Transcript Document

Global Economic Outlook
Business and Policy Dilemmas
Draft
Zbyszko Tabernacki, CFA
Executive Managing Director
Economics and Country Risk
IHS Global Insight
November 18, 2010
The Global Recovery: Status Update
• The global expansion is continuing, but at a more gradual pace
• Recoveries from financial crises are typically slow
• Debt levels will influence the speed of country recoveries
• Inflation will not be a serious problem in most countries
• Interest rates will remain low through 2011 in advanced countries but will rise
in emerging markets
• Quantitative easing will have little impact on economic growth
• The probability of a global double-dip recession is about 20% and declining
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After Slowing in Mid-2010, World Real GDP
Growth Is Expected to Gradually Pick Up
6
(Quarter-on-quarter percent change, annual rate)
4
2
0
-2
-4
-6
-8
2006
2007
Global
Insight
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2008
2009
2010
2011
2012
Global Economic Indicators: Mixed Signals
In October 2010, 18 of 21 indicators signaled expansion
(green), but only 10 had improved since August (up arrow)
Net Output Surprises
Global New Orders
Global Yield Curve
Industrial Metals Prices
Global Real Policy Rate
Global Industrial Production
Global Consumer Price Inflation
Real Baltic Dry Bulk Shipping Rate Index
Global Real Narrow Money (M1) Supply
Global Real Merchandise Imports
Global Real Broad Money (M2) Supply
Real Crude Oil Prices
Lending Standards
Consumer Confidence Diffusion
TED Spread: LIBOR vs. T-bill
Global Real Retail Sales
Global Equity Prices
Corporate Profit Proxy: CPI–WPI Difference
Global Foreign Exchange Reserves
Global Employment Growth
Global Manufacturing Confidence
Source:
Global
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Insight
Crawling Economies
• High debt levels
• Weak growth — post-crisis recoveries are almost always slow
• No inflation
• Rock-bottom interest rates
• Downward pressure on currencies
• Risks: double-dips and/or lost decades
• Risk: currency “wars” and protectionism
• Macro challenges: monetary and fiscal policy “exit strategies” without aborting
the recovery
• Micro challenges: boosting productivity and competitiveness (especially in
Southern Europe), reining in healthcare and pensions costs, cleaning up
housing wreckage, help for the chronically unemployed
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5
Global Unemployment
(Percent of unemployed out of work for at least six months)
Unemployment
Rate, %
7.5
11.6
10.1
20.5
5.1
10.5
7.7
9.6
5.1
7.4
3.3
8.1
Of which: 12 months or more
3.4
Source: OECD
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6
Booming Economies
• Low debt levels
• Strong growth
• Rising (but still low) inflation
• Rising interest rates
• Upward pressure on currencies
• Risks: overheating and asset bubbles
• Risk: currency “wars”
• Macro challenges: less intervention in currency markets, more support for
consumer spending
• Micro challenges: structural and institutional changes to increase share of
consumer spending in economy (i.e. less export dependence)
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7
Millions
Global Auto Markets Reflect Two-Speed
World
Light Vehicle Sales
45
40
35
30
25
Triad LV Sales
BRICs LV Sales
20
15
10
5
0
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
Note: Triad comprises U.S., Japan, and Western Europe
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8
Purchasing Managers’ Indexes Signal
Expansion in Most Areas
(Manufacturing index, over 50 indicates expansion)
65
60
55
50
45
40
35
30
2006
2007
United States
2008
Eurozone
2009
China
2010
Japan
Sources: Institute for Supply Management, Royal Bank of Scotland/NTC Research, China Federation of
Nomura/JMMA
Logistics
and Purchasing,
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Industrial Materials Prices Are Rising Again,
Partly in Response to Dollar Depreciation
(IHS Global Insight Indexes, 2002:1=1.0)
5
4
3
2
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
In U.S. Dollars
Global
Insight
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In GDP-Weighted Currency Basket
Currency Wars Could Lead to Trade Wars
• Fundamental problem: the world economy needs to reflate and rebalance at the
same time
• Textbook solution: currencies of surplus countries appreciate and the currencies of
deficit countries depreciate
• Motivations for market intervention
• deflationary fears (Japan and Switzerland)
• concerns about capital inflows (Brazil)
• insecurities about the strength of domestic demand (China)
• worries about China’s competitiveness (Brazil, South Korea)
• Zero-sum game: shades of 1930s competitive devaluations
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The U.S. Dollar Will Depreciate Against
Currencies of Emerging Markets
(Real Trade-Weighted Dollar Index, 2005=1.0)
1.6
1.4
1.2
1.0
0.8
0.6
1978
1982
1986
1990
1994
Major Trading Partners
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1998
2002
2006
2010
2014
Other Important Trading Partners
The U.S. Recovery: Uneven and Subpar
• Recession “over”, but GDP hasn’t regained previous peak yet
• Growth boost from fiscal stimulus and inventories is fading
• Headwinds are blowing from consumer and business caution
• Policy uncertainties don’t help, but the key problem is the hangover
from the financial boom and bust
• QE II is on the way; it’s not a cure-all
• It’s too early to tighten fiscal policy when the private sector is gripped
by an “epidemic of thrift”
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13
A Deeper U.S. Recession and Slower
Recovery than in Past Cycles
10
(Real GDP, percent difference from recession trough)
8
6
4
2
0
-2
-8
-7
-6
-5
-4
-3
-2 -1 0 1 2 3
Quarters from Trough
Current Recovery
Global
Insight
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4
5
6
7
Average of Post-1950 Recoveries
8
Household Credit Conditions:
Beginning To Loosen
Home Mortgage Credit Growth*
Consumer Credit Growth*
6
4
2
0
-2
-4
-6
2007
10
5
0
2008
2009
2010
-5
2007
Banks Tightening Cons. Credit**
40
2009
2010
Banks Tightening Mortgage Credit**
80
60
2008
80
60
Other Loans
20
20
Credit Cards
0
-20
2007
Prime Loans
40
0
2008
2009
2010
-20
2007
*% change y/y; **Percent of banks tightening less percent loosening
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2008
2009
2010
1
5
Employment Is Turning, But Not Rapidly
Private Payroll Employment*
250
Unemployment Rate**
12
0
10
-250
-500
8
-750
6
-1,000
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
4
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Length of Workweek***
Temporary Employment*
34.0
100
33.5
50
0
33.0
-50
32.5
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
*Thousands, monthly change, SA; **Percent; ***Hours, SA
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-100
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
16
Consumer Spending Stabilizing,
But Not a Strong Driver of Recovery
(Annualized rate of growth)
6
4
2
0
-2
-4
2003
2004
2005
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2006
2007
2008
2009
2010
2011
2012
17
Business Equipment Demand Recovering
(Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)
70
65
60
55
50
45
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Orders
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Shipments
18
U.S. Economic Growth by Sector
(Percent change unless otherwise noted)
Real GDP
Final Sales
Consumption
Light Vehicle Sales (Millions)
Residential Investment
Housing Starts (Millions)
Business Fixed Investment
Federal Government
State and Local Government
Exports
Imports
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2009
-2.6
-2.1
-1.2
10.4
-22.9
0.55
-17.1
5.7
-0.9
-9.5
-13.8
2010
2.7
1.2
1.7
11.4
-4.2
0.60
5.6
4.7
-1.3
11.5
13.2
2011
2.3
2.5
2.4
12.8
4.1
0.78
5.9
0.0
0.2
8.3
5.6
2012
2.9
2.9
2.0
14.8
33.4
1.21
7.3
-3.5
0.0
8.1
5.3
19
Other Key Indicators
(Percent unless otherwise noted)
2009
2010
2011
2012
Industrial Production (% growth)
-9.3
5.3
2.9
3.5
Employment (% growth)
-4.3
-0.5
0.9
2.2
9.3
9.7
9.6
9.1
-0.3
1.7
1.5
1.9
Oil Prices (WTI, US$/bbl)
62
79
83
89
Core PCE Price Inflation
1.5
1.4
1.3
1.4
Federal Funds Rate
0.16
0.17
0.14
1.27
10-year Government Bond Yield
3.26
3.14
2.58
3.43
Dollar (Major Currencies, 2005=1)
0.93
0.90
0.86
0.88
Unemployment Rate
CPI Inflation
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20
What Can QE II Accomplish?
• Don’t expect too much from QE II
• Quantitative easing is powerful in a crisis...
• ...but financial markets are not in meltdown now...
• QE II of $500bln-$1 trl can push down long-term interest rates (25-
50bps?), at least partly priced in already...
• ...and help growth a tenth or two in 2011...
• ...not a game-changer
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21
Canada Recovery Hits a Speed Bump
Retail Sales
30
Total New Motor Vehicle Sales
(Excluding motor vehicles and parts, billions)
(Millions of units, SAAR)
320
2.0
28
300
1.8
15.5
26
280
1.6
13.0
24
260
1.4
10.5
22
2005
240
1.2
2007
2006
2007
Canada (LS)
2008
2009
United States (RS)
Leading Manufacturing Indicators
(Diffusion index, over 50 indicates expansion)
18.0
8.0
2008 2008 2009 2009 2010 2010
Canada (LS)
United States (RS)
Real GDP
70
5.0
60
2.5
50
0.0
40
-2.5
30
2005
-5.0
(Percent change)
2.9
2.7
2.3
2.3
-2.5 -2.6
2006
2007
Canada*
2008
2009
2010
United States**
2009
2010
Canada
2011
United States
* Ivey, n.s.a; ** ISM Index
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22
Mexico Outlook Summary
10
Real GDP Growth (%)
10
5
8
0
6
-5
4
-10
2000 2002 2004 2006 2008 2010 2012
14
Exchange Rate per US$*
Consumer Price Inflation (%)
2
2000 2002 2004 2006 2008 2010 2012
0
Current Account Balance**
13
12
11
-10
-20
10
9
-30
2000 2002 2004 2006 2008 2010 2012
2000 2002 2004 2006 2008 2010 2012
*Annual average, **Billions of U.S. dollars
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23
Eurozone Growth Likely to Be
Uneven and Sluggish
• Despite strong Q2, Eurozone growth will remain sluggish overall
• Two-speed Europe (as well) — marked divergences in performance
of member countries, with North doing relatively well (especially
Germany) and South struggling
• But fiscal policy was already becoming less accommodative even
before Eurozone sovereign debt crisis increased pressure for policy to
be tightened earlier and faster
• High unemployment, weak wage gains, and tight credit will
restrain consumer
• Business investment limited by substantial excess capacity and
concerns about strength and sustainability of recovery
• Exports will be hurt by slowing global growth and the recent strength
in the euro
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24
Asia’s Recovery Is At a Flexing Point
(Percent change from a year earlier, SAAR)
• Impetus from inventories has
12
30
9
20
6
10
3
0
0
-10
-3
-20
-6
-30
already peaked
• Net exports will slow considerably
in coming quarters
• China has become a source of
near-term risk
• Slight shift in policy stance betrays
worry about outlook
08Q1
08Q3
09Q1
09Q3
10Q1
GDP (Left scale)
Industrial Production (Right scale)
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25
A Mild Slowdown in China’s Industrial Output
as the Economy Rebalances
(Percent change from year earlier)
50
40
30
20
10
0
-10
-20
-30
2007
2008
Industrial Output
Real Fixed Investment
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Source: IHS Global Insight
2009
2010
Real Merchandise Exports
Real Retail Sales
China: Focus on Risks
• Slowdown has stabilized
― Property sector tightening policy effective in deflating bubble, so far
― Following the initial sharp slide, construction and overall output have
leveled off
― Growth downtrend should continue, as tightening policy will remain in
effect and export growth is expected to slow
• Soft-landing is still the most probable scenario
― External demand will stagger, not collapse
― Policy will be “cautiously accommodative”, including RMB appreciation
― Consumer demand should remain stable
• But risks of hard-landing have increased
― Recovery in the U.S. and EU still unstable
― 2009 credit binge could turn into a full-fledged banking crisis, especially
local government debt
― The usually steady consumer demand will likely then collapse
― If all flashpoints ignited, we are looking at the worst case scenario
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27
Bottom Line and Business Implications
• The next decade will be less “fun” than the 1990s or the pre-crisis 2000s
• The risk of a lost decade is higher than a double-dip —
but still relatively low
• The risk of deflation is greater than inflation — but also relatively low
• Many companies will pursue market share (or hunker down) strategies in the
developed world and growth strategies in the emerging world
• Since the emerging world is not without risk, diversification will be key — in
other words, don’t put all your eggs in the Chinese basket
• Fiscal consolidation is inevitable and taxes will rise — businesses have a
huge stake in how this happens
• Businesses also have a huge stake in the outcome of the currency “wars”
and especially in keeping the protectionist instincts of politicians in check
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28
Thank you!
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