(1)陆挺：中国经济的短期和长期发展：硬着陆或软着陆？
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TRANSCRIPT
1
Date
China’s landing
in the short and long run:
Hard or soft?
Ting Lu +852 2536 3718
China economist
Merrill Lynch (Hong Kong)
Product ID
2
Date
China in 2011-20: The major challenge:
Aging population
• As of 2010: Age 0-14: 16.6%; Age 15-
59: 70.1%; Age 60 or above: 13.3%; 65
and above: 8.9%.
• Compare with 2000，Ratio of age
group 0-14 declined 6.3 ppt, ratio of age
group 15-59 rose 3.4ppt, ratio of 60 and
above rose 2.9 ppt，ratio 65 and above
rose 1.9 ppt.
• The size of age group 20-34 peaked in
2000, and dropped 22.0% from 2000 to
2008.
• The size of age group 20-44 peaked in
2000, and dropped 3.6% from 2000 to
2008.
Source: CEIC, BofA Merrill Lynch calculations.
The aging population
The falling size of young working age population
200
300
400
500
600
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Age 20-44 20-39 20-34
million person
50
100
150
200
250
300
350
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Age 0-14 Age 65 and abov e
million person
3
Date Lewis turning point in China
More people from villages to cities? Urbanization ratio rose to 51.3% in 2011 from
36.2% in 2000. Net increase in urban population is 253mn in the period of 2000-2010.
Migrant population rose 81% to 261mn in the same period.
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Labor supply-demand ratio
Lew is turning
point in China
Impact of global
financil crisis
4
Date Dependency ratio: China vs. Japan
30
40
50
60
70
80
90
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Japan China
%
5
Date China’s consumption (%) of global commodities
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Steel Aluminum Copper
%
6
Date China’s consumption (%) of global energy
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0.0
1.5
3.0
4.5
6.0
7.5
9.0
10.5
12.0
Coal (LHS) Oil (RHS)
% %
7
Date Impact on growth: double digit is history
0
2
4
6
8
10
12
14
16
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
GDP grow th
%
8
Date
Still backward: Versus other countries
0.950 and over 0.900–0.949
0.850–0.899 0.800–0.849 0.750–0.799
0.700–0.749 0.650–0.699
0.600–0.649 0.550–0.599 0.500–0.549
0.450–0.499 0.400–0.449 0.350–0.399 under 0.350 not available
China and World Human Development Index. Source: UNDP, 2008 update
9
Date Sill backward: Versus the US
0
2
4
6
8
10
12
0 25 50 75 100 125
GDP per capita, as % of US
Rea
l g
row
th o
f G
DP
per
cap
ita,
%
China in 2010
Japan 1960s
Japan 1980s
China Japan
Hong Kong, Singapore,
Korea and Taiw an
10
DateChina’s capital stock
Source: CEIC, BofA Merrill Lynch calculations.
Total length of railroad
Total length of paved roadway
Number of airports
0
50,000
100,000
150,000
200,000
250,000
US
Russia
Chin
a
India
Germ
any
Fra
nce
Bra
zil
Japan
UK
Kore
a
KM
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
US
Chin
a
India
Bra
zil
Japan
Fra
nce
Russia
Germ
any
UK
Kore
a
KM
-1,000
1,000
3,000
5,000
7,000
9,000
11,000
13,000
15,000
US
Bra
zil
Russia
Germ
any
UK
Chin
a
Fra
nce
India
Japan
Kore
a
0
100
200
300
400
500
600
700
800
900
US
Fra
nce
Ja
pa
n
Ge
rma
ny
UK
Ko
rea
Ru
ssia
Bra
zil
Ch
ina
India
Number of vehicles per 1000 people
11
Date Flying geese: This time it’s domestic flight
Less developed regions in China could see
higher growth going forward as growth
trickles down from more developed areas.
Differentiation in GDP growth across
regions will provide rich implications for
investment.
Source: CEIC, BofA Merrill Lynch calculations.
Regional differentiation in GDP growth
6
8
10
12
14
16
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
National Central East West
% YoY
12
Date The great leap forward in human capital
0
1
2
3
4
5
6
7
8
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
New ly enrolled Fresh graduates
Million person
13
Date And the reversal of brain drain
14
Date Lewis turning point: Impact on wage
8
12
16
20
24
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Wage at State Ow ned Enterprises Urban Collectiv es
% YoY
15
Date Inflation: Chinese style
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Food Clothing Transport & Telecom
Jan 2001 =1
16
DateChina could overtake the US on nominal GDP
0
10000
20000
30000
40000
50000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
China GDP in USD US GDP
USD, bn
17
Date Growth in 2012-13: “W”-shape?
0
2
4
6
8
10
12
14
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
YoY (LHS) QoQ. Sa (RHS)
%YoY %QoQ, sa
18
Date Signs of slowdown
-20
-10
0
10
20
30
40
50
2007 2008 2009 2010 2011 2012
Cement Crude steel
% YoY
-10
0
10
20
30
40
2007 2008 2009 2010 2011 2012
Crude oil processing Ten non-ferrous metals
% YoY
-10
0
10
20
30
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
July
Pow er consumption 2nd industry 3rd industry
%YoY
Power consumption Oil processing and metal output
Cement and steel
35
40
45
50
55
60
2005 2006 2007 2008 2009 2010 2011 2012
%
0
5
10
15
20
25% YoY
PMI IP (RHS)
PMI and IP
19
Date Analyze and predict the slowdown
The enlarging gap between FAI and GFCF in China
Value added of exports accounts for about half of
headline value of exports in China. In 2011,
exports contributed 13% of GDP.
In 2011, FAI and real estate FAI makes up 47%
and 10.0% of GDP respectively.
In value added terms (by stripping out imported
capital goods and raw materials for FAI), FAI
contributes 42% of China’s GDP. Value added of
consumption contributed 45% to GDP in 2011.
0
10
20
30
40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Ratio of ex ports to GDP
%
The declining ratio of exports to GDP
0
5,000
10,000
15,000
20,000
25,000
30,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Gross Fix ed Capital Formation Headline FAI
RMB, bn
-30
-20
-10
0
10
20
30
40
50
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
Real FAI grow th Real retail sales grow thReal ex port grow th
% y oy
The three major demand-side components of GDP
20
Date Consumption is still supported by robust income growth
0
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Retail Sales Urban income per capita, y td Rural income per capita, y td
% YoY
21
Date Sources of slowdown: External demand
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1Q20
10
2Q20
10
3Q20
10
4Q20
10
1Q20
11
2Q20
11
3Q20
11
4Q20
11
1Q20
12
2Q20
12
3Q20
12
4Q20
12
1Q20
13
2Q20
13
US EA Japan
Forecast
%,y oy
22
Date Sharp decline of export growth
-40
-20
0
20
40
60
80
2005 2006 2007 2008 2009 2010 2011 2012
% YoY
-20
-10
0
10
20
30
40USD bn
Trade balance (RHS) Ex ports Imports
-40
-20
0
20
40
60
80
2007 2008 2009 2010 2011 2012
% YoY
ASEAN EU Japan US
25
35
45
55
65
75
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Jan-1
1
Jan-1
2
-40
-20
0
20
40
60
PMI: Ex port orders China's ex port grow th (RHS)
% YoY
Processing imports and exportsMajor destinations of China’s exports
The sub-index Export orders of PMI and export growthExports, imports and trade surplus
-40
-20
0
20
40
60
80
2004 2005 2006 2007 2008 2009 2010 2011 2012
% YoY
Processing ex ports Processing imports
23
Date Property FAI growth has been falling
-10
0
10
20
30
40
50
60
2007 2008 2009 2010 2011 2012
Infrastructure Manufacturing Real estate
% YoY
24
Date Property FAI growth more stable than starts, but….
-20
0
20
40
60
80
Mar
-06
Sep
-06
Mar
-07
Sep
-07
Mar
-08
Sep
-08
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
Sep
-11
Mar
-12
Property FAI New Home StartsHome completion Home under construction
%YoY
25
Date Policy-making amid the leadership transition
1998 2002/03 2007/08 2012/13
Hu and Wen’s 10 years
Local govts’
five years
Start of China’s
housing reforms
26
Date The economics of drainage
FAI
Manufacturing
Capacity
Infrastructure
and housing
New or Expansion
Relocation (from
coast to inland)
Private housing
High profile infrastructure
Low profile infrastructure
Low-cost public housing
√
√
√
27
Date How do local govts fund infrastructure in the future?
0
2,000
4,000
6,000
8,000
10,000
1999 2001 2003 2005 2007 2009 2011
Central Local
RMB, bn
0
5000
10000
15000
20000
25000
30000
1999 2001 2003 2005 2007 2009 2011
Central Local
RMB, bn
The sharp difference between central and local govt
Fiscal revenue of local and central govt
• Over the past weekend, the heaviest rainstorm in Beijing in
61 years has killed 37 people and stranded numerous cars
on drowned streets and underpasses.
• Why Beijing lacks some basic infrastructure despite
enormous investment in pass years? Why some
infrastructure like highways is favored and some other
infrastructures are disfavored by governments?
• The answer lies in a better understanding of the special
structure of the Chinese government and public finance and
the solution also lies in a fiscal reform. In China, with a few
exceptions like railway, almost all infrastructures were built
by local governments, which are prohibited from raising
money from bond markets but are under pressure to boost
GDP growth.
• With this backdrop, local officials naturally biased their
spending towards productive investment projects like
highways, roads, ports and industrial parks which could
boost GDP growth, while cut spending on drainage, subway,
social housing and hospital which are good for social welfare
but are less productive in the near term.
• It’s not all local government’s fault. Prohibited from
borrowing long-term funding from capital markets, local
governments have to rely on relatively short-term loans for
funding their infrastructure spending, but they have to favor
those profitable projects which could generate enough cash
flow for repaying bank loans.
28
Date Social housing: the great leap forward?
0
100
200
300
400
500
600
700
800
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Social housing Commodity housing
mn square metersmn square meters
29
Date Agflation in China again?
0
10
20
30
40
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
-4
-2
0
2
4
6
8
10
M1 M2 CPI (Moved backward for 6 months, RHS)
%YoY %YoY
30
Date The changing difference between CPI and PPI
-8
-4
0
4
8
12
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
CPI PPI
Forecast
% YoY
31
Date CRB, Brent oil spot price vs PPI inflation
-80
-60
-40
-20
0
20
40
60
80
100
2005 2006 2007 2008 2009 2010 2011 2012
-10
-5
0
5
10
15
CRB cmdty (2m fw d) Brent oil spot (2m fw d) PPI (RHS)
% YoY % YoY
32
Date China’s grain consumption as percentage of global
0
5
10
15
20
25
30
35
Rice Wheat Corn Soy bean
Production Consumption
% w orld total
0
100
200
300
400
500
600
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Rice Wheat Corn Soy bean
Million tons
1,000
1,500
2,000
2,500
3,000
2006 2007 2008 2009 2010 2011 2012
0
2
4
6
8
10
Corn: China Dalian Corn: US CME (RHS)
RMB/Ton USD/Bushel
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
2006 2007 2008 2009 2010 2011 2012
4
6
8
10
12
14
16
18
20
Soy bean: China Dalian Soy bean: US CME (RHS)
RMB/Ton USD/Bushel
Corn prices: China and US Soybean prices: China and US
Balance of China’s grain production and consumptionGrain consumption composition in China
33
Date Weak link between pork and grain prices
10
15
20
25
30
35
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Pork Corn (RHS) Soy bean meal (RHS)
RMB/kg RMB/kg
-4
-3
-2
-1
0
1
2
3
4
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
410
420
430
440
450
460
470
480
Number of liv e hogs (RHS) Liv e hogs Breeding sow s
% MoM mn
-40
-20
0
20
40
60
80
100
2005 2006 2007 2008 2009 2010 2011 2012
% YoY
CPI: Food: Grain CPI: Food: Vegetable CPI: Food: Pork
Weak link between pork and grain prices Food CPI breakdown
China’s hot inventoryLimited impact of US drought on China’s food inflation
(1) China is still relatively self-sufficient on grain (imports
accounting for 9.5% of total food consumption);
(2) Almost all food imports are soybean, but China
imports 57% of soybeans from non-US markets and
soybean output in the US is less affected by droughts;
(3) The major channel from global corn and soybean
prices to China’s inflation is pork, but China has its
unique pork price cycle, which happens to be in its
downturn in 2H12 and pork prices’ response to feed
grain price shocks is quite slow.
34
Date
What does the Chinese government
will do and have to do?
• Ease property tightening measures by cancelling home purchase restrictions and
encouraging land/home supply;
• Cut RRR and ease/raise the 75% loan-to-deposit ratio;
• Increase fiscal spending of the central government;
• Open up long-term bond financing to provincial governments;
• Cut tax, especially value added and corporate income tax;
• Appropriately easing restrictions on lending to local governments
35
Date YoY change of home prices in top-tier cities
-20
-10
0
10
20
30
2006 2007 2008 2009 2010 2011 2012Beijing Shanghai Shenzhen
% YoY
36
Date Regional differentiation of property prices
0
5,000
10,000
15,000
20,00019
95
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
National Beijing Shanghai
RMB per sqm
37
Date Chinese cities are quite “small”
0.0
5.0
10.0
15.0
20.0
25.0
Beijing Shanghai New
York
City
Toky o Mex ico
City
Moscow Bangkok London Seoul
% of city population to national population
38
Date
Fiscal revenue and expenditure of the
central government
-5
0
5
10
15
20
25
30
35
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Fiscal balance/GDP (RHS) Fiscal rev enue
Fiscal ex penditure
%
39
Date The history of local government debt
0
2000
4000
6000
8000
10000
12000
14000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total local gov t debt Local gov t total rev enue
RMB, bn
Forecast
40
Date The overestimated local government debt
Local government’s fiscal revenue
The rising amount of local government debt
LGFV debt is an important issue, and will
drag the market down from time to time.
But we believe it’s manageable. We don’t
expect banking crisis, crash of FAI and
collapse of the economy because:
• It’s domestic debt;
• Local govts are not that bad;
• Local govts fiscal revenue accounts for
88% total national fiscal revenue, and it’s
growing at 30% pace this year;
• Massive fiscal transfer from central to
local;
• The low debt burden of the central
government;
• Total govt debt (central plus local)
should be about 45-50% of GDP
0
2000
4000
6000
8000
10000
12000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Primary fiscal revenue Fiscal transfer from central govt Net Income from land sales
RMB, bn
0
2
4
6
8
10
12
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
0
10
20
30
40
50
60
70
Total local govt debt Growth rate (RHS)
RMB tn % YoY
41
Date
The 75% cap on loan-to-deposit ratio is not
untouchable
0
15
30
45
60
75
90
105
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
RRR Loan-to-deposit Ratio
%
42
Date RRR and policy interest rates
0
1
2
3
4
5
6
7
8
2006 2007 2008 2009 2010 2011 2012
0
5
10
15
20
25
RRR (RHS) 1-y r lending 1-y r deposit
%%
43
Date Currency: redback versus greenback
96
98
100
102
104
106
108
110
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12
RMB-NEER RMB-USD
21 June 2010 =100
44
Date Can we trust China’s GDP statistics?
-15
-10
-5
0
5
10
15
20
25
30
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
IP Pow er use Pow er use: Industry
%YoY
45
Date Know China’s economic structure first
0
4
8
12
16
00 01 02 03 04 05 06 07 08 09 10 11 12
GDP 1st 2nd 3rd
%YoY
-30
-20
-10
0
10
20
30
40
50
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
Real FAI grow th Real retail sales grow thReal ex port grow th
% y oy
Service and Agriculture is more stable than industry
The three major demand-side components of GDP
How about China’s service sector?
For the financial sector which is dominated by
commercial banks, bank loan and deposit growth was
16.0% and 12.3% yoy respectively in 1H.
• In the sector serving international trade, export and
import growth registered 9.2% and 6.7% yoy respectively
in 1H.
• Retail sales registered a 14.4% nominal and 11.5% yoy
real growth in 1H, meaning decent growth of shops and
gasoline stations.
• Spending on government service must be growing too.
Though only about a third of government expenditure is
used on government itself, growth of payment on
government service should be quite close to growth of
fiscal expenditure, which was at 21.3% yoy in 1H, only
slightly below 21.6% in 2011.
• The number of passengers carried by all transportation
vehicles could be a good proxy for travel. Growth of that
actually slightly picked up to 8.2% yoy in the first five
months of 2012 from 7.6% in 2011.
•Power consumption in the service sector grew 12.1%
yoy in 1H, only slightly down from 13.5% in 2011.
46
Date Why power consumption is different production
-10
-5
0
5
10
15
20
25
30
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Nov
-11
May
-12
Pow er consumption Pow er production
%, y oy
0
20
40
60
80
100
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
tons, mn
Power consumption and production could be different
Service and Agriculture is more stable than industry
In theory, power production and consumption should be
very close to each other as electricity is hardly storable.
However, we believe power consumption released by the
National Energy Administration (NEA) is a better indicator
of actual power demand/output than NBS’ power output
data, which only include enterprises with annual sales
revenue above RMB5mn before 2011 and RMB20mn.
The difference between power production and consumption
then depends on the power generated by smaller plants. If
the supply condition of coal is tight, smaller plants generate
less power as they are in disadvantage compared with
large independent power producers (IPP) in securing coal
supply.
Before Jan 2010, power production and consumption
largely moved together. After that, the supply condition of
coal has been increasingly slack as reflected by climbing
inventory in selected IPPs. Consequently, the role played
by smaller plants has been increasing over time. After Jan
2010, most power consumption data released by the NEA
tends to be higher than production data released by the
NBS, which might underestimate actual power output by
excluding smaller electricity plants.
47
Date Then distorted power consumption structure
2%
75%
11%
12%
Agriculture
Industry
Serv ice
Residential
-10
0
10
20
30
40
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep
-12
Ten non-ferrous metals Steel product Crude steel
%YoY
Breakdown of China’s power consumption
Regulations led to some volatility of metal output
Power consumption of the service industry, which
accounts for 43% of the economy but consumes only
10.7% of total power, grew 11.3% yoy in 2Q (down
from 13.1% in 1Q and 13.5% in 2011).
Growth of power consumption of industry (40% of the
economy and 74% of power demand) slumped to 3.0%
yoy in 2Q from 4.5% in 1Q and 11.8% in 2011.
Ferrous and non-ferrous metals consume 19% of
power but contributes only 5% to GDP and 12.5% to IP
(The non-ferrous metals sector consumes 7.5% of
national power but contributions only 1.7% to China’s
GDP and 4.3% to IP). A 15ppt slowdown of the metal
sector could lower power consumption by about 3ppt,
but the impact on GDP is only 0.75ppt. Actually that’s
roughly the case from 2011 to 2012.
And the unique base effect
From summer 2010 Beijing started pushing local
governments to reach the special 11th Five-year-plan
energy efficiency target. Under pressure, many local
governments reduced or even cut off power supply to
some heavy users of power.
However, right after end-2010, Beijing eased its push
on energy efficiency and local governments stopped
nagging manufacturers. Manufacturers were eagerly to
increase their inventories.
48
DateForecasting table
2004 2005 2006 2007 2008 2009 2010E 2011F 2012F 2013F
Summary Data
Nominal GDP (US$ bn) 1,932 2,258 2,713 3,496 4,522 4,990 5,935 7,485 8,164 9,051
GDP per capita (US$) 1,486 1,727 2,064 2,646 3,405 3,739 4,425 5,560 6,031 6,659
Unemployment rate (%)1 4.2 4.2 4.1 4.0 4.2 4.3 4.1 4.1 4.2 4.1
Population (millions) 1,300 1,308 1,314 1,321 1,328 1,335 1,341 1,347 1,354 1,359
Economic Activity
Real GDP growth (% yoy) 10.1 11.3 12.7 14.2 9.6 9.2 10.3 9.2 7.7 7.6
Domestic demand growth (% yoy) 8.7 10.2 11.0 12.8 9.9 13.9 9.8 9.1 7.9 7.8
Real investment growth (% yoy) 13.0 13.3 12.6 15.2 9.7 17.8 9.4 9.0 8.2 7.7
Real consumption growth (% yoy) 4.9 7.5 9.6 10.7 10.0 10.6 10.1 9.2 7.8 8.0
Real private consumption growth (% yoy) 5.0 7.0 9.5 10.7 9.9 9.0 10.2 9.4 7.7 7.9
Real government consumption growth (% yoy) 4.5 8.8 9.6 10.8 10.0 14.6 9.9 8.7 8.1 8.1
Real export growth (% yoy) 31.9 24.8 24.0 20.0 8.4 -11.4 28.2 11.0 4.8 5.0
Real import growth (% yoy) 31.8 13.0 16.8 13.3 4.2 1.0 22.1 12.1 6.0 6.5
Prices
CPI inflation (% yoy, eop) 2.4 1.6 2.8 6.5 1.2 1.9 4.6 4.1 3.5 4.0
CPI inflation (% yoy, avg) 3.9 1.8 1.5 4.8 5.9 -0.7 3.3 5.4 2.9 4.0
Nominal wages (% yoy) 14.0 14.3 14.6 18.5 16.9 11.6 13.3 15.0 12.5 14.0
Nominal exchange rate (vs. USD, eop) 8.28 8.07 7.81 7.30 6.83 6.83 6.62 6.30 6.40 6.25
Nominal exchange rate (vs. USD, avg) 8.28 8.19 7.97 7.60 6.95 6.83 6.77 6.46 6.37 6.30
Bilateral real exchange rate (% yoy, + dep) - - - - - - - - -
Monetary Sector2
Monetary base growth (% yoy) 8.7 11.9 12.7 12.1 12.7 11.8 16.7 13.8 11.9 12.0
Broad money growth (% yoy) 14.6 17.6 16.9 16.7 17.8 27.7 19.7 13.6 14.0 14.0
Credit extension to private sector (% yoy) 14.5 13.0 15.1 16.1 18.7 31.7 19.9 15.8 14.8 14.0
Central bank policy rate (%, eop)3 2.25 2.25 2.52 4.14 2.25 2.25 2.75 3.50 2.50 2.50
1-month interbank rate (%, eop) 2.31 0.44 2.61 5.07 1.42 1.73 2.70 6.00 5.00 5.00
Long-term yield (%, eop) 4.73 3.12 3.03 4.43 2.78 3.65 4.20 3.48 4.20 5.25
External Sector
Current account balance (% of GDP) 3.6 5.9 8.6 10.1 9.1 5.2 5.1 2.8 2.1 1.2
Current account balance (US$ bn) 68.7 134.1 232.7 354.0 412.4 261.1 305.4 201.7 170.0 110.0
Trade balance (US$ bn) 32.8 102.1 177.5 262.0 297.3 198.2 184.5 157.9 150.0 104.5
Exports, f.o.b. (US$ bn) 593.4 762.5 969.7 1,220.0 1,434.6 1,203.8 1,581.4 1,899.3 2,013.3 2,154.0
main export - - - - - - - - - -
Imports, c.i.f. (US$ bn) 534.4 628.3 751.9 904.6 1,073.9 954.3 1,327.2 1,741.4 1,863.0 2,049.0
Service balance (US$ bn) -9.7 -9.4 -8.8 -7.9 -11.8 -29.4 -22.1 -55.2 -65.5 -70.5
Income balance (US$ bn) -3.5 -16.1 -5.4 7.9 17.7 7.3 30.4 -11.9 -15.5 -9.5
Foreign direct investment (US$ bn) 60.6 72.4 72.7 83.5 108.3 94.1 105.7 116.0 101.0 85.5
International reserves (US$ bn) 609.9 818.9 1,066.3 1,528.2 1,946.0 2,399.2 2,847.0 3,181.1 3,324.5 3,386.5
Public Sector
Consolidated gov. primary budget balance (% of GDP) -0.8 -0.8 -0.5 0.7 -0.3 -2.4 -2.1 -1.6 -2.7 -2.7
Consolidated public sector balance (% of GDP)4 -1.3 -1.2 -1.0 0.2 -0.8 -2.8 -2.5 -1.8 -2.9 -3.0
Central gov. revenues (% of GDP)5 16.5 17.1 17.9 19.3 19.5 20.1 20.7 22.0 23.2 22.9
Debt Indicators
Gross external debt (% of GDP) 12.8 12.4 11.9 10.7 8.3 8.6 9.2 9.3 8.5 8.3
Public (% of GDP) 5.0 4.0 3.9 3.3 2.6 2.6 2.5 2.3 2.3 2.3
Private (% of GDP) 7.9 8.4 8.0 7.4 5.7 6.0 6.8 7.0 6.2 6.0
Gross government debt (% of GDP) 18.5 17.6 16.4 20.1 17.7 19.1 18.7 18.0 18.3 18.2
Domestic (% of GDP) 16.8 16.2 15.2 19.1 17.0 18.4 18.1 17.4 17.7 17.6
External (% of GDP) 1.7 1.5 1.3 1.0 0.7 0.7 0.7 0.6 0.6 0.6
External debt amortizations (US$ bn) 16.2 20.8 17.9 20.3 23.3 34.2 43.8 55.6 70.0 84.0
External debt interest payments (US$ bn) 3.9 3.1 3.1 5.0 4.2 3.6 4.7 5.9 7.4 8.9
External debt service (% of XGS) 3.2 3.1 2.1 2.0 1.8 2.9 2.1 2.2 2.4 2.5
Savings - Investment Balance
Savings (% of GDP) 45.6 47.1 49.3 50.5 51.6 51.5 52.6 51.9 51.4 51.7
Investment (% of GDP) 43.0 41.6 41.8 41.7 43.9 45.9 48.6 49.8 51.0 51.4
3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
Quarterly Economic Forecasts
Real GDP growth (% yoy) 9.6 9.8 9.7 9.5 9.1 8.9 8.1 7.6 7.4 7.7
Real GDP growth (% qoq, sa, annualized) 8.2 10.0 8.2 10.0 9.5 8.2 6.6 7.4 8.1 8.1
CPI inflation (% yoy, eop) 3.6 4.6 5.1 5.7 6.3 4.6 3.8 2.9 2.5 3.5
Central bank policy rate (%, eop) 2.25 2.75 3.00 3.25 3.50 3.50 3.50 3.25 2.75 2.50
Nominal exchange rate (vs. USD, eop) 6.70 6.62 6.55 6.45 6.35 6.30 6.30 6.34 6.45 6.40
Current account balance (US$ bn) 102.3 102.2 28.8 59.0 53.4 59.8 24.7 59.7 45.5 41.3
The US economy
50
Date
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Q1 '11 Q2 Q3 Q4 Q1 '12 Q2 Q3 Q4 Q1 '13 Q2 Q3 Q4
Rebound risks: Triple dip
Note: Consensus forecasts are from Blue Chip Economic Indicators surveys released on March 10, 2012, and August 10, 2012.
Source: Bureau of Economic Analysis, Blue Chip Economic Indicators, BofA Merrill Lynch Global Research
Real GDP
(QoQ SAAR)
Consensus:
BofAML
Forecast
March
August
51
Date Rehab: Post-crisis GDP growth
Real GDP
(YoY % change)
“First” refers to the period T to T + 4, “Second” refers to T + 4 to T + 8, etc. where T is the trough quarter.
Source: Eurostat, OECD, Bureau of Economic Analysis, BofA Merrill Lynch Global Research
First Second Third Fourth
Spain (1977) 1.4 0.0 0.6 1.8
Norway (1987) 3.2 2.9 0.8 4.0
Finland (1991) 4.4 3.7 3.5 5.8
Sweden (1991) 2.5 5.3 2.7 1.1
Japan (1992) 0.5 1.9 2.6 1.7
Average 2.4 2.8 2.1 2.9
US 2.5 1.9 2.1 1.2
Eurozone 2.2 1.7 -0.6 -0.9
52
Date
93
98
103
108
113
118
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Rehab: Big fall; slow recovery
Real GDP
(index level)
2001
1991
Current
Indexed to 100 at the recession trough. Average includes all recessions after 1950 excluding the 1980 and current recessions.
Dotted line represents BofA Merrill Lynch forecast.
Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research
Average
53
Date Jobs: Slow healing
Indexed to 100 at the previous business cycle peak. Average includes all recessions after 1950 excluding the 1980 and current recessions.
Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research
Private payrolls
(index level)
91
92
93
94
95
96
97
98
99
100
101
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
20011991Average
Current
Quarters since business cycle peak
54
Date
58
59
60
61
62
63
64
65
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
3
4
5
6
7
8
9
10
11
Jobs: Another employment gap
Shaded regions represent periods of US recession.
Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research
(percent)
Employment to
population ratio
(LHS)
Unemployment rate
(RHS, inverted)
55
Date Home prices: bumpy bottom
We believe national home prices are bottoming, but we expect prices to bounce along
this bottom until the end of next year.
The recovery should start in earnest in 2014 with sustained home price gains.
60
80
100
120
140
160
180
200
95 00 05 10 15 20
Fair valuation
Forecast
Q1 2012
S&P Case Shiller home price history and forecasts
(indexed level)
Source: S&P Case Shiller, BofA Merrill Lynch Global Research
S&P Case Shiller home price quarterly history and forecasts
Source: S&P Case Shiller, BofA Merrill Lynch Global Research
Case Shiller, % q4/q4 change
2000 9.7%
2001 7.7%
2002 10.6%
2003 10.7%
2004 14.6%
2005 14.6%
2006 -0.3%
2007 -8.4%
2008 -18.4%
2009 -2.4%
2010 -3.7%
2011 -4.0%
2012E 0.5%
2013E 0.3%
2014E 2.8%
2015E 7.4%
2012-2022 Annualized 3.8%
2012-2022 Cumulative 45.5%
56
Date Supply: less in, but less out
The good news is that the flow of new delinquencies into foreclosure has declined
along with the decline in firing.
The bad news is that the flow out of foreclosure has also slowed, keeping the backlog
stubbornly high.
We forecast 6.6 million liquidations from the end of last year through 2016
2
3
4
5
6
7
8
9
10
11
95 97 99 01 03 05 07 09 11
1300
1500
1700
1900
2100
2300
2500
2700
2900
Firing, 000s, (RHS)
Delinquencies, % , (LHS)
Mortgage delinquencies decline as firing drops
Source: MBA, BofA Merrill Lynch Global Research
Foreclosure inventory remains stubbornly high
Source: BofA Merrill Lynch Global Research, MNA
0.0
0.5
1.0
1.5
2.0
2.5
3.0
02 03 04 05 06 07 08 09 10 11 12
Foreclosure inventory
Seriously delinquent
millions of homes
57
Date Housing: pent-up demand?
0
200
400
600
800
1000
1200
1400
1600
1800
1990 1994 1998 2002 2006 2010 2014
Baseline Forecast
Household formation historically low
(thousands of households)
Source: Census Bureau, BofA Merrill Lynch Global Research
Increasing share of young adults living with parents
(% of age cohort)
Source: Census Bureau, BofA Merrill Lynch Global Research
Young adults have delayed the transition from their parents’ homes and/or live with
roommates, reflecting weak economic conditions.
This is not sustainable and will lead to a rebound in household formation and hence housing
demand over time.
The initial gain in household formation from young adults will be more supportive of the
rental market than homeownership.
46
48
50
52
54
56
58
60
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
8
9
10
11
12
13
14
15
Aged 25-34, rhs
Aged 18-24, lhs
58
Date Affordability: the missing link
We attribute the gap between affordability and home sales to the credit environment.
During the boom, greater availability of credit and the perception of rapid home price
appreciation fueled home sales.
The reverse has been true of the past few years with tight credit and falling home prices.
50
70
90
110
130
150
170
190
210
230
75 79 83 87 91 95 99 03 07 11
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Existing home sales,
single family, rhs
NAR affordability
index, lhs
millions, saarindex
Divergence between home sales and affordability index
Source: NAR, BofA Merrill Lynch Global Research
Rising credit scores for new mortgages
(average FICO score for purchase loans, 3m avg)
620
640
660
680
700
720
740
760
780
90 92 94 96 98 00 02 04 06 08 10 12
Fannie/Freddie
FHA
Source: CoreLogic, BofA Merrill Lynch Global Research
59
Date
400
450
500
550
600
650
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
0
20
40
60
80
100
120
140
160
Consumer: Deleveraging continues
*Income is disposable income
Source: Federal Reserve Board, BofA Merrill Lynch Global Research
(percent of income)
Net worth (LHS)
Debt (RHS)
(percent of income)
60
Date
0
2
4
6
8
10
12
14
16
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Consumer: Saving households
Note: Green line is BofA Merrill Lynch forecast
Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research
Savings rate
(percent)
Forecast
Historic Range
61
Date
-40%
-20%
0%
20%
40%
60%
80%
2000 2002 2004 2006 2008 2010 2012
0%
1%
2%
3%
4%
5%
6%
7%
8%
Rehab: Corporate comeback
Source: Statistical Office of the European Communities, BofA Merrill Lynch Global Research
Nonfinancial corporate profits
Forecast
• Healthy balance sheets
• Low valuations / high risk premia
• Will margins start to narrow?
• No (macro) news is good news
% of GDP (RHS)
yoy % change (LHS)
Europe and beyond
63
Date Europe: More shocks to come
Source: BofA Merrill Lynch Global Research
Deepening recession
Missed deficit and debt targets
Bank recapitalization problems
Populist pressure
Periphery: reform resistance
Core: bailout fatigue
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
2004 2005 2006 2007 2008 2009 2010 2011 2012
Consumer Confidence Indicator
Industrial Confidence Indicator
Lacking confidenceEuro area confidence measures (% balance)
64
Date
0
100
200
300
400
500
600
700
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Europe: Short-term LTRO fix
Source: Bloomberg, BofA Merrill Lynch Global Research
Interest rate spreads
(vs. German bunds, bps)
• Three years, generous collateral
• First tranche: €489bn
• Circular guarantees: banks,
sovereigns, and central bank France
Italy
Spain
65
Date Europe: Fait accompli?
Source: BofA Merrill Lynch Global Research, ECB, Haver Analytics
Greek exit underway already:
deposit outflows
No quick political resolution
means uncertainty festers
Contagion through capital
markets
Shrinking bank deposits
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Germany Greece Ireland Portugal Spain
66
Date
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Europe: More tightening=less growth
Source: BofA Merrill Lynch Global Research, Bloomberg, IMF.
Note: Compares IMF estimates of structural fiscal tightening in last two years to average GDP growth in last two years.
Fiscal tightening (% of GDP)
Tw
o-y
ear
GD
P G
row
th A
vera
ge (
%)
Greece
Germany
Ireland
Spain
Italy
Portugal
67
Date Europe: Why it matters
Source: BofA Merrill Lynch Global Research
Historically, the world tended to ignore Europe
US exports to Europe are 4% of GDP
European banks hold US assets = 20% of GDP
The real problem: contagion
68
Date Contagion: Trade shares
Source: IMF and BofA Merrill Lynch Global Research
Note: Broadening the US data to include services and all of Europe increases the export share to about 3% of GDP
Export of goods to euro area(% of GDP)
0
2
4
6
8
10
12
14
16
18C
zech
Rep
ublic
Hun
gary
Pol
and
Sin
gapo
re UK
Turk
ey
Kor
ea
Chi
na
Indi
a
Bra
zil
Mex
ico
US
Japa
n
Can
ada
69
Date Contagion: Banking shares
Source: BofA Merrill Lynch Global Research
0
10
20
30
40
50
60
70
80
90
100C
zech UK
Sin
gapo
re
Pol
and
US
Tur
key
Mex
ico
Tai
wan
Bra
zil
Chi
na
Q4 2010 Q4 2011
European banks – foreign claims
(% of GDP)
70
Date Contagion: Europe matters more
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1990 1991 1992 1993 1994
Note: Shaded area represents European recession
Source: OECD, BEA, Bloomberg, BofA Merrill Lynch Global Research
Real GDP
(QoQ % annualized)
Biggest market moves
(Source of news that caused 10 biggest moves in S&P 500)
Shrugging off the 1992 crisis The whole world is watching
EU
US
0
1
2
3
4
5
6
7
8
9
10
2007 2008 2009 2010 2011
US
Eurozone
Other
(0) (0)(0)
71
Date Europe: The good, the bad and the ugly
Source: BofA Merrill Lynch Global Research
Good (55% prob.): mild recession, feeble recovery
Greece stays in Euro
Spain and Italy avoid funding crisis
GDP falls at 0.5% annual rate
Bad (30% prob.): deeper recession
Greece exits
ECB prevents meltdown in Spain & Italy
GDP falls at a 1.5% annual pace
Ugly (15% prob.): Lehman-like event
Greece and others exit Euro
Europe delays deposit/bond support
GDP falls at 4.0% annual pace
72
Date Growth: Three scenarios
Source: BofA Merrill Lynch Global Research
GDP Growth(Next 4Q)
Base case is weak
Firewalls work = global slowdown
Firewalls fail = global recession
Europe US World
Good (55%) -0.5 1.5 3.5
Bad (30%) -1.5 1.0 3.0
Ugly (15%) -4.0 -0.5 1.0
73
Date Already fading: Forecast cuts
* Old scenario is as of June, 2011
Source: BofA Merrill Lynch Global Research
2012 GDP Forecasts In the past year we have cut
growth in almost every country
Europe and countries close to
Europe have been hurt the most
European and US confidence
shocks explain most of the drop
Old* New Change
Global 4.9 3.3 -1.6
US 3 2.1 -0.9
EZ 1.6 -0.5 -2.1
UK 2.3 0.6 -1.7
JA 3.6 2.4 -1.2
EM 6.5 5.4 -1.1
74
Date Good news: Low & stable inflation
*Old scenario is as of June, 2011
Source: BofA Merrill Lynch Global Research
2012 CPI Forecasts
Inflation is low and stable…
Giving central banks room to act
Old* New Change
Global 3.5 3.3 -0.2
US 1.6 1.7 0.1
EZ 2.0 2.2 0.2
UK 1.8 2.8 1.0
JA 0.2 -0.2 -0.4
EM 4.9 5.0 0.1
75
Date Important Disclosures
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Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition,
investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.
Merrill Lynch Research policies relating to conflicts of interest are described at http://www.ml.com/media/43347.pdf.
Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.