Global Economic Outlook: A tale of two recoveries · Headline inflation looks set to rise in the UK...

Global Economic Outlook:

A tale of two recoveries:Strong recovery in most of EM but a shallow one in developed world

Peter WestawayChief Economist Europe

[email protected]

+44 (0)20 7102 3991

January 2010

Any authors named on this report are research analysts unless otherwise indicated.Please see analyst certifications and important disclosures starting on page 60.

Nomura International plc

3

Our Global View in a NutshellThe developed-world recovery looks set to be weak given de-leveraging forces and other legacies of the crisis.

With good fundamentals and a lack of aftermath issues, the emerging world, particularly Asia, looks set to grow strongly.

Developed-world inflation should stay low amid ample spare capacity, but exchange-rate-targeting central banks risk bubbles.

The main downside risks include a re-eruption of financial distress, a commodity price bubble and premature fiscal tightening.

A possible upside surprise: animal spirits stir and, with monetary conditions super-loose, help release pent-up demand.

4

The worst recession since the Great DepressionForecast real GDP growth rates of major regions/countries, 2009 (% y-o-y)

________________Source: Nomura Global Economics

Euroarea

Rest ofAsia

(0)

5

Emerging Asia set to lead the way in 2010 recoveryForecast real GDP growth of major regions/countries, 2010 (% y-o-y)


Euroarea

Rest ofAsia

s3

s3 in the notes - something awry in the expected Japan growth rate: 1.40.7%saintcym, 05/01/2010

6

Global GDP growth forecast

Source: Nomura Global Economics

2010 and 2011 projections

0

1

2

3

4

5

6

7

8

9

Euro area Japan UK US EEMEA BRICs

%

2010 2011

7

Deflation averted, but little risk of high inflation Consumer price index (% y-o-y)

________________Source: Nomura Global Economics.

8

Monetary stimulus: Policy rates near zeroMain policy interest rates (%)


Forecast

9

Monetary stimulus: Quantitative easingCentral bank balance sheets (Index, January 2007 = 100)

________________Note: Bank of England data available through mid-August; Source: Central Bank websites and Nomura Global Economics.

10

Fiscal stimulus: Unprecedented deficitsCentral government budget balance (% GDP)


11

United States: Deleveraging under wayChange in consumer credit outstanding, by type ($bn)

________________Source: Federal Reserve, Haver Analytics.

12

De-leveraging consumer likely to crimp US recoveryUS household consumption and debt as percentage of GDP


% %

13

Japan back in deflation and heading for double dip Real GDP growth and core inflation


% y-o-y% q-o-q ar

s12

s12 source for actuals?saintcym, 05/01/2010

14

Booming investment-driven Chinese economyFixed asset investment growth and investment share of GDP


% y-o-y %

15

China: Credit-fuelled Investment BoomBank lending (% y-o-y)

________________Note: CEIC, Nomura Global Economics.

16

Europe: Our view in a nutshell

The euro-area economy exited recession in Q3 2009, the UK probably did soin Q4

We expect sub-par growth given household de-leveraging in the UK and feeble domestic momentum in the euro area.

The fiscal policy challenge: deliver short-term stimulus within a credible framework of medium-term consolidation.

Headline inflation looks set to rise in the UK and euro area, but underlying inflation is likely to stay very weak.

We expect the ECB to start gradually removing exceptional liquidity measures but not to start hiking rates until October 2010.

The BoE MPC faces uncertainties on both sides and we do not expect rate hikes until November 2010

17

Euro area: Shape of our forecast


(% y-o-y) (% y-o-y) (% GDP) (% GDP)

18

United Kingdom: Shape of our forecast


(% y-o-y) (% y-o-y) (% GDP) (% GDP)

19

Europe: Key themes

Credit crunch and deleveraging?

Unemployment performance

Net trade and exchange rates

Monetary policy and exit strategies

Euro area periphery issues

20

Europe: Still playing catch-upReal private consumption (Index, Q1 2005 = 100)


100.0

101.0

102.0

103.0

104.0

105.0

106.0

107.0

Mar‐05 Mar‐06 Mar‐07 Mar‐08 Mar‐09 Mar‐10 Mar‐11

Euro area

UK

Forecast

0

10

20

30

40

50

60

70

80

90

100

Euro area US UK

Loans Securities

%%

________________Source: 2007 data, IMF, BIS, Nomura Global Economics.

Source of credit in Europe vs US

Europe: Key role of banks in credit provision

21

22

Europe: Balance sheet burden

________________Source: Bloomberg and Nomura Global Economics.

Total government aid to banking sector since 1997By country (€bn) By type (%)

Liabilityguarantee

Liquidity &funding

CapitalInjection

Impairedassets

23

Europe: Access to credit may not be too bad

Credit obtained against credit needed

10

20

30

40

50

10 20 30 40 50

%, neededloan

%, obtainedloan

FR

FR

GE

GESP

SP

IT

IT

Oth.

0

20

40

60

80

100

Germany Spain France Italy Other

Large firms

SMEs

%

% of firms that applied for a loan and got all the financing requested

Circles= SMEs and Diamonds-large firms, 2009H1________________Source: ECB and Nomura Global Economics.

24

UK credit flow to households has collapsed

UK consumer credit and Home equity withdrawal

Source: ONS and BoE

‐ 4

‐ 2

0

2

4

6

8

10

12

14

1994 1996 1998 2000 2002 2004 2006 2008

consumer credit

HEW

Total

as % of disposable income

25

Employment resilience

Source: OECD, Nomura Global Economics

The rise in unemployment has been surprisingly moderate in Europe, except for Spain

0

2

4

6

8

10

12

2 3 4 5 6 7 8

%, GDP drop from peak

pp, unemployment rise from trough

Spain

United States

FranceOECD

UKItaly

GermanyJapan

Pro-active government policies dampened rise in unemployment

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

1994 1996 1998 2000 2002 2004 2006 2008

ActualIncluding German short-time schemeFitted

pp change y-o-y in unemployment rate

Note: The fitted line is a standard Okun’s law linking unemployment to the GDP growth rateSource: Eurostat, German Labour agency, Nomura Global Economics

Labour adjustment: Hours, not headcount

Source: Eurostat, Nomura Global Economics

34.5

35.0

35.5

36.0

36.5

36.0

36.5

37.0

37.5

38.0

38.5

2Q99 1Q01 4Q02 3Q04 2Q06 1Q08

Euro area (lhs)

UK (rhs)

Hours / week Hours / week

28

World trade rebound


Euro-area foreign demand, surprise since July 2009

-12

-10

-8

-6

-4

-2

0

2

4

6

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Current

July

%, y-o-y

29

Euro strength

Source: ECB and Nomura Global Economics

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

GDP growth Inflation

2010

2011

pp

Trade-weighted euro FX contribution to GDP and inflation revisions

80

90

100

110

120

Jan-93 Mar-96 May-99 Jul-02 Sep-05 Nov-08

December BaselineJuly forecast

100=historical average

Net trade major contribution to UK growth

Net trade share of GDP vs effective exchange rate

Source: ONS, OECD, Nomura Global Economics

75

80

85

90

95

100

105

110‐5

‐4

‐3

‐2

‐1

0

1

2

3

1990 1993 1996 1999 2002 2005 2008 2011

Net trade cntribution to GDP (lhs)

Real effective ecchange rate (3q leads rhs)

2005=100pp

Why QE is necessary

-4

-2

0

2

4

6

8

10

1997 2000 2003 2006 2009

Bank rateNomura forecastfitted

intended QE effect

%

Bank of England balance sheet has expanded

Source: Bank of England

s21

s21 charts need sourcesaintcym, 05/01/2010

Gilt yields have been driven down

Sources: Bank of England and Nomura Global Economics

Lines show 5-year government bond yields less OIS rates.

Bank Rate : Nomura forecast v BoE conditioning assumption

Sources: Bank of England , Bloomberg and Nomura Global Economics.

The BoE November curve is estimated using overnight index swap (OIS) rates in the fifteen working days to 4 November 2009.

0

1

2

3

4

5

6

2008 2009 2010 2011 2012

Bank Rate

BoE November 09 inflation report

Nomura

%

GDP growth forecast: Nomura v BoE

Real GDP

Source: ONS, BoE and Nomura Global Economics.

‐8.0

‐6.0

‐4.0

‐2.0

0.0

2.0

4.0

6.0

2001 2003 2005 2007 2009 2011

Nomura as of July 2009

BoE's forecast as of Nov 09

Nomura as of Dec 09

% y‐o‐y

F

BoE’s GDP level forecast(based on market interest rate expectations and £200 billion asset purchases)

Source: Bank of England

37

Do recessions destroy productive potential?Per capita GDP following banking crises (logarithmic level)

________________Source: IMF World Economic Outlook, Nomura Global Economics.

Korea 1997 Thailand 1997

Japan 1997 Sweden 1991

15.6

15.8

16.0

16.2

16.4

16.6

16.8

17.0

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Pre-crisistrend

Per capita GDP

Crisisyear

10.0

10.2

10.4

10.6

10.8

11.0

11.2

11.4

11.6

11.8

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

14.9

15.0

15.1

15.2

15.3

15.4

15.5

1987 1989 1991 1993 1995 1997 1999 2001 2003 200512.0

12.1

12.2

12.3

12.4

12.5

12.6

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

Alternative UK output gaps depending on what happens to potential output

‐10.0

‐8.0

‐6.0

‐4.0

‐2.0

0.0

2.0

2005 2006 2007 2008 2009 2010 2011

No loss of potential

4% loss of potential

4% loss + slower potential growth

pp


s25

s25 chart need sourcesaintcym, 05/01/2010

CPI inflation forecast: Nomura v BoE

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012

Actual

BoE Nov 09 Inflation Report

Nomura forecast

%, y‐o‐y

40

Inflation outlook

Source: Eurostat, Nomura Global Economics

Euro-area HICP inflation

-1

0

1

2

3

4

5

Dec-06 Jan-08 Jan-09 Jan-10 Jan-11

HeadlineCore (excluding food, energy, alcohol and tobacco)

% y‐o‐y

41

Monetary conditions


Nomura index of monetary conditions in the euro area

0

20

40

60

80

100

120

140

160

Dec-96 Feb-98 Apr-99 Jun-00 Aug-01 Oct-02 Jan-04 Mar-05 May-06 Jul-07 Sep-08 Nov-09 Jan-11

Bank rates Corp spreads REER

Tighter

42

ECB outlook

Source: Bloomberg, Nomura Global Economics

We expect normalisation of ECB operations in Q3 2010, first ratehike in October 2010

-100

-80

-60

-40

-20

0

20

0

50

100

150

200

250

300

02/01/09 02/04/09 02/07/09 02/10/09

bp€ bn

Excess liquidity (lhs)EONIA- ECB main rate spread (rhs)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3Q09 1Q10 3Q10 1Q11 3Q11

%

ECB main rate EONIA 3mth Libor

43

Fiscal outlook

Source: Eurostat and Nomura Global Economics

Consolidation will likely be slow

% GDP

2009 2010 2011 2009 2010 2011

Euro area -6.4 -6.9 -6.4 78.2 83.9 87.4

Germany -3.3 -5.3 -4.9 73.0 76.9 78.5

UK -12.6 -12.7 -10.6 69.1 80.6 89.0

France -8.4 -9.0 -7.9 76.2 83.4 87.5

Italy -5.3 -5.1 -4.9 114.6 116.6 116.3

Spain -11.7 -9.7 -9.5 54.8 66.4 75.8

Netherlands -4.9 -5.6 -5.4 60.0 65.3 68.4

Budget balance Debt

Euro-area periphery: Public-sector debt forecasts

Note: 2009-2011 data are European Commission forecastsSource: European Commission, Nomura Global Economics

0

20

40

60

80

100

120

140

160

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

% GDP

Greece Euro area Ireland Spain Italy

Euro area: Public-sector interest payments

Note: 2009-2011 data are European Commission forecastsSource: European Commission, Nomura Global Economics

Greece and Italy

2

3

4

5

6

7

8

9

10

11

12

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

% GDP

Greece Italy

46

None defaulted

Source: European Commission, Nomura Global Economics

Historical highs in interest payments as percentage of GDP(Our 2011 forecast for Greece: 5%)

% GDP year

Greece 10.1 1994

Italy 10.7 1993

Denmark 6.8 1985

Portugal 6.1 1986

Sweden 4.7 1994

US 4.6 1991

UK 4.2 1982

47

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Global Economic Outlook: A tale of two recoveries · Headline inflation looks set to rise in the UK...

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