first phase, the Council prioritises agreement
on rights of EU citizens, the settlement of the UKs
liabilities and the functioning of external boarders
(with an emphasis on Northern Ireland) .
If the transition were to include elements of the EU,
European Parliament passes a resolution
Similar to the council, MEPs requested an early
agreement regarding the legal status of EU-UK
citizens, outstanding UK budgetary liabilities, the EUs
new external borders, the UKs international
commitments signed as an EU member, as well as
maintaining the jurisdiction of the ECJ during the
transition.
MEPs also denounced any attempt to trade-off
security co-operation and the future economic
relationship between the UK and the EU27.
8 10 May 2017
this would require existing Union regulatory,
budgetary, supervisory and enforcement instruments
and structures to apply.
No new trade agreement can be concluded before the
UK becomes a third country, but both the UK and the
EU seem to agree on the need for a transitional
arrangement in order to avoid a cliff-edge in April
2019.
It remains, however, unclear whether the transitional
arrangement can be negotiated within the scope of
article 50. if not it will require EU27 member-state
level ratification.
MEP supported the Councils approach to sequence
the talks and validate each phase before moving to
the next one. MEPs also want to limit the length of the
transition period to 3 years.
The motion supported by a large majority of MEPs
(516 for versus 133 against only 50 abstentions).
While the Parliament will not actively participate in the
negotiation it does have a veto regarding the final
agreement.
Theme 1: Brexit Sit tight and keep calm
Two years likely insufficient to complete comprehensive Brexit talks
A long road ahead. We believe full negotiations will last much longer than the two years set out for withdrawal.
New trading relationships with the EU and the RoW will likelyto be complex and drawn out. As a result, firms
are likely to review their operations along the entire value chain, with tariffs only being a small part of their
worries.
Accordingly, the government should focus on a bridge agreement to avoid a cliff edge. The EU also
made clear that a new trade agreement can only be finalised once the UK becomes a third country. That will
also involve EU27 member-state ratification.

2017 2018 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Art. 50 1st phase 2nd phase 3rd phase Ratificat UK-EU FTA Talks
(Withdrawal) (LT principles) (Transition)
EU negotiation
UK-RoW Trade Talks
guidelines UK-EU withdrawal Talks

EU Art.50 UK departure from EU

Summit
April Great Repeal Bill

EU Summit UK-EU Talks

June Extension?

UK Gen.
Election
June
Source: Barclays Research

9 10 May 2017
Theme 1: Brexit Sit tight and keep calm
The soft, the hard and the ugly Brexit
While it remains unclear what kind of Brexit PM May is seeking, we believe that her insistence on regaining
control of borders and withdrawing from the ECJ is fundamentally inconsistent with the EUs funding principles
and makes an exit of the single market unavoidable.

The distinction between soft and hard Brexit will be whether the final outcome is a trade agreement a minima or
whether the UK and EU can agree on maintaining some of the deep and comprehensive ties that create
economic value. We believe the final outcome will be one of the following:
A crash Brexit: the UK leaves the EU without any agreement and falls back to WTO tariffs and rules
immediately after leaving the EU. Economic consequences would be maximal and disruptive. Such a
scenario is likely to crystallise very late in the process but might be delayed or avoided by an extension of
talks, which would require a unanimous vote by the EU27.
A soft Brexit : the UK leaves the single market but is able to establish an enhanced partnership with the EU
(such as improved equivalence, preferential access, etc) . Under such a scenario, the deviation from the
status quo is small and the economic impact, still negative, but largely contained.
A hard Brexit: the UK leaves the single market but is not able to establish an strong partnership with the
EU. Although a transitional period could avoid a cliff edge after the actual exit, the negative economic impact
is magnified by the fact that businesses must adjust their operations substantially and over a short period of
time

While information regarding a soft and hard Brexit will likely be revealed along the way (that is a transparency
prerequisite of the Council), a crash exit might only materialise very late in the process as both parties fail to
agree on or ratify a final deal.

10 10 May 2017
Theme 1: Brexit Sit tight and keep calm
Scottish First Minister Sturgeon triggers her referendum
Nicola Sturgeon takes steps towards another independence referendum and received the approval of the
Scottish Parliament to open discussions with the British government on organising a new referendum in H2 18
or H1 19.
But snap elections challenge the SNP on its own turf: the math suggests that the SNP will have a hard time
claiming a bigger mandate than in the last elections. And PM May has publicly stated that the UK will not agree
to a second Scotland independence referendum until after the Scots have had the chance to see how Brexit is
working out in other words, not for several more years.

We believe that a second independence referendum remains a distant event risk.

Conditions for a second referendum are not yet in place (polls).
Conditions may change but likely not before H1 19 (post-Brexit economy, the UK-EU negotiations, domestic
politics, potential conditions for EU accession, etc).
A referendum before 2019 would conflict with EU negotiations and Scotland would not benefit from clarity
about the choice to remain in Brexit-UK or leave and join the EU.
The election cycle in the UK might push back the referendum to after 2021: UK general elections in 2020
and Scottish elections in 2021.
PM May stuck between a rock and a hard place: H2 18 - H1 19 is the worst possible timing for Whitehall if it
were to go through (Brexit negotiations, Scottish independence campaign and FTA negotiation s with RoW).
2022 looks less crowded in terms of the political agenda as it would allow for the first phase of negotiations as
well as the British election cycle to pass. At this point, there would also likely be greater clarity on the various
choices taken and now available.

11 10 May 2017
Theme 1: Brexit Sit tight and keep calm
Scottish First Minister Sturgeon triggers her referendum

A very crowded political agenda ahead

End of EU
withdrawal
Negotiations

March: Article 50 Bill UK-RoW Bilateral Trade negotiations

Brexit negotiation period UK-EU transition and Trade negotiations

2017 2018 2019 2020 2021 2022

? ?
April/May: French Italian Scottish EU Scottish
Pres. Elections Elections Referendum? Elections Elections

June: French Gen.

Elections

September: German Gen.

Elections

Source: Barclays Research

12 10 May 2017
Theme 1: Brexit Sit tight and keep calm
A Busy European Political Agenda 2017

Treaty of Rome
Celebrations
25 March German Federal Elections
French Presidential 24 September
Elections
23 April, 7 May
Czech General
Dutch Elections
Elections French Gen. Elections October
15 March 11 and 18 June

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Art. 50 Bill UK Snap UK-EU Talks UK-EU Talks

Art. 50
Elections 1st phase (Withdrawal) 2nd phase
triggered
8 June (LT principles)
EU (Art.50) Great Repeal Bill
Summit
29 April
EU publishes EU Summit UK Political Party
guidelines on 22 June Conferences
renegotiation Sept. and Oct.

Source: Barclays Research

13 10 May 2017
Theme 1: Brexit Sit tight and keep calm
Brexit Implications for the U.K. Financial Sector (IMF - GFSR Oct.16.)

Market Function Importance What Could Happen?(1)

Banking
Cross-Border Lending 20%of global total Unless passporting is maintained, both the UK and EU are likely to require
Investment Banking 20% of global investment banking revenue branch operations to become subsidiaries. The extent of the relocation or
duplication of operations would vary according to the agreement with the host
Wholesale Banking $7trn in assets country.
Interest Rate Trading 50% of global total If banks relocate some operations, as above, some euro rates trading could
relocate.
European Equity Trading 70% of EU bank trading conducted through If banks relocate some operations, as above, some equities trading could
London relocate.
Foreign Exchange Trading 40% of global total Foreign exchange trading is not directly impacted by a change in the EU/UK
51% of USD relationship.
54% of EUR
Market Infrastructure
OTC Derivatives Clearing Clear 50% of interest rate swaps globally, total of UK clearing of OTC derivatives meets EU standards but the use of UK clearing
(global leader) $384trn annually by EU banks will be subject to negotiation, and if not fully recognised by the EU,
some relocation of clearing activities is likely.
Insurance
Reinsurance 24% of global total UK reinsurance meets EU standards but the use of reinsurance provided by UK
entities will be subject to negotiation, and if not fully recognised by the EU,
some relocation of reinsurance business is likely.
Marine Insurance 30% of global total Unaffected.
Asset Management
Investment Funds Total 6.8trn under management; Unless passporting is retained, a negotiated arrangement will be required;
2.5trn for foreign investors; UCITS are UCITS will need to be domiciled in the EU and some relocation of operations
12.5% of total market share of UCITS in EU; 17% may be required.
of global funds
Hedge Funds 13% of global hedge fund assets managed in UK Many clients are not EU based and funds may be unaffected even if passporting
is not retained.

Source: Autonomous Research LLP; Bank for International Settlements; Boston Consulting Group; Financial Conduct Authority 2015; TheCityUK 2016; and IMF Staff estimates.
Note: OTC = Over the Counter; UCITS = Undertakings for Collective Investment in Transferable Securities.
(1) Reflects a combination of estimates from Autonomous Research LLP, Boston Consulting Group, and IMF staff.

14 10 May 2017
Theme 1: Brexit Sit tight and keep calm
In-line with Next
Overall
Indicator Period Outcome of the print our macro release
trend
scenario? date

GfK Consumer Sentiment edged marginally lower, albeit showing mostly stabilisation over the past six
Apr. 31 May
Confidence months. Households remain pessimistic over the economic outlook, however.
Output and new orders materially rose in April off the back of firm-to-firm sales. Concerns on
PMIs Apr. 1-5 Jun.
this sustainability remain, however, given elevated Brexit uncertainties.
Permanent placements and staff salaries both edged marginally lower, but nonetheless
REC Report on Jobs Mar. 9 May
remain broadly stable despite some volatility.
Total retailing volumes growth printed negative in Q1 17, the first time since
Retail sales Mar. 18 May
Q4 13, and detracted from household consumption and headline GDP growth.
Mortgage data remain stable while the peak in unsecured credit growth appears behind us,
Lending data Mar. 31 May
although it remains elevated at approximately 10% y/y.
RICS Residential Enquiries to buy are broadly unchanged and barely positive while instructions to sell remains
Mar. 11 May
Market Survey in negative territory, supporting prices which appear to have stabilised.
Industrial production Industrial output contracted by more than expected for the second consecutive month,
Feb. 11 May
and manufacturing resulting in a Q1 17 carry-over of 0.6% q/q.
Construction output fell by 1.8% m/m, resulting in a Q1 17 carry-over of
Construction output Feb. 11 May
0.2% q/q. If realised, this implies a flat contribution to headline GDP growth.
February services output grew by 0.2% m/m. However, given Januarys weakness, this leaves
Services output Feb. 25 May
the Q1 17 carry-over at 0.3% q/q, down from 0.7% q/q in Q4 16.
February trade data saw strength in import growth relative to export growth, suggesting a
International trade Feb. 11 May
negative contribution from net trade to headline Q1 17 GDP growth.
Unemployment printed unchanged at 4.7%. Wage growth decelerated materially, resulting in
Labour report Feb. 17 May
the weakest real wage growth since October 2014 at 0.3% 3m/y.
NIESR GDP
Mar. Printed 0.5% 3m/3m in March, unchanged from in February. 11 May
Estimate
CBI Industrial/ New orders, realised output and expected output all dipped in April. Inflationary pressures
Apr. 20/24 May
Distributive Trades remain elevated but appear to have stabilised.
Source: Barclays Research

15 10 May 2017
 Theme 2: Policy mix
Prolonged status quo

16 10 May 2017
 Theme 2: Prolonged status quo
BoE is now on hold after taking 'muscular' response following referendum result
The BoE MPC faces a number of headwinds in order to reset its policy stance:
Recent activity data have fallen short of expectations and the slowdown in household consumption dragged GDP
growth down to 0.3% q/q in Q1 17 against an expected 0.6% by the Bank;
Meanwhile, inflation looks likely to exceed 3% in May, which would require Governor Carney to write a formal letter
to the Chancellor explaining why inflation overshot the target by more than 100bp;
The business community was likely spooked by a fresh start in Brexit talks as the media reported an allegedly
acrimonious May-Juncker dinner, followed by verbal escalation in the context of UK general election.
Upcoming elections (8 June) also mean that the Bank faces speaking restrictions apart from policy-specific events
such as the Inflation Report. Hence, MPC members will not be able to explain policy shifts if they occur.
In February, the MPC lowered its estimate of the medium-term equilibrium rate of unemployment to 4.5% (0.5pp lower
than before), which suggests the MPC could allow the UK economy to run hot for a bit longer given the view of
increased slack in the economy.

BoE is very optimistic on UK GDP growth and expects elevated CPI to persist for longer
% y/y
3.5 %
3.0y/y

3.0 2.5
2.5 2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5

0.0 0.0

-0.5 -0.5
14 15 16 17 18 19 14 15 16 17 18 19 20
BoE QIR Feb 17 BoE QIR Nov 16 Barclays fc GDP BoE QIR Feb 17 BoE QIR Nov 16 Barclays fc CPI (%y/y)
Source: ONS, BoE, Barclays Research Source: ONS, BoE, Barclays Research

17 10 May 2017
Theme 2: Prolonged status quo
The Committee has material concerns on household resilience
The February 2017 minutes focused on households, with scant discussion of firms or investment. Private
consumption resilience has been driven in a large part by unsecured credit ascending to pre-crisis levels:
household debt to income is 134%, or 16pp lower than the 2008 peak.
Double-digit growth rates in unsecured credit has drawn the attention of the MPC as well as the FPC, who is
now investigating whether this may lead to vulnerabilities. Consumer credit may only represent a small share of
total lending, but losses in case of turn around are usually much larger than for other lending categories.
Meanwhile, sterling has held firm against other major currencies, in particular the dollar, helped first by
expectation of interest rate hikes (based on MPCs tough rhetoric) and second by unwinding of large short
positions built up in the wake of the EU referendum. Moderate GBP appreciation has helped mitigate risks of
inflation overshoot

Unsecured credit steams ahead GBP holds up well this year

6 120 120

5 115 115

4 110 110

3 105 105

2 100 100

1 95 95

0 90 90

-1 85 GBP Effective 85

-2 80 GBPEUR (lhs) 80
bn flows, 3mmt 75 75
-3 GBPUSD (rhs)
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 70 70
Credit cards Other Unsecured consumer credit Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18
Source: BoE, Barclays Research Source: BoE, Barclays Research

18 10 May 2017
Theme 2: Prolonged status quo
Mood swings
At the march MPC, K.Forbes said she was convinced by domestic inflation, global reflation and minimal labour
market slack and voted for a hike of 25bp. Minutes reveal that some other members have also moved closer to
supporting a hike, even though there is insufficient evidence of a material slowdown.
Recent public comments have not revealed material shifts: we perceive M.Saunders to be reasonably bullish
on the economy as previously; I.McCafferty is on the verge of voting for a hike but still hesitant; K.Forbes is
happy to maintain her hiking vote; G.Vlieghe is consistently on the more dovish side (a rate hike that turns out
to be premature is a more serious mistake than one that turns out to be somewhat late); and, finally, M.Carney
is supporting a modest withdrawal of stimulus but not before some time.
We also believe that Committee member Broadbent is the most representative of the middle ground and
unless he shows more signs of optimism, we would hold off reassessing our call.

May MPC Policy Gauge

Jon Cunliffe
Mark Carney
Gertjan Vlieghe Ben Broadbent
Andy Haldane
Michael Saunders

STATUS QUO
Ian McCafferty

Kristin Forbes
HIKE Members ending their
Source: Barclays Research CUT term in 2017

19 10 May 2017
Theme 2: Prolonged status quo
Muted domestically generated inflation measures
In March, MPC Forbes voted for a rate hiking arguing that domestic inflationary pressures were on the rise and
sufficiently intense to warrant an immediate rate hike.
We update Forbes set of indicators of domestically generated inflation (DGI) and show that, if anything, these
measures have eased since they were first presented in 2014. Back in 2014, K.Forbes conclusion was that
price pressures were not a concern: inflationary pressures were well contained with little evidence of
imminent inflationary pressures.
At the higher end of the set, service CPI grows about 2.5%, while at the lower end, the GDP deflator (excluding
exports) is in negative territory. Measures of Unit Labour or Wage costs have been evolving recently without a
clear trend, around 2%.

DGI index and headline inflation

9
Forbes 1/10/14
8
7
6
5
4
3
2
1
0
-1
-2
-3
00 02 04 06 08 10 12 14 16 18
Headline CPI DGI Range DGI average
Reference: The Economic impact of the sterlings recent moves: more than a midsummer nights dream,
K.Forbes, BoE, 1 October 2014. Source: ONS. BoE, Barclays Research

20 10 May 2017
Theme 2: Prolonged status quo
Monetary policy, central scenario

1. In our view, economic growth will be weaker than the MPC forecasts during 2017, we believe that activity
data published since the beginning of the year (in particular Q1 GDP) support this view.

2. We believe Inflation will likely peak above 3% in the short term but will fall back towards the BoEs inflation
target of 2% over the course of next year.

3. Downside risks stemming from a sharper slowdown in activity and upside risks from accelerating wages
are contained at this stage.

4. Risks stemming from double-digit growth in consumer credit should be more a concern for the FPC than the
MPC. The latest BoE credit condition survey (Q1 17) shows that banks are tightening their consumer lending
standards, which should also help to mitigate risks stemming from unsecured credit.

5. Consequently, there is no urgency for the MPC to move in one direction or the other and the status quo
could be sustained over our forecast horizon. Risks stemming from a premature tightening are, in our view,
larger than risks stemming from delaying. If anything, the announcement of snap elections on 8 June 2017
makes a change in the policy stance even less likely in the very short term.

6. But the BoE will want to continue to talk tough as long as inflation is above target, if only to maintain an
upwards slope in rate expectations, provide support to the GBP and mitigate risks of inflation moving higher.

7. We believe that most MPC members are sitting firmly on the fence, happy to wait for data to come in
before taking any decision.

Source: Barclays Research

21 10 May 2017
Theme 2: Prolonged status quo
Will the BoE fall behind other central banks?

Source: Barclays Research

22 10 May 2017
Theme 2: Prolonged status quo
Fiscal policy: Austerity lives on except in 2017
New forecasts are mostly driven by changes in Optimistic growth assumption
assumptions and macro forecasts (80% of the % y/y
3.5
deviation) rather than announced measures.
3.0
Fiscal effort is only marginally relaxed and remains 2.5
intense despite growth slowdown and EU withdrawal. 2.0

OBR forecasts very optimistic both for headline as 1.5

well as trend growth. 1.0

Assuming that half of the fiscal effort will be delivered, 0.5

we forecast a 2019/20 PSNBx at 2.8% (60bn), nearly 0.0

11 12 13 14 15 16 17 18 19 20 21
3x the governments target of 1% of GDP.
GDP Barclays fc BoE - Latest IR Latest OBR fcst
Source: ONS, OBR, Barclays Research

Fiscal snapshot (Barclays forecasts) Changes to PSNBx forecasts since Nov 2016
pp of GDP
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 3.5
3.0
PSNBx
2.5
Structural 3.8 2.6 2.9 2.4 2.0 1.5 2.0
1.5
Cyclical 0.0 -0.1 -0.1 0.0 0.0 -0.1
1.0
Total 3.8 2.5 2.8 2.4 2.0 1.4 0.5
0.0
Change
-0.5
Structural -0.8 -1.2 0.3 -0.5 -0.4 -0.5 -1.0
16/17 17/18 18/19 19/20 20/21 21/22
Cyclical -0.6 -0.1 0.0 0.1 0.0 -0.1 RDEL Welfare Other spend Taxes
Total -1.4 -1.3 0.3 -0.4 -0.4 -0.6
Other receipts PSNBx (Mar 17) PSNBx (Nov 16)
Source: Barclays Research
Source: OBR, Barclays Research

23 10 May 2017
Theme 2: Prolonged status quo
Fiscal policy: Austerity lives on except in 2017
Fiscal forecast overview
Forecast (FY)
Total impact
2017 Spring Budget Policy Decisions
Per cent of GDP 16 17 18 19 20 21 over horizon

Revenue and spending

Raising Productivity and Living Standards -2,645
Current receipts 36.4 36.9 36.9 37.0 37.0 37.1
Managed expenditure 39.9 39.8 39.1 38.0 38.0 37.8 An economy that works for everyone -2,955

Deficit: Fiscal mandate measures Social care -2,400

Public sector net borrowing 3.5 2.9 2.2 1.0 0.9 0.7
Other -555
Cycl.adj.net borrowing 3.3 2.6 1.8 0.8 0.8 0.7
Cycl.adj.current budget deficit 1.4 0.5 -0.1 -1.1 -1.5 -1.6 Tax Sustainability and Fairness +4,260

Debt: Supplementary target Rise in NICs for self-employed +2,060

Public sector net debt 87.3 90.2 89.7 88.0 84.8 81.6
Dividend allowance +2,630
Change from March 2016 Budget
Revenue and spending Other -430

Current receipts -0.5 0.0 -0.1 -0.5 -0.4 Avoidance, Evasion, and Imbalances +820
Managed expenditure 0.2 1.0 1.1 1.0 1.1
Previously announced welfare policy decisions +345
Deficit: Fiscal mandate measures
Public sector net borrowing 0.6 1.0 1.2 1.5 1.4 TOTAL POLICY DECISIONS -175
Cycl.adj.current budget deficit 0.5 0.3 0.4 0.9 0.9
Total tax policy decisions -6,210
Debt: Supplementary target
Public sector net debt 4.7 8.9 9.8 10.8 10.1 Total spending policy decisions +6,035

Source: OBR Source: HMT

24 10 May 2017
Theme 2: Prolonged status quo
Fiscal policy: Austerity lives on except in 2017
No escaping higher borrowing Debt to jump on BoEs APF
0 95
bn, 12m
-20 85
cumulative
-40
75
-60
65
-80
55
-100
45
-120

-140 35

-160 25
10 11 12 13 14 15 16 17 18 19 20 21 22 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
PSNBx OBR Barclays PSND ex OBR Barclays

Source: ONS, OBR, Barclays Research Note: % of GDP. Source: ONS, OBR, Barclays Research

Current expenditures Current tax receipts

12mmt 12mmt 12mmt 12mmt
25 9 17 9
% of GDP % of GDP % of GDP % of GDP
24 8 16 8
23 7 15 7
22 6 14 6
21 5 13 5
20 4 12 4
19 3
11 3
18 2
10 2
17 1
9 1
16 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 8 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Other expenditures (lhs) Social assists (rhs)
Pension related payments (rhs) Interest payments (rhs) Income & capital (lhs) VAT receipts (rhs) NICs (rhs)

Note: Cumulative 12mm sum, % of GDP. Source: ONS, Barclays Research Note: Cumulative 12mm sum, % of GDP. Source: ONS, Barclays Research

25 10 May 2017
 Theme 3: Core Inflation
back with a bang

(Reference: UK Themes, Watch out for core distractions, 20 April 2017)

26 10 May 2017
Theme 3: Core Inflation back with a bang
UK Core inflation dropped to 0.7% in mid-2015 but is now back to close to 2.0%
UK inflation is experiencing a V-shaped recovery. Supported by core inflation and, to a lesser extent, volatile
prices, headline CPI has overshot the BoE target.
Underlying prices are a key driver of the rise in inflation and we believe they will continue to support inflation
this year as NEIG inflation is back and services inflation is drifting higher.
Within the NEIG, recovery was driven by the 2 subcomponents that were responsible for the disinflationary
trend started in 2011, namely durables (CPI weight: 11.4%) and non-durables (CPI weight: 6.8%).
Within services, the rebound was fairly broad-based across the most important components of the basket
with the exclusion of housing services (CPI weight: 8.9%) and miscellaneous & other services (CPI weight:
8.0%).

Durables and non-Dur. lead NEIG prices recovery Broad based services inflation recovery

8 5 % y/y
% y/y
6 4

4 3

2 2
1
0
0
-2
-1
-4 97 99 01 03 05 07 09 11 13 15 17
-6 Housing services (8.9%)
Travel & Transport services (7.8%)
-8 Recreational & personal services (20.3%)
97 99 01 03 05 07 09 11 13 15 17 Communication (2.5%)
Durables (11.4%) Semidurables (13.0%) Miscellaneous & other services (8.0%)
Nondurables (6.8%) Services prices, % y/y

Note: Subcomponent weights in brackets. Source: Haver Analytics, Barclays Research Source: Haver Analytics , Barclays Research

27 10 May 2017
Theme 3: Core Inflation back with a bang
Anatomy of a V-shaped recovery 2011-2016
1. The great correction (September 2011 - October 2015): Headline inflation was dragged down by a broad-
based weakening led by Food/Alcohol/Tobacco (FAT), energy, non-energy industrial goods (NEIG) and
services.
2. The brief stabilization (November 2015-May 2016): Following almost four years of unabated decline,
headline inflation experienced a brief period of stability close to all-time lows. Services and energy prices
components posted small improvements, while the drag from FAT and NEIG prices remained almost
unchanged.
3. The current reflation (June 2016 to date): Headline inflation recovery gained momentum as energy and
services prices picked up while the drag from FAT and NEIG eased and eventually reversed.

Durables and non-Dur. lead NEIG prices recovery

5.5 pp*
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
11 12 13 14 15 16 17
Energy Underlying Other CPI (% y/y)
Note: Subcomponent weights in brackets. Source: Haver Analytics, Barclays Research

28 10 May 2017
Theme 3: Core Inflation back with a bang
Our forecasts are in line with consensus this year but notably below next year
We forecast headline to average 2.7% in 2017 and 2.2% in 2018. We forecast core CPI inflation to average and
2.4% in 2017 and 2.1% in 2018.
We believe the ongoing FX driven recovery in NEIG prices has limited room to go after peaking in May/June,
and even more so under the assumption of further gains in the currency as expected by our strategists.
After having decoupled between 2009 and 2015, we expect the relationship between service prices and
wages to normalize and wage inflation (if any) to drive service inflation again. That said we dont see scope
for wages to accelerate beyond their current levels (see also Key Theme 4), and accordingly, dont see
service inflation increasing further.
Risks surrounding our core inflation baseline seem contained and broadly balanced. Over the ST, downside
risks from NEIG and services should be offset by upside risks to volatile components. Over the MT, productivity
development could ease cost pressures, while easing immigration could at the margin weigh on inflation.

NEIG prices strongly dependent on GBP dynamics Services wages/prices disentangling is over now
4.0 70 6.0 %, 3m/y 6
% y/y % y/y
3.0 75 5.0 5
2.0
80
4.0 4
1.0
85
0.0 3.0 3
90
-1.0 2.0 2
95
-2.0
1.0 1
-3.0 100

-4.0 105 0.0 0

00 02 04 06 08 10 12 14 16 18 01 03 05 07 09 11 13 15 17
NEIG (lhs) GBP NEER (rhs, inverted) Nominal wages (lhs) Services prices, % y/y

Source: Haver Analytics, Barclays Research Source: Haver Analytics , Barclays Research

29 10 May 2017
Theme 3: Core Inflation back with a bang
Productivity is set to recover moderately in the coming years
Efficiency gains allow wages to grow faster without inflationary pressure. Conversely, productivity stagnation
makes inflation overshoot more likely.
Much has been written on productivity in the UK and much remains unexplained. The most commonly
mentioned explanations for the productivity gap include the following:
1. Fiscal and financial costs of the crisis came at a cost for the rest of the economy.
2. Credit constraints prevented capital reallocation from non-productive to productive operations.
3. Bank forbearance prevents cleansing effect by keeping non-solvable businesses alive.
4. Hoarding of cheap and flexible labour leads to capital shallowing (underinvestment).
5. Labour compositional effect and immigration may have at times been a drag on productivity.
6. Measurement errors of service sector GVA may have led to underestimating productivity growth.
7. Lack of public and private investment (excl. Construction) is a drag to UK productivity growth.
We also show (read The Great Slowing, EGS 2017, 2 March 2017) that the slowdown in productivity has a
global component driven by demographics, a dearth of capital investment, a sharp increase in regulation
(especially in the banking industry) and a related reduced supply of credit.
While these factors may be secular, they are not permanent and should allow for stronger productivity growth as
the drag eases. Public policies should facilitate this recovery by implementing policies that maintain productivity
levels for older workers, improve effectiveness of regulation and facilitate allocation of new resource.
Brexit will generate new headwinds to productivity growth as we forecast a prolonged period of under-
investment and possibly hard or soft restrictions to immigration reducing the supply of labour force.

30 10 May 2017
 Theme 4: Why wage inflation is unlikely
to be a concern

(Reference: UK Labour market: Why Wage inflation is unlikely to be a concern, 20 April 2017)

31 10 May 2017
Theme 4: Why wage inflation is unlikely to be a concern
The rise in flexible workforce
The rise of self-employed and zero-hour working contracts means that conventional employment is still
materially lower than before the crisis. We believe this shift in composition of the labour market explains why
unemployment could drift lower without triggering sustained wage inflation.
The composition of the labour force has changed: self-employed and zero-hour working contracts are both
+2pp of labour force above their pre-crisis levels, while conventional jobs have not recovered (4pp of labour
force or 1.3mn jobs below pre-crisis level). In other words, the drop in unemployment was nearly exclusively
due to the rise in flexible forms of work.
Flexible labour is associated with higher underemployment (not able to find full time job), lower earnings and
higher income inequalities. It captures the most flexible and less secure fraction of the work force.
The rise in precariousness can also be illustrated through the rise in underemployment, self-employment and
zero-hour working contracts, part-time employees, etc.

Conventional employed did not recover Underemployment still higher than pre-crisis
6 8
total
7
4 Unemployment
6
Underemployment
2
5
0 4

-2 3

2
-4
Unemployement rate 1
-6 Self-e and Zero-h
0
Employment excl. Self-e and Zero-h
-8 -1
94 96 98 00 02 04 06 08 10 12 14 16 18 94 96 98 00 02 04 06 08 10 12 14 16
Note: the chart plots the change in unemployment, self-employed, zero-hour contracts and Note: Underemployment is defined as the share part of temp workers who wanted but couldnt
employment as a share of labour force since 2004. Source: ONS, Barclays Research find a full time job. Source: ONS, Barclays Research

32 10 May 2017
Theme 4: Why wage inflation is unlikely to be a concern
Philips curve shifts lower
Based on historical evidence, real wages accelerate when unemployment falls towards 5.5%. But, recently,
wages have been muted despite unemployment being below 5.5% since early 2015. This deviation from the
historical Philips curve occurs against a background of flat productivity, strong immigration, doubts regarding
the headline unemployment measure and, not least, Brexit.
We believe that the rise of flexible but precarious forms of labour means that the same overall low
unemployment rate will generate significantly less wage pressures today than a decade ago. In other words,
the Philips curve has shifted lower and it might take unemployment below 4% to start seeing wage inflation.
We estimate that the economy has to grow about 1.5% in order to stabilise the unemployment rate. Under our
central scenario, unemployment is more likely than not to increase, hence wage inflation will not materialise.

UK Philips curve shifts lower

9.0
1997-2007
8.0 2008-2012
2013-Present
Unemployement rate, %

7.0 Latest

6.0

5.0

4.0

3.0
-4.0 -2.0 0.0 2.0 4.0
Real Core Wage Growth, %3m/y

Source: ONS, Barclays Research

33 10 May 2017
Theme 4: Why wage inflation is unlikely to be a concern
Facts regarding zero-hour working contracts and self-employed
Zero-hours working contracts are contracts where employers are not required to offer work to an
employee and employees are not required to accept any offered work.
Zero-Hours

Zero-h represented on average 0.5% of the labour force (165k) pre-2012 but increased to 2.7% (905k) at
the end of 2016.
Zero-h are more likely than others to be younger and studying or Seniors (>65years). Overall, they tend to
be less qualified.
Zero-h work less but would like to work more and about 15% of zero hours working contracts actually do
not provide work in reference weeks.

Self employed represented about 12% of the labour Force before the crisis and about 14.5% after. Just
like zero-hour working contracts, self-employment is a very loose and non-exclusive work arrangement.
Self-e are also distinct from the average employee but in a different way than zero-hours contracts:
Self-employed

Self-e tend to be older. They are more likely to work either longer or shorter hours. The share of part-time
in self-e has increased over time with the main reason being lifestyle (do not want full-time jobs).
Older self-employed people are more likely to transition from full time to part-time, suggesting some sort of
retirement management rather than retiring altogether.
At the margins, self-e are more skilled than the average. Nearly half of the self employed are in the highly
skilled category, with an increasing concentration in finance and business service activity.
On average, however, self-e earn about 20% less than employed. They also have not recovered from the
financial crisis with real earnings still about 20% below peak.

34 10 May 2017
 Theme 5: UK Investment
A longer-than-anticipated lag

(reference: UK Themes: Revisiting our investment outlook, 26 January 2017)

35 10 May 2017
Theme 5: UK Investment A longer-than-anticipated lag
Revisiting our investment outlook
Markets and policymakers have been wrong footed by the resilience of investment and overall economic activity
in the UK post-Brexit. However, we do not conclude that Brexit-related uncertainty is a non-issue for firms.
Investment has fallen short of recovering fully from the great recession and remains below its pre-crisis levels in
terms of share of GDP due to lower investment in construction. Other fixed investment evolved through the
crisis in the same fashion as total activity.
Instead, we think that longer (than anticipated) lags from the Brexit shock to investment could be at work. We
examine key investment indicators to test our current forecast of negative investment growth in 2017.
The most recent surveys show that investment behaviour has become more cautious and support our view that
a (mild) investment recession is more likely than not.

Construction drives investment lower (% of GDP) GFCF models point to slowdown

20% 12% 12.5%
10.0%
19% 11% 7.5%
5.0%
2.5%
18% 10%
0.0%
-2.5%
17% 9% -5.0%
-7.5%
16% 8% -10.0%
-12.5%
-15.0%
15% 7%
-17.5%
-20.0%
14% 6% -22.5%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Total GFCF (lhs) Construction (rhs) Other Fixed Investment (rhs) fitted BCC fitted BoE GFCF % y/y GFCF % y/y

Source: ONS, BoE, Barclays Research Source: ONS, BoE, Barclays Research

36 10 May 2017
Theme 5: UK Investment A longer-than-anticipated lag
Revisiting our investment outlook
As suggested by several MPC members, one of the main consequences of Brexit uncertainty
may have been to delay investment decisions, but even if businesses decide to adjust their
operations, investment is only likely to react with a lag.
This would be consistent with resilient data shortly after the EU referendum preceding negative
growth in the last quarter of 2016. Also, investment has been found to move in sync with overall
activity, which is expected to slow.
The effects of uncertainty through weakening the supply potential of the economy are likely to be
even slower.
Confusion about the consequences of Brexit may also be a reason for investment not reacting in
a stylized way as different surveys point in different directions regarding the impact of Brexit.
The IMF finds that the overriding factor driving Uncertainty weight on investment growth
investment is level of economic activity. Hence,
15% -4
further headwinds to investment will arise if
10% -2
consumption slows in response to higher
5%
0
inflation in the course of this year. 0%
2
-5%
Finally, Monetary policy easing has likely 4
-10%
incentivised companies to maintain capex 6
-15%
by supporting perceived profitability (low -20% 8
funding costs and resilient demand) -25% 10
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
GFCF (%y/y, lhs) Forecasts Uncertainty index (inversed, rhs)

Source: ONS, BoE, Barclays Research

37 10 May 2017
Theme 5: UK Investment A longer-than-anticipated lag
Revisiting our investment outlook
Bank lending surveys demonstrate a nice leading relationship with capex.
Credit demand for capex realised over the last three months leads investment by one quarter, with a correlation
of 85%, and captures the mini-cycle between 2011 and 2013 as well as the great recession.
Credit demand for capex expected over the next three months demonstrates a longer lead of two quarters, with
a correlation close to 80%.
The recent decline in credit demand was not previously anticipated by corporations, and may reflect the
October market volatility in the wake of the conservative party conference, which sent the pound to historical
lows.
Taken at face value, credit demand for capex points to a material slowdown of capex in H1 17.

Current credit demand for capital expenditures Expected credit demand for capital expenditures
UK: GFCF (SA, Chn.2013.GBP) % yy UK: GFCF (SA, Chn.2013.GBP) % yy
GFCF forecast GFCF forecast
BoE - Cdt demand for capex, past 3m (RHS, 1q lag) BoE - Cdt demand for capex, next 3m (RHS, 2q lag)
15% 40 15% 40

10% 10%
20 20
5% 5%
0 0%
0% 0
-5% -20 -5%
-10% -20
-10%
-40
-15% -15%
-40
-60 -20%
-20%
-25% -80 -25% -60
07 08 09 10 11 12 13 14 15 16 17 18 07 08 09 10 11 12 13 14 15 16 17 18

Source: BoE, Barclays Research Source: BoE, Barclays Research

38 10 May 2017
 Barclays forecasts

39 10 May 2017
 Global forecasts Barclays projections for 2017-2018
Actual Barclays forecast Global manufacturing confidence
Real GDP (% y/y)
15 6m/6m change, saar normalised diffusion balance
weight* 2014 2015 2016 2017 2018
2
Global 100.0 3.5 3.4 3.2 3.7 3.8
10
Advanced 43.3 1.8 2.2 1.6 1.8 1.9
1
US 19.5 2.4 2.6 1.6 1.9 2.3 5
Australia 1.2 2.8 2.4 2.5 2.8 3.1
Japan 5.3 0.3 1.2 1.0 1.5 1.1 0
0
Euro area 14.4 1.2 1.9 1.7 1.8 1.7
France 2.9 0.7 1.2 1.1 1.5 1.8 -1
-5
Germany 4.2 1.6 1.5 1.8 1.7 1.8
Global industrial production*, LHS
Greece 0.3 0.4 -0.3 -0.1 0.4 2.0 -10 -2
Ireland 0.3 8.4 26.3 4.9 4.1 2.1
Global manuf'g. confidence* RHS
Italy 2.4 0.2 0.7 1.0 0.8 0.8 -15 -3
Netherlands 0.9 1.4 2.0 2.1 2.3 2.0
New orders less fin. gds. inventories* RHS
Portugal 0.3 0.9 1.6 1.4 1.7 1.4 -20 -4
Spain 1.8 1.4 3.2 3.2 2.7 2.0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
UK 2.9 3.1 2.2 1.8 1.5 1.3
Note: *Barclays aggregate. Source: Barclays Research, Markit, Haver. Last update: 02 May 2017
Emerging 56.7 4.9 4.3 4.4 5.1 5.2
Brazil 3.5 0.5 -3.8 -3.6 0.5 2.0
Mexico 2.4 2.3 2.6 2.3 2.3 2.5
China 21.3 7.3 6.9 6.7 6.7 6.3 Our reading of the Barclays global manufacturing
India** 8.7 6.9 7.5 7.5 7.6 8.0 confidence index edged lower to 0.10 in April, from 0.23 in
Indonesia 3.1 5.0 4.9 5.0 5.3 5.7
South Korea 2.0 3.3 2.8 2.8 2.6 2.5
March. This was driven by a fall in the headline
Taiwan 1.2 4.0 0.7 1.5 2.4 2.4 manufacturing PMI prints in the US and China. However,
Poland 1.1 3.2 3.9 2.8 3.2 3.4 some of this weakness was offset by a recovery in UK
Russia*** 4.1 0.7 -3.7 -0.2 1.8 1.5
Turkey 1.7 5.2 6.1 2.9 2.8 3.1
manufacturing sentiment and a strong report from the euro
South Africa 0.8 1.7 1.3 0.3 1.0 1.4 area.

Source: Haver, Barclays Research. Last updated: 09 May 2017

** Barclays forecasts for India are for FY. Note: *Based on 2015 IMF PPP based GDP weights, 5yr
centred moving averages;

40 10 May 2017
Global forecasts Barclays projections for 2017-2018
Actual Barclays forecast Global Inflation Pressures
CPI (% y/y)
US core PCE (market based, LHS)
weight* 2014 2015 2016 2017 2018 % y/y % y/y
Global 100.0 2.3 1.5 1.7 2.4 2.3 4 US 'core' import prices (RHS*) 15
Advanced 61.0 1.4 0.2 0.7 1.8 1.8 US import prices from China (RHS)
US 28.1 1.6 0.1 1.3 2.0 2.2 China PPI (RHS)
Australia 2.1 2.5 1.5 1.3 2.2 2.2 10
Japan 7.3 2.7 0.5 -0.3 0.5 0.7 3
Euro area 19.2 0.4 0.0 0.2 1.6 1.3
France 4.1 0.6 0.1 0.3 1.2 1.1 5
Germany 5.7 0.8 0.1 0.4 1.8 1.8
Greece 0.3 -1.4 -1.1 0.0 1.6 1.3 2
Ireland 0.4 0.3 0.0 -0.2 0.3 0.1
0
Italy 3.1 0.2 0.1 -0.1 1.5 1.4
Netherlands 1.3 0.3 0.2 0.1 1.4 1.3
Portugal 0.3 -0.2 0.5 0.6 1.4 1.3 1
Spain 2.0 -0.2 -0.6 -0.3 2.0 1.4
-5
UK 4.3 1.5 0.0 0.7 2.7 2.2
Emerging 39.0 3.7 3.7 3.3 3.3 3.1
Brazil 3.2 6.3 9.0 8.7 4.2 5.0 0 -10
Mexico 1.8 4.0 2.7 2.8 5.3 3.2 05 06 07 08 09 10 11 12 13 14 15 16 17
China 17.2 2.0 1.4 2.0 2.5 2.3
India** 3.3 6.6 4.9 4.9 4.7 5.2 Source: Barclays Research, Haver Analytics. Last update: 09 May 2017
Indonesia 1.4 6.4 6.4 3.5 4.0 4.3
South Korea 2.2 1.3 0.7 1.0 1.9 2.0
Taiwan 0.8 1.2 -0.3 1.4 1.3 2.1
Poland 0.8 0.2 -0.9 -0.6 2.2 1.7
Even as the growth numbers look solid globally, inflation
Russia*** 2.6 7.8 15.5 7.1 4.2 4.3 pressures remain muted. Euro area inflation came in at 1.5% and
Turkey 1.2 8.9 7.7 7.8 10.3 7.7 core at 0.7% this week, consistent with our view that recent
South Africa 0.5 6.1 4.6 6.3 5.5 5.5 headline inflation was driven by volatile components.

Source: Haver, Barclays Research. Last updated: 09 May 2017

** Barclays forecasts for India are for FY. Note: *Based on 2015 IMF nominal GDP, 5yr centred moving
averages;

41 10 May 2017
Global FX forecasts
Foreign Exchange : 04 May 2017

Spot reference Q217 Q317 Q417 Q118

Developed Economies

EUR/USD 1.10 1.09 1.06 1.03 1.05

USD/JPY 113 112 108 106 103

GBP/USD 1.29 1.30 1.31 1.32 1.38
USD/CHF 0.99 1.00 1.04 1.08 1.07
USD/CAD 1.37 1.35 1.38 1.40 1.38
AUD/USD 0.74 0.74 0.73 0.72 0.72
NZD/USD 0.69 0.68 0.67 0.66 0.66
EUR/JPY 118 122 114 109 108
EUR/GBP 0.85 0.84 0.81 0.78 0.76
EUR/CHF 1.07 1.09 1.10 1.11 1.12
EUR/SEK 9.60 9.40 9.30 9.10 9.00
EUR/NOK 9.18 9.10 9.00 8.90 8.80
GBP/JPY 136 130 132 132 130

GBP/CHF 1.25 1.30 1.35 1.41 1.46

GBP/CAD 1.69 1.72 1.76 1.80 1.85
GBP/AUD 1.67 1.65 1.70 1.75 1.81
GBP/NZD 1.76 1.75 1.80 1.86 1.91
AUD/JPY 82 79 78 75 72
AUD/NZD 1.06 1.06 1.06 1.06 1.06

42 10 May 2017
Chart pack of economic indicators

43 10 May 2017
Activity indicators
Post-exit uncertainty to dampen firms investment intentions
We expect UK economic momentum to slow during Real GDP: A gradual easing of activity into 2017
the course of 2017, on the back of rising inflationary
pp
pressures squeezing household incomes and forcing contrib. Barclays GDP
4 growth forecasts
consumers to hold back on spending.
Firm sentiment and output expectations steadily
2
moderated from highs reached at end-2013, before
stabilising at weak levels post-referendum.
0

We expect these indicators to remain weak, and

potentially deteriorate further, as political tensions -2
13 14 15 16 17 18 19
increase between the UK and EU27 leaders over Private consumption Fixed investment Change in stocks
impending post-exit negotiations. Net trade balance Govt consumption Real GDP (% y/y)

Source: ONS, Barclays Research

Business surveys (realised output) Business surveys (future output expectations)

2 SD 2 SD

1
1
0

0 -1

-2
-1
-3

-2 -4
10 11 12 13 14 15 16 17 18 06 07 08 09 10 11 12 13 14 15 16 17 18
PMI CBI BCC CBI BCC LBB

Source: Markit, CBI, BCC, Barclays Research Source: CBI, BCC, Lloyds, Barclays Research

44 10 May 2017
Activity indicators
Post-exit uncertainty to dampen firms investment intentions
Businesses are reporting that government policies Investment intentions
(national living wage, apprenticeship levy), financial
%
15y/y SD
market jitters and uncertainty regarding the UKs 3
10 2
post-exit relationship with the EU and the rest of the
5 1
world are all adversely impacting firms risk appetite
0 0
and decisions to invest. -5 -1

We expect firm sentiment and investment intentions -10 -2

-15 -3
to remain weak, and even deteriorate further, as
-20 -4
political tensions increase between the UK and EU27
-25 -5
leaders over impending post-exit negotiations. 07 08 09 10 11 12 13 14 15 16 17 18 19
Fixed investment (lhs) BoE Agents' Survey (rhs)
Therefore, we forecast negative growth in BCC Economic Survey (rhs) Deloitte CFO Survey (rhs)
investment over the course of 2017. Source: ONS, BoE, BCC, Deloitte, Barclays Research

Services output Industrial production and manufacturing

Professional/Support Distrib./hotels/catering
q/q pp 115 10
Information & comm. Financial/Insurance
contrib.
1.8 Real estate Gov./Health/Educ.
Other services GVA Total economy (% q/q) 110 5
1.5 Services (% q/q)
1.2 105 0
0.9
100 -5
0.6

0.3 95 -10
0.0
90 -15
-0.3
07 08 09 10 11 12 13 14 15 16 17 18
-0.6 Industrial production (rhs, % 3m/y) Industrial production (lhs, 2012 = 100)
11 12 13 14 15 16 17 18 Manufacturing (lhs, 2012=100)

Source: ONS, Barclays Research Source: ONS, Barclays Research

45 10 May 2017
Consumer indicators
Household spending remains resilient but for how much longer?
Private consumption remained resilient in 2016, likely Private consumption: Set to slow during 2017
helped by modest income growth and buoyant
7 45
consumer confidence, as well as households partially 6 Barclays 35
Consumption
eating into savings, leaving the savings ratio at a 5 Forecast 25

historical low (3.3% of gross disposable income). 4 15

3 5
Unsecured consumer credit, meanwhile, has grown 2 -5
1 -15
steadily over the last three years, likely also having 0 -25
helped keep consumption elevated. -1 -35
-2 -45
Pension reform and PPI payments (25bn since 10 11 12 13 14 15 16 17 18 19

2011) have helped to push up consumption in the Private consumption (lhs, % y/y)
Retail sales incl. fuel (lhs, % 3m/y)
short run but point towards more weakness in saving Consumers' intent to purchase (rhs, % balance)

and investment over the longer run. Source: ONS, GfK, Barclays Research

Household lending Real disposable income, consumption and savings

10 , bn, 3mma 125

100
8
75

6 50
25
4
0

2 -25
-50
0 -75

-2 -100
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 05 06 07 08 09 10 11 12 13 14 15 16 17

Consumer Credit Mortgages Real disposable income Gross savings Consumption

Source: ONS, Barclays Research Source: ONS, Barclays Research

46 10 May 2017
Consumer indicators
Household spending remains resilient but for how much longer?
Retail sales growth (volumes) Consumers intention to purchase
6 pp %
10 y/y 25
Index
contrib.
5
8 15
4
3 6 5

2 4 -5
1
2 -15
0
-1 0 -25
-2
-2 -35
-3
10 11 12 13 14 15 16 17 18 -4 -45
07 08 09 10 11 12 13 14 15 16 17 18
Food stores Non-food stores Non-store retail
Fuel Retail incl. fuel (% 3m/y) Retail sales incl. auto fuel (lhs) Consumers' intent to purchase (rhs)

Source: ONS, Barclays Research Source: ONS, GfK, Barclays Research

Consumer confidence (drivers of the headline) Consumer confidence (change from March)

5
0 Headline
0.9
-5
0.6
-10 Intent to purchase 0.3 Personal finances
-15 (next 12mths) 0.0 (last 12mths)
-0.3
-20 -0.6
-25 -0.9
-30
-35 Wider economy Personal finances
12 13 14 15 16 17 18 (next 12mths) (next 12mths)

Personal finances Personal finances Wider economy

(last 12mths) (next 12mths) (last 12mths) Wider economy
Wider economy Intent to purchase Headline (last 12mths)
(next 12mths) (next 12mths) Mar. 17 Apr. 17

Source: GfK, Barclays Research Source: GfK, Barclays Research

47 10 May 2017
Labour market indicators
The unemployment rate is below pre-crisis levels but looks set to rise
The unemployment rate is now below pre-crisis Unemployment rate
levels, driven partly by the rise in self-employed.
15 10
Job creation since end-2013 appears to be on a
14 9
broadly downward trend. Jobs created are
increasingly being filled by non-UK, and specifically 13 8

EU27, nationals; in 2015, only 48% of all jobs 12 7

created went to British citizens, with EU27 nationals 11 6

filling 38% of posts and 14% from RoW.
10 5

Given Brexit, we expect employment growth to turn 9 4

negative during 2017 and stay so until mid-2018. 06 07 08 09 10 11 12 13 14 15 16 17 18

Self-employed (% of workforce, lhs) Unemployment rate (rhs)

Equally, we expect unemployment to rise and reach
5.6% by Q4 18 as firms pull back on Brexit fears. Source: ONS, Barclays Research

New jobs created by nationality Employment intentions

800 Thous. y/y SD
3
600
2
400 1
200 0
0 -1

-200 -2

-400 Brits EU27 -3

-600 -4
RoW Total
05 06 07 08 09 10 11 12 13 14 15 16 17 18
-800
05 06 07 08 09 10 11 12 13 14 15 16 17 PMI REC BoE GfK (inverted)

Source: ONS, Barclays Research Source: ONS, Barclays Research

48 10 May 2017
Labour market indicators
...and will likely prevent an acceleration in nominal wage growth
Core wage growth accelerated throughout H1 15 and The UK Phillips curve
then did a u-turn, decelerating over H2 15 back to
1997 - 2007
growth rates seen at end-2014. In part, this was 9.0
8.5 2008 - 2012
driven by fewer hours worked per week. But even so, 8.0 2013 - Present

Unemployment rate, %
hourly wage growth decelerated too, so more was 7.5
Feb. 17
7.0
clearly at play behind the scenes.
6.5

Surveys suggest there is little upward pressure in 6.0

5.5
nominal wage growth ahead. 5.0
4.5
We expect Brexit to inhibit nominal wage growth 4.0
pressures from building, resulting in a deterioration of -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0
Real core wage growth, %3m/y
purchasing power as headline CPI ascends. Some
surveys suggest real wage growth of -0.5% in 2017. Source: ONS, Barclays Research

Core wage growth Wage growth surveys

% 3m/y 4.0 % 3m/y SD 2.5

3.0 3.5 2.0

2.5 3.0 1.5
2.0
2.5 1.0
1.5
2.0 0.5
1.0
1.5 0.0
0.5
0.0 1.0 -0.5
-0.5 0.5 -1.0
-1.0
0.0 -1.5
10 11 12 13 14 15 16 17 18
12 13 14 15 16 17 18 19
Hours/week Core wages/hr Core wages Core wages (lhs) BoE Agents (rhs) REC (rhs)

Source: ONS, Barclays Research Note: BoE and REC surveys are 12mth leading. Source: ONS, Barclays Research

49 10 May 2017
Inflation indicators
Headline CPI is on the ascent
Headline CPI averaged 0.7% in 2016, ascending Headline CPI breakdown
from 0.3% y/y in Jan 2016 to 1.6% y/y in Dec 2016,
6pp
while core inflation hovered around 1.3%.
contrib.
5
We expect headline CPI to continue its rise, peaking 4

at 3.1% y/y in June and August 2017, before 3

gradually falling to just below the BoEs 2.0% target 2

1
and hovering around there from mid-2018.
0
Public inflation expectations appear to be rising -1

marginally according to the Basix and BoE surveys, -2

07 08 09 10 11 12 13 14 15 16 17 18
while GfK shows a more pronounced increase. Services NEIGs Energy goods
Food, alcohol & tobacco Other CPI (% y/y)

CPI RPI CPI RPI Source: ONS, Barclays Research

index % y/y index % y/y index % y/y Index % y/y

Jan 17 101.4 1.8 265.5 2.6 Jan 18 104.2 2.8 275.2 3.6
Public inflation expectations
Feb 17 102.1 2.3 268.4 3.2 Feb 18 104.7 2.5 277.9 3.5
Mar 17 102.5 2.3 269.3 3.1 Mar 18 105.0 2.5 278.5 3.4 5.5 95
5.0
Apr 17 102.7 2.5 269.9 3.3 Apr 18 105.3 2.5 279.4 3.5 4.5 85
May 17 103.4 3.0 272.1 3.8 May 18 105.7 2.2 280.4 3.1 4.0
Jun 17 103.7 3.1 273.0 3.8 Jun 18 105.7 1.9 280.9 2.9 3.5 75
3.0
Jul 17 103.5 2.9 273.0 3.7 Jul 18 105.5 1.9 280.8 2.8 2.5 65
Aug 17 104.0 3.1 274.5 3.8 Aug 18 106.0 1.9 282.5 2.9 2.0
Sep 17 104.2 3.0 275.3 3.9 Sep 18 106.2 1.9 283.5 3.0 1.5 55
1.0
Oct 17 104.3 3.0 275.2 3.9 Oct 18 106.3 1.9 283.2 2.9 0.5 45
Nov 17 104.4 2.9 275.5 3.8 Nov 18 106.3 1.9 283.4 2.9 0.0
Dec 17 104.7 2.7 276.9 3.7 Dec 18 106.6 1.9 284.9 2.9 -0.5 35
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
2017 2.7 3.5 2018 2.2 3.1
Basix (lhs) BoE (lhs) CPI (lhs) Barclays CPI fc (lhs) GfK (rhs)
Oil $ 55.8 Oil $ 56.1

Source: ONS, Bloomberg, Barclays Research Source: ONS, BoE, GfK, Barclays Research

50 10 May 2017
External indicators
A large current account deficit
Current account: A persistent deficit Trade balance

15 bn 0.0 50
10
-0.5
5
-1.0 45
0
-5 -1.5
-10 -2.0 40
-15
-2.5
-20
-3.0 35
-25
-30 -3.5
-35 -4.0 30
05 06 07 08 09 10 11 12 13 14 15 16 17 10 11 12 13 14 15 16 17 18
Trade balance Primary income Secondary income Current account Trade balance (lhs) Exports (rhs) Imports (rhs)

Source: ONS, Barclays Research Source: ONS, Barclays Research

GBP Country breakdown of exports

120 ROW US
115 18.1% 12.2%
Rest of Asia
110 2.3%
Germany
105 10.8%
100 China
95 4.4% France
90 6.5%
Middle East
85
5.7%
80 Netherlands
6.0%
75
70 Ireland
10 11 12 13 14 15 16 17 18 Switzerland
Rest of EU 4.9%
12.2%
GBP Nominal Effective GBPEUR GBPUSD 16.8%

Source: BoE, Barclays Research Note: Exports of goods in nominal USD as at January 2017. Source: IMF, Barclays Research

51 10 May 2017
Monetary and financial indicators
Overall lending is elevated
Lending Lending growth rates
50 bn, 12mma 20 % y/y

40
15

30
10
20
5
10

0 0

-10 -5
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Mortgage lending Consumer credit PNFC Total excl. other financials Secured consumer credit Unsecured consumer credit PNFC credit

Source: ONS, BoE, Barclays Research Source: ONS, BoE, Barclays Research

Corporate credit outlook PNFC funding breakdown

10 bn, 3mmt
Availability
9
of credit 8
0.9 7
Tighter 0.6 6
Economic
wholesale 0.3 5
outlook
conditions 4
0.0
3
-0.3 2
-0.6 1
Risk Sector 0
appetite risk -1
-2
-3
Market -4
Pressure from capital
share -5
markets
objectives 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Dec 16 Mar 17 Equity Bonds Loans Other Total

Note: Figures are standardised. Source: BoE, Barclays Research Source: ONS, BoE, Barclays Research

52 10 May 2017
Monetary and financial indicators
Overall lending is elevated
Mortgage data Household secured credit outlook
8 bn Thous. 80
Availability
7 of credit
6 1.8
60 1.5
5 Expectations 1.2 Economic
for house prices 0.9 outlook
4 0.6
40 0.3
3 0.0
2
Tighter Market
1 20
wholesale share
conditions objectives
0
-1 0 Risk
10 11 12 13 14 15 16 17 18 Appetite
New mortgage lending (lhs) Mortgage approvals (rhs) Dec 16 Mar 17

Source: BoE, Barclays Research Source: BoE, Barclays Research

Barclays UK monetary conditions index Financial market volatility

125 Easing 8 80 30
120 70
6 25
115
60
4
110 20
50
105 2
40 15
100
0
30
95 10
-2 20
90
Tightening 5
85 -4 10
05 06 07 08 09 10 11 12 13 14 15 16 17 18
0 0
REER Short Term Real IR Long Term Real IR 05 06 07 08 09 10 11 12 13 14 15 16 17 18
GBP REER (Index, LHS) MCI (RHS) Equities (lhs) Gilts (lhs) GBP (rhs)

Source: BoE, OECD, Barclays Research Source: Bloomberg, Barclays Research

53 10 May 2017
Public finance indicators
Chipping away at the deficit, slowly but surely
Public sector net borrowing Net purchase of UK debt by ownership
12mmt 12mmt 40
4 40
% of GDP % of GDP
20
2 38
0
0 36
-20
-2 34
-40
-4 32
-60 3mth rolling
-6 30 totals, bn
-80
-8 28 10 11 12 13 14 15 16 17 18
05 06 07 08 09 10 11 12 13 14 15 16 17 18 Net Purchases of Public Sector Debt by non-residents
Net Purchases of Public Sector Debt by residents
Current budget (lhs) Expenditures (rhs) Receipts (rhs) Private Sector Net Purchase of Public Sector Debt

Note: Cumulative 12mm sum, % of GDP. Source: ONS, Barclays Research Note: Cumulative 12mm sum, % of GDP. Source: ONS, Barclays Research

Current expenditures Current tax receipts

12mmt 12mmt 12mmt 12mmt
25 9 17 9
% of GDP % of GDP % of GDP % of GDP
24 8 16 8
23 7 15 7
22 6 14 6
21 5 13 5
20 4 12 4
19 3
11 3
18 2
10 2
17 1
9 1
16 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 8 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Other expenditures (lhs) Social assists (rhs)
Pension related payments (rhs) Interest payments (rhs) Income & capital (lhs) VAT receipts (rhs) NICs (rhs)

Note: Cumulative 12mmt, % of GDP. Source: ONS, Barclays Research Note: Cumulative 12mmt, % of GDP. Source: ONS, Barclays Research

54 10 May 2017