prospects for the global economy c harles burton october 2009
TRANSCRIPT
Prospects for the Global economy
Charles Burton
October 2009
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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 should have suffered most in downturn?
Who is most exposed to financial services?
0
2
4
6
8
10
12
UK US Neth Italy Spain Japan France Swe Ger
Dependence on financial services
% of GVA
Source : Oxford Economics
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 should have suffered most in downturn?
Where were house prices most excessive?
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 should have suffered most in downturn?
Who has highest consumer debt?
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 should have suffered most in downturn?
Who is most exposed to trade with US?
0 2 4 6 8 10 12 14 16 18
Poland
Czech
Hungary
Spain
France
Italy
Germany
UK
Japan
Source: Oxford Economics
Exports to US as % of total exports for 2008
%
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 should have suffered most in downturn?
Who has actually suffered most?
-12 -10 -8 -6 -4 -2 0 2 4 6 8
ChinaIndia
PolandGreece
BrazilKorea
FranceCanadaPortugalBelgium
USSpain
AustriaNetherlandCzech Rep
SlovakiaUK
GermanyItaly
JapanHungary
IrelandRussia
Source: Oxford Economics
% change in GDP
% change 2008Q2-2009Q2
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
Outline of presentation
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
What explains who suffered most?
Financial stabilisation costs may differ…
…but credit conditions worsened in sync
-4
-2
0
2
4
6
8
10
12
14
16
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
World: Credit growth% year
Source : Oxford Economics/Haver Analytics
US loans & leases
Eurozone loans to PNFCs and households
UK M4 lending ex OFCs
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
What explains who suffered most?
Synchronised global slump in confidence
0
20
40
60
80
100
120
140
160
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-50
-40
-30
-20
-10
0
10
20
Source: Haver Analytics
Eurozone(RHS)
US(LHS)
Consumer confidence: US, UK and Eurozone1985=100 % Balance
UK(RHS)
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
What explains who suffered most?
Who is most dependent on manufacturing?
0
5
10
15
20
25
30
Cze Slovak Hun Ger Pol Japan Italy Fra US Sp UK
Exposure to manfacturing Manufacturing as % GDP
Source : Oxford Economics
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
What explains who suffered most?
Who is most dependent on cap goods & cars?
0
2
4
6
8
10
12
14
Cze Ger Slovak Hun Pol Japan Italy Fra US UK Sp
Exposure to capital goodsCapital goods production as % GDP
Source : Oxford Economics
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Cze Hun Slovak Ger Jap Pol Fra Sp US UK Italy
Exposure to cars
Motor vehicles production as % GDP
Source : Oxford Economics
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
What explains who suffered most?
Who is most dependent on trade with Asia?
0.0 0.5 1.0 1.5 2.0 2.5
Spain
Poland
UK
Italy
US
Czech
France
Hungary
Germany
Source: Oxford Economics
Exports to Asia as % of GDP for 2008
%
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
What explains who suffered most?
Emerging markets hit by flight to liquidity…
…exposing weaknesses in Eastern Europe
0
10
20
30
40
50
1995 1997 1999 2001 2003 2005 2007 2009
US$ bn
Source: Haver Analytics & central banks
Emerging Europe: Short-term external debt
"Baltics"
Bulgaria & Romania
Hungary
Ukraine
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
What explains who suffered most?
Russia undermined by oil price collapse
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
What explains who suffered most?
Who has actually suffered most?
-12 -10 -8 -6 -4 -2 0 2 4 6 8
ChinaIndia
PolandGreece
BrazilKorea
FranceCanadaPortugalBelgium
USSpain
AustriaNetherlandCzech Rep
SlovakiaUK
GermanyItaly
JapanHungary
IrelandRussia
Source: Oxford Economics
% change in GDP
% change 2008Q2-2009Q2
First signs of recovery…
…with European confidence in sync with US…
0
20
40
60
80
100
120
140
160
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-50
-40
-30
-20
-10
0
10
20
Source: Haver Analytics
Eurozone(RHS)
US(LHS)
Consumer confidence: US, UK and Eurozone1985=100 % Balance
UK(RHS)
…as are equity prices
40
50
60
70
80
90
100
110
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
USUKGermanyFrance
Equity prices1 Jan 2008=100
Source : Oxford Economics/Haver Analytics
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…
0
2
4
6
8
10
12
14
16
UK EZ US Japan China
Headline package
Estimated new money
World: fiscal stimulus packages% of GDP
Source : Oxford Economics/Haver Analytics
…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
-10
-5
0
5
10
15
20
25
-5 -4 -3 -2 -1 0 1 2 3 4 5Source: Bank of England, Oxford Economics
% change on previous year. Year of financial crisis marked as zero.
Japan (1997 = 0)
Norway(1991 = 0)
Sweden (1992 = 0)
Growth in lending to economy following crises
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…
-4.0
-3.0
-2.0
-1.0
0.0
1.0
Hun
gary
Spa
in
UK
Italy
US
Cze
ch R
ep
Eur
ozon
e
Ger
man
y
Fra
nce
Pol
and
Japa
n
Source: Oxford Economics
% quarter
GDP growth - 2009Q1 & Q2
…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
Sh
ort
-ter
m o
utl
oo
k
Deflation■ 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
‘W’-shaped cycle■ 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
Medium-term outlook
Risks to the economic outlook
V-Shaped recovery■ 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■ 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
2008 2009 2010 2011
Oxford Forecast (45%)US 0.4 -2.7 2.3 3.1Eurozone 0.6 -4.1 0.5 1.6China 8.9 8.1 8.6 8.9World 1.6 -2.3 2.4 3.6
V-Shape (20%)US 0.5 -2.3 3.1 3.4Eurozone 0.6 -3.6 1.6 3.1China 9.1 8.5 9.4 9.9World 1.7 -1.9 3.3 4.4
Deflation (7.5%)US 0.5 -3.2 -0.6 0.1Eurozone 0.6 -4.6 -0.6 0.0China 9.1 7.8 4.2 4.5World 1.7 -2.5 0.9 1.4
W-Shaped Cycle (25%)US 0.5 -2.5 2.7 0.9Eurozone 0.6 -3.8 1.2 0.6China 9.1 8.3 8.9 7.1World 1.7 -2.1 2.8 1.8
Alternative GDP growth forecasts
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
0
5
10
15
20
25
30
35
40
45
France Germany Spain UK US Japan Ireland
2008-2010 public debt increase
Financial stabilisation cost
Fiscal costs of the recession% of GDP
Source : Oxford Economics/IMF
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
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
of which:
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
Italy -1.0 -5.1 0.1 1.3 1.8 2.1
UK 0.7 -4.4 0.7 2.2 3.2 3.4
Japan -0.7 -5.4 1.1 1.6 2.1 2.5
China 8.9 8.1 8.6 8.9 9.0 9.0
India 7.5 5.8 6.7 8.8 9.0 8.8
Other Asia 1.1 -4.0 3.4 4.5 4.8 4.7
Mexico 1.4 -6.7 4.4 6.1 5.0 4.5
Other Latin America 5.0 -1.4 2.7 5.2 5.0 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
World GDP Growth% Change on Previous Year