1 the global economy: terror on top of recession klas eklund, seb sns, october 23, 2001
TRANSCRIPT
11
THE GLOBAL THE GLOBAL ECONOMY:ECONOMY:
TERROR ON TOP OF TERROR ON TOP OF RECESSIONRECESSION
Klas Eklund, SEBSNS, October 23, 2001
22
STARTING POINT: STARTING POINT: OECD INDUSTRY IN RECESSIONOECD INDUSTRY IN RECESSION
OECD IP total industry, Volume, sa [c.o.p 12] 0
90 91 92 93 94 95 96 97 98 99 00 01-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
33
US PRE-TERROR: US PRE-TERROR: BOTTOMING OUT?BOTTOMING OUT?
USA Chicago PMI sa USA Philadelphia Fed general business activity, sa USA NAPM Purchasing managers index, sa
97 98 99 00 01-40
-30
-20
-10
0
10
20
30
35
40
45
50
55
60
65
44
THE KEY: THE KEY: CONSUMER CONFIDENCECONSUMER CONFIDENCE
USA Consumer confidence, sa USA Personal consumption expenditures, Volume, AR, sa [c.o.p 12]
90 91 92 93 94 95 96 97 98 99 00 0140
50
60
70
80
90
100
110
120
130
140
150
-1
0
1
2
3
4
5
6
55
RISING UNEMPLOYMENTRISING UNEMPLOYMENT
USA Unemployment per cent of total labour force, sa
95 96 97 98 99 00 013,75
4,00
4,25
4,50
4,75
5,00
5,25
5,50
5,75
6,00
66
US CYCLE, PRE-TERROR US CYCLE, PRE-TERROR
03020100
6
5
4
3
2
1
0
6
5
4
3
2
1
0
Sources: EcoWin, SEB
Y-o-y percentage change
Forecast SEB
77
THE ATTACKS: THE ATTACKS: IMMEDIATE EFFECTSIMMEDIATE EFFECTS
• In a macro perspective, small material damage: 0.1-0.2% of GDP
• But nonetheless recession in Q3-Q4– Losses in communications sectors, finance,
tourism, retail, etc– Supply chain broken
• Financial markets: Flight to safety• Central banks in successful concerted action
to guarantee liquidity • Steeper yield curves: Short rates fall, while
bonds are affected by opposite forces
88
STOCK MARKET: STOCK MARKET: DOWN AND UPDOWN AND UP
USA S&P 500 index, close daily USA Nasdaq Composite index, close daily
Feb Mar Apr May Jun Jul Aug Sep Oct950
1000
1050
1100
1150
1200
1250
1300
1350
1400
1250
1500
1750
2000
2250
2500
2750
3000
99
YIELD CURVE: STEEPERYIELD CURVE: STEEPER
USA 10 year government bond, close daily USA 3 months treasury bills, close daily
01 Feb Mar Apr May Jun Jul Aug Sep Oct2,0
2,5
3,0
3,5
4,0
4,5
5,0
5,5
6,0
6,5
1010
NOW: AN INTERIM STAGENOW: AN INTERIM STAGE
• Consumer confidence and retail sales down
• Important industries severely hit• Monetary and fiscal stimulus in the US• Building broad political coalition, ground
troops on their way• The future will be decided by military/
political developments and effects on consumer confidence - and how this affects the fragile recovery
1111
THREE SCENARIOSTHREE SCENARIOS
• Quick solution– Earthquake scenario
• Drawn out conflict– Gulf War scenario
• The ugly case– Dramatic escalation of conflict
Remember: Our starting point was Remember: Our starting point was below consensusbelow consensus
1212
SCENARIOSSCENARIOS
03020100
6
5
4
3
2
1
0
6
5
4
3
2
1
0
Sources: EcoWin, SEB
Y-o-y percentage change
Forecast SEB
1313
1. THE QUICK SOLUTION1. THE QUICK SOLUTION
• Successful retaliation• No further terror attacks; the Anthrax
scare fades away• Low oil price • Confidence restored after some months• Fiscal stimulus works well• Stock markets rebound • Very short recession: Economic recovery
in 2-3 quarters
1414
US FISCAL INITIATIVESUS FISCAL INITIATIVES
When?
Before Sep 11Immediately after
Now discussed
Sum new initiativesTotal stimulus
What? How much?
Tax cuts 40Emergency relief 40
Guarantees 15Military spending 35
Special stimulus 60-75
150-175Around 200
1515
IMPACT OF SHOCKSIMPACT OF SHOCKS2002 GDP impact2002 GDP impact
NEGATIVE SHOCKS
0.5% higher unemployment: 1.0%20% decline in stock market: 0.7%Global repercussions:
0.5%
Total negative impact: 2.0-2.5%
POSITIVE SHOCKS
Fiscal easing: 1.5%Monetary easing:
1.0%
Total positive impact: 2.5%
1616
US GDP IN US GDP IN “EARTHQUAKE” SCENARIO“EARTHQUAKE” SCENARIO
03020100
6
5
4
3
2
1
0
-1
6
5
4
3
2
1
0
-1
Sources: EcoWin, SEB
Y-o-y percent change Per centPer cent
Forecast SEB
1717
2. A DRAWN-OUT 2. A DRAWN-OUT CRISISCRISIS
• Limited success in retaliation • The broad coalition breaks down • Risks of more terror attacks • Stability in the Middle East is threatened. Oil
prices move up • Equity prices decline further• Consumer confidence takes a hit• Over-capacity remains a great problem;
continued cuts of personnel and capex• Economic recovery is delayed until 2003
1818
CONSUMER CONFIDENCE:CONSUMER CONFIDENCE:PREVIOUS EXPERIENCESPREVIOUS EXPERIENCES
EVENT1973 Oil shock1980 Credit squeeze1987 Market crash1990 Gulf war1998 LTCM collapse
CONFIDENCE- 53- 36- 15- 47- 19
1919
CONFIDENCE NOW...CONFIDENCE NOW...
USA Consumer confidence, sa USA Personal consumption expenditures, Volume, AR, sa [c.o.p 12]
90 91 92 93 94 95 96 97 98 99 00 0140
50
60
70
80
90
100
110
120
130
140
150
-1
0
1
2
3
4
5
6
2020
……AND TOMORROW?AND TOMORROW?
USA Consumer confidence, sa USA Personal consumption expenditures, Volume, AR, sa [c.o.p 12]
90 91 92 93 94 95 96 97 98 99 00 0140
50
60
70
80
90
100
110
120
130
140
150
-1
0
1
2
3
4
5
6
2121
SAVINGS RATE MOVES UPSAVINGS RATE MOVES UP
• According to IMF (2001), US personal savings have been lowered by:– Higher equity wealth– Higher public saving– Higher per capita Medicare transfers– Improved household access to credit– Lower inflationary expectations
• Major influences now point to increasing savings
• 1% change of savings ratio means 0.7% change of GDP
2222
SAVINGS RATE AND SAVINGS RATE AND STOCK MARKETSSTOCK MARKETS
USA Personal saving rate, AR, sa USA S&P 500 index
91 92 93 94 95 96 97 98 99 00 01300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
0
1
2
3
4
5
6
7
8
9
10
11
2323
RICARDIAN EQUIVALENCERICARDIAN EQUIVALENCE
USA Personal saving rate (qtr), sa [ma 12] ((usa12605*1000)/(usa01006*usa01025))*100 [ma 12]
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 010
1
2
3
4
5
6
7
8
9
10
11 -5
-4
-3
-2
-1
0
1
2
3
2424
US INDUSTRIAL PRODUCTIONUS INDUSTRIAL PRODUCTION
USA IP total index, Volume, sa [c.o.p 12]
89 90 91 92 93 94 95 96 97 98 99 00 01-7,5
-5,0
-2,5
0,0
2,5
5,0
7,5
10,0
2525
CAPACITY UTILISATIONCAPACITY UTILISATION
USA Capacity utilization rate, manufacturing, sa
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 0170,0
72,5
75,0
77,5
80,0
82,5
85,0
87,5
2626
NEW ORDERSNEW ORDERS
USA Mfrs' new orders, nondefense capital goods, Volume, sa [cma 3, c.o.p 12] 0
90 91 92 93 94 95 96 97 98 99 00 01-20
-15
-10
-5
0
5
10
15
20
25
2727
INVESTMENTSINVESTMENTS
USA Fixed invest, computers and peripheral equipm, Val, AR, sa [c.o.p 4] USA Gross private domestic fixed investment, Volume, AR, sa [c.o.p 4] 0
89 90 91 92 93 94 95 96 97 98 99 00 01-20
-15
-10
-5
0
5
10
15
20
25
30
2828
DEFAULT RATEDEFAULT RATE(High yield, Emerging markets, Convertibles)
020100999897969594939291908988
12
10
8
6
4
2
0
12
10
8
6
4
2
0
Source: Moody's
Per cent Per cent
2929
STOCK MARKETSSTOCK MARKETS
• Many claim the Fed model showed “fair value” before Sep 11
• That claim was based on optimistic earnings estimates for 2002
• The 64,000 dollar question: What is priced in?
• If earnings estimates are overly optimistic - then the recent market rebound is a false start
3030
EARNINGS ESTIMATESEARNINGS ESTIMATES
3131
US GDP IN US GDP IN “GULF WAR” SCENARIO“GULF WAR” SCENARIO
03020100
6
4
2
0
-2
6
4
2
0
-2
Sources: EcoWin, SEB
Y-o-y per cent change Per centPer cent
Forecast SEB
3232
3. THE UGLY CASE3. THE UGLY CASE
• Escalation of terrorist attacks and retaliation. Attacks spread to Europe.
• Many Muslim countries hostile to the US and its allies. The Saudi House is toppled and Pakistan (nuclear state) turns militant Muslim supporting the Talibans
• Oil supplies in disorder and prices soar• More fiscal and monetary stimulus, but
inflation fears push up bond rates and savings ratio rises
3333
EFFECTS ON EUROPEEFFECTS ON EUROPE
• Europe is not insulated• Several economic transmission
mechanisms– Direct trade links– Stock market links– Consumer confidence
• ECB will cut further• Some fiscal stimulus - but careful• Conclusion: Euro zone will follow
the US, but the amplitude will be smaller
3434
JAPANESE TRIPLE DIPJAPANESE TRIPLE DIP
• Deflation, banking sector crises, debt explosion
• Structural reforms, NPL solution and monetary policy must be co-ordinated
• Reforms in the pipeline - but only slowly
• BoJ prints money• Deep recession 2001-02, slow
recovery earliest by 2003• Is Koizumi Thatcher or Gorbachev?
3535
EMERGING MARKETSEMERGING MARKETS
• Increased risks; premium high• Tourism severely affected• China strong: WTO and reforms• Rest of Asia: Mixed picture• Eastern Europe relatively stable, but
Poland in crisis• Turkey: A drawn-out crisis • Argentina: Large or small default?
Devaluation or dollarisation?– Contagion effects?
3636
GROWTH IN GROWTH IN DIFFERENT SCENARIOS DIFFERENT SCENARIOS
2001 2002 2003
US“Earthquake” 1.0 1.5 3.5“Gulf” 0.8 -0.3 2.9
Euro zone“Earthquake” 1.5 1.7 2.6“Gulf” 1.4 0.7 2.6
3737
CONSENSUS FORECASTSCONSENSUS FORECASTSGDP forecasts for 2002GDP forecasts for 2002
-1-0,5
00,5
11,5
22,5
33,5
4
Janu
ary
April
J uly
Oct
ober
USAEuro ZoneJapan
3838
HUGE UNCERTAINTYHUGE UNCERTAINTY
• New prel. OECD forecast 2001-2002: – US 1.1% and 1.3%– Japan -0.7% and -0,8%– Germany 0.7% and 1.0%– OECD 1.0% and 1.2%
i.e close to SEB’s “earthquake” scenario• Analysts’ forecasts wildly scattered
– standard deviation doubled– On the V side: Goldman, Deutsche– On the recession side: CSFB, MSDW
3939
V SCENARIO PROBLEMSV SCENARIO PROBLEMS
• Even if the effects of terror attacks per se look like a V, they come on top of a weak US economy
• Fed cuts are counteracted by lower credit quality and falling investments...
…and tax cuts by higher savings• Profit margins are low• Even if the US effects were to be mild,
the risks of a global recession increase– Japan is on the brink– Emerging markets slide
4040
WISHFUL THINKING?WISHFUL THINKING?
“It is surely wishful thinking to hope that the bursting of one
of the biggest financial bubbles in history, combined with the
aftershocks from the most serious attack ever on
America’s soil, will be followed by the mildest recession in
history”The Economist, Oct 20
4141
MULTIPLE EQUILIBRIA?MULTIPLE EQUILIBRIA?
• Best case scenario still pretty good
• But worse case significantly worse
• Risk-weighted outcome may not follow normal distribution
• Several likely outcomes, depending on small shifts
• Will make market adjustment jittery
4242
SUMMARYSUMMARY
• US and Japan are moving into recession, Europe more resistant
• The consensus view is a rebound early next year. But do not preclude a drawn-out recession!
• The problem is the combination of– hangover from a burst bubble– psychological effects of terror– global interaction
• Volatile stock markets, risk of a false start. Steep yield curves