31
March 2013 22
Lower potential growth for the global economy
Fewer workers mean less output, an aging world economy
Source: Haver Analytics
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1060.25
60.50
60.75
61.00
61.25
61.50
61.75
62.00
62.25
62.50
World employment to population ratio (%)
March 2013 33
Aging economies must rely on easy monetary policy
Central banks will continue to be aggressive
Source: Haver Analytics
4March 2013
The global manufacturing cycle is turning a corner (again)
4
The rebound is uneven and still vulnerable
Source: Reuters Ecowin Pro
5March 2013 555
Eurozone: Fiscal adjustment
The ‘peripheral’ eurozone member states are undergoing a period of concerted fiscal tightening
The change in the underlying fiscal stance is exceptionally large in 2012 in a number of countries
The adjustment is consistent with large output declines this year, even with a conservative ‘multiplier’ assumption
Concerted tightening
Source: Reuters EcoWin Pro, BNP Paribas
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Germany France Italy Spain Portugal Greece Ireland Eurozone
Change in Cyclically Adjusted Primary Budget Balance (% GDP)
2012
2011
2013
6March 2013
Eurozone: Consumer Sentiment
The EC consumer survey of future financial conditions is as weak currently as it was after the Lehman collapse
High unemployment, fiscal tightening, a squeeze on household incomes – all point to consumer weakness
The eurozone recovery will remain highly dependent on external economic conditions
Domestic doom and gloom
Source: Reuters EcoWin Pro
7March 2013 77
China: Money and credit key
Money growth is turning, although it remains constrained for now
Bank lending has picked up notably …
… especially when ‘other’ types of lending are included
This loosening of credit conditions is key to our belief that the economy is picking up
Source: Reuters Ecowin Pro, CEIC, BNP Paribas
Expansion underway, delicate tradeoffs for new regime
MH / DB
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Official new loans
Other lending*
Total
12-month change in year-to-date lending
* Entrusted loans, trust loans and bankers acceptances
8March 2013
This is Not a Business Cycle
The US is in a deleveraging cycle, not a business cycle
Source: Reuters Ecowin Pro, Bloomberg
March 2013 9
A Nation of Cross-Currents
9
We avoided the worst of the fiscal cliff, but fiscal negotiations will dominate 2013
3.6%3.2%2.6%2.8%Underlying Pace2
-0.9%-1.3%-1.0%-0.8%Fiscal Tightening2
2.7%2.0%1.6%2.0%Real GDP
201412013120122011% Q4/Q4
Source: Haver Analytics, BNP Paribas; (1) Forecast (2) BNP Paribas estimates
March 2013 10
Most of Fiscal Cliff Averted
10
We avoided the worst of the fiscal cliff, but fiscal negotiations will dominate 2013
Potential(2) BNP Paribas
Total impact on GDP -4.3 -1.2Change in federal balance 4.3 1.5Fiscal Multiplier 1.0 0.8
Structural impact on federal balance 4.0 1.2Cyclical impact on federal balance -1.0 0.3
Revenue impact 2.9 0.9Expiration of 2% payroll tax cut 0.5 0.5Expiration of Bush tax cuts, indexing AMT for Inflation, estate and gift tax
1.4 0.2
Affordable care act 0.1 0.1Expiring tax provisions 0.4 0.0Other revenue measures 0.5 0.0
Spending impact -1.1 -0.3Sequestration -0.3 -0.3No unemployment insurance extension -0.2 0.0Medicare fix -0.1 0.0Planned troop reduction -0.1 -0.1Hurricane Sandy stimulus - 0.3Other spending measures -0.5 -0.2
Change in state & local government balance(3) 0.3 0.3
Federal Fiscal Tightening Potential vs Expectations (% of GDP)
FY 2013(1)
Source: Haver Analytics, BNP Paribas; (1) forecast, (2) using CBO estimates
March 2013 1111
US: Still living on trillion dollar deficits
US is turning to fiscal tightening, but the speed and form is subject to a great deal of uncertainty
Source: Haver Analytics
14
16
18
20
22
24
26
Q1 1970 Q1 1977 Q1 1984 Q1 1991 Q1 1998 Q1 2005 Q1 2012
Govt. revenues (% of GDP)
Govt. expenditures (% of GDP)
Bars mark recession
March 2013 12
Much more to come from the Fed, starting to get traction
12
The Fed has stepped into uncharted territory with open-ended QE, interest-sensitive sectors starting to respond more vigorously
Source: Haver Analytics, Reuters Ecowin Pro
March 2013 1313
US public sector has been supporting private deleveraging
In contrast to the Eurozone approach underway, US private sector deleveraging was met with public leveraging
Source: Reuters Ecowin Pro
March 2013 14
Housing makes consumers feel better, but fiscal hit to near term
14
Housing recovery impact is working against fiscal headwind
Source: Reuters Ecowin Pro
March 2013 15
Still no signs of pent up demand
15
Real Consumer Spending on Services (USD bn)
4000
4500
5000
5500
6000
6500
7000
95 95 96 97 98 99 00 01 02 03 04 05 06 06 07 08 09 10 11 12
Consumers have changed their ways but still want stuff
Source: Haver Analytics
Real Consumer Spending on Goods (USD bn)
1500
2000
2500
3000
3500
4000
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
March 2013 16
Households using low rates to deleverage
16
Net Worth remains at levels seen in the mid-1990s while debt levels are still much higher
Source: Reuters Ecowin Pro
March 2013 17
Monetary policy not reaching housing in the usual way
17
Despite record low rates, housing demand continues to be weak
Source: Reuters Ecowin Pro
March 2013 18
People increasingly want to rent not own
18
People want to preserve liquidity, mobility and new households are choosing to rent
Source: Haver Analytics
March 2013 19
QE is creating landlords
19
By suppressing yields QE is making rental yields increasingly attractive
Source: Haver Analytics
March 2013 20
The US Has Run its Course as Consumer of the World
55 60 65 70 75 80 85 90 95 00 05 10-7
-6
-5
-4
-3
-2
-1
0
1
2 US Trade Deficit as % of GDP
20
Source: Haver Analytics
March 2013 21
The degree of corporate caution is at historic levels…
21
Businesses are not playing their traditional role as borrowers. The government is now the main borrower.
Source: Haver Analytics
-6
-4
-2
0
2
4
6
8
1960 1967 1974 1981 1988 1995 2002 2009
Domestic Business
Households
Bars mark recession
Net Saving (% of GDP)
Net lending or borrowing as % of GDP
March 2013 22
Hiring is Only Moderate
22
Looking through seasonal distortions, the pace of hiring has remained only moderate
Source: Reuters Ecowin Pro
March 2013 23
Fewer Workers Points to Slower Trend Growth
23
Fewer pay checks per capita mean slower trend growth rate, but we are seeing some signs of progress.
Source: Reuters Ecowin Pro
March 2013 24
Labor market dynamism still impaired
24
Firing has slowed but hiring has not picked up to prior norms
Source: Reuters Ecowin Pro
March 2013 25
Participation Stabilizing?
25
As labor force participation levels off, the decline in unemployment slows
Source: Reuters Ecowin Pro
March 2013 26
How Much Slack is There?
26
There is a debate on how much of the decline in labor force participation is structural versus cyclical. Most on the FOMC think the decline in unemployment
overstates the improvement.
Source: Reuters Ecowin Pro
March 2013 27
Wages are very subdued
27
There is no wage price spiral without wage growth
Hourly Earnings vs Core PCE
Source: Reuters Ecowin Pro
March 2013 28
Commodity prices still high, down from peaks
28
Source: Haver Analytics
March 2013 29
Core inflation had risen but started to moderate
29
All measures of core inflation rose substantially in the first half of 2011, though statistical measures of underlying inflation have shown some signs of leveling off more recently.
Source: Haver Analytics
March 2013 30
Inflation expectations on the high side
Fed is watching but not yet worried
Source: Haver Analytics
March 2013 31
Disclaimer
31
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