the global recovery: status update

Global Economic OutlookBusiness and Policy Dilemmas Draft

Zbyszko Tabernacki, CFAExecutive Managing DirectorEconomics and Country RiskIHS Global Insight

November 18, 2010

Copyright © 2010 IHS Inc. All Rights Reserved.

The Global Recovery: Status Update

• The global expansion is continuing, but at a more gradual pace

• Recoveries from financial crises are typically slow

• Debt levels will influence the speed of country recoveries

• Inflation will not be a serious problem in most countries

• Interest rates will remain low through 2011 in advanced countries but will rise in emerging markets

• Quantitative easing will have little impact on economic growth

• The probability of a global double-dip recession is about 20% and declining


After Slowing in Mid-2010, World Real GDP Growth Is Expected to Gradually Pick Up

-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012

(Quarter-on-quarter percent change, annual rate)

Source: IHS Global Insight


Global Economic Indicators: Mixed Signals

Net Output Surprises

Global Yield Curve

Global Real Policy Rate

Global Consumer Price Inflation

Global Real Narrow Money (M1) Supply

Global Real Broad Money (M2) Supply

Lending Standards

TED Spread: LIBOR vs. T-bill

Global Equity Prices

Global Foreign Exchange Reserves

Global Manufacturing Confidence

Global New Orders

Industrial Metals Prices

Global Industrial Production

Real Baltic Dry Bulk Shipping Rate Index

Global Real Merchandise Imports

Real Crude Oil Prices

Consumer Confidence Diffusion

Global Real Retail Sales

Corporate Profit Proxy: CPI–WPI Difference

Global Employment Growth

In October 2010, 18 of 21 indicators signaled expansion (green), but only 10 had improved since August (up arrow)


Copyright © 2010 IHS Inc. All Rights Reserved. 5

Crawling Economies

• High debt levels

• Weak growth — post-crisis recoveries are almost always slow

• No inflation

• Rock-bottom interest rates

• Downward pressure on currencies

• Risks: double-dips and/or lost decades

• Risk: currency “wars” and protectionism

• Macro challenges: monetary and fiscal policy “exit strategies” without aborting the recovery

• Micro challenges: boosting productivity and competitiveness (especially in Southern Europe), reining in healthcare and pensions costs, cleaning up housing wreckage, help for the chronically unemployed


Global Unemployment

(Percent of unemployed out of work for at least six months)

Source: OECD

Of which: 12 months or more

7.5

UnemploymentRate, %

11.6

10.1

20.5

5.1

10.5

7.7

9.6

5.1

7.4

3.3

3.4

8.1


Booming Economies

• Low debt levels

• Strong growth

• Rising (but still low) inflation

• Rising interest rates

• Upward pressure on currencies

• Risks: overheating and asset bubbles

• Risk: currency “wars”

• Macro challenges: less intervention in currency markets, more support for consumer spending

• Micro challenges: structural and institutional changes to increase share of consumer spending in economy (i.e. less export dependence)


0

5

10

15

20

25

30

35

40

45

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020M

illi

on

s

Triad LV Sales BRICs LV Sales

Global Auto Markets Reflect Two-Speed World

Light Vehicle Sales

Note: Triad comprises U.S., Japan, and Western Europe


Purchasing Managers’ Indexes Signal Expansion in Most Areas

(Manufacturing index, over 50 indicates expansion)

30

35

40

45

50

55

60

65

2006 2007 2008 2009 2010

United States Eurozone China Japan

Sources: Institute for Supply Management, Royal Bank of Scotland/NTC Research, China Federation of Logistics and Purchasing, Nomura/JMMA


0

1

2

3

4

5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In U.S. Dollars In GDP-Weighted Currency Basket

(IHS Global Insight Indexes, 2002:1=1.0)

Industrial Materials Prices Are Rising Again, Partly in Response to Dollar Depreciation



Currency Wars Could Lead to Trade Wars

• Fundamental problem: the world economy needs to reflate and rebalance at the same time

• Textbook solution: currencies of surplus countries appreciate and the currencies of deficit countries depreciate

• Motivations for market intervention

• deflationary fears (Japan and Switzerland)

• concerns about capital inflows (Brazil)

• insecurities about the strength of domestic demand (China)

• worries about China’s competitiveness (Brazil, South Korea)

• Zero-sum game: shades of 1930s competitive devaluations


The U.S. Dollar Will Depreciate Against Currencies of Emerging Markets

0.6

0.8

1.0

1.2

1.4

1.6

1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Major Trading Partners Other Important Trading Partners

(Real Trade-Weighted Dollar Index, 2005=1.0)


The U.S. Recovery: Uneven and Subpar

• Recession “over”, but GDP hasn’t regained previous peak yet

• Growth boost from fiscal stimulus and inventories is fading

• Headwinds are blowing from consumer and business caution

• Policy uncertainties don’t help, but the key problem is the hangover from the financial boom and bust

• QE II is on the way; it’s not a cure-all

• It’s too early to tighten fiscal policy when the private sector is gripped by an “epidemic of thrift”


A Deeper U.S. Recession and Slower Recovery than in Past Cycles

-2

0

2

4

6

8

10

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Quarters from Trough

Current Recovery Average of Post-1950 Recoveries

(Real GDP, percent difference from recession trough)



-6-4-20246

2007 2008 2009 2010

Household Credit Conditions:Beginning To Loosen

-5

0

5

10

2007 2008 2009 2010

*% change y/y; **Percent of banks tightening less percent loosening

Consumer Credit Growth* Home Mortgage Credit Growth*

Banks Tightening Cons. Credit** Banks Tightening Mortgage Credit**

-20

0

20

40

60

80

2007 2008 2009 2010

Prime Loans

-20

0

20

40

60

80

2007 2008 2009 2010

Credit Cards

Other Loans


-1,000

-750

-500

-250

0

250

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

Employment Is Turning, But Not Rapidly

4

6

8

10

12


*Thousands, monthly change, SA; **Percent; ***Hours, SA

Private Payroll Employment* Unemployment Rate**

Length of Workweek*** Temporary Employment*

-100

-50

0

50

100


32.5

33.0

33.5

34.0



-4

-2

0

2

4

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Annualized rate of growth)

Consumer Spending Stabilizing, But Not a Strong Driver of Recovery


Business Equipment Demand Recovering

(Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)

45

50

55

60

65

70

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Orders Shipments


(Percent change unless otherwise noted)

U.S. Economic Growth by Sector

2009 2010 2011 2012

Real GDP -2.6 2.7 2.3 2.9

Final Sales -2.1 1.2 2.5 2.9

Consumption -1.2 1.7 2.4 2.0

Light Vehicle Sales (Millions) 10.4 11.4 12.8 14.8

Residential Investment -22.9 -4.2 4.1 33.4

Housing Starts (Millions) 0.55 0.60 0.78 1.21

Business Fixed Investment -17.1 5.6 5.9 7.3

Federal Government 5.7 4.7 0.0 -3.5

State and Local Government -0.9 -1.3 0.2 0.0

Exports -9.5 11.5 8.3 8.1

Imports -13.8 13.2 5.6 5.3


(Percent unless otherwise noted)

Other Key Indicators

2009 2010 2011 2012

Industrial Production (% growth) -9.3 5.3 2.9 3.5

Employment (% growth) -4.3 -0.5 0.9 2.2

Unemployment Rate 9.3 9.7 9.6 9.1

CPI Inflation -0.3 1.7 1.5 1.9

Oil Prices (WTI, US$/bbl) 62 79 83 89

Core PCE Price Inflation 1.5 1.4 1.3 1.4

Federal Funds Rate 0.16 0.17 0.14 1.27

10-year Government Bond Yield 3.26 3.14 2.58 3.43

Dollar (Major Currencies, 2005=1) 0.93 0.90 0.86 0.88


What Can QE II Accomplish?

• Don’t expect too much from QE II

• Quantitative easing is powerful in a crisis...

• ...but financial markets are not in meltdown now...

• QE II of $500bln-$1 trl can push down long-term interest rates (25-50bps?), at least partly priced in already...

• ...and help growth a tenth or two in 2011...

• ...not a game-changer

Copyright © 2010 IHS Inc. All Rights Reserved. 22* Ivey, n.s.a; ** ISM Index

22

24

26

28

30

2005 2006 2007 2008 2009

240

260

280

300

320

Canada (LS) United States (RS)

Retail Sales (Excluding motor vehicles and parts, billions)

Real GDP(Percent change)

Canada Recovery Hits a Speed Bump

1.2

1.4

1.6

1.8

2.0

2007 2008 2008 2009 2009 2010 2010

8.0

10.5

13.0

15.5

18.0

Canada (LS) United States (RS)

Total New Motor Vehicle Sales (Millions of units, SAAR)

2009 2010 2011-5.0

-2.5

0.0

2.5

5.0

-2.5

2.92.3

-2.6

2.7 2.3

Canada United States

30

40

50

60

70

2005 2006 2007 2008 2009 2010

Canada* United States**

Leading Manufacturing Indicators(Diffusion index, over 50 indicates expansion)


2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012

*Annual average, **Billions of U.S. dollars

-30

-20

-10

0

2000 2002 2004 2006 2008 2010 2012

9

10

11

12

13

14

2000 2002 2004 2006 2008 2010 2012

-10

-5

0

5

10

2000 2002 2004 2006 2008 2010 2012

Real GDP Growth (%) Consumer Price Inflation (%)

Exchange Rate per US$* Current Account Balance**

Mexico Outlook Summary


Eurozone Growth Likely to Be Uneven and Sluggish

• Despite strong Q2, Eurozone growth will remain sluggish overall

• Two-speed Europe (as well) — marked divergences in performance of member countries, with North doing relatively well (especially Germany) and South struggling

• But fiscal policy was already becoming less accommodative even before Eurozone sovereign debt crisis increased pressure for policy to be tightened earlier and faster

• High unemployment, weak wage gains, and tight credit will restrain consumer

• Business investment limited by substantial excess capacity and concerns about strength and sustainability of recovery

• Exports will be hurt by slowing global growth and the recent strength in the euro


Asia’s Recovery Is At a Flexing Point

• Impetus from inventories has already peaked

• Net exports will slow considerably in coming quarters

• China has become a source of near-term risk

• Slight shift in policy stance betrays worry about outlook

-6

-3

0

3

6

9

12

08Q1 08Q3 09Q1 09Q3 10Q1

-30

-20

-10

0

10

20

30

GDP (Left scale)

Industrial Production (Right scale)

(Percent change from a year earlier, SAAR)


A Mild Slowdown in China’s Industrial Outputas the Economy Rebalances

(Percent change from year earlier)

-30

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010

Industrial Output Real Merchandise Exports

Real Fixed Investment Real Retail Sales



China: Focus on Risks

• Slowdown has stabilized― Property sector tightening policy effective in deflating bubble, so far― Following the initial sharp slide, construction and overall output have

leveled off― Growth downtrend should continue, as tightening policy will remain in

effect and export growth is expected to slow

• Soft-landing is still the most probable scenario― External demand will stagger, not collapse― Policy will be “cautiously accommodative”, including RMB appreciation― Consumer demand should remain stable

• But risks of hard-landing have increased― Recovery in the U.S. and EU still unstable― 2009 credit binge could turn into a full-fledged banking crisis, especially

local government debt― The usually steady consumer demand will likely then collapse― If all flashpoints ignited, we are looking at the worst case scenario


Bottom Line and Business Implications

• The next decade will be less “fun” than the 1990s or the pre-crisis 2000s

• The risk of a lost decade is higher than a double-dip — but still relatively low

• The risk of deflation is greater than inflation — but also relatively low

• Many companies will pursue market share (or hunker down) strategies in the developed world and growth strategies in the emerging world

• Since the emerging world is not without risk, diversification will be key — in other words, don’t put all your eggs in the Chinese basket

• Fiscal consolidation is inevitable and taxes will rise — businesses have a huge stake in how this happens

• Businesses also have a huge stake in the outcome of the currency “wars” and especially in keeping the protectionist instincts of politicians in check

Thank you!

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the global recovery: status update

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