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Old Europe – New Europe
Implications for Risk Management
Supply Chain Risk Leadership Council
February 22, 2007
Daniel M. Hofmann
Group Chief Economist
Zurich Financial Services
The problem defined
•
A definition of supply chain risk* includes risks due to
- Unnatural disasters
- Natural disasters
- Health
- Disruptions in the supply chain infrastructure
•
It excludes the economic framework in which we are operating, a glaring omission
in a time characterized by discontinuities.
•
The answer to the question whether Europe can successfully deal with
discontinuities arising from further integration is decisive for the
treatment – and ultimate mitigation – of economic supply chain risk.
*George A. Zsidisin, Business and Supply Chain Continuity, CAPS Research, January 2007
© Zurich -
Chief Economist - February 22, 2007
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© Zurich -
Chief Economist - February 22, 2007
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A Global Boom...
8
6
4
2
0
2003
World Output
2004
NIAE
2005
Developing Asia
2006
2007
Advanced Economies
… and Fastest Growth Since the Early 1970s
Source: IMF
8
7
Growth in %
Growth in %
10
6
5
4
Average
3.7
3
2
1
0
1970
© Zurich -
Chief Economist - February 22, 2007
1974
1978
1982
1986 1990 1994
World Output
1998
2002
2006
Source: IMF
4
What went right in Europe?
An excellent outlook for the short term
Improved productivity
No housing bubble
5
14
12
4
10
3
8
2
6
1
4
0
2
-1
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
US
Eurozone
0
85
90
95
00
Eurozone
US
Source: Thomson Datastream
05
Source: Thomson Datastream
Diversified export structure
Lower inflation
45
6
36
4
27
2
18
0
9
0
-2
95
96
97
98
US
99
00
01
02
03
04
05
Accession 10, Asia ex Japan, Russia
Source: ABN Amro
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Chief Economist - February 22, 2007
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97
98
99
00
US
01
02
03
04
05
06
Eurozone
Source: Thomson Datastream
5
Too good to be true?
Signs of a liquidity-driven bubble economy…
14/2/07
2200
450
2000
Emerging Market Bond Spreads
A Bubble in Commodities
400
1800
350
1600
1400
300
1200
Oil
Brazil
250
1000
Metal
800
200
600
150
400
Asia
200
100
Composite
Food
0
2002
2003
2004
2005
50
2006
Source: Thomson Datastream
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Crude Oi l -Brent Cur. Month FOB U$/BBL
WD COMPOSIT E PRICE INDEX - FOOD COMMODIT IES NADJ
WD MARKET PRICE INDEX - MET ALS INDEX NADJ
S ourc e: T homs on Datas tream
Source: Thomson Datastream
Saving - Investment in % of GDP
…or real factors at work?
7
Global Saving / Investment Imbalances
400
25
(Notional Amounts Outstanding; USD trill.)
5
360
20
320
15
280
10
-3
240
5
-5
200
3
Japan
NIAE
Dev Asia
1
-1
USA
UK
Euroland
0
June 04
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Chief Economist - February 22, 2007
Dec 04
Total Contracts (lhs)
Source: IMF
© Zurich -
Growth of Global Derivative Markets
June 05
Dec 05
June 06
Credit Default Swaps (rhs)
Source: BIS
6
Three more distinct risks
• Risk one
Upside risks to inflation and interest rates
• Risk two
Global imbalances and a disorderly correction
• Risk three
Lagged impact of high oil prices and the US housing bubble
© Zurich -
Chief Economist - February 22, 2007
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A big challenge not only for Europe:
Governance gap in a time of discontinuity
Discontinuities caused by
• 1989 and all that (e.g. CEE enlargement)
Market
dynamics
Change
• Impacts of globalization due to
 Rapid advances in technology
 Financial engineering
 Tight integration of capital markets
 Doubling of global labor force
Technolog
y
pull
Governance gap
• Geopolitical risks, terrorism
• Climate change
1980
1990
2000
2010
Institutional
capabilities
;mindsets
Time
• Discontinuities create frictions and a potential for political backlash (as seen in
reaction to the perceived inequality of globalization).
• They are of particular concern in light of a widening governance and gap.
© Zurich -
Chief Economist - February 22, 2007
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The big potential of the New Europe
As seen through the lens of CEE enlargement
GDP per capita of CEE members
Stock Market Capitalization
80
in % of GDP
In USD
30000
20000
10000
60
40
20
0
0
Source: World Bank
Source: World Bank
Foreign Direct Investment
Value added through CEE enlargement
Rest of EU
150
Germany
na
Ch
i
In
di
a
a
Ru
ss
i
l
Br
az
i
Es
to
ni
a
y
Hu
ng
ar
Cz
ec
h
by 2012
Source: BA-CA
Chief Economist - February 22, 2007
2
Sl
Austria
0
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Average
4.3
4
0
50
until 2006
Average
6.4
6
ov
ak
ia
100
8
Re
pu
bl
ic
200
In % of GDP
in EUR billion
250
10
Source: IMF
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Pulling it together
•
•
The medium term outlook for Europe and the global economy is excellent.
•
An emerging governance gap points to potential frictions. Example are the growing
resistance to trade liberalization within the framework of the Doha round and the
recent political backlashes in Hungary and Poland.
•
Economic forces driving globalization in general, and the further integration in Europe
in particular, warrant closer monitoring.
Supply chain risk may derive from economic discontinuities unleashed, for example,
by the forces of globalization and EU accession.
© Zurich -
Chief Economist - February 22, 2007
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