The Village View

Wednesday, March 04, 2009

EIU Global Outlook 2009 - what a downer

Yesterday, I attend the Economist Intelligence Unit event "Global Outlook 2009: What lies ahead for the global economy." Below are a few notes based on diligent typing by my colleague Jeff Winter. The comments by the speaker were interesting. However, combining yesterday's talk with the book I'm currently reading ("Contagion: The Financial Epidemic That is Sweeping the Global Economy... and How to Protect Yourself from It")is really bumming me out. Oh, and don't even ask me what I bought Citibank at. :(

Government action has been significant
Slump will bottom out in late 2009, with meaningful growth in 2010-11
There are opportunities
Cheap assets
Some industries will do well: Health, basic foods, education, infrastructure 

How long will the recession last? 
No guarantees, of course, but this quarter may be the bottom, next quarter a touch better, and modest recovery begins towards end of year (Bernanke agrees)
No meaningful recovery until 2010-11
FYI – EIU is suspicion of US predictions of 4% GDP growth in Obama's budget
Housing is key. When housing prices recover, so will the economy
US, UK Japan expected to decline 2.5 – 5% GDP in 2009
Very aggressive stimulus across the globe (US stimulus is 5.7% of GDP; China’s is approaching 15%!)

Interesting facts
Global recession - First time since 1930s that total global output contracts
Banks will take longer than rest of economy to recover (balance sheet adjustments take years to fix)
Housing pricing are falling at an accelerating rate for 21 months (i.e. each month, prices are falling at a faster rate the month before) 
Consumer spending is 70% of US economy…recovery won’t happened until consumers return > savings rate has sky-rocketed, hindering recovery 

Three crises, feeding on themselves 
Financial crisis – leverage, bank write-downs, credit freeze
Developed world recession – withdrawal of credit, spending and investment decline
Emerging market crunch – significant drop, but emerging markets still growing (e.g. China @6% GDP)
- I asked a follow up question about outlook for Mexico/Brazil. Didn't get as much expansion on this subject as I would like. However, Mexico with it's severe dependency on the US is likely going to get hit harder than Brazil. He thought Brazil's financial sector was in relatively decent shape.

Two groups
Debtor nations – have to sell assets to pay down debt…prevents recovery (Uh, this is us, er US)
Creditor nations – have no export markets 

Vulnerability potential…Note – this is NOT a prediction, but rather a risk
Slower growth > production slows > workers idled / layoffs > profits squeezed > bad loans increase (much borrowing from China) > banks struggle (similar to US?) > SOCIAL UNREST 

Back in recession…GDP contracted 12% n Q4!  5.5% contraction predicted for 2009
Japan’s biggest issue is lack of export markets
Risk of deflation – Japan more like Germany than US

Emerging markets
Hurting, but better than off than developed nations
Three issues
Reduced exports
Less inward investment from rich nations (FDI)
More difficult for indebted nations to borrow
Full blown crisis
UK hit hardest
Industrial production and housing market 

How are businesses reacting?
Strategic acquisitions (if you have money, assets are cheap)
Increased response to key accounts is by far #1 response in survey
Much more focus on risk – organizationally, more reports, investments
Off-shoring – China and India still most popular place