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Global Economic Outlook: Bottoming Out Now, Recovery by June 2009 Economics Research and Analytics January 2009 Executive Summary 1. Indicators point to a bottom 2. “Fear Index” is reaching a low-point 3. Rebound to start in June due to massive global response 4. Sustainability of up-swing driven by performance of emerging nations 2 Origin of Crisis The Genesis: Sub Prime Story • • • Sub Prime Model Home Buyer • Loan Defaults • Sub Prime Model: Actions Banks disperse risk of defaults Banks lend more New markets established for retail mortgages New market created for CDS (total CDS market estimated by BIS to be $57 trillion) Lax norms for housing credit as a result of low interest rates Bank Payments Mortgages are traded Mortgage Market Loan remains in the banks books Mortgages not in banks books Loss Due to Defaults Sub Prime Model: Consequences • Repercussions of defaults in mortgage market • Falling house prices • Prime borrowers start to default • Write-downs by holders of mortgages and other instruments • Resulting credit crunch in the economy * Note: CDS: Credit Default Swaps 4 Genesis: From Financial Sector to Real Sector Defaults Lack of Trust in Financial Institutions Sub-Prime Mortgages Financial Institutions Losses Lack of Capital for Companies Tightening Credit Markets $ $ Suspension of Interbank Lending Banks Slow Lending Down $ Lack of Lending for Small Business Slower Growth Consumers Reduce Spending $ Lack of Retail Credit $ Economy Slows Down/Contracts 5 Internationalization of the Crisis European Banks Lose Money on Sub Prime Mortgages European Banks Withdraw Investments in Eastern Europe Unwinding of Yen Carry Trade and FII Withdrawals Oil Prices Drop on Slower growth in Europe and USA Lower Exports From Asia Due to Lower American and European Demand Withdrawal of FII Inflows: Currency Depreciation 6 How Fear Drove the Recession – Fear is Now Bottoming Out “The only thing we have to fear is fear itself.” -- Franklin Roosevelt 7 Bottoming Out Now Employment Creation Hits Bottom; Due for an Upswing Beginning of great moderation; macroeconomic policies smooth business cycles • • Current employment levels the lowest of the Great Moderation Era, suggesting bottom-out Non-Farm Payroll growth indicates increase in non-agricultural employment During the Era of Great Moderation, the business cycle was longer and smoother, and recessions were typically shallower than pre-1984. Employment creation is currently at the lowest level of the Great Moderation Era (i.e., 1984 onwards); job creation will be positive for the foreseeable future, given the massive global fiscal stimulus. 9 Has Industrial Production Bottomed-Out? Lowest since oil shock; that said, recent months’ output indicates recovery Recovery in industrial production despite lower automotive growth rates • Increased output – despite the overhang of a recession – illustrates the robust underlying conditions in American manufacturing Industrial output showing a rebound from recent lows, suggesting the recovery of underlying fundamentals. 10 Consumers Are Continuing to Buy • The decline in retail sales is not as steep as in the 2006 or 2001 recessions. Recovering consumer confidence should lead to positive growth in the near future. Consumers activity, aided by the fiscal stimulus, will boost industrial production and ultimately aid recovery. 11 The Good, The Bad, and the Ugly The Good • • • • “Fear Index” has peaked, indicating bottom-out Non-Farm Payroll growth has hit historic lows Industrial production has recovered and is much higher than during previous recessions Widely accepted that real estate is bottoming out now as well The Bad • • • Credit markets still remain tight Interest rates are at historic lows, but lending has not restarted Crisis has “gone global” The Ugly • • • Potential collapse of US automotive industry (though recent events indicate recovery to come soon) Clarity on the extent of sub prime losses and other securitized losses (no recent losses, suggesting the worst news is behind us) The crisis is reaching a bottom 12 Global Economy to Rebound by June 2009 Mega Drivers for Rebound • • • • • • • • Positive economic news around the world; unprecedented focus worldwide on addressing the economic situation Fastest government response in history, primarily driven by massive government fiscal stimulus package New US Government/Obama’s economic growth plan focuses on creating employment through investments in infrastructure, renewable energy, broadband, and medical technology; infrastructure alone will create 2 million jobs Decline in commodity and oil prices leading to a tax break stimulus Easing of inflationary and liquidity pressures Strong demand from emerging nations will be a factor in reviving the global economy Smart money is coming back to the market, with stock exchanges at historic low P/E ratios “Fear fatigue” and rebound in confidence 14 Global Response: Massive Government Stimulus USA: $700 Billion bailout rapid interest rate cuts $23 billion support for top 3 auto companies; plan to create 2.5 million jobs by 2011 UK: Germany: Belgium & Switzerland: ECB France 250 billion pound bailout $700 billion relief package Capital infusion Interest rate cuts $50 billion stimulus package China: Interest rate cuts and $586 billion stimulus (infrastructure, rural) India: Interest rate cuts $4 billion stimulus package (infrastructure, exports, textiles) Brazil Support to real, infrastructure development under PDP (more than $64billion injected to financial system) Russia Support for ruble; $20 billion stimulus package Japan: Interest rate cuts, 447 billion yen stimulus package South Korea: Interest rate cuts and efforts to keep currency stable, $11 billion stimulus package Global Response • • • • Governments infusing capital into financial institutions Globally coordinated interest rate cuts IMF offers bridge loan to meet foreign exchange requirements Discussions, coordinated efforts (G20 summit) 15 Global Response – Stimulus Packages Country Stimulus Package and Policy Changes USA Job and growth fund- $25 billion 2.5 million jobs by 2011: 82.5% of losses (i.e., 1.6 million jobs) to be recovered within 6 months Every $1 billion spent on roads will create approximately 35,000 jobs Public buildings, schools, roads, energy efficiency, broadband and medical technology will be primary sources for employment growth in 2009 European Union Japan and South Korea Emerging Markets UK: 250 billion pound bailout Germany: $700 billion relief package Belgium & Switzerland: Capital Infusion Spain $14 billion infusion, 300 000 jobs to be added by next year EU Interest rate cuts permanent; reduced VAT for labor-intensive units; $250 billion (i.e., stability and growth pact). Job creation sources include energy efficiency, transportation, infrastructure, broadband connectivity, construction, automobiles Japan: South Korea: Interest rate cuts Interest rate cuts; battling to stabilize currency China: Interest rate cuts and $700 billion bailout; close to $88 billion for railway infrastructure with focus on 10 sectors including infrastructure, technological innovation, Healthcare, and low-income housing India: Interest rate and tax cuts totaling $4 billion in the next four months (March 2009); sector focus is on apparel, infrastructure, other export-oriented sectors 16 Easing of Inflationary and Liquidity Pressures Inflationary Pressures: Easing Worldwide 12.0 10.0 % Y.on Y 8.0 Increase in Real Income 6.0 4.0 2.0 0.0 - 2.0 2002 2003 2004 2005 2006 USA Euro Area Advanced economies 2007 2008 2009 F Japan Latin America Ensuring Liquidity % Y on Y Policy Rate Reduction Leading to Addition in Liquidity 17 Decline in Commodity and Oil Prices 300 Commodity and energy prices have declined sharply in recent months. Oil prices have declined from $147 to $40 and will be a key stimulus for the 2009 rebound. Index 2005=100 250 200 150 100 50 0 1980M1 1982M1 1984M1 1986M1 1988M1 1992M1 1994M1 1996M1 Agricultural Raw Materials Index 1998M1 2000M1 2002M1 2004M1 Metals Price Index 2006M1 2008M2 Fuel/Energy Index 08 Ja n- 07 Ja n- 06 Ja n- 05 Ja n- 04 Ja n- 03 Ja n- 02 Ja n- 01 Ja n- 00 Ja n- 99 Ja n- 98 Ja n- 97 Ja n- 96 Ja n- 95 Ja n- 94 Ja n- 93 Ja n- 92 300 250 200 150 100 50 0 Ja n- Index Industrial Inputs Price Index 1990M1 Com m odity Fuel (energy) Index, 2005 = 100, includes Crude oil (petroleum ), Natural Gas, and Coal Price Indices 18 20 18 16 14 12 10 815.4 6 4 2 0 Industrial Output China (2008) Source: National Institute of Statistics • • • • Month (Year 2008) Steps to Combat Crisis Announced a $586 billion bailout. Focus on developing infrastructure to create jobs and revive economy Government easing lending to stem fall in home prices Coordinated interest rate cuts to boost liquidity 11.4 8.2 O ct ob er m be r Au gu s t 12.8 Se pt e 14.7 Ju ly ay M 16.0 Ju ne 16.0 15.7 Ap ril M ar ch 17.8 Fe br ua ry Growth Rate (%) Emerging Markets - China China is Structurally Vulnerable to External Environment • Export-driven economy • Dependent on foreign capital inflows • High level of migration – imperative to maintain high growth momentum • US is main destination for China’s exports Current Scenario • • • Small and medium manufacturers struggling to access credit Falling real estate prices could adversely affect the banking sector Facing struggling domestic demand, China’s recovery will depend upon access to an alternative market for its exportsnamely India China’s present hard landing is expected to recover by the middle of 2009, when domestic consumption in China recovers as a result of effective use of stimulus package and growth in alternative market for its exports (i.e., India). 19 Emerging Markets - India Industrial Output India (2008) September August Months (Year 2008) Key Issues: Rupee; Real Estate 4.80 1.42 • 7.37 July 5.53 June • 4.37 May 6.22 April 5.47 March 9.52 February 0.00 1.00 2.00 Source: CSO • • • • 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Real estate boom for past few years, with prices now cooling off Rupee has depreciated considerably against the dollar, leading to loss of corporate profits 10.00 Growth Rate % (YoY) Steps to Combat Crisis Comprehensive cut in excise duties to facilitate consumption across the board Easing of norms for foreign investments in local economy. Small manufactures received sops manage rising costs. Exports, automotive, textiles industries have received stimulus Current Scenario • • Fall in consumption: especially consumer durables Increase in outsourcing activity (due to offshoring by US and European companies seeking to cut costs) India is set to record lower but nonetheless significant growth of 7% in 2008. Public spending, investments in infrastructure and third wave of IT boom in India will make the economy even more buoyant by June 2009. 20 World Economy - Composition and Growth 60.00 50.00 Developing Econom ies Advanced Econom ies $ Trillion 40.00 30.00 20.00 10.00 0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Advanced Economies accounted for 67 percent of world GDP in 2007 and Developing Economies 33 percent in 2007. In terms of contribution to growth, the share of emerging countries has been increasing with major contributors being China, India, Russia, Brazil. These are also fastest expanding economies (Russia is now an exception) with large public sector contributions. Stimulus plans to result in more employment and growth. A quarter of growth was driven by these emerging markets; contributions from these economies will play a key role in global economic growth and recovery. 21 $ US/European Stimulus Package $ Credit Market Stabilize Increasing Government Consumption Resumption of Corporate Lending Output Stabilizes-Aided by Capital Goods and Infrastructure Increasing capacity utilization and expansion Road to Recovery Increasing Demand for Capital Goods Increasing Consumption Stemming Job Losses $ $ $ Boom in Asia Chinese Stimulus $ Consumer Spending Gets Back on Track Restarting of Retail Credit $ Asian Stimulus Recovery/End of Trough 22 We Can Help • • • • Request a proposal for a Growth Partnership Services License to support you and your team to accelerate the growth of your company Join us at Growth, Innovation and Leadership 2009: A Frost & Sullivan Global Congress on Corporate Growth (www.frost.com/gilglobal) Register for the next Chairman’s Series on Growth Webcast: (http://www.frost.com/growth) Register for Frost & Sullivan’s Growth Opportunity Newsletter and keep abreast of innovative growth opportunities Contact Call 1.877-GoFrost (1.877.463.7678) email: [email protected] 23