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Dougie Adams
Oxford Economics
A Two-speed Global Economy
January 2011
Dougie Adamsdadams@oxfordeconomics.com
Key points
2010 saw a marked global recovery
Expect continued corporate-driven recovery in 2011 but there are major uncertainties, including
■ New pressures emerging from inflation and austerity
■ Global imbalances
■ Eurozone debt crisis
Production levels remain below peak levels with some slackening of momentum evident
Forecast 25% growth in USMTC orders in 2011 after nearly 80% growth in 2010
2011 orders still 10-12% below 2007 and 2008 levels
World growth – better than expected
-5
0
5
10
15
20
2006
2007
2008
2009
2010
GDP - view from Beijing% pa
Source : Oxford Economics/Haver Analytics
China
World
-5
-4
-3
-2
-1
0
1
2
3
4
5
2006
2007
2008
2009
2010
GDP - view from Washington% pa
Source : Oxford Economics/Haver Analytics
World
US
(GDP; percentage changes)
2010 2011 2012
USA 3.2 3.0 3.2
Eurozone 1.1 1.5 2.1
China 9.5 9.0 9.0
USA 2.9 3.2 3.5
Eurozone 1.7 1.5 1.7
China 10.1 9.2 9.1
USA -0.3 0.2 0.3
Eurozone 0.6 0 -0.4
China 0.6 0.2 0.1
January 2010
January 2011
Differences
Revisions to Oxford Economics forecasts
2010 growth beating earlier expectations…
-2.5
0.0
2.5
5.0
7.5
10.012.5
15.0
17.5
20.0
22.5
25.0
27.5
Manufacturing Motorvehicles
High-tech Consumergoods
% year
Source: Oxford Economics
World: 2010 forecast comparison
Aug 2010
Nov 2010
May 2010
Paced by emerging markets
-8
-6
-4
-2
0
2
4
6
8
10
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014Source: Oxford Economics
% year
Latin America incl. Mexico
Central & Eastern Europe
Developing Asia
Forecast
Emerging Markets: GDP growth
All emergers
Emergers – post recession bounce giving way to sustained growth
-30
-20
-10
0
10
20
30
40
1997 1999 2001 2003 2005 2007 2009 2011
% year
China
India
Source: Haver Analytics
Asia: Industrial output
3 month moving average
Rest of emerging East Asia
-20
-15
-10
-5
0
5
10
15
20
1997 1999 2001 2003 2005 2007 2009 2011
% year
Chile
Source: Haver Analytics
Latin America: Industrial output
3 month moving avg
Mexico
Argentina
Brazil
Subdued recovery for the developed economies
TYPES OF RECESSIONS(output peak at time 0 = 100; sample of 122 recessions)
0 1 2 3 4 5 6 7 8 9 10 11 12
98
99
100
101
102
103
104
105
106
"Normal"recessions
Recessions associatedwith financial shocks
Source: IMF
TYPES OF RECESSIONS(output peak at time 0 = 100; sample of 122 recessions)
0 1 2 3 4 5 6 7 8 9 10 11 12
94
95
96
97
98
99
100
101
102
103
104
105
106
"Normal"recessions
Recessions associatedwith financial shocks
Source: IMF
Presentrecession (OECD)
US a lacklustre recovery
-800
-600
-400
-200
0
200
400
600
800
1996 1998 2000 2002 2004 2006 2008 2010
-3
-2
-1
0
1
2
3
4
5
6000s
US: Private payrolls and consumption
Source: Haver Analytics
Private Payroll change (LHS)
Consumption (RHS)
%, year
Japan – suffering from yen appreciation
-40
-30
-20
-10
0
10
20
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Export volumes
Industrial output
Japan: Industry and exports3-month % change
Source : Oxford Economics/Haver Analytics
German economic renaissance
-8
-6
-4
-2
0
2
4
6
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
% year
Germany
Other Eurozone
Source: Oxford Economics
Forecast
GDP: Germany vs. rest of Eurozone
The major uncertainties
Commodity prices and emerging market inflation?
Too much fiscal tightness in Europe?
Too much fiscal ease in the US?
The bursting of the Chinese bubble?
Persistent imbalances
■ What will happen to the Euro?
■ What will happen to the US-China relationship?
Two-speed world economy…
0
2
4
6
8
10
12
1980 1985 1990 1995 2000 2005 2010
World GDP$trillion 1980
Source : IMF
Industrial countries
Other countries
…impacting commodity prices
0
20
40
60
80
100
120
140
160
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
World: Oil price$/barrel
Source : Haver Analytics
0
5
10
15
20
25
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
World: Commodity prices$/bushel
Source : Haver Analytics
Wheat (lhs)
Cotton (RHS)
$/lb
…leading to food price pressures in the emergers
0
1
2
3
4
5
6
7
8
9
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
% year
Weighted CPI inflation
Source: Oxford Economics
Emerging markets: Consumer prices
Weighted CPI ex food price inflation
The imbalances story times two
US running current account deficit of over $450billion
China running current account surplus of over $300 billion
Intervention by central bank leading to reserves rising on average by over $300 billion per annum in last five years
No sign of any change in next few years?
France, PIGS current account deficit of over $300 billion
Germany Netherlands current account surplus of $250 billion
Banks were lending to Greek government, Spanish companies and Irish banks as offset to the above imbalances
ECB/EU governments will now fill the gap?
Worrying that trade imbalances widening again
-1000
-800
-600
-400
-200
0
200
400
600
1990 1994 1998 2002 2006 2010Source: Oxford Economics
$ billion
US
Japan
World: Current account imbalances
EU
Forecast
China
OPEC
Eurozone – PIGS under pressure
3.0
5.5
8.0
10.5
13.0
Jan-2008 Jul-2008 Feb-2009 Sep-2009 Mar-2010 Oct-2010
Greece Spain
Portugal Ireland
Eurozone: long term rates% points
Source : Oxford Economics/Haver Analytics
Tough to keep up with the Germans
-20 -10 0 10 20 30 40 50
Italy
Spain
Greece
Belgium
Portugal
Netherlands
France
Ireland
Germany
Eurozone: Competitiveness changes% change in unit labour cost-based real exchange rate since joining Euro
Source : Oxford Economics/Haver Analytics
More competitive
Less competitive
Euro
What if the unthinkable happens in the Eurozone?
Recovery – the pluses and minuses
Corporates cash rich
Employment gains
Confidence rebuilding
Recovering household wealth
Interest rates remain low
Low levels of investment through crisis
Strength of emergers
Access to finance still an issue
High unemployment
Consumer confidence still low
Rising commodity prices and taxes
Fiscal retrenchment ex-US
Excess capacity o
Tightening policy & rising exchange rates in emergers
= Continuing modest recovery for developed economies
Corporates have hoarded cash
-5
-4
-3
-2
-1
0
1
2
3
4
5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: Oxford Economics\Haver Analytics
World: PNFC financial balances
US
Eurozone
UK
% of GDP, 4-quarter average
The beginnings of employment recovery
3
4
5
6
7
8
9
10
11
12
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
World: Unemployment%
Source : Oxford Economics
France
Eurozone
GermanyUK
US
Forecast
HOUSEHOLDS DEBT/GDP RATIOS
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
10
30
50
70
90
110
UnitedStates
Eurozone
U.K.
Japan
HOUSEHOLDS DEBT/GDP RATIOS
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
10
30
50
70
90
110
Italy
France
Germany
Spain
Consumers still burdened with debt
…with a long period of austerity to come for many…
0
5
10
15
20
25
30
35
40
45
2010/11 2011/12 2012/13 2013/14 2014/15
Tax rises
Spending cuts
UK: Composition of fiscal tightening£bn
Source : HM Treasury
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2009 2010 2011 2012 2013
Eurozone: Fiscal tightening*% of GDP
Source: Oxford Economics
Restrictive
Expansionary
* Change in deficit not accounted for by growth impact on government revenues and spending
…but rates remain very low
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
2007 2007 2008 2008 2009 2009 2010 2010
10-year bond yield %
Source: S&P
World: Ten year bond yields
Germany
US
-10
-5
0
5
10
15
20
Jan-2007Aug-2007Mar-2008Nov-2008Jun-2009 Jan-2010Sep-2010
6-month annualised growth, %
M2
Source: BEA
US: Broad money growth
MZM
Bigger than usual investment bust over recession
60
70
80
90
100
110
120
130
140
150
160
2005 2007 2009 2011 2013 2015
2005=100
Source : Oxford Economics
Japan
Germany
US
Forecast
Business Investment
60
65
70
75
80
85
90
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
0
40
80
120
Source: Haver / Oxford Economics
Manufacturing capacity utilisation (%)
EU25 (LHS)
USA (LHS)
Japan (RHS)
Operating rate compared with a year earlier (%)
Oxford Economics forecast
2008 2009 2010 2011 2012 2013Real GDP North America United States 0.0 -2.6 2.9 3.2 3.5 3.6 Canada 0.5 -2.5 2.9 2.4 3.4 3.8
Europe Eurozone 0.3 -4.0 1.7 1.5 1.7 2.0 Germany 0.7 -4.7 3.5 2.2 1.7 2.1 France 0.1 -2.5 1.5 1.8 2.0 2.1 Italy -1.3 -5.1 1.0 1.0 1.1 1.2 UK -0.1 -4.9 1.6 2.0 2.6 3.0 EU27 0.4 -4.2 1.8 1.8 2.1 2.4
Asia Japan -1.2 -6.3 4.2 1.1 2.1 2.0 Emerging Asia, excl Japan 6.0 5.3 8.9 7.3 7.7 7.5 China 9.6 9.1 10.1 9.2 9.1 8.8 India 7.3 6.8 8.8 8.2 9.0 8.8
World 1.6 -2.1 3.8 3.5 3.9 4.0 World 2005 PPPs 2.8 -0.8 4.6 4.3 4.8 4.8 World trade 2.4 -12.8 15.2 7.1 8.0 8.2
Summary of International Forecasts
Marked cyclical rebound underway across sectors…
-50
-40
-30
-20
-10
0
10
20
30
40
50
1998 2000 2002 2004 2006 2008 2010
% year
Electronics & computers
Consumer goods
Source: Oxford Economics
World: Output growth
Motor vehicles
Manufacturing
…but production still well below peak levels…
45
50
55
60
65
70
75
80
85
90
95
100
105
2007 2008 2009 2010
2007/08 cyclical peak = 100
US
Germany
Japan
Source: Oxford Economics
Motor vehicles: The present cycle to 2010Q3
UK
France
45
50
55
60
65
70
75
80
85
90
95
100
105
2007 2008 2009 2010
2007/08 cyclical peak = 100 Electronics & computers
Consumer goods
Source: Oxford Economics
Developed countries: The present cycle
Motor vehicles
Manufacturing
Growth slowed in latest quarter
-1
0
1
2
3
4
5
6
7
8
9
10
11
2009Q4 2010Q1 2010Q2 2010Q3
Consumer non-durables
Consumer durables
Intermediate goods
Motor vehicles
Investment goods (exc. Motorvehicles)
% change q-o-q
Source : Oxford Economics
Global manufacturing output
…as this recovery proves lengthier than in earlier cycles…
70
80
90
100
110
Manufacturing Motorvehicles
High-tech Consumergoods
% of previous peak level
Source: Oxford Economics
Developed countries: Two yrs after the trough
Early 90s
Early 00s
Early 80s
Latest cycle
Economic cycle Manufacturing Motor vehicles Electronics & computers
Consumer goods
Early 80s 5 3 na 1
Early 90s 4 5 8 5
Early 00s 13 2 9 18
Latest cycle 20 23 11 25(2014Q1) (2014Q4) (2011Q4) (2015Q3)
Developed countries: Quarters from trough taken to surpass previous peak production
Car production matching sales in recent months
-25
-20
-15
-10
-5
0
5
10
15
1980 1984 1988 1992 1996 2000 2004 2008
3mth mav, % of sales
† calculated as unit production less sales for US, Western Europe & JapanShading indicates sector downturns
Source: J D Power/Oxford Economics
Net car export & inventory changes†
Customer sectors continue to grow globally
-30%
-20%
-10%
0%
10%
20%
30%
40%
Europe Japan China India CentralEurope
US World
2008 2009
2010 2011
Source: Oxford Economics
Growth in industrial production of machine tools customer sectors
…and across sectors
-30%
-20%
-10%
0%
10%
20%
30%
Motor Veh MetalProducts
Aerospace Mechengineering
Comp &electronics
Elec equip Consumergoods
Intermediategoods
2009 2010
2011 2012
Source: Oxford Economics
Global growth in industrial production of machine tools customer sectors
Growth mostly quicker in US customer sectors
-30%
-20%
-10%
0%
10%
20%
30%
Motor Veh MetalProducts
Aerospace Mechengineering
Comp &electronics
Elec equip Consumergoods
Intermediategoods
2009 2010
2011 2012
Source: Oxford Economics
US growth in industrial production of machine tools customer sectors
Orders are picking up
-50
-40
-30
-20
-10
0
10
20
30
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
% year
Source: Haver Analytics
JapanUS
Eurozone
Capital goods orders
3 month moving average
Short term outlook for investment goods
-40
-30
-20
-10
0
10
20
30
US JAPAN EU15 EU_EAST BRICS
2009 2010 2011 2012
Source: Oxford Economics
Investment goods output% annual change
Forecast for the US
Machine tools sales
0
1
2
3
4
5
6
7
8
9
1998 2000 2002 2004 2006 2008 2010 2012
0
20
40
60
80
100
120
140
160
180
Source: Oxford Economics
US
Machine tools sales (LHS)
$ bn Total capital spending by the top 8 customer sectors (RHS)
Forecast
$ bn
Forecast for Japan
Machine tools sales
0
1
2
3
4
5
6
1998 2000 2002 2004 2006 2008 2010 2012
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Source: Oxford Economics
Japan
Machine tools sales (LHS)
US$ bn
Total capital spending by the top 8 customer sectors (RHS)
Forecast
US$ bn
Forecast for Germany
Machine tools sales
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
1998 2000 2002 2004 2006 2008 2010 2012
65
85
105
125
145
165
185
205
225
Source: Oxford Economics
Germany
Machine tools sales(LHS)
US$ bn
Total capital spending by the top 8 customer sectors
(RHS)
Forecast
US$ bn
Forecast for China
Machine tools sales
0
5
10
15
20
25
30
35
40
1998 2000 2002 2004 2006 2008 2010 2012
0
10
20
30
40
50
60
Source: Oxford Economics
China
Machine tools sales
(LHS)
US$ bn
Total capital spending by the top 8 customer sectors
(RHS)
Forecast
US$ bn
Quarterly USMTC orders forecast…
US orders
0.025
0.045
0.065
0.085
0.105
0.125
0.145
2004 2005 2006 2007 2008 2009 2010 2011
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2Forming machine tools, $bn Cutting machine tools, $bn
Forming machine tools (LHS)
Cutting machine tools (RHS)
US metalworking machine tools orders, USMTC
Forecast
Source : Oxford Economics
More growth to come in 2010 across the regions
-100%
-50%
0%
50%
100%
150%
2009 2010 2011
TotalNortheastSouthMidwestCentralWest
Source: Oxford Economics
Growth in value of orders for cutting machines by region
Forming returning to generalised growth too
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
2009 2010 2011
TotalNortheastSouthMidwestCentralWest
Source: Oxford Economics
Growth in value of orders for forming machines by region
Long term outlook for investment goods
0
5
10
15
20
25
30
35
40
45
US JAPAN EU15 EU_EAST BRICS
1990 2010 2030
%
Source: Oxford Economics
Shares of global investment goods output
Conclusions
Policy stimulus, turn in inventory cycle and rebound in world trade drove strong recovery
Global economic recovery should continue but there are growing downside risks
Machine tool orders up sharply from lows. Sales have so far been more subdued but these should now start to pick up.
MT sales are forecast to rebound sharply over the next few years in both developed and emerging markets
Strong rebound in developed economy markets follows very deep recession but focus of global MT market still increasingly moving toward emerging economies
End of presentation
Thank you