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Rebuilding confidence
Han de Jong
Group Economics
March 2012
Six months ago: pessimism
• Contagion in euro crisis
• Sharp drop in economic activity & business confidence
 Fear for another sharp downturn like ‘Lehman’
2
Why did the global economy not ‘collapse’?
• Financial system did not dry up
• European leaders took positive steps
3
Business confidence: PMI and ISM
index
65
60
55
50
45
40
35
30
05
06
07
08
Eurozone PMI
09
10
11
12
US ISM
4
Source: Bloomberg
Business confidence: PMI
Index
65
60
55
50
45
40
35
2006
2007
2008
Brazil
2009
China
2010
2011
2012
India
5
Source : Bloomberg
Divergence US and eurozone
Unemployment, %
12
11
10
9
8
7
6
5
4
06
07
08
09
US
10
11
12
Eurozone
6
Source: Bloomberg
Money growth
% yoy
14
12
10
8
6
4
2
0
-2
04
05
06
07
08
Eurozone M3
09
10
US M2
11
12
7
Source: Bloomberg
Divergence Europe: car sales
% yoy, February 2012
Portugal
-48.8
Greece
-45.2
Ireland
-8.6
France
-20.2
Italy
-18.9
Netherlands
-10.0
UK
Germany
-2.5
0.0
Estonia
+29.7
Iceland
+148.5
8
Source: Bloomberg
US: self sustaining growth
NFIB index
NAHB index
100
40
95
30
90
20
85
10
80
0
07
08
09
10
Source: Bloomberg
11
12
Small businesses' confidence
07
08
09
10
Source: Bloomberg
Car sales, millions
11
12
Home builders' confidence
Consumer confidence, index
18
100
16
90
14
80
12
70
10
60
8
50
07
Source: Bloomberg
08
09
10
11
12
07
Source: Bloomberg
08
09
10
11
12
Univ.of Michigan
9
China hard landing or soft landing: Car sales
millions
25
20
15
10
5
0
05
06
07
08
09
10
11
12
10
Source: Bloomberg
Economic situation
• US moving to self-reinforcing recovery
• Europe improving gradually
• Emerging economies taking advantage of industrial
recovery – and room to stimulate
11
Euro crisis
• LTROs have eased pressure
• Greek tragedy no longer problem for financial markets –
now purely political
• New Compact
• Likely increase bail-out funds
• Calm has returned to markets
12
2yr government bond yields
%
8
7
6
5
4
3
2
1
Jan-10
Jul-10
Jan-11
Italy
Jul-11
Jan-12
Spain
13
Source: Bloomberg
European banks tightening lending criteria until Q4
Net-tightening (%)
80
60
tightening
40
20
0
easing
-20
03
04
05
06
Corporates
07
08
Consumers
09
10
11
12
Housing
14
Source: Thomson Reuters Datastream
Risks to the ECB’s approach
• ECB balance sheet riskier
• Inflation
• Phenomenal distortion in markets, will lead to misallocation
• Reduced urgency other policymakers
- Public finances
- Structural reform
15
Structural improvements?
• Deleverging continues
• Eurozone public finances much improved
• Structural reform
16
Spain
Exports
Exports to emerging Asia
120
200
110
180
100
160
90
140
80
120
70
100
08
09
10
Germany
Source: Thomson Reuters Datastream
11
12
07
EUR bn, 3mma, index Jan08=100
Current account
09
UK
Source: Thomson Reuters Datastream
10
Spain
11
12
GBP/EUR bn, 12mma, index Jan07=100
General government net borrowing
20
4
0
2
-20
0
-40
-2
-60
-4
-80
-6
-100
-8
-120
-10
-140
-12
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Thomson Reuters Datastream
08
Spain
EUR bn, 12 mm total
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: OECD, estimates 2011 en 2012 OECD
% GDP
17
Italy
Exports
Imports
120
120
110
110
100
100
90
90
80
80
70
70
60
08
09
10
Germany
Source: Thomson Reuters Datastream
11
12
08
09
Italy
EUR bn, 3mma, index Jan08=100
Primary budget balance
10
Germany
Source: Thomson Reuters Datastream
11
12
Italy
EUR bn, 3mma, index Jan08=100
General government net borrowing
7
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
6
5
4
3
2
1
0
-1
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: OECD, estimates 2011 en 2012 OECD
% GDP
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: OECD, estimates 2011 en 2012 OECD
% GDP
18
Unemployment
Unemployment, %
Unemployment, %
25
16
14
20
12
10
15
8
10
6
4
5
2
0
0
05
06 07
Greece
Source: Bloomberg
08 09
Spain
10
11 12
Portugal
05
06 07
Ireland
08 09
Italy
10
11 12
Germany
Source: Bloomberg
19
Source: Bloomberg
US: Debt deleveraging households
% GDP
120
100
80
60
40
20
0
55
60
65
70
Households
75
80
85
Business
90
95
00
05
10
Government
20
Source: Thomson Reuters Datastream
Risks
•
Escalation euro crisis
- Austerity fatigue
- Loss of patience
•
Oil prices
•
Rising interest rates
•
China hard landing
•
Too much austerity
•
Too little austerity
21
Price earning ratio S&P 500
35
30
25
20
15
10
5
0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
22
Source: Bloomberg
Investment portfolios – adding risk
• Equities: raised to neutral
• Equities: - more cyclical exposure
- overweight Emerging Markets
• Bond:
23
High yields, corporates, Emerging Markets
23
Equities
24
Bonds
%
10
10
30
10
10
30
Government bonds
Corporate bonds
High yield (funds)
Inflation-linked bonds
Covered bonds
EM bonds (funds)
25
Important information
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