Download What explains who suffered most?

Prospects for the
Global economy
Charles Burton
October 2009
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Who should have suffered most in downturn?
 The global financial crisis was widely anticipated to hit most
hard those countries:
■ Very dependent on financial services
■ Who had experienced large housing and construction
booms
■ Where consumer debt had risen to excessive levels
■ Who were particularly exposed to trade with the US
 So, we’d expect to see US, UK, Spain and Ireland facing the
deepest recessions and countries like Germany, France and
Italy suffering much less
Who is most exposed to financial services?
Dependence on financial services
% of GVA
12
10
8
6
4
2
0
UK
US
Neth
Source : Oxford Economics
Italy Spain Japan France Swe
Ger
Who should have suffered most in downturn?
 The global financial crisis was widely anticipated to hit most
hard those countries:
■ Very dependent on financial services
■ Who had experienced large housing and construction
booms
■ Where consumer debt had risen to excessive levels
■ Who were particularly exposed to trade with the US
 So, we’d expect to see US, UK, Spain and Ireland facing the
deepest recessions and countries like Germany, France and
Italy suffering much less
Where were house prices most excessive?
Who should have suffered most in downturn?
 The global financial crisis was widely anticipated to hit most
hard those countries:
■ Very dependent on financial services
■ Who had experienced large housing and construction
booms
■ Where consumer debt had risen to excessive levels
■ Who were particularly exposed to trade with the US
 So, we’d expect to see US, UK, Spain and Ireland facing the
deepest recessions and countries like Germany, France and
Italy suffering much less
Who has highest consumer debt?
Who should have suffered most in downturn?
 The global financial crisis was widely anticipated to hit most
hard those countries:
■ Very dependent on financial services
■ Who had experienced large housing and construction
booms
■ Where consumer debt had risen to excessive levels
■ Who were particularly exposed to trade with the US
 So, we’d expect to see US, UK, Spain and Ireland facing the
deepest recessions and countries like Germany, France and
Italy suffering much less
Who is most exposed to trade with US?
Exports to US as % of total exports for 2008
Japan
UK
Germany
Italy
France
Spain
Hungary
Czech
Poland
0
2
Source: Oxford Economics
4
6
8
10
12
14
16
18
%
Who should have suffered most in downturn?
 The global financial crisis was widely anticipated to hit most
hard those countries:
■ Very dependent on financial services
■ Who had experienced large housing and construction
booms
■ Where consumer debt had risen to excessive levels
■ Who were particularly exposed to trade with the US
 So, we’d expect to see US, UK, Spain and Ireland facing the
deepest recessions, and countries like Germany, France and
Italy suffering much less
Who has actually suffered most?
% change in GDP
Russia
Ireland
Hungary
Japan
Italy
Germany
UK
Slovakia
Czech Rep
Netherland
Austria
Spain
US
Belgium
Portugal
Canada
France
Korea
Brazil
Greece
Poland
India
China
-12
-10
-8
Source: Oxford Economics
-6
-4
-2
0
2
4
6
% change 2008Q2-2009Q2
8
Outline of presentation
 What explains who suffered most during the downturn?
 Do recent data point to a strong recovery?
 Will those who suffered most recover fastest?
 Risks to the economic outlook
 Legacies from the downturn
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Financial stabilisation costs may differ…
…but credit conditions worsened in sync
World: Credit growth
% year
16
14
UK M4 lending
ex OFCs
US loans & leases
12
10
8
6
4
2
Eurozone loans to
PNFCs and households
0
-2
-4
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source : Oxford Economics/Haver Analytics
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Synchronised global slump in confidence
Consumer confidence: US, UK and Eurozone
1985=100
160
% Balance
20
US
(LHS)
UK
(RHS)
140
120
10
0
100
-10
80
60
Eurozone
(RHS)
40
20
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Haver Analytics
-20
-30
-40
-50
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital inflows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Who is most dependent on manufacturing?
Exposure to manfacturing
Manufacturing as % GDP
30
25
20
15
10
5
0
Cze Slovak Hun Ger
Source : Oxford Economics
Pol Japan Italy
Fra
US
Sp
UK
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Who is most dependent on cap goods & cars?
Exposure to capital goods
Exposure to cars
Capital goods production as % GDP
Motor vehicles production as % GDP
4.5
14
4
12
3.5
10
3
8
2.5
6
2
1.5
4
1
2
0.5
0
0
Cze Ger Slovak Hun Pol Japan Italy Fra
Source : Oxford Economics
US
UK
Sp
Cze Hun Slovak Ger Jap
Source : Oxford Economics
Pol
Fra
Sp
US
UK
Italy
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Who is most dependent on trade with Asia?
Exports to Asia as % of GDP for 2008
Germany
Hungary
France
Czech
US
Italy
UK
Poland
Spain
0.0
0.5
Source: Oxford Economics
1.0
1.5
2.0
2.5
%
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Emerging markets hit by flight to liquidity…
…exposing weaknesses in Eastern Europe
Emerging Europe: Short-term external debt
US$ bn
50
Bulgaria &
Romania
40
"Baltics"
30
Ukraine
20
10
Hungary
0
1995
1997
1999
2001
2003
Source: Haver Analytics & central banks
2005
2007
2009
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Russia undermined by oil price collapse
What explains who suffered most?
 The financial shock was surprisingly similar across countries
 …as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
– especially in capital goods and cars
– especially with Asia
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
Who has actually suffered most?
% change in GDP
Russia
Ireland
Hungary
Japan
Italy
Germany
UK
Slovakia
Czech Rep
Netherland
Austria
Spain
US
Belgium
Portugal
Canada
France
Korea
Brazil
Greece
Poland
India
China
-12
-10
-8
Source: Oxford Economics
-6
-4
-2
0
2
4
6
% change 2008Q2-2009Q2
8
First signs of recovery…
…with European confidence in sync with US…
Consumer confidence: US, UK and Eurozone
1985=100
160
% Balance
20
US
(LHS)
UK
(RHS)
140
120
10
0
100
-10
80
60
Eurozone
(RHS)
40
20
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Haver Analytics
-20
-30
-40
-50
…as are equity prices
Equity prices
1 Jan 2008=100
110
100
90
80
70
US
UK
Germany
France
60
50
40
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Source : Oxford Economics/Haver Analytics
Apr-09
Jul-09
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
Monetary policy on full throttle…
…as is fiscal policy…
World: fiscal stimulus packages
% of GDP
16
14
Headline package
12
Estimated new money
10
8
6
4
2
0
UK
EZ
US
Source : Oxford Economics/Haver Analytics
Japan
China
…and automatic stabilisers will help Europe
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
Recovery from banking crises generally slow
Growth in lending to economy following crises
% change on previous year. Year of financial crisis marked as zero.
25
Norway
(1991 = 0)
20
15
Sweden
(1992 = 0)
10
5
Japan
(1997 = 0)
0
-5
-10
-5
-4
-3
-2
-1
0
Source: Bank of England, Oxford Economics
1
2
3
4
5
Europe’s banks not as well placed as US?
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
Massive wealth losses to be made up
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
How strong will recovery be?
 Likely to be robust initially because of swing in inventory cycle
and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given
large overhang of spare capacity in many sectors, slowing
recovery in countries dependent on capital goods
■ Car sector will be adversely affected when scrappage
schemes end
■ Rising oil prices good for Russia but bad for most
Will rising oil prices derail recovery?
Some evidence those hardest hit up first…
GDP growth - 2009Q1 & Q2
% quarter
1.0
0.0
-1.0
-2.0
-3.0
Hungary
Spain
UK
Italy
US
Czech Rep
Source: Oxford Economics
Eurozone
Germany
France
Poland
Japan
-4.0
…but they won’t all keep up the pace
Why won’t Germany and Italy recover faster?
 Germany and Italy will be hindered by:
■ Slow trend growth
■ Slow recovery in global business investment
■ Measures to support economy and jobs are
temporary – wave of redundancies to come when
support measures end
■ Crisis has accelerated industrial relocation away
from Italy, which remains fundamentally
uncompetitive
Risks to the economic outlook
 V-Shaped recovery
 ‘W’-shaped cycle
■
Short-term outlook
■
■
■
Growth boosted by inventory rebuild
and world trade multiplier
But final demand remains weak as
banks and households keep
deleveraging
Oil/commodity price spike
Growth sluggish again in 2010H2 and
2011 after initial bounceback
 Deflation
■
■
■
■
■
■
■
■
■
Return to growth boosts business and
consumer confidence
Government stimulus efforts feed
through quickly
Financial market rally becomes firmly
established
Emerging markets boosted, adding to
global growth
 Oxford forecast
Renewed weakness in asset prices holds
back recovery in banking sector
Unemployment rises sharply further
depressing consumption
Monetary/fiscal policy not effective as
deflation grips
Protectionism measures enacted
Economy flatlines in 2010 and beyond
■
■
■
■
Medium-term outlook
Fiscal stimulus feeds through but
scale held back by deficits
Monetary easing blunted by weak
banks but eventually works
Gradual rise in business and
consumer confidence
Weak recovery in 2010, gaining
traction in 2011
Scenarios for the global economy
Alternative GDP growth forecasts
2008
2009
2010
2011
Oxford Forecast (45%)
US
Eurozone
China
World
0.4
0.6
8.9
1.6
-2.7
-4.1
8.1
-2.3
2.3
0.5
8.6
2.4
3.1
1.6
8.9
3.6
V-Shape (20%)
US
Eurozone
China
World
0.5
0.6
9.1
1.7
-2.3
-3.6
8.5
-1.9
3.1
1.6
9.4
3.3
3.4
3.1
9.9
4.4
Deflation (7.5%)
US
Eurozone
China
World
0.5
0.6
9.1
1.7
-3.2
-4.6
7.8
-2.5
-0.6
-0.6
4.2
0.9
0.1
0.0
4.5
1.4
W-Shaped Cycle (25%)
US
Eurozone
China
World
0.5
0.6
9.1
1.7
-2.5
-3.8
8.3
-2.1
2.7
1.2
8.9
2.8
0.9
0.6
7.1
1.8
Some legacies from the downturn
 Massive fiscal cost of crisis means years of austerity
 Need to exit eventually from monetary stimulus – is
Eurozone better placed than US and UK?
 Regulation of financial services – how much will really
change?
 EMU has proved to be resilient in the face of massive
financial and economic shocks – will it take confidence
from this and a more forceful role globally?
Downside risks for those burdened by massive debt
Fiscal costs of the recession
% of GDP
45
40
2008-2010 public debt increase
35
Financial stabilisation cost
30
25
20
15
10
5
0
France Germany Spain
Source : Oxford Economics/IMF
UK
US
Japan
Ireland
Some legacies from the downturn
 Massive fiscal cost of crisis means years of austerity
 Need to exit eventually from monetary stimulus – is
Eurozone better placed than US and UK?
 Regulation of financial services – how much will really
change?
 EMU has proved to be resilient in the face of massive
financial and economic shocks – will it take confidence
from this and a more forceful role globally?
Some legacies from the downturn
 Massive fiscal cost of crisis means years of austerity
 Need to exit eventually from monetary stimulus – is
Eurozone better placed than US and UK?
 Regulation of financial services – how much will really
change?
 EMU has proved to be resilient in the face of massive
financial and economic shocks – will it take confidence
from this and a more forceful role globally?
Some legacies from the downturn
 Massive fiscal cost of crisis means years of austerity
 Need to exit eventually from monetary stimulus – is
Eurozone better placed than US and UK?
 Regulation of financial services – how much will really
change?
 EMU has proved to be resilient in the face of massive
financial and economic shocks – will it take confidence
from this and a more forceful role globally?
Oxford Economics’ forecast
World GDP Growth
% Change on Previous Year
2008 2009 2010 2011 2012 2013
US
0.4
-2.7
2.3
3.1
3.3
3.5
Eurozone
0.6
-4.1
0.5
1.6
2.3
2.5
Germany
1.0
-5.1
1.0
1.6
2.3
2.6
France
0.3
-2.1
0.9
1.5
2.2
2.2
-1.0
-5.1
0.1
1.3
1.8
2.1
0.7
-4.4
0.7
2.2
3.2
3.4
-0.7
-5.4
1.1
1.6
2.1
2.5
China
India
Other Asia
8.9
7.5
1.1
8.1
5.8
-4.0
8.6
6.7
3.4
8.9
8.8
4.5
9.0
9.0
4.8
9.0
8.8
4.7
Mexico
Other Latin America
1.4
5.0
-6.7
-1.4
4.4
2.7
6.1
5.2
5.0
5.0
4.5
4.2
Eastern Europe
5.6
-5.9
1.6
3.9
5.2
5.1
World (PPP)
3.0
-1.2
3.0
4.4
4.9
4.9
of which:
Italy
UK
Japan