International economic environment Preparatory Meeting ......Credit Suisse, BNP Paribas, Deutsche...

Federal

Planning BureauEconomic analyses and forecasts

http://www.plan.be

International economic environment

Preparatory Meeting Economic Budget

January 14, 2009

Bart De Ketelbutter

Federal

Planning BureauEconomic analyses and forecasts

http://www.plan.be

Overview economic & financial situation

Federal Planning BureauEconomic analyses and forecasts

New wave of mortgage rate resets

A host of mortgages (Alt-A & Option ARM) will be reset to higher rates in 2009-2011 after low initial rates

Implying more defaults, more homes fore auction, continuing home price declines

Potential damage is large: Alt-A (1trn), Option ARM (0.5 trn) vs. subprime (1trn)

Even prime default rate rising

Also securitized and sold all over the worldSource: IMF, Global Financial Stability Report, October 2007


House price correction to deepen

Nominal house prices have fallen by 20-25% since peak mid-2006

Considering reset rate danger & huge inventory of unsold homes, prices are expected to decline by another 15-25%

Would bring them in line with historical real values again

Losses in mortgage related products (MBS, ABS, CDO) will mountTotal US mortgage related losses might reach

2000bn USD (1000bn written down so far)

Source: New York Times


More credit losses in the offing as economic recession deepens

Commercial real estate

Car loans

Credit card debt

Corporate credit

This implies that a new wave of recapitalisations of banks will be needed and that financial markets will remain tense

Amount ?

Also securitized

Credit Suisse, BNP Paribas, Deutsche Bank have already signalled huge writedowns due to market turmoil in Q4 08


Yet tensions have eased in the interbank market, thanks to government interventions

J F M A M J J A S O N D J F M A M J J A S O N D-0 .5 0

0

0 .5 0

1 .0 0

1 .5 0

2 .0 0

2 .5 0

3 .0 0

3 .5 03 .5 0

US: 3M Interbank - Fedf unds rateEA : 3M Interbank - ECB Ref i Rate

-0 .5 0

0

0 .5 0

1 .0 0

1 .5 0

2 .0 0

2 .5 0

3 .0 0

3 .5 03 .5 0

S o u rce : T h o m so n D a ta stream

Credit market stress has eased in those markets where public authorities intervened: interbank, top-rated commercial paper, agency MBS

In the interbank market support provided by recapitalisations and funding guarantees

Volumes remain low however


Credit standards tightened, credit growth slowing

Unclear whether reduced demand for or reduced supply of credit is responsible

2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8-2 0

-1 0

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

Net Change in Hous ing Credit StandardsNet Change in Credit Standards to Firms

-2 0

-1 0

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0E A : C re d it S ta n d a rd s

S o u rce : T h o m so n D a ta stream


Corporate bond spreads remain at record highs

2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 80

1

2

3

4

5

6

7

88

M L E M U C O R P . A A 7 -1 0 Y (E ) - R Y

M L E M U C O R P . A . 7 -1 0 Y (E ) - R Y -E M U B E N C H M A R K 1 0 Y R . D S G O V T . IN D E X - R YM L E M U C O R P . B B B 7 -1 0 Y (E ) - R Y -E M U B E N C H M A R K 1 0 Y R . D S G O V T . IN D E X - R Y

0

1

2

3

4

5

6

7

88C o rp o ra te B o n d S p re a d s , A A & A & B B B

S o u rce : Th o m s o n D a t a s t re a m


Government bond rates have plunged, especially in the US

Economic recession and plunging inflation

Risk aversion and flight to quality

In the US also the possible buying of treasuries by the Fed to keep rates as low as possible

2006 2007 20082.00

2.50

3.00

3.50

4.00

4.50

5.00

5.505.50

Euro Area 10y gov bnd yldUS 10y gov bnd yld

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.505.50

Source: Thomson Datastream


Problems for gov.bonds might loom ahead

Deficits in all countries are expected to rise sharply (to 10% of GDP in 2009 in the US)

Implies a huge extra supply of government bonds this year

Crowding out private and emerging market lending

And could eventually lead to higher interest rates

Especially with slackening demand for US bonds by China

Failed bond auctions in several EA countries, even in Germany

Rating agencies could downgrade rating ES, GR, IR soon

Source: New York Times, CBO


In the Euro Area spreads have continued to widen against German Bunds

J F M A M J J A S O N D J F M A M J J A S O N D0

0 .5 0

1 .0 0

1 .5 0

2 .0 0

2 .5 02 .5 0

F RIT

E SN LB GA TG R

P T

0

0 .5 0

1 .0 0

1 .5 0

2 .0 0

2 .5 02 .5 0

S our c e: T homson Datastream

Widening of spreads to do with concerns over consequences of bank rescues and fiscal packages on state budgets


Monetary Policy: towards ZIRP for everyone?


1

2

3

4

5

66

USUK

EA

0

1

2

3

4

5

66


Fedfunds: 0-0.25%

BoE Base Rate: 1.5% (lowest in 315y history)

ECB Refi Rate: 2.5%. Cut of 0.5 pp expected this thursday

Fed: Buying agency securities (100bn), MBS (500bn) and possibly treasuries financed by expanding reserves = money supply


Headline inflation plunges

2004 2005 2006 2007 2008-2

-1

0

1

2

3

4

5

66

USEuro AreaJapanUK

-2

-1

0

1

2

3

4

5

66



While core inflation remains fairly stable

2004 2005 2006 2007 2008-1.00

-0.50

0

0.50

1.00

1.50

2.00

2.50

3.003.00

USEuro Area

Japan

-1 .00

-0.50

0

0.50

1.00

1.50

2.00

2.50

3.003.00



Brent oil price

From a high of 144.5USD mid July to a low of 33USD end of December

OPEC output cut of 4.2 mio barrels & turmoil in Middle East has arrested the decline in oil prices for now

2006 2007 200820

40

60

80

100

120

140

160

Brent in USDBrent in EUR

20

40

60

80

100

120

140

160Brent crude oil price in USD & EUR



Commodity price index, main categories

Plunging world demand

Attractiveness as asset class diminished

Forced deleveraging hedge funds


60

80

100

120

140

160

180

200

220

240

TotalEnergyIndustrialsPrecious MetalsFood

40

60

80

100

120

140

160

180

200

220

240CRB Commodity index , main categor ies



Commodity price index, yoy

2005 2006 2007 2008-60

-40

-20

0

20

40

60

80

100

TotalEnergyIndustrialsPrecious MetalsFood

-60

-40

-20

0

20

40

60

80

100CRB Commodities y oy



Equity markets

Worldwide loss in market value in 2008 amounts to 30.000 bn USD

A tremendous drain on wealth

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008800

900

1000

1100

1200

1300

1400

1500

1600

1500

2000

2500

3000

3500

4000

S&P 500 COMPOSITEFTSE EUROTOP 100 E (RHS)



Exchange Rates

USD has risen against the EUR lately as ECB expected to cut rates

GBP has plunged because of very negative economic outlook & slashing of base rate by Bank of England

2006 2007 20081.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.651.65

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.001.00

USD/EURGBP/EUR (RH Scale)



OECD leading indicators

9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 80

0 .5 0

1 .0 0

1 .5 0

2 .0 0

2 .5 0

3 .0 0

3 .5 0

4 .0 0

4 .5 0

5 .0 05 .0 0

-8

-6

-4

-2

0

2

4

6

8

1 0

O E C D L I T re n d R e sto re d

O E C D L I 6 M C h a n g eO E C D G D P yo y (L H S )

O E C D L e a d in g In d ica to rs

S o u rce : Th o m s o n D a t a s t re a m


US leading indicators

68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 0625

30

35

40

45

50

55

60

65

70

75

20

40

60

80

100

120

140

160

Manufacturing ISMConsumer Confidence



US labour market

FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN-600

-500

-400

-300

-200

-100

0

100 4.50

5.00

5.50

6.00

6.50

7.00

7.507.50

Nonfarm Payrolls, changeUnemployment Rate


Last four months:

Net loss of two million jobs

Unemployment rate up by 1 pp

Hundreds of thousands sought full-time work but could only get part-time job

Number of hours worked lowest since start of series in 1964


US retail sales

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08-6

-4

-2

0

2

4

6

8

10

Retail sales yoy (3m mva)Retail sales, excl. cars yoy (3m mva)

-6

-4

-2

0

2

4

6

8

10



Euro Area leading indicators

Economic sentiment has plunged to lowest level since start series (1985)

Other indicators (IFO, NBB, …) have fallen to levels last seen during oil crises

GDP drop in both Q4 08 & Q1 09 expected to be large (1% qoq?)

80 82 84 86 88 90 92 94 96 98 00 02 04 0670

80

90

100

110

120

130

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

Germany (IFO)Belgium (NBB, RHS)

France (INSEE)

EA: Business Confidence Countries



Belgium GDP & NBB indicator

80 82 84 86 88 90 92 94 96 98 00 02 04 06-2

-1

0

1

2

3

4

5

66

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

GDP yoy (Source:OECD)NBB indicator (RHS)

Belgium: GDP & NBB indicator



Germany industrial production & orders

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07-25

-20

-15

-10

-5

0

5

10

15

20

IP yoyIndustrial Orders yoy

-25

-20

-15

-10

-5

0

5

10

15

20Germany industrial production and orders



Germany Exports and export orders

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08-30

-20

-10

0

10

20

30

Exports yoyExport orders yoy

-30

-20

-10

0

10

20

30Germany exports and export orders



EA unemployment rates

2006 2007 20087

8

9

10

11

12

13

1414

Euro AreaGermanyFranceSpain

7

8

9

10

11

12

13

1414EA: Unem ploym ent ra tes countries



UK house prices yoy

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08-20

-10

0

10

20

30

40

Halifax house prices yoy

-20

-10

0

10

20

30

40



Emerging economies

IP & X plunged in November

Hit by recession in developed world, drop in commodity prices and more difficult & more expensive access to credit

Severity downturn in function of dependability of foreign capital

China

00 01 02 03 04 05 06 07 08 095

10

15

0

10

20

30

GDP Industrial product ion [R.H.S.]

India

00 01 02 03 04 05 06 07 08 09-5

0

5

10

15

-5

0

5

10

15Korea

01 02 03 04 05 06 07 08 09-5

0

5

10

-15

-10

0

10

20

(%, year on year)

Source: Dexia Asset Management, Economic Outlook December 2008

International economic environment Preparatory Meeting ......Credit Suisse, BNP Paribas, Deutsche...

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