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Acropolis NowWhere next for the global economy?
Robin BewEditorial Director, Economist Intelligence UnitNew York, June 2010
The crisis in pictures
But recovery now underwayBrighter days for many economies
US: +290,000 jobs (April ’10) beats -528,000 jobs (April ’09)But not everyone is recovering; Europe’s debt crisis deepens
Multi-speed economic recoveryChina, India, Brazil & emerging markets will do better than rich nations
The US will outperform Europe and JapanBeware the bounce back
Yes, some momentum, butPublic debt is alarmingConsumers still stretched Don’t confuse growth rates with levels (which remain low)
So, we’re out of the woods?
Ha-ha-ha
Why the bounce-back?
Too fast, too hardFirms cut back very aggressively in climate of uncertainty
Overdid itCorrecting inventory overhang
International RescueInterest rates slashedPrinting moneyGovernment spending splurgeTax cutsBank bailouts
-14
-12
-10
-8
-6
-4
-2
0
2
4
2000
2002
2004
2006
2008
2010
China Euro area
UK US
Can’t overstate the role of government
Budgets deeply in the redWorst in rich countriesGovernment giveaway
Public worksIncentivesTax cutsBailouts
Budget deficit; % of GDP
Source: Economist Intelligence Unit, Country Data
And the banking crisis is still running
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Write-offs Capital raised
World
Americas
Europe
Asia
Cost of the credit crunch so far for finance cos; US$ bn. As of May 11th 2010.Source: Bloomberg.
• US commercial property market looks sickly—US$1.4trn such loans maturing in 2011-14; UK similar
• W European banks exposed to wobbling bits of euro zone
• A dearth of borrowers—like Japan in 1990s
• Steep yield curve and government guarantees boosting sector
• Monetary policy already tightening—but how far can they go?
• The return of Glass-Steagall?
A mixed picture
Private sector is recoveringOverdid the cutsWeak firms have gone, stronger ones are looking ahead
Policy is helpingGovernment spending, bailouts tax cuts, low interest rates etc
All good stuff, but will soon be taken away
Outlook is therefore extremely uncertainCan we survive on our own?
The skeleton in the cupboard
Government frailty
Crisis was about banks and private sectorBig lenders, big borrowers, big bankruptcies
Governments have (rightly) stepped in
Huge bailouts, public spending, tax cuts
But governments can go bust too
Who rides to their rescue?
Euro zone: Creaking sounds
-1
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5/31
/199
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9
Italy Portugal Greece Spain Ireland
Greece joins the euro
The euro is launched
The Great Moderation
Spreads of 10-year govt bonds over German bunds.Percentage points.Source: Bloomberg.
Euro zone: Acropolis Now?
100
105
110
115
120
125
130
135
140
145
150
2000
2003
2006
2009
Germany Spain Greece Ireland LiquidityCut out of capital marketsFixed by the $1trn bailout?
SolvencyGreece is almost certainly insolventLess clear about the others
Interest costs, Growth, Fiscal tightening
The outcomeLow growth, fiscal hair-shirtStructural reformFiscal help from euro zoneDefault (restructuring)Euro exit
Real private consumption, 2000 Q1=100. Source: Economist Intelligence Unit, CountryData.
Not just Europe
Greece is a special caseFiddling the books for years
But don’t be fooledBanking crisis and low growth is killing public finances in the rich worldUK, US, Japan, other euro zone economies
Too pessimistic to expect crisis everywhereBut the tightening needed to prevent a crisis will be extremely painful and long lasting
The shape of the recovery
Global: RecoverologyBounce-back theory: “V”
The sharper the contraction, the stronger the recovery
Financial-impairment theory: “U”, “L”Recoveries following financial crises are much slower than normal recoveries
Borrowed-time theory: “W”Stimulus boosts economy at the cost of weakness later
Armageddon theory: “Q”Too grim to talk about
US: Better-than-expected growth, but…… pace will slow later in 2010
…as pent-up demand fades; average about 3.2% for the year
Investment spending upEquipment and software rose
19% in 4Q, 13% in 1Q; most in nearly four years
Consumers slowly revivingSpending up 3.5% in Q1
But inventories tell the taleRe-stocking contributed 66% of
growth in 4Q, 50% in 1Q
-8-6-4-202468
10
2000q1
2001q2
2002q3
2003q4
2005q1
2006q2
2007q3
2008q4
2010q1
Recessions
Real GDP growth, % change
5.6%
% change year on year
Source: Bureau of Economic Analysis
US: The long and winding road…..
90
95
100
105
110
115
120
125
1 3 5 7 9 11 13 15 17 19 21 23
19731981
20011991
2007
Peak of GDP = 100. Quarters from peak of GDP. Years denote year of peak. 2007 peak in Q3.Sources: BEA; Economist Intelligence Unit.
2010 Q3
Europe: where’s the growth?
Where’s growth in the periphery going to come from?
Brutal fiscal consolidationNo country specific devaluationStructural reforms neededHigh cost countries will also need
internal devaluationFiscal subsidies, monetisation?Default, euro zone exit?
Euro zone all but stalledGreek problems casting shadow over whole region
Greece is a special case, but fiscal problems looming for many countries
BUT
A cyclical recovery is underway in the rich world
Fiscal consolidation is requiredWill slow growthBut for many this can be partially offset by currency weakness and monetary easing
Emerging markets can survive thisDomestic demand in China is significantCan partially support other countries
Important not to get too gloomy
Asia: Hello, Tiger …
Thai
land
Mal
aysi
aC
hina
Viet
nam
OEC
D
Turk
eyJa
pan
Aus
tral
iaU
SKor
ea
Fran
ceG
erm
any
0
2
4
6
8
10
12
14
16
18
Fiscal stimulus, 2008-10. % of annual GDPSources: OECD; Economist Intelligence Unit.
Policy stimulus in Asia remains strongDriving recovery—but policy needs to
tighten more quicklyMost Asians can afford the fiscal
expansion
Regional dynamicsChinese demand is driving demand for
other Asians’ exportsIndia powered by private investment
spending—8-9% possibleIndonesia buoyed by demographic
dividend and investmentWatch Thailand (politics) and Vietnam
(poor policy—credit too loose, inflation)
Is Asia heading for a new bubble?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
Food commodity prices are again a concern
El Niño, bad monsoon in India
Watch out for inflation/asset bubbles in Asia
China, India: Strong rebound…
A V-shaped recoveryInvestment, consumption risingChina’s exports, India’s industry are
boomingBut…Massive government stimulus
China’s: Largest ever?Inventory rebuildingRisks ahead
Overheating, asset bubbles in ChinaInflation, fiscal strains in India
2
4
6
8
10
12
14
16
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2008 2009
CHINA INDIA
% change, real GDP, year on year;
Source: National Bureau of Statistics, China; Central Statistical Organisation, India
… and growth far outpacing richer countries
Real GDP, % change
Is China’s economy overheating?
-10
-5
0
5
10
15
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Producer prices
% change, year on year
National Bureau of Statistics, China
China: Massive credit expansionChinese government stimulus package
Public worksSubsidiesMake the banks lend
Bank credit rose sharply in 2009• By 31% from previous year• By RMB9.6trn (US$1.4trn)
Credit is always a major risk indicator
What’s the risk of a credit bust?
-500
0
500
1000
1500
2000
2/1/2000
2/1/2001
2/1/2002
2/1/2003
2/1/2004
2/1/2005
2/1/2006
2/1/2007
2/1/2008
2/1/2009
2/1/2010
New loans per month; RMB, bnSources: China Economic Information Net; Bloomberg
New loans
Government can copeGovernment already stamping on the brakes
bank lending slowing sharply
Will all the lending of 2009 turn sour?China sub-prime?
Maybe, but the government is readyCentral bank is the world’s most liquid financial institutionUltimately banks can rely on government
• Government has the fundsGovernment has bailed out many times beforeBanks are key policy instrument
Government will not allow crunchBail-out in China will not be like bail-out in US/EuropeWill not require pay-back
Bigger danger is that the brakes have gone on too hard
Chinese public finances. % of GDP.Source: Economist Intelligence Unit, CountryData.
East Europe: Fragile, but adjustingCIS
Russia an oil story, 7% possible this year—but structural weaknesses linger
Ukraine’s economy stabilises and political risk recedes
Kazakh banking sector problems near resolution; growth boosted by commodities
CE EuropeHungary adjusting fiscally; new govt unlikely to
change debt reduction strategyPoland driven by return of investment growth and
inventory adjustment
BalkansOuzo spillover risk—FDI and bank channelsBulgaria fiscally strong, peg to surviveRomania faces budget challenges
BaltsEndured brutal adjustmentLimbering up for euro membership later this decadeFurther contraction in 2010
0
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2009
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Russian stockmarket
(RTS, 1995=100)
Brent crude oil,
US$/barrel
Source: Haver Analytics.
Latin America: Shows resilience
-30-20-10
0102030405060
2001
2003
2005
2007
2009
2011
2013
Latin AmericaFoodIndustrial
Region will grow by to 4-5% in 2010
Brazil poised to outperform Less than in boom yearsBetter fiscal positionsFlexible exchange ratesBetter trade performanceCountries with Asian exposure
are further aheadMexico set to benefit from US
reboundCommodity prices support growth; China again!
Real GDP growth, % change, for Latin America. EIU commodity price indices: % change, year on year. Source: Economist Intelligence Unit.
Brazil: Powered by strong tailwinds
-2-1012345678
2000
2002
2004
2006
2008
2010
2012
2014
GDPConsumer spending
Growth to reach 6% or more in 2010Bouncing back from recessionHelped by ‘stabilisation dividend’Big boost from commodity prices and
Chinese growthExpanding labour force, more creditRisk of ‘overheating’
Longer term?More stabilisation dividendsLower cost of creditRising consumer spending But risks: rigid labour marketToo reliant on commodities
Real growth, % change, year on year.
Source: Economist Intelligence Unit.
Unsynchronised recovery
-6
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Q1
99 Q
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00 Q
3
01 Q
2
02 Q
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02 Q
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11 Q
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OECDEmerging countriesWorld (PPP)
World GDP growth, %
What does all this mean for the recovery?
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 = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of April 2010.Source: Economist Intelligence Unit, CountryData.
ConclusionCyclical recovery is underway
Economic conditions are improving, and the data support that
Fiscal woes are widespread and realSome countries are on their kneesBut for others, currency weakness and monetary easing will offset some of the pain
Emerging markets are robustGradually reducing dependency on the rich world
Long existing trends are continuingGradual rise of the emerging worldShifting centre of gravity
What does all this mean for you?
You made it!
Lots of companies didn’tBut you’ve probably:
Cut costs to the boneNot had much opportunity for strategic thinking
Time to think strategically is nowBut the external environment has changed out of all recognition
What’s changed?
Cheap creditSpending outpacing income
Investment and consumer spending
Limited creditWeak banksWeak private sector
Excessive leverage being unwoundSpending will rise more slowly than income
For a long time
What’s changed
Jobs for allEconomic growth drove up employment to record levels
Long-term joblessnessA jobless recoveryA division between haves and have-nots
Insider/outsider labour marketSocial strife?
What’s changed
Emerging world attractive but riskyBRIC economies fast growingBut policy uncertaintySmall and illiquidHard to operate it
Emerging markets centralPolicy laudedRobust growthMore creditworthyMore influential internationally
What’s changed?
Government financial stabilityPublic finances broadly under control
tax and spend moving in step
Government financial weaknessPublic spending cutsMuch higher taxesHigh public borrowing
Crowding out your borrowingHigher long-term interest rates
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
Globalisation—a new phase
3
3.25
3.5
3.75
419
95
1998
2001
2004
2007
2010
2013
Globalisation Index.Source: Economist Intelligence Unit.
“Absorption and agility”• weather shocks vs exploiting opportunities
“Embracing manyness”—a world with no centreTreat emerging markets as you would
your home marketFlexibility is key
Watch for the new competitive landscape—incumbents beware!Challenger companies/consumers
are dissolving old barriersTechnology continues to be a driver
of globalisation
Innovations in innovationExpect an innovation surge
Look for EM innovation inProductsProcessesLogisticsCorporate structures
“Reverse innovation”
Flexibility in R+D—developing successful products in one country that can succeed in others is vital
0 20 40 60 80 100
2009
2012
0-9 10 14 15-24 25-49 50-75 75+
What proportion of your company’s revenue is/will be derived from overseas operations?Source: EIU Globalisation Index survey, 2009.
38%
55%
Implications for business
Geographic refocusingEmerging markets will become the primary source of revenue and profit
Doing more with lessPermanently leaner as low cost competition increases
Freeing up resources to become more agile
Balancing the short and long-termSurviving today vs investment in a dramatically changing business
