The World Economy: How Deep a Recession, How Quick a Recovery?

Size: px

Start display at page:

Download "The World Economy: How Deep a Recession, How Quick a Recovery?"

Arabella Little
5 years ago
Views:

1 The World Economy: How Deep a Recession, How Quick a Recovery? Zbyszko Tabernacki, CFA Country Analysis and Forecasting Group IHS Global Insight January 29

2 Bottom Line We are in the midst of the worst global recession of the postwar period: Global GDP to contract.5% this year The synchronization of the business cycle on a global scale is truly unprecedented: the myth of de-coupling put to rest Housing market bust, confidence drop, declines in global trade and collapse in commodity prices drag down all regional economies The aggressive monetary actions so far failed to thaw global credit markets. More action, including aggressive fiscal stimulus desperately needed. A meltdown of the financial sector still a risk Deflationary pressure present in the U.S., Japan While timing of recovery is still unclear, U.S., China likely to emerge first from the economic gloom. Return to trend growth, not before 211 Copyright 29 IHS Global Insight. All Rights Reserved.

9 Federal Reserve Using Super-Leverage Figure Total Assets on Federal Reserve's Balance Sheet (In billions of U.S. dollars) Permanent Portfolio TAF PDCF Maiden Lane Portfolio Holdings ABCP Credit Facility Repo Discount Window Borrowing AIG loan Estimated forex swap lines Other Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Sources: Federal Reserve; and Morgan Stanley. ABCP = asset-backed commercial paper; AIG = American International Group; PDCF = Primary Dealer Credit Facility; TAF = Treasury Auction Facility. Source: IMF Copyright 29 IHS Global Insight. All Rights Reserved.

10 More Fiscal Stimulus in the Pipeline 9 (Federal budget balance, % of GDP) NAFTA Western Europe Japan Other Americas Emerging Europe Mideast- N. Africa Sub- Saharan Africa Other Asia- Pacific Copyright 29 IHS Global Insight. All Rights Reserved.

11 Consumer Price Inflation is no Longer a Worry 15 (Percent change) NAFTA Western Europe Japan Other Americas Emerging Europe Mideast- N. Africa Sub- Saharan Africa* Other Asia- Pacific * Excluding Zimbabwe Copyright 29 IHS Global Insight. All Rights Reserved.

15 The U.S. Economy in Peril

16 The U.S. Economy in the Longest Recession in the Post War Era Recession started in late 27, much earlier than the start of the worst stage of the financial crisis This recession will be long and deep, comparable to the worst in the postwar era The global financial crisis has ended the U.S. export boom Consumers, businesses, and state & local governments will restrain spending as finances deteriorate The CPI will decrease in 29 for the first time since 1955 Fiscal stimulus and lower energy prices will help to spark a recovery beginning in late 29 Copyright 29 IHS Global Insight. All Rights Reserved.

17 NBER s Key Monthly Recession Indicators Real Manuf. & Trade Sales* 8,55 8,5 8,45 8,4 8,35 8,3 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Employment** Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 *Billions of 2 dollars, SAAR; **Millions, SA; ***Index, 22=1, SA Real Pers. Income (ex transfers)* Peak: Oct 7 Peak: Oct 7 Industrial Production*** Peak: Dec 7 Peak: Jan 8 Copyright 29 IHS Global Insight. All Rights Reserved.

19 U.S. Economic Growth by Sector (Percent change) Real GDP Consumption Residential Investment Bus. Fixed Investment Federal Government State & Local Govt Exports Imports Copyright 29 IHS Global Insight. All Rights Reserved.

20 Other Key U.S. Indicators (Percent change unless noted) Industrial Production Payroll Employment Light Vehicle Sales (Millions) Housing Starts (Millions) Consumer Price Index Core Consumption Deflator Federal Funds Rate (%) Year Treasury Yield (%) Copyright 29 IHS Global Insight. All Rights Reserved.

21 ISM Indexes Signal a Sharp U.S. Downturn 65 (Index, over 5 indicates expansion) Manufacturing Index Source: Institute for Supply Management (ISM) Nonmanufacturing Index Copyright 29 IHS Global Insight. All Rights Reserved.

26 Households Are Increasing Their Saving Rate to Rebuild Net Worth 12 (Percent of disposable income) (Ratio to disposable income) Saving Rate Household Net Worth/Disposable Income Copyright 29 IHS Global Insight. All Rights Reserved.

31 Subprime Foreclosure Rate Peaked Last Spring 5 (Percent of all home mortgage loans entering foreclosure) All Mortgages Prime Loans Subprime Loans Source: Mortgage Bankers Association Copyright 29 IHS Global Insight. All Rights Reserved.

36 Real Export and Import Growth Patterns Reflect the Business Cycle and Exchange Rates 16 (Year-over-year percent change) Real U.S. Exports Real U.S. Imports Copyright 29 IHS Global Insight. All Rights Reserved.

39 The European Outlook

40 Eurozone GDP in Four Quarters to Q (Percent change, q/q, real) 1-1 GDP Dom Demand Cons Inv Govt. Spend Stocks* Exports Imports 27/4 28/1 28/2 28/3 * Contributions to growth Copyright 29 IHS Global Insight. All Rights Reserved.

41 Eurozone Economy Faces Major Pressures Eurozone banking system hit hard by the global financial crisis. Increasingly suffering from problems at home. Many banks needed government support or saving. Exposure to loans from emerging markets might bring second wave effects Very tight credit conditions increasingly hurting businesses and consumers. Major losses in European equity markets Sharply slowing global growth hitting Eurozone exports. Euro still relatively strong Eurozone economic sentiment at survey (1985) low in January High inflation squeezed consumers purchasing power for extended period in 28. Inflation now falling back very sharply, but this is increasingly being outweighed by faster rising unemployment across Eurozone. Wages likely to be increasingly hit Serious housing market corrections in Spain, Ireland (and U.K.). Could happen to lesser extent in France, Netherlands and Belgium Copyright 29 IHS Global Insight. All Rights Reserved.

44 Policy Response to Crisis Europeans agreed in mid-october a common approach to tackling financial crisis, largely based on U.K. method Recapitalizations of banks. Government to inject capital in return for taking shares. Governments will not allow systematically important financial institutions to collapse. Governments have taken various moves to guarantee inter-bank lending. Some countries have set up funds to buy bank assets ECB very active in providing liquidity, offering it on more favourable terms and extending collateral ECB has cut interest rate from 4.25% to 2.% since October Increasing fiscal stimulus across Eurozone. European Commission called for EU-wide fiscal stimulus of 2 billion euro (1.5% of EU GDP). 3 billion to come from EU sources, e.g. EIB EIB asked to provide more loans to medium and small companies Copyright 29 IHS Global Insight. All Rights Reserved.

46 Main Features of Eurozone Forecasts Eurozone GDP will contract by 2.% in 29, after growing.9% in 28. Growth seen at.2% in 21 Eurozone consumer price inflation will retreat sharply further due to lower oil and commodity prices, waning food prices, very weak economic activity, rising unemployment and favourable base effects Inflation seen falling well below 1.% during 29. Could be brief period of deflation. Forecast to average.7% in 29. Seen averaging 1.3% in 21 ECB likely to cut interest rates again in March (from 2.% to 1.5%). Forecast to come down to 1.% by mid-29 and stay there through rest of year Euro down from US$1.6 peak to dip below US$1.25 in late-28. Euro seen largely trading around US$1.3 for some time to come Copyright 29 IHS Global Insight. All Rights Reserved.

47 Germany - Outlook and Main Forecasts Risks Major additional banking sector problems Global and particularly Eurozone demand does not show signs of imminent recovery even in late 29, preventing export rebound Labour market deteriorates faster than expected Fiscal stimuli fail to boost business and consumer confidence whilst driving up deficits Positives Significant portion of financial sector not needing to deleverage Absence of housing market problems Already high current savings ratio and falling inflation supports consumer spending only very small risk of turning into deflation Only gradual and relatively limited unemployment increase expected GDP Growth 1.% -2.5%.2% Private Consumption -.3%.1%.2% Exports 3.1% -8.2%.6% Inflation 2.6%.6% 1.1% Unemployment Rate 7.8% 8.4% 9.5% Copyright 29 IHS Global Insight. All Rights Reserved.

48 France - Outlook and Main Forecasts Risks Positives Deteriorating labor market Large fiscal deficit Struggling automotive sector Very weak growth among trade partners Falling house prices Relatively strong financial sector Falling inflation Low unemployment for historical standards High saving ratio GDP Growth.8% -1.6%.3% Consumer Spending 1.1%.1%.9% Exports 1.9% -3.7% -.2% Inflation Rate 2.8%.3% 1.5% Unemployment Rate 7.7% 8.5% 8.9% Copyright 29 IHS Global Insight. All Rights Reserved.

49 U.K. Economy in Recession GDP fell by 1.5% q/q & 1.4% y/y in Q4 28. The worst q/q performance since 198. Followed contraction of.6% q/q in Q3 and flat q/q in Q2. Service sector contracted 1.% q/q &.7% y/y in Q4. PMI shows activity, new business, work backlogs and jobs all contracting at near record rate in December. Industrial production plunged 3.9% q/q & 6.7% y/y in Q4 with manufacturing output down 4.6% q/q & 7.% y/y. Industrial production plunged 2.3% m/m and 6.9% y/y in November (manufacturing output -2.9% m/m, 9th successive fall) and latest surveys very weak No data available for expenditure side of GDP in Q4. Consumer spending contracted.2% q/q in Q3. Consumer confidence very low. Latest evidence points to weak spending Business investment fell sharply overall in Q1-Q3, and capital expenditure plans are being slashed Exports rose.3% in Q3 and under growing pressure from slowing global growth. But will be helped by very weak pound Copyright 29 IHS Global Insight. All Rights Reserved.

50 U.K. GDP Growth in Four Quarters to Q (Percent change, q/q, real) GDP Dom Demand Cons Inv Govt. Spend Stocks* Exports Imports 27/4 28/1 28/2 28/3 * Contributions to growth Copyright 29 IHS Global Insight. All Rights Reserved.

51 Emerging Europe is Facing Very Challenging Near-Term Prospects Main export markets headed into recession Tight credit conditions threaten domestic demand which has been driven by credit expansion based largely on foreign borrowing Business and consumer confidence is deteriorating Much-needed fiscal restructuring will be much more difficult Economies with large external and/or fiscal deficits could face currency crises, drastic macroeconomic adjustment On the positive side, inflation rates are coming down and IMF policy monitoring put in place Copyright 29 IHS Global Insight. All Rights Reserved.

52 Japan Suffers From Collapse in Exports

53 Japan s Economy Still Depends on Exports A drop in exports has sent Japan into recession Consumer and business sentiment are deteriorating The yen s appreciation will continue Price deflation remains a problem Japan s population has entered a long-term decline Trend growth will slow from 2% to 1% over next 1 years Copyright 28 IHS Global Insight. All Rights Reserved.

54 Japan Outlook Summary Real GDP Growth (%) Consumer Price Inflation (%) Exchange Rate per US$* Current Account Balance** *Annual average, **Billions of U.S. dollars Copyright 28 IHS Global Insight. All Rights Reserved.

55 China Decelerates Rapidly

56 Output and Inflation, Both Fast Decelerating in Recent Months (Percent change from a year earlier) Jan-5 Jan-6 Jan-7 Jan-8 Source: IHS Global Insight CPI Industrial Production Copyright 28 IHS Global Insight. All Rights Reserved.

57 Investment Demand Growth Moderated 3 (Fixed Asset Investment, percent change from a year earlier) Jan-5 Jan-6 Jan-7 Jan-8 Source: IHS Global Insight * Deflated by investment goods price index, year-to-date figures Copyright 28 IHS Global Insight. All Rights Reserved.

58 Consumer Demand Strengthening, But Some Areas Are Showing Weakness (Percent change from a year earlier) Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Retail Sales (left scale) Car Sales (right scale) Source: IHS Global Insight Copyright 28 IHS Global Insight. All Rights Reserved.

59 PMI Export Orders Sub-Index Has Remained Under 5 for Six Consecutive Months and Took a Nosedive in November (Diffusion index) Jan-5 Jan-6 Jan-7 Jan-8 Source: IHS Global Insight PMI* New Export Orders Sub-Index* The NBS/CFLP (National Bureaus of Statistics/China Federation of Logistics and Purchasing) purchasing managers index. Copyright 28 IHS Global Insight. All Rights Reserved.

60 Export Growth Has Thus Taken a Nosedive (Percent change from a year earlier) Jan-5 Jan-6 Jan-7 Jan-8 Exports in US$ Exports in RMB Source: IHS Global Insight Copyright 28 IHS Global Insight. All Rights Reserved.

61 China is Now More Exposed to External Shocks due to Globalization and Export-led Growth Strategy (Goods exports, percent of GDP) 5 4 Pre 21 tech sector crash Pre 28 subprime crisis Pre 1998 Asian crisis Source: China State Administration of Foreign Exchange, IMF Copyright 28 IHS Global Insight. All Rights Reserved.

62 Advance Economies Remain China s Major Export Markets (Chinese goods exports by destination, percent of total exports) US, EU, Japan Asia (incl Japan) Japan EU US While Asia market share before Asian Crisis smaller then advanced economies market share now, Asia had a near depression-like recession during Asian Crisis Source: IHS Global Insight (pre Asian Crisis) 2 (pre tech recession) 27 (pre subprime crisis) Copyright 28 IHS Global Insight. All Rights Reserved.

63 China s Current Domestic Conditions Much Stronger then during Asian Crisis (Percent of change) SOE reform s massive layoff (Million persons) Aggressive tightening to rein in 2%+ inflation Bank lending halted to contain NPLs Asian Crisis Source: IHS Global Insight M2 SOE Employment Level Copyright 28 IHS Global Insight. All Rights Reserved.

64 Liquidity Conditions Had Remained Accommodative Even Before the Recent Rate Cuts Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 M2 (%ch y/y) Bank Loans (%ch y/y) Source: IHS Global Insight 1 Year Lending Rate (%) Reserve Requirement Ratio (%) Copyright 28 IHS Global Insight. All Rights Reserved.

65 Key Issues for the Outlook External demand the main pressure point Advanced economies demand will slide How much will demand from rest of the world get dragged down? Domestic demand still has momentum, but Slowing profit growth a drag on investment is worrisome Continued strengthening of household consumption is questionable Government has flexibility in stimulus policy Room for monetary easing Fiscal balance in surplus Reverse or pause strong RMB policy Sequencing of crisis important: Prior to Asian Crisis: draconian monetary tightening, SOE reform led massive layoffs, fixed exchange rate, fiscal deficit Prior to current crisis: moderate monetary tightening, domestic demand still strong, managed float RMB, fiscal surplus Copyright 28 IHS Global Insight. All Rights Reserved.

66 Policy Response So Far Monetary Policy 4 interest rate cuts since Mid-Sep by 189 basis points Expanding credit quota to small- & medium-sized enterprises Fiscal Policy 4 trillion RMB fiscal stimulus over Close to 1/4 th of spending on low income housing construction Accelerate construction of major infrastructure projects Raise export tax rebates 3 times since August Slash housing transaction tax--lower down payment requirement Value-added tax reform allows investment spending deduction Tax cut for corporate income from infrastructure construction, raw materials; tax breaks for acquisition of environmental protection equipment Sharp increase of state purchasing price for grains Copyright 28 IHS Global Insight. All Rights Reserved.

67 Rest of Asia-Pacific Follows

68 Asia-Pacific Region Leads Global Growth While finances are strong, export dependence is a problem Domestic demand will support growth as exports fall But capital inflows are diminishing, hurting investment Japan, Taiwan, Hong Kong, and Singapore are in recession South Korea, Australia, Thailand, Vietnam, and Pakistan are vulnerable External and fiscal balances have improved since the crisis, bringing more resilience to shocks Copyright 28 IHS Global Insight. All Rights Reserved.

70 India Outlook Summary 55 Real GDP Growth (%) Consumer Price Inflation (%) Exchange Rate per US$* Current Account Balance** *Annual average, **Billions of U.S. dollars Copyright 28 IHS Global Insight. All Rights Reserved.

72 Other Emerging Regions

73 South America: A Temporary Setback Exports are falling in response to global slowdown Lower commodity prices will hurt several countries Currencies are under pressure as investors avoid risk But compared with the late 199s, the region is better shielded from the global financial crisis Long-term prospects are bright for countries attracting foreign investment, including Brazil, Chile, Peru, and Colombia Policy mismanagement and resource nationalism will take a toll on Argentina, Venezuela, Bolivia, and Ecuador Copyright 28 IHS Global Insight. All Rights Reserved.

75 Brazil s Economy Faces Competitive Challenges The engines of growth business investment and exports have slowed abruptly Sound monetary policies have kept inflation low, but interest rates are very high The financial crisis has put downward pressure on the real s exchange rate The current account has shifted into deficit The tax burden is comparatively high 34% of GDP Copyright 28 IHS Global Insight. All Rights Reserved.

76 Brazil Outlook Summary Real GDP Growth (%) Consumer Price Inflation (%) Exchange Rate per US$* Current Account Balance** *Annual average, **Billions of U.S. dollars Copyright 28 IHS Global Insight. All Rights Reserved.

79 Thank you Zbyszko Tabernacki, CFA Country Analysis and Forecasting Group

Economic Update. Port Finance Seminar. Paul Bingham. Global Insight, Inc. Copyright 2006 Global Insight, Inc.

Economic Update. Port Finance Seminar. Paul Bingham. Global Insight, Inc. Copyright 2006 Global Insight, Inc. Economic Update Copyright 26 Global Insight, Inc. Port Finance Seminar Paul Bingham Global Insight, Inc. Baltimore, MD May 16, 26 The World Economy: Is the Risk of a Boom-Bust Rising? As the U.S. Economy