Economist Intelligence Unit Webinar: No Double Dip_8_26_10


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During the months following the global recession, many economists (including ones from this organisation) discussed the possibility of a double dip recession. Between the European debt crisis and the US’s high unemployment rate, it seemed likely that the global economy would slip back into recession territory. However, with the exception of the US, recent global economic performance has been better than expected. Fiscal and monetary policy in most countries remains supportive of growth and although another global slowdown looks inevitable, a relapse into recession is unlikely. The Economist Intelligence Unit explains the likelihood of a double dip recesssion in this presentation.

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  • Yen 15-year high Oil slipping
  • Have downgraded US growth forecast for 2011—well below consensus for 2011 is 2.7%, we have 1.5% Also more pessimistic than the Fed The FOMC suggested that it had reduced its growth projections, but it still expected resource utilisation to rise, implying that GDP growth would be maintained above the 2.5 per cent trend into 2011. Unrealistic The Fed surveys suggest that the ISM survey may drop quite sharply when it is published on 1 September, perhaps to somewhere in the low 50s, compared with recent healthy readings of around 55 Companies sitting on a lot of cash—not cash constrained—rather than spending it If animal spirits change, companies become more confident, they can quickly start driving recovery by investing
  • Policy is backstopping the global economy QE impact felt in keeping many stress indicators down Not healthy, but relatively stable
  • 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
  • A long way to go—probably needs to go back below 100%
  • So, does the growth baton pass to Europe? Is Germany now the growth power house? Germany leveraged on global growth—so no
  • 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
  • Markets pointing to deflation and debt and slow growth Japanese, German and UK govt paper also trading very low
  • Private-sector needs to create 150,000 jobs a month to keep up with population growth At current rate of progress it will take 7 years to recoup the 7.5m jobs lost since the crisis started Worrying increase in long-term unemployed Over past three months 1m people have joined ranks of those who have given up the hunt for jobs Some of these are the 99ers—those that have received benefits for 99 weeks but now longer qualify As of Q2 2010, 7m were unemployed for 27 weeks or more—45% of all unemployed. Compares with 4m and 30% of total in Q2 2009 If you include those wanting to work full time but who can’t, unemployment is over 15%
  • A jobless recovery—after each recession the bounceback takes longer Didn’t include 2001—we barely noticed it Who benefits from globalisation This crisis is partly one of globalisation—US needs to create far more mobile, high-tech workforce; more jobs will be sucked out Unemployed workers will be We reckons that unemployment will remain elevated at around 9% this year and next
  • Total consumer debt down by nearly $900m between peak in 2008 Q3 and 2010 Q2 Home ownership rate declining—66.9% in Q2 this year, down from peak of nearly 70%. Takes us roughly back to 2002 levels
  • Shadow inventory on bank books Despite adjustment, prices still high One of the Gateway Cities, Nr LA Dr Housing Bubble reckons LA real estate prices are overvalued by 30% after adjusting for inflation
  • Fiscal spending did have an impact—CBO reckons spending raised GDP by 1.7%-4.5%, increased the no of people employed by 1.4m-3.3m compared with what would have occurred otherwise. Directly funded stimulus jobs around 750,000 in Q2 Poorly targeted fiscal policy—spending money not always positive for economy Washington Post As of June 30 th Washington City had spent $373K of $22m fiscal stimulus in TV ads and billboards promoting new tax on plastic bags Tax highly regressive Cash for clunkers. Housing tax break—massive misallocation of taxpayers funds Great Depression, Fed feared inflation so allowed money stock to fall steeply Japan did it in 1990s—Japanese economy in nominal terms now the same size as it was in 1993 Inflation fears misplaced=does not recognise that money multiplier is dropping Need more QE soon? Bernanke speech at Jackson Hole on Friday may give pointers—sustained return to 2.5% trend growth looks implausible over the next year or so
  • Jobs market
  • We are experiencing a natural pause in the recovery But the downside risks are rising To think about This is a transition period—end of the post-world war 2 settlement Who gains from globalisation? Western consumers must face
  • Economist Intelligence Unit Webinar: No Double Dip_8_26_10

    1. 1. Global Outlook: No Double Dip Part of an EIU Client Webinar Series Robert Ward Director, Global Forecasting London, August 26th 2010
    2. 2. About the Economist Intelligence Unit (EIU) <ul><li>Research arm of The Economist Group for business executives </li></ul><ul><li>650 analysts and industry specialists worldwide covering </li></ul><ul><ul><li>Analysis and forecasting for over 200 countries and territories </li></ul></ul><ul><ul><li>Risk assessment </li></ul></ul><ul><ul><li>Industry data and trends: automotive, consumer goods, energy, financial services, healthcare, technology </li></ul></ul><ul><ul><li>Market sizing </li></ul></ul><ul><ul><li>Custom client research </li></ul></ul>
    3. 3. Today’s Presenter Robert Ward Director, Global Forecasting
    4. 4. Double dip: How concerned should you be?
    5. 5. Greenspan’s wisdom—should we be worried?! <ul><li>“ I think that the probability of a severe recession has come down markedly.” May 2008 </li></ul><ul><li>“ The odds of [a double-dip recession] have fallen very significantly.” April 2010 </li></ul><ul><li>“ We’re in a pause in a recovery … [a double dip] is possible if home prices go down.” July 2010 </li></ul>
    6. 6. Our key scenarios <ul><li>Uneven recovery </li></ul><ul><ul><li>Richer countries soften again in late 2010 and into 2011 </li></ul></ul><ul><ul><li>No return to pre-crisis growth rates </li></ul></ul><ul><ul><li>Emerging markets do reasonably well </li></ul></ul><ul><li>Recovery stalls </li></ul><ul><ul><li>Renewed recession in 2011 </li></ul></ul><ul><ul><li>Sustained weak growth and deflation </li></ul></ul><ul><ul><li>Emerging market sentiment sours </li></ul></ul><ul><li>Economy surges </li></ul><ul><ul><li>Adjustment to 2010 raises growth potential </li></ul></ul><ul><ul><li>Higher trend growth thereafter, but risk of faster inflation </li></ul></ul>60% 30% 10%
    7. 7. Our central scenario <ul><li>Company profits are strong—will be hiring soon? </li></ul><ul><li>Inventories are low, so no inventory shock; worst of job shedding now over </li></ul><ul><li>Supportive policy is now in place, so another Lehman is unlikely </li></ul><ul><li>China is assumed to achieve a soft landing </li></ul><ul><li>H1 2010 growth rates were not sustainable anyway </li></ul><ul><li>The 1980s double dip was triggered by the Volcker squeeze on top of 2nd oil shock </li></ul>
    8. 8. Botox finance smoothes the wrinkles 3-month LIBOR/3-month overnight index swap (OIS) spread, percentage points. A higher spread denotes more market stress . Sources: Haver Analytics; Economist Intelligence Unit. Lehman fails Financial markets crash Fed introduces QE Euro zone woes spook markets
    9. 9. The great deleveraging continues in the US… US personal savings rate, % of disposable income. Sources: BEA; EIU.
    10. 10. … but this is a long haul US household liabilities to disposable income ratio, %. Source: EIU, CountryData.
    11. 11. Just don’t make her angry
    12. 12. Stresses in the euro zone 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 .
    13. 13. UK: More adjustment for the housing market Mortgage approvals, ’000s. Source: Bank of England.
    14. 14. But there are skeletons
    15. 15. Are we turning Japanese? The bond markets think so Nominal yield on 10-year US Treasury bond. Source: Fed. All time low of 2.6%
    16. 16. Risk 1: The US jobs market fails to revive US: Median duration of unemployment. Weeks. Source: St Louis Fed.
    17. 17. This is already a jobless recovery US: % of jobs relative to peak employment. Sources: Bureau of Labour Statistics; EIU.
    18. 18. Risk 2: The US housing market double dips US: Housing starts, ‘000s, SAAR. Source: Bureau of the Census . Spot the recovery!
    19. 19. Demand for mortgages is tepid US: Total household debt outstanding. US$ trn. Source: NY Fed.
    20. 20. But if you really must buy… <ul><li>1,741 sq foot property in La Mirada, LA Co </li></ul><ul><li>Sold in 1988: US$132,000 </li></ul><ul><li>Sold in 1998: US$146,000 </li></ul><ul><li>Sold in 2004: US$350,000 </li></ul><ul><li>Price reductions </li></ul><ul><li>19/Mar/2010: US$374,000 to US$349,000 </li></ul><ul><li>20/Apr/2010: US$349,000 to US$329,000 </li></ul><ul><li>26/May/2010: US$329,000 to US$299,900 </li></ul>La Miranda median price, US$380K (cf US$578K at peak), median income US$77,000 (2007) Source: Dr Housing Bubble Blog. “ Perfect starter home!”
    21. 21. Risk 3: Global policy mistakes <ul><li>Fiscal austerity is too severe and poorly targeted </li></ul><ul><li>Premature withdrawal of monetary stimulus </li></ul><ul><li>Demand for money rising for precautionary saving + banks not lending = deflationary pressure in the rich world </li></ul><ul><li>China is unable to fine-tune its soft landing </li></ul><ul><li>So </li></ul><ul><li>Monetary policy MUST remain loose in the developed world—no rate rise in US, UK or euro zone until 2012 </li></ul>Monetary base, US$ bn. Source: St Louis Fed. 1918 1940 2001 08 09 10
    22. 22. Where does this leave us?
    23. 23. To dip or not to dip? <ul><li>A double dip is not our central forecast </li></ul><ul><ul><li>But 30% probability, and downside risks have risen </li></ul></ul><ul><li>Removal of fiscal stimulus was always going to slow growth </li></ul><ul><ul><li>But some of the negative impact can be offset by monetary support and currency weakness (for some) </li></ul></ul><ul><li>Balance sheet adjustment doesn’t have to result in a double dip </li></ul><ul><ul><li>Banking balance-sheets have been partly rebuilt </li></ul></ul><ul><ul><li>Household and governments have hardly started </li></ul></ul><ul><ul><ul><li>But adjustment will crimp growth rather than kill it </li></ul></ul></ul><ul><ul><ul><ul><li>Provided the adjustment is slow, and policy tightening is measured </li></ul></ul></ul></ul>
    24. 24. Conclusion—so where’s the growth? Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of July 2010. Source: Economist Intelligence Unit, CountryData .
    25. 25. If that was all too much for you, take heart! The seeds of prosperity are sown during the periods of financial depression and the seeds of hard times are just as surely down during the period of business activity and speculative boom . The change from a financial depression to better times comes […] so gradually that for months there is a difference of opinion as to whether a change for the better has actually commenced or not. “ “ L M Holt, economist, Panics and Booms , 1897.
    26. 26. Questions and Answers
    27. 27. Data and analysis from today’s presentation were taken from the EIU’s country analysis and forecasting services. For more information on these services and other EIU capabilities, including risk assessment, economic data, industry briefings / forecastings, and custom client research visit Holly Donahue Marketing Manager Economist Intelligence Unit [email_address] +44 (0)20 7576 8379 Have a question for our country analysts or industry specialists? Please contact: More Information?
    28. 28. Thank you.