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

Global MT outlook: Will the crisis in emerging markets derail the recovery? John Walker Chairman and Chief Economist jwalker@oxfordeconomics.com March 2014

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

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

Renewed turmoil hitting emerging markets Emergers: 10 year government bond yields % 14 13 12 Brazil 11 10 Turkey 9 8 7 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

the Eurozone sliding toward deflation 4

and the US consumer wobbling at start of 2014 5

as jobs data disappoints 6

Are recovery hopes being dashed again? 7

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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

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

the trend in capital goods orders is solid US: Durable goods orders Bn $ 270 250 Non defense capital goods (RHS) Bn $ 105 95 230 210 190 170 150 Total (LHS) 85 75 65 55 45 35 130 25 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 11 Source: Census Bureau/Haver Analytics

and consumers remain optimistic 12

Government no longer major drag on growth 13

Real earnings are rising again 14

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

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

New pressure on emerging markets 19

forcing sharp policy tightening Short-term interest rates % units 12 11 India Turkey 10 9 8 7 6 5 Brazil South Africa Indonesia 4 Jan13 Mar13 May13 Jul13 Sep13 Nov13 Jan14 Source : Oxford Economics/Haver Analytics 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 1995-1996 for Malaysia, Indonesia, Korea and Thailand 21-8 -6-4 -2 0 2 4 6 8 Source : Oxford Economics/Haver Analytics

How much of a threat does the emergers crisis pose? 24 Economic importance of the 'Troubled Bunch' Total US merchandise exports World GDP Canada 19.0 2.5 Europe 17.0 25.9 Mexico 14.0 1.6 China 7.0 11.4 'Troubled Bunch' 7.3 9.9 of which: Brazil 3.0 3.1 India 1.0 2.5 Turkey 0.8 1.1 Thailand 0.7 0.5 Argentina 0.7 0.7 Indonesia 0.5 1.2 South Africa 0.5 0.5 Ukraine 0.1 0.2 Source: Oxford Economics Percentage shares (2012)

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

Baseline forecast is for smooth rebalancing China: Expenditure structure of GDP % 48 46 44 42 40 38 Investment Forecast 36 34 Consumption 32 30 2003 2005 2007 2009 Source : Oxford Economics 2011 2013 2015 2017 2019 26

and gradual moderation in growth China: GDP % quarter 15 Forecast 14 13 12 11 10 9 8 7 6 2006 2008 2010 2012 2014 2016 2018 Source: Oxford Economics 27

but how does China successfully deleverage? 28

Non-financial corporate debt particularly worrying 30

especially given high investment share in GDP Fixed Investment, 2012 % GDP 50 45 40 35 30 25 20 15 10 5 0 31 31 US Germany Brazil Russia India China Source : Oxford Economics

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* 7.3 7.1 Brazil 17.0 15.4 India 5.0 2.5 Indonesia 11.4 9.4 South Africa 11.8 9.5 Thailand 11.7 4.1 Turkey 1.9 1.0 Exports to 'troubled bunch' Commodity exports to 'troubled bunch' China 9.0 0.5 * 2011 values Source: United Nations/ IMF/ Oxford Economics

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

Some encouraging signs in Japan Japan: Labour market % balance 30 % year 5 20 10 0 Tankan employment excess (+)/insufficient (-) (LHS) 4 3 2 1 0 34-10 Employment (RHS) -20 Wages (RHS) -30 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source : Oxford Economics/Haver Analytics -1-2 -3-4 -5

Consumption tax rise takes a big risk with growth 35

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

The Eurozone recovery is gradually strengthening 37

as austerity eases Eurozone: Fiscal measures % of GDP 1.5 Restrictive 1.0 0.5 0.0-0.5-1.0 Expansionary -1.5 2009 2010 2011 2012 2013 2014 2015 Source : Oxford Economics 38

But wide disparities in growth 39

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

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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

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

US manufacturing now very competitive Unit labour costs in manufacturing in US$ 47 320 300 280 260 240 220 200 180 160 140 120 100 80 60 Japan 2000 2002 2004 2006 2008 2010 2012 Source : Oxford Economics/Haver Analytics US China Canada Germany Mexico

Energy boom also transforming US outlook 48

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 2012 49

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 0 20 40 60 80 Source : MIT Forum for Supply Chain Innovation, December 2012 50

pushing investment above pre-crisis levels Manufacturing Investment Index: 2007 = 100 120 Japan UK Germany US 110 100 90 80 70 51 60 2007 2008 2009 2010 2011 2012 2013 Source : Oxford Economics/Haver Analytics

US auto demand has eased US: Car registrations % year Units, thousands 40 30 20 10 0 Levels 700 600 500 400-10 -20-30 -40 Annual growth 300 200 100-50 0 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Source : Oxford Economics/LMC automotive 54

But US production continues to expand US: Output and orders 2005=100 US$ bn 110 50 100 45 90 80 70 60 50 40 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 40 35 30 25 20 55

driven in part by strong non-na exports US: Exports of motor vehicles $bn 6 5 4 3 2 1 0 2000 2002 2004 2006 2008 2010 2012 Source : Oxford Economics/Haver Analytics 56

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

Pent-up demand to fuel future growth 58

Massive innovation coming According to IRN: The industry will launch an average of 125 new vehicles annually between 2013 and 2018 180 vehicles will be launched in 2018 alone 70% of the current global vehicles will be brand new or refreshed over this timeframe 59

Automotive forecast Motor vehicles and their engines Annual percentage changes unless otherwise stated 2012 % share 2007-2011 2012 2013 2014 2015 Germany 13.2 1.5 3.7 1.7-1.7 0.7 France 1.6-3.5-10.4-7.3-0.6-0.9 Italy 1.3-2.6-11.8-4.7-1.7 7.0 UK 1.7-0.9 4.0 9.2 5.7-1.9 EU15 22.1-0.2-0.7 1.3-0.3 1.6 United States 15.9-3.4 19.2 5.6 3.3 4.4 Japan 21.0-2.0 12.3-3.3-1.3-2.0 Brazil 2.0 7.2-14.9 14.5 2.1 3.9 Russia 2.1-0.5 44.5 3.2-5.1 7.7 India 2.0 14.1-0.3-7.4 3.5 11.7 China 10.0 13.7 6.0 9.4 8.2 9.0 Mexico 4.0 4.4 13.7 6.5 10.5 8.7 World 100 1.3 8.8 2.3 2.3 3.4 60

Aerospace strong in 2013 Airbus versus Boeing: Deliveries Number of aircraft 800 700 600 500 400 300 200 100 Boeing Airbus 61 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Company reports and forecasts

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 1,000 500 Deliveries 2013 estimated 0 1990 1993 1996 1999 2002 2005 2008 2011 Source: Company reports and forecasts 62

Growth of traffic should be very strong 63

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

So demand for planes very high 65

Aerospace forecast Aerospace Annual percentage changes unless otherwise stated 2012 % share 2007-2011 2012 2013 2014 2015 Germany 6.9 4.5 12.1 6.8 13.1 10.5 France 4.7 2.7 6.4 14.0 7.7 5.1 Italy 2.5 2.6 4.8 3.7 4.5 8.4 UK 10.5 3.5 8.6 13.0 8.9 3.7 EU15 26.4 3.1 7.3 9.6 8.9 6.0 United States 49.5 2.2 8.3 0.7 10.3 8.2 Japan 1.2 11.2-22.9-1.9 1.8 3.7 Brazil 2.1 15.4 17.6 9.2 6.1 5.1 Russia 4.7 10.0-7.3-23.7 29.9 8.7 India 0.0 13.9 0.7 3.8 5.9 6.9 China 3.8 19.0 13.4 7.3 6.3 6.9 Mexico 0.2 11.7 13.7 4.8 8.0 7.2 World 100 3.6 6.6 2.1 9.5 7.2 66

Activity in key sectors to accelerate in 2014

Driving a pick-up in investment

Developed world MT orders ticking up Europe: Domestic MT orders Year-on-year % 2.5 2 1.5 Italy US machine tool orders year-on-year % 200 1 0.5 0 Germany 150 100 50 0-50 -100 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-13-0.5 France -1 Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113 Source : Oxford Economics/CECIMO Japan: Domestic metal cutting MT orders 2005 = 100 120 100 80 60 40 20 0 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113 Source : Oxford Economics/JMTBA

Abenomics boosts Japananse MT sales

German MT sales to grow at a firm pace

Chinese MT sales growth forecast downgraded

US MT sales to accelerate after soft 2013

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

75 Thank you