Download Section 2: What will companies do?

What are the implications for
public policy & business?
John Walker
Oxford Economics
[email protected]
18 March 2010
US:Current cycle vs previous cycles
7
US:Current cycle vs previous cycles
8
US:Current cycle vs previous cycles
9
Issues
 What form will regulation of financial sector take?
 What will nonfinancial companies do? M&A or invest
 And how much consumer retrenchment?
 Can political structures cope with large public sector deficits?
 Will global imbalances lead to protectionism. Or will we see
more exchange rate adjustment?
 China is more vulnerable than many realise because it has a
debt problem too
What did banks do?
 Banks would normally be wary of
lending to someone whose liabilities
were fifty times their net assets but
they happily lent to each other on that
basis – until, one day, they stopped
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
What does not need to happen
 Controls on hedge funds etc
 Limits on bonuses etc
 A ban on naked CDSs etc
 A long-term tax on banks
What does need to happen
 Regulations that enable non-financial
companies, consumers and governments to be
insulated from a financial crisis.
 And there area number of ways to achieve that
 A year ago we proposed separating the utility
function of banks from other activities
 And we still think that is the most reliable way of
succeeding as well as being something that
many in finance should support
But unlikely to happen!
 Likely to see much more messy structures that
will differ across regions. Nothing on a global
scale
Section 2: What will companies do?
Investment or M&A and how much?
What will companies do? The new normal?
 Partial retreat from supply chain dispersion because of rising
transport costs, worries about intellectual property?
 Networks rather than hierarchies?
 More cautious financial sector limits structural changes
US company debt not high
Non-financial corporate sector debt
% of GDP
120
110
UK
100
90
80
Eurozone
70
60
US
50
40
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Source : Oxford Economics/Haver Analytics
Sectoral balances
US: Sectoral balances
UK: Sectoral balances
% of GDP
10
% of GDP
10
Current
account
Current
account
Private sector
Private sector
5
5
0
0
-5
-5
Public sector
-10
-10
-15
1980
-15
1980
1985
1990
1995
Source : Oxford Economics/Haver Analytics
2000
2005
Public sector
1985
1990
1995
Source : Oxford Economics/Haver Analytics
2000
2005
Private sector balances
US: Private sector financial balances
UK: Private sector financial balances
% of GDP
14
% of GDP
14
12
12
10
10
8
8
6
4
Personal
sector
6
4
2
2
0
0
-2
-2
-4
-8
1980
-4
Company sector
-6
1985
Personal
sector
1990
1995
Source : Oxford Economics/Haver Analytics
Company sector
-6
2000
2005
-8
1980
1985
1990
1995
Source : Oxford Economics/Haver Analytics
2000
2005
Company sector balances
US: Company sector financial balances
UK: Company sector financial balances
% of GDP
8
% of GDP
8
6
6
2
2
0
0
-2
-2
-4
Non-financial
-6
1980
1985
Non-financial
4
Financial
4
1990
1995
Source : Oxford Economics/Haver Analytics
2000
2005
Financial
-4
-6
1980
1985
1990
1995
Source : Oxford Economics/Haver Analytics
2000
2005
Many companies very cash rich
Non-financial corporate sector financial flows
Net acquisition of financial assets*,% of GDP
5
4
UK
3
2
US
1
0
-1
-2
-3
Eurozone
-4
-5
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
* UK & Eurozone are 4-quarter moving averages
Source : Oxford Economics/Haver Analytics
So US manufacturing on the mend
23
Section 3 What will consumers do? And why
the US is a special case?
Wealth not recovered
25
US household savings still low
Household savings ratio
% disposable income
14
12
Eurozone
10
8
UK
6
4
2
US
0
-2
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source : Oxford Economics/Haver Analytics
Savings and housing investment
UK: Savings & investment
US: Savings & investment
% of GDP
% of GDP
10
10
9
9
Savings
8
8
7
7
6
6
5
5
4
4
3
3
Investment
2
2
1
1
0
1987
1990
1993
Investment
1996
1999
Source : Oxford Economics/Haver Analytics
2002
2005
2008
Savings
0
1987
1990
1993
1996
1999
Source : Oxford Economics/Haver Analytics
2002
2005
2008
Section 4 Ways of dealing with public sector
deficits: a lack of political consensus?
US: Government balance and debt
% of GDP
% of GDP
4
95
Government
budget
(LHS)
2
0
Forecast
90
85
80
-2
75
-4
70
-6
-8
-10
65
Debt position
(RHS)
-12
1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: Oxford Economics
60
55
50
Eurozone*: Government balance and debt
% of GDP
% of GDP
0
-1
Forecast
Debt position
(RHS )
90
80
70
-2
60
50
-3
40
Government
budget (LHS )
-4
30
20
-5
-6
1987
*Includes Germany, France,
Italy and Spain
10
0
1991
1995
Source : Oxford Economics
1999
2003
2007
2011
UK: Government balance and debt
% of GDP
2
0
% of GDP
80
Forecast
Government
budget
(LHS)
75
70
65
-2
60
-4
55
50
-6
45
Debt
(RHS)
-8
40
35
-10
30
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Source: Oxford Economics
Section 5 Global imbalances have not gone
away and will dominate policy between many
countries
Current account balances for 2007
Malaysia (15.7)
India (-0.7)
Taiwan (8.4)
Switzerland
(8.9)
Portugal(-9.5)
Sweden (8.8)
Turkey (-6.0)
France (-1.0)
Singapore
(27.9)
Netherlands
(8.7)
Greece (-14.5)
Italy( -2.4)
Australia (6.1)
Japan (4.9)
UK (-2.7)
Germany (8.0)
Exporters of
Oil (10.9)
Spain (-10.0)
726.5
China (10.1)
-600
-400
Source: Oxford Economics
-200
0
US (-5.2)
200
400
600
US$ bn (% of GDP in brackets)
Current account balances forecast for 2009
Switzerland
(6.0)
Turkey (-2.2)
Malaysia (17.2)
Portugal(-10.3)
Sweden (8.2)
UK (-1.4)
Singapore
(19.1)
India (-2.5)
Taiwan (11.3)
Greece (-11.2)
Netherlands
(5.4)
Australia (-4.2)
France (-2.0)
Japan (2.8)
Italy( -3.2)
Germany (5.1)
Exporters of
Oil (6.7)
Spain (-5.0)
439.5
China (5.7)
-400
-200
Source: Oxford Economics
0
US (-3.1)
200
400
US$ bn (% of GDP in brackets)
Current account balances forecast for 2011
Portugal(-9.3)
Taiwan (6.7)
Greece (-9.2)
Sweden (6.7)
Turkey (-4.3)
Malaysia (14.9)
Singapore
(18.0)
Netherlands
(5.2)
Spain (-2.6)
UK (-1.7)
Australia( -4.2)
Switzerland
(10.3)
India (-3.5)
Germany (5.2)
Italy( -2.8)
Japan (3.8)
China (5.2)
France (-2.3)
Exporters of
Oil (7.6)
-600 -500 -400 -300 -200 -100
Source: Oxford Economics
555.0
0
US (-3.5)
100 200 300 400 500 600
US$ bn (% of GDP in brackets)
Inflows from Rest of world played a part in crisis
US: Capital inflows and long-term rates
%
% of GDP
2.5
10
Official flows into US
assets (RHS)
9
8
US real 10-year
rates (LHS)
7
2.0
1.5
6
5
1.0
4
3
0.5
2
1
0.0
0
-1
1984
-0.5
1987
1990
1993
1996
1999
Source : Oxford Economics/Haver Analytics
2002
2005
2008
The private sector is now in surplus everywhere
Sectoral financial balances in the Eurozone in
2006
% of GDP
Sectoral financial balances in the Eurozone in
2009
% of GDP
15
15
Private balance
Capital account
General government financial balance
10
10
5
5
0
Private balance
Capital account
General government financial balance
0
-5
-5
-10
-10
-15
Neth
Germany Austria Eurozone Ireland
Source: OECD
Greece
Spain
-15
Neth
Germany Austria Eurozone Ireland
Source: OECD
Greece
Spain
Will the rise in the renminbe be enough?
China: Exchange rate
US$
9.0
8.5
Forecast
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Oxford Economics
US Dollar
US: Exchange rates
US$/€
1997=100, Yen/US$
140
Broad effective exchange rate
(LHS)1997=100
Euro
(RHS)
1.8
130
1.6
120
1.4
110
1.2
100
1.0
90
Yen
(LHS)Yen/US$
0.8
80
0.6
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source:Haver Analytics
39
Section 6 China: another case of debt levels
being too high?
Chinese and Japanese growth strategies
Exchange rate
Japan’s growth
strategy in late 1960s
China’s growth strategy
in early 2000s
Fixed at Yen360/$ and
not changed since 1950
Fixed at Rmb8.3/$ in
1997 and has been
stable since (except for
2005-8)
Current account Surplus in 1969-72 of
1.7% of GDP
Surplus in 2004-08 of 8%
of GDP
Gross capital
formation
37.5% of GDP in 196972
Over 50% of GDP in
2004-08
Industry value
added
40.3% of GDP in 196972
Nearly 50% of GDP in
2004-08
Is Chinese credit growth too fast?
China: Bank lending & nominal GDP
% year
45
40
Nominal GDP
Bank lending
35
30
25
20
15
10
5
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Haver Analytics
Japanese and Chinese corporate debt
Non financial corporate debt
% of GDP
150
140
130
120
China
110
100
90
Japan
80
70
1997
1999
2001
2003
2005
Source: Oxford Economics/CEIC/Haver Analytics
2007
2009
Summary
 Balance sheets and debt are at the root of the crisis and
remain an issue for both finance and now governments
 Companies are cash rich and will start to invest and to begin a
new round of M&A soon but will remain cautious for some
time
 Consumers will continue to retrench but in US reform of
lending laws will be critical
 Imbalances are more of a problem with fixed exchange rates
 China may be more vulnerable than many realise and once
again debt could be the issue
Thankyou
Households savings
China: Savings ratio
%
40
35
30
25
20
15
10
5
0
1992
1994
1996
1998
2000
2002
Source: CEIC, Oxford Economics' estimates
2004
2006
2008
Share of corporate profits is high
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
Labor costs very low
Hourly labour costs in manufacturing
US$
45
40
35
30
25
20
15
10
5
0
Germany
EU
Source: Oxford Economics
US
UK
Japan
Korea
China
China: Government balance and debt
% of GDP
1.0
% of GDP
18
Forecast
16
0.5
14
0.0
Government
budget
(LHS)
-0.5
-1.0
-1.5
Debt position
(RHS)
-2.0
12
10
8
6
4
-2.5
2
-3.0
1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
0
Source: Oxford Economics
…leads to lower private savings in long run
China: Sectoral balances
% of GDP
15
F'cast
12
9
Current
account
Private
sector
6
3
0
-3
Public
sector
-6
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: Oxford Economics
US/Europe
Eurozone: Bank lending to the private sector
% year
Non-financial
corporations
16
14
12
10
Total
8
6
4
Households
2
0
-2
-4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source : Oxford Economics/Haver Analytics
US/Europe
US: Bank lending to the private sector
Amounts outstanding, % year
Commercial
& Industrial
25
20
Consumer
15
10
5
0
-5
-10
-15
-20
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source : Oxford Economics/Haver Analytics