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Global Outlook – What does the recession mean for the machine tool industry? January 2009 Dougie Adams [email protected] Overview Unprecedented conditions Financial heart-attack with commodity price complications ■ ■ ■ ■ ■ Healing forces ■ ■ ■ ■ 2 credit hard to get collapse in confidence consumer retrenchment employment & investment cut recession or depression? collapse in commodity prices monetary policy – orthodox & unorthodox global fiscal measures continuing impact of lower dollar on US Tough year but some recovery by 2010 Potted history of banking busts Past real per capita GDP cycles and banking crises: Peak to trough Percent decline in Real GDP (left chart) Years Duration of Downturn (right chart) Spain, 1977 Japan, 1992 Norway, 1987 Philippines, 1997 Sweden, 1991 Hong Kong, 1997 Colombia, 1998 Korea, 1997 Historical Average Malaysia, 1997 Finland, 1991 Thailand, 1997 Indonesia, 1997 Argentina, 2001 US, 1929 -30 -25 -20 -15 -10 -5 0 Percent decrease Source: Reinhart & Rogoff 3 5 0 1 2 3 Duration in years 4 5 Inflows from Rest of world play a part US: capital inflows and long-term rates % % of GDP 2.5 9 Official flows into US assets (RHS) 8 7 US real 10-year rates (LHS) 6 2.0 1.5 5 1.0 4 3 0.5 2 0.0 1 0 -0.5 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source : Oxford Economics/Haver Analytics 4 Roots of the crisis Fed funds rate cut from 6.5% to 1% between 2001 and 2003 Federal funds target rate % 7 6 5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Haver Analytics 5 Roots of the crisis Stimulated the boom in house prices Europe and US: House price valuations House prices to income ratio 2007 (long-term average=100) Netherlands Denmark Spain UK France Ireland Sweden Italy US Finland Germany 0 50 100 Source : Oxford Economics 6 Roots of the crisis 150 200 Stresses emerged as subprime defaults rose US: Mortgage delinquency rates % of loans 25 Subprime ARMs 20 15 10 Subprime All loans 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Mortgage Bankers Association 7 Heart attack As bust began price rises were squeezing incomes….. …and constraining policy World: Commodity prices $/barrel 170 2000 Week 1=100 280 260 150 130 110 240 Economist ($) commodity price index (RHS) 220 200 90 180 70 160 140 50 Brent oil (LHS) 30 100 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Haver Analytics 8 120 Heart attack 80 Rising waves of financial stress US: Financial stress indicator 45 high stress 40 35 UK bank recapitalisation 30 Lehmans' collapse, Paulson plan 25 20 Fannie Mae & Freddie Mac support 15 Bear Stearns' rescue 10 End-year liquidity squeeze 5 Credit crunch starts 0 -5 low stress -10 2004 2005 2006 2007 Source: Oxford Economics 9 Heart attack 2008 …as world trade collapses… Freight Rates - Baltic Dry Bulk Index Index value 16000 14000 12000 10000 8000 6000 4000 2000 0 Dec-99 Dec-01 Dec-03 Source : Baltic Exchange 10 Heart attack Dec-05 Dec-07 Credit crunch felt globally… Global credit standards surveys Balance tightening (+)/loosening (-) credit 100 Eurozone US UK 80 60 40 20 0 -20 -40 2003 2004 2005 2006 Source : Oxford Economics/Haver Analytics 11 2007 Credit hard to get 2008 The credit crunch – state of play The credit crunch appears to be moving into a new phase At the wholesale level, funding problems remain serious, but financial stress levels appear to have peaked thanks to central bank actions: ■ Sharp rate cuts have forced down LIBOR levels ■ The Fed has become a central counterparty, substituting for the moribund interbank market ■ Fed purchases have narrowed credit spreads, especially for mortgages But credit restriction has become more intense for consumers and the corporate sectors. So: 12 ■ Asset prices remain under pressure, especially house prices ■ Companies are looking to conserve cash ■ A further round of failures/rescues among financial institutions is still a risk Credit hard to get Why are the bailouts not working? Despite significant recapitalisation efforts, banks across the major economies have continued to tighten credit. This reflects the rapid emergence of a second wave of cyclicallydriven losses: ■ Falling house prices and rising unemployment are generating further mortgage delinquencies and consumer loan defaults ■ Corporate defaults are also rising as weak final demand hits profits and firms struggle to refinance debt Financial institutions have announced US$800 billion of losses so far – but we estimate a further US$1 trillion are still to come. So measures taken to recapitalise banks have largely been neutralised by capital write-offs, keeping the banks short of capital and unable to expand lending to the private sector 13 Credit hard to get More financial stresses to come World default rates % 12 US$bn 500 Speculative default rate (LHS) Forecasts 10 450 400 350 8 300 250 6 200 4 2 0 1981 150 100 Value of defaulted debt (RHS) 1985 1989 1993 50 1997 2001 Source : Oxford Economics/Haver Analytics 14 Credit hard to get 2005 0 2009F Bank write-offs to more than double Expected Bank write offs through credit crunch, $ billion Write offs so far Estimated further write offs Total write offs Assets 15 USA 473 602 1075 56250 Europe 278 402 680 49500 Credit hard to get ROW 42 66 108 61250 Total 793 1070 1863 167000 Business confidence slumps… World: Business confidence Standard deviations from mean 3.0 2.0 Germany (IFO) US (NAPM) 1.0 0.0 -1.0 -2.0 Japan (Tankan) UK (CBI) -3.0 -4.0 2004 2005 2006 2007 Source: Haver Analytics 16 Collapse in confidence 2008 …and investment demand collapses… Eurozone: Business investment & investment Expected capacity % year intentions 15 Business investment (LHS) 10 Investment intentions (RHS) constraints,balance (%), inverted 0 Germany: capital goods orders % year 30 New orders of capital goods 20 5 10 5 15 0 10 0 20 -10 25 -5 30 -10 Forecast 35 -15 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 -20 -30 1992 1994 1996 Source : Oxford Economics 17 1998 2000 Source : Oxford Economics/Haver Analytics Collapse in confidence 2002 2004 2006 2008 with consumer sentiment nosediving Consumer confidence: US and Eurozone 1985=100 160 % Balance 5 0 140 -5 120 -10 100 -15 80 60 Eurozone (RHS) -20 US (LHS) 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: Haver Analytics 18 Consumer retrenchment -25 -30 …impacted by huge falls in household wealth... Household Wealth Spain US UK Japan France Italy Germany 19 Fall in household wealth Eur tn -1.3 -13.3 -1.8 -3.1 -1.7 -1.0 -1.1 Fall in household wealth % of GDP -84 -83 -77 -69 -64 -47 -33 Consumer retrenchment …and threat of unemployment worsens US: Employment and unemployment % 7.5 change, 000s 600 Employment (RHS) 7.0 400 6.5 200 6.0 0 ` 5.5 -200 5.0 -400 Unemployment rate (LHS) 4.5 4.0 2002 -600 -800 2003 2004 2005 2006 2007 2008 Source: BLS/Haver Analytics 20 Employment & investment cut China facing sharp slowdown… China: GDP and industrial production % year 24 20 Forecast Industrial production, manufacturing, value added 16 12 GDP 8 4 0 1995 1997 1999 2001 2003 2005 2007 2009 Source: Oxford Economics 21 Recession or depression? 2011 …as external demand crumbles… China: Exports and imports % year 80 Imports (US$) Exports (US$) 60 40 20 0 -20 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Haver Analytics 22 Recession or depression? So emergers do not escape BRICS: GDP growth % yr 14 Brazil Russia 12 India China 10 8 6 4 2 0 -2 2006 2007 Source: Oxford Economics 23 2008 Recession or depression? 2009 Drop in commodity prices helps… World: Oil and food prices 160 140 120 World food prices (2007=100) 100 80 60 World Base Metal (2007=100) 40 Oil price (US$ pb) 20 F'cast 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Source: Oxford Economics 24 Healing forces – falling commodity prices Inflation falling sharply World: Inflation falls in recessions Fall in inflation, peak to trough % points 0 -2 -4 -6 -8 -10 Last recession Average of last three recessions -12 US Germany UK Japan Source : Oxford Economics/Haver Analytics 25 Healing forces – falling inflation Coordinated interest rate cuts Official interest rates % 7 6 UK repo rate 5 4 3 2 ECB repo rate 1 US Federal funds target rate 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Haver Analytics 26 Healing forces – orthodox monetary policy Normal channels blocked US: Bank assets Quarterly change, US$bn 1000 800 600 other cash interbank loans loans securities 400 200 0 -200 Jun-06 Dec-06 Jun-07 Dec-07 Source : Oxford Economics/Haver Analytics 27 Jun-08 Dec-08 Healing forces – orthodox monetary policy Will QE be taken up in the UK and Eurozone? UK and Eurozone monetary growth % 3m annualised 18 Eurozone (M3 ex financial sector) 16 14 12 10 8 6 4 2 UK (M4 ex OFIs) 0 -2 1998 2000 2002 2004 2006 Source : Oxford Economics/Haver Analytics 28 Healing forces – orthodox monetary policy 2008 What needs to happen now? Further recapitalisation efforts Loan guarantee schemes – attaching government guarantees to new lending to stimulate credit supply By-passing the banking sector – direct financing of households and firms (eg purchase of commercial paper and equities by central banks). A return to TARP-style purchases of bad assets Further fiscal and monetary action (conventional and unconventional) 29 Healing forces – unorthodox monetary policy Fiscal policy to support demand World: Public sector deficits % of GDP 4 US Forecast 2 0 -2 -4 -6 Eurozone UK -8 -10 1986 1990 1994 1998 2002 2006 Source: Oxford Economics 30 Healing forces – fiscal stimulus 2010 …with more stimulus to come… World: fiscal stimulus packages % of GDP 16 14 Headline package 12 Estimated new money 10 8 6 4 2 0 UK EZ US Japan China Source : Oxford Economics/Haver Analytics 31 Healing forces – fiscal stimulus … but markets nervous about state borrowing World: selected sovereign default spreads CDS spread, basis points 140 Aug-08 Dec-08 120 100 80 60 40 20 0 UK US Germany Source : Oxford Economics, Reuters 32 Healing forces – fiscal stimulus US helped by low dollar … US: Real and nominal effective exchange rates Jan '97=100 140 Nominal effective rate (RHS) March '73 = 100 140 130 Real effective rate (LHS) 120 100 120 80 110 60 100 40 90 20 80 1973 1977 1981 1985 1989 1993 1997 2001 2005 0 Source : Oxford Economics/Haver Analytics 33 Healing forces – low dollar …boosting exports US:Trade weighted dollar and net exports % of GDP, 4 qtr average 3.0 TWI 60 2.5 2.0 1.5 70 Real trade weighted dollar (RHS, inverted) 1.0 90 0.5 100 0.0 -0.5 110 -1.0 120 -1.5 -2.0 Net exports, contribution to GDP growth (LHS) -2.5 1973 1977 1981 1985 1989 1993 1997 2001 2005 Source : Oxford Economics/Haver Analytics 34 80 Healing forces – low dollar 130 140 2009 set to be a very tough year World: GDP growth % year 6 Forecast UK 5 US 4 3 2 1 0 -1 Eurozone -2 -3 1990 35 1993 1996 Source: Oxford Economics 1999 2002 2005 2008 2011 … the worst year since WWII… World: GDP in the long run % year 8 7 World GDP 6 5 4 3 2 1 0 -1 1950 36 1962 1974 1986 Source : Oxford Economics/Penn World Tables 1998 2010 …all fall down World: Recessions compared % peak-to-trough fall in GDP 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 -4.0 US UK Germany Japan 1990s 2008-2009F -4.5 -5.0 1970s 37 1980s Source : Oxford Economics/Haver Analytics Scenarios for the global economy Policy effectiveness Policy-makers save the world 38 ■ Significant additional fiscal injections globally, esp China and Germany ■ Aggressive (un)conventional monetary policy ■ Confidence restored quickly and banking frees up ■ Return to trend growth in 2009H2 Oxford Forecast Deep-V ■ Consumers and business retrench sharply to reduce debt ■ Government fiscal stimulus is delayed, esp in Europe, but eventually larger ■ Conditions worsen again in financial/credit market as defaults rise more than expected ■ China falls into recession Deflation ■ Recession bottoms in Q3 ■ Significant fiscal injections and further monetary stimulus ■ Oil prices remain low ■ Credit markets normalise by end2009, helped by further bailouts ■ Confidence returns and growth picks up in late 2009/early 2010 ■ Falling asset prices prove a further drag on recovery in banking sector ■ Unemployment rises sharply and large output gaps open ■ Monetary/fiscal policy are not effective as deflation grips ■ Protectionism measures enacted ■ Economy declines in 2010 and beyond Recession severity Scenarios for the global economy Alternative GDP growth forecasts 2008 2009 2010 US 1.3 -2.0 2.5 Eurozone 0.9 -1.9 0.8 China 8.7 5.6 9.6 World 3.5 0.4 3.3 US 1.3 -3.5 1.4 Eurozone 0.9 -3.4 0.2 China 8.7 3.6 7.0 World 3.5 -1.2 2.1 US 1.3 -2.9 -1.2 Eurozone 0.9 -2.2 -1.0 China 8.7 4.5 5.5 World 3.5 -0.3 0.4 Oxford forecast (40%) Deep-V (30%) Deflation (20%) 39 Activity falls off a cliff… World: Industrial production % year 10 Eurozone US 5 0 -5 UK -10 Japan -15 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Haver Analytics 40 Implications for machine tools …with surveys pointing to worse to come… World: Purchasing managers' indices % Balance 65 Eurozone 60 US 55 50 45 UK Japan 40 35 30 2004 2005 2006 2007 2008 Source: Haver Analytics 41 Implications for machine tools Forecasts – difference a year makes Jan 2008 Current 2008 2009 20102012 2008 Difference 2009 20102012 2008 2009 20102012 Manufacturing Growth rates, % US Japan Germany France Italy UK Spain W. Europe China Emerging Markets Global Source: Oxford Economics 42 3.0 2.2 3.3 2.3 0.8 0.8 0.9 2.0 16.3 11.1 4.7 3.4 1.6 2.4 1.7 0.9 1.2 1.5 1.7 14.2 10.1 4.6 3.7 1.4 1.7 1.7 0.6 0.8 1.6 1.4 15.1 10.9 5.3 -1.7 -0.8 1.4 -1.4 -3.1 -1.9 -5.9 -0.9 11.1 7.3 1.7 -3.9 -4.3 -4.8 -3.0 -4.5 -5.1 -5.7 -4.2 8.3 5.2 -0.9 3.3 2.0 2.6 2.2 1.7 1.5 1.9 2.1 12.0 9.2 5.1 -4.8 -3.0 -1.9 -3.7 -3.9 -2.7 -6.8 -2.9 -5.1 -3.8 -2.9 -7.3 -5.8 -7.2 -4.7 -5.5 -6.2 -7.2 -5.9 -5.9 -4.9 -5.4 -0.4 0.6 0.9 0.5 1.0 0.6 0.3 0.7 -3.1 -1.7 -0.2 Recessions compared across the Triad % Investment Intermediate Consumer goods goods goods Consumer durables Consumer nondurables 0 -2 -4 -6 -8 Early 80's Early 90s Early 2000s Now -10 -12 -14 Source: Oxford Economics 43 Implications for machine tools Sector performance across the Triad % Engineering Electronics 0 Motor vehicles Aerospace Basic metals -5 -10 -15 -20 -25 -30 -35 -40 44 Early 80's Early 90s Early 2000s Now Source: Oxford Economics Implications for machine tools Chemicals World MT markets – no hiding place Growth in industrial production of machine tools' customer sectors 20% 2008 15% 2009 2010 10% 5% 0% -5% -10% Europe Japan China Source: Oxford Economics 45 India Central Europe US Implications for machine tools World Sectors – only aerospace above water Global growth in industrial production of machine tools customer sectors 8% 2008 6% 2009 2010 4% 2% 0% -2% -4% -6% -8% Motor Veh Metal Products Aerospace Mech Comp & Elec equip Consumer Intermediate engineering electronics goods goods Source: Oxford Economics 46 Implications for machine tools Oxford Global Machine Tools Model The MT model built as part of Oxford Economics suite of Global Macro and Sectoral Models Takes forecasts of drivers of the MT market from the Oxford models and uses statistical techniques to to predict MT consumption across 21 countries In addition, the model will forecast global MT consumption Takes account of recent scale of MT consumption relative to other investment by the key client sectors and calculates an implied MT utilisation rate. It is also important to reflect the impact of improvements in the productivity of machine tools on future MT consumption 47 Implications for machine tools Five year forecast for Japan Japan Billion Billion 600 4.5 Forecast 4 500 3.5 400 Apparent consumption Yen (LHS) 3 2.5 300 2 200 100 1.5 Apparent consumption US$ (RHS) 0 1998 2000 2002 2004 Source: Oxford Economics 48 2006 1 0.5 2008 Global MT model 2010 0 2012 Five year forecast for Germany Germany Billion 7 6 Billion 10 Apparent consumption US$ (RHS) Forecast 9 8 5 7 6 4 5 3 2 4 Apparent consumption - Euro (LHS) 3 2 1 1 0 1998 2000 2002 2004 Source: Oxford Economics 49 2006 2008 Global MT model 2010 0 2012 Five year forecast or China China Yuan bn 900 Forecast 800 700 600 500 400 Output of machine tool purchasing industries (2000 prices) 300 Apparent consumption 200 100 0 1998 2000 2002 2004 Source: Oxford Economics 50 2006 Global MT model 2008 2010 2012 Percentage of global consumption - 2007 % 60 50 40 30 20 10 0 Americas Source : AMT\Oxford Economics 51 Asia Global MT model Europe USMTC orders forecast 2008 2009 2010 2008 2009 2010 52 Total Cutting Forming $m $m $m 4,156 2,696 2,900 3,904 2,526 2,717 252 170 184 % % % -3.7% -35.1% 7.6% -4.2% -35.3% 7.5% 4.8% -32.7% 8.2% USMTC orders series …USMTC medium term perspective US metalworking machine tools orders, USMTC Forming machine tools, $bn 0.7 Cutting machine tools, $bn 6 0.6 5 Cutting machine tools (RHS) 0.5 4 0.4 3 0.3 2 0.2 0.1 0 1996 Forming machine tools (LHS) 1998 2000 2002 Forecast 2004 2006 Source : Oxford Economics 53 USMTC orders series 2008 1 0 2010 Forming Forming Machines, US orders levels and growth, by region Growth 2009 (forecast) -45% West -40% -35% Midwest South Northeast -30% -25% Central -20% -15% -10% -5% 0% 0 50 100 Source: Oxford Economics 54 150 200 250 Value 2006, $ millions USMTC orders series Cutting Cutting Machines, US orders levels and growth, by region Growth 2009 (forecast) -39% -38% Midwest -37% -36% South West -35% Northeast -34% -33% -32% Central -31% -30% 0 200 400 Source: Oxford Economics 55 600 800 1,000 1,200 1,400 Value 2006, $ millions USMTC orders series Total Total Cutting and Forming Machines, US orders levels and growth, by region Growth 2009 (forecast) -45% Midwest -40% South West -35% Northeast -30% Central -25% -20% -15% -10% -5% 0% 0 200 400 Source: Oxford Economics 56 600 800 1,000 1,200 1,400 Value 2006, $ millions USMTC orders series 57