Global Outlook: No Double DipPart of an EIU Client Webinar Series

Robert WardDirector, Global Forecasting

London, August 26th 2010

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Today’s Presenter

Robert WardDirector, Global Forecasting

Double dip: How concerned should you be?

Greenspan’s wisdom—should we be worried?!

“I think that the probability of a severe recession has come down markedly.” May 2008

“The odds of [a double-dip recession] have fallen very significantly.” April 2010

“We’re in a pause in a recovery … [a double dip] is possible if home prices go down.” July 2010

Our key scenarios

1. Uneven recovery• Richer countries soften again in late 2010 and into

2011• No return to pre-crisis growth rates• Emerging markets do reasonably well

2. Recovery stalls• Renewed recession in 2011• Sustained weak growth and deflation• Emerging market sentiment sours

3. Economy surges• Adjustment to 2010 raises growth potential• Higher trend growth thereafter, but risk of faster

inflation

60%

30%

10%

Our central scenario

• Company profits are strong—will be hiring soon?

• Inventories are low, so no inventory shock; worst of job shedding now over

• Supportive policy is now in place, so another Lehman is unlikely

• China is assumed to achieve a soft landing

• H1 2010 growth rates were not sustainable anyway

• The 1980s double dip was triggered by the Volcker squeeze on top of 2nd oil shock

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Corporate profits % GDP %

Botox finance smoothes the wrinkles

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3-month LIBOR/3-month overnight index swap (OIS) spread, percentage points. A higher spread denotes more market stress. Sources: Haver Analytics; Economist Intelligence Unit.

Lehman fails

Financial markets

crash

Fed introduces

QEEuro zone

woes spook

markets

The great deleveraging continues in the US…

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US personal savings rate, % of disposable income. Sources: BEA; EIU.

… but this is a long haul

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US household liabilities to disposable income ratio, %. Source: EIU, CountryData.

Just don’t make her angry

Stresses in the euro zone will continue

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

UK: More adjustment for the housing market

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Mortgage approvals, ’000s. Source: Bank of England.

But there are skeletons

Are we turning Japanese? The bond markets think so

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Nominal yield on 10-year US Treasury bond. Source: Fed.

All time low of 2.6%

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Risk 1: The US jobs market fails to revive

US: Median duration of unemployment. Weeks. Source: St Louis Fed.

This is already a jobless recovery

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US: % of jobs relative to peak employment. Sources: Bureau of Labour Statistics; EIU.

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Risk 2: The US housing market double dips

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

Spot the recovery!

Demand for mortgages is tepid

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Mortgage HE Revolving Auto Loan Credit Card Student Loan Other

US: Total household debt outstanding. US$ trn. Source: NY Fed.

But if you really must buy…

1,741 sq foot property in La Mirada, LA Co

• Sold in 1988: US$132,000

• Sold in 1998: US$146,000

• Sold in 2004: US$350,000

Price reductions • 19/Mar/2010: US$374,000 to

US$349,000

• 20/Apr/2010: US$349,000 to US$329,000

• 26/May/2010: US$329,000 to US$299,900La Miranda median price, US$380K (cf US$578K at peak), median income US$77,000 (2007)

Source: Dr Housing Bubble Blog.

“Perfect starter home!”

Risk 3: Global policy mistakes

• Fiscal austerity is too severe and poorly targeted

• Premature withdrawal of monetary stimulus

• Demand for money rising for precautionary saving + banks not lending = deflationary pressure in the rich world

• China is unable to fine-tune its soft landing

So• Monetary policy MUST

remain loose in the developed world—no rate rise in US, UK or euro zone until 2012

Monetary base, US$ bn. Source: St Louis Fed.

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Where does this leave us?

To dip or not to dip?

• A double dip is not our central forecast But 30% probability, and downside risks have risen

• Removal of fiscal stimulus was always going to slow growth But some of the negative impact can be offset by

monetary support and currency weakness (for some)

• Balance sheet adjustment doesn’t have to result in a double dip Banking balance-sheets have been partly rebuilt Household and governments have hardly started

But adjustment will crimp growth rather than kill itProvided the adjustment is slow, and policy

tightening is measured

Conclusion—so where’s the growth?

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Indi

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ASEAN

Latin

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E Euro

pe US

Japan

Euro zo

ne UK

World

2009 2010

2011

Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of July 2010. Source: Economist Intelligence Unit, CountryData.

The seeds of prosperity are sown during the periods of financial depression and the seeds of hard times are just as surely down during the period of business activity and speculative boom.

The change from a financial depression to better times comes […] so gradually that for months there is a difference of opinion as to whether a change for the better has actually commenced or not.

““

L M Holt, economist, Panics and Booms, 1897.

If that was all too much for you, take heart!

Questions and Answers

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