Global MT outlook: Will the crisis in emerging markets derail the recovery?

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1 Global MT outlook: Will the crisis in emerging markets derail the recovery? John Walker Chairman and Chief Economist March 2014

2 Oxford Economics Oxford Economics is one of the world s foremost independent providers of global economic research and consulting Founded in 1981 as a joint venture with Templeton College in Oxford University Team of over 80 in-house economists Forecasts for 190 countries, 100 industries and 2,600 locations globally Unique Global Economic Models Detailed Scenario service-ss Grown at 20%pa over last six years 1

3 Our November SS. All our fears come to pass? Financial fragility Capital flows out of emerging markets (10%) Start of tapering leads to renewed sharp capital outflows from emerging markets fragile 5 particularly hard hit China s property market slumps Investment in EMs undermined by weak infrastructure, corruption and reduced expectations for long-run growth Deflation pressures increase in advanced economies Baseline (50%) US growth accelerates as impact of sequester/tax rises fade and strong competitiveness/energy boom drive investment Ease in austerity allows some pick-up in Europe, but tax rise slows Japan s growth Emerging markets a mixed bag, with China rebalancing and India/Brazil held back by lack of progress on key reforms Eurozone slides into deflation (15%) Weak demand, excess capacity and strong euro push Eurozone into deflation. GDP falls for another two years ECB only responds late with further liquidity boost, but no QE. OMT is activated Peripherals require banking union to stay in EMU Global risk aversion increases as stability of EMU is again questioned US consumer disappoints (10%) Fiscal and monetary policy uncertainty, plus continued political stalemate, hurt business and consumer confidence US growth fails to pick up and unemployment rises above 8%. Weaker world trade and sentiment dampen global GDP Tapering is postponed until 2015Q3, dollar weakens and Treasury yields fall to 2.3% 2 Domestic demand fragility

4 Renewed turmoil hitting emerging markets Emergers: 10 year government bond yields % Brazil Turkey South Africa 6 5 Poland 4 3 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Source: Haver Analytics 3

5 the Eurozone sliding toward deflation 4

6 and the US consumer wobbling at start of

7 as jobs data disappoints 6

8 Are recovery hopes being dashed again? 7

9 8

10 Key macro forecast questions How worried should we be by weak US data? How firm are foundations for recovery? Will the crisis in the fragile 5 undermine US and global growth? How serious is the risk of a financial crisis in China? Can the Japanese revival survive consumption tax rises? Europe on road to recovery or headed for deflation? 9

11 Weather effects dominating latest data IP fell 0.3% in January on a 0.8% plunge in manufacturing production while utilities surged 4.2% 10

12 the trend in capital goods orders is solid US: Durable goods orders Bn $ Non defense capital goods (RHS) Bn $ Total (LHS) Source: Census Bureau/Haver Analytics

13 and consumers remain optimistic 12

14 Government no longer major drag on growth 13

15 Real earnings are rising again 14

16 Taper on, and first rate hike expected in 2015H2 15

17 Key forecast questions How worried should we be by weak US data? How firm are foundations for recovery? Will the crisis in the fragile 5 undermine US and global growth? 18

18 New pressure on emerging markets 19

19 forcing sharp policy tightening Short-term interest rates % units India Turkey Brazil South Africa Indonesia 4 Jan13 Mar13 May13 Jul13 Sep13 Nov13 Jan14 Source : Oxford Economics/Haver Analytics 20

20 needed to correct current account imbalances Current Account Balances, 2013 % of GDP Korea Philippines Malaysia China Thailand Brazil Indonesia India Asia Crisis-4* South Africa Turkey * Average current account deficit during for Malaysia, Indonesia, Korea and Thailand Source : Oxford Economics/Haver Analytics

21 How much of a threat does the emergers crisis pose? 24 Economic importance of the 'Troubled Bunch' Total US merchandise exports World GDP Canada Europe Mexico China 'Troubled Bunch' of which: Brazil India Turkey Thailand Argentina Indonesia South Africa Ukraine Source: Oxford Economics Percentage shares (2012)

22 Key forecast questions How worried should we be by weak US data? How firm are foundations for recovery? Will the crisis in the fragile 5 undermine US and global growth? How serious is the risk of a China financial crisis? 25

23 Baseline forecast is for smooth rebalancing China: Expenditure structure of GDP % Investment Forecast Consumption Source : Oxford Economics

24 and gradual moderation in growth China: GDP % quarter 15 Forecast Source: Oxford Economics 27

25 but how does China successfully deleverage? 28

26 Non-financial corporate debt particularly worrying 30

27 especially given high investment share in GDP Fixed Investment, 2012 % GDP US Germany Brazil Russia India China Source : Oxford Economics

28 China crisis tips the troubled bunch over the edge? Exports between China and 'troubled bunch' (% of total exports) Exports to China Commodity exports to China Argentina* Brazil India Indonesia South Africa Thailand Turkey Exports to 'troubled bunch' Commodity exports to 'troubled bunch' China * 2011 values Source: United Nations/ IMF/ Oxford Economics

29 Key forecast questions How worried should we be by weak US data? How firm are foundations for recovery? Will the crisis in the fragile 5 undermine US and global growth? How serious is the risk of a China financial crisis? Can the Japanese revival survive consumption tax rises? 33

30 Some encouraging signs in Japan Japan: Labour market % balance 30 % year Tankan employment excess (+)/insufficient (-) (LHS) Employment (RHS) -20 Wages (RHS) Source : Oxford Economics/Haver Analytics

31 Consumption tax rise takes a big risk with growth 35

32 Key forecast questions How worried should we be by weak US data? How firm are foundations for recovery? Will the crisis in the fragile 5 undermine US and global growth? How serious is the risk of a China financial crisis? Can the Japanese revival survive consumption tax rises? Europe on road to recovery or headed for deflation? 36

33 The Eurozone recovery is gradually strengthening 37

34 as austerity eases Eurozone: Fiscal measures % of GDP 1.5 Restrictive Expansionary Source : Oxford Economics 38

35 But wide disparities in growth 39

36 So how have our risk perceptions changed? Financial fragility Capital flows out of emerging markets Probability up to 25% (from 10%) with more weight on China risk Baseline (50%) US growth accelerates as impact of sequester/tax rises fade and strong competitiveness/energy boom drive investment Ease in austerity allows some pick-up in Europe, but tax rise slows Japan s growth Emerging markets a mixed bag, with China rebalancing and India/Brazil held back by lack of progress on key reforms Eurozone slides into deflation Probability reduced to 10% (from 15%) given better growth trends US consumer disappoints Not one of our scenarios in next Global Scenarios report 42 Domestic demand fragility

37 44

38 Conclusions on macro outlook 2013 was going to be a year of, possibly strengthening, recovery It did not quite live up to expectations, due mainly to "sequestration" 2014 should be a year of, possibly strengthening, recovery (at least outside China) There are risks - but these are less marked than a year ago US will lead the global upturn 45

39 Conclusions on macro outlook 2013 was going to be a year of, possibly strengthening, recovery It did not quite live up to expectations, due mainly to "sequestration" 2014 should be a year of, possibly strengthening, recovery (at least outside China) There are risks - but these are less marked than a year ago US will lead the global upturn With manufacturing at the forefront 46

40 US manufacturing now very competitive Unit labour costs in manufacturing in US$ Japan Source : Oxford Economics/Haver Analytics US China Canada Germany Mexico

41 Energy boom also transforming US outlook 48

42 and manufacturing re-shoring becoming reality US: Reshoring intentions % of survey respondents Yes, decision taken No response Yes, considering Not considering Source : MIT Forum for Supply Chain Innovation, December

43 with proximity to market a key driver Motivation for reshoring to the US % of survey respondents Reduced time to market Reduced costs Better product quality More managerial control Easier supply chain management Better IP protection Source : MIT Forum for Supply Chain Innovation, December

44 pushing investment above pre-crisis levels Manufacturing Investment Index: 2007 = Japan UK Germany US Source : Oxford Economics/Haver Analytics

45 US auto demand has eased US: Car registrations % year Units, thousands Levels Annual growth Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Source : Oxford Economics/LMC automotive 54

46 But US production continues to expand US: Output and orders 2005=100 US$ bn Orders (RHS) Output (LHS) 3 month moving average Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Source: Oxford Economics / Haver Analytics

47 driven in part by strong non-na exports US: Exports of motor vehicles $bn Source : Oxford Economics/Haver Analytics 56

48 Drivers for US automotive Improving household incomes but some drag from end of declining loan rates Aging vehicle stock average is 12 years in US vs 6 years in Europe Pent-up demand Sustained high gas prices plus CAFE standards 35.5 MPG for 2016, 54.5 MPG for 2025 Changing consumer tastes 57 aging baby boomers, millenials more interested in electronics

49 Pent-up demand to fuel future growth 58

50 Massive innovation coming According to IRN: The industry will launch an average of 125 new vehicles annually between 2013 and vehicles will be launched in 2018 alone 70% of the current global vehicles will be brand new or refreshed over this timeframe 59

51 Automotive forecast Motor vehicles and their engines Annual percentage changes unless otherwise stated 2012 % share Germany France Italy UK EU United States Japan Brazil Russia India China Mexico World

52 Aerospace strong in 2013 Airbus versus Boeing: Deliveries Number of aircraft Boeing Airbus Source: Company reports and forecasts

53 with 6 years of orders already on the books Airbus & Boeing: Orders & deliveries Number of aircraft 3,000 2,500 Orders 2,000 1,500 1, Deliveries 2013 estimated Source: Company reports and forecasts 62

54 Growth of traffic should be very strong 63

55 Also need for efficient next-generation aircraft Source: Boeing 64

56 So demand for planes very high 65

57 Aerospace forecast Aerospace Annual percentage changes unless otherwise stated 2012 % share Germany France Italy UK EU United States Japan Brazil Russia India China Mexico World

58 Activity in key sectors to accelerate in 2014

59 Driving a pick-up in investment

60 Developed world MT orders ticking up Europe: Domestic MT orders Year-on-year % Italy US machine tool orders year-on-year % Germany Jan-08 Source : Oxford Economics/AMT May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep France -1 Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113 Source : Oxford Economics/CECIMO Japan: Domestic metal cutting MT orders 2005 = Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113 Source : Oxford Economics/JMTBA

61 Abenomics boosts Japananse MT sales

62 German MT sales to grow at a firm pace

63 Chinese MT sales growth forecast downgraded

64 US MT sales to accelerate after soft 2013

65 Still plenty of problem areas and risks Certain sectors areas likely to see sustained weakness eg mining And China looks vulnerable overall with knock on dangers to some emerging markets. But our central case sees MT sales staying at or above current high levels for next year or two AND WHAT MIGHT SURPRISE EVERYONE? 74

66 75 Thank you

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