The Global Recession: How Bad, How Long? The Global Recovery: How Robust, How Widespread?

Transcription

1 ECONOMIC OUTLOOK CONFERENCE 18 JUNE 2009 HILTON SANDTON, JOHANNESBURG The Global Recession: How Bad, How Long? The Global Recovery: How Robust, How Widespread? Nariman Behravesh Chief Economist June 18, 2009

2 Are We There Yet? The noise-to-signal ratio has risen not all the data are falling The second derivative has turned positive the rate of descent of the falling data has diminished The IHS Global Insight forecasts for 2009 are no longer being revised down in a few stances they are being revised up! Because the data have stopped plunging does not necessarily mean that a recovery is imminent Big Question: Is the global inventory cycle about to turn?

3 Are We Near the Trough? 70 (PMI Index, over 50 indicates expansion) United States Eurozone Japan China

4 Industrial Materials Prices Have Bottomed Out 5 (IHS Global Insight Indexes, 2002:1=1.0) In U.S. Dollars In GDP-Weighted Currency Basket

5 A Retrospective on the Causes of the Crisis Too much credit growth and risk taking everywhere! It was clear before the crisis that debt-led growth was unsustainable But, in retrospect, it is equally clear that export-led growth is a source of great vulnerability The surplus countries have been hit as hard, if not harder, than the deficit countries A variety of factors (tax structure, institutions, macro economic policies, history, and culture) have fueled the addictions to both debt and exports The global inventory correction amplified the demand shock from the United States and Europe

6 Which Is Worse: An Addiction to Debt 200 (Household debt as a percent of disposable income) U.K. U.S. Canada Japan Germany France Italy Source: OECD

7 Or an Addiction to Exports? 60 (Exports as a percent of nominal GDP) U.S. European Union Germany Asia-Pacific Japan China

8 Policy Mistakes, Which Have Made This Crisis Far Worse Inflation-fear-induced tightening of monetary policy even after onset of the financial crunch especially in the Eurozone No interest rate cuts by the BoE or ECB until growth was collapsing The U.S.-government-sanctioned collapse of Lehman Brothers The problematic rescue of AIG and the chaotic U.S. approach to solving the banking crisis Overly cautious fiscal policy response in many G-7 countries

9 In the Aftermath of Financial Crises, Inflation Is Typically a Low Risk Output gaps are typically large The de-leveraging process is deflationary The large increases in debt and collapsing currencies didn t trigger an inflationary surge in the Nordic countries in the 1990s The very high levels of government debt and long periods of near-zero interest rates have been accompanied by deflation in Japan The large rise in U.S. debt after WWII and the purchases of U.S. government bonds by the Fed did not result in an increase in inflation

10 For the Moment, Inflation Is Not a Problem 15 (Consumer Price Index, percent change) NAFTA Western Europe Japan Other Americas Emerging Europe Mideast- N. Africa Sub- Saharan Africa* Other Asia- Pacific * Excluding Zimbabwe

11 The Forces of Recovery Much lower commodity prices Bank rescue package despite their problems Robust and unorthodox monetary stimulus Massive fiscal stimulus in some countries Pent-up demand A winding down of the global inventory correction But there is no guarantee that the recovery will be strong

12 Oil Prices Helping the Recovery? 140 (West Texas Intermediate price, dollars per barrel)

13 Financial Sector Support Programs* Ireland United States Sweden United Kingdom Netherlands Austria Canada Germany France Italy (Percent of GDP, as of February 2009) * Includes: Capital injection, purchase of assets and lending by treasury, central bank support provided by treasury backing, liquidity provision and other support by central bank, and guarantees. Source: IMF

14 TED Spread: Back to Nearly Normal Levels 5 (3-month LIBOR less 3-month Treasury bill rate, % points) Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

15 Policy Interest Rates Are at or Near Zero 6 (Percent) United States Eurozone Japan United Kingdom

16 Long-Term Government Bond Yields Are Also Very Low 14 (10-year government bond yields, percent) United States Germany Japan

17 Fiscal Stimulus in 2009 and 2010: Not Nearly Enough (Percent of GDP) China United States Japan United Kingdom Germany Canada France India Italy Source: International Monetary Fund, IHS Global Insight

18 U.S. Housing Affordability Has Improved Dramatically 2.0 A higher index means homes are more affordable Source: National Association of Realtors

19 The Great Recession The deepest and longest world recession in the postwar period The depth of this economic contraction can be attributed to a series of policy mistakes in the United States, Europe, and elsewhere North America, Europe, and Japan are facing severe downturns Growth will likely turn negative for most emerging markets no de-coupling here! Stabilization of financial markets and aggressive fiscal stimulus will help to spark recovery for some economies There are early signs that the trough may be close The United States and China will lead the recovery Credit-sensitive sectors have been hit the hardest they may also be among the first to recover Bottom Line: A deep recession in 2009, weak (or no) recovery in 2010, and a stronger rebound in 2011 more or less on track with other post-financial-crisis recessions

20 What De-Coupling? (Real GDP, percent change) OECD Countries All Other Countries

21 Economic Growth Is Much Lower Everywhere 7.5 (Real GDP, percent change) NAFTA Western Europe Japan Other Americas Emerging Europe Mideast- N. Africa Sub- Saharan Africa Other Asia- Pacific

22 U.S. Dollar Exchange Rates Canadian Dollar (Canadian dollars per U.S. dollar, quarterly averages) Euro (Euro per U.S. dollar, quarterly averages) Japanese Yen (Yen per U.S. dollar, quarterly averages) Chinese Renminbi (Yuan per U.S. dollar, quarterly averages)

23 The U.S. Economy: In a Deep Recession This U.S. recession will be the worst of the postwar era Consumers, businesses, state and local governments are reducing spending as finances deteriorate The global financial crisis is depressing exports Lower oil prices are providing some relief to consumers; the CPI will decrease for the first time since 1955 though the risk of deflation is receding Fiscal and monetary policy stimulus, along with a resolution of the banking problems will help As the U.S. economy recovers faster than most other parts of the world, will it be back to the future?

24 The Deepest U.S. Recession Since the 1930s (Annual percent change, 2000 dollars) (Percent) Real GDP Growth (Left scale) Unemployment Rate (Right scale)

25 Mixed Results in Latin America Compared with previous crises, Latin America enjoys relative economic stability Export dependence is less than Asia and debt levels are lower than Emerging Europe The region posted current-account surpluses for the past four years and fiscal balances in most of the countries were positive Debt profiles have improved substantially, and in many cases external debt has shrunk and debt service has been spread out As the global recession deepens, trade will prove to be the major contagion mechanism capital flows and remittances will have major impacts as well No country in the region will be immune to the crisis; however, some economies are better prepared or less exposed than others Policy mismanagement and resource nationalism will take a toll on Argentina, Venezuela, Bolivia, and Ecuador

26 Mild Recessions in Latin America (Real GDP, percent change) Brazil Argentina Venezuela Colombia Chile Peru Mexico

27 Western Europe Faces a Long Recession The global financial crisis has hit Europe hard, reflecting banks high leverage and exposure to subprime securities and Emerging Europe debt Housing markets downturns are affecting Spain, U.K., Ireland; to a lesser extent, France, Netherlands, Belgium, Denmark Consumer spending is weakening Business investment and exports are diving Poor public finances are hampering fiscal stimulus The rising risk of sovereign defaults and the Eurozone will increased IMF funding help? The recovery is likely to be weak

28 Deep Recessions in Western Europe Linger into (Real GDP, percent change) Germany U.K. France Italy Spain

29 Emerging Europe Is Facing Staggering Challenges in the Near Term Main export markets are in recession Tight credit conditions threaten domestic demand, which has been driven by credit expansion based largely on foreign borrowing Business and consumer confidence has plunged Much-needed fiscal restructuring will be much more difficult Economies with large external and/or fiscal deficits are facing currency crises, drastic macroeconomic adjustment On the positive side, inflation rates are coming down and IMF policy monitoring is being put in place in the most distressed economies How big of a threat is social unrest?

30 Emerging Europe: One of the Hardest-Hit Regions (Percent change) Russia Turkey Poland Czech Republic Hungary Romania

31 Japan A Contraction of Massive Proportions A collapse in exports and capital spending has sent Japan into a deep recession the deepest among the G7 A hangover from the yen bubble Consumer and business sentiment are deteriorating rapidly Price deflation remains a problem nominal GDP is at 1993 levels No signs of a structural shift to consumer spending or services The good news is that Japanese banks exposure to the financial crisis was less than most More good news: extra stimulus in the pipeline

32 Japan: A Contraction of (Almost) Depression Proportions (Percent change, real GDP)

33 Asia-Pacific Region Has Been Hard Hit While finances are strong, export dependence is a problem Capital inflows are diminishing, hurting investment Japan, Australia, South Korea, Taiwan, Hong Kong, Singapore, Malaysia, and Thailand are already in recession External and fiscal balances have improved since the crisis, providing leeway for policy stimuli but the recession will be deeper Lower energy prices will help most countries Over the next few decades, Asia will remain the star region of the world

34 Asia-Pacific Economies: Hit Hard by the Collapse in World Trade (Percent change) China India South Korea Australia Taiwan

35 China s Economy Will Struggle Until the Severe Global Recession Is Over Export dependence is the main pressure point of the downturn, due to the severity of the external demand collapse and China s rising openness to trade Crashing export demand has worsened China s excess supply conditions, which risk pushing the economy into a deflationary spiral Beijing s swift and aggressive stimulus policy has prevented the economy from falling off the cliff Beijing will pause the RMB appreciation policy until the global crisis is over When world demand begins to recover in 2010, China s growth will start to rebound, albeit gradually and moderately

36 India s Economy Will Brake to 5-Year Lows, But Medium-Term Prospects Remain Sound India remains relatively insulated from the world economy, with exports share in GDP at only 21% Poor credit conditions and heightened risk aversion have dented private consumption and investment, the economy s main drivers during the recent boom, causing GDP growth to brake to 5-year lows Aggressive monetary easing has compensated for limited flexibility visà-vis massive fiscal response due to the government s indebtedness Weaker domestic as well as external demand will lead to a significant near-term deceleration as the manufacturing and service sectors weaken Medium-term prospects are positive, with growth rebounding in 2010, as the private sector begins to respond to lower prime lending rates, and global demand and capital inflows begin to recover

37 Real GDP Growth in Asia-Pacific Economies 9 (Percent change) Indonesia Hong Kong Thailand Malaysia Singapore Philippines

38 Middle East and Africa: The Boom Is Over The drop in commodity prices and collapse in exports will bring a sharp slowdown in economic growth Large financial reserves in oil-exporting countries will help to cushion the blow But the global liquidity squeeze is hurting investment projects throughout the region The global recession will also harm tourism throughout the region, especially for countries with strong links to Western economies (Israel, Morocco, South Africa, and Tunisia) Fortunately, for most countries debt levels are low

39 Middle East and Africa: The Party Is Over (Percent change) Saudi Arabia Iran South Africa UAE Israel Nigeria Kuwait

40 Longer-Term Economic Prospects Emerging markets will keep growing faster than developed markets but there still will be no de-coupling Trade and finance will continue to play a big role in global economic growth U.S. saving rate will likely rise what kind of adjustments will happen elsewhere? Asia needs a new economic model as does Germany Quote from Zhou Xiaochuan, PBoC Governor: Although the U.S. cannot sustain the growth pattern of high consumption and low savings, it is not the right time to raise its saving ratio at this very moment

41 Long-Term World Economic Growth by Region 7 (Real GDP, annual percent change) NAFTA Other Americas Western Europe Emerging Europe Japan Other Asia- Pacific Mideast & Africa Sub- Saharan Africa

42 Alternative Scenarios Great Recession (55%) Great Depression 2.0 (5%) declines in real GDP of 10% to 25% (oil prices below $10): seems very unlikely, given the recent aggressive policy response and better social safety nets, compared with the 1930s Lost Decade (20%) a long period of sluggish growth, as macroeconomic policies and financial rescue packages are of limited effectiveness (oil prices never stay above $50 for long) Bust-Boom-Bust (20%) strong growth in the near-term and a rapid acceleration of inflation trigger an over-reaction by fiscal and monetary authorities, leading to another bust in the middle of the next decade (oil prices rise over $100 before plunging below $50 again) What would the impact of a swine flu epidemic be?

43 Global Scenarios 6 (Percent change in real world GDP) Baseline (60%) Deeper Recession (20%) Faster Recovery (20%)

44 Business Implications The worst recession in six decades is close to bottom The recovery is likely to be weak at least initially The U.S., China, and India are likely to recover first Interest-sensitive sectors and construction are likely to be the leading sectors Commodity prices can also be expected to rebound early in the expansion Despite fears, wage and price inflation is likely to remain tame But pressures on profits will remain intense In the near term, M&A activity is likely to pick up briskly

45 ECONOMIC OUTLOOK CONFERENCE 18 JUNE 2009 HILTON SANDTON, JOHANNESBURG Thank you! Nariman Behravesh Chief Economist