Prospects for the Global economy C harles Burton October 2009

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The global financial crisis was widely anticipated to hit most hard those countries: ■Very dependent on financial services ■Who had experienced large housing and construction booms ■Where consumer debt had risen to excessive levels ■Who were particularly exposed to trade with the US So, we’d expect to see US, UK, Spain and Ireland facing the deepest recessions and countries like Germany, France and Italy suffering much less Who should have suffered most in downturn?

Who is most exposed to financial services?

The global financial crisis was widely anticipated to hit most hard those countries: ■Very dependent on financial services ■Who had experienced large housing and construction booms ■Where consumer debt had risen to excessive levels ■Who were particularly exposed to trade with the US So, we’d expect to see US, UK, Spain and Ireland facing the deepest recessions and countries like Germany, France and Italy suffering much less Who should have suffered most in downturn?

Where were house prices most excessive?

The global financial crisis was widely anticipated to hit most hard those countries: ■Very dependent on financial services ■Who had experienced large housing and construction booms ■Where consumer debt had risen to excessive levels ■Who were particularly exposed to trade with the US So, we’d expect to see US, UK, Spain and Ireland facing the deepest recessions and countries like Germany, France and Italy suffering much less Who should have suffered most in downturn?

Who has highest consumer debt?

The global financial crisis was widely anticipated to hit most hard those countries: ■Very dependent on financial services ■Who had experienced large housing and construction booms ■Where consumer debt had risen to excessive levels ■Who were particularly exposed to trade with the US So, we’d expect to see US, UK, Spain and Ireland facing the deepest recessions and countries like Germany, France and Italy suffering much less Who should have suffered most in downturn?

Who is most exposed to trade with US?

The global financial crisis was widely anticipated to hit most hard those countries: ■Very dependent on financial services ■Who had experienced large housing and construction booms ■Where consumer debt had risen to excessive levels ■Who were particularly exposed to trade with the US So, we’d expect to see US, UK, Spain and Ireland facing the deepest recessions, and countries like Germany, France and Italy suffering much less Who should have suffered most in downturn?

Who has actually suffered most?

What explains who suffered most during the downturn? Do recent data point to a strong recovery? Will those who suffered most recover fastest? Risks to the economic outlook Legacies from the downturn Outline of presentation

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Financial stabilisation costs may differ…

…but credit conditions worsened in sync

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Synchronised global slump in confidence

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital inflows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Who is most dependent on manufacturing?

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Who is most dependent on cap goods & cars?

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Who is most dependent on trade with Asia?

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Emerging markets hit by flight to liquidity…

…exposing weaknesses in Eastern Europe

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Russia undermined by oil price collapse

The financial shock was surprisingly similar across countries …as was its impact on confidence So financial crisis became a full-blown corporate crisis, with the countries most exposed now those most dependent on: ■Manufacturing and trade –especially in capital goods and cars –especially with Asia ■Capital flows ■Oil and commodity exports Hence, Germany and Italy, as well as Eastern Europe, actually suffered worse recession than the US and UK What explains who suffered most?

Who has actually suffered most?

First signs of recovery…

…with European confidence in sync with US…

…as are equity prices

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

Monetary policy on full throttle…

…as is fiscal policy…

…and automatic stabilisers will help Europe

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

Recovery from banking crises generally slow

Europe’s banks not as well placed as US?

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

Massive wealth losses to be made up

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

How strong will recovery be? Likely to be robust initially because of swing in inventory cycle and rebound in world trade And policy remains very expansionary But likely to be bumpy and slower than ‘normal’: ■Recoveries from banking crises usually slower ■Household financial correction has some way to go ■Business investment likely to be slow to recover given large overhang of spare capacity in many sectors, slowing recovery in countries dependent on capital goods ■Car sector will be adversely affected when scrappage schemes end ■Rising oil prices good for Russia but bad for most

Will rising oil prices derail recovery?

Some evidence those hardest hit up first…

…but they won’t all keep up the pace

Why won’t Germany and Italy recover faster? Germany and Italy will be hindered by: ■Slow trend growth ■Slow recovery in global business investment ■Measures to support economy and jobs are temporary – wave of redundancies to come when support measures end ■Crisis has accelerated industrial relocation away from Italy, which remains fundamentally uncompetitive

Short-term outlook Deflation ■Renewed weakness in asset prices holds back recovery in banking sector ■Unemployment rises sharply further depressing consumption ■Monetary/fiscal policy not effective as deflation grips ■Protectionism measures enacted ■Economy flatlines in 2010 and beyond ‘W’-shaped cycle ■Growth boosted by inventory rebuild and world trade multiplier ■But final demand remains weak as banks and households keep deleveraging ■Oil/commodity price spike ■Growth sluggish again in 2010H2 and 2011 after initial bounceback Medium-term outlook Risks to the economic outlook V-Shaped recovery ■Return to growth boosts business and consumer confidence ■Government stimulus efforts feed through quickly ■Financial market rally becomes firmly established ■Emerging markets boosted, adding to global growth Oxford forecast ■Fiscal stimulus feeds through but scale held back by deficits ■Monetary easing blunted by weak banks but eventually works ■Gradual rise in business and consumer confidence ■Weak recovery in 2010, gaining traction in 2011

Scenarios for the global economy

Some legacies from the downturn Massive fiscal cost of crisis means years of austerity Need to exit eventually from monetary stimulus – is Eurozone better placed than US and UK? Regulation of financial services – how much will really change? EMU has proved to be resilient in the face of massive financial and economic shocks – will it take confidence from this and a more forceful role globally?

Downside risks for those burdened by massive debt

Some legacies from the downturn Massive fiscal cost of crisis means years of austerity Need to exit eventually from monetary stimulus – is Eurozone better placed than US and UK? Regulation of financial services – how much will really change? EMU has proved to be resilient in the face of massive financial and economic shocks – will it take confidence from this and a more forceful role globally?

Some legacies from the downturn Massive fiscal cost of crisis means years of austerity Need to exit eventually from monetary stimulus – is Eurozone better placed than US and UK? Regulation of financial services – how much will really change? EMU has proved to be resilient in the face of massive financial and economic shocks – will it take confidence from this and a more forceful role globally?

Some legacies from the downturn Massive fiscal cost of crisis means years of austerity Need to exit eventually from monetary stimulus – is Eurozone better placed than US and UK? Regulation of financial services – how much will really change? EMU has proved to be resilient in the face of massive financial and economic shocks – will it take confidence from this and a more forceful role globally?

Oxford Economics’ forecast