Forecasts for the UK economy in 2012 with a 2007 - 2015 planning horizon.

1. January 2012 The UK Economy in Black and White 2007 - 2015 Forecasts John Ashcroft is Chief Executive of pro.manchester, a director of Marketing Manchester and a visiting professor at MMU Business School specialising in Macro Economics and Corporate Strategy. Educated at the London School of Economics and London Business School with a PhD in macro economics from MMU. pro.manchester is the members organisation, representing the financial and professional services organisation in Greater Manchester. CEO Blog Econ Blog Search for jkaonline GDP Inflation CPI Earnings - whole economy Unemployment - claimant count Unemployment - LFS basis Base Rates Ten Year Gilts Oil Price - Brent crude PSNBR £ PSNBR % Manufacturing Retail Sales On line sales Trade in Goods Trade in Services Overall Balance House Prices Exchange Rates Exogenous Assumptions : Growth in China - USA recovery - no Euro collapse

2. UK GDP UK GDP growth is expected to be 0.9% in 2011 and more or less the same level in 2012. Thereafter the economy will recover slowly towards a trend rate of growth (2.4%) over a period of five years. January 2012 The UK Economy in Black and White JKA % change year on year

3. UK Inflation CPI UK inflation CPI basis is expected to fall back in the first half of 2012 as the VAT hike drops out of the index and the oil price increases in 2011 fall out in the second quarter. We anticipate some difficulty in achieving the 2% inflation target by the end of the year with 2.5% as the main forecast outcome. January 2012 The UK Economy in Black and White JKA % change year on year

4. UK Earnings - whole economy Earnings data is a little confusing but a negative real rate of growth of over 2% created problems for households in 2011. Inflation will ease back and earnings may increase slightly into the year. January 2012 The UK Economy in Black and White JKA % change year on year

5. UK Unemployment - claimant count Unemployment claimant count is expected to increase slightly in 2012 before falling back modestly over the following three years. January 2012 The UK Economy in Black and White JKA 000s

6. UK Unemployment - LFS basis 000 Unemployment using the Labour Force Survey data is expected to rise to 2.7 million in 2012 before easing back. Forecasts of 3 million unemployed in 2012 may to be too pessimistic. January 2012 The UK Economy in Black and White JKA 000s

7. UK Unemployment - LFS basis % The headline unemployment rate will average around 8.5% in the year. Unemployment claimant count is expected to increase slightly in 2012 before falling back modestly over the following three years. January 2012 The UK Economy in Black and White JKA

8. Interest Rates - UK Base rate Base rates are expected to rise by the end of 2012. Rates averaged 5% in 2007 and 2008. The current 50 basis point strategy is without parallel in post war history. Weakness in achieving the inflation target as growth recovers, will push rates higher. January 2012 The UK Economy in Black and White JKA

9. Interest Rates - Ten Year Gilt Rates We model ten year gilts as a function of inflation and a real rate “risk” premium. The par rate for gilts assuming a 2% inflation target is around 4% compared to a long run average of 4.5%. QE forces up gilt prices and pushes down yields to an unrealistic level. Ten year gilt rates of 2% signal a distortion along the yield curve. January 2012 The UK Economy in Black and White JKA

10. Oil Prices - Brent Crude $ Oil prices are expected to increase over the forecast horizon towards $130 per barrel Brent Crude basis adding to domestic inflationary pressures. The fall in 2009 was a correction to the speculative peak in 2008 rather than a function of market fundamentals January 2012 The UK Economy in Black and White JKA

11. Government Borrowing PSNBR £ Government Borrowing figures are expected to fall to around £122 billion in 2011/12 slightly ahead of the forecasts from the Office for Budget Responsibility. With sluggish growth but with only a moderate rise in unemployment the reduction in borrowing should move to target. January 2012 The UK Economy in Black and White JKA £000

12. Government Borrowing PSNBR % GDP As a percentage of GDP borrowing will fall to around 8% of GDP in the current financial year from a peak of over 11% in 2009/10 January 2012 The UK Economy in Black and White JKA % GDP

13. Manufacturing % Manufacturing growth in the second half of 2011 averaged just 2% growth year on year. The long term average growth is around 1.5% consistent with a continuous fall in manufacturing as a percentage of GDP. There will be no dramatic turn round in UK manufacturing. January 2012 The UK Economy in Black and White JKA % change year on year

14. Retail Sales Retail sales volume growth has averaged over 4% since 2000 prior to the slow down in 2008. Volumes continue to be squeezed as household incomes remain under pressure and more transactions switch on line. Retail will be tough in the years ahead. January 2012 The UK Economy in Black and White JKA % change year on year

15. Retail Sales - online On line sales accounted for 12.5% of total retail sales by the end of 2011 and by the end of the forecast horizon almost a quarter of total sales will be online. The market is racing way ahead of earlier trade expectations placing greater pressure on high street trade. January 2012 The UK Economy in Black and White JKA % of total retail sales

16. Trade in Goods Deficit £ billions The trade in goods deficit increased in 2011 from £97.2 billion to just under £104 billion. The trend deterioration is expected to continue, sterling weakness is of little value to the structural weakness. January 2012 The UK Economy in Black and White JKA £ billions chain linked series

17. Trade in Services Surplus £ billions The service sector surplus increased to £69 billion in 2011 from £51 billion in 2010. A more modest improvement is forecast into 2012 and beyond. January 2012 The UK Economy in Black and White JKA £ billions chain linked series

18. Trade in Goods and Services £ billions The overall deficit trade in goods and services improved significantly in 2012 due to the service sector improvement. A more modest trend improvement is in prospect in the years ahead but welcome news none the less. January 2012 The UK Economy in Black and White JKA £ billions chain linked series

19. House Prices - UK House prices are expected to trade sideways over the forecast horizon with some potential modest recovery towards the end of the period. Buy to let will support market action as first time buyer action will be muted. January 2012 The UK Economy in Black and White JKA % change on prior year

20. Exchange Rates Sterling is expected to hold against the dollar and appreciate slightly against the Euro as interest rate spreads narrow and Euroland worries persist Further dollar weakness against the Renminbi is expected. January 2012 The UK Economy in Black and White JKA 2007 2008 2009 2010 2011 2012 2013 2014 2015 £ : $ 2.00 1.85 1.57 1.55 1.61 1.56 1.56 1.56 1.56 £ : € 1.46 1.26 1.12 1.17 1.15 1.22 1.25 1.28 1.28 £: ¥ 235.6 191.3 146.9 136.1 128.6 117.0 112.3 107.6 103.1 $: € 1.37 1.47 1.40 1.32 1.39 1.28 1.25 1.22 1.22 ¥:$ 117.8 103.4 93.6 87.8 79.9 75.0 72.0 69.0 66.1 Yuan:$ 7.61 6.95 6.83 6.77 6.47 6.47 6.25 6.00 5.75 ¥:Yuan 15.48 14.88 13.70 12.96 12.35 11.59 11.52 11.50 11.49

21. January 2012 The UK Economy in Black and White 2007 - 2015 Forecasts John Ashcroft is Chief Executive of pro.manchester, a director of Marketing Manchester and a visiting professor at MMU Business School specialising in Macro Economics and Corporate Strategy. Educated at the London School of Economics and London Business School with a PhD in macro economics from MMU. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments or trends in financial markets. The publication of this document should not be construed as the giving of investment advice. www.johnashcroft.co.uk GDP Inflation CPI Earnings - whole economy Unemployment - claimant count Unemployment - LFS basis Base Rates Ten Year Gilts Oil Price - Brent crude PSNBR £ PSNBR % Manufacturing Retail Sales On line sales Trade in Goods Trade in Services Overall Balance House Prices Exchange Rates Exogenous Assumptions : Growth in China - USA recovery - no Euro collapse