Hope, headwinds or hurricanes? Charting a course for

the global economy

Leila Butt

Senior Economist, Eastern Europe

November 2010

Most economies now growing againEmerging markets are booming

Unemployment remains very highConsumers rebuilding balance sheets

Countries are heavily indebtedDeflation a risk in rich countriesAsset bubbles a risk in emerging

markets

Key short-term points

A recovery is under way … US: 800,000 private jobs Jan-Sept ’10 beats 4.4m jobs lost in ’09

◦ But job growth is very slow; still 7.5m jobs below the peak Europe shows signs of life

Renewed risk taking is underway Positive growth, loose monetary policy; assets on a tear

Less fear of double-dip Supportive policy

China looks stronger Crash unlikely

Recovery still in doubt Fed returns to QE

Key longer-term points

Growth will not return to 2004-07 levels Fuelled by a bubble

Rich countries: years of slower growth Overstretched consumers Battered financial sector

Crisis accelerated emerging markets Significant drivers of global growth But weakening in West will be felt Slow shift to domestic demand Risks of bubbles

New perspective on global economy Greater volatility

Where are we now?

Global: World trade recovers strongly

8090

100110120130140150160170

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

World trade volumes. 2000=100. Seasonally adjusted.Source: CPB Netherlands Bureau for Economic Policy Analysis.

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

7/4

/04

12

/4/0

4

5/4

/05

10

/4/0

5

3/4

/06

8/4

/06

1/4

/07

6/4

/07

11

/4/0

7

4/4

/08

9/4

/08

2/4

/09

7/4

/09

12

/4/0

9

5/4

/10

10

/4/1

0

World US

Stock prices are higher, but volatile…

US$m. Source: Bloomberg

Stockmarket capitalisation

00.5

11.5

22.5

33.5

44.5

5

Oct 1 2008

Oct 14 2008

Oct 27 2008

No

v 7 2008

No

v 20 2008

Dec 3 2008

Dec 16 2008

Dec 29 2008

Jan 9 2009

Jan 22 2009

Feb

4 2009

Feb

17 2009

Mar 2 2009

Mar 13 2009

Mar 26 2009

Ap

r 8 2009

5/29/2009

7/31/2009

10/2/2009

12/4/2009

2/5/2010

4/9/2010

6/11/2010

8/13/2010

10/15/2010

… and borrowing costs are mostly contained

3-month US$ LIBOR minus 3-month US Treasuries Source: Haver

Spread between the cost of government borrowing and private-sector borrowing, basis points

Post-Lehman Bros panic

Stimulus plans feed through

Greece, EU debt crisis

Fed intervenes; QE

-12

-10

-8

-6

-4

-2

0

2

4

20

00

20

02

20

04

20

06

20

08

20

10

China Euro area

UK US

Government debt soars

Budgets deeply in the red Worst in rich countries Governments offered

subsidies, incentives, tax cuts, bailouts

◦ Banks, car companies More stimulus?

Interest rates still low Fed considering further steps

Inventories being rebuilt Filling the shelves helps

manufacturers But it’s temporary

Budget deficit; % of GDP

Source: Economist Intelligence Unit, Country Data

Global outlook: Upswing, but uneven

GDP growth, % year on year

Source: EIU estimates

Developed

Emerging

World

Credit crunch starts

US and Europe

This is already a jobless recovery

-7

-6

-5

-4

-3

-2

-1

0

1

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49

1948 1981 1990 2001 2007

Sources: Bureau of Labour Statistics; EIU.

US: % of jobs relative to peak employment

The great deleveraging continues in the US…

0

2

4

6

8

10

12

14

16

19

59

- J

an

19

67

- M

ay

19

75

- S

ep

19

84

- J

an

19

92

- M

ay

20

00

- S

ep

20

09

- J

an

Sources: BEA; EIU.

US personal savings rate, % of disposable income.

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

1959

- Q

1

1961

- Q

1

1963

- Q

1

1965

- Q

1

1967

- Q

1

1969

- Q

1

1971

- Q

1

1973

- Q

1

1975

- Q

1

1977

- Q

1

1979

- Q

1

1981

- Q

1

1983

- Q

1

1985

- Q

1

1987

- Q

1

1989

- Q

1

1991

- Q

1

1993

- Q

1

1995

- Q

1

1997

- Q

1

1999

- Q

1

2001

- Q

1

2003

- Q

1

2005

- Q

1

2007

- Q

1

2009

- Q

1

US: Housing still very weak…

US housing starts, ‘000s, SAAR.Source: Bureau of the Census

Spot the recovery!

Home foreclosures still awful

0

50000

100000

150000

200000

250000

300000

350000

400000

1/31/2005

7/31/2005

1/31/2006

7/31/2006

1/31/2007

7/31/2007

1/31/2008

7/31/2008

1/31/2009

7/31/2009

1/31/2010

7/31/2010

Jan-Sept 2010 foreclosures: 2,970,000

Worse than last year

March foreclosures: a record

367,000

1 in 4 mortgage holders with negative equity

Pent-up listings will keep homes coming to market, restraining prices

Yes, housing has stabilised

But new home sales are moribund Prices are largely stagnant

Nationally, 14+% of mortgages

delinquent or foreclosed

Number of foreclosures

Source: Realty Trac

Euro area: Worst crisis ever…but signs of life

-6

-4

-2

0

2

4

6

19

99

q1

q2

q3

q4

20

04

q1

q2

q3

q4

20

09

q1

q2

q3

Debt sinking the periphery Bailout has helped, but… … only buying time;

massive fiscal adjustment required

Must improve competitiveness

But Germany is rebounding Exports, business

investment, stockbuilding But unemployment is high,

consumers hesitantLess impressive in rest of EU

Second quarter 2010? As good as it will get

GDP growth; % change, Y o Y

Source: Economist Intelligence Unit, Country Data

Economic growth

Euro zone: Solvency stresses will continue

0

500

1,000

1,500

2,000

2,500

3,000

Sp

ain

Po

rtu

ga

l

Ire

lan

d

Gre

ec

e

NL

Ita

ly

Ge

rma

ny

Fra

nc

e

1999 (Greece 2001) 2009211% of

GDP

192%

234%

92%

150%111%

112%

110%

Bank claims on private sector, € bn. (UK bank lending at 213% of GDP in 2009, £3trn.)

Sources: IMF, International Financial Statistics; EIU, CountryData.

Euro zone: There’s no way out. Exiting would mean…

• Wipe-out of exiting country’s banking sector, households default on euro debt• Collateral damage to foreign banks, particularly in the euro zone, and companies and households• Contagion—markets pick off weaker countries following exit, triggering further turmoil• Euro collapse would trigger depression for the euro zone? • Leaving the euro would be a political decision, not an economic one

Emerging markets

Asia: Powering ahead

-15

-10

-5

0

5

10

15

20

25Q

1-00

Q4-

00

Q3-

01

Q2-

02

Q1-

03

Q4-

03

Q3-

04

Q2-

05

Q1-

06

Q4-

06

Q3-

07

Q2-

08

Q1-

09

Q4-

09

China Hong Kong India

Indonesia Malaysia Philippines

Singapore Taiwan Thailand

Real GDP, % change on year earlier, Haver

Asian bubbles?

Asia is importing monetary stimulus from US Consequence of active

exchange-rate management

Economic conditions are much stronger in Asia Monetary policy is too loose for

Asian circumstances Fiscal stimulus was very large

Food commodity prices are again a concern El Niño, bad monsoon in India

Fears of inflation/asset bubbles in Asia

China: An explosive recovery

0

5

10

15

20

25

Industrial production

Retail sales

Chinese growth slowed only modestly in 2009

• Big bounce-back in 2010; GDP rose by 11.9% in Q1, 10.3% in Q2

Government now trying to slow economy

• But it’s all relative; industrial production “only” growing by 10% instead of 15%• Retail sales growth down to 15% from 20%

% change, year on year. Source: Haver

What’s ahead for the major currencies?

80

90

100

110

120

130

140

150

Jan

04 1

999

Feb

28

2000

Apr

23

2001

Jun

17 2

002

Aug

11

2003

Oct

04

2004

Nov

28

2005

Jan

22 2

007

Mar

17

2008

May

11

2009

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Trade-weighted € US$:€

US$/€ strongly correlated with risk perception Euro zone structural concerns to dominate over medium term—the euro will remain structurally weak US$1.30:€1 in 2010, US$1.20:€1 in 2011—slightly weaker thereafter But expect volatility

Pity the yen Yen strength is an expression of risk aversion No relation to Japan’s economic performance Intervention won’t change secular trends

Emerging markets RMB to continue slow appreciation against US$ Emerging market currency strength to depend on risk tolerance

Source: Haver Analytics.

AverageS

ept 1

4 20

10

Is there a currency war? Three weapons of attack

China won’t let the renminbi appreciate The currency is undervalued; US$2.6trn in reserves Generating sharp political criticism And not just from the US

Rich-world monetary policy Easy money depresses their

currencies Re-directs investors to EM

currencies, pushing them up; risks export competitiveness

Emerging-market interventions Currency purchases to hold down value Capital controls, such as taxes on foreign purchases of

domestic debt

What does all this mean?

What does that mean?

• Then• Fast growth• Rich world• Easy credit• Rising asset price• Momentum driven

• Now• Slow growth• Emerging world• No credit• Flat asset prices• Value driven

Where’s the growth?

Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of October 2010. Source: Economist Intelligence Unit, CountryData.