robert powell @ omd predicts
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The new normal Or, where the world goes from here
Robert PowellSenior editor, MENArobertpowell@eiu.com
DubaiJune 2010
Where are we now?
Global: Recoverology
Bounce-back theory: “V” The sharper the contraction, the stronger the recovery
Financial-impairment theory: “U”, “L” Recoveries following financial crises are much slower
than normal recoveries
Borrowed-time theory: “W” Stimulus boosts economy at the cost of weakness later
Armageddon theory: “Q” Too grim to talk about
Global: World trade bounces back
8090
100110120130140150160170
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World trade volumes. 2000=100. Seasonally adjusted.Source: CPB Netherlands Bureau for Economic Policy Analysis.
Financial markets: Fragile
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May
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3-month LIBOR/3-month overnight index swap (OIS) spread, percentage points. A higher spread denotes more marketstress. Sources: Haver Analytics; Economist Intelligence Unit.
Lehman fails
Financial markets
crash
Fed introduces
QE
Euro zone woes spook
markets
Policy: No Keynesian free lunch
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30
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70
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130
Ch
ina
NL
Fra
nc
e
Ge
rma
ny
Ita
ly
Sp
ain UK
US
Ja
pa
n
2008 2014
Gross public debt stock as a % of GDP. End-period.Source: Economist Intelligence Unit, CountryData.
The bad news
US: A recovery is under way …
-1,000
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- N
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- M
ay
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- M
ar
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- J
an
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Net new jobs
Unemployment rate
Jobs in ‘000s; unemployment, %. Source: Bureau of Labour Statistics.
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
1959
- Q
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1975
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- Q
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… but housing is still sluggish
US housing starts, ‘000s, SAAR.Source: Bureau of the Census.
Euro zone: Sisyphean task …
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Germany Spain Greece Ireland
Why stay? Cost of leaving too high Keeps borrowing costs down Provides a stability blanket Provides an inflation anchor
Why leave? Adjustment costs too high—eg Greece needs to “do a Latvia” Difficulties of converging with Germany—can only come through increasing competitiveness by cutting wages etc
Reform? Monetary union AND a fiscal union?
Real private consumption, 2000 Q1=100. Source: Economist Intelligence Unit, CountryData.
The good news
0
5,000
10,000
15,000
20,000
25,000
30,000C
hin
a
US
Ind
ia
Jap
an
AS
EA
N
Ge
rman
y
Bra
zil
Ru
ssia
Fra
nce
Mex
ico
UK
2008
2020
Crises accelerate existing trends
GDP, purchasing power parity (PPP) US$ bn. Source: Economist Intelligence Unit, CountryData.
China: Massive credit expansion
Bank credit rose sharply in 2009 By 33% of GDP By 31% from previous year By RMB9.6trn (US$1.4trn)
Govt started to slow loan growth Target is RMB7.5trn increase in 2011 Implies growth of 19%; 18% of GDP
There is a housing bubble, but: Average LTV is 46% (08/2009) 24% of buyers pay all cash 23% of houses bought by investors
What’s the risk of a credit bust? CCP is the world’s most liquid financial institution NPLs can be “disappeared”
Nominal
Real
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Chinese bank credit growth. % change, year on year.Sources: PBC; NBS; Haver Analytics; EIU.
India: Growth strong, but fiscal risks
Monetary and fiscal stimulus measures implemented in 2009 have driven recovery
Industrial output growth has rebounded strongly
Service sector growth remains rapid—pharma/healthcare and retail see highest demand for labour in short term
Construction sector outlook is improving
Assisted by favorable demography, India’s economic growth rate is expected to exceed China’s by 2018
BUT medium-term fiscal consolidation is needed, including implementation of GST
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GDP US$ bn Growth, %
India’s GDP trends.Source: Economist Intelligence Unit.
The CIVETS: Six to watch forPopulation (m)
GDP/head (US$, PPP)
Inflation (%) Growth (%)
Colombia 46.9 8,910 2.9 2.4
Indonesia 243.0 4,240 5.1 5.6
Vietnam 87.8 3,140 10.5 6.2
Egypt 84.7 5,920 12.2 5.2
Turkey 73.3 12,750 10.1 4.8
S Africa 49.1 10,720 5.8 2.8
Forecasts are for 2010, as of June 2010.Source: Economist Intelligence Unit, CountryData.
Currencies: It’s still the ugly sisters
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Jul 3
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Trade-weighted € US$:€
US$/€ strongly correlated with risk perception Euro zone structural concerns to dominate over short term US fiscal tightening will give support to US$ in 2H 2011 Euro zone can’t cope with a strong €?
Pity the yen Racing up against the € and keeping up with the US$. Bad news for Japan’s exporters and for its deflation
Emerging markets RMB “wobbly peg” to US$ EMs to depend on risk tolerance
Source: Haver Analytics.
Average
What this means
Globalisation—a new phase
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3.25
3.5
3.75
4
1995
1998
2001
2004
2007
2010
2013
Globalisation index.Source: Economist Intelligence Unit.
Hyperglobalisation
“Embracing manyness”—a world with no centre
Treat emerging markets as you would your home market
Watch for the new competitive landscape
Technology continues to be a driver of globalisation
Expect an innovation surge
But watch the politics—Sino-US and in fiscally stretched developed world
Where’s the growth?
Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of April 2010. Source: Economist Intelligence Unit, CountryData.
The Middle East – after the windfall
Sheikh Zayed Road -1990 Sheikh Zayed Road – 2007
Resilient!
MENA grew by 1.4% in 2009 Oil prices back at US$70-80/b
Tourism recovering
FDI flows shifting Financial investors still nervous Infrastructure and real estate
projects at risk Fiscal funding to the fore!
OIL: short-term bear, long-term bull
Oil price outlook: Near term
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50Dated Brent
% change
Oil price: US$/barrel; % change, year on year.
Source: Economist Intelligence Unit, CountryData
But prices remains below 2008 highs
EIU oil market outlook
m barrels/day
2007 2008 2009 2010 2011
Total world oil production 85.1 86.3 84.8 86.5 88.4
Non OPEC 47.6 47.1 48.8 49.3 49.9
OPEC 35.4 36.6 33.4 34.4 35.7
Total world oil consumption 86.4 86.0 84.9 86.5 87.8
Stock change -1.3 0.3 -0.02 0.1 0.6
Brent dated price (US$/b) 72.7 97.7 61.9 80.2 78.5
a OECD stocks
Source: Economist Intelligence Unit, CountryData
Long-term picture is still bullish…
Source: International Energy Agency
• Disappointing non-OPEC supply• Potential for strong EM demand• High cost of E&P• Investment depressed
• Geopolitics• OPEC action• Oil nationalism
The BP Macondo spill effectAlgeria
Major investor in upstream gas, operating the In Salah and In Amenas fieldsEgypt
Biggest foreign oil producer and a major player in the offshore gas sectorIraq
Working with CNPC on boosting output at the Rumaila field to a targeted 2.85 b/d in 2016
Oman Investing US$650m in the Khazzan and Makarem tight gas project
UAE Holds minority stakes in several Abu Dhabi oil and gas producers
Iraq 1 – Brazil 0 2010 6% of global oil production from deepwater 2020 Plan was for 10% of global oil production from deepwater
All of which makes the Middle East more important!!
Source: BP, Statistical Review of World Energy
(and don’t forget the gas….)
Source: BP, Statistical Review of World Energy
Pushing on
Oil economies are in the black …
Budget balance, % of GDP
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Arabian peninsula and the Gulf
Bahrain, Iran, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Yemen
Source: Economist Intelligence Unit, MENA RO Country Forecast
…and looking good
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UA
E
Ku
wait
Sau
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ia
Lib
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Qatar
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ina
Sovereign wealth funds, % of GDP
Sources: SWF Institute
But debt remains a worry for some
External debt US$ bn
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Bahrain Saudi Qatar UAE
Sources: Economist Intelligence Unit.
and non-oil economies are in the red
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Non-oil exporters
Budget DEFICITS, % of GDP
Source: Economist Intelligence Unit.
Egypt, Israel, Jordan, Lebanon, Morocco, Tunisia.
Lots done …
Source: World Bank, Doing Business report 2010.
… more to do (Legal & regulatory risk)
Source: Economist Intelligence Unit, Riskbriefing.
Ones to watch…
GCC single currency – back to the stable
GCC Single market created in January 2008
GCC VAT and corporation tax—possible
But a GCC single currency? Not likely….
Abdulrahman al-Attiyah, Secretary-General of the Gulf Cooperation Council “I don't foresee the currency to be launched in 2015”
The US dollar peg – with us a while yet
Meanwhile …Closer economic ties still on track
Gulf power grid and rail network
Gulf Co-operation Council: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE
-5
0
5
10
15
20
2008
2009
2010
2011
Qatar UAE Bahrain Kuwait
Population growth (% change)
Dubai—debt overhang
Property bubble… Fast-rising expat population Tourism boom “Flipping”
…Property bust Inter-bank rates soar Dubai Financial Index crashes Property prices fall by 45% last year Merrill Lynch expects they will fall 15% this year Dubai World asks for US$24.3bn debt “standstill” Dubai International Capital follows suit in May
Abu Dhabi steps in Central Bank, commercial banks and SWF help out Slow road back for Dubai, but Abu Dhabi booms on the back of strong oil prices
A new city is being built, Masdar, designed around green principles
Saudi—conservatism pays
Still the oil king 12.5m b/d capacity; producing around 8m b/d China is now largest market for oil sales, overtaking
US But rising domestic usage, means exports fall from
5.7m b/d in 2009 to 4.8m b/d in 2014
The region’s next property boom? Mortgage law expected by end of the year Could increase housing demand by up to 200,000
units a year but foreign ownership rules still restrictive
(although KAEC may change this)
Iraq—the oily tiger?
An oil superpower? Ten long-term oil contracts signed
Investment of US$100bn in the oil sector predicted
Could conceivably boost capacity to 12m barrels/day in a decade
Extremely positive ramifications for the economy, employment and immigration inflows
A more stable political scene? Iraqi election may see a more cohesive
government in place If this proves to be the case, and losing
parties are sufficiently placated, the security situation could also continue to improve
Source: Economist Intelligence Unit.
40
60
80
100
120
140
1602
00
4
20
06
20
08
20
10
Iraqi GDP, US$ bn (PPP)
Iran—isolated
Sanctions No major restrictions on exporting oil
CNPC heavily involved in Iran’s energy sector South Pars gas field (LNG) Azadegan oilfield
But major restrictions on spending the money Sanctions on banks; insurance; export credits European companies pulling out Impact on Dubai
UAE exported over US$2bn in machinery & US$1.2bn in transport equipment to Iran in 2009
Where’s the growth?
Real GDP growth; % change, year on year. Source: Economist Intelligence Unit, CountryData.
2009 = 9.5% 2010 = 23.3% 2011 = 12.7%
More Information?
Data and analysis from today’s presentation were taken from the Economist Intelligence Unit’s country analysis and forecasting services. For more information on these services and other EIU capabilities, including risk assessment, industry trends, and economic data, please contact:
Economist Intelligence Unit
2 Dubai Media City
Tel: + 971 (0) 4 433 4202Fax: + 971 (0) 4 438 0224
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