Macroeconomic Outlook · • Decouplings in the global economy will continue, both growth and policy wise • Oil prices will remain high and volatile • Outlook for the US has improved,

Macroeconomic OutlookJoaquin Vial, Chief Economist South America, BBVA Research

CRU’s 10th World Copper Conference

Santiago, April 5, 2011

CRU’s 10th World Copper Conference/ April 2011

2

Recovery, but plenty of risks too

• Decouplings in the global economy will continue, both growth and policy wise

• Oil prices will remain high and volatile

• Outlook for the US has improved, but a fiscal adjustment is needed.

• Institutional and economic reforms in Europewill likely be partial.

• Asia and Latin America will continue growing strongly. Overheating risks have increased

• In the long run, the crisis will dent potential growth in advanced economies. Most Emerging markets will come out relatively unscathed.

Overheating in Asia, LatAm

Probability

Hig

her

Low

er

Global ImpactLow Medium High

Short run

Financial tensions in

Europe

Medium run

Long run

Spike in long rates in the US

Taxonomy of Economic Risks

Oil prices

Baseline Scenario


3

1 Exiting the great recession: decouplings and global shocks

2 Global Outlook and Copper Markets

3 Developed Markets look somewhat better

4 Emerging economies on track for a controlled slowdown

5 The long run and the potential of emerging countries

Outline


4

Decouplings and global shocks

7580859095

100105110115120125130135

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

World Advanced Econ.

Emerging Econ. Em. Asia

Latam

After the synchronized hit of the crisis, advanced and emerging economies have been exiting at very different paces

Industrial production (Index Jan 2008=100)Source: BBVA Research and CPB

Exports (Index Jan 2008=100)Fuente: BBVA Research and CPB

7580859095

100105110115120125130135

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

World Advanced Econ.Emerging Econ. Em. Asia

Latam


5

Decouplings and global shocksThe outlook is for continued strong global growth with many decouplings: emerging/advanced, US/EMU, and within EMU

Contributions to GDP growth (%)Source: BBVA Research

GDP growth forecasts (%)Source: BBVA Research

-3-2-10123456

2007 2008 2009 2010 2011 (f) 2012 (f)

Rest of the World EmergingMarketsOther Adv. Economies EurozoneUSA World Growth

0

3

6

9

12

US EMU LatAm7 Turkey China EmergingAsia excChina

EAGLES©

2010 2011 2012


6

Diverging growth leads to a decoupling of fiscal and (especially) monetary policies

Policy interest rate hikes expected during 2011 (percentage points)Source: BBVA Research


0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00

USA EMU

MEX MAL

PHL

TWN

CHN

IDN

IND

THA

KOR VIE

BRA

COL

PER

CHI

TUR

ARG

HKG

Asia

SouthAmerica


7

Geopolitical scenarios for the MENA region are highly uncertain, and fallout on oil markets depends on many unknowns


Libya conflict likely draws out

Algeria fall of Gaddafi increases probab. of unrest

Iran

lower protests, efficient repression

already int'lly isolated

Saudi Arabia

Bahrein as proxy war Iran-Saudi Arabia (sunni-shia)

Resources to buyout protesters

Shiites are minority population, not present in security forces

Oil facilit ies isolated from population

OPEC likely spare capacity

Heat map of unrest in MENA oil producing countries(height of boxes proportional to oil production on Dec. 2010)Source: BBVA Research

Effect on oil markets depending on:

• True extent of reduction in production

• True level of OPEC spare capacity• OPEC (Saudi Arabia) possible new

target price• Willingness of OECD countries to

use strategic oil reserves• Lingering geopolitical risk

premium


8

The recovery risks being derailed by an oil shock, especially inadvanced economies. Contrary to 2004-2010, recent price spike derives from a negative supply shock, potentially more damaging to growth.

Oil prices in real terms Fuente: BBVA Research

Effect on 2011 growth of oil prices sustained at 130 USD Source: BBVA Research and OEF


0

20

40

60

80

100

120

140

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Nominal pricePrice in dollars of 2010

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0USA EMU LatAm Turkey Em. Asia


9


2 Global Outlook and copper markets




Outline


10

• Large shifts in copper use at the global level, as a consequence of shifts in industrial capacity localization• China and other Developing countries is Asia are the main sources of demand growth• However, we know very little about the relative origin of final demand for copper• Evidence from the crisis suggests that Asia has become the critical final consumer of copper.

Global Outlook and copper

Copper Use by regions

02000400060008000

1000012000140001600018000

60-7

0

80-9

0

2000

-10

North America Europe Japan China Other Asia Rest

Source: Cochilco, WBMS Contributions to increases in copper use

-10%0%

10%20%30%40%50%60%

Nor

thAm

eric

a

Euro

pe

Japa

n

Chi

na

Oth

erAs

ia

Res

t

80-90 2000-10

Source: Cochilco, WBMS:


11

• GDP growth is strongly correlated with copper consumption in key Emerging Countries.• Not so much in the US, Europe and other declining copper users.• Intensity of use in all major players has already peaked out and is descending, with the exception of China

Global Outlook and copper

Declining Users of Copper

0,0000,2000,4000,6000,8001,0001,2001,4001,6001,8002,000

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

Australia Begium Canada USA France

UK Japan Finland Russia

Source: Cochilco, WBMS, IMF: Rising Users of Copper

0,0000,2000,4000,6000,8001,0001,2001,4001,6001,800

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

China Korea Mexico Taiw an Turkey

Source: Cochilco, WBMS, IMF:


12






Outline


13

Data confirms a low probability of a double dip in the US, as fiscal and monetary policy continue supporting growth. Risks are roughly balanced

US: Business confidenceSource: BBVA Research and Haver Analytics

Brighter outlook in the US

42.0

44.0

46.048.0

50.0

52.0

54.0

56.058.0

60.0

62.0

May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11

US: unemployment rateSource: BBVA Research and Bureau of Labor Statistics

0

2

4

6

8

10

12

71 74 77 80 83 86 89 92 95 98 01 04 07 10 13

Unemployment Rate NAIRU


14

But some cyclical vulnerabilities remain… and long-term fiscal risks emerge.

Brighter outlook in the US

( )

0102030405060708090

100

2007 2008 2009 2010 2011 2012 2013 2014 2015

US EMU

Public Debt in US and EMU (% GDP)Source : BBVA Research and CBO

-11-10-9-8-7-6-5-4-3-2-10

2008 2009 2010 2011 2012 2013 2014 2015

US Deficits projected on August 2010US Deficits projected on Jan 2011EMU deficit

US and EMU public deficits (% of GDP)Source: BBVA Research and CBO


15

A window of opportunity in EuropeIn the fourth quarter of 2011, financial tensions surged again in Europe. Possibility of actions by European authorities reduced stress and opened up a window of opportunity that is closing fast

Sovereign CDS differentials against GermanySource: BBVA Research and Bloomberg

0

100

200

300

400

500

600

700

Nov-10 Dec-10 Jan-11 Feb-11 Mar-110

100

200

300

400

500

600

700

Ireland Italy Spain Portugal Belgium

EMU: Growth forecasts(GDP growth rates, y-o-y)Source: BBVA Research

-5-4-3-2-101234

EMU GER FRA ITA SPA IRL POR GRE

2010 e 2011 (f)


16






Outline


17

EMEs: controlled slowdownIncrease in commodity prices and buoyant domestic demand raise risk of overheating in Asia. The baseline scenario is one of controlled deceleration.

Inflation (%, y-o-y)Source: BBVA Research and Datastream

-3-2-1012345678

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

China LatAm7Emerging Asia (ex China & India) USEMU

China: Contributions to GDP growthSource: BBVA Research and CEIC

-10

-5

0

5

10

15

T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4

2007 2008 2009 2010

-10

-5

0

5

10

15

Net ExportsInvestmentConsumptionGDP Growth


18

EMEs: controlled slowdownStrong recovery in Asia meets inflation threat • Strong domestic demand (investment) and a recovery in industrial exports led Asian growth.• Inflationary pressures come mostly from imported raw materials, oil and food.• Global capacity growth of natural resources based products has problems to keep up with strong Asian

growth.

After a strong rebound, GDP growth is moderatingSource: CEIC and BBVA Research

Export performance remains robust, despite signs of a slowdownSource: CEIC and BBVA Research

-10

-5

0

5

10

15

20

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

-10

-5

0

5

10

15

20

Hong Kong India IndonesiaKorea Singapore TaiwanChina

YoY% YoY%

50

70

90

110

130

150

170

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

50

70

90

110

130

150

170

India Indonesia KoreaSingapore Taiwan Australia

Jan 2008=100 Jan 2008=100


19

EMEs: controlled slowdownLatam will converge to potential growth, with growing external deficits. • Growth will continue to be supported by domestic demand, after strong readings in 2010.• High growth and commodity prices have increased public revenues, but expenditure has not adjusted as

expected.• High commodity prices have only partially compensated the pressure of strong domestic demand on

imports. External deficits will continue growing.

Contributions to Latam growth (% annual)Source: BBVA Research

Latam: Fiscal and external balance (% GDP)Source: BBVA Research

-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.06.07.0

2008 2009 2010 2011* 2012*

Small (Pan, Par and Uru)Pacific Trio (Chi, Col and Per)Heterodox (Arg and Ven)Giants (Bra and Mex)GDP % y/y -3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

2008 2009 2010 2011 2012

Current Account Fiscal Balance


20






Outline


21

Rising Middle Classes will be key EAGLES hold the key for markets growth • Fast growth, large and growing populations will translate into higher absolute GDP growth.• But there is also a “non-linear” effect: large numbers of people will leave poverty and will begin

purchasing durables, houses, cars as they surpass some critical thresholds.• In China alone we expect about 180 million additional people will cross that threshold by 2020

3.4

8.5

10.09.0

5.7

27.3

7.8

2.1

14.0

0

10

20

30

40

50

BRA EGY

IDN

IND

KOR

MEX

RUS

TUR

TW

N

Millones de personas en 2010 Variación absoluta, 2010 a 2020

3.2

0.0

2.5

3.8

1.92.9

2.4

8.4

3.7

1.0

4.6

0

10

20

30

40

50

ARG

BGD

CO

L

MY

S

NG

A

PER

PHL

POL

THA

VN

M

ZAF

Millones de personas en 2010 Variación absoluta, 2010 a 2020

Size of population with income higher or equal than middle-income (millions)Source: BBVA Research

EAGLES EAGLES’ Nest


22

Rising Middle Classes will be key EAGLES hold the key for the copper market as well • China will remain the critical market for copper use in this decade…• Followed by the other EAGLES,• While the Developed Economies keep losing ground in relative terms.• Looking into the longer term we have to bear in mind the demographic prospects: Chine will be gradually

replaced as the pool of surplus rural labor is exhausted and the absolute number of working age population becomes a constraint for further growth.

World Copper use by regions

0

5.000

10.000

15.000

20.000

25.000

30.000

2000

2010

2020

China Other Eagles Rest Developing Developed

Source:BBVA Research, WBMS


23

Main messages• The global economy will continue growing strongly but also decoupling, both growth and

policy wise; between advanced and emerging economies; between the US and EMU, and within EMU.

• The incipient oil shock will risk derailing the recovery in advanced economies if it is permanent.

• US will continue growing more strongly than Europe. Outlook for the US has improved, but a fiscal adjustment is needed to avoid a sharp reaction by financial markets.

• Institutional and economic reforms in Europe will be crucial to solve the financial crisis. It is imperative that Europe takes advantage of a window of opportunity that is closing fast.

• Asia and Latin America will continue growing strongly, on track for a mild slowdown. However, overheating risks have increased, as domestic demand is growing too fast, and capital flows could return attracted by higher interest rates.

• In the long run, the EAGLES hold the key for copper market expansion, since high growth and a large and growing population will combine to produce a non linear expansion of purchasing power of durables.

• China will not lead forever: unfavorable demography will begin exerting a toll..

Macroeconomic OutlookJoaquin Vial, Chief Economist South America, BBVA Research

CRU’s 10th World Copper Conference

Santiago, April 5, 2011

For our latest forecast summary go to our English language website:

http://serviciodeestudios.bbva.com/KETD/ketd/ing/index.jsp

http://serviciodeestudios.bbva.com/KETD/ketd/ing/index.jsp


25

Forecast summary US


26

Forecast summary Europe


27

Forecast Summary Emerging Asia


28

Forecast summary LATAM

Documents

Macroeconomic Outlook · • Decouplings in the global economy will continue, both growth and policy wise • Oil prices will remain high and volatile • Outlook for the US has improved,