Transcript PS-3-Croft 2719KB Dec 14 2009 01:08:49 PM

Economic Outlook
A Brave New World
April 15, 2009
Presented by:
Patricia Croft, Chief Economist
RBC Global Asset Management
The Great Recession of 2009
We are all looking for
answers
1.
Have stock markets
bottomed?
2.
Is the worst of the
economic downturn
behind us?
3.
Have we found a
solution to the credit
crisis?
4.
What are the longer
term implications of
today’s epic policy
response?
The Great Recession of 2009

World economy set to contract for first time since WWII

Recession is global with hardest hit countries those that
are most reliant on exports

There is no quick fix


Global financial system is still dysfunctional

Enormous negative wealth effect

Debt overhang still considerable
Key to recovery:

Recapitalization of world banking system

Policy response
The Fiscal Policy Response
Country
Package Size
% GDP
China
$ 586 billion
14.0%
US
$ 787 billion
5.5%
UK
$
50 billion
2.5%
India
$
26 billion
2.4%
Canada
$
34 billion
2.0%
Japan
$
85 billion
1.7%
Eurozone
$ 260 billion
1.5%
Germany
$
39 billion
1.3%
TOTAL
$2292 billion
2.8%
The Monetary Policy Response
The Race Towards Zero
US
0.0 to 0.25%
UK
0.5%
Canada
0.5%
5
ECB
1.25%
4
Japan
0.1%
G7* Real Central Bank Policy Rate
3
1
0
-1
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
-3
1982
-2
1980
%
2
*GDP weighted average of US, Japan, Eurozone, UK & Canada target interest rates minus inflation
Source: National Central Banks, National Statistical Agencies, PH&N. Dec 2008 is an estimate.
A Challenging World
The Patient Has Yet to Respond

Nominal policy rates are already at zero – but
this is not a cost of money problem

Quantitative easing now underway in the US,
Japan and the UK – Canada headed that way

Today’s fight is against deflation and depression
– tomorrow’s battle is against inflation and
reversing fiscal trends
Financial Market Stress is Easing
80
70
60
50
40
30
20
10
0
U.S. Dollar LIBOR
%
Index
CBOE Volatility Index (VIX)
Source: U.S. Federal Reserve, Bank of England
CDX Credit Default Swap Index
Source: Bloomberg
900
US$ billions
Index
Source: Chicago Board Options Exchange
300
275
250
225
200
175
150
125
100
75
50
25
0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
U.S. Financial Commercial Paper Outstanding
850
800
750
700
650
600
550
500
450
Source: Federal Reserve
Bear Market Rally A Welcome Relief
Major Markets Since January 2008(local currency terms)
110
Index, Jan. 1, 2008 = 100
100
90
Lehman Bros Fails
80
70
60
50
S&P 500
S&P/TSX
MSCI EAFE
MSCI Emerging
40
Source: Datastream
Key is Estimate of Credit Losses
Estimated
Losses
($ Billions)
Residential Mortgages
US
Banks
1,100
508
Commercial Real Estate
234
125
Credit Cards
226
169
Auto Loans
133
78
C&I Loans and Corp Bonds
390
81
2,083
962
TOTAL
Source: GS Equity Research
Leading Indicators Plunge
Leading Economic Indicators: OECD & Selected Non-OECD
105
Index
100
95
OECD
Non-OECD*
90
* Trade-weighted average of China, India, Brazil, Russia,
Indonesia & South Africa
85
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Organization for Economic Cooperation & Development, PH&N
No Region Spared, But Trading Nations
Worst Hit
Quarterly % change, annualized
Q4 Real GDP Growth
6
0
-6
-12
-18
-24
Source: The Economist
When the US Consumer Catches a Cold…
The U.S. Consumer in Perspective
(% share of GDP: 2008)
Exports Crater Across the Globe
(year-over-year % change)
18.0
16.0
0.0
14.0
-5.0
12.0
-10.0
10.0
% -15.0
8.0
-20.0
%
6.0
4.0
-25.0
-30.0
-35.0
2.0
0.0
-40.0
-45.0
-50.0
Source: Bureau of Economic Analysis, IMF, Banc of
America Securities – Merrill Lynch
Source: Bloomberg, Banc of America Securities
– Merrill Lynch
U.S. in Recession – Now What?
 Recession began in December 2007 – 16 months old
 Now spread beyond the consumer in a negative feed
back loop
 No meaningful recovery expected until 2010
Layoffs Pile Up
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Source: WSJ Research, Updated March 3, 2009
Consumer Net Worth Eviscerated
U.S. Household Net Worth Year-over-year Change
10,000
$ billions
5,000
-
-5,000
-10,000
-15,000
1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Source: U.S. Federal Reserve, Merrill Lynch
From Conspicuous Consumption to Thrift?
US Household Debt Relative to Disposable Income
150
Household
deleveraging
will be a drawnout process
130
%
110
90
70
Source: U.S. Federal Reserve Flow of Funds
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
30
1952
50
U.S. House Prices – Close to a Bottom
S&P/Case-Shiller US Home Price Index
25
 Housing affordability at
250
Year-over-year growth rate (LHS)
record high
20
 Home sales up in
15
200
February
10
5
0
150
 Housing starts have
plunged
 But foreclosures still
-5
-10
100
-15
rising and inventories
remain high
 Further 10 to 15%
Source: MacroMarkets LLC
50
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
-20
-25
Index
% change year-over-year
Index level (RHS)
decline in house prices
but bulk of the
adjustment is behind us
U.S. Deficit Set to Soar
Debt and Deficit (% of GDP)
25
20
80
Financial balance (left)
Net debt (right)
48
10
32
5
16
0
0
-5
-16
-10
-32
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Debt to GDP
ratio will rise
sharply

Higher private
sector savings
will offset public
sector dissaving

Longer term
issue:
intergenerational
transfer of taxes
64
15
Source: Finance Canada, OECD Economic
Outlook No. 84, Nov 2008. Data is general
government, national account basis

Fed’s Balance Sheet Explodes but Velocity
of Money Plummets
U.S. Federal Reserve Assets
Money Velocity
2.5
19
18
17
2.0
Times GDP
US$ Trilions
16
1.5
1.0
9/11
Y2K
15
14
13
12
0.5
11
10
Source: Federal Reserve
9
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.0
1999
Nominal GDP / Monetary base (M0)
Source: Federal Reserve, BEA, PH&N
Canada - Last In First Out?
 Canadian Q1 job losses worst in 26 years –
unemployment rate to rise to over 9%
 Consumer confidence weak – home sales and car
sales plunge
 Impact of lower commodity prices now feeding
through
 Lower C$ offers some relief
 Harper/Carney optimistic – for now
Canadian Economy: Slam on the Brakes
Canadian Real GDP Growth
2009
2010
6.0
–2.2%
+1.0%
4.0
%
2.0
0.0
-2.0
Month-over-month
-4.0
Year-over-year
Quarterly GDP (ann.)
-4.8% BoC
-5.5% PH&N
-6.2% Built-in
-6.0
-8.0
2006
2007
Source: Statistics Canada, PH&N
2008
2009
Regional Variations Set to Narrow
Retail Sales Change, Jan. 2008 - Jan. 2009
0
Provincial Unemployment Rates
16
Canada
15
-1
Ontario
14
-2
Quebec
Year-over-year % change
13
12
-3
11
%
-4
10
9
-5
8
-6
7
6
-7
Source: Statistics Canada
Source: Statistics Canada
2008
2004
2000
1996
1992
1988
BC AL ON MB QC NS NL PEI NB SK
1984
-9
4
1980
-8
1976
5
A Rare Synchronized Global Economic
Recession
 Europe in recession led by Germany – periphery countries
under pressure
 Bank of England slashes interest rates, recognizing economy
in deep trouble
 Japan’s economy fragile – depression?
 India slowing – central bank cutting rates
 China easing massively as economic growth stalls
World growth set to contract in 2009 –
Recovery a 2010 story
Starting to See Green Shoots!
 US – car sales, home sales, retail sales, housing
starts, PMI
 Canada – car sales, retail sales, trade balance
 UK – house prices, leading indicator, PMI
 China – electricity production, cement demand,
car sales, home sales, PMI
Appears the worst is behind us but the
contours of the recovery remain uncertain
140
80
120
75
100
70
Hungarian Forint
240
200
180
160
Mar-09
10
Jan-09
11
Nov-08
12
Sep-08
13
Jul-08
14
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
160
150
140
130
120
110
100
90
80
70
60
May-08
15
KNR per USD
Mexican Peso
Mar-08
220
USD per CAD
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
MXN per USD
16
Jan-08
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
260
Jan-08
9
Jan-08
Forint per USD
Currency Markets Incredibly Volatile
Icelandic Kronor
105
Canadian Dollar
100
95
90
85
Canadian Dollar Parity Not Justified
Labour Productivity, Canada & US
160
6
Index, 1997 - 2007 = 100
5
3
2
1
0
150
United States
140
Canada (in USD terms)
130
120
110
100
90
Source: Statistics Canada, US BLS
2003
2005
2007
2009
1999
2001
1997
1995
1991
1993
2009
2008
2007
2006
2005
2004
2003
2002
60
2001
-2
2000
70
1999
-1
1987
1989
80
1998
% Year-over-year
4
Manufacturing Unit Labour Costs
Source: Bank of America-Merrill Lynch,
Statistics Canada, Bureau of Economic
Analysis
“In regione caecorum rex est luscus”
In the land of the blind, the one-eyed
man is king - Desiderius Erasmus
150
U.S. Dollar Trade-Weighted Index
140
130
Index
120
110
100
90
80
70
Major currency index
60
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Source: U.S. Federal Reserve
2009/10 – Risky Business
1.
Global credit deadlock
2.
Global depression and deflation – paradox of
thrift
3.
Further fallout from credit crisis - sovereign
defaults
4.
President Obama/protectionism/populism
5.
Unrest in China, Russia as unemployment rises
6.
U.S. dollar collapses
Long Term Downtrend Not Over Yet
U.S. 10-Year Treasury Bond Yield
16
10-year yield
14
60 per. Mov. Avg. (10-year
yield)
12
8
6
4
Source: U.S. Federal Reserve
07
04
01
98
95
92
89
86
83
80
77
74
71
68
65
62
59
0
56
2
53
%
10
Equity Valuations Look Very Attractive
Reflation vs. Deflation
Forward P/E Ratios
28
26
24
P/E Ratio
22
20
18
16
14
S&P 500
12
TSX
10
MSCI EAFE
8
1998 1999 2000 2001 2002 2003 2004
Source: I/B/E/S
2005 2006 2007 2008 2009
A Brave New World - Implications for
Investors
1.
Bears are in vogue – great contrarian indicator
2.
Epic policy response will put a floor under global economy – will
take time to work through the credit/deleveraging/economic cycle
3.
Equity markets look extremely attractive although bottoming
process may be prolonged
4.
Legacy of the credit crisis: more government intervention, more
regulation, more transparency, less leverage, change in world
order
5.
Lower equity risk premium?
6.
Inflation will be an issue post 2011 – US dollar ultimately debased