Rebuilding confidence
Han de Jong
Group Economics
March 2012
Six months ago: pessimism
• Contagion in euro crisis
• Sharp drop in economic activity & business confidence
 Fear for another sharp downturn like ‘Lehman’
2
Why did the global economy not ‘collapse’?
• Financial system did not dry up
• European leaders took positive steps
3
Business confidence: PMI and ISM
index
65
60
55
50
45
40
35
30
05
06
07
08
Eurozone PMI
09
10
11
12
US ISM
4
Source: Bloomberg
Business confidence: PMI
Index
65
60
55
50
45
40
35
2006
2007
2008
Brazil
2009
China
2010
2011
2012
India
5
Source : Bloomberg
Divergence US and eurozone
Unemployment, %
12
11
10
9
8
7
6
5
4
06
07
08
09
US
10
11
12
Eurozone
6
Source: Bloomberg
Money growth
% yoy
14
12
10
8
6
4
2
0
-2
04
05
06
07
08
Eurozone M3
09
10
US M2
11
12
7
Source: Bloomberg
Divergence Europe: car sales
% yoy, February 2012
Portugal
-48.8
Greece
-45.2
Ireland
-8.6
France
-20.2
Italy
-18.9
Netherlands
-10.0
UK
Germany
-2.5
0.0
Estonia
+29.7
Iceland
+148.5
8
Source: Bloomberg
US: self sustaining growth
NFIB index
NAHB index
100
40
95
30
90
20
85
10
80
0
07
08
09
10
Source: Bloomberg
11
12
Small businesses' confidence
07
08
09
10
Source: Bloomberg
Car sales, millions
11
12
Home builders' confidence
Consumer confidence, index
18
100
16
90
14
80
12
70
10
60
8
50
07
Source: Bloomberg
08
09
10
11
12
07
Source: Bloomberg
08
09
10
11
12
Univ.of Michigan
9
China hard landing or soft landing: Car sales
millions
25
20
15
10
5
0
05
06
07
08
09
10
11
12
10
Source: Bloomberg
Economic situation
• US moving to self-reinforcing recovery
• Europe improving gradually
• Emerging economies taking advantage of industrial
recovery – and room to stimulate
11
Euro crisis
• LTROs have eased pressure
• Greek tragedy no longer problem for financial markets –
now purely political
• New Compact
• Likely increase bail-out funds
• Calm has returned to markets
12
2yr government bond yields
%
8
7
6
5
4
3
2
1
Jan-10
Jul-10
Jan-11
Italy
Jul-11
Jan-12
Spain
13
Source: Bloomberg
European banks tightening lending criteria until Q4
Net-tightening (%)
80
60
tightening
40
20
0
easing
-20
03
04
05
06
Corporates
07
08
Consumers
09
10
11
12
Housing
14
Source: Thomson Reuters Datastream
Risks to the ECB’s approach
• ECB balance sheet riskier
• Inflation
• Phenomenal distortion in markets, will lead to misallocation
• Reduced urgency other policymakers
- Public finances
- Structural reform
15
Structural improvements?
• Deleverging continues
• Eurozone public finances much improved
• Structural reform
16
Spain
Exports
Exports to emerging Asia
120
200
110
180
100
160
90
140
80
120
70
100
08
09
10
Germany
Source: Thomson Reuters Datastream
11
12
07
EUR bn, 3mma, index Jan08=100
Current account
09
UK
Source: Thomson Reuters Datastream
10
Spain
11
12
GBP/EUR bn, 12mma, index Jan07=100
General government net borrowing
20
4
0
2
-20
0
-40
-2
-60
-4
-80
-6
-100
-8
-120
-10
-140
-12
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Thomson Reuters Datastream
08
Spain
EUR bn, 12 mm total
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: OECD, estimates 2011 en 2012 OECD
% GDP
17
Italy
Exports
Imports
120
120
110
110
100
100
90
90
80
80
70
70
60
08
09
10
Germany
Source: Thomson Reuters Datastream
11
12
08
09
Italy
EUR bn, 3mma, index Jan08=100
Primary budget balance
10
Germany
Source: Thomson Reuters Datastream
11
12
Italy
EUR bn, 3mma, index Jan08=100
General government net borrowing
7
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
6
5
4
3
2
1
0
-1
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: OECD, estimates 2011 en 2012 OECD
% GDP
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: OECD, estimates 2011 en 2012 OECD
% GDP
18
Unemployment
Unemployment, %
Unemployment, %
25
16
14
20
12
10
15
8
10
6
4
5
2
0
0
05
06 07
Greece
Source: Bloomberg
08 09
Spain
10
11 12
Portugal
05
06 07
Ireland
08 09
Italy
10
11 12
Germany
Source: Bloomberg
19
Source: Bloomberg
US: Debt deleveraging households
% GDP
120
100
80
60
40
20
0
55
60
65
70
Households
75
80
85
Business
90
95
00
05
10
Government
20
Source: Thomson Reuters Datastream
Risks
•
Escalation euro crisis
- Austerity fatigue
- Loss of patience
•
Oil prices
•
Rising interest rates
•
China hard landing
•
Too much austerity
•
Too little austerity
21
Price earning ratio S&P 500
35
30
25
20
15
10
5
0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
22
Source: Bloomberg
Investment portfolios – adding risk
• Equities: raised to neutral
• Equities: - more cyclical exposure
- overweight Emerging Markets
• Bond:
23
High yields, corporates, Emerging Markets
23
Equities
24
Bonds
%
10
10
30
10
10
30
Government bonds
Corporate bonds
High yield (funds)
Inflation-linked bonds
Covered bonds
EM bonds (funds)
25
Important information
ABN AMRO Group Economics on the internet
abnamro.nl/economischbureau - Dutch publications
abnamro.nl/groupeconomics – English publications
This material is provided to you for information purposes only. Before investing in any product of ABN AMRO Bank NV, you
should inform yourself about various consequences that you may encounter under the laws of your country. ABN AMRO
Bank NV. has taken all reasonable care to ensure that the information contained in this document is correct but does not
accept liability for any misprints. ABN AMRO Bank NV reserves the right to make amendments to this material.
This material which is subject to change without notice is provided for informational purposes and should not be construed
as a solicitation or offer to buy or sell any securities or related financial instruments. While ABN AMRO makes reasonable
efforts to obtain information from sources, which it believes to be reliable, ABN AMRO makes no representation or warranty
of any kind, either express or implied as to the accuracy, reliability, up-to-dateness or completeness of the information
contained herein. Nothing herein constitutes an investment, legal, tax or other advice nor is it to be relied on in any
investment or decision. Certain services and products are subject to legal restrictions and therefore may not be available for
residents of certain countries. You should obtain relevant and specific professional advice before making any investment
decision. The past performance is not necessarily a guide to the future result of an investment. The value of investments
may go up or down due to various factors including but not limited to changes in rates of foreign exchange and investors
may not get back the amount invested. ABN AMRO disclaims any responsibility and liability whatsoever in this respect.
26