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The global economy: Healing or
still hurting?
Leo Abruzzese
Global Forecasting Director
June 2013
Key points for the global economy in 2013
• After a series of setbacks, the global economy is slowly mending
US economy is strengthening; star performer ◦ Jobs market is on a modest upswing
◦ Housing is bouncing back
China is recovering from a slowdown ◦ Boom years are over, but so is the slump
European debt crisis is stabilising… ◦ …but austerity is killing the economy
◦ Euro zone remains big drag on global growth
Japan is showing signs of recovery under a new government
• Central banks are supporting the bounce-back in a big way
• Don’t expect a brisk recovery, though; many risks remains Debt levels still high; asset prices are volatile; tensions in Middle East, China, Korea
Growth and the funds to fuel it
Manufacturing is edging higher in US and China…
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12/31/2007
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US
China
Euro zone
Diffusion index; 50 is dividing line between expansion and
contraction. Source: Bloomberg
Purchasing
managers’
indices
…and has stabilised in Europe, but at a low level. In Germany,
manufacturing output is rising again.
The US stock market has been on a roll…
6,000,000
8,000,000
10,000,000
12,000,000
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18,000,000
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3
US stockmarket capitalisation; US$m. Source: Bloomberg
…and will continue to move higher as the recovery deepens. But it
will fall back as the Fed comes closer to tightening policy later
in the year.
US stock market has risen more than
20% in the last six months.
0
1,000,000
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y
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- Ja
n
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- Se
p
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- Ma
y
20
14
- Ja
n
Central bankassets US$
Central banks: When in doubt, print more money
Total central bank assets, US$m: US Fed, ECB, BOE,
BOJ. Source: National central banks, Haver Analytics
Major central banks will have added nearly US$6trn in liquidity by
the end of this year. Japan is the latest to promise “unlimited”
flows of funds.
-8
-6
-4
-2
0
2
4
6
8
10
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99
Q1
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Q4
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Q3
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Q2
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Q1
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Q4
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Q3
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Q2
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Q1
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Q4
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Q3
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Q2
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Q1
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Q4
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Q3
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Q2
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Q1
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Q4
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Q3
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Q2
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Q1
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Q4
Developed countries
Emerging markets
World
Outlook? Somewhat better results from later in 2013…
…assuming no political catastrophes, like another euro-zone debt
debacle, a US fiscal crisis or a major Middle East conflict.
GDP growth, % change, YoY. Source: Economist Intelligence Unit
US and developed economies
US: Job growth is steadily improving…
0
50
100
150
200
250
300
350
May-
12
Jul-
12
Sep-12
Nov-
12
Jan
-13
Mar-
13
May-
13
Net new jobs
Non-farm payrolls, monthly net job change. Source: Bureau of
Labour Statistics
…and the unemployment rate has fallen to 7.6%, though that’s still
very high by historical standards.
Post-recession US jobs? Very long journey
-7
-6
-5
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-3
-2
-1
0
1
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65
1948 1981 1990 2001 2007
Months from peak employment. Sources: Bureau of Labour
Statistics; EIU.
US: % of jobs relative to
peak employment
A stronger housing market is boosting sentiment
0
500
1000
1500
2000
2500
Feb-04
Oct-04
Jun-05
Feb-06
Oct-06
Jun-07
Feb-08
Oct-08
Jun-09
Feb-10
Oct-10
Jun-11
Feb-12
Oct-12
Housing starts
New home construction, units, monthly at annual rate.
Source: US Census Bureau.
US now building around 1m homes a year, but still well below
2.2m at peak of housing bubble in early 2006
Lending to businesses has been rising for three years…
400,000
600,000
800,000
1,000,000
1,200,000
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1,600,000
1,800,000
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2003-05
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2006-09
2007-07
2008-05
2009-03
2010-01
2010-11
2011-09
2012-07
Commercial and industrial loans
Outstanding levels of loans, millions of US$. Source: Federal
Reserve
…but is still below the late 2008 peak, when Lehman Brothers crashed and
credit dried up for all but the most creditworthy borrowers.
Corporate profits: Holding at the highest in 50 years
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- Q1
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- Q1
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12
- Q1
50-year average
% of GDP. Source: Bureau of Economic Analysis
US corporate profits have rebounded—companies have
the means to resume hiring, but aren’t sure of demand,
taxes, regulation, financial stability.
Surprise!! No short-term deficit/debt crisis in the US
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
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4
Public debt (% of GDP) Budget balance (% of GDP)
By 2017, deficit will be 2% of GDP and public debt will be
falling. The problems begin in 2020, when health and social
insurance spending accelerate.
Source: US Department of the Treasury
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1
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1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
US forecast: Steady growth; risks to the upside in 2013
• Budget cuts will weigh on growth, but…
• Competitive wages/manufacturing
• Energy supply/cost advantages
• Strong culture of innovation
GDP, % change, real terms. Source: Economist
Intelligence Unit
US: Less imported oil, more domestic production
5
7
9
11
13
15
17
19
21
23
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
2024
2027
2030
Domestic production
Imports
Crude oil, quadrillion BTUs. Source: US Department of Energy
US crude oil production (7.3m b/d) has climbed 31% in less than
two years, almost entirely from unconventional sources
US is also enjoying a boom in shale gas production
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15
20
25
30
35
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2000
2010
2020
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2040
Non-associated onshore Associated with oil
Coalbed methane Non-associated offshore
Alaska Tight gas
Shale gas
Source: US Energy Information Administration, June 2012
Euro zone crisis: Worst seems to be over
• Three related but distinct issues
• Underlying levels of government debt
Still very high for many countries, especially
on the periphery; years to resolve
• Fiscal austerity; ongoing recession
Necessary, up to a point, to reduce debt
Will keep growth at 1% or less for some time
• Financial catastrophe and break-up?
Less probability of market panic
Euro zone break-up less likely short term
Misjudgment risk (Cyprus) remains
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6.5
Oct 0
3 2
011
Nov 2
1 2
011
Jan 0
9 2
012
Feb 2
7 2
012
Apr 1
6 2
012
Jun 0
4 2
012
Jul 2
3 2
012
Sep 1
0 2
012
Oct 2
9 2
012
Dec 1
7 2
012
Feb 0
4 2
013
Mar 2
5 2
013
May 1
3 2
013
Spain: 2-yearbond yield
2-year government bond yield, %. Source: Haver
“Whatever it
takes”
EU: Catastrophe less likely, but growth is awful
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2007_I 2007_I 2008_III 2009_II 2010_I 2010_I 2011_III 2012_II 2013_I 2013_I 2014_III
France Germany
Italy Spain
Among the major economies, only Germany will grow in the next
couple of quarters. The euro zone, overall, will contract again in
2013.
Real GDP, % change YoY. Source: EIU Country Data
Japan: Putting it all on the line
• Abe has introduced bold steps to
reverse two decades of deflation
• “Abenomics”—fiscal stimulus,
structural reforms and, most of all,
central bank money-printing
Doubling the monetary base
Twice as much easing as the US
Fed, as share of GDP
• Initial results? Strong Q1 GDP
Stocks up, yen down
But deflation remains a concern…
…and investors worry if reforms
will stick, leading to a retreat
75
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105 Oc
t 1 2
01
2
Oc
t 25
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No
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Yen
Stockmarket
Yen:US$1, lh scale; Nikkei 225 stockmarket, rh
scale. Source: Haver Analytics
Emerging markets
China: Carrying more of the load; EU, much less
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CHINA EU 15 INDIA JAPAN US
% contribution to real global GDP growth; 2005 US$; countries that
contracted in any year assigned zero growth. Source: Economist
Intelligence Unit
USA
China
Global economic growth,
% contribution
Hitting a BRIC wall? The stars are no longer shining
0
2
4
6
8
10
12
14
2010- Q1
2010- Q2
2010- Q3
2010- Q4
2011- Q1
2011- Q2
2011- Q3
2011- Q4
2012- Q1
2012- Q2
2012- Q3
2012- Q4
2013- Q1
China India Brazil Russia
Quarterly real GDP growth % change year on year.
Source: Haver Analytics.
Some improvement in 2013 in India
and Brazil, less so in Russia.
Slowdown in trade growth is hurting emerging markets
• Many emerging markets are
highly dependent on exports
• Europe’s recession cuts imports
EU import demand dropped 4%
in 2012 and nearly 5% year-on-
year in Q1
• China’s slowdown has also
curbed imports from emerging
markets
Imports grew by just 4.5% in
2012 after a 25% jump in 2011
But import demand began
climbing again in March and April
-25
-20
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- Ap
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- Au
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- Ap
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- Au
g
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- De
c
World trade volume, % change year on year. Source: CPB World
Trade Monitor, Netherlands Bureau for Economic Analysis
World trade volume
National Bureau of Statistics historic data, EIU forecasts
China: Forecast for 2013
Income over Rmb40,000
• China has been struggling,
by its lofty standards, for the
last year
• First quarter was surprisingly
weak
• A pick-up is underway;
infrastructure projects are
coming through; property
investment has been strong
• Rising incomes support
consumption longer term
• But a new era has started
• Economic growth no longer
at 8+%; economy maturing
Income over Rmb25,000
Risks to the global economic outlook
• Politics, politics, politics
Governments making a hash of things
◦ Fiscal issues in the US, debt crisis in Europe, conflict in the Middle East,
factionalism in China, showdown on the Korean peninsula
◦ Any of these issues could cause a shock to global
financial markets, erode business confidence and kill growth
• Fragility of the economic recovery
Austerity savaging Europe; joblessness stubbornly high
• Inflation and asset bubbles
Not imminent, but central bank money-printing carries risks
Will new asset bubbles start to form? Stocks, PE, property?
Shifting marketplace
Key economies to watch in next five years
0 1 2 3 4 5 6 7 8
China
India
Nigeria
Indonesia
Vietnam
Turkey
Colombia
South Africa
Egypt
Mexico
Russia
South Korea
Brazil
US
Canada
Japan
Germany
UK
France
Italy
Real GDP, average annual % change, 2013-2017. Source:
Economist Intelligence Unit
BRICs
CIVETS
Other EMs
G 7
The CIVETS will become increasingly important.
Retail sales: The rise of emerging-market consumers
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2000 2010 2016
G10 E10
Retail sales, US$m. G10: US, UK, Canada, France, Germany, Italy, Spain, Australia,
NZ, Japan. E10: Brazil, Russia, India, China, Colombia, Indonesia, Vietnam, Egypt,
Turkey, South Africa. Source: EIU
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