Global Economy & the Machine Tool Outlook Jan 21 Rhys Herbert rherbert@oxfordeconomics.com
Which scenario do you favour? Short-term outlook (a) W -shaped cycle Growth initially boosted by inventory rebuild But final demand remains weak as banks and households keep deleveraging Oil/commodity price spike Growth sluggish again in 21H2 and 211 after initial bounce back (c) Deflation Renewed asset price weakness holds back banking recovery Unemployment rises sharply further depressing consumption Monetary/fiscal policy not effective as deflation grips Economy flatlines in 21 and beyond (b) V-Shaped recovery Return to growth boosts business and consumer confidence Fiscal and monetary stimuli feed through quickly Financial market rally becomes firmly established Exchange rate movements aid global rebalancing (d) Muddle through Monetary easing blunted by weak banks but eventually works Gradual rise in business and consumer confidence Bumpy growth profile due waning of fiscal stimulus Weak recovery in 21, gaining traction in 211 2 Medium-term outlook
What do you now think is the most likely scenario? 1. W -shaped 2. V -shaped 3. Deflation 4. Muddle Through % % % % 1 2 3 4 3
Recession giving way to recovery World: GDP growth % year PPP exchange rates 6 5 4 3 2 1 4-1 -2-3 -4 1996 1998 2 22 24 26 28 21 212 Source: Oxford Economics Market exchange rates Recession giving way to recovery Forecast
Recession was particularly deep Peak to trough fall in manufacturing output % -5-1 -15-2 -25-3 -35-2% 198s 199s Early 2s 2s Now -16% -33% -22% 5-4 Developed US Japan Germany Source: Oxford Economics Recession giving way to recovery
And perhaps surprising in terms of its focus % change in GDP Russia Ireland Hungary Japan Italy Germany UK Slovakia Czech Rep Netherland Austria Spain Belgium US Portugal Canada France Korea Brazil Greece Poland India China 6-12 -1-8 -6-4 -2 2 4 6 8 Source: Oxford Economics % change 28Q2-29Q2 Recession giving way to recovery
Different reactions in the labour market World: Unemployment rate % 12 Forecast 11 1 Eurozone 9 8 7 6 5 UK US 4 3 Japan 2 1998 2 22 24 26 28 21 Source: Haver Analytics 7 Recession giving way to recovery
But some Emergers have coped quite well Change in manufacturing output during recession % 5-5 -1-15 -2 8-25 China India Brazil Russia Emerging Developed Source: Oxford Economics Recession giving way to recovery
The cycle has turned US purchasing managers survey Index 75 7 65 New orders Production 6 55 5 Overall index 45 4 35 3 25 2 2 21 22 23 24 25 26 27 28 29 Source: Haver Analytics PMI: Manufacturing 65 France Germany 6 55 5 UK 45 Italy 4 35 3 2 21 22 23 24 25 26 27 28 29 Source: Haver Analytics 9 Recession giving way to recovery
across all major blocs Japan: PMI Index Vs Exports % Balance 6 PMI index 55 PMI 65 China 6 India 5 55 45 4 35 3 5 45 4 Russia Brazil 25 Export Orders 35 2 23 24 25 26 27 28 29 Source : Oxford Economics/Markit 3 24 25 26 27 28 29 Source: Haver Analytics 1 Recession giving way to recovery
But recovery is narrowly based Developed economies % change q-on-q 2 1-1 -2-3 Manufacturing Engineering & Metal Goods Basic Metals Motor Vehicles Electronic Engineering 11-4 28 Q4 29 Q1 29 Q2 29 Q3 Source: Oxford Economics Recession giving way to recovery
Only a bit more diverse in emerging markets Emerging economies % change q-on-q 2 Manufacturing 15 Engineering & Metal Goods Basic Metals Motor Vehicles 1 Electronic Engineering 5-5 -1 28 Q4 29 Q1 29 Q2 29 Q3 12 Source: Oxford Economics Recession giving way to recovery
Outlook looks better for US car production Car sales % yr 1 Car Production less sales 1 5 5 Western Europe -5-5 -1-15 -2 Western Europe US -1-15 US -25 1991 1993 1995 1997 1999 21 23 25 27 29 Source : Oxford Economics/Haver Analytics -2 1991 1993 1995 1997 1999 21 23 25 27 29 Source : Oxford Economics/Haver Analytics 13 How big a payback from cash for clunkers?
Inventories major contributors to the cycle US: Inventories % of GDP 1.5 1. Forecast.5. -.5-1. 15-1.5 1995 1999 23 27 211 Source: Oxford Economics How big a bounce from inventories
Recession over but key questions remain How fast a recovery in final demand? Judging the normalisation of policy Can China and India remain so robust? How much will high levels of spare capacity hold back investment spending? 16
Monetary policy on full throttle Official interest rates % 7 6 5 UK bank rate 4 3 17 2 1 US Federal funds target rate ECB refi rate 1999 2 21 22 23 24 25 26 27 28 29 21 Source: Haver Analytics How strong will the recovery be?
Bank lending down, but corporate bond markets returning to normal US: C&I loans & CP outstanding % year 2 15 1 5 US: Risk spreads % point spread over Treasuries 21 18 15 12 High-yield corporates -5-1 -15 3-2 C&I = Banks' commercial Investment-grade corporates & industrial loans -25 24 25 26 27 28 29 24 25 26 27 28 29 Source: Haver Analytics / Merrill Lynch Source: Haver Analytics 9 6 18 How strong will the recovery be?
Fiscal policy supportive for now World: fiscal stimulus packages % of GDP 16 14 12 1 8 6 4 2 Headline package Estimated new money 19 UK EZ US Japan China Source : Oxford Economics/Haver Analytics How strong will the recovery be?
Downside risks for those burdened by massive debt Fiscal costs of the recession % of GDP 45 4 35 28-21 public debt increase Financial stabilisation cost 3 25 2 15 1 5 2 France Germany Spain UK US Japan Ireland Source : Oxford Economics/IMF How strong will the recovery be?
Housing to be a big contributor to recovery 1999 Contribution to growth from residential investment million, ar 2.4 2.2 2. 1.8 1.6 1.4 1.2 1..8.6.4.2. 1999 21 23 25 27 29 211 213 215 217 219 Source: BEA, Census, Oxford Economics 21 Housing starts (LHS) Forecast How strong will the recovery be? Contribution (RHS) % points 1.5 1..5. -.5-1. -1.5-2.
Orders on the rebound from low levels 22 Orders 25=1 15 Japan 14 13 12 Germany 11 1 9 8 US 7 6 5 2 21 22 23 24 25 26 27 28 29 Source: Haver Analytics How strong will the recovery be?
China - remarkable growth in output China: Industrial production % y/y 25 2 15 1 5 23 1999 2 21 22 23 24 25 26 27 28 29 Source: Haver Analytics Can China and India remain so robust?
Possible risks from expansionary policy China: Bank lending & nominal GDP % year 45 4 Bank lending Nominal GDP 35 3 25 2 15 1 5 29 figures are estimates 199 1992 1994 1996 1998 2 22 24 26 28 Source: Haver Analytics 24 Can China and India remain so robust?
And from global trade tensions World: Current account imbalances $ billion 8 OPEC 6 4 Asia 2 Japan -2 Eurozone -4-6 US 25-8 Forecast -1 199 1994 1998 22 26 21 Source: Oxford Economics Can China and India remain so robust?
Scenarios for the economic outlook Short-term outlook W -shaped cycle (21%) Growth initially boosted by inventory rebuild But final demand remains weak as banks and households keep deleveraging Oil/commodity price spike Growth sluggish again in 21H2 and 211 after initial bounce back Deflation (7%) Renewed asset price weakness holds back banking recovery Unemployment rises sharply further depressing consumption Monetary/fiscal policy not effective as deflation grips Economy flatlines in 21 and beyond V-Shaped recovery (27%) Return to growth boosts business and consumer confidence Fiscal and monetary stimuli feed through quickly Financial market rally becomes firmly established Strong global rebound and weak pound boost exports Oxford forecast (45%) Monetary easing blunted by weak banks but eventually works Gradual rise in business and consumer confidence Bumpy growth profile due waning of fiscal stimulus Weak recovery in 21, gaining traction in 211 26 Medium-term outlook
The Oxford Economics forecast 27 World GDP Growth % Change on Previous Year 28 29 21 211 212 213 US.4-2.5 3.2 3. 3.2 3.1 Japan -1.2-5.3 1.2 1.6 2.1 2.4 Eurozone.5-4. 1.1 1.5 2.1 2.4 of which: Germany 1. -4.8 1.6 1.7 2.1 2.3 France.3-2.3 1.3 1.4 1.8 2.2 Italy -1. -4.8 1. 1.3 1.8 2.2 South Korea 2.2.2 4.6 4.4 4.5 4.3 China 9.6 8.7 9.5 9. 9. 9. India 7.5 6.7 7.4 9.1 9. 8.8 Other Asia 4.7. 3.6 4.6 5.5 5.3 Mexico 1.4-6.6 4.5 5.1 5.4 4.8 Brazil 5.2 -.3 5.4 5.1 5. 4.6 Other Latin America 4.7 -.7 3.5 4.7 5. 4.3 Eastern Europe 5.6-6.4 2.9 4.6 6.2 6.3 World 1.7-2.1 3. 3.5 4. 4.1 World (PPP) 3. -1. 3.7 4.4 4.9 4.9
Risks Global economic environment less uncertain than last winter but weighting on base forecast still lower than usual Risks no longer biased on downside, particularly in US, for both the overall economy and machine tools Downside scenarios of W cycle and deflation would both be negative for MT Still have to face the normalisation of policy with potential that moves will be made too early or too late Global imbalances still in place increasing the risk of sharp exchange rate movements and protectionism 28
All sectors in developed economies hit 29 Peak to trough fall in output % -5-1 -15-13% -14% -2-25 -21% -3-29% -35 198s 199s -4 Early 2s 2s -39% -45 Now -5-45% Motor vehicles Engineering Electronics Aerospace Basic metals Chemicals Source: Oxford Economics Industrial outlook
Performance in Emergers more mixed Change in output during current recession % 2 15 1 5-17% v s -45% % v s -14% -5-1 -15-7% v s -29% -2.5% v s -21% -7% v s -39% -2 EngineeringElectronics Source: Oxford Economics Motor vehicles Other means of transport Basic metals Chemicals 3 Industrial outlook
Recovery in developed world similar to 199s Manufacturing output - rise in first 2 years of recovery % 3 25 2 198s 199s Early 2s 2s Now 15 1 5 31 Developed US Japan Germany Source: Oxford Economics Industrial outlook
Motor vehicles sees strongest initial rise Developed - rise in first 2 years of manufacturing recovery % 4 35 3 25 2 15 1 5 198s 199s Early 2s 2s Now 32 Motor Basic ElectronicsEngineeringChemicals Aerospace Vehicles metals Source: Oxford Economics Industrial outlook
Much faster growth in emerging markets Manufacturing rise in first 2 years of recovery % 4 35 3 25 2 15 1 5 33 China Russia India Brazil Emerging Developed Source: Oxford Economics Industrial outlook
and gains will be widespread Emerging markets - rise in first 2 years of manufacturing recovery % 4 35 3 25 2 15 1 5 34 Motor vehicles Basic metals Electronics Engineering Chemicals Other means of transport Source: Oxford Economics Industrial outlook
No immediate need to boost investment US: Capacity utilization and real private nonresidential fixed investment % % year 9 15 85 8 1 5 36 75 7 65 6 Capacity utilization (LHS) Real private non-residential fixed investment (RHS) 1993 1995 1997 1999 21 23 25 27 29 Source: Federal Reserve Investment outlook -5-1 -15-2 -25
So investment share slow to recover US: Nominal investment, share of GDP % of GDP 22 F'cast 21 2 19 18 17 16 15 14 1982 1988 1994 2 26 212 218 Source: Oxford Economics 37 Investment outlook
Global investment patterns - 29 Other Transport, 6.9% Precision Instruments, 3.2% Basic metals, 14.9% Rest of Europe 17% US 14% Motor Vehicles, 17.6% Electricals, 26.9% Rest of Asia 13% Japan 21% Metal Products, 11.9% Specialised Machinery, 7.8% Source : Oxford Economics General Machinery, 1.9% Rest of Americas 4% Germany 6% Source : Oxford Economics China 25% 38 Investment outlook
Forecast for the US US 9 8 7 6 5 $ bn Total capital spending by the top 8 customer sectors (RHS) Forecast $ bn 18 16 14 12 1 4 3 2 1 Machine tools sales (LHS) 8 6 4 2 1998 2 22 24 26 28 21 212 43 Source: Oxford Economics Machine tools sales
Forecast for Japan Japan US$ bn 9 8 7 6 5 Total capital spending by the top 8 customer sectors (RHS) US$ bn 25. Forecast 2. 15. 4 3 2 1 Machine tools sales (LHS) 1. 5. 44. 1998 2 22 24 26 28 21 212 Source: Oxford Economics Machine tools sales
Forecast for Germany Germany US$ bn 11. 1. 9. 8. 7. 6. Total capital spending by the top 8 customer sectors (RHS) US$ bn 6 Forecast 5 4 3 5. 4. 3. Machine tools sales (LHS) 2 1 45 2. 1998 2 22 24 26 28 21 212 Source: Oxford Economics Machine tools sales
Forecast for China China US$ bn 3 Forecast US$ bn 3 25 2 15 Total capital spending by the top 8 customer sectors (RHS) Machine tools sales (LHS) 25 2 15 1 1 5 5 46 1998 2 22 24 26 28 21 212 Source: Oxford Economics Machine tools sales
Percentage of global sales - 29 % 7 6 5 4 3 2 1 47 Americas Asia Europe Source : AMT\Oxford Economics Machine tool consumption
Plunge in orders in late 28 48 US machine tools orders annual growth % yr 4 3 2 1-1 -2-3 -4-5 -6-7 -8 25 26 27 28 29 Source : Oxford Economics US orders
Quarterly USMTC orders forecast US metalworking machine tools orders, USMTC Forming machine tools, $bn.145.125.15 Forming machine tools (LHS) Cutting machine tools, $bn 1.2 Forecast 1.1 1.9.85.65.45 Cutting machine tools (RHS).8.7.6.5.4 5.25 24 25 26 27 28 29 21 211 Source : Oxford Economics US orders.3
and on an annual basis US metalworking machine tools orders, USMTC Forming machine tools, $bn Cutting machine tools, $bn.8 6.7.6.5.4 Forming machine tools (LHS) 5 4 3 51.3.2.1 Cutting machine tools (RHS) 1996 1998 2 22 24 26 28 21 Source : Oxford Economics US orders Forecast 2 1
General regional rebound in 21 Growth in value of orders for cutting machines by region 6% 4% 2% % -2% -4% -6% Total Northeast South Midwest Central West 52-8% 28 29 21 Source: Oxford Economics US orders
Similar story in forming orders Growth in value of orders for forming machines by region 6% 4% 2% % 53-2% -4% -6% -8% 28 29 21 Source: Oxford Economics US orders Total Northeast South Midwest Central West
Cutting: All regions stronger in 21 Cutting Machines, US orders levels and growth, by region Growth 21 (forecast) 42% Northeast 41% 4% Central 39% 38% West 37% 36% South Midwest 54 35% 1 2 3 4 5 6 7 Source: Oxford Economics Value 21, $ millions US orders
Forming: Stronger growth in 21 Forming Machines, US orders levels and growth, by region Growth 21 (forecast) 45% 4% 35% West Northeast Central 3% 25% 2% 15% South Midwest 55 1% 2 4 6 8 1 Source: Oxford Economics Value 21, $ millions US orders
57 Thank you