EMEA Emerging Markets Research                                                                                            ...
Presentation trackerThe global outlook for 2012 and 2013: EM outperforming DM   J.P. Morgan’s 2012 and 2013 GDP forecasts ...
Presentation trackerThe global outlook for 2012 and 2013: downside for the Euro area        EM Asia growth softening. Chin...
Presentation trackerPopulation distributions among major DM and EM countries    Population distributions    Population dis...
Presentation trackerGlobal growth and inflation, 2011-2013  Real GDP and inflation forecasts  Real GDP and inflation forec...
Presentation trackerChina will contribute 25% to global growth in 2013, slightly more than the USA     Percent contributio...
Presentation trackerGlobal inflation is moving lower and has peaked in most EM as well     Headline CPI (%oya)     Headlin...
Presentation trackerEuro zone countries have worse fiscal and debt figures than EMEA EM     2012F Fiscal and Debt Indicato...
Presentation trackerUS 2012-2013 Economic Outlook: Withdrawal of fiscal stimulus – Part 1       We forecast US growth in 2...
Presentation trackerUS 2012 Economic Outlook: Withdrawal of fiscal stimulus – Part 2        Existing home sales have been ...
Presentation trackerUS consumers have been adjusting as their debt burden declines    US household wealth                 ...
Presentation trackerUS household saving rate has risen and US labor costs have fallen      US saving rate                 ...
Presentation trackerUS house prices have firmed modestly lately     Distressed sales and house prices                     ...
Presentation trackerEuro area 2012: Recession and a Greek Exit from the Euro area – Part 1       We see two more quarters ...
Presentation trackerEuro area 2012: Recession and a Greek Exit from the Euro area – Part 2       Easy monetary policy and ...
Presentation trackerEuro area slides into recession Euro area composite PMIIndex 60 55 50                                 ...
Presentation trackerEuro area unemployment looks like early stage of recession   Euro area unemployment   Monthly change, ...
Presentation trackerThe three speed Euro area recovery has lost momentum     Euro area economic sentiment      Index, sa, ...
Presentation trackerThe challenging fiscal journey in the Euro area Peripheral fiscal consolidation: forecasts, outturns a...
Presentation trackerThe outlook for the Euro area   J.P. Morgan forecasts                                                 ...
Presentation trackerEuro area: Lending to households has begun to decline     Euro area bank lending     %oya      20     ...
Presentation trackerIs the Euro area experiencing a credit crunch?    Flow of bank loans to households and nonfinancial co...
Presentation trackerJapan 2012 Economic Outlook: Underpinnings and Risks – Part 1         Japan to grow 1.7% in 2012, far ...
Presentation trackerJapan 2012 Economic Outlook: Underpinnings and Risks – Part 2        CPI deflation has continued in 20...
Presentation trackerChina 2012 Economic Outlook: Soft landing – Part 1        For 2012, we predict 8.0% GDP growth, after ...
Presentation trackerChina 2012 Economic Outlook: Soft landing – Part 2       The policy-driven correction in the housing m...
Presentation trackerGlobal imbalances, 2011-2013   Current account and fiscal forecasts   Current account and fiscal forec...
Presentation trackerNarrowing of current account imbalances and major policy challenges          For 2012, the USD value o...
Presentation trackerRecent depreciation in EM FX    % change over 1Q12 average as of May 18, 2012    % change over 1Q12 av...
Presentation trackerEmerging Markets real effective exchange rates   Real Effective Exchange rate                         ...
Presentation tracker  Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certif...
Presentation tracker Legal Entities DisclosuresDisclosures of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is ...
Presentation tracker  two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker fo...
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Michael Marrese. Contrasting Fortunes for Developed Markets versus Emerging Markets

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Michael Marrese. Contrasting Fortunes for Developed Markets versus Emerging Markets

  1. 1. EMEA Emerging Markets Research May 18, 2012 Presentation trackerAgenda Developed and Emerging Market Prospects and Challenges Through 2013 Michael MarreseAC Topic Slides EMEA EM Economics and Strategy DM and EM overview 1-7 (44-207) 134-7547 US 8-12 michael.marrese@jpmorgan.com Euro Area 13-21 Japan 22-23 China 24-25 Anthony WongAC Global indicators 26-29 (44-207) 134-7549 anthony.wong@jpmorgan.com J.P. Morgan Securities Ltd. See the end pages of this presentation for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. [CLIENT NAME]
  2. 2. Presentation trackerThe global outlook for 2012 and 2013: EM outperforming DM J.P. Morgan’s 2012 and 2013 GDP forecasts are respectively: Global, 2.2% and 2.6%; USA, 2.4% and 2.2%; Japan, 2.0% and 1.3%; Euro area, -0.4% and 0.4%; developed markets (DM), 1.2% and 1.5%; and emerging markets (EM), 4.9% and 5.5%. Not only are our DM 2012/2013 growth forecasts well below average DM growth during 2002-2007 of 2.3%, unemployment also remains unacceptably high, especially in the US, Japan and peripheral Europe. EMEA EM is likely to continue to outperform its DM neighbors: 1. DM countries should continue to perform much more poorly than their EM counterparts. In February 2011, we expected DM to grow 2.6% in 2012. Now we expect DM to grow just 1.2%—54% lower than our February estimate. In February 2011, we expected EM to grow 6.0% in 2012. Now we expect 4.9%, just an 18% decline. 2. Eurozone countries have worse fiscal and debt figures than EM Europe, and recent EU/ECB decision have not changed that situation. (slide 7) 3. The ECB’s December policy decisions—the 25bp rate cut; reduction in reserve requirements from 2% to 1%; the unprecedented three-year unlimited refinancing tenders (LTROs); and the loosening of collateral requirements—have allowed Euro area banks to gain access to funding and to slow down their process of deleveraging. 4. Given that the global appetite for Italian and Spanish debt has declined substantially, it seems reasonable to expect several additional LTROs should Italian and Spanish bond yields continue to widen from current levels. Remember that the first two LTROs injected net EUR510 billion of new liquidity into Euro area banks allowing these banks to: refinance their maturing debt without going to the markets; buy additional sovereign debt; and de-leverage more gradually. J.P.Morgan estimates that Spanish banks borrowed net EUR 166bn and Italian banks borrowed net EUR133bn out of the net 510bn injection. 5. In our view, it is likely that Portugal and Ireland will receive second assistance packages from the Troika, both without PSI. Also we believe it is likely that Spain will receive a three-year IMF SBA, which will partially cover these sovereign rollover needs. Our growth forecasts are based on the following set of assumptions: 1. Average 2012 Brent oil price of $119. 2012 base metal prices to average slightly lower than 2011 averages (lead -6.1%, tin -8.8%, silver -6.1%, nickel -6.7%, zinc -3.7%). 2. EMEA EM inflation forecast at 5.5%oya in December 2012 and 5.3% in December 2013, compared to 6.0% in December 2011. 1
  3. 3. Presentation trackerThe global outlook for 2012 and 2013: downside for the Euro area EM Asia growth softening. Chinese data release have disappointed and raise questions about whether our forecast of a bottoming is tracking. Based on the government’s seasonally adjusted data, April sales growth was moderate while fixed investment continued to slow. Alongside weak export performance, manufacturing gains were subpar. Separately, India’s manufacturing PMI ticked up moderately in April, and confirming our suspicion that the PMI surges observed in January and February were an aberration. Downside # 1 for 2012-2013 Euro area: EU policies could continue to disappoint. Yields widened for Peripheral European countries except Portugal. For example, between March 8 and May 17, yields in the 10-year part of the curve widened 102bp for Italy, 123bp for Spain, 931bp for Greece. Downside # 2 for 2012-2013 Euro area: The marginal benefit of additional ECB LTROs may disappoint. Downside # 3 for 2012-2013 Euro area: Ratings downgrade of key Euro area countries. For example, Spain’s public sector debt-to-GDP is not likely to improve over the next few years. Downside # 4 for 2012-2013 Euro area: Institutional chaos caused either by some Euro area country leaving the Euro area without assistance from the ECB, Euro zone countries, and the IMF or by disagreement over EU institutional reform. 2
  4. 4. Presentation trackerPopulation distributions among major DM and EM countries Population distributions Population distributions EM Countries in general have younger populations than Population in millions, % in each age group Population in millions, % in each age group DM countries. In EMEA EM, Russia, Poland and South Total Median 0-14 15-59 60+ Korea have relatively older populations (older than even that population age of the US), while South Africa, Turkey have relatively young Germany 81 44.9 13.3 60.2 26.4 populations. Turkey’s population is particularly young relative Japan 126 44.8 13.2 55.8 31.0 to that of EU countries. UK 63 40.0 17.3 60.1 22.5 The structure of China’s population is changing rapidly France 65 39.9 18.5 58.5 23.1 given the relatively low share of its population aged 0-14 years. China’s aged 0-14 year old cohort is 17.6% of its Russia 139 38.7 15.2 66.2 18.7 total population compared to: India’s 29.7%; South Africa’s Poland 38 38.5 14.7 65.4 20.0 28.6%; Mexico’s 28.3%; Turkey’s 26.5%; Brazil’s 26.2%; and the USA’s 20.1%. China’s median age and its +60 cohort South Korea 49 38.4 15.6 68.5 15.9 are projected to rise rapidly, which will be yet another reason US 313 36.9 20.1 61.4 18.6 (along with rapid growth in nominal and real wages) for China 1,337 35.5 17.6 69.1 13.2 China’s current-account surplus to narrow rapidly (slide 24). Brazil 203 29.3 26.2 63.7 10.0 Among DM countries, the US has a relatively young population and its labor force is predicted to grow by Turkey 79 28.5 26.5 64.1 9.3 1% per year over the medium term. For example, the Mexico 114 27.1 28.3 62.3 9.4 median age for the US is 36.9, whereas it is 44.9 for India 1,189 26.2 29.7 62.0 8.4 Germany, 44.8 for Japan, 40.0 for the UK, and 39.9 for France. The provides the US with an advantage with regards Saudi Arabia 26 25.3 29.4 65.9 4.5 to potential real GDP growth. South Africa 49 25.0 28.6 62.9 8.6 MENA countries have very young populations. The Egypt 82 24.3 32.7 60.0 7.3 median age is below 30 in the majority of MENA countries— Source: US estimates 2011 Source: US Census estimates 2011 18.1 in Yemen. The young demographic was a contributing factor to the popular unrest in the region. 3
  5. 5. Presentation trackerGlobal growth and inflation, 2011-2013 Real GDP and inflation forecasts Real GDP and inflation forecasts Real GDP (%oya) Real GDP (%q/q, saar) Consumer prices (%oya) 2011 2012 2013 2Q12 3Q12 4Q12 4Q11 4Q12 4Q13 USA 1.7 2.4 2.2 2.5 3.0 2.0 3.3 1.8 1.7 1 0.7 0.1 1.9 -1.0 2.5 1.5 4.6 2.0 2.0 United Kingdom Germany 3.1 1.1 1.4 1.0 0.8 1.3 2.6 2.1 1.7 France 1.7 0.3 0.7 0.0 0.3 0.5 2.6 2.3 1.5 Italy 0.5 -1.9 -0.7 -2.5 -1.5 -1.0 3.7 4.2 2.1 Spain 0.7 -1.3 -0.7 -2.5 -2.0 -1.5 3.1 2.0 1.3 Japan -0.7 2.0 1.3 2.0 1.4 1.2 -0.3 0.1 -0.2 China 9.2 8.0 8.9 7.0 9.1 9.5 4.6 3.6 3.6 Taiwan 4.0 2.4 5.0 4.8 6.5 5.8 1.4 1.7 1.7 Korea 3.6 3.3 4.0 4.0 4.5 4.0 4.0 2.9 3.5 Malaysia 5.1 3.9 3.2 2.0 2.0 2.5 3.2 2.2 1.8 India 7.0 7.1 7.3 5.5 6.3 6.5 8.4 8.2 7.8 Brazil 2.9 2.9 4.5 4.5 5.7 5.7 6.7 5.0 5.5 Mexico 3.9 3.8 3.5 3.9 2.0 3.2 3.5 4.0 3.5 Russia 4.3 3.7 3.7 2.0 4.0 3.5 6.1 6.2 6.1 South Africa 3.1 2.5 3.6 2.6 2.8 3.2 6.1 6.1 5.1 Turkey 8.5 2.5 4.5 - - - 10.5 7.0 5.8 Poland 4.3 3.0 3.0 2.0 2.5 3.0 4.6 3.1 2.5 Israel 4.8 2.9 4.4 3.2 6.1 7.4 2.6 2.5 2.4 Saudi Arabia 6.1 5.1 4.5 - - - 5.4 4.5 3.8 Ukraine 5.2 3.0 4.2 - - - 4.6 8.3 9.2 Kazakhstan 7.5 4.0 4.5 - - - 7.4 7.6 6.9 Global 2.6 2.2 2.6 2.1 2.6 2.5 3.6 2.4 2.2 Developed markets 1.3 1.2 1.5 1.0 1.5 1.3 2.8 1.5 1.3 Emerging markets 5.8 4.9 5.5 4.8 5.7 5.7 5.7 5.0 4.9 1. FY 2011/2012. Source: J.P. Morgan estimates 4
  6. 6. Presentation trackerChina will contribute 25% to global growth in 2013, slightly more than the USA Percent contribution to global real GDP Percent contribution to global real GDP 50 China US India Brazil 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Country weights based on the average nominal GDP 2005-2009. Source: J.P. Morgan 5
  7. 7. Presentation trackerGlobal inflation is moving lower and has peaked in most EM as well Headline CPI (%oya) Headline CPI (%oya) Shaded area denotes J.P.Morgan forecast 7 6 EM 5 4 3 Global 2 DM 1 2010 2011 2012 2013 Source: J.P. Morgan 6
  8. 8. Presentation trackerEuro zone countries have worse fiscal and debt figures than EMEA EM 2012F Fiscal and Debt Indicators 2 General Gvt Total Debt General Gvt Gross General Gvt Gross borrowing Ease of Doing Corruption 3 Country GDP (2010) Debt Revenue Balance needs Business Perceptions Index USDbn % of GDP % of GDP % of GDP % of GDP % of GDP Ranking (2012) Ranking (2011) United States 15696.5 345.7 105.0 32.6 -6.4 13.8 4 22 Core Europe Austria 440.8 359.7 74.2 48.4 -3.0 6.2 32 16 Belgium 549.7 420.5 100.5 50.9 -3.0 9.1 28 19 Finland 285.3 276.2 50.5 53.6 -0.7 3.6 11 2 France 2888.9 345.8 90.5 51.8 -4.5 9.2 29 25 Germany 3707.8 310.4 82.2 44.7 -0.9 6.8 19 14 Netherlands 881.8 647.4 70.1 46.3 -4.4 9.2 31 7 1 UK 2603.9 523.7 91.2 40.8 -6.7 9.9 7 16 Peripheral Europe Greece 306.4 233.1 170.4 42.4 -7.6 22.7 100 80 Ireland 227.4 1080.0 116.7 35.8 -9.3 13.0 10 19 Italy 2287.7 326.6 123.2 48.4 -2.6 14.3 87 69 Portugal 240.6 492.0 117.0 43.0 -5.9 11.7 30 32 Spain 1575.1 400.9 80.4 36.0 -5.9 10.0 44 31 EMEA EM Bulgaria 57.7 201.6 17.6 33.3 -1.5 2.2 59 86 Czech 232.7 132.5 43.0 40.4 -3.6 6.2 64 57 Egypt 252.8 92.0 83.0 25.0 -11.0 15.7 110 112 Hungary 148.5 296.8 78.6 46.1 -2.8 5.1 51 54 Latvia 29.4 245.4 51.9 36.0 -2.7 5.0 21 61 Lithuania 45.4 136.6 42.6 33.5 -3.3 4.4 27 50 Poland 547.9 151.7 56.3 40.1 -3.2 8.3 62 41 Romania 191.0 131.7 35.3 33.4 -3.5 12.9 72 75 Russia 2053 90.0 11.5 36.0 -0.1 0.9 120 143 Saudi Arabia 581.9 37.0 13.0 45.0 4.2 -4.1 12 57 South Africa 410.7 117.6 40.1 27.7 -4.6 5.1 35 64 Turkey 822.5 91.6 40.1 33.6 -1.5 8.4 71 61 Ukraine 184.9 167.7 39.0 41.2 -5.6 12.2 152 152 Source: J.P. Morgan, European Commission, World Bank Doing Business Report 2012 (out of 183 countries) and Transparency International Corruption Perception Index 2011 (out of 178 countries). 1. FY2010/11, government debt is for the total public sector. 2. Latest (2010) from Eurostat or J.P.Morgan estimate - Total debt is the sum of household debt, financial and nonfinancial corporate loans and debt securities and government debt; but excludes unfunded government pension liabilities. 3. European Commission forecast. 7
  9. 9. Presentation trackerUS 2012-2013 Economic Outlook: Withdrawal of fiscal stimulus – Part 1 We forecast US growth in 2012 of 2.4%, and in 2013 of 2.2%. Domestic final sales in 2012 forecast to rise 2.1%y/y compared to 1.8% in 2011, and 2.2% in 2013. This assumes inflation will be appreciably lower and the US federal budget balance will contract only 1.5%-age points of GDP in 2013. For 1Q12, GDP decelerated to 2.2%q/q saar, from 3.0% in 4Q11. The number printed a little softer than expectations, with the downside surprise apparently concentrated in business investment in equipment and in federal defense outlays. The composition of growth was weak, (although consumer spending was better than expected) and the firm pace of stockbuilding last quarter is a headwind for growth in the current quarter, as firms are likely to slow the rate of inventory accumulation. We continue to look for 2.5% growth in 2Q12, and feel that there is probably more downside than upside risk to that call. Because of the slowdown in payroll employment growth. While real spending has moderated, measures of consumer confidence has rebounded sharply since October. For example, The University of Michigan consumer sentiment index increased 1.4 points to 77.8 in the preliminary May report. The increase in May extended the survey’s streak of consecutive increases to nine months and brought the survey’s headline up to a new high for the recovery, although the level of the index remains low by historic standards. On aggregate, state and local government budgets are in surplus in 2012 and are expected to remain in surplus in 2013. Yet two large US states continue to be plagued with large deficits: California and Illinois. 8
  10. 10. Presentation trackerUS 2012 Economic Outlook: Withdrawal of fiscal stimulus – Part 2 Existing home sales have been on an upward trend over the past few months, but levels of activity still do not look very good. We forecast a US household saving rate of 3.8% in 2012, compared to 4.7% in 2011 and 5.3% in 2010. The rate was close to 6% in 2009. For 2012, we expect business investment to remain strong and for residential investment to grow 11.4% after five years of contraction. Import prices continued to moderated to 0.5%oya in April, the monthly (sa) index declined 1.7%. Import prices reached their cyclical peak of 13.7% in mid-2011. The price of imported goods excluding fuels subsided to 1.3%oya in April. Note that imported apparel prices remain above 4%oya. US unemployment rate improved, but will remain elevated, projected to average 8.1% this year, from 9.0% in 2011. Initial jobless claims were unchanged at 370,000 during the week ending May 12 (claims for the prior week were revised up by 3,000). The four-week moving average—a better measure of the trend—was essentially unchanged at 375,000; although this latest figure is not as low as what was reported between February and mid- April, this recent move down is a sign of improvement in the labor market. Fed on hold until at least late-2014. Operation ‘twist’ (reinvestments of maturing securities into longer-term USTs, and sales of short-term USTs offset by purchases of longer-term USTs) is underway. Fed issued a “white paper” on steps to heal the house market, which could mean that the Fed would purchase mortgages if another round of QE were to occur. 9
  11. 11. Presentation trackerUS consumers have been adjusting as their debt burden declines US household wealth US household debt service ratio % of disposable income % 650 15 14.0 600 14 550 13 Historic average (12.0) 500 12 450 11 11.1 400 10 52 57 62 67 72 77 82 87 92 97 02 07 12 80 84 88 92 96 00 04 08 12 Source: J.P. Morgan Source: J.P. Morgan Household debt Household debt % of disposable income % of household and nonfinancial corporate assets 140 130.0 25 120 20 Historic 112.7 100 average 80 (73.1) 15 60 10 40 5 20 0 0 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12 Source: J.P. Morgan Source: J.P. Morgan 10
  12. 12. Presentation trackerUS household saving rate has risen and US labor costs have fallen US saving rate US employment cost index %, sa %oya 14 8 Benefits J.P.Morgan forecast 7 12 6 10 5 8 Compensation 4 6 3 4 2 Wages/salaries 2 1 0 0 80 85 90 95 00 05 10 02 03 04 05 06 07 08 09 10 11 12 Source: J.P. Morgan Source: J.P. Morgan 11
  13. 13. Presentation trackerUS house prices have firmed modestly lately Distressed sales and house prices Homeownership ratio at late-1990s level %oya % % Case-Shiller Index 2000=100 20 J.P.Morgan 45 70 250 Case-Shiller House Distressed sales as % of Homeownership ratio Case-Shiller House Price Price Index all home sales forecast 15 40 69 Index 200 10 35 68 LoanPerformance 30 5 House Price Index 150 67 25 0 20 66 100 -5 15 65 -10 10 50 64 -15 5 -20 0 63 0 2006 2007 2008 2009 2010 2011 2012 2013 2000 2002 2004 2006 2008 2010 2012 Source: J.P. Morgan Source: J.P. Morgan House price index, total and ex distressed sales Housing starts and NAHB homebuilder survey % ch saar, over six months; CoreLogic millions of units, saar %, sa 30 2.5 60 Total ex. distressed Starts 20 NAHB survey 50 2.0 10 40 1.5 0 30 1.0 -10 20 Total 0.5 -20 10 -30 0.0 0 05 06 07 08 09 10 11 12 06 07 08 09 10 11 12 Source: J.P. Morgan Source: J.P. Morgan 12
  14. 14. Presentation trackerEuro area 2012: Recession and a Greek Exit from the Euro area – Part 1 We see two more quarters of Euro area GDP contraction of -0.8%q/q saar, and -0.5% in 2Q12 and 3Q12, respectively. This is due to the deterioration in sentiment caused by: fiscal tightening; tight credit conditions (not only in the periphery, but also in parts of the core); and the possibility that Greece leaves the Euro area (we now place a 50% likelihood that Greece exits the Euro area). The Euro area economy effectively stagnated in 1Q12 (+0.1%q/q saar). However, the GDP outturn was above expectations on the back of a much better-than-expected economic expansion in Germany in 1Q12 (2.1%q/q saar vs expectations of 0.3%). This would be marginally better than the -0.5%q/q saar that we had pencilled in. Consensus expectation was for a -0.2%q/q (not annualised), which is around -0.8%q/q annualised. There will be no more PSI. For program countries, debt relief will be provided by restructuring official loans: very long maturities at concessional borrowing rates. Spain and Italy may become program countries, in which case they can benefit from this debt relief. However, a significant substitution of official liabilities for market liabilities for Italy and Spain can only happen via ECB lending to the ESM. Thus, the ECB balance sheet will grow a lot more. Given the prospect of deflation in the periphery, inflation in the core will need to get to at least 3% to deliver 2% inflation in the region as a whole (the ECB’s target). This will only happen with a very easy monetary stance for a very extended period. The main policy rate will come down before QE. Only after the policy rate is cut will the ECB engage in areawide unsterilized asset purchases (perhaps purchases of unsecured bank debt with a government guarantee rather than purchases of government debt). 13
  15. 15. Presentation trackerEuro area 2012: Recession and a Greek Exit from the Euro area – Part 2 Easy monetary policy and a much larger central bank balance sheet will eventually push the euro a lot lower. It is now relatively easy to see what the path to a Greek exit could look like. The next election on June 17th leads to a government dominated by Syriza. The Troika decides to withhold any further disbursements from the second program and in response, the Greek government declares a moratorium on all debt payments and nationalizes the banks. Significant deposit flight takes place that is impossible to manage because the ECB will no longer accept Greek sovereign debt as collateral. The Greek government pressures the Greek central bank to use the ELA to finance both the sovereign and the banks, against the wishes of the ECB in Frankfurt (if the banks are nationalized they could buy new government debt and use it as collateral in the ELA). A Greek exit would involve broad-based defaults in Greece by the government, banks, and nonfinancial corporates. With the new currency likely to drop sharply, it would not be possible to repay liabilities in euros or other currencies. As far as the rest of the region is concerned, this would likely be disruptive but much less than it would have been two years ago. Greek government debt has already been restructured, and there has been a significant substitution of official liabilities both for government debt and for bank debt. If the direct effects of default were the only thing to worry about, a Greek exit would be manageable as far as the rest of the region is concerned. The really serious risk comes from contagion to other peripheral economies, which would put both sovereigns and banks under pressure. 14
  16. 16. Presentation trackerEuro area slides into recession Euro area composite PMIIndex 60 55 50 Level at start of 45 2008/09 recession 40 35 07 08 09 10 11 12Source: J.P. Morgan 15
  17. 17. Presentation trackerEuro area unemployment looks like early stage of recession Euro area unemployment Monthly change, 000s, 3-mo avg 500 400 300 Level at start of 200 2008/09 recession 100 0 -100 -200 07 08 09 10 11 12 Source: J.P. Morgan 16
  18. 18. Presentation trackerThe three speed Euro area recovery has lost momentum Euro area economic sentiment Index, sa, 100 is post-1990 average 120 115 110 Germany 105 100 Core, ex Germany 95 90 85 Periphery 80 75 70 2007 2008 2009 2010 2011 2012 Source: J.P. Morgan 17
  19. 19. Presentation trackerThe challenging fiscal journey in the Euro area Peripheral fiscal consolidation: forecasts, outturns and growth Holding the line on 2012 budget objectives Budget is % GDP, GDP is %oya, forecasts from annual SGP % GDP Greece Ireland Italy Portugal Spain Greece Ireland Italy Portugal Spain 2009 Budget -15.7 -11.1 -5.4 -10.1 -11.2 Impact on 2012 budget of 2010 GDP Forecast -0.3 -1.3 1.1 0.7 -0.3 Weaker growth -2.4 -0.5 -0.2 -0.6 -1.6 Actual -3.4 -0.4 1.8 1.4 -0.1 Budget Forecast -8.7 -11.6 -5.0 -8.3 -9.8 Fiscal slippage in 2011 -3.3 0.0 -0.1 -1.6 -2.5 Actual -10.6 -9.2 -4.6 -9.8 -9.3 Slippage plus growth effect -5.7 -0.5 -0.3 -2.2 -4.1 2011 GDP Forecast -3.5 0.8 1.1 -2.2 1.3 2012 budget in 2011 SGP -6.4 -8.6 -2.7 -4.7 -4.4 Actual -6.9 0.7 0.4 -1.5 0.7 2012 budget now -6.8 -8.6 -1.7 -4.5 -5.3 Budget Forecast -7.3 -10.0 -3.9 -5.9 -6.0 Actual -10.6 -10.0 -3.9 -7.5 -8.5 Chg in budget target -0.4 0.0 1.0 0.2 -0.9 Budget data for Ireland exclude capital cost of bank recap, data for Portugal Impact of weaker growth assumes 0.4 multiplier applied to change in exclude pension transfer in 2011 2012 official growth forecast since 2011 SGP. Source: J.P. Morgan Source: J.P. Morgan Fiscal thrust - JPMorgan estimates based on official plans Official versus JPMorgan forecasts for GDP growth % oya % GDP, +ve is tightening 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Greece Official -3.3 -3.5 -6.8 -4.8 0.0 JPMorgan -6.9 -7.4 -1.9 Greece -4.4 6.9 5.0 6.5 2.0 Ireland Official -7.0 -0.5 0.9 0.5 2.0 JPMorgan 0.7 -0.5 0.7 Ireland -1.5 1.3 2.2 1.5 2.3 Portugal Official -2.9 1.3 -1.6 -3.0 0.7 Portugal -5.6 -0.1 3.3 4.3 1.5 JPMorgan -1.5 -4.3 -1.2 Spain Official -3.7 -0.1 0.7 -1.7 2.4 Spain -4.4 2.3 1.4 4.0 3.0 JPMorgan 0.7 -1.1 -0.7 Italy Official -5.5 1.8 0.7 -1.2 0.5 Italy -0.7 0.0 1.0 3.5 2.3 JPMorgan 0.4 -1.8 -0.7 Source: J.P. Morgan Source: J.P. Morgan 18
  20. 20. Presentation trackerThe outlook for the Euro area J.P. Morgan forecasts 2011 2012 Overall Primary Overall Primary Growth Debt Growth Debt deficit deficit deficit deficit Germany 3.1 -1.0 1.6 81 0.6 -1.0 1.5 82 France 1.7 -5.2 -2.6 86 0.3 -4.4 -1.5 87 Italy 0.5 -3.9 1.0 120 -1.7 -2.6 2.7 123 Spain 0.7 -8.5 -6.3 69 -1.1 -6.0 -3.0 80 Portugal -1.5 -7.5* -3.3* 105 -4.3 -5.9 -1.0 117 Ireland 0.7 -10.0 -6.7 105 -0.5 -9.3 -5.1 117 Greece -6.9 -9.5 -2.6 167 -7.4 -7.6 -1.7 170 UK 0.7 -8.3 -5.3 84 0.4 -7.5 -4.9 89 *This is excluding pension transfer. Source: J.P. Morgan 19
  21. 21. Presentation trackerEuro area: Lending to households has begun to decline Euro area bank lending %oya 20 Nonfinancial corporate loans 15 10 5 Household loans 0 -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: J.P. Morgan 20
  22. 22. Presentation trackerIs the Euro area experiencing a credit crunch? Flow of bank loans to households and nonfinancial corporates €bn, not adjusted for loan sales and securitisations 100 90 80 Monthly flow 70 60 3-month average 50 40 30 20 10 0 -10 -20 -30 -40 -50 03 04 05 06 07 08 09 10 11 12 Source: J.P. Morgan 21
  23. 23. Presentation trackerJapan 2012 Economic Outlook: Underpinnings and Risks – Part 1 Japan to grow 1.7% in 2012, far above the potential growth rate (0.5%), with an increase in the reconstruction works. 1Q GDP came in stronger than expected, led by public works, consumption and inventories. Reconstruction works surged, with the implementation of the supplementary budget, and private consumption strengthened, supported by the pent-up demand. Strength of consumption was broad based. It was not only durables, but also nondurables and services, which rose noticeably. However, a massive decline in capex was disappointing, although it happened after it surged in 4Q. Corporations appeared to be shifting the investment to abroad amid strong yen. Japanese policy makers are concerned about the yen’s strength. Yet in our view, the use of FX intervention in an attempt to support business confidence and the economy has been ineffective. All of Japan’s nuclear power plants have now been shut down. All of Japan’s 54 power plants are now under maintenance or completely offline. A national power shortage could take place, in our view, unless local governors approve the reopening of many of the nuclear power plants that are now closed. The replacement of nuclear power by fossil fuel would require 0.7% of GDP of additional spending, or a 40% higher trade surplus. 22
  24. 24. Presentation trackerJapan 2012 Economic Outlook: Underpinnings and Risks – Part 2 CPI deflation has continued in 2011. We project deflation to be an ongoing problem, while we headline CPI is expected to register a positive number (0.3%) this year, Japan will likely return to deflation next year. The BoJ established its asset purchase plan and is expected to keep its virtual zero rate policy until it judges that price stability has been achieved (at least for several more years). Fiscal consolidation is an urgent issue. Yet the 10-year JGB yield remains below 1%. The natural disaster and the uncertain political situation dim the prospects of near-term fiscal consolidation. 97% of JGBs are held by Japanese investors and central banks. In our view, Japan’s current-account surplus could disappear as early as 2014. Once Japan’s current account falls into deficit, non-residents will need to finance Japan’s fiscal deficit. Unless the market is convinced of Japan’s fiscal discipline, bond yields will rise markedly. For 2012, Japan is projected to have a 1.3% of GDP current-account surplus. The consumption tax rate is now 5%, but in order to avoid much higher government borrowing costs in say 3-5 years, an increase in the consumption tax is needed. The ruling party’s Research Commission has announced plans to raise the tax to 8% in October 2013, and to 10% in April 2015. Yet it is unclear whether those recommendations will be implemented. 23
  25. 25. Presentation trackerChina 2012 Economic Outlook: Soft landing – Part 1 For 2012, we predict 8.0% GDP growth, after 9.2% in 2011. We revised the GDP growth trajectory in the next three quarters to 7.8%oya, 7.9%oya and 8.1%oya, respectively (previous forecast: 8.0%oya, 8.2%oya and 8.5%oya, respectively), compared to 8.1%oya in 1Q12. Our forecast of full-year GDP growth now stands at 8.0%oya (previous forecast: 8.2%), in light of slowing global growth and the slowdown in credit extension to the private sector. The slowdown in domestic demand has been mainly due to the government’s efforts to address imbalances in the economy. Tightening in the housing market and sectors with overcapacity (e.g. auto and steel) is an important part of this effort. However, it tends to pose significant drag on the economy in the near term. Overall, weak economic data pointed at downside risk associated with external and internal headwinds. Policy responses were delayed related to our expectations, driven by concerns about inflation and distractions from political transition. This raised the risk of a delayed and milder economic recovery. China’s loans to the household sector equal 19% of GDP, while loans to corporates and government have reached 134% of GDP. State-owned bank loans to local government and to SMEs have become a source of concern for Chinese policymakers. Triggered by disappointing economic data in April, PBoC announced a 50bp RRR cut on May 12th, this was the second RRR cut this year. Looking ahead, we expect the central bank to adopt a combination of open market operations and RRR cuts to provide liquidity in the coming months. In particular, we expect 2 more RRR cuts this year, and PBoC is likely to keep policy rate on hold unless the economy deteriorates further. 24
  26. 26. Presentation trackerChina 2012 Economic Outlook: Soft landing – Part 2 The policy-driven correction in the housing market has caused a slowdown in real estate investment and demand in related industries. On the currency front, PBoC announced widening of CNY trading band to +/-1% from the previous +/-0.5% (effective Apr 6th). Overall, we believe there is still room for CNY appreciation in the coming years, though limited and the pace is likely to slow. We expect CNY to appreciate against USD by about 3% this year and the next year, but the pace will slow markedly after that. China’s April CPI inflation rate eased moderately to 3.4% (vs. 3.6% in March), in line with our expectation. As we have argued that the comeback in March inflation figure was largely driven by seasonal food price increases, especially vegetable prices. Due to continued effort in containing inflation pressure and the favorable base effect, we expect that the CPI inflation will continue to ease in the coming months, falling to around 3% in mid-year. Manufacturing costs in China have risen significantly, to an average of US $450 per month from less than US$200 in 2005. In 2010, Chinese labor costs were almost twice as high as in Thailand, roughly three times higher than in the Philippines, and four times higher than in Indonesia. If nominal wage growth continues to accelerate faster than inflation, then this will strengthen domestic demand and help to reduce China’s current-account surplus. 25
  27. 27. Presentation trackerGlobal imbalances, 2011-2013 Current account and fiscal forecasts Current account and fiscal forecasts 2012 Nominal GDP Current account (% of GDP) Fiscal balance (% of GDP) (US$ billion) 2011 2012 2013 2011 2012 2013 USA 15684.1 -3.1 -3.2 -3.5 -8.6 -7.7 -6.2 United Kingdom1 2428.5 -1.9 -1.3 -0.7 -8.6 -7.8 -6.2 Germany* 3478.8 5.3 4.7 4.5 -1.0 -1.5 -1.5 France* 2712.0 -2.7 -2.4 -2.1 -5.2 -5.2 -4.4 Italy* 2066.9 -3.1 -2.2 -1.3 -3.9 -2.3 -1.1 Spain* 1397.8 -3.9 -2.0 -1.0 -8.5 -5.9 -4.5 Japan 6344.0 2.0 1.3 0.7 -9.0 -9.1 -9.1 China 8588.5 2.8 2.8 2.1 -1.1 -2.0 -2.0 Taiwan 477.6 8.2 7.9 7.4 -1.8 -2.0 -2.0 Korea 1158.7 2.2 1.5 1.0 0.5 1.5 2.0 Malaysia 291.5 11.5 13.3 15.5 -5.4 -4.7 -4.5 India 2090.8 -3.9 -3.6 -3.5 -5.9 -5.5 -5.7 Brazil 2386.5 -2.1 -2.8 -2.4 -2.6 -3.0 -3.3 Mexico 1173.8 -0.5 -0.9 -1.3 -2.5 -2.4 -2.4 Russia 2053.5 5.3 4.5 1.6 0.8 -0.1 -0.9 South Africa 411.0 -3.3 -3.6 -3.7 -4.8 -4.6 -4.0 Turkey 831.0 -9.9 -7.5 -6.1 -1.3 -1.5 -1.4 Poland 549.4 -4.1 -3.8 -3.5 -5.1 -3.2 -3.0 Israel 260.8 -0.2 -1.7 -3.0 -3.3 -3.5 -3.0 Saudi Arabia* 476.0 17.4 6.5 8.4 14.2 4.2 -1.6 Nigeria 275.9 5.9 6.5 5.8 -3.6 -3.2 -2.8 1. FY 2011/2012 *Official and IMF forecasts. Source: J.P. Morgan 26
  28. 28. Presentation trackerNarrowing of current account imbalances and major policy challenges For 2012, the USD value of the forecast current-account surpluses of Germany, Japan, China, Korea, Malaysia, Russia, Israel, Saudi Arabia, U.A.E., and Nigeria equals US$604 billion, which is 1.27 times the estimated current-account deficits of the USA and the UK. Note that the current-account surpluses of the above 10 countries are estimated at 3.8%, 3.0%, and 2.4% of their combined GDP for 2011, 2012 and 2013 respectively. Many EM countries have found their currencies appreciating in nominal terms tremendously versus USD in the first quarter of 2012. J.P. Morgan estimates that during the period January 2004 through April 2012, CNY appreciated in real effective terms 28.8% (modest relative to some EM countries), and appreciated 3.9% in real effective terms since the bankruptcy of Lehman in September 2008 (slide 29). 27
  29. 29. Presentation trackerRecent depreciation in EM FX % change over 1Q12 average as of May 18, 2012 % change over 1Q12 average as of May 18, 2012 versus USD -0.31 -0.47 -0.59 -1.28 -1.30 -1.60 -2.18 -2.21 -2.61 -2.99 -3.38 -5.70 -5.89 -6.20 -6.45 -6.52 -6.97 -7.82 -8.63 -9.01 TWD CNY PHP COP SGD THB IDR MYR TRY ILS KRW HUF RON RUB CZK INR MXN ZAR PLN BRL Source: Bloomberg 28
  30. 30. Presentation trackerEmerging Markets real effective exchange rates Real Effective Exchange rate At end-April 2012, COP, CLP, EGP and SAR stood out as having Real Effective Exchange rate % change (positive denotes appreciation) appreciated significantly more since September 2008 in real effective % change (positive denotes appreciation) Jan 2004- Sep 2008- Big Mac Index Under (-) terms than other EM currencies. Since September 2008, TRY, UAH, PLN, Apr 2012 Apr 2012 or over (+) valuation HUF, ISK and MXN have depreciated in real effective terms the most. DM Change Change against the dollar 1 USD -12.8 1.0 Many EMEA EM central banks have been actively intervening in the FX EUR -4.0 -9.8 5.5 JPY -3.7 15.5 -1.0 market to stem depreciation pressures, but with generally limited CHF 2.2 18.9 62.1 success. The Romanian and Serbian central banks have both been actively AUD 25.5 13.1 17.6 selling euros on the spot market to prevent their currencies from reaching NZD 7.4 18.2 -3.6 new lows, but depreciation pressures remain due to election noise and/or CAD -6.9 -2.8 10.2 potential delays in IMF talks. The Central Bank of Egypt also continues to Latam BRL 83.9 5.6 35.2 actively intervene in FX markets despite dwindling official reserves. In Sub- COP 46.1 20.0 8.1 Saharan Africa, the Bank of Ghana has complemented FX intervention with CLP 42.3 15.1 -3.6 aggressive rate hikes in order to stem the cedi’s decline, also with limited MXN -0.3 -10.4 -35.7 success so far. The National Bank of Poland this week hiked rates in EMEA EM BGN 34.5 5.0 - response to persistently above-target inflation, citing zloty weakness as one CZK 30.4 -3.8 -17.9 of the factor. We pencil in one more rate hike for 3Q12, but we believe the EGP 59.4 14.4 -38.8 zloty will remain biased to depreciate as Euro contagion risks increase in HRK 30.1 0.8 - coming months. In Turkey, the CBRTs high effective funding rate (currently HUF -4.6 -10.6 -37.4 I LS 17.9 -1.4 -1.7 at 10.5%) should be enough to prevent further lira weakness. But if the lira ISK 2 -32.0 -10.5 - continues to perform poorly, the CBRT could hike its ON lending rate and KWD 5.0 0.8 - thus push the effective funding rate higher. We do not see the CBRT KZT -5.4 -0.8 - intervening by selling FX again. Finally, the National Bank of Hungary has LVL 2 19.6 -2.6 -28.6 been conducting euro sale tenders to reduce the FX demand arising from the PLN 17.7 -12.2 -38.6 early repayment of FX mortgages and the conversion of non-performing FX RON 39.0 -7.4 - RUB 55.7 10.3 -39.3 loans. S AR 5.3 10.7 -36.4 S KK 2.5 -9.4 - We remain of the view that the currency pegs in Bulgaria, the Baltics TRY -6.3 -16.3 -15.7 and the GCC will hold. We also believe that if a eurozone government UAH 3.6 -16.3 - restructured its government debt, the eurozone itself would remain intact. ZAR 7.4 5.9 -41.7 Other EM CNY 28.8 3.9 -41.9 I NR -4.6 -2.6 -61.4 KRW -4.0 -2.7 -24.0 Source: J.P.Morgan based on PPI. KZT and LVL data lag by one month. 1 The Economist as of 1 Jan 1 2. Central Bank, based on CPI. . 1 2. 29
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