1) While recent economic data from the UK has been positive, showing growth and falling unemployment, the UK economy still faces structural weaknesses that will dampen medium-term growth. 2) The UK has experienced decades of underinvestment and the private sector remains cautious, keeping investment levels well below pre-financial crisis levels. 3) The financial services sector, a key industry, also still faces weaknesses since the crisis and is limiting lending to the private sector. 4) External trade partners in Europe also remain weak, holding back UK growth.

1. Weekly Commentary
QNB Economics
economics@qnb.com.qa
22 September 2013
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.
Positive Economic Data Clouds Weak Medium-Term
Fundamentals for the UK Economy, According to QNB Group
A raft of positive economic data on the UK
economy has raised expectations that the
economy may be emerging from an extended
period of stagnation following the global
economic crisis of 2008-09. According to QNB
Group, much of the improvement however can
be attributed to short-term temporary factors
while structural weaknesses are likely to
dampen the medium-term growth outlook,
preventing a much-needed recovery in
investment.
The flow of economic data coming from the UK
has turned markedly positive in recent months.
Real GDP growth has picked up in the last two
quarters (see chart). Jobless claims fell faster
than expected in August, leading to a surprise
reduction in the unemployment rate to 7.7%.
Advance indicators, notably surveys of
purchasing managers, have shown stronger-
than-expected growth across all sectors: mainly
manufacturing, services and construction.
However, the UK economy continues to face a
number of structural weaknesses. First, the
economy has experienced decades of
underinvestment in its industry and
infrastructure. The private sector remains too
concerned about structural weaknesses in the
economy to commit to major long-term
investments in vital sectors such as transport
and energy. Investment in the economy
remains well below pre-financial crisis levels
and its share of GDP continues to fall (see
chart).
Second, financial services are a key component
of the UK economy, but weaknesses have
persisted since the financial crisis. Banks
received considerable financial support with the
state retaining large stakes in two major banks
(RBS and Lloyds). Banks remain overleveraged
with unrecognized losses and considerable
exposure to undercapitalized European
counterparties. The financial sector is further
holding back lending to the private sector,
except for real estate.
UK Growth and Investment
(2007 to Q2 2013)
Source: Global Insight and QNB Group analysis
Finally, economic weakness persists across key
external trading partners in Europe. Although
there are indications that Europe could be
emerging from recession, the heavy reliance on
trade with Europe means the outlook remains
uncertain and this could continue to hold back
UK growth.
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
0
5
10
15
20
Q1
07
Q1
12
Q3
11
Q1
11
Q3
10
Q1
10
Q3
09
Q1
09
Q3
08
Q1
08
Q3
07
Q2
13
Q3
12
Investment (% ofNominal GDP, right axis)
Real GDP (% change, left axis)

2. Weekly Commentary
QNB Economics
economics@qnb.com.qa
22 September 2013
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.
The government has seized on the recent strong
economic indicators as a vindication of its fiscal
austerity policy. It argues that the pickup in
growth has been achieved despite higher taxes
and spending cuts that have seen the fiscal
deficit almost halve from 11% of GDP in 2009 to
around 6% currently. However, much of the
discretionary fiscal tightening has been
postponed to after the next parliamentary
elections in 2014. The government has also
recently introduced schemes to subsidize the
housing sector, supporting home buyers and
helping to bring down banks’ financing costs
and mortgage rates. These schemes are
contradictory to the government’s austerity
policies. They may be helping to boost
sentiment ahead of the elections, but they also
raise questions about the sustainability of the
recovery and concerns about a boom and bust
cycle in the real estate market, which has been
an Achilles’ heel of the UK economy in the past.
On the monetary side, the UK economy is
receiving unprecedented support. Bank of
England policy rates have been at an all-time
low of 0.5% since March 2009 and the incoming
central bank governor recently introduced
forward guidance on interest rates and
committed to keeping interest rates on hold
until unemployment falls below 7.0%.
Additionally, the Bank of England continues its
policy of quantitative easing, maintaining a
stock of long-term government debt currently
worth GBP375bn (USD596bn).
However, the extraordinary loose monetary
policies and postponed fiscal austerity have
failed to prevent a sharp increase in long-term
government bond yields. These yields have
risen by around 50 basis points since the
beginning of August on expectations the US
Federal Reserve will begin tapering its own
quantitative easing. Rising long-term interest
rates threaten to undermine the long-term
growth prospects of the UK economy.
Therefore, despite recent positive indications of
a UK economic recovery, growth is likely to
continue to be muted over the medium term.
Fiscal constraints will hold back public spending
while investment will be discouraged by rising
long-term interest rates as loose monetary
policy appears to be largely ineffectual.
According to QNB Group, unless the underlying
structural weaknesses of the UK economy are
addressed, it is unlikely that the economic
clouds will clear over the British horizon.