Transcript Presentation Title - GRI – Global Real Estate Institute

Goldman Sachs Global Economics, Commodities and Strategy Research 2010
1
The Credit Crisis and the Euro
Ben Broadbent
Managing Director & Senior European Economist
September 2010
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
2
Summary
 Europe recovering but sharp divergence within the Eurozone.
 Partly industrial composition: investment-driven cycle so
sharpest “V”s in capital-goods-producing countries.
 Credit crunch has also blown away a decade of interestrate convergence between “core” and “periphery”.
 Eurozone needs (i) more fiscal discipline ahead in good
times &/or (ii) more support in bad times. Will politics
allow this?
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
3
Estimated banks’ losses, March 2009
 Eurozone banks:
EUR 920bn (10.1% of GDP)
 UK banks:
GBP 210bn (14.6%)
 Total:
USD 1.4tn (15.1%)
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
4
Domestic Demand and Growth
Contributions, Last Decade
45
%
40
2000-2009 average contribution
in USD terms
35
Demand Contribution
30
Growth Contribution
25
20
15
10
5
0
China
Russia
India
Brazil
BRICs
US
Euroland
Source: GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
5
Chinese Growth: Not Just Exports
60
%yoy, 3MMA
40
20
0
-20
Total Exports
Non-Commodity Imports
-40
05
06
07
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
08
09
10
11
6
US not as central as it once was
100
80
USD Billion
Jan 2007
Change in Real Retail Sales
Since Jan 2007
60
40
20
0
-20
-40
-60
Jan-07
U.S.
China
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Source: GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
7
Very aggressive policy response
3
Base Rate (%)
2
Max
1
0
-1
Mean
-2
-3
-4
Euroland (Current Cycle)
Min
UK (Current Cycle)
Months from start of crisis
-5
-4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36
Source: GS Global ECS Calculations
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
8
No comparison with Japan
240
220
Index
(0 = 100)
Central bank liabilities
(as a % of nominal GDP)
200
180
160
Weighted average of ECB,
BoE & Fed
140
120
BoJ
100
80
-24 -12
0
12
24
Source: ECB, BoE, Fed, BoJ.
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
36
48
60
72
84
96 108 120
Months since start of crisis
9
Not the Great Depression II for output...
105
Index
100
95
June 1929=100
90
April 2008=100
85
80
75
70
65
60
0
6
12
18
24
Source: Almunia et al, with GS updates
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
30
36
42
48
Months since peak
10
...or for asset prices
120
Index
110
100
June 1929=100
90
April 2008=100
80
70
60
50
40
30
0
6
12
18
24
Source: Almunia et al, with GS updates
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
30
36
42
48
Months since peak
11
Bounce in asset prices has helped
banks’ balance sheets
14
12
10
Tier I Capital,
% RWA
Average 2005-07
2008
2009
8
6
4
2
0
Italy
Spain
France
Germany
UK
Source: Bank of England FSR
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
12
More like other post-war financial
crises
108
GDP
Index
103
NOR
JAP
ESP
SWE
GS F'cast
Euro-zone
(current cycle)
98
FIN
93
88
UK
(current cycle)
83
Current cycle includes
GS Forecast
78
-5
-4
-3
-2
-1
0
1
Source: OECD, GS Global ECS research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
2
3
4
5
6
Years from start of crisis
13
Divergence
4
Periphery
Other EMU
2
0
-2
-4
GDP growth,
% yoy
-6
05
06
07
08
09
10
Source: National sources, Eurostat
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
14
Partly reflects industrial composition
20
% yoy
15
10
5
0
Private consumption
-5
-10
-15
Private-sector
investment
-20
-25
00
01
02
03
04
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
05
06
07
08
09
10
15
But markets price of sovereign debt
has also diverged significantly
450
bps
400
Periphery
350
Germany
300
250
200
150
100
50
0
07
08
09
10
Source: Datastream, GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
16
Spill-over impact on banks’ funding
costs
250
Weighted ave. of European
Sovereigns
iTraxx Senior European
Financials
5-yr CDS Spread,
bps
200
150
100
50
0
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Source: GS Global ECS Research, Datastream
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
17
Divergence follows years of
convergence
15
27
Real GDP Level
('000 EUR per capita)
25
14
Other EMU
13
Periphery
23
12
21
11
19
10
17
9
15
8
13
7
80
83
86
89
92
Source: National sources, Eurostat
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
95
98
01
04
07
10
18
No evidence EMU deepened trade
integration
34
23
(Trade shares)
%, GDP
22
32
21
30
Intra Euroland
(rhs)
28
20
19
26
18
17
24
16
World Exports
(lhs)
22
15
20
14
18
13
91
93
95
97
99
01
03
05
07
09
Source: Eurostat, IMF, GS Calculations.
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
19
But it did help compress bond yields
18
%
16
German 10-yr yields
14
Weighted ave. 10-yr
yield (Periphery)
12
10
8
6
4
2
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: National sources, Eurostat
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
20
And as income converged, current
accounts diverged
10
% of GDP
5
Current Account
0
-5
-10
Germany
France
Italy
Greece
Ireland
Portugal
Spain
-15
95
96
97
98
99
00
01
02
Source: Haver Analytics and GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
03
04
05
06
07
08
21
Low rates encourage domestic
demand
7
6
60
pp of
GDP
% of GDP
50
5
4
40
3
2
30
1
0
20
-1
Change in gov. expenditure (lhs)
Gov. expenditure (2000)
Gov. expenditure (2008)
-2
-3
-4
10
0
Germany France
Spain
Italy
Greece
Ireland Portugal
Source: OECD and GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
22
Strong demand raises domestic costs
22
Index (2005=100)
% of
GDP
21
120
110
20
Real Effective Exchange Rate (ULC, rhs)
100
19
18
90
17
Government
Consumption
(lagged 4q)
16
80
70
15
14
60
85
87
90
92
95
97
00
02
05
07
10
Source: IMF, the Spanish Statistical Office and GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
23
…causing declines in the periphery’s
export market shares
110
Index
(2000 =100)
105
100
Export Market Shares
(Volume Index)
95
90
85
Germany
Spain
Portugal
France
Italy
Greece
80
75
70
00
01
02
03
04
05
06
07
08
Source: IMF
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
24
And sharp deteriorations in external
positions
40
20
% of
GDP
Net International Investment Position
0
-20
-40
-60
2000
2008
-80
-100
-120
Portugal
Spain
Greece
Ireland
Italy
France Germany
Source: Haver Analytics and GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
25
Not a problem for the Eurozone as a
whole
30
% Euroland
GDP
25
20
Country's Share of
Euroland GDP (2009)
15
10
5
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
Malta
Cyprus
Slovenia
Luxembourg
Slovakia
Portugal
Ireland
Finland
Greece
Austria
Belgium
Netherlands
Spain
Italy
France
Germany
0
26
Hefty adjustments needed to
achieve stabilization of debt levels
6
% of GDP
4
2
0
-2
-4
-6
Debt-stabilizing primary
balance
-8
Targeted primary balance
(2010)
-10
Greece
Ireland
Italy
Portugal
Spain
Source: National Budget Offices, GS Global ECS Research
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
27
Decline in interest rates not restricted
to the Eurozone
7
6
Real ex ante
consol rate, %
5
4
Avg. since 1700
3
2
1
0
1750 1775 1800 1825 1850 1875 1900 1925 1950 1975 2000
Source: BoE, GS calculations
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
28
Reform: The options
 Nothing: let countries restructure (if they have to)
 Piecemeal: More support/control ex post (EFSF plus
EC intervention); tighter standards ex ante (Van
Rompouy)
 Wholesale: Full fiscal federalism (note US example:
political union precedes monetary union).
 Euro break-up
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
29
Macro rebalancing
Keynes (Bretton Woods, 1946):
“the process of adjustment is compulsory for the debtor
and voluntary for the creditor. If the creditor does not
choose to make, or allow, his share of the adjustment,
he suffers no inconvenience. For whilst a country’s
reserve cannot fall below zero, there is no ceiling which
sets an upper limit”.
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
30
Disclaimer
I, Ben Broadbent, hereby certify that all of the views expressed in this report accurately reflect personal views, which have not been influenced by considerations of the firm’s business or
client relationships.
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in
Goldman Sachs offices around the w orld produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia
by Goldman Sachs JBWere Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs & Co. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Hong Kong by
Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by
Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number:
1986021
European Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection w ith its distribution in the European Union and United Kingdom;
Goldman, Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that w e consider reliable, but w e do not represent it is accurate or complete, and it
should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of
reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships w ith a substantial percentage of
the companies covered by our Global Investment Research Division. SIPC: Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://w w w .sipc.org).
Our salespeople, traders, and other professionals may provide oral or w ritten market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions
expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent w ith the recommendations or view s expressed in this
research.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, w ill from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any,
referred to in this research.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction w here such an offer or solicitation w ould be illegal. It does not constitute a personal recommendation or take into account
the particular investment objectives, financial situations, or needs of individual clients. Clients should consider w hether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance,
future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents w hich are
available from Goldman Sachs sales representatives or at http://w w w .theocc.com/publications/risks/riskchap1.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and sales of options
such as spreads. Supporting documentation w ill be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client w ebsites. Not all research content is redistributed to our clients or available to third-party
aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to
w w w .360.gs.com
Disclosure information is also available at http://w w w .gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.
No part of this m aterial m ay be (i) copied, photocopied or duplicated in any form by any m eans or (ii) redistributed w ithout the prior w ritten consent of The Goldm an Sachs Group, Inc.
© Copyright 2010, The Goldm an Sachs Group, Inc. All Rights Reserved.
Goldman Sachs Global Economics, Commodities and Strategy Research 2010
31