Global 3 March 2011Macro Global Economic Perspectives Economics Oil and the Global Economy: Table of Contents Key Economic Forecasts .................................... Page 2Global Markets Research Oil and the Global Economy: Measured Impact Measured Impact ............................................... Page 3 Central Bank Watch .......................................... Page 10 Global Data Monitor ......................................... Page 14 Over the past six months, oil prices have risen more than 50%, with more Charts of the Week .......................................... Page 15 than one-fourth of that rise coming in recent weeks as tensions in the Middle Global Week Ahead.......................................... Page 16 East have risen. We estimate that most of the rise on oil prices to date (i.e., Financial Forecasts .......................................... Page 18 to a level of about $100/barrel Brent) can be attributed to the strengthening of aggregate demand in the global economy and therefore does not have Main Deutsche Bank Global Economics Publications ...................... Page 19 significant negative implications for global growth. If the roughly $10-15/barrel additional increase in oil prices in recent weeks that can be attributed to concerns about possible disruptions to oil production in and distribution from the Middle East to the rest of the world is sustained, global growth could be reduced by about ½% this year relative to our current baseline forecast for global growth in the vicinity of 4.3%. The risk of a more severe disruption, while not high, has risen in the wake of recent events, and we would put a 10-15% probability on oil prices rising to $150/barrel in the near term and remaining near that for a time. Such a shock would reduce global growth by an estimated 2.5%, moving it back into recession territory. The positive effects of the shock on inflation would be somewhat greater in terms of percentage points than the negative effect on real GDP. Countries that are more dependent on imported oil or do not have significant domestic sources of energy would be hit more than the global average (Japan and Korea, for example), while those with significant domestic production of energy would be hit less. Everything else equal, industrial countries would be hit less than emerging market economies given their greater energy efficiency (lower dependence of output on energy input). Impact of oil price shocks on GDP growth and inflation for year ahead Mild oil shock Severe oil shock Oil prices to stay at $110/brl Oil prices reach $150/brl Research Team GDP Inflation GDP Inflation Peter Hooper US -0.35 0.5 -1.75 2.6 (+1) 212 250-7352 email@example.com Euro Area -0.5 0.4 -2.3 1.8 Thomas Mayer Japan -0.3 0.3 -1.5 1.5 (+49) 69910-30800 firstname.lastname@example.org Total Developing -0.2 -1.0 Michael Spencer countries (+852) 220-38303 Asia ex Japan -0.8 0.7 -4.0 3.5 email@example.com World -0.4 -2.0 Source: DB Global Markets Research Torsten Slok (+1) 212 250-2155 firstname.lastname@example.orgEconomics Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010
3 March 2011 Global Economic PerspectivesKey Economic Forecasts Real GDP Consumer Prices Current Account Fiscal Balance % growthb % growthc % of GDPd % of GDP 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F US 2.8 3.5 3.9 1.6 2.2 2.4 -3.7 -4.1 -4.3 -8.8 -9.7 -6.9 Japan 3.9 1.6 2.2 -0.7 -0.1 -0.6 3.6 3.8 4.5 -8.7 -7.7 -7.4 Euroland 1.7 1.4 1.5 1.6 2.3 1.9 -0.6 0.0 0.4 -6.0 -4.8 -3.7 Germany 3.5 2.5 1.4 1.2 2.0 1.7 5.1 4.8 4.1 -3.7 -2.8 -2.0 France 1.5 1.2 1.6 1.7 1.7 1.6 -2.1 -2.2 -2.6 -7.6 -6.2 -4.8 Italy 1.1 0.9 1.2 1.5 2.1 1.9 -3.2 -2.8 -2.4 -5.0 -4.1 -3.1 Spain -0.1 0.6 1.1 1.8 1.8 1.6 -4.5 -4.5 -3.6 -9.0 -6.5 -4.8 UK 1.3 1.8 2.0 3.3 4.1 1.8 -2.4 -2.0 -1.7 -9.5 -7.9 -4.4 Sweden 5.3 3.5 2.5 1.3 1.5 2.0 6.8 6.5 6.0 -1.0 -0.5 0.5 Denmark 2.1 2.4 2.0 2.3 2.0 2.0 5.3 4.0 3.5 -5.3 -3.5 -3.0 Norway 0.4 1.5 2.5 2.4 1.5 2.0 12.8 12.9 13.0 6.8 7.5 8.5 Poland 3.8 3.9 3.5 2.6 3.4 2.7 -3.1 -3.2 -3.7 -7.9 -5.8 -4.7 Hungary 0.8 3.0 3.2 5.0 4.1 3.4 1.5 0.3 -0.4 -3.8 -2.9 -4.0 Czech Republic 2.4 2.3 3.1 1.5 2.1 2.2 -1.5 -1.0 -1.2 -5.2 -4.6 -4.2 Australia 2.7 3.2 3.1 2.8 2.9 3.0 -2.7 -2.7 -4.0 -4.5 -3.5 -2.2 Canada 3.1 2.6 3.2 1.8 2.3 2.4 -3.3 -3.6 -3.4 -3.5 -2.0 -1.7 Asia (ex Japan) 9.4 8.0 7.6 4.6 5.5 4.4 4.0 3.1 2.9 -3.1 -2.8 -2.3 India 9.8 8.2 8.5 9.4 8.2 6.7 -2.6 -3.0 -3.0 -8.5 -7.8 -7.2 China 10.3 9.4 8.6 3.3 5.0 3.5 5.2 4.3 3.8 -2.5 -2.0 -1.5 Latin America 5.9 4.3 3.9 8.9 8.8 7.4 -0.8 -1.5 -2.0 -2.6 -2.5 -2.4 Brazil 7.7 4.2 4.4 5.9 5.8 4.8 -2.3 -2.8 -3.7 -2.6 -2.9 -2.9 EMEA 4.5 4.7 5.1 8.0 7.5 7.1 0.6 -0.5 -1.3 -4.6 -3.4 -2.9 Russia 4.0 5.4 5.5 6.9 9.6 7.2 5.0 3.7 2.0 -3.9 -2.0 -1.7 G7 2.7 2.6 2.9 1.4 1.9 1.8 World 4.8 4.2 4.4 3.2 3.9 3.3 (a) Euroland forecasts as at the last forecast round on 10/12/10. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b) GDP figures refer to working day adjusted data. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactionsForecasts: G7 quarterly GDP growth% qoq saar/annual: % yoy Q1 10 Q2 10 Q3 10 Q4 10F 2010F Q1 11F Q2 11F Q3 11F Q4 11F 2011F 2012F US 3.7 1.7 2.6 2.8 2.8 3.8 4.2 4.1 4.3 3.5 3.9 Japan 6.0 2.1 3.3 -1.1 3.9 0.8 3.2 2.5 1.9 1.6 2.2 Euroland 1.5 4.1 1.4 1.2 1.7 1.2 0.9 1.1 1.3 1.4 1.5 Germany 2.6 9.2 2.8 1.5 3.5 3.0 1.1 1.3 1.4 2.5 1.4 France 1.1 2.4 1.0 1.4 1.5 1.0 0.8 1.6 1.5 1.2 1.6 Italy 1.8 1.9 1.1 0.2 1.1 1.0 0.7 0.8 1.4 0.9 1.2 UK 1.3 4.2 2.8 -2.3 1.3 1.3 2.1 2.1 2.0 1.8 2.0 Canada 5.5 2.2 1.8 3.3 3.1 3.4 3.7 3.3 2.1 2.6 3.2 G7 3.5 2.8 2.5 1.4 2.7 2.6 3.0 3.0 2.9 2.6 2.9Sources: National authorities, DB Global Markets ResearchPage 2 Deutsche Bank Securities Inc.
3 March 2011 Global Economic PerspectivesOil and the Global Economy: Measured Impact Over the past six months, oil prices have risen past and most recent movements in oil prices, since the more than 50%, with more than one-fourth of that effects of an oil price increase will depend importantly on rise coming in recent weeks as tensions in the what it was that drove prices higher—increases in demand Middle East have risen. We estimate that most of associated with strong global growth or cutbacks in supply the rise on oil prices to date (i.e., to a level of associated with disruptions in major producing regions. about $100/barrel Brent) can be attributed to the The assessment then moves to a survey of various model- strengthening of aggregate demand in the global based and other empirical estimates of the effects of oil economy and therefore does not have significant price increases on the growth of real GDP and consumer negative implications for global growth. prices in major regions of the world. Finally, we provide quantitative estimates of the effects of the recent rise in oil If the roughly $10-15/barrel additional increase in prices and the potential implications of a further run-up in oil prices in recent weeks that can be attributed to oil prices that could materialize if oil supplies in the Middle concerns about possible disruptions to oil East are significantly disrupted. production in and distribution from the Middle East to the rest of the world is sustained, global growth could be reduced by about ½% this year Chart 1. Oil prices moving higher $/barrel $/barrel relative to our current baseline forecast for global 150 Brent WTI 150 growth in the vicinity of 4%. The risk of a more severe disruption, while not 125 125 high, has risen in the wake of recent events, and we would put a 10-15% probability on oil prices 100 100 rising to $150/barrel in the near term and remaining near that for a time. Such a shock 75 75 would reduce global growth by more than 2%, moving it back into recession territory. The 50 50 positive effects of the shock on inflation would be somewhat greater in terms of percentage points 25 25 than the negative effect on real GDP. 2006 2007 2008 2009 2010 2011 Countries that are more dependent on imported oil Source: WSJ, DB Global Markets Research or do not have significant domestic sources of energy would be hit more than the global average on impact (Japan and Korea, for example), while Global oil market those with significant domestic production of In the past six months, world oil prices have risen by about energy would be hit less. Everything else equal, $40/barrel or more than 50% (Chart 1).1 Roughly one-third industrial countries would be hit less than of this increase has occurred since the flare-up of tensions emerging market economies given their greater in the Middle East began to hit the market a little over a energy efficiency (lower dependence of output on month a ago (Chart 2). Before addressing the potential energy input). effects of this rise in oil prices on the global economy, it is useful to review some of the basic features of the globalIntroduction market for oil, including its major demand and supplyOil prices have been on the rise, and ongoing tensions in features.the Middle East have again raised questions about thepotential risks to the global economy associated with a Oil continues to be the single most important source ofpossible significant disruption of oil supplies. In this week’s energy in the global economy; it currently accounts for wellGEP we address these questions in a number of over one-third of total primary energy supply. Oil and gasdimensions. We begin with an overview of the world oil combined account for over 60% of primary energy, andmarket, including a breakdown of the majordemanders/users and suppliers/producers of oil. We thenassess the potential effects of a sustained increase orsurge in oil prices on economic activity and prices. This 1 We focus on the Brent price rather than the WTI series because of theassessment begins with analysis of the extent to which extent to which the latter price has been artificially depressed in recentdemand factors and supply factors have contributed to weeks by oil pipeline distribution problems in Cusning Oklahoma.Deutsche Bank Securities Inc. Page 3
3 March 2011 Global Economic Perspectivestogether with coal, these fossil fuels account for more than about two thirds to roughly half, as their oil usage has80% of energy (Chart 2). remained relatively stable while that of emerging market regions has risen strongly (Chart 4). These trends implyChart 2. Relative importance of oil in total global that GDP growth in emerging markets, especially Asia,energy usage have become increasingly important as a driver of world oil OECD: total primary energy supply demand and therefore oil prices. They also imply that (2009, 5.2 m toe) industrial regions of the world have become less sensitive Combustibe Other renewables 1.1% to “oil shocks” over time as their dependence on oil has 4.4% Hydro diminished. To some extent, decreasing oil dependency Coal 2.1% 19.7% reflects a shift to other sources of energy—natural gas in Nuclear 11.3% particular, and here, given the relatively high correlation of prices across energy sources noted above, exposure to oil Oil 37.2% shocks may not have declined commensurately. Chart 4. Global demand for oil by region Gas 24.2% mln brls per day Global demand for oil by region mln brls per day 100 100 Non OECD Other OECD US: North America TotalSource: IEA, DB Global Markets Research 90 90 80 80 70 70What has been striking about the energy market in the past 60 60few years has been the near-perfect synchronization of 50 50prices of these three major sources of energy (Chart 3).Whereas historically gas and oil prices have had a 40 40reasonably high correlation, coal had historically been 30 30uncorrelated with the other two commodities. But since 20 202007 the three prices have clearly moved together. This 10 10period has seen robust demand for energy of all types. 0 0And if anything, oil price increases have tended to lead gas 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11and coal price increases since 2007. Source: IEA, OECD and DB Global Markets ResearchChart 3. Prices of oil, gas and coal moving together However, there is also ample evidence that energy%y/y, % y/y,3mma efficiency has increased substantially in response to past 3mma Oil Coal Gas increases in the relative price of oil and other sources of 225 225 200 200 energy. The World Bank has tracked energy efficiency 175 175 (measured as the amount of energy consumed to produce 150 150 125 125 one unit of real GDP) going back at least 15 years for 125 100 100 economies. It finds that In the United States and Germany, 75 75 50 50 for example, between 1990/91 and 2006/07, real GDP per 25 25 unit of energy consumed has increased by one-third. Gains 0 0 in energy efficiency have not been limited to industrial -25 -25 -50 -50 countries. In India, the ratio of GDP per unit of energy -75 -75 consumed has increased more than 50% since 1990/91 00 02 04 06 08 10 and in China it has more than doubled. Interestingly, whenSource: IMF, DB Global Markets Research we measure the major emerging market economies up against each other, the Latin American economies stand out as generally achieving a higher real GDP per unit of energy consumed than economies in the other regions.Demand EMEA are over-represented at the inefficient right tail butDemand for oil has been driven increasingly by emerging are well represented in the middle of the range toomarket regions. Over the past 15 years, the OECD (Chart 5).countries’ share of global oil consumption has fallen fromPage 4 Deutsche Bank Securities Inc.
3 March 2011 Global Economic PerspectivesChart 5. Energy efficiency across EM could have a large impact on prices. Because the short-runGDP/kgoe GDP/kgoe elasticities of demand for and supply of oil are very low,25 25 relatively small changes in supply from any source in the oil market can have a large impact on price. Supply may be20 20 elastic up to a certain point if major producers like Saudi Arabia are producing short of their full capacity and to the15 15 extent that consuming countries have built up strategic petroleum reserves. The International Energy Agency10 10 estimates that current excess capacity in major producing regions (primarily Saudi Arabia) are currently more than 5 5 sufficient to replace production by Libya and Algeria if it is cut off (Chart 6). Thus it is unlikely that events in the Middle 0 0 East will result in a large shock to world oil prices (pushing them to $150/barrel or more) unless production in Saudi MEX PER COL ISR PHL CHL HUN POL KOR IND VEN IDN CHN UKR HKG ARG ZAF KAZ LKA SGP BRA ROM SVK EGY CZE THA MYS PAK VNM RUS TUR Arabia is disrupted.Source: World Bank and DB Global Markets Research Chart 6. OPEC spare capacity exceeds Libyan +Supply Algerian production Mln brl/day OPEC Libya Algeria Mln Brl/dayOn the supply side of the ledger, the Middle East accounts 6.0 6.0for about 25% of total world oil production, with SaudiArabia being the biggest producer at close to 10% of world 5.0 5.0oil production (Table 1). 4.0 4.0Table 1. Global supply of oil by region 2010 3.0 3.0 Share in world Mil B/day 2.0 2.0 supply (2010)Saudi Arabia 8.2 9.4Iran, I.R 3.7 4.3 1.0 1.0Iraq 2.4 2.8Kuwait 2.3 2.6 0.0 0.0 1994 1996 1998 2000 2002 2004 2006 2008 2010UAE 2.3 2.6 Source: USDOE/EIA,DB Commodity Research and DB Global MarketsVenezuela 2.3 2.6 ResearchNigeria 2.1 2.4Angola 1.8 2.1Libya, SPAJ 1.6 1.8 How oil price shocks affect the economyAlgeria 1.3 1.5Qatar 0.8 0.9 Whether a rise in oil prices is benign or a threat to globalEcuador 0.5 0.5 growth depends of course on whether the price increase isTotal Middle East driven by an expansion of demand or a cut in supply. In the 22.6 25.8 former case, higher oil prices reflect a buoyant economyCountriesNon Middle East OPEC (i.e., are endogenous to economic developments), in the 6.6 7.6countries latter case they restrict economic activity (i.e., areTotal OPEC 29.2 33.4 exogenous to economic developments). One way to seeOECD 18.9 21.6 whether an oil price increase is endogenous or exogenousFormer Soviet Union 13.6 15.6 is to check whether it precedes or follows changes inOther non OECD 25.6 29.4 economic activity. Chart 7 shows global GDP growth andTotal World 87.3 100.0 changes in the world market price for oil since the earlySource: OPEC, OECD,IEA and DB Global Markets Research 1970s. Clearly, the oil price spikes of 1974-75 and 1979-80 preceded the change in global growth. Thus, these periodsWhile the Middle East is not the dominant global producer, are correctly remembered as “oil price shocks” triggeringit does account for enough of world production to mean economic downturns. Since then, however, the lead of oilthat a substantial disruption to production in that region price changes over economic growth seems to have disappeared. Periods of declining growth have tended toDeutsche Bank Securities Inc. Page 5
3 March 2011 Global Economic Perspectivesbe followed by periods of falling oil prices, and vice versa, Chart 8. Brent prices and global PMIsuggesting that oil price changes have been endogenous. yoy% Brent crude oil prices (ls) IndexThe spike in oil prices in 2007-08 was a bit ambiguous. As 120 Global PMI: composite output (50+ = expansion, rs) 65the chart shows that spike slightly preceded the slow-down in economic growth, suggesting some influence 60 80from rising oil prices on economic activity. However, thedeep recession of 2009 then clearly caused a sharp drop in 55 40oil prices, while the recovery of 2010 pushed oil prices 50higher again. 0 45Chart 7. World GDP and spot oil prices -40% y/y % y/y 40 World GDP (ls) World spot price for oil(rs) -80 35 -2.0 200 2001 2003 2005 2007 2009 2011 150 Source: WSJ, JPM, DB Global Markets Research 0.0 100 2.0 50 To what extent is the current level of 4.0 0 prices supply-driven or demand driven? 6.0 As we have noted, before judging how strong an effect a -50 given move in oil prices is going to have on activity, we 8.0 -100 need to judge whether that move is driven by supply 71 76 81 86 91 96 01 06 11 factors or demand factors. In Chart 9, we plot monthly dataSource: OECD, DB Global Markets Research on yoy changes in real oil prices (deflated by US CPI) against changes in a world industrial production index. A key indicator of growth is demand for oil. The estimatedThe relationship between oil prices and economic activity relationship indicates that the estimated 7.5% increase inin the more recent past is explored further in Chart 8, world industrial production over the past year waswhich plots changes in oil prices against the global consistent with a 35-40% increase in the price of oil. Thiscomposite purchasing managers’ index on a monthly basis. would put the price of oil about $25-30 above where it wasAgain, the lead of economic activity over oil prices is clearly a year ago, or in a range of $100-105/bl, compared with itsvisible until 2007-08. Developments in 2006-07 suggest current level of about $110-115/bl (Brent). This suggeststhat growth had already begun to weaken when oil pricesstarted to rise. The acceleration of oil price increases that most of the rise in oil prices over the past can betowards the end of 2007 and during the first half of 2008 explained by demand factors, and about $10/bbl of thethen seems to have exacerbated the weakening of most recent increase can be attributed to actual or moreeconomic growth. This changed during the second half of likely anticipated/feared supply disruptions.2008, when the weakening of economic activity draggeddown oil prices. Recovery during 2009-10 clearly led oil Chart 9. World IP growth and oil prices, 2001-2011prices higher again, and even the latest round of oil price 100 WTI, %yoyincreases to February 2011 appears to have followed the 80renewed pick-up of activity. Oil = 5.07 x IP - 2.5 60 R² = 0.51 40 20 0 -20 -40 -60 -80 World IP, %yoy -15 -10 -5 0 5 10 15 Source: IMF, BLS. Haver, DB Global Markets ResearchPage 6 Deutsche Bank Securities Inc.
3 March 2011 Global Economic PerspectivesTo corroborate this finding, we consider the relationship the same effect is observed in export markets. So growthbetween the S&P500 stock price index and oil prices. To is likely to slow down by more than the initial impactthe extent that oil prices are impinging on economic assessment – indeed, even an oil exporting country mayactivity rather than respond to it we would expect the ratio find growth slows down despite a positive terms of tradeof stock to oil prices to drop. If strong demand is driving oil shock – but the impact on inflation is ambiguous. Slowerprices up, the stock price/oil price ratio should be flat to growth means weaker demand for non-oil items, sorising. This ratio did decline in 2007-08 (Chart 10), headline inflation may rise by less than the initial impact asconfirming our earlier observation that concerns about oil non-oil prices decline.supply disruptions played a role in the relationship between To help us sort through these complications we use aoil and activity during that period—the jump in oil prices did computational general equilibrium (CGE) model of thecontribute to the drop in growth. More recently, the world economy calibrated to 2009 levels of activity/pricesstock/oil price ratio has been more stable, edging lower and so on2 . Such a model is well suited to analyzing amodestly over the past couple months and a bit more shock such as an exogenous increase in oil prices,noticeably in the past few days. This suggests that demand although the use of a 2009 base year in this particularfactors have dominated the rise in oil prices until very instance is perhaps unfortunate given how low oil pricesrecently. were then. Unlike VAR analysis, though, this approach doesn’t allow us to identify separately the impact andChart 10. Ratio of S&P500 to Brent oil price eventual effects of an oil price increase. Instead, we reportRatio Ratio in the table below the changes in prices and GDP levels28 28 after the global economy has returned to equilibrium. We are cautious about reading too much into the individual24 24 figures in the tables, but view this exercise at least as offering a means of ranking economies according to their20 20 sensitivity to an oil price shock.16 16 Table 2. Impact on levels of GDP and CPI of a 10% oil price increase12 12 Oil Importers Latest value for March 1 GDP CPI GDP CPI Chile -0.33 0.69 Philippines -0.23 0.66 8 8 2006 2007 2008 2009 2010 2011 China -0.27 0.46 Poland -0.41 0.64 Chech Rep -0.41 0.68 Singapore -0.25 0.44Source: WSJ, DB Global Markets Research France -0.62 0.71 S. Africa -0.29 0.7 Germany -0.43 0.65 S.Korea -0.69 0.57 HK -0.11 0.48 Spain -0.41 0.66Empirical estimates of the effects of oil Hungary -0.31 0.6 Taiwan -0.53 0.46price shocks on the global economy. India -0.52 0.01 Thailand -0.56 0.48 Italy -0.34 1.08 Turkey -0.46 0.58We consider a variety of model-based estimates, including Japan -0.29 0.73 U.K -0.72 0.53two done in-house (CGE and VAR models) and several by Netherlands -0.72 0.49 U.S -0.49 0.45external research groups (the IMF, OECD, and Fed). We Oceania -0.35 0.6then derive a “consensus” measure to be used in the Oil Exporterssensitivity analysis that follows. GDP CPI GDP CPI Argentina -0.44 0.59 Malaysia -0.49 1.05CGE model-based estimates Brazil -0.69 0.62 Mexico -0.32 0.77 OtherFiguring out how higher oil prices impact an economy cries Colombia -0.71 0.98 MENA -0.22 0.82 Egypt 0.38 0.34 Peru -0.51 0.62out for a general equilibrium approach because beyond the Indonesia -0.26 0.55 Russia -0.26 0.9immediate impact of oil prices on headline inflation and Iran -0.34 1.08 Venezuela -0.15 0.87energy demand the “second round” effects quickly Source: DB Global Markets Researchbecome too difficult to sort out as many of these effectsoperate in conflicting directions. For a small openeconomy, for example, an increase in the world price of oilmay be genuinely a supply shock, pushing up headlineinflation and reducing demand for oil. But the latter will 2 Our CGE model is a modified version of the Purdue University GTAPtend to depress activity as will a decline in export growth if model.Deutsche Bank Securities Inc. Page 7
3 March 2011 Global Economic PerspectivesWhat is interesting about the results is how similar they are Other model simulationsacross regions. Of particular importance, while oil Extensive work has been done by the IMF and OECD onexporters see a rise in their trade surpluses (not reported) capturing the impact of oil price shocks on GDP andand importers generally experience a decline, by the time inflation of US and Euro Area. The Fed, too has reportedall the second- and third-round effects are worked out, simulations for the US economy with its FRB-US model.most countries don’t differ too much. On average, real The results of this work, standardized to capture theGDP falls by about 0.4% -- slightly less for the exporters, effects of a $10 per barrel increase in oil prices, areonly slightly more for the importers. Only one oil exporter summarized in Table 3A and 3B. We have also added a– Egypt – is estimated to enjoy an increase in GDP, “consensus” estimate, which is our own judgmentallyalthough Venezuela, possibly the most oil dependent weighted average of the various model results, givingeconomy in this sample – experiences only a very mild some weight to the CGE results discussed above.reduction in output. But the message is that even for oilexporting countries, the impact of weaker global demand Table 3A. Impact on GDP growth due to rise in oil prices bygrowth after an oil price shock generally more than offsets $10 per barrelthe initial gains. OECD- IMF- Interlink FRB/US Mulitmod DB VAR Consen-There is more variance across countries in terms of the model (1999) Model (2011) susimpact on inflation. While the average increase in inflation (2004-05) (2000)for the countries we present above is 0.6%, oil exportersare estimated to see relatively higher price level increases US -0.3 -0.2 -0.6 -0.4 -0.35than the importers – where the dampening effect on Euro Area -0.5 -0.4 -0.5growth is stronger.The model suggests that the developed economies are Japan -0.4 -0.2 -0.3slightly worse off after an oil price shock than emerging Totalmarkets. The former group would see a larger drop in GDP Developing -0.2 -0.2and a slightly larger increase in inflation than the oil- countriesimporting emerging market economies would on average, Asia ex -0.8 -0.8although the group-wise differences are not large. JapanBetween the US and Europe, the simulation suggests that World -0.4 -0.4the biggest difference will be on the inflation front, with Source: OECD, FRB, DB Global Markets Researchmore inflation in Europe than the US after an oil shock.We are surprised at the relative resilience of growth inHong Kong and Singapore that falls out of the simulations –the other “high beta” Asian oil importers do see a larger Table 3B. Impact on inflation due to rise in oil prices by $10GDP drop than in the developed economies, as we’d per barrelexpect. OECD- IMF- Interlink FRB/US Mulitmod DB VAR Consen-VAR model-based estimates model (1999) Model (2011) sus (2004-05) (2000)We have also used a VAR (vector autoregression) model togauge the impact of changes in oil prices on the US real US 0.5 0.5 0.6 0.5 0.5GDP growth and consumer price inflation. The model Euro Area 0.5 0.2 0.4incorporates two lags on the quarterly annualized growthrates for each of these variables. The impulse response to Japan 0.3 0.3a one standard deviation shock to oil price growth shows Totalan immediate fall in real GDP growth by about -0.4 to - Developing0.5% while the consumer price inflation rise by about 0.4 countriesto 0.5%. The accumulated responses for GDP growth and Asia exinflation over a period of 10 quarters are -1.8% and 2.2%. 0.7 0.7 JapanThese results, when translated into $10 rise in oil prices,imply a reduction in real growth rate by about 0.2% Worldimmediately and 0.6% over a period of 10 quarters. Source: OECD, FRB, DB Global Markets ResearchInflation rises by 0.2% and 0.7% for a $10 rise in oil pricesduring the same periods.Page 8 Deutsche Bank Securities Inc.
3 March 2011 Global Economic PerspectivesEffects of mild and severe oil price have made the global economy less sensitive than inshocks the past. But the increasing importance of emerging market economies to the global GDP picture andUsing the consensus estimates in Tables 3A and B, we can their lower energy efficiency would have tended toconsider the possible effects of two alternative scenarios go the other way and increase sensitivity somewhat.involving disruption of Middle East oil supplies. The first isa mild disruption that entails holding the Brent price in therange of 110 to 115/brl for much of the year ahead. In this Peter Hooper, (+1) 212 250-7352case, we see US, Euro area and global growth slowing by Thomas Mayer, (49) 69 910 30800about 0.4 to 0.5% relative to our baseline forecast. Thesecond scenario entails a more severe disruption of output, Michael Spencer, (852) 2203 8305with unrest spreading meaningfully to Saudi Arabia and/orother major Middle Eastern producers by enough to push Torsten Slok, (+1) 212 250-2155the Brent oil price up to $150 per barrel until global growthresponds negatively. In this case, the hit to global growthwould be five times as large as in the mild shock case,enough to reduce global growth to near recession levels(less than 2%).Table 4. Impact of oil price shocks on GDP growth andinflation for year ahead Mild oil shock Severe oil shock Oil prices to stay at Oil prices reach $110/brl $150/brl GDP Inflation GDP InflationUS -0.35 0.5 -1.75 2.6Euro Area -0.5 0.4 -2.3 1.8Japan -0.3 0.3 -1.5 1.5TotalDeveloping -0.2 -1.0countriesAsia ex -0.8 0.7 -4.0 3.5JapanWorld -0.4 -2.0Source: DB Global Markets ResearchOur estimate that a 50% supply-induced oil price shockwould cut roughly 2 to 2.5% points off global growthallows for an interesting historical comparison withpast supply-induced shocks. Oil prices jumpednearly 200% in 1973-75, and global growth droppedby 6% points. In 1979-80, a 67% jump in oil pricesresulted in nearly a 4% point drop in olobal growth.Thus our current estimate is not too far out of linewith this earlier experience. Increases in energyefficiency and reduced dependence on oil per unit ofoutput, especially among industrial countries, wouldDeutsche Bank Securities Inc. Page 9
3 March 2011 Global Economic PerspectivesCentral Bank Watch Euroland We expect the ECB to leave policy rates unchanged at theUS next Council meeting on March 3. We expect moreThe Feds stated intention is to purchase $600 bn of hawkishness but also insistence that there is “nolonger-term US Treasury securities by June under QE2. precommitment” to hikes. In our opinion, the most likelyWe expect that intention to be fulfilled and not extended occasion for the first hike is June. We see May as thebeyond this commitment unless the economy takes a earliest possible date for a hike where we expect a moresignificant turn for the worse. The improving US definitive decision on March 3 is on the non-standardeconomic picture suggests that once QE2 terminates, the liquidity policies. Against the prevailing uncertainties (e.g.,Fed will likely turn next to ending the MBS rollover Spanish bank refinancing in the next few months, EFSFprogram later this summer or fall. It will likely also begin reforms, Irish and EU bank stress tests) we expect theto modify its "extended period" language sometime during ECB to leave the full allotment regime intact.that time frame, signaling that the initial rate hike will Current Mar11 Jun 11 Dec 11follow within several meetings. With economic news Refi rate 1.00 1.00 1.25 1.75improving, we see a good chance of an initial hike inpolicy rates occurring around the end of 2011--our US Key rates in the G3 countrieseconomics teams call has been for this December. Prior % K ey rates in th e G 3 co u n tries %to hiking rates, the Fed will most likely engage in reverse 7 BoJ 7repo operations and term deposits to reduce the liquidity 6 E C B refi F orecast 6 Fed Fundsof its liabilities. And it should begin to sell off some of its 5 5holdings of MBS and Treasury securities after it has begun 4 4to raise policy rates. How quickly it proceeds in raising 3 3rates and selling its holdings of longer-term assets will 2 2depend on how the markets and the economy are 1 1responding to this shift toward policy tightening. But onour current growth and inflation forecast, and the Fed’s, 0 0 1999 2001 2003 2005 2007 2009 2011we think that tightening could proceed somewhat faster Source: DB Global Markets Research, Bloomberg Finance LPthan the market currently has priced in for 2012. Current Mar11 Jun11 Dec11 UKfed funds rate 0 - 0.25 0 - 0.25 0 - 0.25 0.50 The minutes of the last MPC meeting show that three ofJapan the nine committee members are now voting for rateHad there been a severe slump in the economy in 4Q hikes, with Andrew Sentence voting for 50bp; Adam2010 and 1Q 2011, the BoJ may have been forced to Posen continues to support additional QE. Among the fiveenact further monetary easing purely from the business members voting for the status quo, there are “some”cycle viewpoint but it seems reasonable to consider that who worry about inflation developments but want to bethe decline in economic activity now assumed likely has sure the Q4 GDP contraction is an aberration beforeeffectively eliminated the possibility of further monetary taking action. Q1 GDP will be available by the time of theeasing. After a temporary increase in the current account May MPC meeting. We still see risks of a delay on thebalance of commercial banks with the BoJ (bank reserves) first hike until August.to ¥22trn to satisfy year-end rise in demand for funds Current Mar11 Jun 11 Dec 11(Figure 12), we expect the bank reserves to settle at Bank rate 0.50 0.50 0.50 1.00around the ¥18trn level once again in January 2011.The SwedenBoJ started the purchase of ¥5trn worth of financial The Riksbank raised rates from 1.25% to 1.50% at itsassets proposed in the 5 October 2010 “Comprehensive February meeting, as the market expected. The nextMonetary Easing” (¥1.5trn long-term government meeting is on 20th April.securities, ¥2trn short-term Treasury bills, ¥500bnCPs,¥500bn corporate bonds, ¥450bn ETFs, and ¥50bn Current Mar11 Jun 11 Dec 11REITs) but we are not certain that the total amount will Repo rate 1.50 1.50 2.00 2.50definitely lead to an increase in BoJ total assets by thesame magnitude. Current Mar11 Sep11ON rate 0 - 0.10 0.10 0.10Page 10 Deutsche Bank Securities Inc.
3 March 2011 Global Economic Perspectives Current Mar11 Jun11 Dec11Central Bank Watch (continued) OC rate 4.75 4.75 5.00 5.50Switzerland New ZealandThe SNB left policy rates unchanged in December. While higher prices for energy, food and other raw materialsthe economy has performed better than expected, we see probably explain an increase in both the number of firmsthe franc continuing to limit the rise in core inflation. The intending to rise selling prices (up 4pts to +26) and a risenext meeting is on 17 March. in surveyed inflation expectations (up 0.18bps to 3.02%). Current Mar11 Jun 11 Dec 11 Whilst the latter will not be welcomed by the RBNZ, we3M Libor tgt 0.25 0.25 0.50 1.00 do not expect this to be an obstacle to an easing of the OCR when the Bank formally reviews policy settings onKey rates in the peripheral European countries 10 March. A rate hike could occur marginally earlier% Switzerland 3m interbank rate %7 UK repo rate 7 (perhaps in July) if the economy and/or underlying inflation Sweden repo rate Forecast strengthens considerably more than we presently expect6 6 or be delayed beyond September if the economy fails to5 5 gather pace over coming months. Whilst clearly not on4 4 the table at present, in the near term we think the only3 3 conceivable change is a wind-back of the rate hikes implemented last year should signs emerge that the2 2 economy is set to continue a sideways crawl of the1 1 second half of 2010 for a significant part of 2011.0 0 1999 2001 2003 2005 2007 2009 2011 Current Mar11 Jun11 Dec11Source: DB Global Markets Research, Bloomberg Finance LP OC rate 3.00 2.50 2.50 2.50Canada Key rates in the Peripheral $-blocThe Bank of Canada left its target for the overnight rate % Official interest rates (cash rates) %unchanged at 1% today as expected. Policy Rate 9 9 New Zealand Australia Canadaannouncement is considerably more dovish that we 8 8 7 7expected given the strong pattern of full time job growth 6 6over the past six months, the stronger than expected (by 5 5the Bank) growth of GDP in the fourth quarter of 2010 and 4 4the evidence of stronger inflationary expectations noted in 3 3the most recent BoC Business Outlook Survey. Looking 2 2forward, it is still possible that the Bank will begin to 1 Forecast 1tighten at its April 15 Policy Rate Announcement. 0 0However, the emphasis on downside risks in this Policy 1999 2001 2003 2005 2007 2009 2011 Source: DB Global Markets Research, Bloomberg Finance LPRate Announcement makes it unlikely it will do so. Thisbeing said, given sustained growth of US/global economic Chinaactivity, persisting strength of domestic demand in Chinas official CPI inflation came in at 4.9% yoy inCanada, a further intensification of domestic inflationary January, up from 4.6% in December but significantly below market and our expectations of 5.3-5.4%. Theexpectations and an abatement of concerns regarding the widely speculated reason for this lower-than-expectedrisk of an oil shock, it appears more likely that the Bank figure -- the government adjustment to the CPI weights --will adopt a more restrictive policy stance in late May. was incorrect. The main surprises were that the official Current Mar11 Jun11 Dec11 mom increase in food prices (at 2.8%) was significantlyON rate 1.00 1.00 1.50 2.25 lower than our expectation of 3.7% (based on 6.2% mom rise in the agriculture price index in January, as reportedAustralia by the Ministry of Agriculture), and that clothing prices fellWith a positive global and domestic backdrop, RBA views in Jan (which is difficult to explain, after a 86% rise inthe monetary stance in Australia as mildly restrictive and cotton prices last year). We believe that Feb food pricelook for inflation to be consistent with the 2-3% target inflation in the official CPI statistics will likely surprise onover the year aheadWe therefore see nothing in the the upside, as the pass-through from agriculture prices tostatement to suggest that the Bank is contemplating any processed food prices are being delayed. We maintain ournear-term change in policy. Hence, even though our year- annual average CPI inflation forecast of 5%, and continueend cash rate target of 5.50% is likely (in our assessment) to expect yoy inflation to peak in June (at 5.8%yoyto be at the relatively hawkish end of views, we continue according to our latest forecast, vs the previous 6%). Forto struggle to see the Bank tightening again before mid- the second half of this year, we expect CPI inflation to fallyear (i.e. June / July).Deutsche Bank Securities Inc. Page 11
3 March 2011 Global Economic Perspectives would complement the increase in interest rates, implyingCentral Bank Watch (continued) that they could help reduce the magnitude of the tightening cycle. We expect two additional 50bp hikes ingradually towards 4% at the end of the year. The key March and in April, although the sharp deterioration inassumptions behind this projection include a 3% inflation expectations has increased the likelihood of acumulative decline in mom food prices in March-May, a longer cycle.stable global oil price, a stable velocity of money, andlimited pass-through of raw materials and wage inflation Current Mar11 Jun11 Dec11to consumer prices. CBR refi rate 11.25 11.75 12.25 12.25 Current Mar11 Jun11 Dec11 Russia1-year rate 3.00 3.20 3.50 3.50 Most recently, the CBR declared that it would hike interest rates across the spectrum of its instruments ofIndia monetary policy. Starting from the last day of February,Stressing that “inflation is clearly the dominant concern,” the refinancing rate, the key benchmark rate of thethe Reserve Bank of India resumed monetary policy Russian money market, is be set at 8% - 25bps above itstightening in its January review, raising the repo and current value of 7.75%. Overnight deposit rates werereverse repo rates to 6.5% and 5.5%, respectively. Apart hiked 25bp from 2.75% to 3% and overnight credit ratesfrom elevated food and fuel inflation risks, the central reached 8%.bank sees emerging demand side risk to inflation as well. Separately, reserve requirements were raised on FridayThe output gap has been closing, wage growth is robust, from 3.5% to 4.5% in foreign currency and from 3% toand public social spending programs are boosting income 3.5% in local currency. We note that this is the secondof the rural poor. Given these risks, the central bank time (the first one was at the end of January), when therevised up its inflation forecast for March 2011 to 7% CBR raises reserve requirements in foreign currency(from 5.5%), lower than our projection of 8%. It also together with local currency reserve requirements. Werecognized that the risk to the forecast was to the upside. link these hawkish actions by the CBR with the still highCuriously, the RBI statement did not entertain the inflation inflation levels, which reached 2.4% in January and 0.7%trajectory beyond March. Incorporating the risks thus far in February.highlighted by the central bank, we see inflation remaining The high levels of inflation observed in February werearound 8% through the course of the year. [January observed despite the significant reduction in fuel prices,inflation print of 8.2% further reinforces our concerns]. which suggests that the in-built inflationary momentumThe RBI justified the rate hikes by arguing that the growth- remains substantial. Furthermore, we note that the CBRinflation balance of risk has tilted toward the opted to raise rates in spite of the disappointing growthintensification of inflation. We see the RBI remaining open figures for January, which suggests that inflation concernsto further rate hikes, especially as we see no major respite have taken on prime importance for the monetaryfrom inflation pressure in the coming months. The central authorities.bank also seems ready to allow for some growth to be As for inflation prospects later this year, Deutsche Banksacrificed, if necessary, in its fight on inflation. If the non- forecasts the oil prices to remain high in 2011, averagingcore to core price spillover begins, which seems rather at USD101/bbl for Brent. We think that with oil prices atlikely in our view, the central bank will have no choice but such a high level, the government’s forecast (and theto act. We expect 100 more basis points in rate hikes CBR’s target) of 6-7% CPI inflation in 2011 will be hardlyduring 2011. achievable. We currently forecast the inflation to reach Current Mar11 Sep11 Dec11 8.5% in 2011.Repo rate 6.50 6.75 7.50 7.50 Current Mar11 Sep11 Dec CBR refi rate 8.00 8.25 8.25 8.00Brazil Key rates in major emerging marketsThe Central Bank initiated a new tightening cycle in % B razil C hina India %January, raising the SELIC overnight rate by 50bp to 30 3011.25%. The increase in interest rates was inevitable 25 F orecast 25given the strength of domestic demand and sharp 20 20deterioration in inflation expectations. Market participantscurrently expect inflation to surpass the 4.5% target in 15 152011 and 2012. The official statement released by the 10 10Central Bank explained that the hike in the SELIC rate was 5 5the “beginning of a process of adjustment,” indicatingthat it planned to implement additional hikes. At the same 0 2002 2004 2006 2008 2010 0time, however, the Central Bank stated that “macro- Source: DB Global Markets Research, Bloomberg Finance LPprudential measures” (such as the increase in reserverequirements on bank deposits announced in December)Page 12 Deutsche Bank Securities Inc.
3 March 2011 Global Economic Perspectives G loba l c ent r a l ba nk polic y r a t e hikes s inc e S ept em ber 2008 Trough 2009 2010 2011 Total bps policy rate Aug Oct Nov Dec Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb hikeIsrael 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 200Australia 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 175Norway 1.25% 1.50% 1.75% 2.00% 75Vietnam 7.00% 8.00% 9.00% 11.00% 400Malaysia 2.00% 2.25% 2.50% 2.75% 75India 4.75% 5.00% 5.25% 5.75% 6.00% 6.25% 6.50% 175Brazil 8.75% 9.50% 10.25% 10.75% 11.25% 250Peru 1.25% 1.50% 1.75% 2.00% 2.50% 3.00% 3.25% 3.50% 225Canada 0.25% 0.50% 0.75% 1.00% 75Chile 0.50% 1.00% 1.50% 2.00% 2.50% 2.75% 3.00% 3.25% 3.50% 300New Zealand 2.50% 2.75% 3.00% 50Taiwan 1.25% 1.38% 1.50% 1.63% 38Sweden 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 125S Korea 2.00% 2.25% 2.50% 2.75% 75Thailand 1.25% 1.50% 1.75% 2.00% 2.25% 100Serbia 8.00% 8.50% 9.00% 9.50% 10.50% 11.50% 12.00% 400Uruguay 6.25% 6.50% 25Nigeria 6.00% 6.25% 6.50% 50China 2.25% 2.50% 2.75% 3.00% 75Hungary 5.25% 5.50% 5.75% 6.00% 75Poland 3.50% 3.75% 25Indonesia 6.50% 6.75% 25Colombia 3.00% 3.25% 25Russia 7.75% 8.00% 25Note: Reserve Bank of India hiked twice in July, each by 25bpsDeutsche Bank Securities Inc. Page 13