the bric effect - u.s. chamber of commerce bric effect jim o’neill managing director head of...

Goldman Sachs Global Economics, Commodities and Strategy Research 2010 1

The BRIC Effect

Jim O’NeillManaging Director Head of Global Economics, Commodities and Strategy Research

March 29 2010


GDP Forecasts

Source: GS Global ECS Research

GS Consensus* GS Consensus*USA 0.4 -2.4 2.6 3.1 2.4 3.0Japan -1.2 -5.2 2.2 1.9 1.7 1.6Euroland 0.5 -4.0 1.2 1.1 1.9 1.5UK 0.6 -4.9 1.7 1.4 3.4 2.3Europe 0.8 -3.9 1.4 1.2 2.3 1.8China 9.6 8.7 11.4 9.9 10.0 9.1India 6.7 6.6 8.2 8.2 8.7 7.9Brazil 5.1 -0.1 6.4 5.3 5.0 4.6Russia 5.6 -7.9 4.5 3.9 5.5 4.6BRICs 7.9 5.1 9.4 8.4 8.8 8.0Advanced Economies 0.5 -3.1 2.3 2.4 2.5 2.5

World 2.8 -0.7 4.6 4.3 4.7 4.3* Consensus Economics March 2010

% yoy 2008 20092010 2011


Domestic Demand Forecasts (%)

% yoy 2008 2009 (f) 2010 (f) 2011 (f)

USA -0.7 -3.4 2.3 1.9Japan -1.3 -4.0 1.5 1.3Euroland 0.6 -3.4 0.3 1.2UK 0.1 -5.3 1.2 2.5China 9.0 13.0 12.4 9.9India 4.8 4.9 7.6 9.7BRICs 8.1 7.0 9.8 9.3

Advanced Economies 0.2 -3.4 1.9 2.0

World 2.6 -0.4 4.4 4.4



Change in US$ Size of GDP from 2000 to 2009

0500

100015002000250030003500400045005000

US$bn

Source: IMF, GS Global ECS Research*2000 GDP was adjusted for the updated 2003 re-base of the series.


Inflation Forecasts


GS Consensus* GS Consensus*

USA 3.8 -0.3 1.9 2.2 0.5 1.9Japan 1.4 -1.4 -1.0 -1.1 -0.5 -0.3Euroland 3.3 0.3 1.0 1.1 1.6 1.4UK 3.6 2.2 2.5 2.6 1.4 1.7Europe 3.5 0.8 1.4 1.4 1.7 1.5China 5.9 -0.7 3.5 3.2 2.8 3.3India 8.4 3.4 5.0 3.3 5.5 6.6Brazil 5.7 4.9 5.1 4.6 5.4 4.7Russia 14.1 11.7 5.3 7.1 6.6 6.9BRICs 7.5 2.2 4.2 3.8 4.0 4.6Advanced Economies 3.4 0.2 1.5 1.6 1.2 1.6

World 5.4 1.6 2.9 2.9 2.7 3.1* Consensus Economics March 2010

% yoy 2008 20092010 2011


‘Crisis’ Indicator

-2

-1

0

1

2

3

4

5

6

90 92 94 96 98 00 02 04 06 08 10

Index

GS FSI (Financial Stress Index



Credit Spreads

200

400

600

800

1000

1200

1400

1600

1800

30

80

130

180

230

280

06 07 08 09 10

bpbp

CDX IG (lhs)

CDX HY (rhs)



US Financial Conditions Index


97

98

99

100

101

102

103

104

00 01 02 03 04 05 06 07 08 09 10

Index

US FCI

Oil Augmented FCI

Easier Conditions

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OECD Financial Conditions


98

99

100

101

102

103

104

00 01 02 03 04 05 06 07 08 09 10

Index, Jan 2000 = 100

OECD FCI

Oil Augmented FCI

Easier Conditions

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UK Financial Conditions Index


92

93

94

95

96

97

98

99

100

101

102

98 99 00 01 02 03 04 05 06 07 08 09 10

Index

UK FCI

Easier Conditions

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China FCI


102

103

104

105

106

107

108

109

110

111

112

00 01 02 03 04 05 06 07 08 09 10

Index

Easier Conditions

China FCI


GLI vs IP


-20

-16

-12

-8

-4

0

4

8

98 99 00 01 02 03 04 05 06 07 08 09 10

% yoy

GLI

G7 IP


Momentum of the GLI


-1.8

-1.4

-1.0

-0.6

-0.2

0.2

0.6

1.0

98 99 00 01 02 03 04 05 06 07 08 09 10

%mom, 3MMA

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Monthly Direction of GLI Components


UpBusiness Confidence Aggregate

GS Australian Dollar Trade Weighted IndexS&P GS Industrial Metals Index

US Initial Jobless ClaimsFlat

Belgian Manufacturing Survey

Japan IP Inventory/Sales Ratio

US Durable Goods Inventory/Shipments RatioDown

Consumer Confidence AggregateISM New Orders Less Inventories

Korean Exports


Korean Exports Year on Year Since 2006


-70

-50

-30

-10

10

30

50

70

90

01 02 03 04 05 06 07 08 09 10

% yoy

% qoq sa ann

% chgFebruary

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China Lead Indicators


96979899100101102103104105106

2

4

6

8

10

12

14

16

18

97 98 99 00 01 02 03 04 05 06 07 08 09 10

Index1996=100

% yoy

GSCA (lhs)CEMAC-GS Leading Indicator (rhs)

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BRICs Manufacturing Activity*

Source: Institute of Supply Management, NTC, GS Calculations.*GDP weights

40

42

44

46

48

50

52

54

56

58

-20

-15

-10

-5

0

5

10

15

20

05 06 07 08 09

IndexIndex

BRICs New Orders Less Inventories (lhs)

BRICs Manufacturing PMI

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Euroland Leading Indicator vs Industrial Production


-12

-10

-8

-6

-4

-2

0

2

4

97 98 99 00 01 02 03 04 05 06 07 08 09 10

qoq

IP, 3m/3m

Leading indicator

Euroland IP and leading indicator (3m/3m)


UK Services PMI


35

40

45

50

55

60

65

97 98 99 00 01 02 03 04 05 06 07 08 09 10

Index

UK Services PMI


BoJ Tankan


-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

%, DI

BoJ Large manufacturers

BoJ Large nonmanufacturers


Relative Manufacturing Production


60

70

80

90

100

110

120

06 07 08 09 10

indexJan06=100

Germany

Japan

Korea

Taiwan

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US House Prices vs Income

3.0

4.0

5.0

6.0

7.0

8.0

9.02.5

3.0

3.5

4.0

4.5

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

House Price/Income Ratio* (left)Mortgage Rate (right, inverted)

Percent

* S.a. median home price divided by median family income.Source: Department of Commerce. FRB. NAR.

Ratio


Share of Private Consumption in US GDP


65

66

67

68

69

70

71

72

90 92 94 96 98 00 02 04 06 08 10

% GDP


US Export and Import Growth


-30

-25

-20

-15

-10

-5

0

5

10

15

20

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

3M MA,% yoy

Exports

Non-oil Imports


Domestic Demand and Growth Contributions, Last Decade


0

5

10

15

20

25

30

35

40

45

China Russia India Brazil BRICs US Euroland

%

Demand Contribution

Growth Contribution

2000-2009 average contribution in USD terms


Retail Sales US and BRICs


-12

-8

-4

0

4

8

12

16

20

24

28

32

36

04 05 06 07 08 09 10

%yoy

USA Brazil BRICsRussia China India*

* Private final consumption


Recent Trend in Real Retail Sales


-60

-40

-20

0

20

40

60

80

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

USD Billion Jan 2007

U.S.

China

Change in Real Retail Sales Since Jan 2007


Real Retail Sales in Developed vs EM

-60

-40

-20

0

20

40

60

80

100

120

140

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Bil$ WorldAdvancedEmerging

Source: National Sources, GS Global ECS Research.

Change in Real Retail Sales Since Jan 2007


Chinese Export and Import Growth


-40

-20

0

20

40

60

80

05 06 07 08 09 10

%yoy, 3MMA

Total Exports

Total Imports

Non-Commodity Imports

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Germany’s Exports to Asia rising –stabilisation elsewhere

60

70

80

90

100

110

120

130

140

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

indexJan07=100

Source: Haver Analytics, GS calculations

ChinaIndiaRussiaUSUKFranceJapanItalySpain


Consumption Contribution


-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

04 05 06 07 08 09 10 11

pps

USA EurolandEM ex BRICs BRICs

Real Contribution to World Consumption*

*Calculated from consumer expenditure for India, US, Japan, Euroland, and other Emerging Markets. Brazil and Russia use private consumption and China uses household consumption. Annual averages 2004-2008, GS forecasts 2009-2010.


The Largest Economies in 2050


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000GDP 2007 US$bn

Presenter

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The Largest Economies in 2050


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000Ch

ina

Unite

d St

ates

Indi

aEU

-5Br

azil

Russ

iaIn

done

sia

Mex

ico

Unite

d Ki

ngdo

mTu

rkey

Japa

nFr

ance

Ger

man

yG

CCNi

geria

Phili

ppin

esCa

nada

Italy

Kore

aIra

nVi

etna

mEg

ypt

Spai

nPa

kist

anBa

ngla

desh

GDP 2007 US$bn

In 2050, the BRICs and N-11 will dominate


BRICs & N11. 2009 Growth Environment Score (GES)


0

1

2

3

4

5

6

7

8B

razi

l

Chi

na

Rus

sia

Indi

a

Kor

ea

Mex

ico

Turk

ey

Viet

nam

Iran

Egyp

t

Indo

nesi

a

Phili

ppin

es

Ban

glad

esh

Nig

eria

Paki

stan

1997-2009 Change1997 GES1997 Average Developing2009 Average Developing


GES Scores for BRICs vs Korea


Brazil China India Russia KoreaTotal 5.3 5.2 4.0 5.1 7.4

Rule of Law 4.4 4.3 5.2 3.2 6.6Corruption 4.9 4.1 4.3 3.0 5.9Political Stability 4.8 4.4 3.0 3.8 5.8Lifeexp 7.5 7.6 5.9 6.5 8.8Inflation 8.6 8.5 7.9 6.5 8.8External Debt 8.5 9.1 8.4 7.6 ..GovtDebt 4.0 4.8 0.0 7.1 5.6GFCF 3.8 8.0 6.9 4.4 5.9Schooling 7.4 6.2 4.2 6.9 9.7Openness 2.2 4.0 3.1 2.2 5.0Computers 2.1 0.8 0.4 1.8 7.7Mobiles 6.4 4.2 2.1 10.0 9.0Internet 4.7 2.2 1.0 2.8 10.0

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NOT LINKED


Maplecroft Risk Indices

Dynamic Structural

BRICsBrazil 6.2 6.0Russia 2.5 5.8India 3.9 3.1China 5.4 3.5N11Bangladesh 3.1 1.7Egypt 4.9 4.3Indonesia 4.1 3.6Iran 1.9 4.0Mexico 6.5 6.1Nigeria 2.4 2.1Pakistan 2.2 1.3Philippines 3.8 4.3South Korea 8.3 8.9Turkey 6.0 5.9Vietnam 5.5 3.9USA 8.9 8.9Germany 9.2 9.2Luxembourg 9.7 9.5Source: Maplecroft


Each Country’s Share of Euroland GDP

0

5

10

15

20

25

30G

erm

any

Fran

ce

Italy

Spai

n

Net

herla

nds

Bel

gium

Aus

tria

Gre

ece

Finl

and

Irela

nd

Portu

gal

Slov

akia

Luxe

mbo

urg

Slov

enia

Cyp

rus

Mal

ta

% Euroland GDP

Country's Share of Euroland GDP (2009)


Cyclically Adjusted Budget Deficit (%GDP)**

Gross general government debt (% of GDP)***

Germany* -1.9 76.3France -7.0 77.8Italy -3.5 114.9Spain -10.0 55.2Netherlands -3.2 61.5Belgium -4.6 97.9Austria -3.3 67.6Greece -12.6 113.4Finland -0.5 39.6Ireland -9.6 64.5Portugal -6.6 76.6Slovakia -6.0 34.7*Countries listed according to their share of Euroland GDP.**Source: European Commission***Source: Eurostat, GS estimates.

Euroland Budget Deficit and Government Debt


Inflation Expectations in US


2.5

2.7

2.9

3.1

3.3

3.5

3.7

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

% yoyUniversity of Michigan 5-yr Inflation Expectations

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Five Year Forward Oil Price


0

20

40

60

80

100

120

140

00 01 02 03 04 05 06 07 08 09 10

$/barrel

5-yr Forward Oil Price


GSDEER Estimates for Major Countries

Spot* GSDEER Q1-2010

% Deviation from GSDEER

5-Yr Forecast

EUR/$ 1.33 1.22 10 1.20

$/Yen 91.90 105.52 15 108.12

£/$ 1.49 1.59 -6.6 1.55

$/CNY 6.82 6.84 0.3 5.85

$/CAD 1.03 1.15 11.8 1.16

AUD/$ 0.91 0.79 14.3 0.79

$/KRW 1138 1274 12.0 975

$ TWI 210.8 232.1 -10.1 -

*as of 24 March 2010



US BBoP vs Current Account


-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

% of GDP4qtr avg

Current AccountBBoP

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BRICs BBoP vs Current Account

-2

0

2

4

6

8

10

12

97 98 99 00 01 02 03 04 05 06 07 08

% GDP

Current Account

BBoP


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Euroland: BBoP vs Current Account


-5

-4

-3

-2

-1

0

1

2

3

4

5

98 99 00 01 02 03 04 05 06 07 08 09 10

BBoP

Current Account

% of GDP12-Month Mov. Avg.


Japan: BBoP vs Current Account


-10

-8

-6

-4

-2

0

2

4

6

8

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

% of GDP, 12MMA

BBoP

Current Account


Current Estimates for the Equity Risk Premium*


Real GDP Growth

Real Earnings Growth +

Dividend Yield =

Expected Real

Return -

Real Bond Yield =

Implied ERP

Expected Inflation

Expected Nominal Return

US 3.0 3.0 1.9 4.9 1.5 3.4 2.0 6.9Japan 1.5 1.5 1.8 3.3 0.8 2.4 0.5 3.8UK 2.8 2.8 3.3 6.1 -0.8 6.9 2.0 8.1Europe ex UK 2.3 2.3 2.9 5.2 -0.8 6.0 2.0 7.2

World 2.5 2.5 2.3 4.8 0.5 4.4 1.8 6.6Optimistic World 4.0 4.0 2.3 6.3 0.5 5.9 1.8 8.1*Calculated as of 24 March 2010


Trend in Forward P/Es


0

5

10

15

20

25

30

35

06 06 07 08 08 09 10

12mth forward PE

United States JapanChina IndiaEurope RussiaBrazil


Interest Rate Forecasts


3-month horizon 6-month horizon 12-month horizon

Current* Forward Forecast Forward Forecast Forward ForecastUS 3M 0.3 0.4 0.3 0.6 0.3 1.2 0.3

10Y 3.9 4.0 3.5 4.2 3.3 4.5 3.5Canada 3M 0.5 0.6 0.4 1.1 0.4 1.9 1.2

10Y 3.5 3.7 3.5 3.8 3.5 4.0 3.8Australia 3M 4.4 4.7 4.7 5.1 4.8 5.5 5.4

10Y 5.7 5.8 5.3 5.8 5.5 5.9 6.0Japan 3M 0.4 0.2 0.4 0.3 0.4 0.3 0.4

10Y 1.3 1.4 1.5 1.5 1.5 1.6 1.8Euroland 3M 0.6 0.7 0.8 0.9 1.0 1.4 1.5

10Y 3.1 3.1 3.3 3.2 3.3 3.3 3.4UK 3M 0.7 0.7 0.8 0.9 1.3 1.5 2.4

10Y 4.0 4.1 4.0 4.2 4.0 4.5 4.3Sweden 3M 0.5 0.7 0.5 1.1 1.0 1.8 2.5

10Y 3.0 3.1 3.3 3.2 3.4 3.4 3.8Switzerland 3M 0.3 0.3 0.3 0.4 0.5 1.2 1.0

10Y 1.8 1.9 2.0 1.9 2.1 2.1 2.3Close 24 March 10

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Foreign Exchange Forecasts

3-months 6-months 12-months

Current* Forward Forecast Forward Forecast Forward Forecast

EUR/$ 1.33 1.33 1.45 1.33 1.45 1.33 1.35$/¥ 92.1 92.0 92.0 92.0 94.0 91.6 98.0EUR/¥ 122.8 122.8 133.4 122.7 136.3 122.2 132.3EUR/CHF 1.43 1.43 1.44 1.43 1.42 1.42 1.40CHF/¥ 85.91 85.93 92.64 85.94 95.99 85.83 94.50$/CHF 1.07 1.07 0.99 1.07 0.98 1.07 1.04EUR/£ 0.90 0.90 0.87 0.90 0.84 0.90 0.84£/$ 1.49 1.49 1.67 1.49 1.73 1.49 1.61£/¥ 137.1 137.0 153.3 136.8 162.3 136.2 157.5£/CHF 1.60 1.59 1.66 1.59 1.69 1.59 1.67EUR/NOK 8.04 8.08 8.00 8.11 7.90 8.18 7.80EUR/SEK 9.69 9.69 9.60 9.69 9.40 9.71 9.00A$/$ 0.91 0.90 0.95 0.89 0.95 0.87 0.90NZ$/$ 0.70 0.70 0.74 0.69 0.74 0.68 0.70$/C$ 1.02 1.02 1.00 1.03 1.00 1.03 1.08$/CNY 6.83 6.80 6.83 6.76 6.83 6.68 6.49

* Close 24 March 10


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Top Trades for 2010


Trade Entry Level Target

1. Short S&P 500 Dec10/Dec11 Forward Starting Variance Swap 28.20 21.00

2. Long Russian Equities (RDXUSD) 1645.9 2050

3. Long GBP/NZD 2.29 2.60

4. Pay UK Rates vs. Receiving AUD Rates via 1-yr Forward 2-yr Swaps -268.5bp -150bp

5. Pay 2y Rates in Turkey 8.77% 12.00%

6. Long Credit Protection on Spain, Short Credit Protection on Ireland 70.2bp 20bp

7. Long 'Growth' FX Current 103.5 111.8

8. Long PLN/JPY 32.1 37.5

Presenter

Presentation Notes

Not linked


Disclaimer

I, Jim O’Neill hereby certify that all of the views expressed in this report accurately reflect personal views, which have not been influenced by considerations of the firm’s business or client relationships.

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