External Risks to the U.S. Economy Georgia State University - - PowerPoint PPT Presentation

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External Risks to the U.S. Economy Georgia State University - - PowerPoint PPT Presentation

Oct 05, 2023 249 likes •526 views

External Risks to the U.S. Economy Georgia State University Forecasting Center Conference August 27, 2008 Duncan Meldrum Chief Economist Air Products & Chemicals, Inc. D. H. Meldrum August 27, 2008 External Risks to U.S. Economy

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SLIDE 1
  • D. H. Meldrum

August 27, 2008

External Risks to the U.S. Economy

Georgia State University Forecasting Center Conference August 27, 2008

Duncan Meldrum Chief Economist Air Products & Chemicals, Inc.

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SLIDE 2
  • D. H. Meldrum

August 27, 2008

External Risks to U.S. Economy

  • Faltering growth outside the U.S.
  • Global Inflation
  • Global credit contraction
  • Political risks

– Wars – WTO collapse – Differential economic policies

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SLIDE 3
  • D. H. Meldrum

August 27, 2008

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U.S. Economy 2008-2009

  • Financial industry problems restrain growth

– Consensus: real GDP grows ~ 1½% in both years – Tight credit, a hangover from subprime mess, offsets stimulus from tax rebates and interest rate cuts – The housing and auto declines last through end of 2008 – Consumer spending weak until jobs pick up in 2009

  • Temporary boost to inflation due to global factors

– Energy, commodities & food prices

  • Demand strong from developing world
  • Supply tightness slowly eased as capacity expands

– Low wage inflation will keep long-run inflation in check

  • Manufacturing outlook mixed, below-trend

– Long, slow recovery in housing – Modest demand for consumer goods – Energy-related markets remain healthy into 2009 – Foreign demand boosts export-oriented industries

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SLIDE 4
  • D. H. Meldrum

August 27, 2008

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09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 8 6 4 2

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8 6 4 2

  • 2

CALENDAR QUARTERS % CH VS YR AGO % CH VS YR AGO

REAL GDP GROWTH

The U.S. outlook framework grew out of the post-interest rate increases of 2006-2007, which noticeably slowed the economy

Shaded area indicates U.S. recession

  • U. S.
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SLIDE 5
  • D. H. Meldrum

August 27, 2008

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09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 8 6 4 2

  • 2

8 6 4 2

  • 2

CALENDAR QUARTERS % CH VS YR AGO % CH VS YR AGO

REAL GDP GROWTH

Slower real GDP growth in the U.S. than in the rest of the world slowed US import growth, improving net exports (and GDP)

Shaded areas indicates U.S. recession

  • U. S.

World EX US

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SLIDE 6
  • D. H. Meldrum

August 27, 2008

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09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 8 6 4 2

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16 12 8 4

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Quarterly to 2008Q2 % CH VS YR AGO % CH VS YR AGO (US Exports)

WORLD REAL GDP GROWTH VS US EXPORTS

U.S. exports grow (or decline) at a multiple to world growth Strong demand growth since 2004 boosted U.S. export growth

Shaded area indicates U.S. recession

World EX US US Real Exports (Right Scale)

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SLIDE 7
  • D. H. Meldrum

August 27, 2008

2008 2007 2006 2005 2004 2003 2002 8 6 4 2

  • 2
  • 4
  • 6
  • 8

Quarterly Through 2008 Q2 Share Of GDP

SHARE OF GDP

Until the oil price spike, better export performance improved net exports INCREASING U.S. real GDP growth Net Exports

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SLIDE 8
  • D. H. Meldrum

August 27, 2008

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2008 2007 2006 2005 2004 2003 2002 8 6 4 2

  • 2
  • 4
  • 6
  • 8

Quarterly Through 2008 Q2 Share Of GDP

SHARE OF GDP

Until the oil price spike, better export performance made up for some of the housing collapse impact on GDP Net Exports Residential Investment

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SLIDE 9
  • D. H. Meldrum

August 27, 2008

Faltering Growth Risk

  • Risk:

– U.S. exports would slow more than anticipated while imports remained unchanged, causing real GDP growth to slip lower than the 1.5% now anticipated by the consensus – (with an additional negative impact from weaker overseas profits earned by US corporations)

  • Recent developments:

– Europe: slowing from ~3% to ~1 - 1½% – Asia: slowing from ~6% to ~4 ½% – Latin America: slowing from ~5.5% to ~4% – Oil exporting Middle East/North Africa: accelerating from ~4% to ~6% – World Ex US: SLOWING from ~4% to ~2 ½ - 3%

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SLIDE 10
  • D. H. Meldrum

August 27, 2008

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10 08 06 04 02 00 98 140 120 100 80 60 Source: U.S. Federal Reserve (Monthly Through July 08) INDEX, FOREIGN CURRENCY PER US$

Weak Dollar Helped Boost US Exports

Since 2002 peak, dollar declined more than 35% VS major currencies and more than 25% VS other important currrencies

Shaded Areas Indicate U.S. Recession

Major Currencies Trading Partners Other Important Trading Partners

Global Inflation Risk

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SLIDE 11
  • D. H. Meldrum

August 27, 2008

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09 07 05 03 01 99 97 140 120 100 80 60 40 20 Calendar Month $/BBL

OIL PRICE FORECAST (WTI)

Energy prices surged far above fundamental drivers Now seeing readjustment (as demand weakens)

Shaded Area U.S. Recession Forecast Begins CY08Q2 ->

* 8/19/08 West Texas Intermediate (Through July 08) A "reasonable" forecast based on supply-demand

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SLIDE 12
  • D. H. Meldrum

August 27, 2008

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10 08 06 04 02 00 160 140 120 100 80 60 40 20 Calendar Month Currency/BBL

OIL PRICE (WTI)

Prices increased less when measured in many local currencies, but still drove up inflation

Shaded Area U.S. Recession

WTI US$ RMB (/10) Euro

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SLIDE 13
  • D. H. Meldrum

August 27, 2008

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10 09 08 07 06 05 04 03 02 01 00 99 10 8 6 4 2

  • 2

Calendar Month % CH VS YR AGO

CPI Inflation Rising Globally

Pass-through of higher energy, commodity & food prices UK Eurozone

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SLIDE 14
  • D. H. Meldrum

August 27, 2008

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10 09 08 07 06 05 04 03 02 01 00 99 10 8 6 4 2

  • 2

Calendar Month % CH VS YR AGO

CPI Inflation Rising Globally

Pass-through of higher energy, commodity & food prices UK Eurozone Chile China

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SLIDE 15
  • D. H. Meldrum

August 27, 2008

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08 07 06 05 04 03 02 01 00 99 98 97 96 10 8 6 4 2 Source: Global Insight PERCENT

ECB Pushed Short Term Rates Up

Inflation fighting measure that will slow growth in Europe Short Term Interest Rates in Eurozone Countries

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SLIDE 16
  • D. H. Meldrum

August 27, 2008

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08 07 06 05 04 03 02 01 00 99 98 97 96 10 8 6 4 2 Source: Global Insight PERCENT

ECB Pushed Short Term Rates Up

Inflation fighting measure that will slow growth in Europe and a far different policy than being followed in U.S. Short Term Interest Rates in Eurozone Countries U.S. Fed Funds Rate

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SLIDE 17
  • D. H. Meldrum

August 27, 2008

Global Inflation Risk

  • Policy response to inflation could weaken

growth more than anticipated

– Europe already much weaker than recent forecasts – Asia & Latin America mixed possibilities

  • Some countries susceptible to boom-bust
  • Some susceptible to stagflation

– Oil exporting Middle East/North Africa overheated – Currency turmoil possible

  • Multiple possible outcomes make planning

more difficult

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SLIDE 18
  • D. H. Meldrum

August 27, 2008

Global Credit Risk

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Reported losses at major financial institutions headquartered outside the U.S. as large as losses in U.S. headquartered institutions. Capital shortfalls ensure tighter credit standards, less credit available from major institutions. Data source: Bianco Research LLC and Cumberland Investment Advisors

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SLIDE 19
  • D. H. Meldrum

August 27, 2008

Fed’s Senior Loan Officer Survey: Tightening Credit, Rising Costs of Credit

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SLIDE 20
  • D. H. Meldrum

August 27, 2008

Foreign-owned Institutions Also Tightening Standards & Raising Margins

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SLIDE 21
  • D. H. Meldrum

August 27, 2008

Reasons For Tighter Commercial & Industrial Credit Standards Cited By Foreign Institutions

  • Less favorable or more uncertain economic
  • utlook (100%)
  • Decreased liquidity in secondary market for

these types of loans (79%)

  • Reduced tolerance for risk (79%)
  • Deterioration in bank’s current or expected

capital position (64%)

(SRC: Senior Loan Officer Opinion Survey on Bank Lending Practices – FRB Board of Governors August 11, 2008)

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SLIDE 22
  • D. H. Meldrum

August 27, 2008

Demand For Loans Continues to Decline

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SLIDE 23
  • D. H. Meldrum

August 27, 2008

For Both Domestic and Foreign-owned Institutions

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SLIDE 24
  • D. H. Meldrum

August 27, 2008

9 7 5 3 1 11 9 7 5 3 1 08 07 3.5 3.1 2.6 2.2 1.8 1.4 0.9 0.5 3.5 3.1 2.6 2.2 1.8 1.4 0.9 0.5 Daily Through August 19, 2008 PERCENT PERCENT

RISK PREMIUMS - RISK AVERSION REMAINS

March 17 (Bear Sterns) looked like the "risk" trough but market deteriorating since early June (IndyMac)

BAA minus 10 YR Tbond (Daily) AAA minus 10 yr Tbond (Daily)

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Risk aversion plus credit restrictions a GLOBAL problem with the potential to sharply reduce investment

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SLIDE 25
  • D. H. Meldrum

August 27, 2008

Increased Political Risk

  • New wars or stress points

– Russia-Georgia (implications for EU and non-EU states) – Kashmir – Philippines

  • New leaders in key countries

– U.S. – Pakistan

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SLIDE 26
  • D. H. Meldrum

August 27, 2008

Economic Policy Risk

  • Less alignment on policy

– EU vs US (monetary) – WTO talks collapsed (developed vs emerging)

  • Differing approaches to inflation

– Monetary restrictions to control – Looseness that may lead to boom-bust

  • Commodity exporting country wealth

recycling

– Sovereign wealth funds – Possibility of commodity price bust that sharply disrupts domestic fiscal policy

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SLIDE 27
  • D. H. Meldrum

August 27, 2008

External Risks to U.S. Economy

  • Faltering growth outside the U.S.
  • Global Inflation
  • Global credit contraction
  • Political risks

– Wars – WTO collapse – Differential economic policies

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