Transcript Title Slide (Title Here) - Growth Consulting

Global Economic Outlook:
Bottoming Out Now,
Recovery by June 2009
Economics Research and Analytics
January 2009
Executive Summary
1. Indicators point to a bottom
2. “Fear Index” is reaching a low-point
3. Rebound to start in June due to massive global response
4. Sustainability of up-swing driven by performance of emerging nations
2
Origin of Crisis
The Genesis: Sub Prime Story
•
•
•
Sub Prime Model
Home Buyer
•
Loan
Defaults
•
Sub Prime Model: Actions
Banks disperse risk of defaults
Banks lend more
New markets established for
retail mortgages
New market created for CDS
(total CDS market estimated by
BIS to be $57 trillion)
Lax norms for housing credit as
a result of low interest rates
Bank
Payments
Mortgages
are traded
Mortgage Market
Loan remains in
the banks books
Mortgages not in
banks books
Loss Due to
Defaults
Sub Prime Model: Consequences
•
Repercussions of defaults in
mortgage market
•
Falling house prices
•
Prime borrowers start to default
•
Write-downs by holders of
mortgages and other
instruments
•
Resulting credit crunch in the
economy
* Note: CDS: Credit Default Swaps
4
Genesis: From Financial Sector to Real Sector
Defaults
Lack of Trust in Financial Institutions
Sub-Prime Mortgages
Financial Institutions
Losses
Lack of Capital
for Companies
Tightening Credit Markets
$
$
Suspension of
Interbank Lending
Banks Slow Lending Down
$
Lack of Lending for
Small Business
Slower Growth
Consumers Reduce Spending
$
Lack of Retail
Credit
$
Economy Slows Down/Contracts
5
Internationalization of the Crisis
European Banks Lose
Money on Sub Prime
Mortgages
European Banks Withdraw
Investments in Eastern
Europe
Unwinding of Yen Carry
Trade and FII Withdrawals
Oil Prices Drop on Slower
growth in Europe and USA
Lower Exports From Asia
Due to Lower American
and European Demand
Withdrawal of FII Inflows:
Currency Depreciation
6
How Fear Drove the Recession – Fear is Now Bottoming Out
“The only thing we have
to fear is fear itself.”
-- Franklin Roosevelt
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Bottoming Out Now
Employment Creation Hits Bottom; Due for an Upswing
Beginning of great moderation;
macroeconomic policies smooth
business cycles
•
•
Current employment levels the lowest
of the Great Moderation Era,
suggesting bottom-out
Non-Farm Payroll growth indicates increase in non-agricultural employment
During the Era of Great Moderation, the business cycle was longer and smoother, and recessions were
typically shallower than pre-1984.
Employment creation is currently at the lowest level of the Great Moderation
Era (i.e., 1984 onwards); job creation will be positive for the foreseeable future,
given the massive global fiscal stimulus.
9
Has Industrial Production Bottomed-Out?
Lowest since oil shock; that said, recent months’
output indicates recovery
Recovery in industrial production despite lower
automotive growth rates
•
Increased output – despite the overhang of a recession – illustrates the robust underlying
conditions in American manufacturing
Industrial output showing a rebound from recent lows, suggesting the
recovery of underlying fundamentals.
10
Consumers Are Continuing to Buy
•
The decline in retail sales is not as steep as in the 2006 or 2001 recessions.
Recovering consumer confidence should lead to positive growth in the near future.
Consumers activity, aided by the fiscal stimulus, will boost industrial
production and ultimately aid recovery.
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The Good, The Bad, and the Ugly
The Good
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•
•
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“Fear Index” has peaked, indicating bottom-out
Non-Farm Payroll growth has hit historic lows
Industrial production has recovered and is much higher than during previous recessions
Widely accepted that real estate is bottoming out now as well
The Bad
•
•
•
Credit markets still remain tight
Interest rates are at historic lows, but lending has not restarted
Crisis has “gone global”
The Ugly
•
•
•
Potential collapse of US automotive industry (though recent events indicate recovery to come soon)
Clarity on the extent of sub prime losses and other securitized losses (no recent losses,
suggesting the worst news is behind us)
The crisis is reaching a bottom
12
Global Economy to Rebound by June 2009
Mega Drivers for Rebound
•
•
•
•
•
•
•
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Positive economic news around the world; unprecedented focus
worldwide on addressing the economic situation
Fastest government response in history, primarily driven by massive
government fiscal stimulus package
New US Government/Obama’s economic growth plan focuses on
creating employment through investments in infrastructure, renewable
energy, broadband, and medical technology; infrastructure alone will
create 2 million jobs
Decline in commodity and oil prices leading to a tax break stimulus
Easing of inflationary and liquidity pressures
Strong demand from emerging nations will be a factor in reviving the
global economy
Smart money is coming back to the market, with stock exchanges at
historic low P/E ratios
“Fear fatigue” and rebound in confidence
14
Global Response: Massive Government Stimulus
USA:
$700 Billion bailout rapid
interest rate cuts
$23 billion support for top
3 auto companies;
plan to create 2.5 million
jobs by 2011
UK:
Germany:
Belgium & Switzerland:
ECB
France
250 billion pound bailout
$700 billion relief package
Capital infusion
Interest rate cuts
$50 billion stimulus package
China: Interest rate cuts and $586
billion stimulus (infrastructure,
rural)
India: Interest rate cuts $4 billion
stimulus package (infrastructure,
exports, textiles)
Brazil
Support to real, infrastructure development
under PDP (more than $64billion injected to
financial system)
Russia
Support for ruble; $20
billion stimulus package
Japan:
Interest rate cuts, 447
billion yen stimulus
package
South Korea:
Interest rate cuts and
efforts to keep currency
stable, $11 billion
stimulus package
Global Response
•
•
•
•
Governments infusing capital into financial institutions
Globally coordinated interest rate cuts
IMF offers bridge loan to meet foreign exchange requirements
Discussions, coordinated efforts (G20 summit)
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Global Response – Stimulus Packages
Country
Stimulus Package and Policy Changes
USA
Job and growth fund- $25 billion
2.5 million jobs by 2011: 82.5% of losses (i.e., 1.6 million jobs) to be recovered within 6 months
Every $1 billion spent on roads will create approximately 35,000 jobs
Public buildings, schools, roads, energy efficiency, broadband and medical technology will be
primary sources for employment growth in 2009
European Union
Japan and
South Korea
Emerging Markets
UK:
250 billion pound bailout
Germany:
$700 billion relief package
Belgium & Switzerland: Capital Infusion
Spain
$14 billion infusion, 300 000 jobs to be added by next year
EU
Interest rate cuts permanent; reduced VAT for labor-intensive units;
$250 billion (i.e., stability and growth pact). Job creation sources include energy efficiency,
transportation, infrastructure, broadband connectivity, construction, automobiles
Japan:
South Korea:
Interest rate cuts
Interest rate cuts; battling to stabilize currency
China:
Interest rate cuts and $700 billion bailout; close to $88 billion for railway
infrastructure with focus on 10 sectors including infrastructure, technological innovation,
Healthcare, and low-income housing
India:
Interest rate and tax cuts totaling $4 billion in the next four months (March 2009);
sector focus is on apparel, infrastructure, other export-oriented sectors
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Easing of Inflationary and Liquidity Pressures
Inflationary Pressures: Easing Worldwide
12.0
10.0
% Y.on Y
8.0
Increase in Real Income
6.0
4.0
2.0
0.0
- 2.0
2002
2003
2004
2005
2006
USA
Euro Area
Advanced economies
2007
2008
2009 F
Japan
Latin America
Ensuring Liquidity
%
Y
on
Y
Policy Rate Reduction
Leading to
Addition in Liquidity
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Decline in Commodity and Oil Prices
300
Commodity and energy prices have declined sharply in recent
months. Oil prices have declined from $147 to $40 and will be a
key stimulus for the 2009 rebound.
Index 2005=100
250
200
150
100
50
0
1980M1
1982M1
1984M1
1986M1
1988M1
1992M1
1994M1
1996M1
Agricultural Raw Materials Index
1998M1
2000M1
2002M1
2004M1
Metals Price Index
2006M1
2008M2
Fuel/Energy Index
08
Ja
n-
07
Ja
n-
06
Ja
n-
05
Ja
n-
04
Ja
n-
03
Ja
n-
02
Ja
n-
01
Ja
n-
00
Ja
n-
99
Ja
n-
98
Ja
n-
97
Ja
n-
96
Ja
n-
95
Ja
n-
94
Ja
n-
93
Ja
n-
92
300
250
200
150
100
50
0
Ja
n-
Index
Industrial Inputs Price Index
1990M1
Com m odity Fuel (energy) Index, 2005 = 100, includes Crude oil (petroleum ), Natural Gas, and Coal Price
Indices
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20
18
16
14
12
10
815.4
6
4
2
0
Industrial Output China (2008)
Source: National Institute of Statistics
•
•
•
•
Month (Year 2008)
Steps to Combat Crisis
Announced a $586 billion bailout.
Focus on developing infrastructure to create
jobs and revive economy
Government easing lending to stem fall in
home prices
Coordinated interest rate cuts to boost
liquidity
11.4
8.2
O
ct
ob
er
m
be
r
Au
gu
s
t
12.8
Se
pt
e
14.7
Ju
ly
ay
M
16.0
Ju
ne
16.0
15.7
Ap
ril
M
ar
ch
17.8
Fe
br
ua
ry
Growth Rate (%)
Emerging Markets - China
China is Structurally Vulnerable
to External Environment
•
Export-driven economy
•
Dependent on foreign capital
inflows
•
High level of migration –
imperative to maintain high
growth momentum
•
US is main destination for
China’s exports
Current Scenario
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•
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Small and medium manufacturers
struggling to access credit
Falling real estate prices could adversely
affect the banking sector
Facing struggling domestic demand,
China’s recovery will depend upon access
to an alternative market for its exportsnamely India
China’s present hard landing is expected to recover by the middle of 2009, when domestic
consumption in China recovers as a result of effective use of stimulus package and growth
in alternative market for its exports (i.e., India).
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Emerging Markets - India
Industrial Output India (2008)
September
August
Months (Year 2008)
Key Issues: Rupee; Real Estate
4.80
1.42
•
7.37
July
5.53
June
•
4.37
May
6.22
April
5.47
March
9.52
February
0.00
1.00
2.00
Source: CSO
•
•
•
•
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Real estate boom for past few
years, with prices now cooling
off
Rupee has depreciated
considerably against the dollar,
leading to loss of corporate
profits
10.00
Growth Rate % (YoY)
Steps to Combat Crisis
Comprehensive cut in excise duties to
facilitate consumption across the board
Easing of norms for foreign investments in
local economy.
Small manufactures received sops manage
rising costs.
Exports, automotive, textiles industries have
received stimulus
Current Scenario
•
•
Fall in consumption: especially consumer
durables
Increase in outsourcing activity (due to offshoring by US and European companies
seeking to cut costs)
India is set to record lower but nonetheless significant growth of 7% in 2008. Public
spending, investments in infrastructure and third wave of IT boom in India will make the
economy even more buoyant by June 2009.
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World Economy - Composition and Growth
60.00
50.00
Developing Econom ies
Advanced Econom ies
$ Trillion
40.00
30.00
20.00
10.00
0.00
1991 1992
1993 1994
1995 1996
1997 1998
1999 2000 2001
2002 2003
2004 2005
2006 2007
2008 2009
Advanced Economies accounted for 67 percent of world GDP in 2007 and Developing Economies 33 percent
in 2007. In terms of contribution to growth, the share of emerging countries has been increasing with major
contributors being China, India, Russia, Brazil. These are also fastest expanding economies (Russia is now
an exception) with large public sector contributions. Stimulus plans to result in more employment and growth.
A quarter of growth was driven by these emerging markets; contributions from these economies will play a
key role in global economic growth and recovery.
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$
US/European Stimulus
Package
$
Credit Market
Stabilize
Increasing Government
Consumption
Resumption of Corporate
Lending
Output Stabilizes-Aided by
Capital Goods
and Infrastructure
Increasing capacity utilization
and expansion
Road to Recovery
Increasing Demand for
Capital Goods
Increasing
Consumption
Stemming
Job Losses
$
$
$
Boom in Asia
Chinese Stimulus
$
Consumer Spending Gets Back on Track
Restarting of
Retail Credit
$
Asian Stimulus
Recovery/End of Trough
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