1. Is the global recovery stalling? October 2010 John Walker jwalker@oxfordeconomics.com

2. Overview of the Oxford MT Model Oxford Global Macro Model Oxford Global Sectoral Model Global Machine Tools Model Forecasts for major macroeconomic indicators across 175 economies: GDP Industrial production Investment Interest rates Exchange rate Inflation and costs Competitiveness Profitability Forecasts for output across 85 sectors in 67 countries driven by: Mix of demand – ie consumption vs investment Inter-sector supply chain linkages – ‘input- output modelling’ Sectoral competitiveness Forecasts investment by sector, based on sectoral output growth and capacity utilisation, and macro drivers, such as interest rates and profits Sectoral output and investment forecasts in key client sectors are then used to drive the global forecast for machine tools sales

3. Countries covered Americas BrazilCanada Mexico United States Asia ChinaIndiaJapanSouth Korea TaiwanThailand Europe AustriaCzech RepFrance Germany HungaryItalyPolandRussia SlovakiaSpainSwitzerlandUK Turkey

4. Three key points There is still a very high level of uncertainty about the outlook especially in the US and Europe: ie FEAR still rules

5. Bernanke on uncertainty Statement to Senate Banking Committee, 22 July: "Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognise that the economic outlook remains unusually uncertain.“ Keynote speech at Jackson Hole, Wyoming, 27 August: “…macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments.”

6. OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) USAEurozoneJapan OEF0.71.42.0 Note: Forecasts made in December for year ahead.

7. OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) USAEurozoneJapan OEF0.71.42.0 EIU Global Ins. IMF OECD Consens. Note: Forecasts made in December for year ahead.

8. OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) USAEurozoneJapan OEF0.71.42.0 EIU1.0 Global Ins.0.7 IMF1.6 OECD1.1 Consens.1.0 Note: Forecasts made in December for year ahead.

9. OXFORD ECONOMICS FORECASTING RECORD 2007-2009 (average absolute forecast divergence for real GDP growth) USAEurozoneJapan OEF0.71.42.0 EIU1.02.22.6 Global Ins.0.71.72.4 IMF1.62.22.9 OECD1.11.82.7 Consens.1.01.82.4 Note: Forecasts made in December for year ahead.

10. Three key points There is still a very high level of uncertainty about the outlook especially in the US and Europe: ie FEAR still rules Crisis has been in part a story of two currency unions!!

11. The imbalances story times two US running current account deficit of over $450billion China running current account surplus of over $300 billion Intervention by central bank leading to reserves rising on average by over $300 billion per annum in last five years No sign of any change in next few years?

12. The imbalances story times two US running current account deficit of over $450billion China running current account surplus of over $300 billion Intervention by central bank leading to reserves rising on average by over $300 billion per annum in last five years No sign of any change in next few years? France, PIGS current account deficit of over $300 billion Germany Netherlands current account surplus of $250 billion Banks were lending to Greek government, Spanish companies and Irish banks as offset to the above imbalances ECB/EU governments will now fill the gap?

13. …Yuan is expected to slowly appreciate against $

14. Worrying that trade imbalances widening again

15. Three key points There is still a very high level of uncertainty about the outlook especially in the US and Europe: ie FEAR still rules Crisis has been in part a story of two currency unions!! The recession was driven by the corporate sector and the shape of the recovery will depend on how corporates react in different countries

17. The recession wasn’t consumer driven in US…

18. Nor were bank job cuts as bad as feared

19. Sharp decline in investment for the US

20. …and globally, then magnified through trade

21. So corporates are now cash rich

22. And also in China

23. Who will lead the recovery? Governments!! Consumers!! Companies? Emerging markets?

24. …households constrained by debt… Eurozone

25. …the weak labour market…

26. …and squeeze on real wages as well as higher taxes

27. Financial surpluses here for extended period

28. So consumers will lag rather than lead recovery

29. Corporate sector now running big surpluses

30. Partly that is banks…

31. …non-financials all cash rich

32. Corporate surpluses normally get spent in US…

33. …and elsewhere

34. We are seeing some recovery in M&A

35. What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints

36. What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints

37. Excess capacity holding back investment Eurozone: Capacity utilisation and real non- residential investment US: Capacity utilisation and real non- residential investment

38. What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints

39. Companies seeking to pay down debt

40. What might hold companies back this time? Unusual uncertainty Excess capacity Debt Credit constraints

41. Corporate lending very weak…

42. …although that is a demand as well as supply issue

43. Forecast takes a hopeful view on investment

44. But still subdued recovery for major economies

45. Emerging markets leading recovery?

46. Emergers leading recovery despite slowing in some

47. Recovery in output has stalled – but not for long? Source:

48. Emerging markets leading recovery? Export markets slowing

49. Recovery in exports is slowing Source:

50. Emerging markets leading recovery? Export markets slowing But domestic demand is strong

51. … domestic demand generally solid

52. …and domestic demand is solid in the rest of Asia

53. Emerging markets leading recovery? Export markets slowing But domestic demand is strong Still scope for further stimulus

54. Low debt levels gives plenty of fiscal scope… /CEIC

55. …and credit taps can turn on quickly if needed… CEIC

56. …and are already flowing in Brazil

57. …& capacity utilisation is high in several emergers Oxford Economics/CEIC

58. So what will limit Emergers growth

59. Oxford Economics’ forecast

60. Corporate recovery Financial sector recovery Outlook still highly uncertain

61. Corporate recovery Financial sector recovery Outlook still highly uncertain Oxford forecast ■Gradual rise in business confidence encourages corporates to invest ■But weak banks combined with excess capacity limit scale of investment recovery ■Consumer spending recovery limited by pace of job growth and fiscal retrenchment ■But recovery strong enough that fiscal crisis remains contained

62. Corporate recovery Financial sector recovery Outlook still highly uncertain Renewed global boom ■Strong corporate liquidity feeds into new investment boom ■Faster growth boosts business and consumer confidence, and trade multiplier magnifies upturn ■Bank balance sheets improve quickly and credit growth resumes ■Strong growth boosts tax revenues/cuts social security payments, helping fiscal consolidation Oxford forecast ■Gradual rise in business confidence encourages corporates to invest ■But weak banks combined with excess capacity limit scale of investment recovery ■Consumer spending recovery limited by pace of job growth and fiscal retrenchment ■But recovery strong enough that fiscal crisis remains contained

63. Corporate recovery Sub-par recovery ■Business optimism remains low and corporates continue to hoard cash ■Investment and job growth is modest as capacity is underutilised ■Monetary policy supports banking sector but fiscal coffers are empty ■Easier credit conditions mean benefits of loose monetary policy feeds through to a stronger housing and consumer recovery Financial sector recovery Outlook still highly uncertain Renewed global boom ■Strong corporate liquidity feeds into new investment boom ■Faster growth boosts business and consumer confidence, and trade multiplier magnifies upturn ■Bank balance sheets improve quickly and credit growth resumes ■Strong growth boosts tax revenues/cuts social security payments, helping fiscal consolidation Oxford forecast ■Gradual rise in business confidence encourages corporates to invest ■But weak banks combined with excess capacity limit scale of investment recovery ■Consumer spending recovery limited by pace of job growth and fiscal retrenchment ■But recovery strong enough that fiscal crisis remains contained

64. Corporates are key

65. Scenarios for the global economy

66. Corporate recovery Sub-par recovery ■Business optimism remains low and corporates continue to hoard cash ■Investment and job growth is modest as capacity is underutilised ■Monetary policy supports banking sector but fiscal coffers are empty ■Easier credit conditions mean benefits of loose monetary policy feeds through to a stronger housing and consumer recovery Financial sector recovery Outlook still highly uncertain Renewed global boom ■Strong corporate liquidity feeds into new investment boom ■Faster growth boosts business and consumer confidence, and trade multiplier magnifies upturn ■Bank balance sheets improve quickly and credit growth resumes ■Strong growth boosts tax revenues/cuts social security payments, helping fiscal consolidation Oxford forecast ■Gradual rise in business confidence encourages corporates to invest ■But weak banks combined with excess capacity limit scale of investment recovery ■Consumer spending recovery limited by pace of job growth and fiscal retrenchment ■But recovery strong enough that fiscal crisis remains contained

67. Corporate recovery Renewed crisis ■Threat of double-dip means renewed slump in asset prices as Eurozone sovereign debt crisis re-emerges ■Pressure to cut budget deficits rapidly in all major economies ■Rising unemployment and business failures feed back into banking ■Limited scope for monetary policy offset Sub-par recovery ■Business optimism remains low and corporates continue to hoard cash ■Investment and job growth is modest as capacity is underutilised ■Monetary policy supports banking sector but fiscal coffers are empty ■Easier credit conditions mean benefits of loose monetary policy feeds through to a stronger housing and consumer recovery Financial sector recovery Outlook still highly uncertain Renewed global boom ■Strong corporate liquidity feeds into new investment boom ■Faster growth boosts business and consumer confidence, and trade multiplier magnifies upturn ■Bank balance sheets improve quickly and credit growth resumes ■Strong growth boosts tax revenues/cuts social security payments, helping fiscal consolidation Oxford forecast ■Gradual rise in business confidence encourages corporates to invest ■But weak banks combined with excess capacity limit scale of investment recovery ■Consumer spending recovery limited by pace of job growth and fiscal retrenchment ■But recovery strong enough that fiscal crisis remains contained

68. Eurozone sovereign debt crisis

70. Global Financial Crisis

71. Industrial outlook

72. …

73. …

74. Aerospace orders now below deliveries Investment outlook

75. Global investment patterns - 2009 Investment outlook

76. Motor Vehicle Investment Investment outlook

77. General machinery output and investment Investment outlook

78. Special Purpose Machinery – output and investment Investment outlook

79. Forecast for the US Machine tools sales

80. Forecast for Japan Machine tools sales

81. Forecast for Germany Machine tools sales

82. Forecast for China Machine tools sales

83. Percentage of global sales 2010 Machine tool sales

84. Percentage of global sales – 2014 Machine tool sales

85. Oxford Economics forecast

86. Sharp decline followed by big rebound US orders

87. Orders growth will slow next year US orders

88. Quarterly USMTC orders forecast… US orders

89. General regional rebound in 2010

90. Very different story with forming orders

91. Conclusions Policy stimulus, turn in inventory cycle and rebound in world trade drove strong recovery Global economic recovery should continue but there are growing downside risks Machine tool orders up sharply from lows. Sales have so far been more subdued but these should now start to pick up. MT sales are forecast to rebound sharply over the next few years in both developed and emerging markets Strong rebound in developed economy markets follows very deep recession but focus of global MT market still increasingly moving toward emerging economies

92. US orders