The current economic environment

Prof. Dr. Andreas Dombret Member of the Board Deutsche Bundesbank

– June 11, 2010 –

The world economy in June 2010 – where do we stand?

❙

Economic recovery stronger than expected.

❙ Upward revisions of GDP forecasts.

❙

Pace of recovery uneven both globally and within Eurozone.

❙ ❙ Strong in EMEs, the US and Japan; more subdued in the euro area.

Recovery in Germany intact, with strong impulses from exports.

❙

Rising sovereign debt as major downside risk.

❙ Uncertainty on financial markets due to Greek debt crisis.

❙ Consolidation: major task of economic policy.

June 11, 2010 TMA Europe Conference 2

Good news: Upward trend in global leading indicators

❙

Upward trend of important global leading indicators continues.

❙

Signals proceeding robust recovery of world economy:

❙ Global PMI consistent with strong expansion in manufacturing as well as in other sectors.

❙ German ifo world economic climate index on the rise; index component of expectations at comparably high level in recent months.

❙ OECD composite leading indicator signaling expansion for world economy since November 2009.

June 11, 2010 TMA Europe Conference 3

Good news: Upward revisions for global growth and trade projections Forecasts from OECD Economic Outlook May 2010 Growth in: 2009 2010 Diff. from Nov.

2011 Diff. from Nov.

Real GDP OECD World World trade -3.3

-0,9 -11,0 +2.7

+4,6 +0,8PP +1,2PP +10,6 +4,6PP +2.8

+0,3PP +4,5 +0,8PP +8,4 +0,7PP

❙

OECD: global output +4.6% in 2010.

❙

Forecasts revised upward; in particular for OECD members (from 1.9% to 2.7%).

❙

World trade strengthened; trade growth robust.

June 11, 2010 TMA Europe Conference 4

Good news: Robust Recovery Forecasts from OECD Economic Outlook May 2010 GDP growth (calendar adjusted) USA Japan UK Euro area Germany China OECD 2009 -2.4

-5.2

-4.9

-4.1

-4.9

+8.7

-3.3

2010 +3.2

+3.0

+1.3

+1.2

+1.9

+11.1

+2.7

2011 +3.2

+2.0

+2.5

+1.8

+2.1

+9.7

+2.8

❙

Global economy now back on growth track.

❙

Performed better than anticipated.

❙

Recovery expected to continue…

❙

… after most severe recession since WW II in 2009.

June 11, 2010 TMA Europe Conference 5

Bad news: Recovery uneven across and within regions Forecasts from OECD Economic Outlook May 2010 GDP growth (calendar adjusted) USA Japan UK Euro area Germany China OECD 2009 -2.4

-5.2

-4.9

-4.1

-4.9

+8.7

-3.3

2010 +3.2

+3.0

+1.3

+1.2

+1.9

+11.1

+2.7

2011 +3.2

+2.0

+2.5

+1.8

+2.1

+9.7

+2.8

❙

Output expanding at

❙

varying speeds:

Growth strong and close to pre-crisis levels in some EMEs in South and East Asia and Latin America; … ❙ … recovery in some OECD member much weaker.

❙

US on the verge of self sustaining recovery; growth in Europe more subdued.

June 11, 2010 TMA Europe Conference 6

USA: On the verge of self-sustaining recovery

❙

Since mid-2009 strong pick-up in real GDP.

❙

Temporary impulses from fiscal stimulus and slower pace of inventory decumulation.

❙

Strengthening in private final demand (consumption as well as spending on equipment and software) points to self-sustaining recovery.

❙

Continued decline in private non residential construction; recovery in housing fragile.

June 11, 2010 TMA Europe Conference 7

USA: Housing market tentatively stabilizing US house price indices

Year-on-year change 20 15 10 0 5 -5 -10 -15 -20 -25 2001Q1 S&P Case-Shiller Index (national) FHFA Purchase-Only Index 2003Q1 2005Q1 2007Q1 2009Q1 ❙

Noticeable stabilization of house prices in 2009.

However, also due to … ❙ … Fed interventions on the mortgage market … ❙ … as well as fiscal incentives to buy homes.

❙ FHFA Purchase-Only Index declined in 2010Q1 by 3.2% yoy. S&P Case-Shiller Index up by 2.0% yoy.

June 11, 2010 TMA Europe Conference 8

Japan: Recovery on its way

June 11, 2010 ❙

GDP expanded strongly in winter 2010, for fourth consecutive quarter.

❙

Recovery mainly driven by substantial growth in exports; high demand particularly from Asian emerging countries.

❙

Domestic demand rebounded recently as well; ongoing fiscal stimulus measures and recovery in trade feeding into profits and wages.

❙

However, public finances increasingly strained, with gross debt forecasted to exceed 200% of GDP.

TMA Europe Conference 9

Euro area: Recovery moderate as well as uneven

❙

In Q1 only slight increase in GDP.

❙ Growth mainly driven by inventories.

❙

Noticeable rise of GDP in Italy (+0.5%); much smaller increases in Germany (+0.2%), France and Spain (both +0.1%).

❙

New forecast of the Eurosystem (published yesterday):

❙ GDP growth (average of published bandwidth): +1.0% in 2010, +1,2% in 2011.

❙ Quarterly profile volatile.

June 11, 2010 TMA Europe Conference 10

Euro area: Slow recovery of industrial production

❙

Capacity utilization still well below long-term average.

❙

But: Remarkable inflow of orders in particular from outside euro area; …

❙

… industrial confidence recovered noticeably in early spring; now just below long term average …

❙

… hinting at further recovery of production.

June 11, 2010 TMA Europe Conference 11

Euro area: Still no turnaround on labor market

❙

Employment: Q4/2009 -0.3% qoq; Q3/2009 -0.5% qoq.

❙

In April slight increase in standardized unemployment rate to 10.1% (highest level since August 1998).

❙ Compared to previous year, significant increases in all large EMU member countries (ES, F, IT) except Germany.

June 11, 2010 TMA Europe Conference 12

Germany: Intact recovery

June 11, 2010 ❙

Pace of recovery slowed in winter half year.

❙ GDP +0.2% in both Q4/2009 and Q1/2010.

❙ ❙ ❙ In Q1 marked positive contribution from inventories, negative contributions from domestic demand and foreign trade (imports increased even more than exports).

Much stronger momentum expected for Q2.

Forecasts of GDP growth:

mostly

above euro area average

in 2010 and 2011, making

Germany temporarily the engine of growth.

TMA Europe Conference 13

Germany: Strong industrial production more than compensates negative impact of cold weather in Q1

❙

Further rise in industrial production in April.

❙

Orders: Ongoing strong impulses; pick-up in demand regionally broad-based.

❙

Stock of orders (according to ifo Institute) still as low as during the last recession 2002/2003.

❙

Outlook for 2010: Industrial output catching up with orders.

June 11, 2010 TMA Europe Conference 14

Germany: Labor market surprisingly robust

❙

Employment continued to increase in April; only slightly lower than a year ago.

❙

In May registered unemployment declined significantly, unemployment rate now at 7.7%.

❙

Past fears of looming backlash refuted by ongoing robustness.

June 11, 2010 TMA Europe Conference 15

Euro area: Moderate rise in prices expected in 2010 Harmonised Consumer Price Index

(Overall index / EMU-countries (incl. Germany)) 1) ❙

Recently, inflation accelerated somewhat in euro area.

❙ HICP-inflation: s.a. +0.1% in May mom; +0.2% in April mom.

❙ In April, again marked rise in prices for energy and unprocessed food.

❙

But core rate stabilised at low level.

❙ ❙

Inflation expectations continue to be anchored in line with price stability.

Eurosystem forecasts for 2010 and 2011

(average of published bandwidth)

: +1.5% and +1.6%.

1) Changing Composition June 11, 2010 TMA Europe Conference 16

Germany: Consumer prices continue to rise moderately Consumer price index

❙

After significant increases in the two preceding months, …

❙

… consumer prices stopped rising further in May.

❙

Price level: +1.2% compared to May 2009.

June 11, 2010 TMA Europe Conference 17

What are the risks?

❙

So far: Global economy returned to strong growth and recovery probable to continue.

❙

Stronger than expected recovery in world trade as upside risk.

❙

In some EMEs in South and East Asia and Latin America already some signs of overheating.

❙

Failure to reign in rising sovereign debt in industrialised countries as major downside risk.

❙ Up to now, no observable impact of Greek crisis on real economy outside of Greece.

❙ Rising concerns about insufficient consolidation; possibly undermining process of normalization in financial system.

June 11, 2010 TMA Europe Conference 18

Financial markets assessment

❙

Overall, financial markets stabilizing in recent months with economic recovery gathering steam.

❙

Premature to conclude financial conditions have normalized.

❙

Banking system’s health generally improving; some banks remain vulnerable.

❙

Bank lending activity remains weak.

❙ Some supply side effects within the euro area … ❙ … but decline in Germany mostly due to lower demand – credit crunch only a risk scenario.

June 11, 2010 TMA Europe Conference 19

Euro-area: Government bond markets strained

❙

Continuous stress on government bond markets due to Greek debt crisis.

❙

Initial decrease of EMU yield spreads over German Bunds after rescue package was agreed in early May largely evaporated.

❙

Spread widening partly due to falling Bund yields (“safe haven flows”).

❙

Financing conditions of corporations deteriorated somewhat in May, but spreads still below 5-year average.

June 11, 2010 TMA Europe Conference 20

Interest rate spreads between EMU government bonds strongly dispersing

❙

Individual spreads of EMU government bonds over German Bunds still on a high level.

❙

Significant downward effects from stability measures; spreads rising again since mid-May.

❙

Further increase of uncertainty, possibly due to doubts about success of fiscal consolidation efforts.

June 11, 2010 TMA Europe Conference 21

Exchange rates: Euro strained

❙

In May, Euro depreciated markedly against US-Dollar, Pound sterling and Yen.

❙

Effective exchange rate (against 21 trading partners): since end of 2009 depreciation of about 10%.

❙

However, compared to LT average: level of exchange rate actually less noteworthy than pace of change.

June 11, 2010 TMA Europe Conference 22

Stock markets: Uncertainty about future stock price developments above five-year average

❙

Strong fall in stock prices in May. In recent days stock markets recovered somewhat.

❙

Global rise in uncertainty in EMU, US, Germany and JP; in Germany below trend.

June 11, 2010 TMA Europe Conference 23

Summing up

❙ All in all: global economic recovery progressed better than expected. ❙ Recovery in Germany intact; should pick up again after weak winter half-year.

❙ GDP growth expected to exceed that of the euro area at least in 2010.

❙ At the same time, the outlook for activity unusually uncertain.

❙ Deteriorating public budgets in advanced economies major downside risk.

❙ Furthermore, the multi-speed nature of the global recovery likely to continue, and current account imbalances likely to widen again over the medium term.

June 11, 2010 TMA Europe Conference 24