Economist intelligence unit global outlook

Hope, headwinds or
hurricanes? Charting a course for
the global
economy
Leila Butt
Senior Economist, Eastern Europe
November 2010


Most economies now growing again
Emerging markets are booming

Unemployment remains very high
Consumers rebuilding balance sheets

Countries are heavily indebted
Deflation a risk in rich countries
Asset 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


Where are we now?


Global: World trade recovers strongly

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

Stock prices are higher, but volatile…
Stockmarket capitalisation

US$m. Source:
Bloomberg


… and borrowing costs are mostly contained
Post-Lehman Bros panic

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

Fed intervenes; QE
Stimulus plans
feed through

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

Greece, EU
debt crisis


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


Source: Economist Intelligence Unit, Country Data

Budget deficit; % of GDP


Global outlook: Upswing, but uneven
Developed
Emerging
World

Credit
crunch
starts

GDP growth, % year on year
Source: EIU estimates


US and Europe


This is already a jobless recovery

US: % of jobs relative to
peak employment

Sources: Bureau of Labour Statistics; EIU.


The great deleveraging continues in the US…
US personal savings rate, % of disposable income.

Sources: BEA; EIU.


US: Housing still very weak…
Spot the
recovery!

US housing starts, ‘000s, SAAR.

Source: Bureau of the Census


Home foreclosures still awful
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


Number of foreclosures

Nationally, 14+% of mortgages

Source: Realty Trac

delinquent or foreclosed


Euro area: Worst crisis ever…but signs of life
Economic growth

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 hesitant

Less impressive in rest of EU

GDP growth; % change, Y o Y
Source: Economist Intelligence Unit, Country Data

Second quarter 2010? As
good as it will get


Euro zone: Solvency stresses will continue
112
%

211%
of
GDP
234%

192%

150%

111%

92%

Bank claims on private sector, € bn. (UK bank lending at 213% of GDP in 2009, £3trn.)
Sources: IMF, International Financial Statistics; EIU, CountryData.

110%

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

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
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?
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

Sept 14 2010

Average

Source: Haver Analytics.

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


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?