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

July

Octobe

r

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