economist intelligence unit webinar: no double dip_8_26_10
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Global Outlook: No Double DipPart of an EIU Client Webinar Series
Robert WardDirector, Global Forecasting
London, August 26th 2010
About the Economist Intelligence Unit (EIU)
Research arm of The Economist Group for business executives650 analysts and industry specialists worldwide covering
• Analysis and forecasting for over 200 countries and territories
• Risk assessment
• Industry data and trends: automotive, consumer goods, energy, financial services, healthcare, technology
• Market sizing
• Custom client research
Today’s Presenter
Robert WardDirector, Global Forecasting
Double dip: How concerned should you be?
Greenspan’s wisdom—should we be worried?!
“I think that the probability of a severe recession has come down markedly.” May 2008
“The odds of [a double-dip recession] have fallen very significantly.” April 2010
“We’re in a pause in a recovery … [a double dip] is possible if home prices go down.” July 2010
Our key scenarios
1. Uneven recovery• Richer countries soften again in late 2010 and into
2011• No return to pre-crisis growth rates• Emerging markets do reasonably well
2. Recovery stalls• Renewed recession in 2011• Sustained weak growth and deflation• Emerging market sentiment sours
3. Economy surges• Adjustment to 2010 raises growth potential• Higher trend growth thereafter, but risk of faster
inflation
60%
30%
10%
Our central scenario
• Company profits are strong—will be hiring soon?
• Inventories are low, so no inventory shock; worst of job shedding now over
• Supportive policy is now in place, so another Lehman is unlikely
• China is assumed to achieve a soft landing
• H1 2010 growth rates were not sustainable anyway
• The 1980s double dip was triggered by the Volcker squeeze on top of 2nd oil shock
-30
-20
-10
0
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2007
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2009
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-6
-4
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0
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Corporate profits % GDP %
Botox finance smoothes the wrinkles
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0.5
1
1.5
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3.5
Sep
15
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02
2004
Jun
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2004
No
v 08
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ar 2
8 20
05A
ug
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02
2006
May
22
2006
Oct
09
2006
Feb
26
2007
Jul
16 2
007
Dec
03
2007
Ap
r 21
200
8S
ep 0
8 20
08D
ec 2
3 20
08Ja
n 2
0 20
09F
eb 1
7 20
09M
ar 1
7 20
09A
pr
14 2
009
May
12
2009
Jun
9 2
009
Jul
7 20
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ug
4 2
009
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1 2
009
Sep
29
2009
Oct
27
2009
No
v 24
200
9D
ec 2
2 20
09Ja
n 1
9 20
10F
eb 1
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ar 1
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10A
pr
13 2
010
May
11
2010
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8 2
010
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ug
3 2
010
3-month LIBOR/3-month overnight index swap (OIS) spread, percentage points. A higher spread denotes more market stress. Sources: Haver Analytics; Economist Intelligence Unit.
Lehman fails
Financial markets
crash
Fed introduces
QEEuro zone
woes spook
markets
The great deleveraging continues in the US…
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- J
an
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- M
ay
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- S
ep
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- J
an
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- M
ay
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- S
ep
2009
- J
an
US personal savings rate, % of disposable income. Sources: BEA; EIU.
… but this is a long haul
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14019
90
1992
1994
1996
1998
2000
2002
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2010
US household liabilities to disposable income ratio, %. Source: EIU, CountryData.
Just don’t make her angry
Stresses in the euro zone 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.
UK: More adjustment for the housing market
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Mortgage approvals, ’000s. Source: Bank of England.
But there are skeletons
Are we turning Japanese? The bond markets think so
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l 16
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No
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b 1
8 1
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n 0
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v 0
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l 03
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Fe
b 2
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Oc
t 1
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00
9
Nominal yield on 10-year US Treasury bond. Source: Fed.
All time low of 2.6%
0
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10
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25
30
Ju
l-6
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Ju
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Risk 1: The US jobs market fails to revive
US: Median duration of unemployment. Weeks. Source: St Louis Fed.
This is already a jobless recovery
-7
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-5
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-3
-2
-1
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1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49
1948 1981 1990 2001 2007
US: % of jobs relative to peak employment. Sources: Bureau of Labour Statistics; EIU.
500
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1,100
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1959
- Q
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Risk 2: The US housing market double dips
US: Housing starts, ‘000s, SAAR. Source: Bureau of the Census.
Spot the recovery!
Demand for mortgages is tepid
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Mortgage HE Revolving Auto Loan Credit Card Student Loan Other
US: Total household debt outstanding. US$ trn. Source: NY Fed.
But if you really must buy…
1,741 sq foot property in La Mirada, LA Co
• Sold in 1988: US$132,000
• Sold in 1998: US$146,000
• Sold in 2004: US$350,000
Price reductions • 19/Mar/2010: US$374,000 to
US$349,000
• 20/Apr/2010: US$349,000 to US$329,000
• 26/May/2010: US$329,000 to US$299,900La Miranda median price, US$380K (cf US$578K at peak), median income US$77,000 (2007)
Source: Dr Housing Bubble Blog.
“Perfect starter home!”
Risk 3: Global policy mistakes
• Fiscal austerity is too severe and poorly targeted
• Premature withdrawal of monetary stimulus
• Demand for money rising for precautionary saving + banks not lending = deflationary pressure in the rich world
• China is unable to fine-tune its soft landing
So• Monetary policy MUST
remain loose in the developed world—no rate rise in US, UK or euro zone until 2012
Monetary base, US$ bn. Source: St Louis Fed.
0
200
400
600
800
1,000
1,200
1,400
1,600
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2,000
1918 1940 2001 08 09 10
Where does this leave us?
To dip or not to dip?
• A double dip is not our central forecast But 30% probability, and downside risks have risen
• Removal of fiscal stimulus was always going to slow growth But some of the negative impact can be offset by
monetary support and currency weakness (for some)
• Balance sheet adjustment doesn’t have to result in a double dip Banking balance-sheets have been partly rebuilt Household and governments have hardly started
But adjustment will crimp growth rather than kill itProvided the adjustment is slow, and policy
tightening is measured
Conclusion—so where’s the growth?
-8
-6
-4
-2
0
2
4
6
8
10
China
Indi
a
ASEAN
Latin
Am
eric
aCIS
Mid
dle E
ast
Africa
E Euro
pe US
Japan
Euro zo
ne UK
World
2009 2010
2011
Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of July 2010. Source: Economist Intelligence Unit, CountryData.
The seeds of prosperity are sown during the periods of financial depression and the seeds of hard times are just as surely down during the period of business activity and speculative boom.
The change from a financial depression to better times comes […] so gradually that for months there is a difference of opinion as to whether a change for the better has actually commenced or not.
““
L M Holt, economist, Panics and Booms, 1897.
If that was all too much for you, take heart!
Questions and Answers
Data and analysis from today’s presentation were taken from the EIU’s country analysis and forecasting services.
For more information on these services and other EIU capabilities, including risk assessment, economic data, industry briefings / forecastings, and custom client research visit www.eiu.com
Holly DonahueMarketing ManagerEconomist Intelligence Unitcoraliethomson@economist.com+44 (0)20 7576 8379
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