(1)陆挺:中国经济的短期和长期发展:硬着陆或软着陆?
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(1)陆挺:中国经济的短期和长期发展:硬着陆或软着陆?

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(1)陆挺:中国经济的短期和长期发展:硬着陆或软着陆? Presentation Transcript

  • 1. Date Ting Lu +852 2536 3718 China economist Merrill Lynch (Hong Kong) ting.lu@baml.com China’s landing in the short and long run: Hard or soft? Product ID 1
  • 2. China in 2011-20: The major challenge: Aging population Date The aging population • As of 2010: Age 0-14: 16.6%; Age 15- million person 350 59: 70.1%; Age 60 or above: 13.3%; 65 300 and above: 8.9%. 250 200 150 • Compare with 2000,Ratio of age 100 50 group 0-14 declined 6.3 ppt, ratio of age 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 group 15-59 rose 3.4ppt, ratio of 60 and Age 0-14 Age 65 and abov e above rose 2.9 ppt,ratio 65 and above rose 1.9 ppt. The falling size of young working age population million person 600 • The size of age group 20-34 peaked in 2000, and dropped 22.0% from 2000 to 500 2008. 400 300 • The size of age group 20-44 peaked in 200 2000, and dropped 3.6% from 2000 to 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Age 20-44 20-39 20-34 2008.Source: CEIC, BofA Merrill Lynch calculations. 2
  • 3. Date Lewis turning point in China 1.6 1.5 Impact of global 1.4 financil crisis Lew is turning 1.3 point in China 1.2 1.1 1.0 0.9 0.8 0.7 0.6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Labor supply-demand ratio More people from villages to cities? Urbanization ratio rose to 51.3% in 2011 from 36.2% in 2000. Net increase in urban population is 253mn in the period of 2000-2010. Migrant population rose 81% to 261mn in the same period. 3
  • 4. Date % 30 40 50 60 70 80 90 1960 1963 1966 1969 1972 1975 1978 1981 Japan 1984 1987 1990 1993 China 1996 1999 2002 2005 Dependency ratio: China vs. Japan 2008 20114
  • 5. Date China’s consumption (%) of global commodities%605040302010 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Steel Aluminum Copper 5
  • 6. Date China’s consumption (%) of global energy % %50.0 12.045.0 10.540.0 9.035.0 7.530.0 6.025.0 4.520.0 3.015.0 1.510.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Coal (LHS) Oil (RHS) 6
  • 7. 10 12 14 16 0 2 4 6 8 % 1980 Date 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 GDP grow th 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Impact on growth: double digit is history7 2026
  • 8. Still backward: Versus other countriesDate 0.950 and over 0.700–0.749 0.450–0.499 0.900–0.949 0.650–0.699 0.400–0.449 0.850–0.899 0.600–0.649 0.350–0.399 0.800–0.849 0.550–0.599 under 0.350 0.750–0.799 0.500–0.549 not available China and World Human Development Index. Source: UNDP, 2008 update 8
  • 9. Date Sill backward: Versus the US 12 China in 2010 China Japan Real growth of GDP per capita, Japan 1960s Hong Kong, Singapore, 10 Korea and Taiw an 8 6 Japan 1980s % 4 2 0 0 25 50 75 100 125 GDP per capita, as % of US 9
  • 10. Date China’s capital stock Total length of railroad Number of airports KM 15,000 250,000 13,000 200,000 11,000 150,000 9,000 7,000 100,000 5,000 50,000 3,000 0 1,000 -1,000 India US UK China Korea Brazil Russia Japan France Germany India US UK Brazil Russia China Japan Korea France Germany Total length of paved roadway Number of vehicles per 1000 people KM 7,000,000 900 6,000,000 800 700 5,000,000 600 4,000,000 500 3,000,000 400 2,000,000 300 200 1,000,000 100 0 0 India US UK Korea China Japan Brazil France Russia Germany India US UK Korea Japan China Brazil France Russia GermanySource: CEIC, BofA Merrill Lynch calculations. 10
  • 11. Date Flying geese: This time it’s domestic flight Less developed regions in China could see higher growth going forward as growth trickles down from more developed areas. Differentiation in GDP growth across regions will provide rich implications for investment. Regional differentiation in GDP growth % YoY 16 14 12 10 8 6 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 National Central East WestSource: CEIC, BofA Merrill Lynch calculations. 11
  • 12. Date The great leap forward in human capital Million person 8 7 6 5 4 3 2 1 0 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 New ly enrolled Fresh graduates 12
  • 13. Date And the reversal of brain drain 13
  • 14. Date Lewis turning point: Impact on wage % YoY 24 20 16 12 8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Wage at State Ow ned Enterprises Urban Collectiv es 14
  • 15. Date Inflation: Chinese style Jan 2001 =1 2.0 1.8 1.6 1.4 1.2 1.0 0.8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Food Clothing Transport & Telecom 15
  • 16. China could overtake the US on nominal GDPDateUSD, bn5000040000300002000010000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 China GDP in USD US GDP 16
  • 17. Date Growth in 2012-13: “W”-shape?%YoY %QoQ, sa14 4.012 3.5 3.010 2.5 8 2.0 6 1.5 4 1.0 2 0.5 0 0.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 YoY (LHS) QoQ. Sa (RHS) 17
  • 18. Date Signs of slowdownPower consumption Oil processing and metal output %YoY % YoY 30 40 30 20 20 10 10 0 0 -10 -10 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 July 2007 2008 2009 2010 2011 2012 Pow er consumption 2nd industry 3rd industry Crude oil processing Ten non-ferrous metalsCement and steel PMI and IP % YoY % % YoY 50 60 25 40 55 20 30 20 50 15 10 45 10 0 -10 40 5 -20 35 0 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Cement Crude steel PMI IP (RHS) 18
  • 19. Date Analyze and predict the slowdownThe declining ratio of exports to GDP The three major demand-side components of GDP % y oy % 5040 40 3030 20 1020 0 -1010 -20 -30 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Real FAI grow th Real retail sales grow th Real ex port grow th Ratio of ex ports to GDPThe enlarging gap between FAI and GFCF in China Value added of exports accounts for about half of RMB, bn headline value of exports in China. In 2011,30,000 exports contributed 13% of GDP.25,00020,000 In 2011, FAI and real estate FAI makes up 47%15,000 and 10.0% of GDP respectively.10,000 5,000 0 In value added terms (by stripping out imported capital goods and raw materials for FAI), FAI 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Gross Fix ed Capital Formation Headline FAI contributes 42% of China’s GDP. Value added of consumption contributed 45% to GDP in 2011. 19
  • 20. Date Consumption is still supported by robust income growth % YoY 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Retail Sales Urban income per capita, y td Rural income per capita, y td 20
  • 21. Date Sources of slowdown: External demand %,y oy 6.0 Forecast 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 US EA Japan 21
  • 22. Date Sharp decline of export growthExports, imports and trade surplus The sub-index Export orders of PMI and export growth% YoY USD bn80 40 % YoY 75 6060 30 65 4040 20 55 2020 10 45 0 35 -20 0 0 25 -40-20 -10 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12-40 -20 PMI: Ex port orders Chinas ex port grow th (RHS) 2005 2006 2007 2008 2009 2010 2011 2012 Trade balance (RHS) Exports ImportsMajor destinations of China’s exports Processing imports and exports % YoY 80 % YoY 80 60 60 40 40 20 20 0 0 -20 -20 -40 -40 2004 2005 2006 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Processing ex ports Processing imports ASEAN EU Japan US 22
  • 23. Date Property FAI growth has been falling% YoY605040302010 0-10 2007 2008 2009 2010 2011 2012 Infrastructure Manufacturing Real estate 23
  • 24. Date Property FAI growth more stable than starts, but…. %YoY 80 60 40 20 0-20 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Property FAI New Home Starts Home completion Home under construction 24
  • 25. Date Policy-making amid the leadership transition Start of China’s housing reforms Local govts’ five years 1998 2002/03 2007/08 2012/13 Hu and Wen’s 10 years 25
  • 26. Date The economics of drainage New or Expansion Manufacturing Capacity Relocation (from coast to inland) √FAI Low-cost public housing √ Infrastructure and housing Low profile infrastructure √ High profile infrastructure Private housing 26
  • 27. Date How do local govts fund infrastructure in the future?The sharp difference between central and local govt • Over the past weekend, the heaviest rainstorm in Beijing in 61 years has killed 37 people and stranded numerous cars RMB, bn30000 on drowned streets and underpasses.25000 • Why Beijing lacks some basic infrastructure despite enormous investment in pass years? Why some20000 infrastructure like highways is favored and some other15000 infrastructures are disfavored by governments?10000 5000 • The answer lies in a better understanding of the special 0 structure of the Chinese government and public finance and 1999 2001 2003 2005 2007 2009 2011 the solution also lies in a fiscal reform. In China, with a few Central Local exceptions like railway, almost all infrastructures were built by local governments, which are prohibited from raising money from bond markets but are under pressure to boost GDP growth.Fiscal revenue of local and central govt • With this backdrop, local officials naturally biased theirRMB, bn10,000 spending towards productive investment projects like highways, roads, ports and industrial parks which could 8,000 boost GDP growth, while cut spending on drainage, subway, 6,000 social housing and hospital which are good for social welfare but are less productive in the near term. 4,000 • It’s not all local government’s fault. Prohibited from 2,000 borrowing long-term funding from capital markets, local 0 governments have to rely on relatively short-term loans for 1999 2001 2003 2005 2007 2009 2011 funding their infrastructure spending, but they have to favor Central Local those profitable projects which could generate enough cash flow for repaying bank loans. 27
  • 28. Date Social housing: the great leap forward?mn square meters800700600500400300200100 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Social housing Commodity housing 28
  • 29. Date Agflation in China again? %YoY %YoY 40 10 8 30 6 4 20 2 0 10 -2 0 -4 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 M1 M2 CPI (Moved backward for 6 months, RHS) 29
  • 30. Date The changing difference between CPI and PPI % YoY 12 Forecast 8 4 0 -4 -8 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 CPI PPI 30
  • 31. Date CRB, Brent oil spot price vs PPI inflation% YoY % YoY100 15 80 60 10 40 5 20 0 0-20-40 -5-60-80 -10 2005 2006 2007 2008 2009 2010 2011 2012 CRB cmdty (2m fw d) Brent oil spot (2m fw d) PPI (RHS) 31
  • 32. Date China’s grain consumption as percentage of globalCorn prices: China and US Soybean prices: China and USRMB/Ton USD/Bushel RMB/Ton USD/Bushel3,000 10 6,000 20 5,500 18 8 5,000 162,500 4,500 14 62,000 4,000 12 4 3,500 101,500 3,000 8 2 2,500 61,000 0 2,000 4 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 Corn: China Dalian Corn: US CME (RHS) Soy bean: China Dalian Soy bean: US CME (RHS)Grain consumption composition in China Balance of China’s grain production and consumption Million tons % w orld total600 35500 30 25400 20300 15200 10100 5 0 0 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Rice Wheat Corn Soy bean Rice Wheat Corn Soy bean Production Consumption 32
  • 33. Date Weak link between pork and grain pricesWeak link between pork and grain prices Food CPI breakdown RMB/kg RMB/kg % YoY35 5.0 100 4.5 8030 4.0 6025 3.5 3.0 4020 2.5 20 2.0 015 1.510 1.0 -20 -40 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 2005 2006 2007 2008 2009 2010 2011 2012 Pork Corn (RHS) Soy bean meal (RHS) CPI: Food: Grain CPI: Food: Vegetable CPI: Food: PorkChina’s hot inventory Limited impact of US drought on China’s food inflation (1) China is still relatively self-sufficient on grain (imports % MoM mn accounting for 9.5% of total food consumption); 4 480 3 470 2 (2) Almost all food imports are soybean, but China 460 1 imports 57% of soybeans from non-US markets and 450 soybean output in the US is less affected by droughts; 0 440 -1 -2 430 (3) The major channel from global corn and soybean -3 420 prices to China’s inflation is pork, but China has its -4 410 unique pork price cycle, which happens to be in its Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 downturn in 2H12 and pork prices’ response to feed Number of liv e hogs (RHS) Liv e hogs Breeding sow s grain price shocks is quite slow. 33
  • 34. What does the Chinese governmentDate will do and have to do?• Ease property tightening measures by cancelling home purchase restrictions andencouraging land/home supply;• Cut RRR and ease/raise the 75% loan-to-deposit ratio;• Increase fiscal spending of the central government;• Open up long-term bond financing to provincial governments;• Cut tax, especially value added and corporate income tax;• Appropriately easing restrictions on lending to local governments 34
  • 35. Date YoY change of home prices in top-tier cities% YoY302010 0-10-20 2006 2007 2008 2009 2010 2011 2012 Beijing Shanghai Shenzhen 35
  • 36. Date Regional differentiation of property prices RMB per sqm 20,000 15,000 10,000 5,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 National Beijing Shanghai 36
  • 37. Date Chinese cities are quite “small” % of city population to national population 25.0 20.0 15.0 10.0 5.0 0.0 Beijing Shanghai New Toky o Mex ico Moscow Bangkok London Seoul York City City 37
  • 38. Fiscal revenue and expenditure of theDate central government % 35 30 25 20 15 10 5 0 -5 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal balance/GDP (RHS) Fiscal rev enue Fiscal ex penditure 38
  • 39. Date The history of local government debtRMB, bn140001200010000 8000 6000 Forecast 4000 2000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total local gov t debt Local gov t total rev enue 39
  • 40. Date The overestimated local government debtLocal government’s fiscal revenueRMB, bn LGFV debt is an important issue, and will12000 drag the market down from time to time.10000 But we believe it’s manageable. We don’t 8000 expect banking crisis, crash of FAI and 6000 collapse of the economy because: 4000 • It’s domestic debt; 2000 0 • Local govts are not that bad; 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 • Local govts fiscal revenue accounts for Primary fiscal revenue Fiscal transfer from central govt Net Income from land sales 88% total national fiscal revenue, and it’sThe rising amount of local government debt growing at 30% pace this year; RMB tn % YoY • Massive fiscal transfer from central to 12 70 60 local; 10 50 8 40 • The low debt burden of the central 6 30 government; 4 20 2 10 • Total govt debt (central plus local) 0 0 should be about 45-50% of GDP 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total local govt debt Growth rate (RHS) 40
  • 41. The 75% cap on loan-to-deposit ratio is notDate untouchable%105 90 75 60 45 30 15 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 RRR Loan-to-deposit Ratio 41
  • 42. Date RRR and policy interest rates% %8 257 2065 1543 102 510 0 2006 2007 2008 2009 2010 2011 2012 RRR (RHS) 1-yr lending 1-yr deposit 42
  • 43. Date Currency: redback versus greenback 21 June 2010 =100 110 108 106 104 102 100 98 96 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 RMB-NEER RMB-USD 43
  • 44. Date -15 -10 -5 0 5 10 15 20 25 30 %YoY Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 IP Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Pow er use Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Pow er use: Industry Dec-11 Mar-12 Jun-1244 Can we trust China’s GDP statistics?
  • 45. Date Know China’s economic structure firstService and Agriculture is more stable than industry How about China’s service sector? For the financial sector which is dominated by%YoY16 commercial banks, bank loan and deposit growth was 16.0% and 12.3% yoy respectively in 1H.12 • In the sector serving international trade, export and 8 import growth registered 9.2% and 6.7% yoy respectively in 1H. 4 • Retail sales registered a 14.4% nominal and 11.5% yoy 0 real growth in 1H, meaning decent growth of shops and gasoline stations. 00 01 02 03 04 05 06 07 08 09 10 11 12 GDP 1st 2nd 3rd • Spending on government service must be growing too.The three major demand-side components of GDP Though only about a third of government expenditure is used on government itself, growth of payment on % y oy government service should be quite close to growth of 50 fiscal expenditure, which was at 21.3% yoy in 1H, only 40 slightly below 21.6% in 2011. 30 20 • The number of passengers carried by all transportation 10 vehicles could be a good proxy for travel. Growth of that 0 actually slightly picked up to 8.2% yoy in the first five-10 months of 2012 from 7.6% in 2011.-20-30 •Power consumption in the service sector grew 12.1% 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 yoy in 1H, only slightly down from 13.5% in 2011. Real FAI grow th Real retail sales grow th Real ex port grow th 45
  • 46. Date Why power consumption is different productionPower consumption and production could be different In theory, power production and consumption should be very close to each other as electricity is hardly storable. %, y oy However, we believe power consumption released by the 30 National Energy Administration (NEA) is a better indicator 25 of actual power demand/output than NBS’ power output 20 data, which only include enterprises with annual sales 15 revenue above RMB5mn before 2011 and RMB20mn. 10 5 0 The difference between power production and consumption -5 then depends on the power generated by smaller plants. If-10 the supply condition of coal is tight, smaller plants generate May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 less power as they are in disadvantage compared with large independent power producers (IPP) in securing coal Pow er consumption Pow er production supply.Service and Agriculture is more stable than industry Before Jan 2010, power production and consumption largely moved together. After that, the supply condition of tons, mn coal has been increasingly slack as reflected by climbing100 inventory in selected IPPs. Consequently, the role played 80 by smaller plants has been increasing over time. After Jan 2010, most power consumption data released by the NEA 60 tends to be higher than production data released by the NBS, which might underestimate actual power output by 40 excluding smaller electricity plants. 20 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 46
  • 47. Date Then distorted power consumption structureBreakdown of China’s power consumption Power consumption of the service industry, which 2% accounts for 43% of the economy but consumes only 12% Agriculture 10.7% of total power, grew 11.3% yoy in 2Q (down from 13.1% in 1Q and 13.5% in 2011). 11% Growth of power consumption of industry (40% of the Industry economy and 74% of power demand) slumped to 3.0% yoy in 2Q from 4.5% in 1Q and 11.8% in 2011. Serv ice Ferrous and non-ferrous metals consume 19% of power but contributes only 5% to GDP and 12.5% to IP Residential (The non-ferrous metals sector consumes 7.5% of 75% national power but contributions only 1.7% to China’s GDP and 4.3% to IP). A 15ppt slowdown of the metal sector could lower power consumption by about 3ppt, but the impact on GDP is only 0.75ppt. Actually that’sRegulations led to some volatility of metal output roughly the case from 2011 to 2012. %YoY 40 And the unique base effect 30 From summer 2010 Beijing started pushing local governments to reach the special 11th Five-year-plan 20 energy efficiency target. Under pressure, many local 10 governments reduced or even cut off power supply to some heavy users of power. 0-10 However, right after end-2010, Beijing eased its push on energy efficiency and local governments stopped Mar-10 Jul-10 Sep-10 Mar-11 Jul-11 Sep-11 Mar-12 Jul-12 Sep-12 Jan-10 Jan-11 Jan-12 May-10 Nov-10 May-11 Nov-11 May-12 nagging manufacturers. Manufacturers were eagerly to Ten non-ferrous metals Steel product Crude steel increase their inventories. 47
  • 48. Forecasting table Date 2004 2005 2006 2007 2008 2009 2010E 2011F 2012F 2013FSummary Data Nominal GDP (US$ bn) 1,932 2,258 2,713 3,496 4,522 4,990 5,935 7,485 8,164 9,051 GDP per capita (US$) 1,486 1,727 2,064 2,646 3,405 3,739 4,425 5,560 6,031 6,659 Unemployment rate (%)1 4.2 4.2 4.1 4.0 4.2 4.3 4.1 4.1 4.2 4.1 Population (millions) 1,300 1,308 1,314 1,321 1,328 1,335 1,341 1,347 1,354 1,359Economic Activity Real GDP growth (% yoy) 10.1 11.3 12.7 14.2 9.6 9.2 10.3 9.2 7.7 7.6 Domestic demand growth (% yoy) 8.7 10.2 11.0 12.8 9.9 13.9 9.8 9.1 7.9 7.8 Real investment growth (% yoy) 13.0 13.3 12.6 15.2 9.7 17.8 9.4 9.0 8.2 7.7 Real consumption growth (% yoy) 4.9 7.5 9.6 10.7 10.0 10.6 10.1 9.2 7.8 8.0 Real private consumption growth (% yoy) 5.0 7.0 9.5 10.7 9.9 9.0 10.2 9.4 7.7 7.9 Real government consumption growth (% yoy) 4.5 8.8 9.6 10.8 10.0 14.6 9.9 8.7 8.1 8.1 Real export growth (% yoy) 31.9 24.8 24.0 20.0 8.4 -11.4 28.2 11.0 4.8 5.0 Real import growth (% yoy) 31.8 13.0 16.8 13.3 4.2 1.0 22.1 12.1 6.0 6.5Prices CPI inflation (% yoy, eop) 2.4 1.6 2.8 6.5 1.2 1.9 4.6 4.1 3.5 4.0 CPI inflation (% yoy, avg) 3.9 1.8 1.5 4.8 5.9 -0.7 3.3 5.4 2.9 4.0 Nominal wages (% yoy) 14.0 14.3 14.6 18.5 16.9 11.6 13.3 15.0 12.5 14.0 Nominal exchange rate (vs. USD, eop) 8.28 8.07 7.81 7.30 6.83 6.83 6.62 6.30 6.40 6.25 Nominal exchange rate (vs. USD, avg) 8.28 8.19 7.97 7.60 6.95 6.83 6.77 6.46 6.37 6.30 Bilateral real exchange rate (% yoy, + dep) - - - - - - - - -Monetary Sector2 Monetary base growth (% yoy) 8.7 11.9 12.7 12.1 12.7 11.8 16.7 13.8 11.9 12.0 Broad money growth (% yoy) 14.6 17.6 16.9 16.7 17.8 27.7 19.7 13.6 14.0 14.0 Credit extension to private sector (% yoy) 14.5 13.0 15.1 16.1 18.7 31.7 19.9 15.8 14.8 14.0 Central bank policy rate (%, eop)3 2.25 2.25 2.52 4.14 2.25 2.25 2.75 3.50 2.50 2.50 1-month interbank rate (%, eop) 2.31 0.44 2.61 5.07 1.42 1.73 2.70 6.00 5.00 5.00 Long-term yield (%, eop) 4.73 3.12 3.03 4.43 2.78 3.65 4.20 3.48 4.20 5.25External Sector Current account balance (% of GDP) 3.6 5.9 8.6 10.1 9.1 5.2 5.1 2.8 2.1 1.2 Current account balance (US$ bn) 68.7 134.1 232.7 354.0 412.4 261.1 305.4 201.7 170.0 110.0 Trade balance (US$ bn) 32.8 102.1 177.5 262.0 297.3 198.2 184.5 157.9 150.0 104.5 Exports, f.o.b. (US$ bn) 593.4 762.5 969.7 1,220.0 1,434.6 1,203.8 1,581.4 1,899.3 2,013.3 2,154.0 main export - - - - - - - - - - Imports, c.i.f. (US$ bn) 534.4 628.3 751.9 904.6 1,073.9 954.3 1,327.2 1,741.4 1,863.0 2,049.0 Service balance (US$ bn) -9.7 -9.4 -8.8 -7.9 -11.8 -29.4 -22.1 -55.2 -65.5 -70.5 Income balance (US$ bn) -3.5 -16.1 -5.4 7.9 17.7 7.3 30.4 -11.9 -15.5 -9.5 Foreign direct investment (US$ bn) 60.6 72.4 72.7 83.5 108.3 94.1 105.7 116.0 101.0 85.5 International reserves (US$ bn) 609.9 818.9 1,066.3 1,528.2 1,946.0 2,399.2 2,847.0 3,181.1 3,324.5 3,386.5Public Sector Consolidated gov. primary budget balance (% of GDP) -0.8 -0.8 -0.5 0.7 -0.3 -2.4 -2.1 -1.6 -2.7 -2.7 Consolidated public sector balance (% of GDP)4 -1.3 -1.2 -1.0 0.2 -0.8 -2.8 -2.5 -1.8 -2.9 -3.0 Central gov. revenues (% of GDP)5 16.5 17.1 17.9 19.3 19.5 20.1 20.7 22.0 23.2 22.9Debt Indicators Gross external debt (% of GDP) 12.8 12.4 11.9 10.7 8.3 8.6 9.2 9.3 8.5 8.3 Public (% of GDP) 5.0 4.0 3.9 3.3 2.6 2.6 2.5 2.3 2.3 2.3 Private (% of GDP) 7.9 8.4 8.0 7.4 5.7 6.0 6.8 7.0 6.2 6.0 Gross government debt (% of GDP) 18.5 17.6 16.4 20.1 17.7 19.1 18.7 18.0 18.3 18.2 Domestic (% of GDP) 16.8 16.2 15.2 19.1 17.0 18.4 18.1 17.4 17.7 17.6 External (% of GDP) 1.7 1.5 1.3 1.0 0.7 0.7 0.7 0.6 0.6 0.6 External debt amortizations (US$ bn) 16.2 20.8 17.9 20.3 23.3 34.2 43.8 55.6 70.0 84.0 External debt interest payments (US$ bn) 3.9 3.1 3.1 5.0 4.2 3.6 4.7 5.9 7.4 8.9 External debt service (% of XGS) 3.2 3.1 2.1 2.0 1.8 2.9 2.1 2.2 2.4 2.5Savings - Investment Balance Savings (% of GDP) 45.6 47.1 49.3 50.5 51.6 51.5 52.6 51.9 51.4 51.7 Investment (% of GDP) 43.0 41.6 41.8 41.7 43.9 45.9 48.6 49.8 51.0 51.4 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12Quarterly Economic Forecasts Real GDP growth (% yoy) 9.6 9.8 9.7 9.5 9.1 8.9 8.1 7.6 7.4 7.7 Real GDP growth (% qoq, sa, annualized) 8.2 10.0 8.2 10.0 9.5 8.2 6.6 7.4 8.1 8.1 CPI inflation (% yoy, eop) 3.6 4.6 5.1 5.7 6.3 4.6 3.8 2.9 2.5 3.5 Central bank policy rate (%, eop) 2.25 2.75 3.00 3.25 3.50 3.50 3.50 3.25 2.75 2.50 Nominal exchange rate (vs. USD, eop) 6.70 6.62 6.55 6.45 6.35 6.30 6.30 6.34 6.45 6.40 Current account balance (US$ bn) 102.3 102.2 28.8 59.0 53.4 59.8 24.7 59.7 45.5 41.3 48
  • 49. The US economy
  • 50. Date Rebound risks: Triple dipReal GDP(QoQ SAAR) Forecast 4.5% BofAML 4.0% Consensus: 3.5% March 3.0% August 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Q1 11 Q2 Q3 Q4 Q1 12 Q2 Q3 Q4 Q1 13 Q2 Q3 Q4Note: Consensus forecasts are from Blue Chip Economic Indicators surveys released on March 10, 2012, and August 10, 2012.Source: Bureau of Economic Analysis, Blue Chip Economic Indicators, BofA Merrill Lynch Global Research 50
  • 51. Date Rehab: Post-crisis GDP growthReal GDP(YoY % change) First Second Third Fourth Spain (1977) 1.4 0.0 0.6 1.8 Norway (1987) 3.2 2.9 0.8 4.0 Finland (1991) 4.4 3.7 3.5 5.8 Sweden (1991) 2.5 5.3 2.7 1.1 Japan (1992) 0.5 1.9 2.6 1.7 Average 2.4 2.8 2.1 2.9 US 2.5 1.9 2.1 1.2 Eurozone 2.2 1.7 -0.6 -0.9“First” refers to the period T to T + 4, “Second” refers to T + 4 to T + 8, etc. where T is the trough quarter.Source: Eurostat, OECD, Bureau of Economic Analysis, BofA Merrill Lynch Global Research 51
  • 52. Date Rehab: Big fall; slow recoveryReal GDP(index level) 118 Average 1991 113 2001 108 Current 103 98 93 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Indexed to 100 at the recession trough. Average includes all recessions after 1950 excluding the 1980 and current recessions.Dotted line represents BofA Merrill Lynch forecast.Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research 52
  • 53. Date Jobs: Slow healingPrivate payrolls(index level) 101 Average 1991 2001 100 99 98 97 Current 96 95 94 93 92 91 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Quarters since business cycle peakIndexed to 100 at the previous business cycle peak. Average includes all recessions after 1950 excluding the 1980 and current recessions.Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research 53
  • 54. Date Jobs: Another employment gap (percent) 65 3 Employment to population ratio 4 64 (LHS) 5 63 6 62 Unemployment rate 7 61 (RHS, inverted) 8 60 9 59 10 58 11 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012Shaded regions represent periods of US recession.Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research 54
  • 55. Date Home prices: bumpy bottom We believe national home prices are bottoming, but we expect prices to bounce along this bottom until the end of next year. The recovery should start in earnest in 2014 with sustained home price gains. S&P Case Shiller home price quarterly history and forecasts Case Shiller, % q4/q4 changeS&P Case Shiller home price history and forecasts 2000 9.7%(indexed level) 2001 7.7% 2002 10.6% Q1 2012 2003 10.7% 200 2004 14.6% 2005 14.6% 180 2006 -0.3% 160 2007 -8.4% 2008 -18.4% 140 2009 -2.4% Forecast 2010 -3.7% 120 2011 -4.0% 2012E 0.5% 100 Fair valuation 2013E 0.3% 2014E 2.8% 80 2015E 7.4% 60 2012-2022 Annualized 3.8% 95 00 05 10 15 20 2012-2022 Cumulative 45.5%Source: S&P Case Shiller, BofA Merrill Lynch Global Research Source: S&P Case Shiller, BofA Merrill Lynch Global Research 55
  • 56. Date Supply: less in, but less out The good news is that the flow of new delinquencies into foreclosure has declined along with the decline in firing. The bad news is that the flow out of foreclosure has also slowed, keeping the backlog stubbornly high. We forecast 6.6 million liquidations from the end of last year through 2016 Foreclosure inventory remains stubbornly highMortgage delinquencies decline as firing drops 11 Delinquencies, % , (LHS) 2900 millions of homes 3.0 Foreclosure inventory 10 2700 2.5 9 2500 8 2.0 2300 7 2100 1.5 6 1900 1.0 Seriously delinquent 5 1700 4 0.5 Firing, 000s, (RHS) 3 1500 0.0 2 1300 02 03 04 05 06 07 08 09 10 11 12 95 97 99 01 03 05 07 09 11Source: MBA, BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research, MNA 56
  • 57. Date Housing: pent-up demand? Young adults have delayed the transition from their parents’ homes and/or live with roommates, reflecting weak economic conditions. This is not sustainable and will lead to a rebound in household formation and hence housing demand over time. The initial gain in household formation from young adults will be more supportive of the rental market than homeownership.Household formation historically low Increasing share of young adults living with parents(thousands of households) (% of age cohort) 1800 60 15 1600 Baseline Forecast 58 14 1400 Aged 25-34, rhs 56 13 1200 1000 54 12 800 52 11 600 50 10 400 Aged 18-24, lhs 200 48 9 0 46 8 1990 1994 1998 2002 2006 2010 2014 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Source: Census Bureau, BofA Merrill Lynch Global ResearchSource: Census Bureau, BofA Merrill Lynch Global Research 57
  • 58. Date Affordability: the missing link We attribute the gap between affordability and home sales to the credit environment. During the boom, greater availability of credit and the perception of rapid home price appreciation fueled home sales. The reverse has been true of the past few years with tight credit and falling home prices.Divergence between home sales and affordability index Rising credit scores for new mortgages (average FICO score for purchase loans, 3m avg) index millions, saar 780 230 7.0 760 Fannie/Freddie 210 Existing home sales, single family, rhs 6.0 190 740 170 5.0 720 FHA 150 700 4.0 130 680 110 3.0 660 NAR affordability 90 index, lhs 2.0 640 70 50 1.0 620 75 79 83 87 91 95 99 03 07 11 90 92 94 96 98 00 02 04 06 08 10 12Source: NAR, BofA Merrill Lynch Global Research Source: CoreLogic, BofA Merrill Lynch Global Research 58
  • 59. Date Consumer: Deleveraging continues(percent of income) (percent of income)650 160 Net worth (LHS) 140600 120 Debt (RHS) 100550 80500 60 40450 20400 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012*Income is disposable incomeSource: Federal Reserve Board, BofA Merrill Lynch Global Research 59
  • 60. Date Consumer: Saving householdsSavings rate(percent) 16 Forecast 14 12 10 Historic Range 8 6 4 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015Note: Green line is BofA Merrill Lynch forecastSource: Bureau of Economic Analysis, BofA Merrill Lynch Global Research 60
  • 61. Date Rehab: Corporate comeback Nonfinancial corporate profits Forecast• Healthy balance sheets 80% % of GDP (RHS) 8% 7% 60% 6%• Low valuations / high risk premia 40% 5% 20% 4%• Will margins start to narrow? 0% 3% 2% -20% 1% yoy % change (LHS)• No (macro) news is good news -40% 0% 2000 2002 2004 2006 2008 2010 2012Source: Statistical Office of the European Communities, BofA Merrill Lynch Global Research 61
  • 62. Europe and beyond
  • 63. Date Europe: More shocks to come Lacking confidence Deepening recession Euro area confidence measures (% balance) 10 Missed deficit and debt targets 5 0 -5 -10 Bank recapitalization problems -15 -20 -25 Populist pressure -30 Consumer Confidence Indicator -35 Industrial Confidence Indicator  Periphery: reform resistance -40 2004 2005 2006 2007 2008 2009 2010 2011 2012  Core: bailout fatigueSource: BofA Merrill Lynch Global Research 63
  • 64. Date Europe: Short-term LTRO fix Interest rate spreads (vs. German bunds, bps) 700 Spain• Three years, generous collateral 600 500• First tranche: €489bn 400 Italy 300 200• Circular guarantees: banks, 100 sovereigns, and central bank France 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Source: Bloomberg, BofA Merrill Lynch Global Research 64
  • 65. Date Europe: Fait accompli? Shrinking bank deposits 30% Germany Greece Ireland Portugal Spain  Greek exit underway already: 25% deposit outflows 20% 15% 10%  No quick political resolution 5% means uncertainty festers 0% -5% -10%  Contagion through capital -15% markets -20% Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12Source: BofA Merrill Lynch Global Research, ECB, Haver Analytics 65
  • 66. Date Europe: More tightening=less growth 4.0Two-year GDP Growth Average (%) 3.0 Germany 2.0 Italy 1.0 Ireland Spain 0.0 Portugal -1.0 -2.0 -3.0 -4.0 Greece -5.0 -6.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Fiscal tightening (% of GDP)Source: BofA Merrill Lynch Global Research, Bloomberg, IMF.Note: Compares IMF estimates of structural fiscal tightening in last two years to average GDP growth in last two years. 66
  • 67. Date Europe: Why it matters  Historically, the world tended to ignore Europe  US exports to Europe are 4% of GDP  European banks hold US assets = 20% of GDP  The real problem: contagionSource: BofA Merrill Lynch Global Research 67
  • 68. Date Contagion: Trade shares Export of goods to euro area (% of GDP) 18 16 14 12 10 8 6 4 2 0 UK US Brazil Czech Republic Hungary India Poland Turkey China Mexico Singapore Korea Japan CanadaSource: IMF and BofA Merrill Lynch Global ResearchNote: Broadening the US data to include services and all of Europe increases the export share to about 3% of GDP 68
  • 69. Date Contagion: Banking shares European banks – foreign claims (% of GDP) 100 90 80 70 60 50 40 30 20 10 0 UK US Brazil Czech Poland Turkey Mexico China Taiwan Singapore Q4 2010 Q4 2011Source: BofA Merrill Lynch Global Research 69
  • 70. Date Contagion: Europe matters moreShrugging off the 1992 crisis The whole world is watchingReal GDP Biggest market moves(QoQ % annualized) (Source of news that caused 10 biggest moves in S&P 500)7% 106% 95% US US 8 Eurozone4% 7 Other3% 62%1% 50% 4-1% 3-2% 2-3% EU 1 (0) (0) (0)-4% 0 1990 1991 1992 1993 1994 2007 2008 2009 2010 2011 Note: Shaded area represents European recession Source: OECD, BEA, Bloomberg, BofA Merrill Lynch Global Research 70
  • 71. Date Europe: The good, the bad and the ugly Good (55% prob.): mild recession, feeble recovery  Greece stays in Euro  Spain and Italy avoid funding crisis  GDP falls at 0.5% annual rate Bad (30% prob.): deeper recession  Greece exits  ECB prevents meltdown in Spain & Italy  GDP falls at a 1.5% annual pace Ugly (15% prob.): Lehman-like event  Greece and others exit Euro  Europe delays deposit/bond support  GDP falls at 4.0% annual paceSource: BofA Merrill Lynch Global Research 71
  • 72. Date Growth: Three scenarios GDP Growth (Next 4Q) Base case is weak Europe US World Firewalls work = global slowdown Good (55%) -0.5 1.5 3.5 Bad (30%) -1.5 1.0 3.0 Firewalls fail = global recession Ugly (15%) -4.0 -0.5 1.0Source: BofA Merrill Lynch Global Research 72
  • 73. Date Already fading: Forecast cuts 2012 GDP Forecasts In the past year we have cut growth in almost every country Old* New Change Europe and countries close to Global 4.9 3.3 -1.6 Europe have been hurt the most US 3 2.1 -0.9 EZ 1.6 -0.5 -2.1 European and US confidence UK 2.3 0.6 -1.7 shocks explain most of the drop JA 3.6 2.4 -1.2 EM 6.5 5.4 -1.1* Old scenario is as of June, 2011Source: BofA Merrill Lynch Global Research 73
  • 74. Date Good news: Low & stable inflation 2012 CPI Forecasts Inflation is low and stable… Old* New Change Giving central banks room to act Global 3.5 3.3 -0.2 US 1.6 1.7 0.1 EZ 2.0 2.2 0.2 UK 1.8 2.8 1.0 JA 0.2 -0.2 -0.4 EM 4.9 5.0 0.1*Old scenario is as of June, 2011Source: BofA Merrill Lynch Global Research 74
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