www.pwc.co.uk/economics Global Economic Outlook John Hawksworth Chief Economist, September 2012
Agenda Global overview Short term prospects for Europe, US and BRICs Long term trends: demographics, growth and income levels Key opportunities and challenges for Brazil Q&A 2
Key points Hangover from global financial crisis continues to dampen growth around the world Risks around European growth remain weighted to the downside at present given the ongoing challenges in the Eurozone, which will take many years to resolve US is growing at around 2% but may find it hard to accelerate in medium term as fiscal deficit still needs to be tackled China and India have slowed but retain strong long term growth potential Brazil also has great potential subject to improving the fiscal position and boosting savings, investment and competitiveness 3
Global outlook very mixed, with continuing storms in Europe and recent slowdown in BRICs 2.1 UK Canada Portugal -0.1 Russia Germany 0.7 3.9-3.3 Greece US 2.1 France 0.2-6.9 Japan Mexico 3.6 Spain -1.7 Italy -2.1 China 7.6 2.2 Key India 5.8 x.x = GDP growth in 2012 Source: main scenario for 2012 Brazil 2.0 South Africa 2.3 Australia 3.1 4
2007 JAN 2007 MAR 2007 MAY 2007 JUL 2007 SEP 2007 NOV 2008 JAN 2008 MAR 2008 MAY 2008 JUL 2008 SEP 2008 NOV 2009 JAN 2009 MAR 2009 MAY 2009 JUL 2009 SEP 2009 NOV 2010 JAN 2010 MAR 2010 MAY 2010 JUL 2010 SEP 2010 NOV 2011 JAN 2011 MAR 2011 MAY 2011 JUL 2011 SEP 2011 NOV 2012 JAN 2012 MAR 2012 MAY Worldwide markets were spooked by the deepening of the Eurozone crisis this spring Equity market indices 120 110 Index (January 2007 = 100) US 100 90 80 UK 70 60 50 Eurozone 40 Source: Datastream FTSE 100 Euronext 100 Dow Jones Industrial 5
Short term prospects for Europe, US and the BRICs 6
The latest growth figures from Q2 show most of the Eurozone is in recession, with the notable exception of Germany Key Outlook 2012 Q2 Q-o-Q GDP growth (%) Germany 0.3% Finland Netherlands -1.0% 0.2% Ireland -1.1% (Q1 2012) Austria 0.2% Spain -0.4% Greece Portugal France Italy -6.2% (y-on-y) -1.2% 0.0% -0.7% Source: Eurostat
The 2012 growth outlook for the Eurozone has deteriorated sharply since last summer Real GDP growth (quarter-on-quarter) 2,5 2,0 1,5 1,0 0,5 1999-2010 average EU-17 quarterly growth: 0.4% 0,0 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2-0,5-1,0 Euro area - 17 Germany Spain Italy Source: Eurostat
out/10 nov/10 dez/10 jan/11 fev/11 mar/11 abr/11 mai/11 jun/11 jul/11 ago/11 set/11 out/11 nov/11 dez/11 jan/12 fev/12 mar/12 abr/12 mai/12 jun/12 jul/12 Leading indicators are suggesting that Q3 could be even worse Eurozone confidence indicators (change over last 10 months to July) Italy Industrial confidence Consumer confidence Manufacturing new orders Manufacturing PMI 65 60 Spain Netherlands 55 Greece Germany Austria Finland Portugal France Deterioration by more than 5 percentage points. Deterioration by less than 5 percentage points. Positive change. 50 45 40 German PMI France PMI Italy PMI Expansion Contraction No change over period Source: Markit Source: Eurostat
We have created four distinct scenarios describing how events in the Eurozone could evolve Scenario 1. Successive phases of fiscal and monetary action Eurozone survives High inflation, especially in the core Return to growth Scenario 2. A sequence of managed defaults causing a second credit crunch Debt restructuring of indebted economies Government bails out banks Contractionary debt spiral Slowing growth Scenario 3. Greek exit but contagion avoided Greek exit of the Eurozone Monetary expansion, fiscal transfers Ring fencing by the ECB, EFSF/ESM Contagion avoided, currency union remains intact Scenario 4. Contagion with several countries exiting Greek exit of the Eurozone Contagion spreads and other peripheral countries exit New currency union is formed Capital flight to new euro Breakaway countries have high inflation and low output Source: Now What Next for the Eurozone? June 2012
Eurozone can survive (even if Greece exits), but someone has to bear cost European banking sector: 400bn shortfall in core tier 1 capital August 2011 Government refinancing requirement in 2012-13: 1.1 trillion Fiscal transfers (German deficit in 2011 only 1% of GDP) ESM 500bn from 2012 (EFSF before that) ECB balance sheet: 14% of GDP Bank of England: 25% of GDP IMF support? Eurobonds?
Eurozone restructuring impacts on business operations could be wide ranging, for example: REVENUE A 50% fall in revenue in some markets is not inconceivable PRICING Pricing actions, negotiations, and contract amendments will be required EURO LIABILITIES A 20% fall in the value of the Euro would mean non-euro liabilities would increase for all non-hedged exposures. Business implications LEASING Leases and long-term commitments may be renegotiated upwards BANK LENDING Bank lending into departing nations will seize up or becoming increasingly tight REPORTING Statutory and management reporting will become more complex, with additional layers of consolidation
US growth expected to remain relatively muted given need to tackle budget deficit in medium term 3 % real GDP growth 2,5 2 1,5 1 0,5 0 2011 2012 2013 2014-18 average 13
BRICs expected to recover from recent setbacks 10 9 8 7 6 5 4 3 2 1 0 % real GDP growth 2011 2012 2013 2014-18 average China India Russia Brazil 14
Rise of emerging economies Developing economies are expected to overtake advanced economies in share of world GDP from 2012 onwards Share of world GDP, % 70% Forecast 60% 50% 40% 30% 20% Advanced economies Emerging and developing economies China India Japan United States 10% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IMF World Economic Outlook, April 2012
Long-term trends: demographics, growth and average income levels 16
Demographics matter: Age vs. Youth Fast ageing Russia Korea Japan Poland China Italy Germany Younger for longer India Indonesia Brazil Mexico Turkey US (relative to EU) Decumulation Accumulation Slide 17
% change per annum Projected average growth of working population (2009-50) Brazil relatively well placed Projected average growth of working age population (2009-50) 2,0% 1,5% 1,0% Brazil 0,5% China 0,0% -0,5% -1,0% Average Pop Growth p.a %
Median age of population in 2020 (UN projection) EU: 43 Russia: 40 US: 38 China: 38 Brazil: 33 Middle East and North Africa: 31 India: 28 Sub-Saharan Africa: 20 Brazil close to the demographic sweet spot by 2020 19
Vietnam India Nigeria China Indonesia Turkey South Africa Saudi Arabia Argentina Mexico Brazil Russia Korea Australia US UK Canada Spain France Italy Germany Japan Contributions to average annual GDP growth Emerging economies are set to grow much faster than G7 for the next four decades (though risks are also higher) Breakdown of components of average real growth in GDP at MERs (2009-50) 10% 8% 6% Brazil 4% 2% 0% -2% Average population growth Average growth in GDP per capita Average growth due to changes in MER Source:
China US India Brazil Japan Russia Mexico Germany UK Indonesia France Turkey Italy Nigeria Canada Spain South Korea Vietnam Saudi Arabia Australia Argentina South Africa Index relative to US = 100 By 2050, China, US and India could be by far the largest economies with Brazil in 4 th place Relative GDP at market exchange rates and PPPs (2050) 180 160 140 120 100 80 60 40 20 0 GDP at market exchange rates in US $ terms GDP in PPP terms Source:
The rise of emerging Asia can be seen as a return to pre-industrial historic norm (% of world GDP) 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 1000 1820 1998 2050 Source: Maddison (OECD, 2006) for estimates to 1998, projection for 2050
US Canada UK Germany France Italy Japan Russia Mexico Turkey Brazil China Indonesia India GDP per capita in PPP terms (constant 2009 US$) But income per capita levels in emerging markets still well below levels in mature markets (though Brazil in 2050 may be similar to Germany today) GDP per capita levels in PPP terms for the G7 and E7 economies 100.000 90.000 80.000 70.000 60.000 50.000 40.000 30.000 20.000 10.000 0 2009 2050
Key opportunities and challenges for Brazil 24
Realising Brazil s long term potential Key opportunities Key challenges Relatively young, fast growing labour force Growing middle class consumer markets Abundant natural resources Regional leadership in South America Excellent global trading network (notably with China, Europe and the US) Volatile commodity prices and exchange rates Further improvements in income distribution Reduce public spending growth to allow room for lower tax burden and improved fiscal balance Boost savings, investment and cost competitiveness 25
Recap of key points Hangover from global financial crisis continues to dampen growth around the world Risks around European growth remain weighted to the downside at present given the ongoing challenges in the Eurozone, which will take many years to resolve US is growing at around 2% but may find it hard to accelerate in medium term as fiscal deficit still needs to be tackled China and India have slowed but retain strong long term growth potential Brazil also has great potential subject to improving the fiscal position and boosting savings, investment and competitiveness Questions? 26
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