1 Philippe d ARVISENET Group Chief Economist THE GLOBAL ECONOMIC OUTLOOK
UNITED STATES Business cycle indicators The industrial recession began 1 months ago (see p. 9) Economic growth came to a halt last spring that was followed by a recession (see p. 9) Clear signs of a recovery are showing up (ISM indicators, household confidence -expectation component-, decrease in the number of jobs moderating, yield curve slope) (see p. 9& ) Resulting from an adjustment well on its way in the corporate sector and from a very accommodative policy mix (see p. 11)
3 The corporate sector is adjusting Corporates have cut their capex expenditure (see p. 11) : investment is dropping as a result of slack capacity presently at a record high (see p. 11) profits decrease (see p. 1) decline in net borrowing : the cost of funds (higher yields, weaker stock market...) and stricter lending standards... (see p. 1 & 13) are driving towards (lower capex in order to cut the external borrowing requirement) Inventories are adjusting rapidly (see p. 13). Corporates managed to stabilize the inventories/sales ratio despite the recession. Inventories contribution to growth has been negative for 5 quarters in a row. A slowdown in this adjustment as expected for Q1 will be positive for growth.
Productivity gains have remained in positive territory, suggesting that there is some truth in the new economy story (higher structural productivity gains) (see p. 1)
5 Households kept consuming despite : a negative contribution of jobs to their real disposable income (see p. 1) a negative impact of the rise of unemployment on confidence (see p. 15) in fact : disinflation has contributed to a lasting increase of the real purchasing power the unemployment rate is still close to the full employment level (see p.15) tax cuts has a positive impact lower rates have been an incentive to renegociate mortgages (see p. 1) There was no negative wealth effect from the real estate/housing market (see p. 1)
but : in the short term, the unexpected good consumption in 1 Q will be a drag in the coming months (see p. 17) the low level of savings should be corrected. If it does, consumption growth moderation could last longer
7 Policy mix Fiscal policy : there is a significant room of manoeuvre but it lacks visibility... The delay in the adoption of a new fiscal package could postpone the investment recovery (see p. 17) Monetary policy has been extremely reactive (fed funds from.5% down to 1.75% in less than 1 year) but it is only recently (5 months ago) that it really became accommodative with real rates turning slightly negative (the other components of monetary conditions stocks, credits spreads, USD in effective terms were restrictive) (see p. 1)
rates will remain low until year end : past experience show that the fed does not adapt a restrictive stance as long as the rate of unemployment, a lagging indicator, keeps increasing
9 % 15 U n ited S ta tes: in d u stria l p ro d u ctio n a n d ca p a city u tiliza tio n ra te (3-m onth m oving averages) % 9 Industrial production, y-o-y % change 5-5 Capacity utilization rate in industry 7-1 7-1 5 7 7 7 7 7 9 9 9 9 9 % United States : econom ic growth and ISM index 75 - - ISM index of purchasing m anagers R eal G D P, y/y % change 7 7 7 7 7 9 9 9 9 9 7 5 55 5 5 35 3 5
% 11 U nem ploym ent and U nem ploym ent rate C onference Board 13 9 1 7 9 7 5 3 5 C onference B oard index: expectations 7 7 7 7 7 9 9 9 9 9 U nited States : yield curve and G D P grow th (quarterly data) R eal G D P, yoy % change 5 3 1-1 - year - 3m onth yield spread, % 53 55 57 59 1 3 5 7 9 71 73 75 77 79 1 3 5 7 9 91 93 95 97 99 1 - -
% 1 Capital expenditures U nited States : non-financial corporate (as % of G D P ) 11 Financing requirem ent - 1 1 53 57 1 5 973 77 1 5 993 97 1 G DP, consum ption and investm ent (y -o -y % ch a n g e) 15 1 9 3-3 - -9-1 RealGDP Private consum ption N onresidential private fixed investm ent 7 7 7 7 7 9 9 9 9 9
% 3 5 15 5-5 - -15 - -5-3 9 7 N ew orders of nondefense capital goods exc. aircraft U nited States : orders and profits (y/y % change) C orporate profits before tax 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 % AAA BBB BB B U nited States : -year interest spread (corporate bonds - T.Bond) 1 5 3 1 sources: D R I, D atastream /T hom son Financial -95-9 -9-97 -97-9 -9-99 -99 - - -1-1
% 7 Net % of bank respondents tightening standards for com m ercial & industrial loans (Fed- Senior L oan O fficer O pinion survey on bank lending practices) 13 5 3 to large and m edium to sm all firm s firm s - - 1.5 source: Federal Reserve (Senior Loan O fficer O pinion Survey) 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 United States: inventories/shipm ents ratio, m anufacturing 1. 1.55 1.5 1.5 1. 1.35 1.3 1.5 9 9 3 9 9 5 9 9 7 9 9 1
% U nited States : G D P and productivity Real GDP (q/q change, annualized, % ) 1 - - - P rod uctivity, n on farm business sector - 1 3 5 7 9 9 91 9 93 9 95 9 97 9 99 1 % U nited States : unem ploym ent and jobs creation th ou san d 7.5 7.5 5.5 5.5 3.5 M onthly change in em ploym ent, 3-m onth m oving average U nem ploym ent rate 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 3 - - -3 -
15 % 11 U nem ploym ent and U nem ploym ent rate C onference Board 9 7 5 C onference B oard index: present situation 3 7 7 7 7 7 9 9 9 9 9 thousands % 55 U n ited S ta tes: u n em p lo y m en t a n d in itia l cla im s (m o n th ly d ata ) 5 5 Total unem ploym ent rate 7 In itia l cla im s fo r unem ploym ent insurance 5 35 3 3 Insured unem ploym ent rate 5 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 1
% 3 U nited States : housing starts and m ortgage rate % H o u s in g s ta r ts * Sales of new one 3-year fixed m ortgage fam ily houses* in terest rate (in verted sca le) 1.5 7 7.5 -.5-9 -3 1 1 * 3-m onth m oving average of the y-o-y % change 9 3 9 9 5 9 9 7 9 9 1 U nited States : household savings rate and w ealth (as % of personal disposable incom e) Savings rate N et financial assets N et residential assets 7 7 7 7 7 9 9 9 9 9 9.5 39 3 33 3 7 15 9
% 1 1 - - - RealGDP U nited States : G D P and em ployee hours w orked (quarterly change, annualized, % ) 17 - - 3 1-1 - -3 - -5 - Em ployee hours w orked 7 7 7 7 7 9 9 9 9 9 United States : budget balance and debt as % of G DP Budget balance D e b t sources O EC D, BN P Paribas 1 3 5 7 9 9 91 9 93 9 95 9 97 9 99 1e f 75 7 5 55 5 5
1 % 9 7 United States : interest rates and inflation (monthly averages) 3-month -year 3-year Inflation y/y 5 3 1 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1
19 EUROLAND It was wrong to believe that Euroland would be protected from the global slowdown it is obvious that the openness of the euro zone is lower that the openness of any member country it is probably true that the very existence of the euro has prevented turmoil showing up in the forex and interest rates markets but euroland shared common shocks with the US (higher oil prices, stockmarket, restrictive monetary policy) and was impacted by specific shocks (bad weather, foot and mouth and mad cow diseases on food prices) as a result, the business cycles kept correlated (obvious in hard statistics since the industrial production, or in confidence indices both for businesses and households) (see p. & 5)
the Reuter index indicates that the manufacturing sector keeps contracting (below the 5 level) (see p.). Euroland activity growth came to a halt last spring (just as in the US). Exports and investment keep on a negative trend while consumption is impacted by the deterioration of the labour market, particularly in France and Germany where unemployment have been rising since January 1 and May 1 respectively (but supported by lower energy prices) However a drop in the economic activity as important as in the US is not on the agenda : Euroland is less sensitive to the stock market development Euroland has not experienced such big excesses in investment as it is testified by the fact that capacity utilization rates remains not far from its long term average (a result of a weak in investment in mots of the 199 s) (see p.)
1 Euroland does not experience a huge private sector indebtedness the decrease in consumer price inflation is contributing significantly to the real personal incomes (see p. 7) the policy mix is supportive to growth but the room of manoeuvre is limited on the fiscal side, it s difficult to implement anything on top of the mechanism of the so called automatic stabilisers (for example, the French supplementary budget decided at the end of 1 is limited to.% of the GDP) while complying with the stability pact (see p. 7) monetary policy has not been as aggressive as in the US (the repo rate begun to be cut last May, the total decrease to date is 15 bp) (see p. )
however, this is not the end of the story ECB recognised that M3 with presently overshoots its target (% to.5%) is not a source of concern (there is a lot of liquidity held because of risk aversion, significant just of the increase results from short term securities held by non-residents. Headline inflation is moderating rapidly (no more impact of oil and food prices) and is to get soon below the % cap (ECB s ceiling). with a rate of growth below potential, core inflation will be impacted in a few months. we have an objective of further cuts 5/75 bp, the magnitude of these cuts, the speed with which they will be implemented will depend to a large extend of the outcome of the wage negociations which are taking in Germany (see p. 9& 3)
The euro : the success of the euro change over (notes and coins) could be welcomed by the market. The diversification of central banks reserves away from the dollar could have a similar impact but this will take time. Potential growth is higher in the US, structural reform is difficult to implement. (see p. ) 3
% U nited States/E uro zone : G D P grow th (y/y % change) USA Euro Zone - - % 1 3 5 7 9 9 91 9 93 9 95 9 97 9 99 1 United States/Euro zone : industrial production (y /y % ch a n g e) - - - U S A Euro Zone - 5 7 9 9 91 9 93 9 95 9 97 9 99 1
Industrial confidence in d ice % 5 5 55 5 5 5-5 - -15 - -5 U nited States (ISM index) Euro zone -3 (balance of opinions) 35-35 5 7 9 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 in d ice Consum er confidence % 15 5 13 1 9 7 5 Euro zone (balance of opinions, % ) U nited States (C onference B oard index) 5 7 9 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1-5 - -15 - -5-3
5 E uro zone : Purchasing M anagers' indices Total index N ew orders Output 55 5 5 7-97 1-9 7-9 1-99 7-99 1-7- 1-1 7-1 1- source R euters % Euro zone/united States : capacity utilization rate (m anufacturing sector) 7 U nited States Euro zone 7 7 7 5 7 9 9 91 9 93 9 95 9 97 9 99 1
3.5 3 Euro zone : inflation (y-o-y % ch an ge) 7.5 H e a d lin e Core 1.5 1.5 1 9 97 9 99 1 Euro zone : budget balance as % of G D P -1 - -3 - -5 - sources:oecd, BNP Paribas 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 e f
% 1 11 9 7 5 3 E uro zone : interest rates & m oney supply (m onthly average) 3-m onth -Y ear M 3 (y /y % c h a n g e ) 1. 1/93 1/9 1/95 1/9 1/97 1/9 1/99 1/ 1/1 1/ E U R /U S D e x c h a n g e r a te 1.15 1.1 1.5 1.95.9.5. 1/99 /99 7/99 /99 1/ / 7/ / 1/1 /1 7/1 /1 1/
Private nonresidential G FC F: real grow th 9 15 U nited States 5-5 - 5 E uro zone OECD source 7 7 7 7 7 9 9 9 9 9 Productivity (y/y % ch an ge) U nited States 3 1 Euro zone -1 9 1 9 9 3 9 9 5 9 9 7 9 9 1
3 1 Indicator of product market regulation OECD source 3 Portugal Italy (from least to most restrictive) USA New Zealand Sweden Netherlands Austria Denmark Germany Canada Japan Spain Finland Portugal Switzerland Belgium France Norway Greece Indicator of employment protection regulation Ireland New Zealand Australia Switzerland Denmark Belgium Finland Netherlands Austria Sweden Japan Germany Norway France Spain Italy Greece Ireland Australia Canada UK UK 3 1 (from least to most restrictive) USA
31 55 5 5 35 3 5 15 5 Total public spending as %of GDP USA Japan Germany France Italy UK Canada 9 7 5 3 Menactivity rate, % 55- years old USA UK Germany France Italy Spain Ranking in terms of growth performance 1 Medium<growth rates &the impact of regulation Ireland UK Denmark Belgium Portugal Spain Netherlands Germany France 1 Ranking in terms of degree of regulation Italy Greece
1 1 Real GDP growth, % 3 Spain Spain Portugal Portugal 1 Finland France Germany Ireland Italy Netherlands Consumer prices, y/y % change Finland France Germany Ireland Italy Netherlands Luxemburg Luxemburg Belgium Belgium Austria 7 5 3 1 nov-99 nov- nov-1 Austria
33 JAPAN The Japanese economy has entered its 3rd recession in a decade (see p. 3) Despite the effort to cut costs, the decrease in volumes and in pricing power kept the profit outlook deteriorating (see p. 3) The excess capacity and the drop in profits have resulted in a decrease in investment which is to last until year end (see p. 39) The leading indicators suggest that investment is to keep declining in the coming months
3. The inventory ratio is at a record high, it implies deserves a correction which will be a drag on growth (see p. 39) Unemployment is rising, it has reached a post-war high (see p. ) Even though prices are decreasing, the drop in nominal wages, in overtime hours, in bonuses is negative for consumption (see p. ) The room of manoeuvre on the fiscal side is nil (the fiscal instruments have become ineffective, households are ricardian ) (see p. 1) Monetary policy is to maintain zero rates in the foreseeable future. The injection of liquidity has resulted in a very strong growth in base money. However the banks are loading this liquidity (their reserves are far above the official requirement) (see p. 1 & )
35 It would be advisable to modify the present policy : an end to the deflationary environment requires the adoption of a positive inflation target (not just zero rates until the end of negative inflation) in order to build incentives to spend and borrow. This entails that the BoJ buys items which are usually not in the basket of a central bank (shares, real estate...) on top of bonds. The depreciation of the yen is by itself of a limited impact (the Japanese openness is limited) and an appropriate exchange rate in that purpose ( against the dollar) would undoubtedly generate turmoil among Japans Asian trade partners
3 On top of that, the so called credit channel of the monetary policy is not working. To sort out this problem there must be an end to a situation in which the government is waiting for an easier stance of the monetary policy to launch reforms, while the BoJ is waiting for the implementation of reforms to become more accommodative. The necessary conditions are the following : incentives for banks to get rid of their NPLs (they fear to get deeper in the red and loss of independance) recapitalization of the banking sector. This seems difficult with taxpayer s money but it is probably possible through money financing
37 Presently, the amount of bad loans is uncertain and anyway underestimated. Several reporting systems are competing the grey zone is huge and the economic situation is generating new bad loans. A solution to the problem would put an end to the traditional links between the banking sector and big companies, funds would then be more effectively allocated. The experience of the last few years suggests that the probability of true implementation of reform is limited. Our central scenario does not take into account the consequences of reforms on growth (negative in the short term, positive afterwards). Under this assertion we see a GDP contraction limited to -.3% in 1 and -.7% in.
Japan: G DP and industrial production (y-o-y % ch an ge) 3 5-5 - G D P volum e Industrial production -15 5 3 - - -3 - -5 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 Japan: profits and business clim ate C urrent profits, all industries, y-o-y % change T ankan surveys: business condition, actu al situ ation, all in d u stries, % 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1
9 7 5 3 Japan : orders and leading indicator % (3-m on th m ov in g avera ges) EPA leading indicator 1 1 7-7 39 115 1 5 95 9 5 75 7 5 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 Japan : industrial production and inventories Industrial production Inventory ratio source: C abinet O ffice of Japan (indices, 1995=) O r d e r s fo r m achines, y-o-y % change 1 3 5 7 9 9 91 9 93 9 95 9 97 9 99 1-1 -1 -
.5 The labour m arket in Japan 5.5 1.5 T o ta l em p lo y m en t, y-o-y % change 5 1.5.5 3.5 -.5 3-1 -1.5 Unem ploym ent rate, %.5-9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 % Japan : w ages and inflation (y-o-y % ch an ge) 1.5 Average earnings (-m onth m oving average) - Consum er price index 1 3 5 7 9 9 91 9 93 9 95 9 97 9 99 1
% Japan : fiscal balance and public debt as % of G D P % 15 1 Fiscal balance 13 - - - 1 9 - Public debt sources O EC D, B N P Paribas -1 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 e f % Japan : interest & exchange rates 9 3-m onth interest rate (m on th ly average) 7 5 17 7 U SD /JPY exchange rate 15 5 3 1 -year interest rate 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1 13 1 9
5 Japan: m onetary sector, y/y % change 3 M onetary base - M + C D - 97 9 99 1 J a p a n : b a n k reserv es, trillio n J P Y 9 T otal reserves 7 5 3 R equired reserves Bank of Japan source 9 9 1 9 9 3 9 9 5 9 9 7 9 9 1