Economic Imbalances in the post-maastricht Treaty World A Look at Global and European Implications and Investment Conclusions

Transcription

1 Economic Imbalances in the post-maastricht Treaty World A Look at Global and European Implications and Investment Conclusions JOHN W. BECK Senior Vice President Co-Director, Global Fixed Income Franklin Templeton Fixed Income FOR PROFESSIONAL INVESTORS ONLY

2 Overview 1. Global Growth Continues 2. Reliance on China Grows 3. Europe/Euro Introspection 4. US Double Dip?

3 Soft Economic Growth, but World isn t Ending Year-on-Year % Change 1980s 1990s F World Output Advanced Economies United States Euro Area N/A Emerging and Developing Developing Asia China Source: Copyright 2011, International Monetary Fund (IMF), World Economic Outlook. 2

4 G3 Markets Continue to Fall Behind Source: Copyright 2011, The International Monetary Fund (IMF), World Economic Outlook as at September

5 Clear Gap in Growth Trajectory has Emerged Source: Copyright 2011, International Monetary Fund (IMF), World Economic Outlook. 4

6 Real GDP Growth 2000s vs 1990s Global Real GDP Growth - Noughties vs Nineties World United States Euro Area United Kingdom 1990s 2000s New ly Industrialised Asian Developing Asia Source: Copyright 2011, International Monetary Fund (IMF), World Economic Outlook. 5

7 How Did We Get Here - Debt Evolution F 6

8 Developed Market Debt Continues to Grow Source: Copyright 2011, International Monetary Fund (IMF), World Economic Outlook. 7

9 Developed Markets Downgraded Source: Moody s and S&P 8

10 As Emerging Markets Become Investment Grade Source: Moody s and S&P 9

11 A China-Dependent World Source: Haver analytics and Citi Investment Research and Analysis. Source: Citi Investment Research and Analysis. 10

12 GDP Growth for China Since th 7th 8th 9th 10th 11th Source: CEIC and CIRA 11 12/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / /2010 GDP: Real Real: GDP 1978=100 (f 1) Fixed Assets Investment: Total (f 2)

13 Domestic Strength: Demand in China Retail Sales Growth, as of 30/11/11 30% Fixed Asset Investment 1 Growth, as of 30/11/11 60% 25% 50% Retail Sales Grow th (y/y) 20% 15% 10% Fix ed Asset Inv estment Growth (y/y) 40% 30% 20% 5% 10% 0% % Source: National Bureau of Statistics China Economic Information Network, as of 30/11/ Fixed asset investments exclude rural households. Charts are for illustrative and discussion purposes only. 12

14 Selected Advanced Economies (Annual percent change unless noted otherwise) Real GDP Consumer Prices¹ Current Account Balance² Debt to GDP Projections Projections Projections Projections Advanced Economies United States Euro Area 3, 4, Japan United Kingdom Canada Movements in consumer prices are shown as annual averages. 2 Percent of GDP 3 Based on Eurostat s harmonised index of consumer prices. 4 Current account position corrected for reporting discrepancies in intra-area transactions. 5 Excludes Estonia Source: Copyright 2011, International Monetary Fund (IMF) World Economic Outlook 13

15 The Maastricht Criteria : Signed in Maastricht on 7 February Inflation Rates No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU. 2. Government Finance Annual Government Deficit The ratio of the annual government deficit to gross domestic product must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases. Government Debt The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace. 3. Exchange Rate Applicant countries should have joined the exchange rate mechanism under the European Monetary System for two consecutive years and should not have devalued its currency during the period. 4. Long Term Interest Rates The nominal long term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states. Source: Council of the European Union 14

16 Current Account Balance Percentage GDP Budget Deficits, Percentage of GDP Source: Copyright 2011, International Monetary Fund (IMF), World Economic Outlook. 15

17 Eurozone Current Account Imbalances bn Belgium Germany Estonia Ireland Greece Spain France Italy Cyprus Luxembourg Malta Netherlands Source: Eurostat Austria Portugal Slovenia Slovakia Finland 16

18 The Excessive Deficit Procedure..Becomes the Excessive Imbalance Procedure! 1. From the Website of the European Commission Economic and Financial Affairs In order for EMU to function smoothly, Member States must avoid excessive budgetary deficits. Under the provisions of the Stability and Growth Pact, they agree to two criteria; a deficit to GDP ratio of 3% and a debt to GDP of 60%. If a Member State exceeds the deficit ceiling, the excessive deficit procedure (EDP) is triggered at EU level. This entails several steps including the possibility of sanctions to encourage the Member State concerned to take measures to rectify the situation...no EDP procedure will be launched if the excess of the government deficit over the 3% of GDP threshold is considered temporary and exceptional and the deficit remains close to the threshold.. If the Member State fails to comply, the council can decide to move to the next step of the EDP, the ultimate possibility being to impose financial sanctions. Source: Council of the European Union 17

19 Maastricht Criteria: Avoid Excessive Government Deficits as Measured by 3% of GDP for Annual Deficit Austria Belgium Germany Spain Finland France Greece Ireland Italy Luxembourg Netherlands Portugal Eurozone Source: Eurostat; Copyright 2011, International Monetary Fund (IMF), World Economic Outlook. 18

20 Maastricht Criteria: Stock of Debt to GDP Not to Exceed 60% Austria Belgium Germany Spain Finland France Greece Ireland Italy Luxembourg Netherlands Portugal Average Source: Copyright 2011, International Monetary Fund (IMF), World Economic Outlook. 19

21 The Excessive Deficit Procedure..becomes the Excessive Imbalance Procedure! 1. The Excessive Imbalance Procedure The Valentine s Day Massacre Published on February 14 th under the new Fiscal Compact, the Excessive Imbalance Procedure looks at a new scoreboard of indicators of competitiveness covering aspects of competitiveness, labour markets, house prices and debt. They are Current Account (Percent of GDP, 3 Year average) Net International Investment Position Export Market Share Unit Labour Costs Real Effective Exchange Rate Private Debt ( Percent of GDP) Private Credit Growth (Percent of GDP) House Prices Public Debt Unemployment 2. So Who are the Saints and Who are the Sinners? On our estimates Greece has 7 imbalances, Spain and Ireland 6, Portugal 5. Italy has 3 as do Germany and France. Source: Council of the European Union 20

22 Italy is not Greece Government Debt to GDP, as of December 2010, IMF Projections through % Greece 180% Government Debt/GDP 160% 140% 120% Italy 100% 80% There is no assurance that any projection, estimate or forecast will be realised. Sources: Copyright 2011, International Monetary Fund, World Economic Outlook, September Charts are for illustrative and discussion purposes only. 21

23 Italy is not Greece Debt Servicing Capacity Primary Balance, as of December 2011 Current Account Balance, as of December % 2% 4% 0% 2% -2% Primary Balance/GDP 0% -2% -4% -6% Italy Greece Current Account Balance/GDP -4% -6% -8% -10% Italy Greece -8% -12% -10% -14% -12% % Sources: Copyright 2011, International Monetary Fund, World Economic Outlook, September Historical Data, as of IMF Projections through Charts are for illustrative and discussion purposes only. 22

24 Core Euro Government Bond Returns Eurozone Core Treasuries (by maturity bucket) 2011 Return Total Austria Belgium Finland France Germany Netherlands Total Source: Barclay s POINT 23

25 Periphery Euro Government Returns Eurozone Periphery Treasuries (by maturity bucket) 2011 Return Total Italy Spain Portugal Greece Ireland Total Source: Barclay s POINT 24

26 The Composition of Debt Varies Widely Across Countries Total debt, 1 Q % of GDP 10 largest mature economies Japan United Kingdom Spain France Italy South Korea United States Germany Eurozone-crisis countries Ireland Spain Portugal Italy Greece Households Nonfinancial corporations Financial institutions Government Australia Canada Source: Haver Analytics; Bank for International Settlements; national central banks; McKinsey Global Institute 1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government. 2 Q data. NOTE: Numbers may not sum due to rounding. 25

27 Deleveraging Has Only Just Begun in the Ten Largest Developed Economies Total debt, Q % of GDP Q Source: Haver Analytics; national central banks; McKinsey Global Institute 1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government. 2 Defined as an increase of 25 percentage points or more. 3 Or latest available Japan 37 United Kingdom177 Spain 145 France 89 Italy 68 South Korea 91 United States 75 Germany 7 Australia 77 Canada 39 Significant increase in leverage 2 Deleveraging Change Percentage points Q

28 Deleveraging vs. Quantitative Easing (QE) Central Banks Balance Sheets, as of 31/12/11 Central Bank/Total Banking System Assets 25% 20% 15% 10% 5% 0% Fed ECB Sources: Federal Reserve, European Central Bank as of 31/12/11. *Historical data through November November 2011 banking system assets used for December 2011 Calculation. Charts are for illustrative and discussion purposes only. 27

29 Unprecedented Negative Real Interest Rates Growth, Inflation and Yield on 10-Year TIPS, as of 30/11/ % 14.00% Growth and Inflation (y/y change) 12% 8% 4% 0% -4% -8% -12% Inflation (LHS) Growth (LHS) Real Rate (RHS) 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Real Yield (perccentage points) -16% % Source: Department of Labor, Bureau of Economic Analysis, Federal Reserve, and Bloomberg, as of 30/11/2011. Real Rate is calculated as the real return of a 10-year Treasury security at maturity on the data of purchase through 12/31/1996, and as the yield on a 10-year Treasury Inflation Protected Security thereafter. Charts are for illustrative and discussion purposes only. 28

30 Low Yields Despite Government Deficits Government Surplus or Deficit, Historical Data through 2010, OECD estimates for 2011 Government Surplus or Deficit (percent of GDP) 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% Source: Organization for Economic Cooperation and Development, as of December Charts are for illustrative and discussion purposes only. 29

31 Relative Currency Fundamentals Policy Progress As of January 2012 United States Euro Area Japan Non-Leveraged RoW Growth Monetary Policy Fiscal Policy Good Neutral Poor There is no assurance that any projection, estimate or forecast will be realised. Charts are for illustrative and discussion purposes only. 30

32 Relatively High Yields Available Internationally on Short-Term Securities Government Bond Yields yields on 2 year securities, as of 31/12/11 14% 12% 10.6% 10% 8.6% 8.1% 8% 6% 5.2% 4.9% 4.9% 4.9% 4% 3.6% 3.4% 3.3% 2.9% 2% 1.2% 0.9% 0.3% 0.2% 0.1% 0.1% 0% Brazil Hungary India Indonesia Mexico Chile Poland Philippines South Korea Australia Malaysia Norway Sweden UK US Germany Japan Major Developed Economies Source: Bloomberg, as of 31/12/11. Charts are for illustrative and discussion purposes only. 31

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