Eiu global outlook oct 2010 public

Hope, headwinds or hurricanes? Charting a course for the global economy

Robert PowellSenior Editor/EconomistChicagoOctober 2010

Key points

A recovery is under way …US: 500,000 new jobs in 1H 2010 beats 4m jobs lost in 1H ’09◦ But job growth is slow; still 7.5m jobs below the peak

Europe shows signs of life◦ Germany improving, but the EU periphery is drowning in debt

Does a global double-dip recession lie ahead?◦ Probably not. Why?

► Emerging markets • Strong recovery

► Active central banks► Stimulus still available► Corporate profits

Where are we now?

Global: World trade recovers strongly

8090

100110120130140150160170

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

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

Industrial production rebounds…

-25%-20%-15%-10%-5%0%5%

10%15%20%25%

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

US China

Euro India

% change, year over year in production volumes, Source: National governments, Haver

00.5

11.5

22.5

33.5

44.5

5

Oct 1 2008

Oct 14 2008

Oct 27 2008

Nov 7 2008

Nov 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

Apr 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

Federal Reserve intervenes

… 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

Why the bounce-back?

Too fast, too hardFirms cut back very aggressively in a climate of fear and panic

o Overdid ito Correcting inventory overhang

International rescueo Interest rates slashedo Printing moneyo Government spending splurgeo Tax cutso Bank bailouts

Emerging market serenityo Domestic demando More trade amongst themselveso Less banking stress

-6-4-202468

10

99 Q

1

99 Q

3

00 Q

1

00 Q

3

01 Q

1

01 Q

3

02 Q

1

02 Q

3

03 Q

1

03 Q

3

04 Q

1

04 Q

3

05 Q

1

05 Q

3

06 Q

1

06 Q

3

07 Q

1

07 Q

3

08 Q

1

08 Q

309

Q1

09 Q

3

10 Q

1

10 Q

3

11 Q

1

11 Q

3

Global outlook: Upswing, but uneven

GDP growth, % year on year Source: EIU estimates

Developed

Emerging

World

Credit crunch starts

US, Europe and Japan

US: Weakening after strong surge…

… as pent-up demand, stimulus fade; growth will average 2.3% for the year

Inventories tell the taleRe-stocking contributed around 60% of growth on average in last 3 qtrs

But investment spending upEquipment and software rose 20%-plus in last two qtrs; most in four years

Consumers fading again?Spending rose by 2% in Q2

-8-6-4-202468

10

2000q1

2001q2

2002q3

2003q4

2005q1

2006q2

2007q3

2008q4

2010q1

Recessions

Real GDP growth, % change

% change year on year Source: Bureau of Economic Analysis

Jobs market remains tough

-1,000-800-600

-400-200

0200

400600

2000

- Ja

n

2000

- N

ov

2001

- Se

p

2002

- Ju

l

2003

- M

ay

2004

- M

ar

2005

- Ja

n

2005

- N

ov

2006

- Se

p

2007

- Ju

l

2008

- M

ay

2009

- M

ar

2010

- Ja

n

0

2

4

6

8

10

12

Net new jobsUnemployment rate

Jobs in ‘000s; unemployment, %. Source: Bureau of Labor Statistics.

US jobs market

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

1959

- Q

1

1961

- Q

119

63 -

Q1

1965

- Q

119

67 -

Q1

1969

- Q

119

71 -

Q1

1973

- Q

119

75 -

Q1

1977

- Q

119

79 -

Q1

1981

- Q

119

83 -

Q1

1985

- Q

119

87 -

Q1

1989

- Q

1

1991

- Q

119

93 -

Q1

1995

- Q

119

97 -

Q1

1999

- Q

120

01 -

Q1

2003

- Q

120

05 -

Q1

2007

- Q

120

09 -

Q1

US: Housing still very weak…

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

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

1H 2010 foreclosures: 1,961,000, and more than 1m in Q3

Worse than last year1 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

“Delay and Pray”

Foreclosure rate: % change, year on year

Source: Realty Trac

Euro area: Worst crisis ever…but signs of life

Debt sinking the peripheryBailout has helped, but…… only buying time; massive fiscal adjustment required Must improve competitiveness

But Germany is reboundingExports, business investment, stockbuildingBut unemployment is high, consumers hesitant

Less impressive in rest of EUSecond quarter 2010? As good as it will get

100

105

110

115

120

125

130

135

140

145

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Germany Spain

Greece Ireland

Real private consumption, 2000 Q1=100. Source: Economist Intelligence Unit, CountryData.

Euro zone: Acropolis Now?

LiquidityCut out of capital marketsFixed by the $1trn bailout?

SolvencyGreece is almost certainly insolventLess clear about the others

o Interest costs, growth, fiscal tightening

The outcomeLow growth for years to comeStructural reform; wage cutsDefault (restructuring)Monetary AND fiscal union??Euro exit

-1

1

3

5

7

9

11

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10Italy Portugal Greece Spain Ireland

Spreads of 10-year govt bonds over German bunds.Percentage points.Source: Haver.

Japan

Foreign demand supports growthHelped by fiscal leakage elsewhere

Yen a significant riskBut firms are profitable and can take some pain

Structural issues cloud pictureDeclining populationRenewed deflationFiscal woes

Cash cow country?Japan measures up on traditional measures of economic efficiency◦ But declining workforce means

poor top-line performance

0.0

0.5

1.0

1.5

2.0

2.5

1990

1993

1996

1999

2002

2005

2008

JapanUS

Output per worker

Labour productivity growth, % change

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 IndiaIndonesia Malaysia PhilippinesSingapore Taiwan Thailand

Real GDP, % change on year earlier, Haver

But Asian governments are in driver’s seat

Robust recovery in trainOnly a gentle slowdown next year

Policy stimulus is the keyDomestic recovery stronger than usualChina acting as a boost to rest of regionAsian and trading partner stimulus accounts for half of GDP growth

0

1

2

3

4

5

6

7

China India

Indone

siaMala

ysia

Singap

oreTha

iland

Expanding fiscal deficits

Change in fiscal deficit as % of GDP, 2008-10, EIU

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 circumstancesFiscal stimulus was very large

Food commodity prices are again a concern

El Niño, bad monsoon in India

Fears of inflation/asset bubbles in Asia

Should we worry about China?

-500

0

500

1000

1500

2000

11/30/20008/31/20015/31/20022/28/200311/30/20038/31/20045/31/20052/28/200611/30/20068/31/20075/31/20082/28/200911/30/2009

-4

-2

0

2

4

6

8

10

12

14

New loans

Houseprices

Why are investors worried?Inflationary asset price bubbleUS-style property crisisGovernment inspired crash

Government also worried about:Poor allocation of capitalInflation causing social ills

Government has reactedHave the brakes have gone on too hard?◦ Government can step in

again if necessaryWill all the lending of 2009 turn sour?

New loans, m RMB; House prices,% change YoY. Source China Economic Info Net, Natl Reform and Development Commission

India: Outperforming China—one day

Strong prospectsMedian age: 24 yearsIndia will have world’s largest population in 2030s, overtaking ChinaIndia will be growing more rapidly than China by 2018Labour-force growth to remain strong while China, others see decline

ChallengesAbsorbing labour force growth will be challenge in absence of sufficient education, structural changeFiscal consolidation is needed

Population (1990=100)

70

90

110

130

150

170

190

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

India

China

Russia

Source: Economist Intelligence Unit.

Latin America has shown resilience

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2001

2003

2005

2007

2009

2011

2013-3

-2

-1

0

1

2

3

4

5

6

7GDP/head PPPGDP growth

Region will grow by 4-5% in 2010Brazil: outsized performance

Countries linked to the US are doing better than expected

Mexico will grow 4.7% this year◦ Will feel the effects of US

slowdown in 2011

Regionally, not back to boom yearsBut better fiscal positionsFlexible exchange ratesBetter trade performanceCountries with Asian exposure further ahead◦ Commodities help growth; China!

Real GDP growth, % change. GDP per head in US $.

Source: Economist Intelligence Unit.

Medium to long-term perspectives

Currencies: It’s still the ugly sisters

US$/€ strongly correlated with risk perception

Euro zone structural concerns to dominate over medium term

2010: Av: US$1.30: €12011: Av: US$1.40: €12012: Av: US$1.15: €1

• Pity the yenRacing up against the € and keeping up

with the US$. Bad news for Japan’s exporters and for its deflation

Emerging markets RMB “wobbly peg” to US$EMs to depend on risk tolerance

0

20

40

60

80

100

120

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Weaker demand will restrain prices in the medium term; they willrise thereafter as broad-based growth returns, and EMs accelerate

Oil price outlook: Long term

Oil price: Brent dated, US$/barrel; % change, year on year.

Source: Economist Intelligence Unit

Where’s the growth?

-8-6-4-202468

China

IndiaMiddle

East

ASEANAfri

caLati

n Ameri

ca CISE Euro

pe USJa

panEuro

zone UK

2009 2010 2011

Real GDP growth; % change, year on year. ASEAN = Assoc of South East Asian Nations. CIS = Russia, Ukraine etc. Source: EIU, CountryData.

Overtaken by events: China takes the lead

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,00020

08

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

CHINAGERMANYINDIAJAPANUNITED STATES

GDP; nominal; US$ bn

Economist Intelligence Unit, Country Data

More Information?

Data and analysis from today’s presentation were taken from the Economist Intelligence Unit’s country analysis and forecasting services. For more information on these services and other EIU capabilities, including risk assessment, industry trends, and economic data, please contact:

Holly DonahueMarket Development ManagerEconomist Intelligence [email protected] (212) 541 - 0596