another year of muddling through? han de jong chief economist november 2012

Another year of muddling through? Han de JongChief EconomistNovember 2012

2

• Will the euro crisis be controlled?

• Will the US avoid the fiscal cliff and continue its recovery?

• Will Chinese growth bounce back?

Key questions for 2013

3

Today’s western problems require

• Fiscal consolidation

• Strengthening the banks

• Structural reform to improve growth dynamics

• Debt relief

• Support from monetary policy

Finding the right balance is crucial!

4

Frankfurt air freight vs world trade – bottoming out

% yoy

Source: Website Fraport, Thomson Reuters Datastream

-40

-30

-20

-10

0

10

20

30

40

01 02 03 04 05 06 07 08 09 10 11 12

Frankfurt air freight World trade

5

Areas of divergence

• US and emerging economies OKEurope and Japan lagging

• In Europe: core – periphery

hard data – confidence

• In the US: labour market – corporate investment

6

Industrial production

Index, Jan07=100

Source: Bloomberg

50

60

70

80

90

100

110

2007 2008 2009 2010 2011 2012

Germany Spain

7

Eurozone hard data and confidence parting ways?

-12

-10

-8

-6

-4

-2

0

2

4

05 06 07 08 09 10 11 12

25

30

35

40

45

50

55

60

65

Industrial production (% 3mo3m, lhs) PMI (index, rhs)

Source: Bloomberg

8

ECB bank lending survey points to investment slump

-15

-10

-5

0

5

10

Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011

-50-40-30-20-10

0102030

investment spending loan demand (rhs)

Source: Thomson Reuters Datastream loan demand from ECB bank lending survey

9

What is needed to make the euro viable?

Medium to longer term (politicians)

• Sustainable public finances

• Convincing budget rules

• Structural reform boosting growth dynamics

• Banking union

Shorter term (ECB/ESM)

• Access to funding for governments

• Financial system that works

• Support economic growth

10

Positives for Europe

• Work on framework for sustainable euro in progress

• ECB has limited downside tail-end risk

• Improvement on deficits in the periphery

• Fiscal consolidation not getting worse

• Inventory cycle becoming supportive

• Waiting for an external lift

11

US: Housing market has turned

S&P / Case Shiller house market index, % yoy

-20

-15

-10

-5

0

5

10

15

20

05 06 07 08 09 10 11 12

Source: Bloomberg

12

US: Housing starts – much more to come

Source: Bloomberg

thousands

400

800

1200

1600

2000

2400

2006 2007 2008 2009 2010 2011 2012

13

US: Mortgage rate and refi

3

4

5

6

7

04 05 06 07 08 09 10 11 12

0

1000

2000

3000

4000

5000

6000

7000

30yr mortgage rate (lhs) Mortgage refi index (rhs)

Source: Bloomberg

14

US: Unemployment

3

4

5

6

7

8

9

10

00 01 02 03 04 05 06 07 08 09 10 11 12

%

15

US: Employment growth has picked up (household survey)

% yoy

-5

-4

-3

-2

-1

0

1

2

3

4

90 92 94 96 98 00 02 04 06 08 10 12

Source: Thomson Reuters Datastream

16

But here too, a strange divergence

-20

-15

-10

-5

0

5

10

92 94 96 98 00 02 04 06 08 10 12

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Core capital goods orders Nonfarm payrolls

% 3Mo3M, core capital goods orders and nonfarm payrolls

Source: Thomson Reuters Datastream

17

Positives on the cliff despite political stalemate

• After the elections, political dynamics change

• Tea Party is weaker

• Fiscal consolidation is not new

18

US budget balance as % GDP

-12

-10

-8

-6

-4

-2

0

2

4

72 75 78 81 84 87 90 93 96 99 02 05 08 11

Source: Bloomberg

19

Why did China slow?

• Policy driven

• Global cycle

• FX appreciation / rising wages

20

China: Uncertainties

• Change in leadership

• Pressure for social and political reform

• Transition to different growth model

21

China: Industrial production and retail sales turning

5

10

15

20

25

2008 2009 2010 2011 2012Industrial production Retail sales

% yoy

Source: Bloomberg

22

Implications for financial markets

• Monetary policy to remain very loose

• Search for return

• Reasonably valued risky assets will do well

23

10 yr bond yields – how low can it go?

%

Source: Bloomberg

0

2

4

6

8

10

91 93 95 97 99 01 03 05 07 09 11

US Germany

24

Euro stoxx and S&P500 – is the underperformance justified?

Index, Jan 2008 = 100

Source: Bloomberg

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012Euro stoxx S&P500

25

PE S&P500

0

5

10

15

20

25

30

35

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Source: Bloomberg

26

Conclusions

• The world’s economy remains on a knife’s edge

• But the glass is half full

• Europe keeps eurocrisis under control

• US avoids fiscal cliff

• China makes successful transition

• Risky assets to perform well in 2013

272727

Thank you for your attention

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