Transcript Implications for machine tools

Global Outlook – What does the
recession mean for the machine tool
industry?
January 2009
Dougie Adams
[email protected]
Overview

Unprecedented conditions

Financial heart-attack with commodity price complications
■
■
■
■
■

Healing forces
■
■
■
■

2
credit hard to get
collapse in confidence
consumer retrenchment
employment & investment cut
recession or depression?
collapse in commodity prices
monetary policy – orthodox & unorthodox
global fiscal measures
continuing impact of lower dollar on US
Tough year but some recovery by 2010
Potted history of banking busts
Past real per capita GDP cycles and banking crises: Peak to trough
Percent decline in Real GDP (left chart) Years Duration of Downturn (right chart)
Spain, 1977
Japan, 1992
Norway, 1987
Philippines, 1997
Sweden, 1991
Hong Kong, 1997
Colombia, 1998
Korea, 1997
Historical Average
Malaysia, 1997
Finland, 1991
Thailand, 1997
Indonesia, 1997
Argentina, 2001
US, 1929
-30
-25
-20
-15
-10
-5
0
Percent decrease
Source: Reinhart & Rogoff
3
5
0
1
2
3
Duration in years
4
5
Inflows from Rest of world play a part
US: capital inflows and long-term rates
%
% of GDP
2.5
9
Official flows into US
assets (RHS)
8
7
US real 10-year
rates (LHS)
6
2.0
1.5
5
1.0
4
3
0.5
2
0.0
1
0
-0.5
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source : Oxford Economics/Haver Analytics
4
Roots of the crisis
Fed funds rate cut from 6.5% to 1% between 2001 and 2003
Federal funds target rate
%
7
6
5
4
3
2
1
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver Analytics
5
Roots of the crisis
Stimulated the boom in house prices
Europe and US: House price valuations
House prices to income ratio 2007 (long-term average=100)
Netherlands
Denmark
Spain
UK
France
Ireland
Sweden
Italy
US
Finland
Germany
0
50
100
Source : Oxford Economics
6
Roots of the crisis
150
200
Stresses emerged as subprime defaults rose
US: Mortgage delinquency rates
% of loans
25
Subprime ARMs
20
15
10
Subprime
All loans
5
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Mortgage Bankers Association
7
Heart attack
As bust began price rises were squeezing incomes…..
…and constraining policy
World: Commodity prices
$/barrel
170
2000 Week 1=100
280
260
150
130
110
240
Economist ($)
commodity price
index (RHS)
220
200
90
180
70
160
140
50
Brent oil
(LHS)
30
100
10
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver Analytics
8
120
Heart attack
80
Rising waves of financial stress
US: Financial stress indicator
45
high stress
40
35
UK bank recapitalisation
30
Lehmans' collapse, Paulson plan
25
20
Fannie Mae & Freddie Mac support
15
Bear Stearns' rescue
10
End-year liquidity squeeze
5
Credit crunch starts
0
-5
low stress
-10
2004
2005
2006
2007
Source: Oxford Economics
9
Heart attack
2008
…as world trade collapses…
Freight Rates - Baltic Dry Bulk Index
Index value
16000
14000
12000
10000
8000
6000
4000
2000
0
Dec-99
Dec-01
Dec-03
Source : Baltic Exchange
10
Heart attack
Dec-05
Dec-07
Credit crunch felt globally…
Global credit standards surveys
Balance tightening (+)/loosening (-) credit
100
Eurozone
US
UK
80
60
40
20
0
-20
-40
2003
2004
2005
2006
Source : Oxford Economics/Haver Analytics
11
2007
Credit hard to get
2008
The credit crunch – state of play

The credit crunch appears to be moving into a new phase

At the wholesale level, funding problems remain serious, but financial stress
levels appear to have peaked thanks to central bank actions:

■
Sharp rate cuts have forced down LIBOR levels
■
The Fed has become a central counterparty, substituting for the
moribund interbank market
■
Fed purchases have narrowed credit spreads, especially for mortgages
But credit restriction has become more intense for consumers and the
corporate sectors. So:
12
■
Asset prices remain under pressure, especially house prices
■
Companies are looking to conserve cash
■
A further round of failures/rescues among financial institutions is still a
risk
Credit hard to get
Why are the bailouts not working?

Despite significant recapitalisation efforts, banks across the major
economies have continued to tighten credit.

This reflects the rapid emergence of a second wave of cyclicallydriven losses:
■
Falling house prices and rising unemployment are generating
further mortgage delinquencies and consumer loan defaults
■
Corporate defaults are also rising as weak final demand hits
profits and firms struggle to refinance debt

Financial institutions have announced US$800 billion of losses so
far – but we estimate a further US$1 trillion are still to come.

So measures taken to recapitalise banks have largely been
neutralised by capital write-offs, keeping the banks short of capital
and unable to expand lending to the private sector
13
Credit hard to get
More financial stresses to come
World default rates
%
12
US$bn
500
Speculative default rate (LHS)
Forecasts
10
450
400
350
8
300
250
6
200
4
2
0
1981
150
100
Value of defaulted
debt (RHS)
1985
1989
1993
50
1997
2001
Source : Oxford Economics/Haver Analytics
14
Credit hard to get
2005
0
2009F
Bank write-offs to more than double
Expected Bank write offs through credit crunch, $ billion
Write offs so far
Estimated further write offs
Total write offs
Assets
15
USA
473
602
1075
56250
Europe
278
402
680
49500
Credit hard to get
ROW
42
66
108
61250
Total
793
1070
1863
167000
Business confidence slumps…
World: Business confidence
Standard deviations from mean
3.0
2.0
Germany
(IFO)
US (NAPM)
1.0
0.0
-1.0
-2.0
Japan
(Tankan)
UK
(CBI)
-3.0
-4.0
2004
2005
2006
2007
Source: Haver Analytics
16
Collapse in confidence
2008
…and investment demand collapses…
Eurozone: Business investment & investment
Expected capacity
% year
intentions
15
Business
investment
(LHS)
10
Investment
intentions
(RHS)
constraints,balance (%),
inverted
0
Germany: capital goods orders
% year
30
New orders of
capital goods
20
5
10
5
15
0
10
0
20
-10
25
-5
30
-10
Forecast
35
-15
40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-20
-30
1992
1994
1996
Source : Oxford Economics
17
1998
2000
Source : Oxford Economics/Haver Analytics
Collapse in confidence
2002
2004
2006
2008
with consumer sentiment nosediving
Consumer confidence: US and Eurozone
1985=100
160
% Balance
5
0
140
-5
120
-10
100
-15
80
60
Eurozone
(RHS)
-20
US
(LHS)
40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Haver Analytics
18
Consumer retrenchment
-25
-30
…impacted by huge falls in household wealth...
Household Wealth
Spain
US
UK
Japan
France
Italy
Germany
19
Fall in household wealth
Eur tn
-1.3
-13.3
-1.8
-3.1
-1.7
-1.0
-1.1
Fall in household wealth
% of GDP
-84
-83
-77
-69
-64
-47
-33
Consumer retrenchment
…and threat of unemployment worsens
US: Employment and unemployment
%
7.5
change, 000s
600
Employment
(RHS)
7.0
400
6.5
200
6.0
0
`
5.5
-200
5.0
-400
Unemployment rate
(LHS)
4.5
4.0
2002
-600
-800
2003
2004
2005
2006
2007
2008
Source: BLS/Haver Analytics
20
Employment & investment cut
China facing sharp slowdown…
China: GDP and industrial production
% year
24
20
Forecast
Industrial production,
manufacturing, value
added
16
12
GDP
8
4
0
1995
1997
1999
2001
2003
2005
2007
2009
Source: Oxford Economics
21
Recession or depression?
2011
…as external demand crumbles…
China: Exports and imports
% year
80
Imports (US$)
Exports
(US$)
60
40
20
0
-20
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver Analytics
22
Recession or depression?
So emergers do not escape
BRICS: GDP growth
% yr
14
Brazil
Russia
12
India
China
10
8
6
4
2
0
-2
2006
2007
Source: Oxford Economics
23
2008
Recession or depression?
2009
Drop in commodity prices helps…
World: Oil and food prices
160
140
120
World food prices
(2007=100)
100
80
60
World Base Metal
(2007=100)
40
Oil price
(US$ pb)
20
F'cast
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: Oxford Economics
24
Healing forces – falling commodity prices
Inflation falling sharply
World: Inflation falls in recessions
Fall in inflation, peak to trough % points
0
-2
-4
-6
-8
-10
Last recession
Average of last three recessions
-12
US
Germany
UK
Japan
Source : Oxford Economics/Haver Analytics
25
Healing forces – falling inflation
Coordinated interest rate cuts
Official interest rates
%
7
6
UK repo rate
5
4
3
2
ECB repo rate
1
US Federal funds target rate
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver Analytics
26
Healing forces – orthodox monetary policy
Normal channels blocked
US: Bank assets
Quarterly change, US$bn
1000
800
600
other
cash
interbank loans
loans
securities
400
200
0
-200
Jun-06 Dec-06 Jun-07 Dec-07
Source : Oxford Economics/Haver Analytics
27
Jun-08
Dec-08
Healing forces – orthodox monetary policy
Will QE be taken up in the UK and Eurozone?
UK and Eurozone monetary growth
% 3m annualised
18
Eurozone (M3 ex financial sector)
16
14
12
10
8
6
4
2
UK (M4 ex OFIs)
0
-2
1998
2000
2002
2004
2006
Source : Oxford Economics/Haver Analytics
28
Healing forces – orthodox monetary policy
2008
What needs to happen now?
 Further recapitalisation efforts
 Loan guarantee schemes – attaching government guarantees to
new lending to stimulate credit supply
 By-passing the banking sector – direct financing of households
and firms (eg purchase of commercial paper and equities by
central banks).
 A return to TARP-style purchases of bad assets
 Further fiscal and monetary action (conventional and
unconventional)
29
Healing forces – unorthodox monetary policy
Fiscal policy to support demand
World: Public sector deficits
% of GDP
4
US
Forecast
2
0
-2
-4
-6
Eurozone
UK
-8
-10
1986
1990
1994
1998
2002
2006
Source: Oxford Economics
30
Healing forces – fiscal stimulus
2010
…with more stimulus to come…
World: fiscal stimulus packages
% of GDP
16
14
Headline package
12
Estimated new money
10
8
6
4
2
0
UK
EZ
US
Japan
China
Source : Oxford Economics/Haver Analytics
31
Healing forces – fiscal stimulus
… but markets nervous about state borrowing
World: selected sovereign default spreads
CDS spread, basis points
140
Aug-08
Dec-08
120
100
80
60
40
20
0
UK
US
Germany
Source : Oxford Economics, Reuters
32
Healing forces – fiscal stimulus
US helped by low dollar …
US: Real and nominal effective exchange rates
Jan '97=100
140
Nominal effective rate (RHS)
March '73 = 100
140
130
Real effective rate (LHS)
120
100
120
80
110
60
100
40
90
20
80
1973 1977 1981 1985 1989 1993 1997 2001 2005
0
Source : Oxford Economics/Haver Analytics
33
Healing forces – low dollar
…boosting exports
US:Trade weighted dollar and net exports
% of GDP, 4 qtr average
3.0
TWI
60
2.5
2.0
1.5
70
Real trade weighted
dollar (RHS, inverted)
1.0
90
0.5
100
0.0
-0.5
110
-1.0
120
-1.5
-2.0
Net exports, contribution to
GDP growth (LHS)
-2.5
1973 1977 1981 1985 1989 1993 1997 2001 2005
Source : Oxford Economics/Haver Analytics
34
80
Healing forces – low dollar
130
140
2009 set to be a very tough year
World: GDP growth
% year
6
Forecast
UK
5
US
4
3
2
1
0
-1
Eurozone
-2
-3
1990
35
1993
1996
Source: Oxford Economics
1999
2002
2005
2008
2011
… the worst year since WWII…
World: GDP in the long run
% year
8
7
World GDP
6
5
4
3
2
1
0
-1
1950
36
1962
1974
1986
Source : Oxford Economics/Penn World Tables
1998
2010
…all fall down
World: Recessions compared
% peak-to-trough fall in GDP
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
-4.0
US
UK
Germany
Japan
1990s
2008-2009F
-4.5
-5.0
1970s
37
1980s
Source : Oxford Economics/Haver Analytics
Scenarios for the global economy
Policy effectiveness
 Policy-makers save the world
38
■ Significant additional fiscal
injections globally, esp China and
Germany
■ Aggressive (un)conventional
monetary policy
■ Confidence restored quickly and
banking frees up
■ Return to trend growth in 2009H2
 Oxford Forecast
 Deep-V
■ Consumers and business retrench
sharply to reduce debt
■ Government fiscal stimulus is delayed,
esp in Europe, but eventually larger
■ Conditions worsen again in
financial/credit market as defaults rise
more than expected
■ China falls into recession
 Deflation
■ Recession bottoms in Q3
■ Significant fiscal injections and
further monetary stimulus
■ Oil prices remain low
■ Credit markets normalise by end2009, helped by further bailouts
■ Confidence returns and growth
picks up in late 2009/early 2010
■ Falling asset prices prove a further
drag on recovery in banking sector
■ Unemployment rises sharply and large
output gaps open
■ Monetary/fiscal policy are not effective
as deflation grips
■ Protectionism measures enacted
■ Economy declines in 2010 and beyond
Recession severity
Scenarios for the global economy
Alternative GDP growth forecasts
2008
2009
2010
US
1.3
-2.0
2.5
Eurozone
0.9
-1.9
0.8
China
8.7
5.6
9.6
World
3.5
0.4
3.3
US
1.3
-3.5
1.4
Eurozone
0.9
-3.4
0.2
China
8.7
3.6
7.0
World
3.5
-1.2
2.1
US
1.3
-2.9
-1.2
Eurozone
0.9
-2.2
-1.0
China
8.7
4.5
5.5
World
3.5
-0.3
0.4
Oxford forecast (40%)
Deep-V (30%)
Deflation (20%)
39
Activity falls off a cliff…
World: Industrial production
% year
10
Eurozone
US
5
0
-5
UK
-10
Japan
-15
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver Analytics
40
Implications for machine tools
…with surveys pointing to worse to come…
World: Purchasing managers' indices
% Balance
65
Eurozone
60
US
55
50
45
UK
Japan
40
35
30
2004
2005
2006
2007
2008
Source: Haver Analytics
41
Implications for machine tools
Forecasts – difference a year makes
Jan 2008
Current
2008 2009 20102012
2008
Difference
2009 20102012
2008 2009 20102012
Manufacturing
Growth rates, %
US
Japan
Germany
France
Italy
UK
Spain
W. Europe
China
Emerging Markets
Global
Source: Oxford Economics
42
3.0
2.2
3.3
2.3
0.8
0.8
0.9
2.0
16.3
11.1
4.7
3.4
1.6
2.4
1.7
0.9
1.2
1.5
1.7
14.2
10.1
4.6
3.7
1.4
1.7
1.7
0.6
0.8
1.6
1.4
15.1
10.9
5.3
-1.7
-0.8
1.4
-1.4
-3.1
-1.9
-5.9
-0.9
11.1
7.3
1.7
-3.9
-4.3
-4.8
-3.0
-4.5
-5.1
-5.7
-4.2
8.3
5.2
-0.9
3.3
2.0
2.6
2.2
1.7
1.5
1.9
2.1
12.0
9.2
5.1
-4.8
-3.0
-1.9
-3.7
-3.9
-2.7
-6.8
-2.9
-5.1
-3.8
-2.9
-7.3
-5.8
-7.2
-4.7
-5.5
-6.2
-7.2
-5.9
-5.9
-4.9
-5.4
-0.4
0.6
0.9
0.5
1.0
0.6
0.3
0.7
-3.1
-1.7
-0.2
Recessions compared across the Triad
%
Investment Intermediate Consumer
goods
goods
goods
Consumer
durables
Consumer
nondurables
0
-2
-4
-6
-8
Early 80's
Early 90s
Early 2000s
Now
-10
-12
-14
Source: Oxford Economics
43
Implications for machine tools
Sector performance across the Triad
% Engineering Electronics
0
Motor
vehicles
Aerospace
Basic
metals
-5
-10
-15
-20
-25
-30
-35
-40
44
Early 80's
Early 90s
Early 2000s
Now
Source: Oxford Economics
Implications for machine tools
Chemicals
World MT markets – no hiding place
Growth in industrial production of machine tools'
customer sectors
20%
2008
15%
2009
2010
10%
5%
0%
-5%
-10%
Europe Japan China
Source: Oxford Economics
45
India
Central
Europe
US
Implications for machine tools
World
Sectors – only aerospace above water
Global growth in industrial production of machine
tools customer sectors
8%
2008
6%
2009
2010
4%
2%
0%
-2%
-4%
-6%
-8%
Motor Veh
Metal
Products
Aerospace
Mech
Comp & Elec equip Consumer Intermediate
engineering electronics
goods
goods
Source: Oxford Economics
46
Implications for machine tools
Oxford Global Machine Tools Model

The MT model built as part of Oxford Economics suite of Global
Macro and Sectoral Models

Takes forecasts of drivers of the MT market from the Oxford
models and uses statistical techniques to to predict MT
consumption across 21 countries

In addition, the model will forecast global MT consumption

Takes account of recent scale of MT consumption relative to
other investment by the key client sectors and calculates an
implied MT utilisation rate.

It is also important to reflect the impact of improvements in the
productivity of machine tools on future MT consumption
47
Implications for machine tools
Five year forecast for Japan
Japan
Billion
Billion
600
4.5
Forecast
4
500
3.5
400
Apparent consumption Yen (LHS)
3
2.5
300
2
200
100
1.5
Apparent
consumption US$
(RHS)
0
1998
2000
2002
2004
Source: Oxford Economics
48
2006
1
0.5
2008
Global MT model
2010
0
2012
Five year forecast for Germany
Germany
Billion
7
6
Billion
10
Apparent consumption
US$ (RHS)
Forecast
9
8
5
7
6
4
5
3
2
4
Apparent
consumption - Euro
(LHS)
3
2
1
1
0
1998
2000
2002
2004
Source: Oxford Economics
49
2006
2008
Global MT model
2010
0
2012
Five year forecast or China
China
Yuan bn
900
Forecast
800
700
600
500
400
Output of machine tool
purchasing industries
(2000 prices)
300
Apparent
consumption
200
100
0
1998
2000
2002
2004
Source: Oxford Economics
50
2006
Global MT model
2008
2010
2012
Percentage of global consumption - 2007
%
60
50
40
30
20
10
0
Americas
Source : AMT\Oxford Economics
51
Asia
Global MT model
Europe
USMTC orders forecast
2008
2009
2010
2008
2009
2010
52
Total
Cutting
Forming
$m
$m
$m
4,156
2,696
2,900
3,904
2,526
2,717
252
170
184
%
%
%
-3.7%
-35.1%
7.6%
-4.2%
-35.3%
7.5%
4.8%
-32.7%
8.2%
USMTC orders series
…USMTC medium term perspective
US metalworking machine tools orders, USMTC
Forming machine tools, $bn
0.7
Cutting machine tools, $bn
6
0.6
5
Cutting machine tools
(RHS)
0.5
4
0.4
3
0.3
2
0.2
0.1
0
1996
Forming machine
tools (LHS)
1998
2000
2002
Forecast
2004
2006
Source : Oxford Economics
53
USMTC orders series
2008
1
0
2010
Forming
Forming Machines, US orders levels and growth,
by region
Growth 2009 (forecast)
-45%
West
-40%
-35%
Midwest
South
Northeast
-30%
-25%
Central
-20%
-15%
-10%
-5%
0%
0
50
100
Source: Oxford Economics
54
150
200
250
Value 2006, $ millions
USMTC orders series
Cutting
Cutting Machines, US orders levels and growth, by
region
Growth 2009 (forecast)
-39%
-38%
Midwest
-37%
-36%
South
West
-35%
Northeast
-34%
-33%
-32%
Central
-31%
-30%
0
200
400
Source: Oxford Economics
55
600
800
1,000 1,200 1,400
Value 2006, $ millions
USMTC orders series
Total
Total Cutting and Forming Machines, US orders
levels and growth, by region
Growth 2009 (forecast)
-45%
Midwest
-40%
South
West
-35%
Northeast
-30%
Central
-25%
-20%
-15%
-10%
-5%
0%
0
200
400
Source: Oxford Economics
56
600
800
1,000 1,200 1,400
Value 2006, $ millions
USMTC orders series
57