Michala Marcussen

Cheføkonom i Société Générale

Verdensøkonomien og den europæiske gældskrise

GLOBAL OUTLOOK

NEW PARADIGM

May 2012

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DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.

Michala Marcussen, CFA

Global Head of Economics

+44.20.7676.7813

michala.marcussen@sgcib.com

3 May 2012

SLOWEST POST-WAR RECOVERY ON RECORD…

Source: DataStream, NBER, SG Cross Asset Research/Economics

90

95

100

105

110

115

120

125

0 1 2 3 4 5 6 7 8 9

Years

United States: GDP per capita, Cycle peak = 100

Average post-war cycle Current Peak=Q4.07 SGf

4 May 2012

… ACROSS THE ADVANCED ECONOMIES

Source: DataStream, SG Cross Asset Research/Economics

70

75

80

85

90

95

100

105

110

115U

nite

d

Sta

tes

Ja

pa

n

Unite

d

Kin

gd

om

De

nm

ark

Euro

are

a

Ge

rma

ny

Fra

nce

Italy

Sp

ain

Po

rtug

al

Gre

ece

Ire

land

GDP per capita, 2007=100

2011 2016

5 May 2012

STRUCTURAL SHIFT: TIME TO DELEVERAGE!

Source: OECD, IMF, Eurostat, European Commission, BIS, SG Cross Asset Research / Economics

*Ireland : 2002 vs 2011 **Austria : 1988 vs 2011 ***Canada : 1980 vs 2010 ****Australia : 1989 vs 2010

0

100

200

300

400

500

1980 debt vs. 2011 debt

Non financial corpo 1980 Households 1980 General government 1980

Non financial corpo 2011 Households 2011 General government 2011

1980 2011

6 May 2012

STRUCTURAL SHIFT: NEW DRIVERS OF DEMAND AND SUPPLY

Asian consumers

Factors expected to act on supply Factors expected to act on demand

Output

Pri

ce

New Technologies

From

monetary policy

dominance

to

fiscal policy

dominance

EM deregulation

Urbanization

Ageing populations

Deleveraging

Higher cost of capital

Structural reform

7 May 2012

BACK TO CREDIT DRIVEN MARKETS

Source: DataStream, SG Cross Asset Research/Economics

0

2

4

6

8

10

12

Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

10Y Benchmark Bond Yield

Germany France Italy Spain

8 May 2012

EURO AREA: MAKING ALL THE WHEELS TURN THE RIGHT WAY

Debt Deleveraging

New European

House

Economic Growth

Source: SG Cross Asset Research/Economics

9 May 2012

-2

0

2

4

6

8

10

12

14

16

18

GDP impact of meeting Fiscal Compact

targets, %GDP

Adjustment to meet Fiscal Compact targets,

%GDP

EURO AREA: LARGE FISCAL ADJUSTMENTS REQUIRED …

… WITH A POTENTIALLY HIGH PRICE TAG ON GROWTH

Source: EU Commission, SG Cross Asset Research/Economics

10 May 2012

EURO AREA: AMPLE ROOM FOR STRUCTURAL REFORM

0

2

4

6

8

10

12

14

16

18

Impact of aligning structural variables

to OECD average when above

After 1 year

After 3 years

After 5 years

After 10 years

Source: OECD, SG cross Asset Research/Economics

%GDP per capita

11 May 2012

EURO AREA: A NEW DEBATE ON INFRASTRUCTURE SPENDING

Structural funds

• 2007-13 : just under €350bn

EIB

• Proposal to raise capital by €10bn to raise lending capacity to €180bn

Project bonds

• Could amount to €1.5-2.0tn out to 2020

12 May 2012

EUROPE’S NEW HOUSE IS STILL A CONSTRUCTION SITE

CACs

in 2013

Europe

2020

ECB

3Y LTRO

EFSF (May

2010) & EFSM

ECB

SMP

ECB

1Y LTRO

Source: EU Commission, EFSF, EBA, SG Cross Asset Research / Economics

Europe is building a new framework based on three pillars; (1) economic governance and policy co-ordination, (2) crisis management and (3) financial stability. Dark red indicates

the facility is operational, light red soon to be finalised, white elements in very early stages but we expect will come (ultimately). Measures indicated black relate to ECB action.

ESFS

(started Jan. 2011)

CT1 of 9%

1st Greek programme - Bilateral

loans

European Semester (Started Jan. 2011)

Euro+ Pact (Mar. 2011)

National financial supervisors

Economic governance

and policy coordinationStability mechanisms Financial stability

ESM

(effective July 1, 2012)

E-bond ?November 2011, EU Commission published proposal on

Stability bonds.

EFSF

PRP & CIF (Oct. 2011)

"Six Pack"

(Effective Dec-13, 2011)

European bank

bail-out fund ?

Treaty on Stability, Coordination and Governance

(TSCG)

Europe's New House

13 May 2012

US: HOUSEHOLD DEBT DECLINING SLOWLY … MORE TO COME

Source: Global Insight, SG Cross Asset Research/Economics

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

50

60

70

80

90

100

110

120

130

140

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Household Debt, % of Disp. Income (LHS)

Debt Service, % of Disp. Pers. Income (RHS)

Decline in debt burden due to debt reduction

Decline in debt burden due to other factors (lower interest rates, lower taxes)

14 May 2012

US: FISCAL POLICY BECOMES A WILDCARD IN 2013

Source: CBO,SG Cross Asset Research/Economics

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1980 1990 2000 2010 2020

Current law

Current policy

SG Baseline

Obama Budget

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1970 1980 1990 2000 2010 2020

Current law

Current policy

SG Baseline

Obama Budget

Deficit, % of GDP Debt, % of GDP

15 May 2012

CHINA’S DEBT ADDICTION

Source: CEIC, ADB, NAO, SG Cross Asset Research / Economics

China’s debt by sector A cross-country comparison

16 May 2012

CHINA: REBALANCING IS NOT A CHOICE

Source: World Bank, CEIC, IMF, SG Cross Asset Research / Economics

0%

10%

20%

30%

40%

50%Investment, as % of GDP

China (T=2007)

Japan (T=1969)

Korea (T=1988)

0

2

4

6

8

10

12

14

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49

China (1985-2010)

Germany (1960-2010)

Japan (1960-2010)

Export share (% of world total)

17 May 2012

CONCLUSION: A DECADE OF WEAKER GROWTH, BUT NOT WITHOUT OPPORTUNITIES

Europe: Building a new house … it will take time!

• Privatisation

• Infrastructure

• New energy

US: A fiscal adjustment to

come

• Infrastructure

• New energy

China: from “producer” to “consumer”

• New consumers

• New energy

A structural shift in the global economy: It’s time to deleverage

18 May 2012

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