Economist Intelligence Unit Global Outlook nov 2 2010_Boston
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Economist Intelligence Unit Global Outlook nov 2 2010_Boston



On November 2, 2010, EIU Senior Economist Leila Butt, presented the Economist Intelligence Unit Global Outlook in Boston. Key points in this presentation include: ...

On November 2, 2010, EIU Senior Economist Leila Butt, presented the Economist Intelligence Unit Global Outlook in Boston. Key points in this presentation include:

- Most economies are growing again
- Emerging markets are booming
- Unemployment remains very high
- Consumers are rebuilding balance sheets
- Countries are heavily indebted
- Deflation is a risk in rich countries
- Asset bubbles are a risk in emerging markets



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  • A jobless recovery— after each recession the bounceback takes longer Never really recovered from 2001 tech-wreck. Barely noticed it in growth terms, but jobs market flatlined Great sucking sound from globalisation—who really benefits? This period also includes the great debt binge and stagnant wages—lower income Americans buttressing flagging income with debt This crisis is partly one of globalisation—US needs to create far more mobile, high-tech workforce; more jobs will be sucked out Labour force never really recovered after 2001 recession—although in growth terms we barely noticed it Unemployed workers will be shut out of labour market. Skills levels erode very quickly We reckon that unemployment will remain elevated at around 9% this year and next—could be hovering around 8% for years For youngsters particularly grim Yale study showed that for every 1ppt increase in unemployment the starting salary of a new graduate falls by up to 7%--this gap is never closed with graduates who joined in better economic weather Japan’s example grim. 6 out of every 10 cases of depression, stress and work-related mental disabilities are found in those in their 30s, the generation that graduated in the 1990s
  • Savings rate was revised up in the latest data revision Better reflects what we think is going on—we assume around 5-6% going forward—similar to where it was in the 1980s and 1990s 1988 there were 8,000 pawn shops, now there are 15,000 serving 30m customers
  • Adjusting Existing and new home unsold supply—7-8 months; better than peak of 10-11, but needs to come down to around 3-4 Good news for US— productivity rising sharply Labour force adjustment brutal—employment, 138m workers, back to roughly 2002 levels Cf Germany, 40m now, barely lower than in 2008—labour hoarding Italy, 23m, down to 2007 levels Frugality is a coping mechanism—consumer spending not going to be defined by doing without But consumers will be aware of the consequences of their consumption
  • Downgrade to Ireland Greece will probably be defaulting in 2012 Low growth, deflationary pressures Germany doing well, but Q2 will be a peak—exports account for 40% of economy, country highly geared to global growth Longer term face significant demographic challenges Funding gap Contingent liabilities hitting Ireland—not public finances so much (BBB rated by us—AA minus by S+P

Economist Intelligence Unit Global Outlook nov 2 2010_Boston Economist Intelligence Unit Global Outlook nov 2 2010_Boston Presentation Transcript

  • Hope, headwinds or hurricanes? Charting a course for the global economy Leila Butt Senior Economist, Eastern Europe November 2010
    • Most economies now growing again
    • Emerging markets are booming
    • Unemployment remains very high
    • Consumers rebuilding balance sheets
    • Countries are heavily indebted
    • Deflation a risk in rich countries
    • Asset bubbles a risk in emerging markets
    H H H ope eadwinds urricanes
  • Key short-term points
    • A recovery is under way …
      • US: 800,000 private jobs Jan-Sept ’10 beats 4.4m jobs lost in ’09
        • But job growth is very slow; still 7.5m jobs below the peak
      • Europe shows signs of life
    • Renewed risk taking is underway
      • Positive growth, loose monetary policy; assets on a tear
    • Less fear of double-dip
      • Supportive policy
    • China looks stronger
      • Crash unlikely
    • Recovery still in doubt
      • Fed returns to QE
  • Key longer-term points
    • Growth will not return to 2004-07 levels
      • Fuelled by a bubble
    • Rich countries: years of slower growth
      • Overstretched consumers
      • Battered financial sector
    • Crisis accelerated emerging markets
      • Significant drivers of global growth
      • But weakening in West will be felt
      • Slow shift to domestic demand
      • Risks of bubbles
    • New perspective on global economy
      • Greater volatility
  • Where are we now?
  • Global: World trade recovers strongly World trade volumes. 2000=100. Seasonally adjusted. Source: CPB Netherlands Bureau for Economic Policy Analysis.
  • Stock prices are higher, but volatile… US$m. Source: Bloomberg Stockmarket capitalisation
  • … and borrowing costs are mostly contained 3-month US$ LIBOR minus 3-month US Treasuries Source: Haver Spread between the cost of government borrowing and private-sector borrowing, basis points Post-Lehman Bros panic Stimulus plans feed through Greece, EU debt crisis Fed intervenes; QE
  • Government debt soars
    • Budgets deeply in the red
      • Worst in rich countries
      • Governments offered subsidies, incentives, tax cuts, bailouts
        • Banks, car companies
      • More stimulus?
    • Interest rates still low
      • Fed considering further steps
    • Inventories being rebuilt
      • Filling the shelves helps manufacturers
      • But it’s temporary
    Budget deficit; % of GDP Source: Economist Intelligence Unit, Country Data
  • Global outlook: Upswing, but uneven GDP growth, % year on year Source: EIU estimates Developed Emerging World Credit crunch starts
  • US and Europe
  • This is already a jobless recovery Sources: Bureau of Labour Statistics; EIU. US: % of jobs relative to peak employment
  • The great deleveraging continues in the US… Sources: BEA; EIU . US personal savings rate, % of disposable income.
  • US: Housing still very weak… US housing starts, ‘000s, SAAR. Source: Bureau of the Census Spot the recovery!
  • Home foreclosures still awful
    • Jan-Sept 2010 foreclosures: 2,970,000
    • Worse than last year
      • March foreclosures: a record 367,000
      • 1 in 4 mortgage holders with negative equity
      • Pent-up listings will keep homes coming to market, restraining prices
    • Yes, housing has stabilised
      • But new home sales are moribund
      • Prices are largely stagnant
    • Nationally, 14+% of mortgages delinquent or foreclosed
    Number of foreclosures Source: Realty Trac
  • Euro area: Worst crisis ever…but signs of life
    • Debt sinking the periphery
      • Bailout has helped, but…
      • … only buying time; massive fiscal adjustment required
      • Must improve competitiveness
    • But Germany is rebounding
      • Exports, business investment, stockbuilding
      • But unemployment is high, consumers hesitant
    • Less impressive in rest of EU
      • Second quarter 2010? As good as it will get
    GDP growth; % change, Y o Y Source: Economist Intelligence Unit, Country Data Economic growth
  • Euro zone: Solvency stresses will continue 211% of GDP 192% 234% 92% 150% 111% 112% 110% Bank claims on private sector, € bn. (UK bank lending at 213% of GDP in 2009, £3trn.) Sources: IMF, International Financial Statistics; EIU, CountryData .
  • Euro zone: There’s no way out. Exiting would mean…
    • Wipe-out of exiting country’s banking sector, households default on euro debt
    • Collateral damage to foreign banks, particularly in the euro zone, and companies and households
    • Contagion—markets pick off weaker countries following exit, triggering further turmoil
    • Euro collapse would trigger depression for the euro zone?
    • Leaving the euro would be a political decision, not an economic one
  • Emerging markets
  • Asia: Powering ahead Real GDP, % change on year earlier, Haver
  • Asian bubbles?
    • Asia is importing monetary stimulus from US
      • Consequence of active exchange-rate management
    • Economic conditions are much stronger in Asia
      • Monetary policy is too loose for Asian circumstances
      • Fiscal stimulus was very large
    • Food commodity prices are again a concern
      • El Niño, bad monsoon in India
    • Fears of inflation/asset bubbles in Asia
  • China: An explosive recovery
    • Chinese growth slowed only modestly in 2009
      • Big bounce-back in 2010; GDP rose by 11.9% in Q1, 10.3% in Q2
    • Government now trying to slow economy
      • But it’s all relative; industrial production “only” growing by 10% instead of 15%
      • Retail sales growth down to 15% from 20%
    % change, year on year. Source: Haver
  • What’s ahead for the major currencies?
    • US$/€ strongly correlated with risk perception
    • Euro zone structural concerns to dominate over medium term—the euro will remain structurally weak
    • US$1.30:€1 in 2010, US$1.20:€1 in 2011—slightly weaker thereafter
    • But expect volatility
    • Pity the yen
    • Yen strength is an expression of risk aversion
    • No relation to Japan’s economic performance
    • Intervention won’t change secular trends
    • Emerging markets
    • RMB to continue slow appreciation against US$
    • Emerging market currency strength to depend on risk tolerance
    Source: Haver Analytics . Average Sept 14 2010
  • Is there a currency war? Three weapons of attack
    • China won’t let the renminbi appreciate
      • The currency is undervalued; US$2.6trn in reserves
      • Generating sharp political criticism
      • And not just from the US
    • Rich-world monetary policy
      • Easy money depresses their
        • currencies
      • Re-directs investors to EM
        • currencies, pushing them up; risks export competitiveness
    • Emerging-market interventions
      • Currency purchases to hold down value
      • Capital controls, such as taxes on foreign purchases of domestic debt
  • What does all this mean?
  • What does that mean?
    • Then
    • Fast growth
    • Rich world
    • Easy credit
    • Rising asset price
    • Momentum driven
    • Now
    • Slow growth
    • Emerging world
    • No credit
    • Flat asset prices
    • Value driven
  • Where’s the growth? Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of October 2010. Source: Economist Intelligence Unit, CountryData.