Dougie Adams Oxford Economics

A Two-speed Global Economy Dougie Adams dadams@oxfordeconomics.com January 2011

Key points 2010 saw a marked global recovery Expect continued corporate-driven recovery in 2011 but there are major uncertainties, including New pressures emerging from inflation and austerity Global imbalances Eurozone debt crisis Production levels remain below peak levels with some slackening of momentum evident Forecast 25% growth in USMTC orders in 2011 after nearly 80% growth in 2010 2011 orders still 10-12% below 2007 and 2008 levels

World growth – better than expected Growth has been better than expected at a world level – perhaps +1% compared with expectations a year ago Developed world lagging; US recovery too weak to make real inroads to unemployment Emerging markets growing fast, though took a hit through the recession Worries – there are always plenty – include trade tensions; the impact of US policy – QE – on the $ and money flows to the emerging markets. Many emerging markets with fixed exchange rates to the $ effectively adopt US monetary policy. Too loose for them sparking inflation / tightening fears Forecast growth contingent on a path through the European sovereign debt crisis and further out a rebalancing of trade and the US economy.

Revisions to Oxford Economics forecasts (GDP; percentage changes) 2010 2011 2012 January 2010 USA 3.2 3.0 3.2 Eurozone 1.1 1.5 2.1 China 9.5 9.0 9.0 January 2011 USA 2.9 3.2 3.5 Eurozone 1.7 1.5 1.7 China 10.1 9.2 9.1 Differences USA -0.3 0.2 0.3 Eurozone 0.6 -0.4 China 0.6 0.2 0.1

2010 growth beating earlier expectations… C:\my documents\ICT\NewICTcharts.xls

Paced by emerging markets

Emergers – post recession bounce giving way to sustained growth E:\oefcom\On-Line Services\CountrySpecific\Emerging\Macro\SecureArea\emweekly\

Subdued recovery for the developed economies

US a lacklustre recovery

Japan – suffering from yen appreciation From Adam

German economic renaissance

The major uncertainties Commodity prices and emerging market inflation? Too much fiscal tightness in Europe? Too much fiscal ease in the US? The bursting of the Chinese bubble? Persistent imbalances What will happen to the Euro? What will happen to the US-China relationship?

Two-speed world economy… D:\NewChart\One Offs\World Trade.xls

…impacting commodity prices Andy Goodwin Item charts

…leading to food price pressures in the emergers E:\oefcom\On-Line Services\CountrySpecific\Emerging\Macro\SecureArea\emweekly\food prices1.xls

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?

…Yuan is expected to slowly appreciate against $ ChinaForecastCharts ‘RXD & RSH’

Worrying that trade imbalances widening again World Forecast charts BCU - US,Jap,EU,china,OPEC

Eurozone – PIGS under pressure From Paolo

Tough to keep up with the Germans Euro From Adam

What if the unthinkable happens in the Eurozone?

Recovery – the pluses and minuses Corporates cash rich Employment gains Confidence rebuilding Recovering household wealth Interest rates remain low Low levels of investment through crisis Strength of emergers Access to finance still an issue High unemployment Consumer confidence still low Rising commodity prices and taxes Fiscal retrenchment ex-US Excess capacity o Tightening policy & rising exchange rates in emergers = Continuing modest recovery for developed economies

Corporates have hoarded cash WHC

The beginnings of employment recovery D:\NewChart\World\Forecast\WorldForecastCharts.xls ‘World Unemployment (UPILO)

Consumers still burdened with debt

…with a long period of austerity to come for many…

…but rates remain very low

Bigger than usual investment bust over recession JNJUNPPT.xls and OverhistoricalChartsjn.xls

Oxford Economics forecast

Marked cyclical rebound underway across sectors… C:\my documents\ICT\NewICTcharts.xls

…but production still well below peak levels… C:\my documents\ICT\NewICTcharts.xls

Growth slowed in latest quarter D:\IIS_Presn\Presentations\June10\jnjun10ptt.xls “recent history broad2”

…as this recovery proves lengthier than in earlier cycles… C:\my documents\ICT\NewICTcharts.xls

Car production matching sales in recent months D:\IIS_Chart\Cars\Historical\carshistoricalcharts (move on manually)

Customer sectors continue to grow globally

…and across sectors

Growth mostly quicker in US customer sectors

Orders are picking up D:\IIS_Presn\Presentations\June10\jnjun10ptt.xls “Capital goods orders 3mma”

Short term outlook for investment goods D:\IIS_Presn\Presentations\June10\jnjun10ptt.xls “Investment Goods ST”

Forecast for the US Machine tools sales E:\Projects\AMT\Charts & Tables\Forecastcharts.xls Machine tools sales

Forecast for Japan Machine tools sales E:\Projects\AMT\Charts & Tables\Forecastcharts.xls Machine tools sales

Forecast for Germany Machine tools sales E:\Projects\AMT\Charts & Tables\Forecastcharts.xls Machine tools sales

Forecast for China Machine tools sales E:\Projects\AMT\Charts & Tables\Forecastcharts.xls Machine tools sales

Quarterly USMTC orders forecast… US orders

More growth to come in 2010 across the regions

Forming returning to generalised growth too

Long term outlook for investment goods D:\IIS_Presn\Presentations\June10\jnjun10ptt.xls “Investment Goods LT”

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

End of presentation Thank you