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 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  in 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? 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 [...]... 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... 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 ... 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... 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... Association of South East Asian Nations CIS = Russia, Ukraine etc As of October 2010 Source: Economist Intelligence Unit, CountryData