economist intelligence unit global outlook nov 2 2010_boston
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On November 2, 2010, EIU Senior Economist Leila Butt, presented the Economist Intelligence Unit Global Outlook in Boston. Key points in this presentation include: - Most economies are growing again - Emerging markets are booming - Unemployment remains very high - Consumers are rebuilding balance sheets - Countries are heavily indebted - Deflation is a risk in rich countries - Asset bubbles are a risk in emerging marketsTRANSCRIPT
Hope, headwinds or hurricanes? Charting a course for
the global economy
Leila Butt
Senior Economist, Eastern Europe
November 2010
Most economies now growing againEmerging markets are booming
Unemployment remains very highConsumers rebuilding balance sheets
Countries are heavily indebtedDeflation a risk in rich countriesAsset bubbles a risk in emerging
markets
Key short-term points
A recovery is under way … US: 800,000 private jobs Jan-Sept ’10 beats 4.4m jobs lost in ’09
◦ But job growth is very slow; still 7.5m jobs below the peak Europe shows signs of life
Renewed risk taking is underway Positive growth, loose monetary policy; assets on a tear
Less fear of double-dip Supportive policy
China looks stronger Crash unlikely
Recovery still in doubt Fed returns to QE
Key longer-term points
Growth will not return to 2004-07 levels Fuelled by a bubble
Rich countries: years of slower growth Overstretched consumers Battered financial sector
Crisis accelerated emerging markets Significant drivers of global growth But weakening in West will be felt Slow shift to domestic demand Risks of bubbles
New perspective on global economy Greater volatility
Where are we now?
Global: World trade recovers strongly
8090
100110120130140150160170
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
World trade volumes. 2000=100. Seasonally adjusted.Source: CPB Netherlands Bureau for Economic Policy Analysis.
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
7/4
/04
12
/4/0
4
5/4
/05
10
/4/0
5
3/4
/06
8/4
/06
1/4
/07
6/4
/07
11
/4/0
7
4/4
/08
9/4
/08
2/4
/09
7/4
/09
12
/4/0
9
5/4
/10
10
/4/1
0
World US
Stock prices are higher, but volatile…
US$m. Source: Bloomberg
Stockmarket capitalisation
00.5
11.5
22.5
33.5
44.5
5
Oct 1 2008
Oct 14 2008
Oct 27 2008
No
v 7 2008
No
v 20 2008
Dec 3 2008
Dec 16 2008
Dec 29 2008
Jan 9 2009
Jan 22 2009
Feb
4 2009
Feb
17 2009
Mar 2 2009
Mar 13 2009
Mar 26 2009
Ap
r 8 2009
5/29/2009
7/31/2009
10/2/2009
12/4/2009
2/5/2010
4/9/2010
6/11/2010
8/13/2010
10/15/2010
… and borrowing costs are mostly contained
3-month US$ LIBOR minus 3-month US Treasuries Source: Haver
Spread between the cost of government borrowing and private-sector borrowing, basis points
Post-Lehman Bros panic
Stimulus plans feed through
Greece, EU debt crisis
Fed intervenes; QE
-12
-10
-8
-6
-4
-2
0
2
4
20
00
20
02
20
04
20
06
20
08
20
10
China Euro area
UK US
Government debt soars
Budgets deeply in the red Worst in rich countries Governments offered
subsidies, incentives, tax cuts, bailouts
◦ Banks, car companies More stimulus?
Interest rates still low Fed considering further steps
Inventories being rebuilt Filling the shelves helps
manufacturers But it’s temporary
Budget deficit; % of GDP
Source: Economist Intelligence Unit, Country Data
Global outlook: Upswing, but uneven
GDP growth, % year on year
Source: EIU estimates
Developed
Emerging
World
Credit crunch starts
US and Europe
This is already a jobless recovery
-7
-6
-5
-4
-3
-2
-1
0
1
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49
1948 1981 1990 2001 2007
Sources: Bureau of Labour Statistics; EIU.
US: % of jobs relative to peak employment
The great deleveraging continues in the US…
0
2
4
6
8
10
12
14
16
19
59
- J
an
19
67
- M
ay
19
75
- S
ep
19
84
- J
an
19
92
- M
ay
20
00
- S
ep
20
09
- J
an
Sources: BEA; EIU.
US personal savings rate, % of disposable income.
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
1959
- Q
1
1961
- Q
1
1963
- Q
1
1965
- Q
1
1967
- Q
1
1969
- Q
1
1971
- Q
1
1973
- Q
1
1975
- Q
1
1977
- Q
1
1979
- Q
1
1981
- Q
1
1983
- Q
1
1985
- Q
1
1987
- Q
1
1989
- Q
1
1991
- Q
1
1993
- Q
1
1995
- Q
1
1997
- Q
1
1999
- Q
1
2001
- Q
1
2003
- Q
1
2005
- Q
1
2007
- Q
1
2009
- Q
1
US: Housing still very weak…
US housing starts, ‘000s, SAAR.Source: Bureau of the Census
Spot the recovery!
Home foreclosures still awful
0
50000
100000
150000
200000
250000
300000
350000
400000
1/31/2005
7/31/2005
1/31/2006
7/31/2006
1/31/2007
7/31/2007
1/31/2008
7/31/2008
1/31/2009
7/31/2009
1/31/2010
7/31/2010
Jan-Sept 2010 foreclosures: 2,970,000
Worse than last year
March foreclosures: a record
367,000
1 in 4 mortgage holders with negative equity
Pent-up listings will keep homes coming to market, restraining prices
Yes, housing has stabilised
But new home sales are moribund Prices are largely stagnant
Nationally, 14+% of mortgages
delinquent or foreclosed
Number of foreclosures
Source: Realty Trac
Euro area: Worst crisis ever…but signs of life
-6
-4
-2
0
2
4
6
19
99
q1
q2
q3
q4
20
04
q1
q2
q3
q4
20
09
q1
q2
q3
Debt sinking the periphery Bailout has helped, but… … only buying time;
massive fiscal adjustment required
Must improve competitiveness
But Germany is rebounding Exports, business
investment, stockbuilding But unemployment is high,
consumers hesitantLess impressive in rest of EU
Second quarter 2010? As good as it will get
GDP growth; % change, Y o Y
Source: Economist Intelligence Unit, Country Data
Economic growth
Euro zone: Solvency stresses will continue
0
500
1,000
1,500
2,000
2,500
3,000
Sp
ain
Po
rtu
ga
l
Ire
lan
d
Gre
ec
e
NL
Ita
ly
Ge
rma
ny
Fra
nc
e
1999 (Greece 2001) 2009211% of
GDP
192%
234%
92%
150%111%
112%
110%
Bank claims on private sector, € bn. (UK bank lending at 213% of GDP in 2009, £3trn.)
Sources: IMF, International Financial Statistics; EIU, CountryData.
Euro zone: There’s no way out. Exiting would mean…
• Wipe-out of exiting country’s banking sector, households default on euro debt• Collateral damage to foreign banks, particularly in the euro zone, and companies and households• Contagion—markets pick off weaker countries following exit, triggering further turmoil• Euro collapse would trigger depression for the euro zone? • Leaving the euro would be a political decision, not an economic one
Emerging markets
Asia: Powering ahead
-15
-10
-5
0
5
10
15
20
25Q
1-00
Q4-
00
Q3-
01
Q2-
02
Q1-
03
Q4-
03
Q3-
04
Q2-
05
Q1-
06
Q4-
06
Q3-
07
Q2-
08
Q1-
09
Q4-
09
China Hong Kong India
Indonesia Malaysia Philippines
Singapore Taiwan Thailand
Real GDP, % change on year earlier, Haver
Asian bubbles?
Asia is importing monetary stimulus from US Consequence of active
exchange-rate management
Economic conditions are much stronger in Asia Monetary policy is too loose for
Asian circumstances Fiscal stimulus was very large
Food commodity prices are again a concern El Niño, bad monsoon in India
Fears of inflation/asset bubbles in Asia
China: An explosive recovery
0
5
10
15
20
25
Industrial production
Retail sales
Chinese growth slowed only modestly in 2009
• Big bounce-back in 2010; GDP rose by 11.9% in Q1, 10.3% in Q2
Government now trying to slow economy
• But it’s all relative; industrial production “only” growing by 10% instead of 15%• Retail sales growth down to 15% from 20%
% change, year on year. Source: Haver
What’s ahead for the major currencies?
80
90
100
110
120
130
140
150
Jan
04 1
999
Feb
28
2000
Apr
23
2001
Jun
17 2
002
Aug
11
2003
Oct
04
2004
Nov
28
2005
Jan
22 2
007
Mar
17
2008
May
11
2009
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Trade-weighted € US$:€
US$/€ strongly correlated with risk perception Euro zone structural concerns to dominate over medium term—the euro will remain structurally weak US$1.30:€1 in 2010, US$1.20:€1 in 2011—slightly weaker thereafter But expect volatility
Pity the yen Yen strength is an expression of risk aversion No relation to Japan’s economic performance Intervention won’t change secular trends
Emerging markets RMB to continue slow appreciation against US$ Emerging market currency strength to depend on risk tolerance
Source: Haver Analytics.
AverageS
ept 1
4 20
10
Is there a currency war? Three weapons of attack
China won’t let the renminbi appreciate The currency is undervalued; US$2.6trn in reserves Generating sharp political criticism And not just from the US
Rich-world monetary policy Easy money depresses their
currencies Re-directs investors to EM
currencies, pushing them up; risks export competitiveness
Emerging-market interventions Currency purchases to hold down value Capital controls, such as taxes on foreign purchases of
domestic debt
What does all this mean?
What does that mean?
• Then• Fast growth• Rich world• Easy credit• Rising asset price• Momentum driven
• Now• Slow growth• Emerging world• No credit• Flat asset prices• Value driven
Where’s the growth?
Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of October 2010. Source: Economist Intelligence Unit, CountryData.