Transcript Euro area

CONFIDENTIAL
WHOLESALE BANKING & MARKETS
DUTCH ACT CONFERENCE
THE ECONOMIC OUTLOOK FOR CORPORATES
PRESENTED BY
PROFESSOR* TREVOR WILLIAMS
CHIEF ECONOMIST
LLOYDS BANK
9 NOVEMBER 2012
* Visiting professor of the University of Derby
FIVE KEY SHORT-TERM RISKS
FIVE LONGER-TERM ISSUES
• European debt crisis – lingering effect of
global financial crisis
• Growth shift from developed to developing
countries
• ‘Fiscal cliff’ in the US
• Growth of developing Asia
• Higher food and commodity price inflation
• Ageing populations
• Financial market shock that hits confidence
• Growing income/wealth inequality
• Harder landing in China?
• Heightened geopolitical tensions?
Global output turns lower, but still expanding
DEVELOPED ECONOMIES
DEVELOPING ECONOMIES
Balance
65
Balance
65
Euro area
UK
US
60
60
55
55
50
50
45
45
40
40
35
35
2008
30
2008
Source: Haver Analytics
2009
2010
2011
2012
2009
2010
Brazil
China
India
Russia
2011
2012
Why has growth been poor?
● Eurozone financial crisis:
►
Severe fiscal austerity across the Eurozone
►
World trade effects
►
Deepening credit crunch, spreading to other regions
►
Global confidence effects
● But also significant policy tightening elsewhere:
►
Spending cuts in the US
►
Monetary policy tightening in emerging markets now reversing as growth slows
● High oil and commodity prices
● US growth stuck between 1-1 ¾% since Q4 2011
● China and India and other emerging slowed more than expected
4
On the surface, conditions have improved global equity markets off lows of the year
U.S., EURO AREA AND EMERGING MARKETS EQUITIES
115
MSCI index, rebased 12/31/2011 = 100
110
105
100
US
95
Euro area
Emerging markets
90
Jan
Source: MSCI, Datastream, IIF calculations
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
5
Corporate bond issuance on the up
GLOBAL CORPORATE BOND ISSUANCE IN AUGUST*
USD billion
120
Number of issues
360
Number of issues (RHS)
340
Total deal value
100
320
80
300
280
60
26
0
240
40
200
20
200
180
0
1995
1997
1999
2001
Source: Dealogic *includes IG, HY, MTNs, preferred shares, covered bonds and securitisation
2003
2005
2007
2009
2011
6
Commodity prices also rising
AGRICULTURAL COMMODITIES SPOT PRICES
210
index, rebased, 1/1/2010 = 100
190
170
Agriculture
Corn
Livestock
Wheat
150
Soybeans
130
110
90
70
Jan 2010
Source: Lloyds Bank WBM
Sep 2010
May 2011
Jan 2012
Sep 2012
7
Global growth will eventually recover…
GDP GROWTH, % INCREASE ON YEAR
2010
2011
2012
2013
2014
US
3.0
1.7
2.2
2.5
3.0
JAPAN
4.5
-0.7
1.8
2.4
2.0
CHINA
10.4
9.2
8.0
8.9
8.9
EURO ZONE
1.9
1.5
-0.6
-0.2
1.0
UK
2.1
0.7
0.0
1.0
2.0
WORLD
3.9
2.8
2.4
3.0
3.6
Source: Lloyds Bank WBM
8
…but this is underpinned by unprecedented
monetary expansion…
%
16
14
12
10
UK
8
6
4
Euro area
2
Japan
US
0
1990
Source: Lloyds Bank WBM
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
9
…with central bank balance sheets likely to
expand further
500
Index, Jan 2007=100
450
US Fed
400
ECB
350
Bank of England
Bank of Japan
300
250
200
150
100
50
0
Jan 2007
Source: Oxford Economics/Haver Analytics
Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
10
FOCUS ON THE EUROZONE
11
Breakup looked imminent…
• Fear of a breakup
− Potentially toxic as it paralyses financial and physical investment
− ECB action targeted to address this risk.
− Imminent breakup now seen less likely (Dutch elections have gone way pro EU parties,
Germany signed for the EMS, Spain and Portugal 1 more year to pay debt and Greece may
be given 2 more years)
• Too tight fiscal policy
− Has austerity has become part of the problem instead of the solution?
− Where has the Growth Pact gone?
• Social cost of reforms
− Correcting competitiveness and current account imbalances comes at a cost of (very) high
unemployment for a (very) long time
• Slow pace of politics
12
Labour market trends highlight the difficulties
Unemployment rate, %
11
Euro area
10
US
9
8
UK
7
6
5
4
2007
Source: DataStream
2008
2009
2010
2011
13
…and had already started in banking…
TYPICAL INTEREST RATES ON LOANS TO BUSINESSES
%
8
7
Spain
6
5
4
Germany
3
2
Jan 05
Source: ECB
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
14
… which prompted a very strong ECB pledge
to intervene
SOVEREIGN BOND SPREADS
% spread over German bunds
6.5
6.0
5.5
Spain
Italy
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1 Sep 2011
Source: Oxford Economics\Haver Analytics
24 Nov 11
16 Feb 12
10 May 12
2 Aug 12
15
Financial conditions have improved…
WEIGHTED AVERAGE PERIPHERAL BOND SPREAD
% spread over German bunds
8
7
6
5
4
3
2
1
0
1 Jul 10
Source: Oxford Economics
28 Nov 10
27 Apr 11
24 Sep 11
21 Feb 12
20 Jul 12
16
Will it happen?
•
Economic cost of collapse would be enormous
− Future direction of European Union would also be challenged
− Do not underestimate political investment in Eurozone
•
So, our baseline forecast is that policy-makers will ultimately do whatever is
needed to hold Eurozone together
− But the reform process will be erratic and slow
17
Outlook remains challenging…
EUROZONE PMIS
PMI index
65
60
Services
55
50
45
Manufacturing
40
Values above 50 indicate
35
expansion in activity; values
below 50 indicate contraction
30
1998
Source: Markit
2000
2002
2004
2006
2008
2010
2012
18
…with domestic demand dragging on growth
EUROZONE GDP AND DOMESTIC DEMAND
% year
GDP
4
Domestic demand
3
2
1
0
-1
-2
-3
-4
-5
2006
Source: Oxford Economics/Haver Analytics
2007
2008
2009
2010
2011
2012
2013
2014
2015
19
Growth is struggling even in the ‘core’
% increase in year, economic growth
6
forecast
Germany
4
2
France
0
Euro area
-2
-4
-6
-8
2005
Source: DataStream
2006
2007
2008
2009
2010
2011
2012
2013
But at least inflation is low
% increase in year, inflation
5
forecast
Euro area
4
3
2
1
Germany
France
0
-1
2005
Source: DataStream
2006
2007
2008
2009
2010
2011
2012
2013
Growth negative for ‘peripherals’
% increase in year, economic growth
8
forecast
6
Spain
4
2
0
-2
Portugal
-4
-6
Italy
-8
-10
2005
Source: DataStream
2006
2007
2008
2009
2010
2011
2012
2013
…but there too inflation is weak
% increase in year, inflation
6
forecast
Spain
4
2
Italy
0
Portugal
-2
2005
Source: DataStream
2006
2007
2008
2009
2010
2011
2012
2013
Emerging Europe is stronger
% increase in year, economic growth
18
forecast
15
Poland
12
Hungary
9
6
3
0
-3
-6
-9
Czech Republic
-12
2005
Source: DataStream
2006
2007
2008
2009
2010
2011
2012
2013
Though inflation higher
% increase in year, inflation
12
forecast
Czech Republic
10
8
6
4
2
Poland
Hungary
0
-2
2005
Source: DataStream
2006
2007
2008
2009
2010
2011
2012
2013
Industrial production is following this pattern…
STRONGER IN CORE…
..WEAKER IN PERIPHERY
% increase in year, industrial production
20
forecast
Germany
15
% increase in year, industrial production
20
forecast
15
Italy
10
10
5
5
0
0
France
-5
Euro area
Portugal
-10
-10
-15
-15
-20
-20
-25
-25
2005 2006 2007 2008 2009 2010 2011 2012 2013
2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: DataStream
-5
Spain
…but companies are cash rich - is there a
chance of an upside surprise?
CASH HOLDINGS: EURO AREA AND US CORPORATES
% of total assets
14.0
10.0
US (RHS)
13.5
9.5
Euro Area
13.0
9.0
12.5
12.0
8.5
11.5
8.0
11.0
7.5
10.5
7.0
10.0
6.5
9.5
2000
Source: US Flow of Funds
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Summary of Eurozone forecast
• Recent policy moves from the ECB have worked to lower tensions, with financial conditions
improving over the summer (although there has been a partial reversal in recent weeks).
• It seems the ECB’s actions were necessary but not sufficient to solve the problems faced by
the currency block.
• The recent data indicate that the region is still in recession, with domestic demand being held
back by fiscal austerity, and stubbornly high inflation, which is depressing real income.
• As a result, our forecast for the short term is broadly unchanged, with the economy expected to
contract this year and next (by 0.6% and 0.2% respectively) before growing by 1.0% in 2014.
28
UK SUMMARY OVERVIEW
Key issues affecting the UK economy
•
UK economy - showing recent signs of improvement?
•
Fall in inflation - key to boosting household and corporate real incomes
•
UK Bank Rate on hold - further QE in prospect
•
Global economic weakness - threat to UK export rebalancing
•
World economic recovery - still underway as policy stays loose
•
Euro area – the single largest risk to UK economic stability
30
…Lloyds business barometer signalled Q3 recovery
% q/q
z-score
1.5
Business Barometer
Index
(RHS)
GDP (LHS)
1.0
1.5
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.5
-1.0
-2.0
-1.5
-2.5
-2.0
-2.5
Jan 02
-3.0
-3.5
Jan 03
Source: Haver Analytics, Lloyds Bank WBM
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
…as did the Lloyds job security survey
%
index
10
73.5
ONS empl. rate (LHS)
5
73.0
0
72.5
-5
72.0
71.5
-10
Job security (RHS)
-15
-20
71.0
-25
70.5
-30
70.0
-35
Source: Lloyds Bank WBM/BDRC Continental
Key forecasts for the UK
2010
2011
2012 (f)
2013 (f)
1.8
0.8
0.0
1.2
Bank Rate
0.50
0.50
0.50
0.50
3m (offer)
0.76
1.08
0.70
0.70
5yr swap rate (mid)
2.63
1.56
1.30
1.50
£:$
1.57
1.55
1.54
1.49
£:€
1.17
1.20
1.27
1.25
€:$
1.34
1.30
1.22
1.19
GDP %Yr
Interest rates (%, end yr)
FX rates (end year)
Source: Lloyds Bank WBM
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