What are the implications for public policy & business?

What are the implications for public policy & business?

18 March 2010

John WalkerOxford Economics [email protected]

US:Current cycle vs previous cycles

7


8


9

Issues

What form will regulation of financial sector take?

What will nonfinancial companies do? M&A or invest

And how much consumer retrenchment?

Can political structures cope with large public sector deficits?

Will global imbalances lead to protectionism. Or will we see more exchange rate adjustment?

China is more vulnerable than many realise because it has a debt problem too

What did banks do?

Banks would normally be wary of lending to someone whose liabilities were fifty times their net assets but they happily lent to each other on that basis – until, one day, they stopped

40

50

60

70

80

90

100

110

120

130

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

US: Sectoral indebtedness% of GDP

Source : Oxford Economics/Haver Analytics

Consumer

Non financial business

Domestic financial sector

What does not need to happen

Controls on hedge funds etc

Limits on bonuses etc

A ban on naked CDSs etc

A long-term tax on banks

What does need to happen

Regulations that enable non-financial companies, consumers and governments to be insulated from a financial crisis.

And there area number of ways to achieve that

A year ago we proposed separating the utility function of banks from other activities

And we still think that is the most reliable way of succeeding as well as being something that many in finance should support

But unlikely to happen!

Likely to see much more messy structures that will differ across regions. Nothing on a global scale

Section 2: What will companies do? Investment or M&A and how much?

What will companies do? The new normal?

Partial retreat from supply chain dispersion because of rising transport costs, worries about intellectual property?

Networks rather than hierarchies?

More cautious financial sector limits structural changes

US company debt not high

40

50

60

70

80

90

100

110

120

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Non-financial corporate sector debt% of GDP


US

UK

Eurozone

Sectoral balances

-15

-10

-5

0

5

10

1980 1985 1990 1995 2000 2005

US: Sectoral balances% of GDP


Current account

Public sector

Private sector

-15

-10

-5

0

5

10

1980 1985 1990 1995 2000 2005

UK: Sectoral balances% of GDP


Current account

Public sector

Private sector

Private sector balances

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005

US: Private sector financial balances% of GDP


Personalsector

Company sector

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005

UK: Private sector financial balances% of GDP


Personalsector

Company sector

Company sector balances

-6

-4

-2

0

2

4

6

8

1980 1985 1990 1995 2000 2005

UK: Company sector financial balances% of GDP


Non-financial

Financial

-6

-4

-2

0

2

4

6

8

1980 1985 1990 1995 2000 2005

US: Company sector financial balances% of GDP


Non-financial

Financial

Many companies very cash rich

-5

-4

-3

-2

-1

0

1

2

3

4

5

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Non-financial corporate sector financial flowsNet acquisition of financial assets*,% of GDP


US

UK

Eurozone

* UK & Eurozone are 4-quarter moving averages

So US manufacturing on the mend

23

Section 3 What will consumers do? And why the US is a special case?

Wealth not recovered

25

US household savings still low

-2

0

2

4

6

8

10

12

14

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Household savings ratio% disposable income


Eurozone

UK

US

Savings and housing investment

0

1

2

3

4

5

6

7

8

9

10

1987 1990 1993 1996 1999 2002 2005 2008

US: Savings & investment


% of GDP

Savings

Investment

0

1

2

3

4

5

6

7

8

9

10

1987 1990 1993 1996 1999 2002 2005 2008

UK: Savings & investment% of GDP


Savings

Investment

Section 4 Ways of dealing with public sector deficits: a lack of political consensus?

-12

-10

-8

-6

-4

-2

0

2

4

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

50

55

60

65

70

75

80

85

90

95

Source: Oxford Economics

% of GDP

Debt position(RHS)

Government budget(LHS)

US: Government balance and debt% of GDP

Forecast

-6

-5

-4

-3

-2

-1

0

1987 1991 1995 1999 2003 2007 2011

0

10

20

30

40

50

60

70

80

90

Eurozone*: Government balance and debt

% of GDP

Source : Oxford Economics

Debt position (RHS )

Government budget (LHS )

% of GDP

*Includes Germany, France, Italy and Spain

Forecast

-10

-8

-6

-4

-2

0

2

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

30

35

40

45

50

55

60

65

70

75

80% of GDP % of GDP


UK: Government balance and debt

Government budget (LHS)

Debt (RHS)

Forecast

Section 5 Global imbalances have not gone away and will dominate policy between many countries

Italy( -2.4)

Spain (-10.0)

US (-5.2)

UK (-2.7)

Australia (6.1)

Greece (-14.5)

Turkey (-6.0)

France (-1.0)

Portugal(-9.5)

India (-0.7)

China (10.1)

Malaysia (15.7)

Taiwan (8.4)Switzerland

(8.9)

Sweden (8.8)

Singapore (27.9)

Netherlands (8.7)

Exporters of Oil (10.9)

Germany (8.0)

Japan (4.9)

-600 -400 -200 0 200 400 600

Current account balances for 2007

US$ bn (% of GDP in brackets)Source: Oxford Economics

726.5

Australia (-4.2)

Spain (-5.0)

US (-3.1)

Italy( -3.2)

France (-2.0)

Greece (-11.2)

India (-2.5)

UK (-1.4)

Portugal(-10.3)

Turkey (-2.2)

China (5.7)

Switzerland (6.0)

Malaysia (17.2)

Sweden (8.2)

Singapore (19.1)

Taiwan (11.3)

Netherlands (5.4)


Germany (5.1)

Japan (2.8)

-400 -200 0 200 400

Current account balances forecast for 2009


439.5

Australia( -4.2)

France (-2.3)

US (-3.5)

Italy( -2.8)

India (-3.5)

UK (-1.7)

Spain (-2.6)

Turkey (-4.3)

Greece (-9.2)

Portugal(-9.3)


Taiwan (6.7)

Sweden (6.7)

Malaysia (14.9)Singapore

(18.0)Netherlands

(5.2)

Switzerland (10.3)

China (5.2)

Japan (3.8)

Germany (5.2)

-600 -500 -400 -300 -200 -100 0 100 200 300 400 500 600

555.0

Current account balances forecast for 2011


Inflows from Rest of world played a part in crisis

-1

0

1

2

3

4

5

6

7

8

9

10

1984 1987 1990 1993 1996 1999 2002 2005 2008

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

US: Capital inflows and long-term rates%


Official flows into US assets (RHS)

US real 10-year rates (LHS)

% of GDP

The private sector is now in surplus everywhere

-15

-10

-5

0

5

10

15

Neth Germany Austria Eurozone Ireland Greece Spain

Private balanceCapital accountGeneral government financial balance

% of GDP

Source: OECD

Sectoral financial balances in the Eurozone in 2006

-15

-10

-5

0

5

10

15

Neth Germany Austria Eurozone Ireland Greece Spain

Private balanceCapital accountGeneral government financial balance

% of GDP

Source: OECD

Sectoral financial balances in the Eurozone in 2009

Will the rise in the renminbe be enough?

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

US$


Forecast

China: Exchange rate

US Dollar

39

80

90

100

110

120

130

140

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Source:Haver Analytics

Euro(RHS)

US: Exchange rates

Yen(LHS)Yen/US$

Broad effective exchange rate(LHS)1997=100

1997=100, Yen/US$ US$/€

Section 6 China: another case of debt levels being too high?

Chinese and Japanese growth strategies

Japan’s growth strategy in late 1960s

China’s growth strategy in early 2000s

Exchange rate Fixed at Yen360/$ and not changed since 1950

Fixed at Rmb8.3/$ in 1997 and has been stable since (except for 2005-8)

Current account Surplus in 1969-72 of 1.7% of GDP

Surplus in 2004-08 of 8% of GDP

Gross capital formation

37.5% of GDP in 1969-72

Over 50% of GDP in 2004-08

Industry value added

40.3% of GDP in 1969-72

Nearly 50% of GDP in 2004-08

Is Chinese credit growth too fast?

0

5

10

15

20

25

30

35

40

45

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

% year

Source: Haver Analytics

China: Bank lending & nominal GDP

Bank lendingNominal GDP

Japanese and Chinese corporate debt

70

80

90

100

110

120

130

140

150

1997 1999 2001 2003 2005 2007 2009

Non financial corporate debt% of GDP

Source: Oxford Economics/CEIC/Haver Analytics

China

Japan

Summary

Balance sheets and debt are at the root of the crisis and remain an issue for both finance and now governments

Companies are cash rich and will start to invest and to begin a new round of M&A soon but will remain cautious for some time

Consumers will continue to retrench but in US reform of lending laws will be critical

Imbalances are more of a problem with fixed exchange rates

China may be more vulnerable than many realise and once again debt could be the issue

Thankyou

Households savings

0

5

10

15

20

25

30

35

40

1992 1994 1996 1998 2000 2002 2004 2006 2008

China: Savings ratio

Source: CEIC, Oxford Economics' estimates

%

Share of corporate profits is high

20

25

30

35

40

45

50

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007


% of GDP

China : Corporate profits

Labor costs very low

0

5

10

15

20

25

30

35

40

45

Germany EU US UK Japan Korea China


Hourly labour costs in manufacturing

US$

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

0

2

4

6

8

10

12

14

16

18


% of GDP

Debt position(RHS)

Government budget(LHS)

China: Government balance and debt% of GDP

Forecast

…leads to lower private savings in long run

-6

-3

0

3

6

9

12

15

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

% of GDP

F'cast


China: Sectoral balances

Currentaccount

Publicsector

Private sector

US/Europe

-4

-2

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Eurozone: Bank lending to the private sector% year


Total

Households

Non-financial corporations

US/Europe

-20

-15

-10

-5

0

5

10

15

20

25

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

US: Bank lending to the private sectorAmounts outstanding, % year


Commercial & Industrial

Consumer

Documents

What are the implications for public policy & business?