the state of the business cycle
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The State of the Business Cycle. Frankfurt, 13 April 2005 Dr Holger Schmieding European Economics Bank of America, London +44 20 7174 4924. Globalisation spreading to more countries, more sectors, more workers Rise of Emerging Eurasia, from Bratislava to Bangalore and Beijing - PowerPoint PPT PresentationTRANSCRIPT
The State of the Business Cycle
Frankfurt, 13 April 2005
Dr Holger Schmieding
European EconomicsBank of America, London+44 20 7174 4924
2
Longer-term Themes: From Worker to Consumer Power
Globalisation spreading to more countries, more sectors, more workers
Rise of Emerging Eurasia, from Bratislava to Bangalore and Beijing
Shift from labour to profit income
Helped by the information technology revolution, productivity growth remains high in US, despite some signs of a slowdown
IT revolution strengthens consumer choice
Increased pace of supply growth and reduced wage pressures constrain inflation risks
The demographic challenge: Germany and Japan vs the US and France
3
US Productivity Growth Still Strong
Remember the “new economy”? There was some kernel of truth in the notion.
Labour productivity in US business sector, annualized change in %. Source: BLS
-2
0
2
4
6
8
Mar-52 Mar-62 Mar-72 Mar-82 Mar-92 Mar-02
Productivity in US business sector 5-year average
4
Erosion of Union Power Paves the Way for Reforms
Would Hartz IV have been possible 10 years ago?
Source: DGB; DAG
Union Members in % of German Workers
20
24
28
32
36
Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04
Unionisation Rate
5
Cyclical Themes: US Healthy - Europe Vulnerable
US is removing its extraordinary monetary and fiscal stimulus.
Inflation Outlook: Globalisation and technological advances augment the pace of supply growth, the erosion of union power reduces the risks of wage inflation, increased consumer choice enhances competitive pressures. Inflation risks now look more subdued than in the last 3 decades.
US outlook: Sound fundamentals. We expect only a slight growth deceleration in 2005 as consumers gradually raise their savings rate in response to more normal interest rates. Worries about the US twin deficits are overdone.
Eurozone: A modest pick-up in domestic demand will be largely offset by a reduced external stimulus in 2005. Growth below trend until late 2005.
Japan: Structural progress, but Japan’s upswing is too vulnerable to bear a slowdown in Chinese demand and a strong Yen at the same time. BoJ rates on hold until mid-2006.
Oil: The renewed surge in oil prices will hit global growth in Q2 and Q3, in the Eurozone slightly more so than in the more flexible US. Expect a modest fall in oil prices later in 2005.
Asset bubbles?
6
US Corporate Health Restored
5%
6%
7%
8%
9%
10%
11%
12%
Mar-60 Mar-65 Mar-70 Mar-75 Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05
Corporate Profits in US GDP
US corporate profits have recovered back to normal.
Share of pre-tax profits in US nominal GDP. Source: BEA
7
US Households Are Rich – Not Overindebted
US Household Wealth Back on Trend
10
20
30
40
50
Mar-60 Mar-70 Mar-80 Mar-90 Mar-00
Real Net Worth of US Households in $ trn
US households are more heavily indebted than before. However, they are also more wealthy. Real wealth adjusted for debt is back on trend.
Source: Fed
8
US Consumers: Excessive Debt Burden?
US Households: Debt Service and Interest Income
10
12
14
16
18
20
Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05
Debt Service Interest Income
In line with lower nominal interest rates, interest income has fallen. Many households would benefit from higher interest rates.
In % of disposable income. Source: Fed; BEA
9
US Consumer: Help from the Labour Market
Although higher interest rates will be a burden for some households, extra income from an improving labour market should offset this even for lower-income groups who are not major recipients of interest income.
Yoy change in %. Source: BLS
Strong Rebound in US Employment
-2
-1
0
1
2
3
4
5
6
Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04
Employment Growth in %
10
Fiscal Deficits – Signs of Improvement in US
The US fiscal balance has started to improve, helped by a rebound in tax revenues. Tax cuts are over. Capital gains tax receipts are recovering. We expect US tax revenues to rise by at least 6% per year.
Yoy change of 12-month rolling sum, in %. Source: US Treasury; BEA
US Federal Tax Revenues: Growing Again
-15
-10
-5
0
5
10
15
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04
US Federal Tax Revenues
11
House Prices: Spot the Bubble
House Prices Relative to Earnings
0.8
1
1.2
1.4
1.6
1.8
Mar-74 Mar-79 Mar-84 Mar-89 Mar-94 Mar-99 Mar-04
US UK
The UK has a serious house price problem – the US does not. In a fast-growth economy such as the US, real estate prices should rise in real terms over time. In the UK, supply constraints add to the volatility of house prices.
Average earnings for UK; average weekly earnings for US; rebased to 1974-2003 average = 1. Source: ONS; ODPM; BLS; Bloomberg
12
Japan: The China Factor
Japanese export growth has started to falter. A slowdown in Chinese demand for investment goods will likely dampen Japanese GDP growth to around 1% in 2005.
Yoy change in Japanese exports to China, 3-month average. Source: MoF
Losing Momentum: Japanese Exports to China
-20
-10
0
10
20
30
40
50
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04
Exports to China
13
Eurozone Outlook
The big external stimulus already faded last summer
Leading indicators have turned down again
Investment: Only a modest upturn likely
Consumption: Higher oil prices restrain growth in disposable income
Technical rebound in Q1 GDP likely to be followed by weaker Q2; expect some strengthening back to trend growth in late 2005 if oil prices and the euro decline.
Huge disparities within the Eurozone
Real estate boom in “Club Med”: Liquidity-driven bubble - or sustainable adjustment to EMU-related permanent decline in interest rates?
14
Eurozone Leading Indicators Turning South Again
Industrial confidence has fallen sharply, the halting rebound in consumer confidence has stalled.
Source: EU Commission survey
Cyclical Rebound in Confidence Already Over
-35
-30
-25
-20
-15
-10
-5
0
5
10
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04
Consumer confidence Industrial confidence
15
Eurozone Export Outlook: Mediocre at Best
The rate of demand growth among trading partners and the lagged impact of exchange rate changes drive Eurozone exports. A deceleration of global demand has started to reduce export growth.
Yoy changes in %; Bank of America forecasts for trading partner growth from 1Q05 onwards. Source: Eurostat; BoA
Export Growth Has Peaked
-2
0
2
4
6
8
10
12
14
Q1 1994 Q1 1996 Q1 1998 Q1 2000 Q1 2002 Q1 2004
0.5
1.5
2.5
3.5
4.5
Eurozone export growth
Trading partner GDP growth (RHS)
16
Eurozone Domestic Demand: Investment Outlook
Buoyant profits support investment.
Yoy change in %, gross fixed capital formation and gross operating surplus including mixed income. Source: Eurostat
Profits Recovery Points to Stronger Investment
-8
-4
0
4
8
12
Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04
Profits
Investment
17
Eurozone Consumption: A German Problem
Real Private Consumption
100
110
120
130
140
Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05
US Eurozone ex Germany Germany
The weakness in German consumption is weighing on the Eurozone as a whole.
Consumption levels, 1Q95=100. Source: Eurostat
18
German Outlook
Regaining cost competitiveness within the Eurozone thanks to wage restraint
Hoping for the lagged impact of recent labour market reforms
Leading indicators have turned down again
Significant decline in household savings rate unlikely
No support from the housing market
Decline in working age population and continuing transfers to East Germany will make further benefit cuts inevitable
19
The Demographic Burden
Germany: Working Age Population Shrinking
-0.3
0
0.3
0.6
0.9
1.2
1.5
1980 1983 1986 1989 1992 1995 1998 2001 2004
yoy change in %
Is Germany reforming fast enough to cope with the demographic challenge?
Source: OECD; OECD forecasts for 2004-05
20
The Demise of Wage Inflation?
Wage inflation has fallen sharply in the Eurozone, following years of weak domestic demand. We look for headline inflation to drop below the ECB’s 2% pain threshold again in June.
Total hourly labour costs in whole economy, advanced by one year; service CPI and service CPI excluding German health care charges on right-hand scale; yoy in %. Source: Eurostat
Labour Cost Pressures Receding
1
2
3
4
Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
1
2
3
4
Euro Labour Costs, 1yr fwd
Euro Service CPI
21
Eurozone Inflation: Oil Matters
Oil Price Scenarios: Inflation Impact
-1.0
-0.5
0.0
0.5
1.0
Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06
Brent at €35 €30 €40
We expect oil prices to moderate to €35 per barrel Brent crude by end-2005. Near-term, oil prices pose the greatest risk to our inflation forecast.
Direct and indirect impact of oil prices on headline inflation. Source: Eurostat; BoA forecasts from April 2005 onwards
22
Global Economic ForecastsIMF GDP Unemployment CPI Current Account Budget Balance
WEIGHT % change (%) % change % of GDP % of GDP2004 2005 2006 2004 2005 2006 2004 2005 2006 2004 2005 2006 2004 2005 2006
WORLD 100.00 3.8 3.0 3.3THE AMERICAS 37.55 4.4 3.7 3.7United States 29.42 4.4 3.8 3.7 5.5 5.2 5.0 2.7 2.9 2.6 -5.7 -5.9 -5.4 -3.6 -3.3 -2.8Canada 2.44 2.8 2.6 3.2 7.2 7.2 7.0 1.8 2.3 2.5 2.6 1.6 1.2 0.7 0.5 0.2Latin America 4.68 5.3 3.8 3.6
Brazil 1.36 5.3 4.1 4.3 9.8 9.5 9.2 7.5 5.6 5.2 1.5 0.8 0.3 -2.8 -3.2 -3.0 Mexico 1.73 4.4 3.8 3.7 3.8 3.6 3.7 5.2 4.2 3.9 -1.3 -1.7 -2.0 -2.7 -2.9 -3.2 Argentina 0.35 8.8 3.7 1.3 15.6 14.3 14.0 3.1 8.9 12.1 4.3 3.7 2.1 2.5 2.1 1.9 Chile 0.20 5.7 5.3 5.0 9.1 8.8 8.1 2.8 3.0 3.1 1.7 3.0 0.8 1.5 1.3 1.0
EUROPE 34.50 2.6 2.0 2.4
Eurozone 23.09 1.8 1.4 2.1 8.8 8.9 8.5 2.1 1.9 1.6 0.6 0.3 0.2 -2.7 -2.7 -2.1
Germany 6.64 1.0 0.8 1.8 9.6 9.8 9.4 1.7 1.7 1.4 -3.7 -3.5 -2.9
France 4.87 2.4 1.9 2.2 10.0 9.9 9.7 2.3 1.9 1.8 -3.7 -3.0 -3.5Italy 4.06 1.0 0.8 1.9 8.1 8.0 7.9 2.3 1.8 1.8 -3.0 -3.8 -3.0
Other Western Europe 7.90 2.9 2.3 2.2 United Kingdom 5.23 3.1 2.3 2.0 4.8 4.7 4.9 1.3 1.7 1.6 -2.2 -1.7 -1.0 -3.6 -3.5 -3.6
Switzerland 0.88 1.7 1.3 1.8 3.9 4.0 3.6 0.8 1.4 1.5 11.4 10.1 9.7 -1.0 -0.6 -0.2 Sweden 0.83 3.0 2.9 3.2 5.5 5.3 5.0 0.4 0.5 1.6 8.1 7.6 6.7 -0.5 0.0 0.5 Norway 0.61 3.4 3.5 2.7 3.9 4.2 4.2 0.5 1.5 2.1 13.7 12.2 10.9 6.0 5.0 5.0Other Europe 3.93 6.2 5.0 4.3 Russia 1.19 6.3 6.1 4.6 7.7 7.5 7.0 10.9 12.1 9.5 10.8 5.2 2.0 3.6 1.5 0.2
Turkey 0.66 9.9 5.4 4.7 10.1 9.5 9.1 10.7 8.6 9.3 -4.8 -4.5 -4.0 -7.5 -6.0 -5.4
Poland 0.58 5.4 3.8 3.7 19.6 19.0 18.5 3.5 2.6 2.7 -2.1 -2.4 -2.8 -6.4 -6.7 5.9 Czech Republic 0.25 4.3 3.3 3.1 9.4 8.9 8.4 2.9 2.0 2.9 -5.9 -5.5 -5.2 -5.8 -5.1 -4.6 Hungary 0.23 4.0 3.5 3.4 6.1 5.9 5.3 6.8 3.6 3.7 -8.4 -7.8 -7.0 -5.5 -5.3 -4.8ASIA & PACIFIC 24.21 4.7 3.4 4.1
Japan 12.00 2.6 1.1 2.6 4.7 4.4 4.1 -0.1 -0.2 0.1 3.7 3.5 3.7 -7.0 -6.5 -6.3
China 3.90 9.5 8.0 7.5 8.5 8.0 7.5 3.9 3.0 2.5 2.5 3.0 2.6 -3.0 -2.0 -1.0Other Asia 6.81 5.8 4.9 5.0Oceania 1.64 3.4 2.9 3.6 Australia 1.50 3.2 3.0 3.7 5.6 5.2 5.4 2.3 2.7 2.9 -6.4 -6.1 -5.4 0.8 0.6 0.6AFRICA / MID EAST 3.76 3.9 4.3 3.8