crisis and change in europe what it means for u.s. business presented by kris bledowski economist...

CRISIS AND CHANGE IN EUROPE

WHAT IT MEANS FOR U.S. BUSINESS

Presented byKris BledowskiEconomist andCouncil Directorkbledowski@mapi.net

Outline

• Two-Pronged Analysiso Structural change: long-term risks and opportunities for U.S. exporterso Medium-term change: cyclical outlook for European manufacturing

• Beyond the Crisiso Europe as long-term partner in manufacturingo Competitiveness, convergence, integration, cohesiono Emphasis on longer-term trends

• Beyond Headline Numberso Europe’s manufacturing business cycleo Risk areaso Detailed European industrial outlook by sector

• Will the Eurozone Break Up?

Despite Growing Importance of Asia, Trade with Europe Weighs Big …

Trade Volumes in Goods

Source(s): Bureau of Economic Analysis and Manufacturers Alliance/MAPI

Trade Balance in Services

… And the European Share of FDI Flows Dwarfs Other Regions

Foreign Direct Investment to/from Europe

Source(s): U.S. Bureau of Economic Analysis and Manufacturers Alliance/MAPI

Income Convergence Inches Ahead But the Pace is Slow

Real GDP Level, PPP-Weighted, Relative to EU27 Mean

Source(s): Eurostat and Manufacturers Alliance/MAPI

Industrial Integration Has Tightened Sharply Over the Past Decade

Correlation Coefficients of Annual Manufacturing Growth Rates With EU27 Benchmark

Source(s): Eurostat and Manufacturers Alliance/MAPI*Poland 1996-1999

Volatility of Cyclical Change is Down This Decade

Standard Deviation of Real GDP Annual Growth Rates, (Quarterly Data)

Source(s): Eurostat and Manufacturers Alliance/MAPI*Poland 1996-1999

Leverage Ratios Vary Widely; So Do Relative Changes

Liabilities of Non-Financial Corporations, percent of GDP

Source(s): Eurostat and Manufacturers Alliance/MAPI* 2008; all others 2009

Source(s): Eurostat and Manufacturers Alliance/MAPI

Exports and Wages, 2000-2007

All Countries Grew Exports; Some Also Improved Competitiveness

Source(s): OECD and Manufacturers Alliance/MAPI

Productivity and Costs, Average Annual Growth Rates, 2000-2007

All Countries Are Productive; Some Control Costs Better Than Others

Eurozone Consumers Are Absent – Weak Growth Supported by Public Spending

Contribution to Eurozone’s GDP Growth, 2010Q1

Source(s): Eurostat and Manufacturers Alliance/MAPI

Contribution to Eurozone’s GDP Growth, 2009Q4

Central European Growth is More Robust But Also Uneven

GDP Forecast, Czech Republic, Hungary, Poland (CEE3)

Source(s): Eurostat and Manufacturers Alliance/MAPI

Lending Conditions Are Easing and Economic Climate Is Up

IFO Economic Climate and ECB Loan Officer Survey for the Eurozone

Source(s): European Central Bank and IFO Institute and Manufacturers Alliance/MAPI

Recovery Held Back By Depressed Bank Lending

Lending to the Private Sector

Source(s): European Central Bank and Manufacturers Alliance/MAPI

Costs of Financial Rescue Packages Have Been Modest So Far

Net Revenue (Cost) to General Governments, 2009 (Percent of GDP)

Source: Eurostat and Manufacturers Alliance/MAPI

The Industrial Side of the Economy Holds Up Better Than the Rest

Manufacturing Growth Rates, 2010Q2

Source(s): Eurostat and Manufacturers Alliance/MAPI

Sector 2009 2010 2011

Motor vehicles -23.8 19.5 4.0Chemicals -10.8 10.5 1.4Computers & electronics -21.1 8.3 1.2Electrical equipment -21.6 6.2 -1.1Rubber & Plastics -13.7 5.9 -0.9Fabricated Metals -22.8 4.0 3.2Paper & products -9.4 3.9 -1.0Textiles -19.1 3.5 -7.8Machinery & Equipment -27.0 2.6 5.9Food, beverages, tobacco products -1.1 0.1 -0.8Wood & products -16.3 -2.2 -2.7Non-Metallics -19.5 -4.0 -2.3Petroleum & Coke -8.0 -4.4 2.3Construction -8.3 -7.5 -0.2

Source: Eurostat and Consensus Forecasts and European Commission and Manufacturers Alliance/MAPI

Industrial Rebound in Western Europe Will Be Short-Lived

Manufacturing Production, Eurozone (Annual Percentage Change)

Sector 2009 2010 2011

Computers & electronics -1.9 31.8 -2.1Paper & products 0.5 14.8 3.3Machinery & Equipment -17.2 14.8 9.5Motor vehicles -14.6 13.1 7.8Rubber & Plastics -7.7 11.4 6.6Electrical equipment -9.7 11.3 11.2Fabricated Metals -17.3 8.7 7.2Textiles -11.3 5.3 -2.4Chemicals -8.7 5.1 -0.9Wood & products -3.9 3.5 1.1Petroleum & Coke -9.3 1.6 2.8Food, beverages, tobacco products 0.9 0.5 -1.1Non-Metallics -14.6 -1.0 3.6Construction 0.9 -14.5 1.0

Source: Eurostat and Consensus Forecasts and European Commission and Unicredit and Manufacturers Alliance/MAPI

Central Europe’s Industry Will Post Few Weak Spots in 2010

Manufacturing Production, Central Europe (Annual Percentage Change)

Will the Eurozone Break Up?

• Monetary Union as a Political Projecto Politics trumps economicso But economic costs of break-up matter

• What to Expect in Medium Termo Revisions to Stability-Growth Pacto New/improved fiscal ruleso Institutionalized macro-prudential oversight?

• Total Break-up vs. Individual Defectionso High cost of individual countries leaving (e.g., Greece, Germany)o More probable than total break-up but probability still lowo Sovereign defaults possibleo Permanent improvement in regional imbalances unlikely even in long term