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Is the global recovery stalling? John Walker [email protected] October 2010 Overview of the Oxford MT Model Oxford Global Macro Model Oxford Global Sectoral Model Forecasts for major macroeconomic indicators across 175 economies: Forecasts for output across 85 sectors in 67 countries driven by: • GDP • Industrial production • Investment • Interest rates • Exchange rate • Inflation and costs • Competitiveness • Profitability • Mix of demand – ie consumption vs investment • Inter-sector supply chain linkages – ‘inputoutput modelling’ • Sectoral competitiveness Global Machine Tools Model Forecasts investment by sector, based on sectoral output growth and capacity utilisation, and macro drivers, such as interest rates and profits Sectoral output and investment forecasts in key client sectors are then used to drive the global forecast for machine tools sales Countries covered Americas Brazil Canada Mexico United States India Thailand Japan South Korea Czech Rep Italy Spain France Poland Switzerland Germany Russia UK Asia China Taiwan Europe Austria Hungary Slovakia Turkey Three key points There is still a very high level of uncertainty about the outlook especially in the US and Europe: ie FEAR still rules 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.” OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) OEF USA Eurozone Japan 0.7 1.4 2.0 Note: Forecasts made in December for year ahead. OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) OEF USA Eurozone Japan 0.7 1.4 2.0 EIU Global Ins. IMF OECD Consens. Note: Forecasts made in December for year ahead. OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) USA Eurozone Japan OEF 0.7 1.4 2.0 EIU 1.0 Global Ins. 0.7 IMF 1.6 OECD 1.1 Consens. 1.0 Note: Forecasts made in December for year ahead. OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) USA Eurozone Japan OEF 0.7 1.4 2.0 EIU 1.0 2.2 2.6 Global Ins. 0.7 1.7 2.4 IMF 1.6 2.2 2.9 OECD 1.1 1.8 2.7 Consens. 1.0 1.8 2.4 Note: Forecasts made in December for year ahead. Three key points There is still a very high level of uncertainty about the outlook especially in the US and Europe: ie FEAR still rules Crisis has been in part a story of two currency unions!! The imbalances story times two US running current account deficit of over $450billion China running current account surplus of over $300 billion Intervention by central bank leading to reserves rising on average by over $300 billion per annum in last five years No sign of any change in next few years? The imbalances story times two US running current account deficit of over $450billion France, PIGS current account deficit of over $300 billion China running current account surplus of over $300 billion Germany Netherlands current account surplus of $250 billion Intervention by central bank leading to reserves rising on average by over $300 billion per annum in last five years Banks were lending to Greek government, Spanish companies and Irish banks as offset to the above imbalances No sign of any change in next few years? ECB/EU governments will now fill the gap? …Yuan is expected to slowly appreciate against $ China: Exchange and interest rates % US$ 14 Exchange rate (RHS) 9 F'cast 12 8 10 7 8 6 6 4 2 Loans interest rate (LHS) 0 5 4 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Oxford Economics Worrying that trade imbalances widening again World: Current account imbalances $ billion 600 China OPEC 400 200 Japan 0 -200 EU -400 -600 US -800 -1000 1990 Forecast 1994 Source: Oxford Economics 1998 2002 2006 2010 Three key points There is still a very high level of uncertainty about the outlook especially in the US and Europe: ie FEAR still rules Crisis has been in part a story of two currency unions!! The recession was driven by the corporate sector and the shape of the recovery will depend on how corporates react in different countries US: Sectoral indebtedness % of GDP 130 120 Domestic financial sector 110 100 90 Consumer 80 70 60 Non financial business 50 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source : Oxford Economics/Haver Analytics 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 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 Sharp decline in investment for 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 So corporates are now cash rich World: PNFC financial balances % of GDP, 4-quarter average 5 4 3 UK 2 1 0 -1 -2 US -3 -4 Eurozone -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Oxford Economics\Haver Analytics And also in China China : Corporate profits % of GDP 50 45 40 35 30 25 20 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Source: Oxford Economics Who will lead the recovery? Governments!! Consumers!! Companies? Emerging markets? …households constrained 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 …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 So consumers will lag rather than lead recovery …non-financials all cash rich 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 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 …although that is a demand as well as supply issue World: Firms' demand for credit for investment % net balance 30 20 10 0 US -10 -20 -30 -40 -50 UK -60 Eurozone -70 -80 2007 2008 Source : Oxford Economics/Haver Analytics 2009 2010 Forecast takes a hopeful view on investment But still subdued recovery for major economies Emerging markets leading recovery? 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 Emerging markets leading recovery? Export markets slowing But domestic demand is strong … domestic demand generally solid Brazil, Russia & China: Retail sales volumes % year 20 16 China Russia 12 8 Brazil 4 0 -4 -8 3 month moving average -12 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics …and domestic demand is solid in the rest of Asia 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 Emerging markets leading recovery? Export markets slowing But domestic demand is strong Still scope for further stimulus Low debt levels gives plenty of fiscal scope… China: Government budget balance and debt % of GDP 1 Government balance (LHS) % of GDP 28 Forecast 24 0 20 -1 16 12 -2 Government debt (RHS) 8 -3 4 -4 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Oxford Economics /CEIC …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 CEIC Analytics …and are already flowing in Brazil Brazil: Bank lending % year 40 35 30 Total private sector 25 20 15 10 5 0 Industry & commerce sectors -5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics …& capacity utilisation is high in several emergers Korea: Manufacturing operating rate 2005=100 (seasonally adjusted) 115 110 105 100 95 90 85 80 75 70 1995 1997 1999 2001 OxfordAnalytics Economics/CEIC Source: Haver 2003 2005 2007 2009 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 Corporate recovery Outlook still highly uncertain Financial sector recovery Outlook still highly uncertain Corporate recovery Oxford forecast ■ 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 Financial sector recovery 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 Financial sector recovery 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 ■ 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 Corporates are key US: Business investment $2005 billions 650 600 550 500 Base Renewed boom Sub-par recovery 450 400 350 300 250 200 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Oxford Economics Scenarios for the global economy 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 (20%) 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 (25%) 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 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 ■ 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 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 Growth in industrial production of machine tools' customer sectors 2009 2010 2011 2012 30 20 10 0 -10 -20 -30 Motor Vehicles Metal Products Aerospace Source: Oxford Economics Mech Comp & Elec equip Consumer Intermediate engineering electronics goods goods Industrial outlook … Unit car sales & production† 3mth mav, mn 2.6 2.4 2.2 2.0 Sales 1.8 1.6 Production 1.4 † Covering the US, Western Europe & Japan 1.2 1980 1984 1988 1992 1996 Source: J D Power/Oxford Economics 2000 2004 2008 Aerospace orders now below deliveries Airbus & Boeing: Orders & deliveries No. of aircraft 3,000 No. of aircraft 1,000 2,600 900 Deliveries (RHS) 2,200 800 1,800 700 1,400 600 1,000 500 Orders (LHS) 600 200 1990 400 300 1993 1996 1999 2002 Source: Company reports and forecasts Investment outlook 2005 2008 Motor Vehicle Investment Motor vehicle investment % yoy US 8.3% Rest of Europe 20.7% 30 20 Motor vehicle investment 2009 Asia Japan 23.4% 10 0 -10 Rest of Asia 13.5% Americas -20 Europe -30 Rest of Americas 8.5% -40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source : Oxford Economics Source: Oxford Economics Investment outlook China 16.2% Germany 9.5% General machinery output and investment General machinery investment 2009 General machinery output Rest of Europe, 8.0% % yoy 30 Rest of Asia, 5.7% 20 Rest of Americas, 2.0% Asia 10 US, 42.9% Europe 0 Germany, 3.6% -10 -20 Americas China, 23.2% -30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Oxford Economics Japan, 14.5% Source : Oxford Economics Investment outlook Special Purpose Machinery – output and investment Special purpose machinery output Special purpose machinery investment 2009 Rest of Europe, 15.1% % yoy 40 30 US, 11.8% Asia Japan, 24.9% 20 Rest of Asia, 15.1% 10 0 Rest of Americas, 3.1% -10 -20 Americas Europe Germany, 4.9% -30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Oxford Economics China, 25.0% Source : Oxford Economics Investment outlook Oxford Economics forecast Machine Tools Sales % change on previous year 2009 2010 2011 2012 2013 2014 China Germany Japan US Italy Korea Brazil Taiwan India Russia Mexico France Switzerland Spain UK -2.6 -37.4 -38.5 -52.7 -44.3 -21.0 -22.4 -43.0 -33.9 -26.7 -20.5 -46.6 -44.0 -49.9 -34.0 18.2 -12.3 3.6 -0.4 10.1 14.8 17.2 18.1 15.1 4.0 11.2 0.2 -16.4 -15.6 -19.3 15.1 29.9 21.5 36.2 11.7 21.9 22.7 22.6 25.7 22.5 19.9 19.4 20.7 10.4 19.7 20.1 18.6 18.0 25.5 14.6 15.4 15.3 14.1 30.5 25.5 15.7 17.1 16.1 15.9 22.8 19.1 13.9 9.2 12.0 11.3 10.5 15.3 10.1 22.7 15.5 9.7 14.8 15.4 16.9 15.4 17.1 9.9 7.2 10.0 11.3 8.5 15.3 8.1 15.7 10.5 8.7 9.8 11.8 19.9 11.4 Americas Asia Europe World -44.1 -15.1 -44.5 -30.7 11.1 17.9 -0.8 11.4 27.9 17.4 21.8 19.9 20.5 19.4 18.2 19.3 12.5 16.8 14.1 15.5 11.2 14.6 11.1 13.2 Sharp decline followed by big rebound US machine tools orders annual growth % yr 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 2005 2006 2007 2008 Source : Oxford Economics US orders 2009 2010 Orders growth will slow next year US machine tools orders annual growth % yr 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 2005 Forecast 2006 2007 2008 2009 Source : Oxford Economics US orders 2010 2011 Quarterly USMTC orders forecast… US metalworking machine tools orders, USMTC Forming machine tools, $bn 0.145 0.125 Cutting machine tools, $bn 1.2 Forming machine tools (LHS) Forecast 1.1 1 0.105 0.9 0.8 0.085 0.7 0.065 0.045 0.025 2004 0.6 0.5 Cutting machine tools (RHS) 0.4 0.3 2005 2006 2007 2008 Source : Oxford Economics US orders 2009 2010 2011 General regional rebound in 2010 Growth in value of orders for cutting machines by region 100% 80% 60% 40% 20% Total Northeast South Midwest Central West 0% -20% -40% -60% -80% 2009 Source: Oxford Economics 2010 2011 Very different story with forming orders Growth in value of orders for forming machines by region 30% 20% 10% 0% -10% -20% -30% Total Northeast South Midwest Central West -40% -50% -60% -70% -80% 2009 Source: Oxford Economics 2010 2011 Conclusions Policy stimulus, turn in inventory cycle and rebound in world trade drove strong recovery Global economic recovery should continue but there are growing downside risks Machine tool orders up sharply from lows. Sales have so far been more subdued but these should now start to pick up. MT sales are forecast to rebound sharply over the next few years in both developed and emerging markets Strong rebound in developed economy markets follows very deep recession but focus of global MT market still increasingly moving toward emerging economies Machine Tool Orders Forecasts (Annual percentage changes) USMTC: cutting USMTC: forming USMTC: total 2006 2007 2008 2009 2010 2011 26.2 -0.6 23.0 7.5 -9.7 7.9 -2.1 40.3 -0.6 -61.2 -52.8 -60.3 67.0 -28.4 54.1 27.7 14.7 26.9 Source: AMT US orders