Is the global recovery stalling?

Is the global recovery stalling?

October 2010

Adrian [email protected]

Oxford Economics

2

■ Founded in 1981 as a joint venture with Templeton College in Oxford University, Oxford Economics has since grown into one of the world’s foremost independent providers of global economic research and consulting

■ The rigor of our analysis, calibre of staff and links with Oxford University make us the most trusted resource for decision makers seeking independent thinking and evidence-based research.

■ Over 60 in-house economists.

■ Extensive experience in industry and public-sector analysis.

■ Access to over 100 economic research groups through the UN's project link.

■ Links to Oxford University and other leading research institutes.

Our track record

USA Eurozone JapanOE 0.7 1.4 2.0

EIU 1.0 2.2 2.6

Global Insight 0.7 1.7 2.4

IMF 1.6 2.2 2.9

OECD 1.1 1.8 2.7

Consensus Economics 1.0 1.8 2.4

Macro Advisors 1.2 - -

Note: Forecasts made in December for year ahead.

Forecasting Record

Oxford Economics

2007-2009(average absolute forecast divergence for real GDP growth)

Global growth better than expected in 2010

-3

-2

-1

0

1

2

3

4

5

1999 2001 2003 2005 2007 2009 2011 2013

World: Global real GDP growth % yr

Source : Oxford Economics/Haver Analytics

January 2010 forecast

October 2010 forecast

Forecast

World trade has bounced back very strongly

80

85

90

95

100

105

2008Q3 Q4 2009Q1 Q2 Q3 Q4 2010Q1 Q2

Global Trade and GDP during the Crisis2008Q1=100


GDP

Trade

Two key points

There is still a very high level of uncertainty about the outlook, especially in the US and Europe

The recession was driven by the corporate sector and the shape of the recovery will depend on how corporates react in different countries

US weaker than Europe in Q2…

-4

-3

-2

-1

0

1

2

3

US Eurozone Germany UK

09Q1 09Q2 09Q3 09Q4 10Q1 10Q2

GDP growth% quarter

Source : Oxford Economics

…although Europe still lagging US recovery

92

93

94

95

96

97

98

99

100

101

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

Source: Oxford Economics

2008 Q1 = 100

GDP: US, UK, Eurozone & Germany

US

UK

Germany

Eurozone

Why has the US recovery slowed?

Q2 pulled down by surging imports and easing of restocking cycle

Domestic demand was still strong

And many recent indicators encouraging

Two main areas of worry:

■ Housing sector is still a mess

■ Jobs recovery disappointing

US domestic demand still strong in Q2

ISM points to sustained healthy growth

30

35

40

45

50

55

60

65

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Index

Non-manufacturing

Manufacturing

Source: Institute for Supply Management

ISM indexes

But corporates are still not hiring in the US…

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10Source: National Statistics

000's

US: Monthly change in private employment

Strong productivity promised jobs rebound…

-3

-2

-1

0

1

2

3

4

5

6

1981 1985 1989 1993 1997 2001 2005 2009Source: Oxford Economics

% year

Whole economy

US: Productivity growth

F'cast

…given US productivity level very high

0

10

20

30

40

50

60

70

US Japan Germany France UK

Productivity: GDP per hour worked (2009)US$

Source: Oxford Economics' calculation

Why aren’t companies hiring in the US?

Long-term unemployment encouraged by more generous benefits?

Job losses concentrated in construction and outlook in this sector is bleak

Regional mismatch between labour demand and supply

Uncertainty



Job losses concentrated in construction


Uncertainty

Changes in US unemployment - worst & best

0 2 4 6 8 10 12

Nevada

Florida

California

Pennsylvania

Texas

New York

Alaska

South Dakota

North Dakota

Peak to trough change in unemployment

Source : Haver Analytics

Smallest impact

Large states

Biggest impact



Job losses concentrated in construction


Uncertainty

Bernanke on uncertainty

Statement to Senate Banking Committee, 22 July:

"Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognise that the economic outlook remains unusually uncertain.“

Keynote speech at Jackson Hole, Wyoming, 27 August:

“…macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments.”

The recession wasn’t consumer driven in US…

90

92

94

96

98

100

102

104

106

108

-6 -5 -4 -3 -2 -1 0 1 2 3 4

US : Consumer spendingtrough=100


1980Q3

1982Q4

1975Q1

1991Q1

Periods from trough

2009Q2

2001Q4

…and even less so in Germany

94

96

98

100

102

104

106

-6 -5 -4 -3 -2 -1 0 1 2 3 4

Germany : Consumer spendingtrough=100


Early 1980s

Early 1970s

Early 1990s

Periods from trough

2008-10

Nor were bank job cuts as bad as feared

-7

-6

-5

-4

-3

-2

-1

0

1

US Japan UK Germany France Italy

GovernmentOther servicesFinance/businessIndustryConstructionAgriculture

Sectoral contribution to employment lossesContribution to peak-to-trough change in employment, % pts


Corporates have driven the cycle – in the US…

…and globally, then magnified through trade

95

97

99

101

103

105

107

109

111

113

115

Q-5 Q-4 Q-3 Q-2 Q-1 Q0 Q1 Q2 Q3 Q4 Q5

100= GDP trough


Germany: Investment recoveries compared

2008-10

Early 1970s

Early 1990s

Early 1980s

Corporate sector now running big surpluses

-10

-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: Oxford Economics

% of GDP, 4QMA

Total corporate financial balance

France

US

UK

Germany

Japan

Partly that is banks…

-5

-4

-3

-2

-1

0

1

2

3

4

5


% of GDP, 4QMA

Financial corporate balance

France

US

UK

Germany

Japan

…but critically it is also non-financials

-10

-5

0

5

10

15


% of GDP, 4QMA

Non financial corporate balance

France

US

UK

Germany

Japan

Government retrenchment intensifying…

…amid threat of Eurozone sovereign debt crisis

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010 Jul-2010

Greece Spain

Portugal Ireland

Italy

Eurozone: Credit spreads% spread of 10-year bonds over German bunds


And households constrained not only by debt…

0

50

100

150

200

250

1995 1997 1999 2001 2003 2005 2007 2009

Household debt% of income


US

UK

Eurozone

Germany

Ireland

SpainEurozone

…but also the weak labour market…

3

4

5

6

7

8

9

10

11

12

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

World: Unemployment%


France

Eurozone

GermanyUK

US

Forecast

…and squeeze on real wages as well as higher taxes

-2

-1

0

1

2

3

4

5

6

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Real wagesAnnual % change


US

UK

Eurozone

Forecast

Financial surpluses here for extended period

-6

-4

-2

0

2

4

6

8

10


% of GDP, 4QMA

Household financial balance

France

US

UK

Germany

Japan

So consumers will lag rather than lead recovery

Corporate surpluses normally get spent in US…

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

US: Investment and corporate money% year


Real corporate broad money

Non-residential investment

…and elsewhere

-30

-20

-10

0

10

20

30

40

50

1970 1976 1982 1988 1994 2000 2006

UK: Corporate liquidity and investment% year


Business Investment

Real PNFC M4

We are seeing some recovery in M&A

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1996 1998 2000 2002 2004 2006 2008 2010Jan-Jul

ann.

World: M&AUS$ bn

Source : Dealogic/Thomson Reuters

What might hold companies back this time?

Unusual uncertainty

Excess capacity

Debt

Credit constraints

Excess capacity holding back investment

65

70

75

80

85

90

1995 1997 1999 2001 2003 2005 2007 2009

-20

-15

-10

-5

0

5

10

15

% point

Source: Oxford Economics, Haver Analytics

Low capacity discourages new investment

Capacity utilisation

(LHS)

Non residential investment

(RHS)

% year

Eurozone: Capacity utilisation and real non-residential investment

US: Capacity utilisation and real non-residential investment


Unusual uncertainty

Excess capacity

Debt

Credit constraints

Companies seeking to pay down debt


Unusual uncertainty

Excess capacity

Debt

Credit constraints

Corporate lending very weak

-24

-20

-16

-12

-8

-4

0

4

8

12

16

20

24

28

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% year

UK

Source: Haver Analytics

World: Lending to PNFCs*

Eurozone

US

*3 month moving average

Forecast takes a hopeful view on investment for US

Subdued recovery for major economies

Interest rates to remain low for some time

0

2

4

6

8

10

12

14

16

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012Source: Oxford Economics

World: Interest rates

Euro

UK

3-month interest rates, %

US

Forecast

Japan

Emergers leading recovery despite slowing in some

-20

-15

-10

-5

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010

% year


BRICS: Industrial production

3 month moving average

Brazil

Russia

China

India

Consumption is robust in China…

3

6

9

12

15

18

21

24

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% year

Volume sales


China: Retail sales

Value sales

…pulling up rest of Asia…

-40

-30

-20

-10

0

10

20

30

40

50

60

200501 200601 200701 200801 200901 201001

-40

-20

0

20

40

60

80Korea (LHS) Japan (LHS)

Singapore (LHS) China (RHS)

China import* growth and regional IP*% yr


% yr

*3 month moving average

…and supporting Asian consumer

-6

-3

0

3

6

9

12

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% year


Emerging Asia: Consumer spending

Malaysia

Taiwan

Thailand

Korea

Low debt levels gives plenty of fiscal scope…

0

20

40

60

80

100

120

140

160

180

200

0 2 4 6 8 10 12

Budget Deficits and government debt in 2010debt as % GDP


UK

Japan

GreeceItaly

US

Spain

Germany

Malaysia

India

Taiwan

SingaporeFrance

Thailand

Korea

China

deficit as % of GDP

…and credit taps can turn on quickly if needed

0

4

8

12

16

20

24

28

32

36

19981999 200020012002 200320042005 2006200720082009 2010

12-month % change


China: Total RMB loans

But pull from China’s imports is easing…

-40

-20

0

20

40

60

80

1995 1997 1999 2001 2003 2005 2007 2009

% year

Exports (US$)


China: Exports and imports

Imports (US$)


…pressure coming from stronger currencies…

80

90

100

110

120

130

140

150

2002 2003 2004 2005 2006 2007 2008 2009 2010

2002Q1=100


Emerging Asia: Exchange rates v US$

Taiwan

Korea

China

appreciation

India

month average data except for last observation (= Oct 14)

Thailand

80

90

100

110

120

130

140

150

2002 2003 2004 2005 2006 2007 2008 2009 2010

2002Q1=100



Singapore

Malaysia

IndonesiaPhilippines

appreciation


…and dependence on OECD still significant

Co

rpo

rate

rec

ove

ry

Renewed crisis■ Threat of double-dip means renewed

slump in asset prices as Eurozone sovereign debt crisis re-emerges

■ Pressure to cut budget deficits rapidly in all major economies

■ Rising unemployment and business failures feed back into banking

■ Limited scope for monetary policy offset

Sub-par recovery■ Business optimism remains low and

corporates continue to hoard cash■ Investment and job growth is modest as

capacity is underutilised■ Monetary policy supports banking sector

but fiscal coffers are empty■ Easier credit conditions mean benefits of

loose monetary policy feeds through to a stronger housing and consumer recovery

Financial sector recovery

Outlook still highly uncertain

Renewed global boom■ Strong corporate liquidity feeds into new

investment boom■ Faster growth boosts business and

consumer confidence, and trade multiplier magnifies upturn

■ Bank balance sheets improve quickly and credit growth resumes

■ Strong growth boosts tax revenues/cuts social security payments, helping fiscal consolidation

Oxford forecast■ Gradual rise in business confidence

encourages corporates to invest ■ But weak banks combined with excess

capacity limit scale of investment recovery

■ Consumer spending recovery limited by pace of job growth and fiscal retrenchment

■ But recovery strong enough that fiscal crisis remains contained

Oxford Economics’ forecast scenarios

2009 2010 2011 2012

Oxford Forecast (45%)US -2.6 2.6 2.5 3.5Eurozone -4.0 1.5 1.3 1.7China 9.1 9.7 9.0 9.2World -0.7 4.5 4.2 4.9

Renewed boom (15%)US -2.6 2.8 3.7 4.2Eurozone -4.0 1.7 2.4 2.8China 9.1 10.4 10.7 10.4World -0.7 4.8 5.5 5.9

Sub-par recovery (30%)US -2.6 2.4 1.8 2.2Eurozone -4.0 1.2 0.8 0.9China 9.1 8.8 7.2 7.5World -0.7 4.1 3.3 3.7

Renewed crisis (10%)US -2.6 2.2 -0.6 1.0Eurozone -4.0 1.0 -1.3 -0.2China 9.1 8.0 4.9 5.5World -0.7 3.7 1.0 2.3

Alternative GDP growth forecasts

Oxford Economics’ forecast

2008 2009 2010 2011 2012 2013US 0.0 -2.6 2.6 2.5 3.5 3.8

Japan -1.2 -5.2 2.6 1.1 2.1 2.0

Eurozone 0.3 -4.0 1.5 1.3 1.7 2.0

of which:

Germany 0.7 -4.7 3.1 1.8 1.7 2.0

France 0.1 -2.5 1.5 1.6 2.0 2.1

Italy -1.3 -5.1 0.9 1.0 1.2 1.4

UK -0.1 -5.0 1.6 2.0 2.7 3.2

China 9.6 9.1 9.7 9.0 9.2 8.8

India 7.4 6.7 8.2 8.3 9.0 8.8

Other Asia 4.0 2.0 6.6 5.4 6.2 6.0

Mexico 1.5 -6.6 4.7 4.5 5.4 4.8

Brazil 5.2 -0.2 7.3 4.5 5.1 4.6

Other Latin America 4.8 -0.6 4.5 4.0 4.7 4.3

Eastern Europe 4.8 -5.6 3.1 3.7 5.3 5.5

MENA 4.7 1.8 7.0 7.4 7.0 6.6

World 1.4 -2.0 3.6 3.3 4.0 4.2

World (PPP) 2.8 -0.7 4.5 4.2 4.9 5.0

World GDP Growth% Change on Previous Year

Singapore: Overview

Advance Q3 GDP showed a 19.8% drop, the worst on record and driven by a sharp slowdown in manufacturing, in particular the biomedical sector. Annual growth halved from 19.6% in Q2 to 10.3% in Q3 although the still economy remains on track to meet the governments forecast of growth between 13 and 15% this year.

With Chinese imports now less buoyant and growth faltering in the EU and the US, we expect export growth to slow markedly in the coming months.

The Monetary Authority of Singapore tightened monetary policy this month.

Property prices were 23% up on a year ago in Q3. The authorities recently announced a series of measures aimed at cooling the property market.

Tourist arrivals have been buoyant this year, boosting by hosting the Youth Olympic games and by the opening of two new casino complexes. The authorities are targeting 17m tourist arrivals by 2015, up from 9.7m last year.

Singapore: GDP growth slowing after H1 surge

-12

-8

-4

0

4

8

12

16

20

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

% year


Forecast

Singapore: GDP growth

Singapore: H1 activity was strong across the board

-12

-8

-4

0

4

8

12

16

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

% year

Forecast


GDP

Domestic demand

Singapore: Contributions to GDP growth

Net exports

Singapore: Manufacturing now slowing sharply

-40

-20

0

20

40

60

80

1995 1997 1999 2001 2003 2005 2007 2009Source: Haver Analytics

% year Singapore: Industrial production


Total

Electronics

Singapore: House prices soaring

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Singapore: Property Prices% year


Property Price Index: All residential

Singapore: Tourist arrivals buoyant

200

300

400

500

600

700

800

900

1000

1995 1997 1999 2001 2003 2005 2007 2009Source: Haver Analytics

Thousands Singapore: Tourist arrivals

seasonally adjusted(3 month moving average)

Malaysia: Overview

National accounts data showed that GDP growth slowed to 8.9% in Q2, a stronger performance than had been expected. GDP growth is expected to moderate in the second half of the year but consumer spending should be less affected than the more export-oriented sectors. Robust domestic demand boosted the import recovery to such an extent that net exports subtracted from growth throughout the recovery period

Malaysia is very vulnerable to developments abroad, particularly in China, the main destination for its exports behind Singapore. The uncertain outlook for the global economy means quarterly growth is likely to be much more modest in 2010H2 than in H1.

Bank Negara have already raised rates three times this year. We expect one more increase in Q4.

The fiscal deficit hit a twenty year high of 7% of GDP last year and the government is hoping to reduce it to 5.6% this year.

Malaysia: strong recovery starting to slow

-20

-15

-10

-5

0

5

10

15

20

25

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

% year

GDP Industrial production


F'cast

Malaysia: GDP and industrial production

Malaysia: Strong imports hindered net exports

-30

-25

-20

-15

-10

-5

0

5

10

15

20

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

% year

F'cast


GDP

Net exports

Domestic demand

Malaysia: Contributions to GDP

Malaysia: Recovery lagged neighbours

60

70

80

90

100

110

120

130

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2005=100

Source: Haver Analytics / Oxford Economics

Malaysia: Industrial output

Malaysia

Weighted aggregate of Korea, Thailand & Taiwan

Malaysia: Exports now slowing sharply

-40

-30

-20

-10

0

10

20

30

40

50

1995 1997 1999 2001 2003 2005 2007 2009

% year

Exports (US$)

Imports (US$)


Malaysia: Exports and imports


Malaysia: Government keen to reduce the deficit

-21

-18

-15

-12

-9

-6

-3

0

3

6

20

30

40

50

60

70

80

90

100

1980 1984 1988 1992 1996 2000 2004 2008 2012

% of GDPGovernment balance

(LHS)

Government debt(RHS)

% of GDP


F'cast

Malaysia: Government budget balance & debt

Bank Lending: Strong recovery this year

-10

-5

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% year


Malaysia & Singapore: Bank lending

Malaysia

Singapore

Exchange Rates: Rapid gains in recent months

90

100

110

120

130

140

150

2002 2003 2004 2005 2006 2007 2008 2009 2010

2002Q1=100



Singapore

Malaysia

appreciation


Is the global recovery stalling?

Documents

Transcript of Is the global recovery stalling?