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Is the global recovery stalling? Adrian Cooper [email protected] October 2010 Oxford Economics ■ Founded in 1981 as a joint venture with Templeton College in Oxford University, Oxford Economics has since grown into one of the world’s foremost independent providers of global economic research and consulting ■ The rigor of our analysis, calibre of staff and links with Oxford University make us the most trusted resource for decision makers seeking independent thinking and evidencebased research. ■ Over 60 in-house economists. ■ Extensive experience in industry and publicsector analysis. ■ Access to over 100 economic research groups through the UN's project link. ■ Links to Oxford University and other leading research institutes. 2 Our track record Oxford Economics Forecasting Record 2007-2009 (average absolute forecast divergence for real GDP growth) USA Eurozone Japan OE 0.7 1.4 2.0 EIU Global Insight IMF OECD Consensus Economics Macro Advisors 1.0 0.7 1.6 1.1 1.0 1.2 2.2 1.7 2.2 1.8 1.8 - 2.6 2.4 2.9 2.7 2.4 - Note: Forecasts made in December for year ahead. Global growth better than expected in 2010 World: Global real GDP growth % yr 5 Forecast 4 3 October 2010 forecast 2 January 2010 forecast 1 0 -1 -2 -3 1999 2001 2003 2005 2007 2009 Source : Oxford Economics/Haver Analytics 2011 2013 World trade has bounced back very strongly Global Trade and GDP during the Crisis 2008Q1=100 105 100 GDP 95 90 Trade 85 80 2008Q3 Q4 2009Q1 Q2 Q3 Source : Oxford Economics/Haver Analytics Q4 2010Q1 Q2 Two key points There is still a very high level of uncertainty about the outlook, especially in the US and Europe The recession was driven by the corporate sector and the shape of the recovery will depend on how corporates react in different countries US weaker than Europe in Q2… GDP growth % quarter 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 3 2 1 0 -1 -2 -3 -4 US Eurozone Source : Oxford Economics Germany UK …although Europe still lagging US recovery GDP: US, UK, Eurozone & Germany 2008 Q1 = 100 101 100 99 US 98 97 96 Germany 95 94 UK 93 92 2008 Q1 Eurozone 2008 Q2 2008 2008 Q3 Q4 Source: Oxford Economics 2009 Q1 2009 Q2 2009 2009 Q3 Q4 2010 Q1 2010 Q2 Why has the US recovery slowed? Q2 pulled down by surging imports and easing of restocking cycle Domestic demand was still strong And many recent indicators encouraging Two main areas of worry: ■ Housing sector is still a mess ■ Jobs recovery disappointing Why has the US recovery slowed? Q2 pulled down by surging imports and easing of restocking cycle Domestic demand was still strong And many recent indicators encouraging Two main areas of worry: ■ Housing sector is still a mess ■ Jobs recovery disappointing US domestic demand still strong in Q2 Why has the US recovery slowed? Q2 pulled down by surging imports and easing of restocking cycle Domestic demand was still strong And many recent indicators encouraging Two main areas of worry: ■ Housing sector is still a mess ■ Jobs recovery disappointing ISM points to sustained healthy growth ISM indexes Index 65 Non-manufacturing 60 55 50 45 Manufacturing 40 35 30 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Institute for Supply Management Why has the US recovery slowed? Q2 pulled down by surging imports and easing of restocking cycle Domestic demand was still strong And many recent indicators encouraging Two main areas of worry: ■ Housing sector is still a mess ■ Jobs recovery disappointing Why has the US recovery slowed? Q2 pulled down by surging imports and easing of restocking cycle Domestic demand was still strong And many recent indicators encouraging Two main areas of worry: ■ Housing sector is still a mess ■ Jobs recovery disappointing Why has the US recovery slowed? Q2 pulled down by surging imports and easing of restocking cycle Domestic demand was still strong And many recent indicators encouraging Two main areas of worry: ■ Housing sector is still a mess ■ Jobs recovery disappointing But corporates are still not hiring in the US… US: Monthly change in private employment 000's 300 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800 -900 Jan-09 Apr-09 Jul-09 Source: National Statistics Oct-09 Jan-10 Apr-10 Jul-10 Strong productivity promised jobs rebound… US: Productivity growth % year 6 F'cast 5 4 Whole economy 3 2 1 0 -1 -2 -3 1981 1985 1989 Source: Oxford Economics 1993 1997 2001 2005 2009 …given US productivity level very high Productivity: GDP per hour worked (2009) US$ 70 60 50 40 30 20 10 0 US Japan Germany Source: Oxford Economics' calculation France UK Why aren’t companies hiring in the US? Long-term unemployment encouraged by more generous benefits? Job losses concentrated in construction and outlook in this sector is bleak Regional mismatch between labour demand and supply Uncertainty Why aren’t companies hiring in the US? Long-term unemployment encouraged by more generous benefits? Job losses concentrated in construction Regional mismatch between labour demand and supply Uncertainty Why aren’t companies hiring in the US? Long-term unemployment encouraged by more generous benefits? Job losses concentrated in construction Regional mismatch between labour demand and supply Uncertainty Changes in US unemployment - worst & best Peak to trough change in unemployment North Dakota Smallest impact South Dakota Alaska New York Large states Texas Pennsylvania California Biggest impact Florida Nevada 0 2 Source : Haver Analytics 4 6 8 10 12 Why aren’t companies hiring in the US? Long-term unemployment encouraged by more generous benefits? Job losses concentrated in construction Regional mismatch between labour demand and supply Uncertainty Bernanke on uncertainty Statement to Senate Banking Committee, 22 July: "Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognise that the economic outlook remains unusually uncertain.“ Keynote speech at Jackson Hole, Wyoming, 27 August: “…macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments.” The recession wasn’t consumer driven in US… US : Consumer spending trough=100 108 1975Q1 106 104 1980Q3 2009Q2 102 100 1991Q1 98 1982Q4 96 94 2001Q4 92 90 -6 -5 -4 -3 -2 Source : Oxford Economics -1 0 1 2 3 Periods from trough 4 …and even less so in Germany Germany : Consumer spending trough=100 106 Early 1970s 104 Early 1990s Early 1980s 102 100 2008-10 98 96 94 -6 -5 -4 -3 -2 Source : Oxford Economics -1 0 1 2 3 Periods from trough 4 Nor were bank job cuts as bad as feared Sectoral contribution to employment losses Contribution to peak-to-trough change in employment, % pts 1 0 -1 -2 -3 Government Other services Finance/business Industry Construction Agriculture -4 -5 -6 -7 US Japan UK Germany Source : Oxford Economics/Haver Analytics France Italy Corporates have driven the cycle – in the US… …and globally, then magnified through trade Germany: Investment recoveries compared 100= GDP trough 115 113 2008-10 111 Early 1990s 109 107 105 103 101 99 Early 1980s 97 95 Q-5 Early 1970s Q-4 Q-3 Q-2 Source: Oxford Economics Q-1 Q0 Q1 Q2 Q3 Q4 Q5 Corporate sector now running big surpluses Total corporate financial balance % of GDP, 4QMA 20 15 Japan 10 UK 5 0 France -5 Germany US -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Oxford Economics Partly that is banks… Financial corporate balance % of GDP, 4QMA 5 4 Germany 3 Japan 2 1 0 -1 US -2 -3 France UK -4 -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Oxford Economics …but critically it is also non-financials Non financial corporate balance % of GDP, 4QMA 15 Japan 10 UK 5 0 France -5 Germany US -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Oxford Economics Government retrenchment intensifying… …amid threat of Eurozone sovereign debt crisis Eurozone: Credit spreads % spread of 10-year bonds over German bunds 12.0 10.0 Greece Spain Portugal Ireland Italy 8.0 6.0 4.0 2.0 0.0 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010 Jul-2010 Source : Oxford Economics/Haver Analytics And households constrained not only by debt… Household debt % of income 250 Ireland 200 UK 150 US 100 Germany 50 Eurozon Eurozone e Spain 0 1995 1997 1999 Source : Oxford Economics 2001 2003 2005 2007 2009 …but also the weak labour market… World: Unemployment % 12 France Forecast 11 10 Eurozon e 9 8 UK 7 Germany 6 5 US 4 3 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source : Oxford Economics …and squeeze on real wages as well as higher taxes Real wages Annual % change 6 Forecast 5 4 3 UK US 2 1 0 -1 Eurozone -2 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source : Oxford Economics Financial surpluses here for extended period Household financial balance % of GDP, 4QMA 10 France 8 Germany 6 4 2 Japan 0 US -2 UK -4 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Oxford Economics So consumers will lag rather than lead recovery Corporate surpluses normally get spent in US… US: Investment and corporate money % year 30 25 20 15 10 5 0 -5 -10 -15 -20 Real corporate broad money Nonresidential investment -25 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 Source : Oxford Economics/Haver Analytics …and elsewhere UK: Corporate liquidity and investment % year 50 40 30 Business Investment 20 10 0 -10 -20 Real PNFC M4 -30 1970 1976 1982 1988 1994 Source : Oxford Economics/Haver Analytics 2000 2006 We are seeing some recovery in M&A World: M&A US$ bn 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1996 1998 2000 2002 Source : Dealogic/Thomson Reuters 2004 2006 2008 2010 Jan-Jul ann. What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints Excess capacity holding back investment US: Capacity utilisation and real nonresidential investment Eurozone: Capacity utilisation and real nonLow capacity discourages new investment residential investment % year % point 90 15 Capacity utilisation (LHS) 85 10 5 80 0 -5 Non residential investment (RHS) 75 -10 70 -15 65 1995 -20 1997 1999 2001 2003 2005 Source: Oxford Economics, Haver Analytics 2007 2009 What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints Companies seeking to pay down debt What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints Corporate lending very weak World: Lending to PNFCs* % year 28 UK 24 20 16 12 8 Eurozone 4 0 -4 -8 -12 US -16 -20 *3 month moving average -24 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics Forecast takes a hopeful view on investment for US Subdued recovery for major economies Interest rates to remain low for some time World: Interest rates 3-month interest rates, % 16 14 Forecast UK 12 10 8 6 4 2 US Euro Japan 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Oxford Economics Emergers leading recovery despite slowing in some BRICS: Industrial production % year 25 20 China 15 India 10 5 0 Brazil -5 Russia -10 -15 3 month moving average -20 2005 2006 Source: Haver Analytics 2007 2008 2009 2010 Consumption is robust in China… China: Retail sales % year 24 Value sales 21 18 15 12 Volume sales 9 6 3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics …pulling up rest of Asia… China import* growth and regional IP* % yr % yr 60 Korea (LHS) 80 Japan (LHS) 50 60 40 Singapore (LHS) China (RHS) 30 40 20 10 20 0 0 -10 -20 -30 -20 *3 month moving average -40 200501 -40 200601 200701 200801 Source : Oxford Economics/Haver Analytics 200901 201001 …and supporting Asian consumer Emerging Asia: Consumer spending % year 15 Thailand 12 Malaysia 9 6 3 0 -3 Taiwan Korea -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics Low debt levels gives plenty of fiscal scope… Budget Deficits and government debt in 2010 debt as % GDP 200 Japan 180 160 Italy 140 Greece 120 US 100 Singapore Germany 80 China 60 40 UK India Malaysia Korea 20 France Thailand Spain Taiwan 0 0 2 4 6 8 Source : Oxford Economics/Haver Analytics deficit as % of GDP 10 12 …and credit taps can turn on quickly if needed China: Total RMB loans 12-month % change 36 32 28 24 20 16 12 8 4 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics But pull from China’s imports is easing… China: Exports and imports % year 80 60 40 Imports (US$) Exports (US$) 20 0 -20 3 month moving average -40 1995 1997 1999 Source: Haver Analytics 2001 2003 2005 2007 2009 …pressure coming from stronger currencies… Emerging Asia: Exchange rates v US$ Emerging Asia: Exchange rates v US$ 2002Q1=100 150 appreciation 140 2002Q1=100 150 appreciation Korea month average data except for last observation (= Oct 14) Thailand 140 130 130 120 120 110 110 Singapore month average data except for last observation (= Oct 14) Malaysia Taiwan 100 India 100 China 90 90 80 2002 80 2002 2003 2004 2005 Source: Haver Analytics 2006 2007 2008 2009 2010 Philippines 2003 2004 2005 Source: Haver Analytics Indonesia 2006 2007 2008 2009 2010 …and dependence on OECD still significant Outlook still highly uncertain Corporate recovery Oxford forecast Renewed global boom ■ Gradual rise in business confidence encourages corporates to invest ■ But weak banks combined with excess capacity limit scale of investment recovery ■ Consumer spending recovery limited by pace of job growth and fiscal retrenchment ■ But recovery strong enough that fiscal crisis remains contained ■ Strong corporate liquidity feeds into new investment boom ■ Faster growth boosts business and consumer confidence, and trade multiplier magnifies upturn ■ Bank balance sheets improve quickly and credit growth resumes ■ Strong growth boosts tax revenues/cuts social security payments, helping fiscal consolidation Sub-par recovery Renewed crisis ■ Threat of double-dip means renewed slump in asset prices as Eurozone sovereign debt crisis re-emerges ■ Pressure to cut budget deficits rapidly in all major economies ■ Rising unemployment and business failures feed back into banking ■ Limited scope for monetary policy offset ■ Business optimism remains low and corporates continue to hoard cash ■ Investment and job growth is modest as capacity is underutilised ■ Monetary policy supports banking sector but fiscal coffers are empty ■ Easier credit conditions mean benefits of loose monetary policy feeds through to a stronger housing and consumer recovery Financial sector recovery Oxford Economics’ forecast scenarios Alternative GDP growth forecasts 2009 2010 2011 2012 Oxford Forecast (45%) US Eurozone China World -2.6 -4.0 9.1 -0.7 2.6 1.5 9.7 4.5 2.5 1.3 9.0 4.2 3.5 1.7 9.2 4.9 Renewed boom (15%) US Eurozone China World -2.6 -4.0 9.1 -0.7 2.8 1.7 10.4 4.8 3.7 2.4 10.7 5.5 4.2 2.8 10.4 5.9 Sub-par recovery (30%) US Eurozone China World -2.6 -4.0 9.1 -0.7 2.4 1.2 8.8 4.1 1.8 0.8 7.2 3.3 2.2 0.9 7.5 3.7 Renewed crisis (10%) US Eurozone China World -2.6 -4.0 9.1 -0.7 2.2 1.0 8.0 3.7 -0.6 -1.3 4.9 1.0 1.0 -0.2 5.5 2.3 Oxford Economics’ forecast World GDP Growth % Change on Previous Year 2008 2009 2010 2011 2012 2013 US 0.0 -2.6 2.6 2.5 3.5 3.8 -1.2 -5.2 2.6 1.1 2.1 2.0 0.3 -4.0 1.5 1.3 1.7 2.0 Germany 0.7 -4.7 3.1 1.8 1.7 2.0 France 0.1 -2.5 1.5 1.6 2.0 2.1 -1.3 -5.1 0.9 1.0 1.2 1.4 -0.1 -5.0 1.6 2.0 2.7 3.2 China 9.6 9.1 9.7 9.0 9.2 8.8 India 7.4 6.7 8.2 8.3 9.0 8.8 Other Asia 4.0 2.0 6.6 5.4 6.2 6.0 Mexico 1.5 -6.6 4.7 4.5 5.4 4.8 Brazil 5.2 -0.2 7.3 4.5 5.1 4.6 Other Latin America 4.8 -0.6 4.5 4.0 4.7 4.3 Eastern Europe 4.8 -5.6 3.1 3.7 5.3 5.5 MENA 4.7 1.8 7.0 7.4 7.0 6.6 World 1.4 -2.0 3.6 3.3 4.0 4.2 World (PPP) 2.8 -0.7 4.5 4.2 4.9 5.0 Japan Eurozone of which: Italy UK Singapore: Overview Advance Q3 GDP showed a 19.8% drop, the worst on record and driven by a sharp slowdown in manufacturing, in particular the biomedical sector. Annual growth halved from 19.6% in Q2 to 10.3% in Q3 although the still economy remains on track to meet the governments forecast of growth between 13 and 15% this year. With Chinese imports now less buoyant and growth faltering in the EU and the US, we expect export growth to slow markedly in the coming months. The Monetary Authority of Singapore tightened monetary policy this month. Property prices were 23% up on a year ago in Q3. The authorities recently announced a series of measures aimed at cooling the property market. Tourist arrivals have been buoyant this year, boosting by hosting the Youth Olympic games and by the opening of two new casino complexes. The authorities are targeting 17m tourist arrivals by 2015, up from 9.7m last year. Singapore: GDP growth slowing after H1 surge Singapore: GDP growth % year Forecast 20 16 12 8 4 0 -4 -8 -12 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Oxford Economics Singapore: H1 activity was strong across the board Singapore: Contributions to GDP growth % year 16 GDP 12 8 4 0 -4 -8 Domestic demand Net exports Forecast -12 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Oxford Economics Singapore: Manufacturing now slowing sharply Singapore: Industrial production % year 80 3 month moving average 60 40 Total 20 0 -20 Electronics -40 1995 1997 1999 Source: Haver Analytics 2001 2003 2005 2007 2009 Singapore: House prices soaring Singapore: Property Prices % year 50% 40% Property Price Index: All residential 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -10% -20% -30% Source : Oxford Economics/Haver Analytics Singapore: Tourist arrivals buoyant Singapore: Tourist arrivals Thousands 1000 900 800 700 600 500 400 seasonally adjusted (3 month moving average) 300 200 1995 1997 1999 Source: Haver Analytics 2001 2003 2005 2007 2009 Malaysia: Overview National accounts data showed that GDP growth slowed to 8.9% in Q2, a stronger performance than had been expected. GDP growth is expected to moderate in the second half of the year but consumer spending should be less affected than the more export-oriented sectors. Robust domestic demand boosted the import recovery to such an extent that net exports subtracted from growth throughout the recovery period Malaysia is very vulnerable to developments abroad, particularly in China, the main destination for its exports behind Singapore. The uncertain outlook for the global economy means quarterly growth is likely to be much more modest in 2010H2 than in H1. Bank Negara have already raised rates three times this year. We expect one more increase in Q4. The fiscal deficit hit a twenty year high of 7% of GDP last year and the government is hoping to reduce it to 5.6% this year. Malaysia: strong recovery starting to slow Malaysia: GDP and industrial production % year 25 20 GDP 15 Industrial production F'cast 10 5 0 -5 -10 -15 -20 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Oxford Economics Malaysia: Strong imports hindered net exports Malaysia: Contributions to GDP % year 20 GDP 15 F'cast 10 5 0 -5 Net exports -10 -15 -20 -25 Domestic demand -30 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: Oxford Economics Malaysia: Recovery lagged neighbours Malaysia: Industrial output 2005=100 140 130 Weighted aggregate of Korea, Thailand & Taiwan 120 110 100 90 Malaysia 80 70 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics / Oxford Economics Malaysia: Exports now slowing sharply Malaysia: Exports and imports % year 50 3 month moving average 40 Exports (US$) 30 20 10 0 -10 -20 -30 Imports (US$) -40 1995 1997 1999 Source: Haver Analytics 2001 2003 2005 2007 2009 Malaysia: Government keen to reduce the deficit Malaysia: Government budget balance & debt % of GDP 6 % of GDP 100 Government balance (LHS) 3 90 0 80 -3 70 -6 60 -9 50 -12 40 -15 Government debt (RHS) -18 F'cast -21 30 20 1980 1984 1988 1992 Source: Oxford Economics 1996 2000 2004 2008 2012 Bank Lending: Strong recovery this year Malaysia & Singapore: Bank lending % year 30 Singapore 25 20 15 Malaysia 10 5 0 -5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics Exchange Rates: Rapid gains in recent months Emerging Asia: Exchange rates v US$ 2002Q1=100 150 appreciation 140 Singapore month average data except for last observation (= Oct 13) 130 120 110 Malaysia 100 90 2002 2003 2004 2005 Source: Haver Analytics 2006 2007 2008 2009 2010