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Uphill struggle: Struggling to keep the economic recovery on track Aidan Manktelow Senior Economist IBCL September 2011 Slowdown? Ask purchasing managers 65 PMI close to stagnant in July, August 60 55 50 45 US China Euro zone 40 35 30 Aug-11 Jun-11 Apr-11 Feb-11 Dec-10 Oct-10 Aug-10 Jun-10 Apr-10 Feb-10 Dec-09 Oct-09 Aug-09 Jun-09 Apr-09 Feb-09 Dec-08 Oct-08 Aug-08 Jun-08 Apr-08 Feb-08 Dec-07 Diffusion index; 50 is dividing line between expansion and contraction. Source: Bloomberg Key points for 2011-12 • Shocks and stresses Euro zone debt crisis US debt debacle, downgrade Volatile commodity prices Inflationary pressures Political tensions • Developed countries stalling Fragile recovery, shocks impact confidence • Emerging markets Will they calibrate policy tightening correctly? Resilience to renewed slowdown in OECD? • Slowdown or meltdown? Our scenarios • Slow, sustained recovery Richer countries continue to grow In 2012 US slows to 2%, euro zone to 0.8% Emerging markets slow but outperform Euro zone crisis contained; oil price recedes 50% • Recession Shocks derail the recovery ◦ Asset price declines hit confidence 45% US and euro zone suffer recessions Defaults, break-up of euro zone Emerging markets hit • Recovery strengthens Policymakers get their act together Confidence surges 5% Euro zone: Crisis escalates Economic growth weakens (even in Germany) 3 Bond yield, % Source: Haver Analytics Sep 14 2011 • Aug 25 2011 4 Aug 5 2011 More fiscal consolidation announced by Italy, Spain Jul 18 2011 • Jun 28 2011 5 Jun 8 2011 ECB starts buying Italian and Spanish government bonds Spain May 19 2011 • Apr 29 2011 6 Apr 11 2011 Crisis engulfs Italy and Spain Much larger economies, debts Mar 22 2011 • Mar 2 2011 7 Feb 10 2011 Greece bail-out and changes to EFSF fail to restore confidence Jan 21 2011 • Jan 3 2011 Italy 2nd Euro zone: Which way out? Three possible outcomes: 1. Some form of fiscal union and joint euro bonds Would be a lengthy process But moves would do much to reassure markets 2. ECB undertakes massive bond purchases Mimicking the US Fed Reluctant, but already some moves in this direction 3. Euro-zone break-up Policy response fails to protect Italy and Spain Ructions could spell the end for the euro Where’s the growth? Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. Source: Economist Intelligence Unit, CountryData. Relative market size: G7 vs E7 GDP, US$ trn E7 is 22% bigger than the G7 120 100 G7 E7 E7 is half the size of the G7 80 60 40 20 0 2011 2020 G7 = US, Japan, Germany, UK, France, Italy, Canada. E7 = China, Brazil, India, Indonesia, Russia, Mexico, Turkey. Source: Economist Intelligence Unit, CountryData. 2030 Implications for marketing strategies • Prepare for volatility Short-term outlook is highly uncertain • Geographic refocusing Emerging markets will become the primary source of revenue and profit • Balancing the short and long-term Surviving today vs necessary investment in a changing world