Download Sep. 2008 - March 2009

When and How will
the Global Economy Recover ?
Philip Suttle
IIF, Director of Global Macroeconomic Analysis
Garanti Masters Private Banking Conference
Istanbul, Turkey
April 17, 2009
An Organizing Framework
 A different kind of global business cycle, driven by private
credit, not public (monetary and fiscal) policy
 The private credit cycle is global in nature, albeit with some
sector, country and regional concentration
 The downleg of this cycle (“the de-leveraging phase”) has
come in two parts: the “strains” phase (early 2007 – Sept
2008) and the “crisis” phase (Sept 2008 – Mar 2009)
 The best way to characterize our global outlook is that we
are projecting a return to conditions more consistent with the
“strains” phase in the months ahead
2
Global Capital Flows and the Global Business Cycle
percent
percent change oya, inverted scale
20
Pre-1992
Post-1992
-20
Fed Funds Rate
Manufacturing Output
16
Rates drive the cycle
Rates driven by
the cycle
-15
-10
-5
12
0
8
5
10
4
15
0
1969
20
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
3
A Global Credit Boom
U.S. Household Debt Growth
Emerging Markets Monetary Growth
Percent, q/q saar
Percent change over a year ago
14
40
12
EMEA
LAT
ASIA
35
10
8
30
6
25
4
20
2
15
0
-2
-4
1990 1993 1996 1999 2002 2005 2008
10
5
2001
2003
2005
2007
2009
4
The De-Leveraging Phase Has Had Two Phases
The “Strains” Phase
The “Crisis” Phase
(2007 - Sep. 2008)
(Sep. 2008 - March 2009)
 Collapse of asset-backed securities
market; re-intermediation of credit
on to banks’ balance sheet
 Unprecedented turmoil in financial
markets, break down of trust
 Slowing in U.S. growth to nearrecession levels
 Solid growth in other key parts of
global economy (“decoupling”)
 High and rising commodity prices
 Increasingly supportive G7 policy
stance
 Collapse in global industry, world
trade and commodity prices
 Widespread global recession
 Plunge in operating levels and rise
in unemployment
 Policy has become very supportive
and highly innovative
5
The Current Global Slump is Unprecedented:
Deep and Synchronized
Global Exports and Manufacturing
Production
Manufacturing Production
20
10
Percent, 3m/3m,
saar (nominal terms)
40
15
5
30
5
10
0
20
0
Percent, 3m/3m, saar (both axes)
5
-5
0
-10
-5
-15
-10
-20
-15
-20
Emerging Markets (left axis)
-25
G3 (right axis)
-30
06
07
08
09
Percent,
3m/3m, saar
10
10
-5
0
-10
-10
-15
-20
-30
-25
-40
-30
-50
-35
-60
2006
-20
Goods Exports
(left axis)
-25
Mfg. Production
(right axis)
-30
-35
2007
2008
2009
6
A Rotation in the Sources of Weakness in Final Demand
G3 Retail Sales Volume and Industrial
Production
G3 Capital Goods Orders
Percent, 3m/3m, saar
Percent change at annual rate, GDP weighted
10
30
20
5
10
0
0
-5
-10
-10
-20
-30
-15
-20
Retail Sales
IP
-40
%3m/3m, saar
-50
-25
00 01 02 03 04 05 06 07 08 09
-60
1993
over a year ago
1996
1999
2002
2005
2008
7
A Significant Rise in Unemployment is in the Pipeline
United States
Percent change
over a year ago
Euro Area
Change versus a year
ago, %, inv. scale
6
-1.5
5
-1.0
4
-0.5
0.0
3
0.5
Percent change over
a year ago
Change versus a year
ago, % inv. scale
5
-1.5
4
-1.0
3
-0.5
2
2
1.0
1
1.5
0.0
1
0.5
0
0
2.0
-1
2.5
-1
1.0
-2
1995
3.0
-2
1996
1.5
1999
2003
2007
Real GDP (left axis)
2000
2004
Change in Unemployment Rate
2008
8
A Significant Rise in Unemployment is in the Pipeline (2)
Japan
Percent change
over a year ago
Emerging Asia
Change versus a year
ago, %, inv. scale
5
Percent change over
a year ago
Change versus a year
ago, % inv. scale
-0.8
11
-0.4
-0.4
9
-0.2
7
0.0
5
0.2
3
0.4
1
1996
0.6
4
3
2
0.0
1
0
0.4
-1
-2
0.8
-3
-4
-5
1995
1.2
1999
2003
2007
Real GDP (left axis)
2000
2004
Change in Unemployment Rate
2008
9
A Significant Rise in Unemployment is in the Pipeline (3)
Emerging Markets
Percent change
over a year ago
Latin America
Change versus a year
ago, %, inv. scale
9
-0.8
8
-0.6
7
-0.4
6
-0.2
5
Percent change over
a year ago
Change versus a year
ago, % inv. scale
8
-2.0
-1.5
6
-1.0
-0.5
4
0.0
4
0.2
3
0.0
2
0.5
0.4
2
1.0
0
1
0.6
0
1996
0.8
2000
2004
2008
Real GDP (left axis)
1.5
-2
1996
2.0
2000
2004
Change in Unemployment Rate
2008
10
Massive Support From Global Economic Policy
U.S. Fiscal Thrust*
Trends in Official Interest Rates
Percent of GDP
Percent, GDP – weighted regional averages
2
9
8
1
7
6
0
5
4
-1
3
2
-2
- = expansion
-3
91 93 95 97 99 01 03 05 07 09
1
0
2006
Mature Economies
Emerging Economies
2007
2008
2009
* Change in full employment budget balance
11
Fiscal Thrust in International Perspective
Fiscal Stimulus Packages in Summary
Percent of GDP
7.0
China
Japan
5.0
4.5
Australia
3.3
Chile
United States
2.8
Mexico
2.8
2.5
Canada
European Union
1.5
Korea
1.5
U.K.
1.4
0.8
Norway
India
0.4
12
U.S. Fiscal Policy
Impact of Obama Package on the Federal Deficit
CBO Estimate, Fiscal Year (Oct-Sep)
$ billion
The Rise in the Federal Deficit
Decomposed
FY2008 to FY2009
2009
2010
2011
20122019
Total
Budget authority
379
115
54
34
581
Outlays
120
219
126
110
575
Revenues
-65
-180
-8
41
-212
Net Increase in
Deficit
185
399
134
68
787
percent of GDP
1.3
2.7
0.9
$ billion
% of GDP
1752
12.3
611
“Cyclical
effects”
4.3
185
Discretionary
Easing
1.3
497
TARP
3.5
459
2008 Deficit
3.2
13
Quantitative Easing is the New “New Thing”
Central Bank Balance Sheets: Total Assets
Index, end-June 2007=100
350
300
250
Current Level of
Assets (% GDP)
Fed
ECB
BoE
BoJ
BoE
12.6%
Fed
14.5%
ECB
19.7%
BoJ
24.1%
200
150
100
50
Jul 07
Nov 07
Mar 08
Jul 08
Nov 08
Mar 09
14
Key Unknown is How Protracted Private Sector
Adjustments Will Be
U.S. Personal Sector Saving Rate and Wealth/Income Ratio
Percent of disposable income,
average of last 8 quarters
Percent, average of last 8 quarters,
inv. scale
12
400
Dotted lines denote latest
estimate (09Q1)
10
440
8
480
6
520
4
Saving rate (left axis)
560
2
Net worth (right axis)
600
0
1954
640
1960
1966
1972
1978
1984
1990
1996
2002
2008
15
Relative Pessimism about Europe
German Manufacturing Indicators
Percent, 3m/3m, saar
30
20
10
0
-10
-20
-30
Manufacturing Production
-40
Manufacturing Orders
-50
-60
-70
1998
1999
2001
2003
2004
2006
2008
16
Areas of Concern in Europe
 Lack of economic flexibility
 Lack of policy coordination
 Extent of deleveraging ahead in banking systems remains
significant
 Growing public debt problems in many countries
 Over-extended housing markets
 Difficulties in Emerging Europe
17
Emerging Europe: The Epicenter of the Third EM Capital
Flows Slump since 1980
Net Private Capital Flows by Major Region
Percent of emerging market GDP
Percent of emerging market GDP
7
14
6
12
5
10
4
8
3
6
2
4
1
2
0
0
-1
-2
1980
1985
Latin America
1990
1995
Emerging Asia
2000
2005
Emerging Europe (right axis)
18
The IMF to the Rescue
IMF Credit Outstanding
$ billion
IMF Flexible Credit Line
Condition
75
Eligibility
Large countries with sound
fundamentals and strong track
record of policy implementation. Preset qualifying criteria, upfront
access, no ongoing (ex post)
conditions.
Maturity
and
Repayment
6-month or 12-month renewable
credit line, with a review of eligibility
after 6 months. Unrestricted
renewals. Repayment period of 3.25
to 5 years.
70.4
65
55
45
35
25
16.9
Access to
funds
15
5
Oct 08
Current
FCL (March 2009)
Amount
Draw immediately or treat it as
precautionary tool. Can be used for
crisis prevention or crisis resolution
No hard cap, case-by-case
assessment
19
There Are Encouraging Signs from China
China: Monetary Growth
Percent change over a year ago
26
Total Loans
24
M2
22
20
18
16
14
12
2005
2006
2007
2008
2009
20
Commodity Prices Appear to Have Hit Bottom, For Now
CRB Commodity Price Index
Index Jan. 2002 =100
250
225
200
175
150
125
100
2002
2004
2006
2008
21
Global Output Growth
Percent y/y
2006
2007
2008
2009
2010
2.8
2.3
0.7
-3.1
1.3
United States
2.8
2.0
1.1
-2.4
2.2
Eurozone
3.0
2.7
0.7
-3.8
0.0
Japan
2.1
2.4
-0.7
-3.7
2.0
Emerging Markets
7.5
7.8
5.6
1.2
4.7
Latin America
5.4
5.5
4.1
-1.3
2.1
EMEA
6.5
6.3
4.4
-2.9
2.6
Emerging Asia
9.2
9.9
7.1
4.6
6.9
3.8
3.5
1.8
-2.2
2.1
Mature Economies
World
22
Concluding Messages
 The global economy has been in free-fall for six months, but there
are some tentative signs that this is moderating.
 In the months ahead, a return to a desynchronized global
economy is likely.
 A significant increase in global unemployment is now underway,
however.
 Massive, unprecedented, global policy easing is now underway,
the long-term implications of which are somewhat unclear.
 Major challenges lie ahead in Europe.
 The global backdrop for Asia and Latin America remains very
tough, but has improved slightly in the past few months.
23
When and How will
the Global Economy Recover ?
Philip Suttle
IIF, Director of Global Macroeconomic Analysis
Garanti Masters Private Banking Conference
Istanbul, Turkey
April 17, 2009