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14:00 Vortrag / Presentation

Jürgen PFISTER

Chefvolkswirt/Chief Economist, Bayerische Landesbank BayernLB, Deutschland/Germany

The global and European environment for CEE economiesCEE Economic forumVelden, 16 September 2009

Dr. Jürgen Pfister, Chief Economist

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Agenda

» CEE economies successfully integrating in the global economy

» Two challenges: Home-made problems and the repercussions of the financial crisis and the global recession

» Financial crisis not yet overcome

» Outlook for the world economy 2009/2010

» US economy: Leading the recovery?

» Germany/Euro area: Deep recession – weak recovery

» Monetary and fiscal policies: Exit strategies wanted

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CEE economies: Highly exposed to foreign tradeExports plus imports as percentage of GDP, at current prices

Country 1999 2008

Poland 54.2 83.2

Czech. Rep. 112.1 149.3

Romania 60.9 75.7

Hungary 131.4 161.7

Slovakia 126.8 167.6

Bulgaria 94.9 143.7

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CEE economies: Dominant role of Western European customersShare of merchandise exports to EU-15 countries in total exports in percent

Country 2008

Poland 58.4

Czech. Rep. 63.7

Romania 55.2

Hungary 57.7

Slovakia 55.4

Bulgaria 46.6

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CEE economies: FDI inflows have fallen dramaticallyFDI inflows in billions of dollars/in percent of GDP

1) Without Special Purpose Entities (SPE)

Country 2006 2007 2008Average

2006 - 2008 As %

of GDPExpected inflows

2009 as % of GDP

Poland 19.9 23.0 16.5 19.8 4.6 2.5

Czech. Rep. 5.5 10.6 10.9 9.0 5.1 3.5

Romania 11.4 9.9 13.3 11.5 7.0 3.5

Hungary1 7.5 6.1 6.4 6.7 4.9 2.0

Slovakia 4.2 3.4 3.4 3.7 5.0 2.0

Bulgaria 7.8 11.7 9.2 9.6 23.7 7.0

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CEE economies: Massive turnaround in private capital flowsIn billions of dollars; eleven countries according to IMF definition

-40,0

0,0

40,0

80,0

120,0

160,0

2005 2006 2007 2008 2009 2010

160.0

120.0

80.0

40.0

0.0

-40.0

Private capital flows, netDirect investmentsPortfolio investments

of which:

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CEE economies: Catching up in living standards will take another generationPer-capita GDP, average of EU-15 countries =100, in purchasing power parities

Country 1999 2008

Poland 42.1 51.9

Czech. Rep. 60.2 72.6

Romania 22.5 41.3

Hungary 46.4 56.8

Slovakia 43.8 64.9

Bulgaria 23.5 36.2

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CEE economies: Home-made problems and international challenges

• Exaggerations and imbalances during the rapid catching-up process led to massive adjustments (e.g. sharp rise in private debt, loss of price competitiveness)

• The global financial crisis affected the CEE economies mainly indirectly: reversal in cross border capital flows, massive problems of foreign banks as owners of CEE banks

• EU membership as a stabilising factor

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Financial crisis: The second “tsunami” is nearing the beach!IMF, World Economic Outlook and Global Financial Stability Report, April 2009

Total writedowns expected: 4.1 trillion dollars• of which 2/3 fall on banks and 2.0 trillion dollars on securities• of which on US assets: 2.7 trillion dollars

Disclosed writedowns by banks so far: Less than half of the expected amount

Loan losses by Continental European banks: 888 billion dollars

Banks need fresh capital in large amounts:• in the US: 275 to 500 billion dollars• in Continental Europe: 475 to 950 billion dollars

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World economy: Severe recession – slow recovery IMF World Economic Outlook, April 2009

Results (1): Recessions associated with financial crisis are longer and more severe. It takes almost three years to get back to pre-recession output levels, which is more than one and a half years longer than in the case of other recessions.

Results (2): Globally synchronized recessions are also longer and deeper than other recessions. Recessions which are both financial sector driven and globally synchronized last almost two years and it takes over three and a half years for economies to return to pre-crisis output levels.

» 122 recessions in industrial countries since 1960 were analyzed

» The IMF distinguishes between recessions associated with financial shocks and other recessions. It also distinguishes between recessions that were highly synchronized across countries and recessions that were country or regionally specific.

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World economy: Severe recession in 2009 (1) Inflation-adjusted GDP, change on previous year in percent, market exchange rates

Forecast

-3

-2

-1

0

1

2

3

4

5

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Average 1980 - 2008

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World economy: Severe recession in 2009 (2)Inflation-adjusted GDP, change on previous year, in percent

Weight 2008 2009 2010

US 25.5 0.4 -2.7 1.8

Japan 8.1 -0.7 -6.0 1.0

Euro area 22.4 0.8 -4.0 1.0

Germany 6.1 1.3 -5.0 0.5

United Kingdom 5.1 0.7 -4.0 0.5

Industrial countries 68.8 0.5 -3.6 1.2China 6.0 9.0 8.0 9.5

India 2.0 7.3 5.8 6.8

Latin America 6.4 4.2 -3.1 2.0

Central and eastern Europe 4.1 3.2 -4.9 1.8

Russia 2.4 5.6 -7.5 2.0

Emerging markets 31.1 5.3 -0.1 4.1

World 100 2.0 -2.5 2.1

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US: Recovery, but not yet an upswing in sightPurchasing mangers index (ISM, manufacturing) and consumer confidence (Conference Board), seasonally-adjusted monthly figures

20

40

60

80

100

120

Jul Sep Nov Jan Mrz Mai Jul Sep Nov Jan Mrz Mai Jul 30

35

40

45

50

55

Consumer Confidence (lS) ISM (rS)

2007 2008 2009

Mar May AugMar May

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Overlapping forces obscuring the underlying cyclical dynamism

• Bounce-back effect: The sharp fall in activity – mainly in manufacturing and exports – was exacerbated due to severe financing constraints.

• Economic policy stimulus: Highly expansionary monetary and fiscal policies raising demand temporarily.

• Underlying cyclical forces: Inventory adjustment, sharp reduction in business fixed investment, rising unemployment.

The numbers are difficult to interpret. The outlook remains highly uncertain.

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US: Typical recession – slow recoveryInflation and seasonally-adjusted GDP, change on previous quarter in percent, annualised

-6,5

-4,5

-2,5

-0,5

1,5

3,5

5,5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2-6.5

2007 2009 2010

ForecastRecession

2008

-4.5

-2.5

-0.5

1.5

5.5

3.5

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US: High losses of wealthChange in net assets of private households in trillions of dollars and net assets as a percentage of disposable income

-12000

-8000

-4000

0

4000

8000

2004 2005 2006 2007 2008400

500

600

700

800

Net wealth (lS) Net wealth/disposable income (rS)

Memorandum item:disposable income2008: 10.81 trillion dollars

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US: Risky courseGeneral government fiscal balance as percent of GDP

-12,0

-9,0

-6,0

-3,0

0,0

3,0

2000 2002 2004 2006 2008 2010

Forecast3.0

0.0

-3.0

-6.0

-9.0

-12.0

3.0

0.0

-3.0

-6.0

-9.0

-12.0

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US: Indicators and contra-indicators for a (strong) recovery in 2010

• Inventory adjustment and housing market correction is (almost) completed

• Sharp fall in employment has reduced the cost base of businesses

• Adjustment in private households’ spending and saving behaviour is almost completed

• Strong stimulus from monetary and fiscal policies

• Incalculable risks in the US financial sector (credit crunch)

• Private households’ deleveraging will continue

• Highly expansionary monetary and fiscal policies will raise inflation expectations and undermine confidence in the dollar (failed exit strategies)

+ -

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Germany: Recovery, but not yet an upswing in sightifo business climate, seasonally-adjusted monthly figures, 2000=100

75

85

95

105

115

Jan Mrz Mai Jul Sep Nov Jan Mrz Mai Jul Sep Nov Jan Mrz Mai Jul

Current situation Climate Expectations

2007 2008 2009

Mar May Mar May Mar May

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Germany: Signs of stabilisation after dramatic fallOrder intake (in volume terms) and production in manufacturing, seasonally-adjusted monthly figures, 2005=100

70

90

110

130

Jan Mrz Mai Jul Sep Nov Jan Mrz Mai Jul Sep Nov Jan Mrz Mai Jul Sep Nov Jan Mrz Mai

Industrial production Order intake, volume

2006 2007 2008 2009Mar May Mar May Mar May Mar May Jun

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Germany: Slump in winterInflation and seasonally-adjusted GDP, quarterly figures, 2000=100

Annual average: +1.3%

102

104

106

108

110

112

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09

Prognose

Carry over: -2.1%

Forecast

Annual average: -5.0%

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Euro area: No inflation risks for the foreseeable futureHICP and core rate (excl. unproc. food and energy), change on previous year in percent

-1,0

0,0

1,0

2,0

3,0

4,0

Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 July 09

HICP Core rate

4.0

2.0

1.0

0.0

-1.0

3.0

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Commodity prices: Turn up againHWWI commodity price index, dollar basis, 2000=100

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Advanced economies: Sharp rise in government deficitsGeneral government fiscal balance as percent of GDP

-15

-12

-9

-6

-3

0

1992-96 1997-01 2002-06 2007 2008 2009 2010

Deutschland Frankreich ItalienEuroraum Großbritannien USAGermanyEuro area

FranceUnited Kingdom

ItalyUS

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Advanced economies: High debt burdenGross government debt as percent of GDP

40

60

80

100

2004 2005 2006 2007 2008 2009 2010

Deutschland Euroraum Großbritannien USAGermany Euro area United Kingdom US

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US: Strong growth in the monetary base – stagnating credit volumesIn billions of dollars and change on previous year in percent

Monetary base M2 Credit

Commercial and industrial loans

Real estate Consumer

Dec. 2006 811.1 +2.5 7033.6 +5.4 1187.5 +14.7 3378.8 +14.9 742.8 +5.0

Dec. 2007 822.4 +1.4 7438.4 +5.8 1430.8 +20.5 3607.9 +6.8 806.8 +8.6

Dec. 2008 1651.3 +100.8 8153.7 +9.6 1618.6 +13.1 3820.2 +5.9 861.8 +6.8

July 2009 1666.2 +1.6 8347.8 +4.1 1489.2 -13.3 3840.3 +0.9 850.1 -2.3

Updated: August 24, 20091) Change on December 2008, annual rate

1) 1) 1) 1) 1)

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Euro area: Credit expansion has slowed sharplyIn billions of euros and change on previous year in percent

Monetary base M3 Credit

To businesses Consumer credit housing loans

Dec. 2006 771.8 +11.4 7743.7 +9.9 3836.9 +12.8 584.2 +5.8 3194.3 +10.0

Dec. 2007 841.9 +9.1 8664.6 +11.6 4383.4 +14.2 616.1 +5.5 3419.9 +7.1

Dec. 2008 1150.7 +36.7 9407.3 +7.5 4825.8 +10.1 630.8 +2.4 3480.9 +1.8

July 2009 1102.0 +23.8 9446.0 +0.7 4759.0 -2.4 631.0 +0.1 3488.0 +0.3

Updated: August 27, 20091) Change on December 2008, annual rate

1) 1) 1) 1)

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US/euro area: Rising short-term rates from spring 2010 onwards In percent p.a.

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009 2010

Fed Funds Target Rate ECB Main Refinancing RateForecast

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Bond market: Low yields for some months 10-y government bond yields, monthly averages, in percent

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Sep Dez Mrz Jun Sep Dez Mrz Jun Sep Dez Mrz Jun Sep

Bundesanleihen Treasuries

2007 2009 20102008

ForecastBunds

Dec Mar Dec Mar Dec Mar

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Summary

• The recovery from the deep recession will be slow; an outright upswing will not occur before 2011.

• The main risks are persistent weaknesses in the banking sector and rising unemployment in Europe.

• The main challenge for policy makers is determining when and how fast exit strategies should be implemented.

• Growth in CEE economies will be dampened for a while by slow growth in the EU-15 economies and the correction of imbalances (debt, competitiveness).In the medium term, however, the process of catching up (real convergence) will continue.

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General Note

This publication constitutes research of a non-binding nature on the market situation and the investment instruments cited here at the time of the publication of this information on 7 April 2023. This research is, to the best of our knowledge, based on generally accessible sources which are reliable and accurate. However, no liability can be accepted for any errors or inaccuracies in information derived from these sources. The information used in this publication has not been checked for accuracy, completeness or relevance to current events. Consequently, no guarantee can be assumed for the completeness and accuracy of this report. This publication is for information only. It is not intended as a substitute for individual professional advice on investments and assets. Our investment consultants are at your disposal should you wish to procure additional up-to-date information.

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Dr. Jürgen Pfister Chief Economist

Phone: +49 (0)89.2171.21750Email: juergen.pfister@bayernlb.de

Thank you for your attention!