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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