The current economic environment

The current economic environment

Prof. Dr. Andreas Dombret

Member of the Board Deutsche Bundesbank

– June 11, 2010 –

June 11, 2010 TMA Europe Conference 2

❙Economic recovery stronger than expected.❙Upward revisions of GDP forecasts.

❙Pace of recovery uneven both globally and within Eurozone.❙Strong in EMEs, the US and Japan; more subdued in the euro area.❙Recovery in Germany intact, with strong impulses from exports.

❙Rising sovereign debt as major downside risk.❙Uncertainty on financial markets due to Greek debt crisis.❙Consolidation: major task of economic policy.

The world economy in June 2010 – where do we stand?


❙Upward trend of important global leading indicators continues.

❙Signals proceeding robust recovery of world economy:

❙Global PMI consistent with strong expansion in manufacturing as well as in other sectors.

❙German ifo world economic climate index on the rise; index component of expectations at comparably high level in recent months.

❙OECD composite leading indicator signaling expansion for world economy since November 2009.

Good news: Upward trend in global leading indicators


❙OECD: global output

+4.6% in 2010.

❙Forecasts revised

upward;

in particular for

OECD members

(from 1.9% to 2.7%).

❙World trade

strengthened;

trade growth robust.

Good news: Upward revisions for global growth and trade projections

Growth in: 2009 2010 Diff. from Nov.

2011 Diff. from Nov.

Real GDP

OECD -3.3 +2.7 +0,8PP +2.8 +0,3PP

World -0,9 +4,6 +1,2PP +4,5 +0,8PP

World trade -11,0 +10,6 +4,6PP +8,4 +0,7PP

Forecasts from OECD Economic Outlook May 2010


❙Global economy now back

on growth track.

❙Performed better than

anticipated.

❙Recovery expected to

continue…

❙… after most severe

recession since WW II in

2009.

Good news: Robust Recovery

GDP growth

(calendar adjusted)2009 2010 2011

USA -2.4 +3.2 +3.2

Japan -5.2 +3.0 +2.0

UK -4.9 +1.3 +2.5

Euro area -4.1 +1.2 +1.8

Germany -4.9 +1.9 +2.1

China +8.7 +11.1 +9.7

OECD -3.3 +2.7 +2.8



❙Output expanding at

varying speeds:❙Growth strong and close to

pre-crisis levels in some

EMEs in South and East

Asia and Latin America; …

❙… recovery in some OECD

member much weaker.

❙US on the verge of self-

sustaining recovery; growth

in Europe more subdued.

Bad news: Recovery uneven across and within regions

GDP growth

(calendar adjusted)2009 2010 2011

USA -2.4 +3.2 +3.2

Japan -5.2 +3.0 +2.0

UK -4.9 +1.3 +2.5

Euro area -4.1 +1.2 +1.8

Germany -4.9 +1.9 +2.1

China +8.7 +11.1 +9.7

OECD -3.3 +2.7 +2.8



❙Since mid-2009 strong pick-up in real

GDP.

❙Temporary impulses from fiscal

stimulus and slower pace of inventory

decumulation.

❙Strengthening in private final demand

(consumption as well as spending on

equipment and software) points to

self-sustaining recovery.

❙Continued decline in private non-

residential construction; recovery in

housing fragile.

USA: On the verge of self-sustaining recovery


❙Noticeable stabilization of house prices

in 2009. However, also due to …

❙… Fed interventions on the mortgage

market …

❙… as well as fiscal incentives to buy

homes.

❙FHFA Purchase-Only Index declined in

2010Q1 by 3.2% yoy. S&P Case-Shiller

Index up by 2.0% yoy.

USA: Housing market tentatively stabilizing

US house price indicesYear-on-year change

-25

-20

-15

-10

-5

0

5

10

15

20

2001Q1 2003Q1 2005Q1 2007Q1 2009Q1

%

S&P Case-Shiller Index(national)

FHFA Purchase-Only Index


❙GDP expanded strongly in winter

2010, for fourth consecutive quarter.

❙Recovery mainly driven by

substantial growth in exports; high

demand particularly from Asian

emerging countries.

❙Domestic demand rebounded

recently as well; ongoing fiscal

stimulus measures and recovery in

trade feeding into profits and wages.

❙However, public finances

increasingly strained, with gross debt

forecasted to exceed 200% of GDP.

Japan: Recovery on its way


❙ In Q1 only slight increase in GDP.

❙Growth mainly driven by inventories.

❙ Noticeable rise of GDP in Italy (+0.5%);

much smaller increases in Germany

(+0.2%), France and Spain (both +0.1%).

❙ New forecast of the Eurosystem (published

yesterday):

❙GDP growth (average of published

bandwidth): +1.0% in 2010, +1,2% in 2011.

❙Quarterly profile volatile.

Euro area: Recovery moderate as well as uneven


Euro area: Slow recovery of industrial production

❙Capacity utilization still well below

long-term average.

❙But: Remarkable inflow of orders in

particular from outside euro area; …

❙… industrial confidence recovered

noticeably in early spring; now just

below long-term average …

❙… hinting at further recovery of

production.


Euro area: Still no turnaround on labor market

❙Employment:

Q4/2009 -0.3% qoq;

Q3/2009 -0.5% qoq.

❙In April slight increase in

standardized unemployment rate

to 10.1% (highest level since

August 1998).❙Compared to previous year, significant increases in all large EMU member countries (ES, F, IT) except Germany.


Germany: Intact recovery

❙Pace of recovery slowed in winter half-

year.❙GDP +0.2% in both Q4/2009 and

Q1/2010.

❙In Q1 marked positive contribution from

inventories, negative contributions from

domestic demand and foreign trade

(imports increased even more than

exports).❙Much stronger momentum expected for Q2.❙Forecasts of GDP growth: mostly above

euro area average in 2010 and 2011,

making Germany temporarily the engine

of growth.


Germany: Strong industrial production more than compensates negative impact of cold weather in Q1

❙Further rise in industrial

production in April.

❙Orders: Ongoing strong impulses;

pick-up in demand regionally

broad-based.

❙Stock of orders (according to ifo-

Institute) still as low as during the

last recession 2002/2003.

❙Outlook for 2010: Industrial output

catching up with orders.


Germany: Labor market surprisingly robust

❙Employment continued to

increase in April; only slightly

lower than a year ago.

❙In May registered

unemployment declined

significantly, unemployment

rate now at 7.7%.

❙Past fears of looming backlash

refuted by ongoing robustness.


Euro area: Moderate rise in prices expected in 2010

❙Recently, inflation accelerated

somewhat in euro area. ❙HICP-inflation:

s.a. +0.1% in May mom; +0.2% in

April mom.❙In April, again marked rise in prices

for energy and unprocessed food.

❙But core rate stabilised at low level.

❙Inflation expectations continue to be

anchored in line with price stability.❙Eurosystem forecasts for 2010 and

2011 (average of published bandwidth):

+1.5% and +1.6%.

Harmonised Consumer Price Index (Overall index / EMU-countries (incl. Germany)) 1)

1) Changing Composition


Germany: Consumer prices continue to rise moderately

❙After significant increases

in the two preceding

months, …

❙… consumer prices stopped

rising further in May.

❙Price level: +1.2% compared

to May 2009.

Consumer price index


❙So far: Global economy returned to strong growth and recovery probable to continue.

❙Stronger than expected recovery in world trade as upside risk.

❙ In some EMEs in South and East Asia and Latin America already some signs of overheating.

❙Failure to reign in rising sovereign debt in industrialised countries as major downside risk.❙Up to now, no observable impact of Greek crisis on real economy outside of Greece.❙Rising concerns about insufficient consolidation; possibly undermining process of

normalization in financial system.

What are the risks?


❙Overall, financial markets stabilizing in recent months with economic recovery gathering steam.

❙Premature to conclude financial conditions have normalized.

❙Banking system’s health generally improving; some banks remain vulnerable.

❙Bank lending activity remains weak.❙Some supply-side effects within the euro area …❙… but decline in Germany mostly due to lower demand – credit crunch only a risk

scenario.

Financial markets assessment


Euro-area: Government bond markets strained

❙Continuous stress on government bond

markets due to Greek debt crisis.

❙ Initial decrease of EMU yield spreads over

German Bunds after rescue package was

agreed in early May largely evaporated.

❙Spread widening partly due to falling

Bund yields (“safe haven flows”).

❙Financing conditions of corporations

deteriorated somewhat in May, but

spreads still below 5-year average.


Interest rate spreads between EMU government bonds strongly dispersing

❙ Individual spreads of EMU

government bonds over German

Bunds still on a high level.

❙Significant downward effects from

stability measures; spreads rising

again since mid-May.

❙Further increase of uncertainty,

possibly due to doubts about

success of fiscal consolidation

efforts.


Exchange rates: Euro strained

❙In May, Euro depreciated

markedly against US-Dollar,

Pound sterling and Yen.

❙Effective exchange rate (against

21 trading partners): since end of

2009 depreciation of about 10%.

❙However, compared to LT

average: level of exchange rate

actually less noteworthy than

pace of change.


Stock markets: Uncertainty about future stock price developments above five-year average

❙Strong fall in stock prices in

May. In recent days stock

markets recovered somewhat.

❙Global rise in uncertainty in

EMU, US, Germany and JP;

in Germany below trend.


❙All in all: global economic recovery progressed better than expected. ❙Recovery in Germany intact; should pick up again after weak winter half-year.❙GDP growth expected to exceed that of the euro area at least in 2010.

❙At the same time, the outlook for activity unusually uncertain.

❙Deteriorating public budgets in advanced economies major downside risk.

❙Furthermore, the multi-speed nature of the global recovery likely to continue, and current account imbalances likely to widen again over the medium term.

Summing up

Documents

The current economic environment