Global Economic and Market Outlook Larry Kantor Head of Research March 3, 2010
Please read carefully the important disclosures at the end of this publication.
Recovery in 2010 still on course  The world is normalizing, which implies a strong rebound from extremely depressed levels Industrial production already turning
Exports are expanding % y/ y, real exports
IP index: Jan 08 = 100
Korea
105 100
Brazil
40
90
US
20
85
Europe
95
80
Japan
75 70
0 -20 -40
65 60 Jan-08
Korea Brazil US Germany China Japan
60
Jul-08
Jan-09
Jul-09
Jan-10
-60 Jan-08
Jul-08
Jan-09
Note: Europe includes Germany, France, Italy, Spain and UK. Source: Haver, Barclays Capital
Jul-09
Jan-10
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Recovery patterns in manufacturing and exports % of manufacturing and export loss recovered since start of '08 8 38
Euro area
Manufacturing production Exports (local currency)
15
UK
142 26
US
82 51 55
Japan
112
EM Asia
140 0
30
60
90
120
150
Note: Recovery = (current-trough since Jan 08)/(Jan 08 – trough since Jan 08). Source: Haver Analytics, Barclays Capital
3
Fiscal pedal off the metal, but only slightly Cash-for-clunkers and housing incentives are short-lived and “borrow” from the future, but are only a small part of overall fiscal packages 40% of global discretionary stimulus is still in the pipeline for 2010; even higher in China.
Estimated stimulus spending by year
Fiscal stimulus by country Discretionary fiscal stimulus % of GDP (in relation to 2007 baseline)
Esimated share of stimulus spending by year OECD Countries
70
China
US 60%
60 48% 50%
50
50% 40%
40
37%
Brazil
China
France
Ger.
India (FY)
2008
0.0
0.4
0.0
0.0
0.6
2009
0.6
3.1
0.7
1.6
0.6
2010
0.8
2.7
0.8
2.0
0.6
Japan
Korea
S Arabia
UK
US
2008
0.3
1.1
2.4
0.2
1.1
2009
2.4
3.9
3.3
1.3
2
2010
1.8
1.2
3.5
-0.1
1.8
30 20 10
15% 0% 0%
0 2008
2009
2010
Source: OCED Economic Outlook, June 2009, Barclays Capital
4
China: Trains to nowhere? Not quite. 33,000 km of new railways currently under construction, totaling investment of CNY2.5trn Wuhan – Guangzou high-speed railway opened on Dec 09: 10.5 hour trip made into 3hs By 2012, high-speed railways will reach 13,000 km, covering 70% of cities with pop. of above 0.5 mn
Source: chineserailways.com
5
Controlling the hangover from the 2009 boost
Index of monetary conditions and GDP growth 106
Index
Nov 08
Strong January prompted early warning % y/ y
% y/ y 4
2.0
6
1.6
30
1.2
26
0.8
22
0.4
18
104 102
8
100 98
CNY trn
34
10
96
12 Loosening
94
14
92 90 Oct-04 Aug-05 Jun-06
16 Apr-07 Feb-08 Dec-08 Oct-09
Monetary Condition Index
Real GDP (RHS, inverted)
Source: Barclays Capital, CEIC
0.0 Jan 07
Jul 07
Jan 08
Jul 08
Newly increased loans (LHS)
Jan 09
Jul 09
14 Jan 10
M2 growth (RHS)
6
Productivity: Europe lags US Productivity comparisons: GDP per hour worked (% y/y) 6 5 4 3 2 1 0 US (business sector)
-1
Germany-France-Italy
-2
Japan (4 qtr ma)
-3 79
85
91
97
03
09
Source: Barclays Capital, Haver, Thomson DataStream
7
Inventory cycle is larger than in past recessions Change in real private inventories as a % of real GDP
1.5
1.0
f/ c
0.5
0.0
-0.5
-1.0
-1.5 60
65
70
75
80
85
90
95
00
05
10
Note: Shading indicates recession. Source: BEA, Haver Analytics, Barclays Capital
8
Production is bouncing now, supporting household labor income growth 3m/ 3m % chg, saar
index, 3mma, sa
3m/ 3m % chg, saar 10 Payroll proxy (agg wkly hrs * avg hrly earnings)
15
65
10
60
5
55
0
50
-5
45
-10
40
-15
35
-20
30
-6
25
-8
20
-10
Mfg. agg. hours worked (lhs) ISM manufacturing product ion (rhs)
-25 -30 05
06
07
08
09
10
8 6 4 2 0 -2 -4
05
06
07
08
09
10
Note: Shading indicates recession. Source: BLS, ISM, Haver Analytics, Barclays Capital.
9
Consumption is improving along with labor income % y/ y, quarterly data 20
% 3m/ 3m, saar 8
10
6 4
0
2
-10
0 -20 -2 -30
-4
-40
-6 00
01
02
03
04
05
06
07
08
09
00
01
Light vehicle sales
02
03
04
05
06
07
08
09
10
Real non-aut o consumption
Note: Shading indicates recession. Source: BEA, Haver Analytics, Barclays Capital
10
Negative wealth effects are starting to lessen % consumer spending (saar)
f/ c
3.0%
7.0%
f/ c
6.0%
2.5%
5.0%
2.0%
4.0%
1.5%
3.0%
1.0%
2.0%
0.5%
1.0%
0.0%
0.0%
-0.5%
-1.0%
-1.0%
-2.0%
-1.5%
95
97
99
01
03
Total wealth effects as % PCE
-3.0%
Real estate wealth effect Financial wealth effect
-2.0%
Real PCE (%y/ y)
-4.0% 05
07
09
95
97
99
01
03
05
07
09
Source: FRB, Barclays Capital, Haver Analytics
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Leading indicators of payroll changes are improving 3mth avg chg, thous
3mth avg chg, thous
80
400
40
200
0
0
-40
5.0
41.6
41.2
4.5
40.8 4.0 40.4
-200 3.5
-80
-400
-120
-600
-160
-800 00
01
02
03
04
05
06
07
08
Temporary hires (lhs) Total nonfarm payrolls (rhs)
09
10
40.0 3.0
39.6
2.5
39.2 00
01
02
03
04
05
06
07
08
09
10
Average weekly hours: manufacturing overtime (lhs) Average weekly hours: manufacturing (rhs)
Source: BLS, Haver Analytics
12
Level of business investment spending is very low 15
Business investment as a % of US GDP
14
13
12
11
10
9 65
70
75
80
85
90
95
00
05
Source: BEA, Haver Analytics
13
Unemployment is well above the Fed’s desired range, while inflation is below y/ y % chg
% 11
Forecast
10
Forecast
5 4
9 8
3
7 2
6 5
1
4 0
3 2 00
01
02
03
04
Fed's objective
05
06
07
08
09
Unemployment rate
10
11
-1 00
01
02
03
04
05
Fed's objective
06
07
PCE
08
09
10
11
Core PCE
Source: BLS, BEA, FRB, Haver Analytics
14
Fiscal package is massive 400
Federal budget balance
4
200
2
0
0
-200
-2
-400 -600
-4
Stimulus packages
-800 -1,000 -1,200 Level (bn $, lhs) Percent of GDP (rhs)
-1,400 -1,600 68
73
78
billion
% of GDP
2001 tax cut
$174
1.7%
2003 tax cut
$231
2.1%
2008 rebate
$150
1.0%
2009
$787
5.5%
-6 -8 -10 -12
83
88
93
98
03
08
Source: BEA, CBO, Barclays Capital
15
Most of the stimulus has yet to kick in $ bn
$ bn
Tax benefits
300
ARRA spending
500 450
250
400 350
200
Entitlements
300 150
Contracts, grants, loans
250 200
100
150 100
50
50 0
0 Appropriated
Paid out
Appropriated
Paid out
Source: Recovery.gov, BEA, CBO, Council of Economic Advisers, Haver Analytics, Barclays Capital
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Fixed income accounting plus composition The retrenchment of the Fed and the return to risk suggest it is inevitable that rates are going up
FI supply demand imbalance
Ex Ante Demand Overseas Banks Households Pension allocation Total ex-ante demand Total net term FI supply Imbalance
Demand for risk free assets
Total +600 +300 +600 +100 1600 2640 -1040
$bn 1200
Cumulative flows into government money market funds since start of 2006
1000 800 600 400 200 0 -200 2006
2007
2008
2009
2010
Source: ICI, OECD Outlook, Barclays Capital
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A global fiscal shock  Massive amounts of QE reduced the burden of the fiscal shock US net fixed income issuance
G4 net debt/GDP set to increase dramatically Expected change in net debt/ GDP 2007-2011 (in pp) Euro Area
US net fixed income issuance, $bn 3000
19.6
2,640
2,593
2500 32.3
Japan
2000
1,551 1,314
1500 UK
35.2
1,124 843
1000 500
38.4
US
0 0
10
20
30
40
2006
2007
2008
2009E 2009-Ex 2010E Fed
Source: OECD Outlook, Barclays Capital.
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