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Global Economic Outlook: Bottoming Out Now, Recovery by June 2009


Interest rate cuts and efforts to keep currency stable, $11 billion stimulus package ... Stimulus Package and Policy Changes. Job and growth fund- $25 billion ... – PowerPoint PPT presentation

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Title: Global Economic Outlook: Bottoming Out Now, Recovery by June 2009

Global Economic Outlook Bottoming Out Now,
Recovery by June 2009
  • Economics Research and Analytics
  • January 2009

Executive Summary
1. Indicators point to a bottom
2. Fear Index is reaching a low-point
3. Rebound to start in June due to massive global
4. Sustainability of up-swing driven by
performance of emerging nations
Origin of Crisis
The Genesis Sub Prime Story
  • Sub Prime Model Actions
  • Banks disperse risk of defaults
  • Banks lend more
  • New markets established for retail mortgages
  • New market created for CDS (total CDS market
    estimated by BIS to be 57 trillion)
  • Lax norms for housing credit as a result of low
    interest rates

Sub Prime Model
Home Buyer
  • Sub Prime Model Consequences
  • Repercussions of defaults in mortgage market
  • Falling house prices
  • Prime borrowers start to default
  • Write-downs by holders of mortgages and other
  • Resulting credit crunch in the economy

Loss Due to Defaults
Mortgages are traded
Mortgage Market
Loan remains in the banks books
Mortgages not in banks books
Note CDS Credit Default Swaps
Genesis From Financial Sector to Real Sector
Lack of Trust in Financial Institutions
Financial InstitutionsLosses
Sub-Prime Mortgages
Lack of Capitalfor Companies
Suspension of Interbank Lending
Tightening Credit Markets

Banks Slow Lending Down

Lack of Lending forSmall Business

Slower Growth
Lack of RetailCredit
Consumers Reduce Spending

Economy Slows Down/Contracts
Internationalization of the Crisis
European Banks Withdraw Investments in Eastern
European Banks Lose Money on Sub Prime Mortgages
Unwinding of Yen Carry Trade and FII Withdrawals
Lower Exports From Asia Due to Lower American
and European Demand
Oil Prices Drop on Slower growth in Europe and USA
Withdrawal of FII Inflows Currency Depreciation
How Fear Drove the Recession Fear is Now
Bottoming Out
The only thing we have to fear is fear
itself. -- Franklin Roosevelt
Bottoming Out Now
Employment Creation Hits Bottom Due for an
Current employment levels the lowest of the Great
Moderation Era, suggesting bottom-out
Beginning of great moderation macroeconomic
policies smooth business cycles
  • Non-Farm Payroll growth indicates increase in
    non-agricultural employment
  • During the Era of Great Moderation, the business
    cycle was longer and smoother, and recessions
    were typically shallower than pre-1984.

Employment creation is currently at the lowest
level of the Great Moderation Era (i.e., 1984
onwards) job creation will be positive for the
foreseeable future, given the massive global
fiscal stimulus.
Has Industrial Production Bottomed-Out?
Lowest since oil shock that said, recent
months output indicates recovery
Recovery in industrial production despite
lower automotive growth rates
  • Increased output despite the overhang of a
    recession illustrates the robust underlying
    conditions in American manufacturing

Industrial output showing a rebound from recent
lows, suggesting the recovery of underlying
Consumers Are Continuing to Buy
  • The decline in retail sales is not as steep as in
    the 2006 or 2001 recessions. Recovering consumer
    confidence should lead to positive growth in the
    near future.

Consumers activity, aided by the fiscal stimulus,
will boost industrial production and ultimately
aid recovery.
The Good, The Bad, and the Ugly
  • The Good
  • Fear Index has peaked, indicating bottom-out
  • Non-Farm Payroll growth has hit historic lows
  • Industrial production has recovered and is much
    higher than during previous recessions
  • Widely accepted that real estate is bottoming out
    now as well
  • The Bad
  • Credit markets still remain tight
  • Interest rates are at historic lows, but lending
    has not restarted
  • Crisis has gone global
  • The Ugly
  • Potential collapse of US automotive industry
    (though recent events indicate recovery to come
  • Clarity on the extent of sub prime losses and
    other securitized losses (no recent losses,
    suggesting the worst news is behind us)

The crisis is reaching a bottom
Global Economy to Rebound by June 2009
Mega Drivers for Rebound
  • Positive economic news around the world
    unprecedented focus worldwide on addressing the
    economic situation
  • Fastest government response in history, primarily
    driven by massive government fiscal stimulus
  • New US Government/Obamas economic growth plan
    focuses on creating employment through
    investments in infrastructure, renewable energy,
    broadband, and medical technology infrastructure
    alone will create 2 million jobs
  • Decline in commodity and oil prices leading to a
    tax break stimulus
  • Easing of inflationary and liquidity pressures
  • Strong demand from emerging nations will be a
    factor in reviving the global economy
  • Smart money is coming back to the market, with
    stock exchanges at historic low P/E ratios
  • Fear fatigue and rebound in confidence

Global Response Massive Government Stimulus
UK 250 billion pound bailout Germany 700
billion relief package Belgium Switzerland
Capital infusion ECB Interest rate
cuts France 50 billion stimulus package
Russia Support for ruble 20 billion stimulus
USA 700 Billion bailout rapid interest rate
cuts 23 billion support for top 3 auto
companies plan to create 2.5 million jobs by
Japan Interest rate cuts, 447 billion yen
stimulus package South Korea Interest rate
cuts and efforts to keep currency stable, 11
billion stimulus package
China Interest rate cuts and 586 billion
stimulus (infrastructure, rural) India Interest
rate cuts 4 billion stimulus package
(infrastructure, exports, textiles)
Brazil Support to real, infrastructure
development under PDP (more than 64billion
injected to financial system)
  • Global Response
  • Governments infusing capital into financial
  • Globally coordinated interest rate cuts
  • IMF offers bridge loan to meet foreign exchange
  • Discussions, coordinated efforts (G20 summit)

Global Response Stimulus Packages
Stimulus Package and Policy Changes
Job and growth fund- 25 billion 2.5 million jobs
by 2011 82.5 of losses (i.e., 1.6 million jobs)
to be recovered within 6 months Every 1 billion
spent on roads will create approximately 35,000
jobs Public buildings, schools, roads, energy
efficiency, broadband and medical technology will
be primary sources for employment growth in 2009
UK 250 billion pound bailout Germany 700
billion relief package Belgium Switzerland
Capital Infusion Spain 14 billion infusion,
300 000 jobs to be added by next
year EU Interest rate cuts permanent reduced
VAT for labor-intensive units 250 billion
(i.e., stability and growth pact). Job creation
sources include energy efficiency,
transportation, infrastructure, broadband
connectivity, construction, automobiles
European Union
Japan Interest rate cuts South Korea
Interest rate cuts battling to stabilize
Japan and South Korea
China Interest rate cuts and 700 billion
bailout close to 88 billion for railway
infrastructure with focus on 10 sectors including
infrastructure, technological innovation,
Healthcare, and low-income housing India
Interest rate and tax cuts totaling 4 billion
in the next four months (March 2009) sector
focus is on apparel, infrastructure, other
export-oriented sectors
Emerging Markets
Easing of Inflationary and Liquidity Pressures
Inflationary Pressures Easing Worldwide
Increase in Real Income
Ensuring Liquidity
Policy Rate Reduction Leading to Addition in
Y onY
Decline in Commodity and Oil Prices
Commodity and energy prices have declined sharply
in recent months. Oil prices have declined from
147 to 40 and will be a key stimulus for the
2009 rebound.
Emerging Markets - China
Industrial Output China (2008)
  • China is Structurally Vulnerable to External
  • Export-driven economy
  • Dependent on foreign capital inflows
  • High level of migration imperative to maintain
    high growth momentum
  • US is main destination for Chinas exports

Source National Institute of Statistics
  • Current Scenario
  • Small and medium manufacturers struggling to
    access credit
  • Falling real estate prices could adversely affect
    the banking sector
  • Facing struggling domestic demand, Chinas
    recovery will depend upon access to an
    alternative market for its exports- namely India
  • Steps to Combat Crisis
  • Announced a 586 billion bailout.
  • Focus on developing infrastructure to create jobs
    and revive economy
  • Government easing lending to stem fall in home
  • Coordinated interest rate cuts to boost liquidity

Chinas present hard landing is expected to
recover by the middle of 2009, when domestic
consumption in China recovers as a result of
effective use of stimulus package and growth in
alternative market for its exports (i.e., India).
Emerging Markets - India
Industrial Output India (2008)
  • Key Issues Rupee Real Estate
  • Real estate boom for past few years, with prices
    now cooling off
  • Rupee has depreciated considerably against the
    dollar, leading to loss of corporate profits

Source CSO
  • Steps to Combat Crisis
  • Comprehensive cut in excise duties to facilitate
    consumption across the board
  • Easing of norms for foreign investments in local
  • Small manufactures received sops manage rising
  • Exports, automotive, textiles industries have
    received stimulus
  • Current Scenario
  • Fall in consumption especially consumer
  • Increase in outsourcing activity (due to off-
    shoring by US and European companies seeking to
    cut costs)

India is set to record lower but nonetheless
significant growth of 7 in 2008. Public
spending, investments in infrastructure and third
wave of IT boom in India will make the economy
even more buoyant by June 2009.
World Economy - Composition and Growth
Advanced Economies accounted for 67 percent of
world GDP in 2007 and Developing Economies 33
percent in 2007. In terms of contribution to
growth, the share of emerging countries has been
increasing with major contributors being China,
India, Russia, Brazil. These are also fastest
expanding economies (Russia is now an exception)
with large public sector contributions. Stimulus
plans to result in more employment and growth.
A quarter of growth was driven by these
emerging markets contributions from these
economies will play a key role in global economic
growth and recovery.
Road to Recovery

Increasing Demand for Capital Goods
Increasing Government Consumption
Output Stabilizes-Aided byCapital Goods and
US/European StimulusPackage
Increasing capacity utilization and expansion

StemmingJob Losses
Resumption of Corporate Lending

Credit MarketStabilize

Boom in Asia
Chinese Stimulus

Consumer Spending Gets Back on Track
Restarting ofRetail Credit

Asian Stimulus
Recovery/End of Trough
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