The effect of the global economy on
Europe in 2007 and 2008
March 2007
Thomas Mayer, CFA
Co-head of Global Economics
& Chief European Economist
tom.mayer@db.com
(+44) 20 7547 2884
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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Global PMI and OECD LI signalling moderate slow-down
60
(Based on manufacturing PMI data)
pp
10
US
18
% 6m change
Japan
16
Euroland
BRIC(rhs)
14
8
12
14
% 6m change
12
55
6
10
4
50
2
6
0
Global PMI
45
2003
8
2
2004
2005
2006
2007
-2
4
-4
2
-6
2003
0
2004
Source: NTCS, OECD, Haver, DB Global Markets Research
2005
2006
2007
Global manufacturing PMI has led global growth
Global GDP growth (lhs)
Global weighted manuf PMI (rhs)
5.5
56
5.0
54
4.5
52
4.0
50
3.5
48
3.0
2.5
46
Forecast
2.0
44
1997
3
1999
2001
2003
2005
Source: NTCS, DB Global Markets Research
2007
Global monetary policy back to broadly neutral
6
%
G3 real policy rate
5
average
4
3
2
1
0
-1
-2
1986
4
1989
1992
1995
1998
2001
Source: Haver, DB Global Markets Research
2004
2007
World growth headed for a mid-cycle slow-down…
8.0
7.0
% yoy
GDP
f'cast
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: IMF, DB Global Markets Research
5
…while CPI inflation remains benign
World inflation to remain low…
40
80.00
% yoy
$/bbl
CPI
forecast
70.00
25
65.00
20
60.00
15
55.00
10
50.00
5
forecast
45.00
0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
40.00
2005
Source: IMF, Haver, DB Global Markets Research
6
WTI
75.00
35
30
…as oil prices are likely to stay low
2006
2007
Robust world growth and moderate inflation
Table A: Economic Forecast Summary
GDP grow th, %
CPI inflation, %
2006F
2007F
2008F
2006F
2007F
2008F
3.4
2.0
2.8
3.2
1.4
1.8
US
2.2
2.0
2.5
0.2
-0.1
0.5
Japan
2.8
2.2
1.9
2.2
1.9
2.0
Euroland
G7
Asia (ex
Japan)
EM EA
Latam
3.0
2.1
2.2
2.5
2.0
1.8
8.8
6.3
4.9
7.8
6.2
4.5
7.6
6.2
3.8
3.3
8.8
5.0
2.9
7.6
4.9
2.7
6.8
4.9
Global
5.3
4.5
4.6
3.1
2.6
2.5
Source: DB Global M arkets Research
7
What if the US sneezes?
Euroland responding most to a shock emanating in the US
5
PMI impulse responses to a +1 stde. US shock
pp
4
3
2
1
0
-1
-2
-3
1
8
3
5
7
Asia
E.Europe
EU12
Japan
UK
9
11
13
15
Source: Haver, DB Global Markets Research
17
19
The Achilles Heel of the world economy
Housing weakness…
10
65
9
63
2100
8
61
1900
7
59
1700
57
1500
6
5
1300
4
53
1100
3
51
900
2
49
1
47
0
45
2003
2500
2300
700
%yoy
'000, SAAR
House building permits
New house prices (rhs)
500
95 96 97 98 99 00 01 02 03 04 05 06
Sources: Haver, DB Global Markets Research
9
…manufacturing-services gap…
55
manuf.ISM
non-manuf.ISM
2004
2005
2006
Sources: Haver, DB Global Markets Research
The Achilles Heel of the world economy
…but consumer still holding up…
…thanks to a robust labour market
160
4.0
8
140
3.0
7
120
6
100
9
% yoy
1985=100
5
4
3
% yoy
non-farm payrolls
2.0
80
1.0
60
0.0
40
2
retail sales (lhs)
1
20
consumer confidence
0
0
95 96 97 98 99 00 01 02 03 04 05 06
-1.0
-2.0
95 96 97
Sources: Haver, DB Global Markets Research
10
98 99 00 01
02 03 04 05
06
Japan suffering from investment and credit adjustment
…as banks adjust to monetary policy
Investment cycle turning…
1400
1.0
bn
Yen
1300
%
2.0
1200
8
1.5
2.5
6
3.0
1000
3.5
4.0
2
4.5
0
800
700
core mach.ords.
5.0
unempl.rate (rhs)
5.5
6.0
600
87
89
91
93
95
97
99
01
Sources: Haver; DB Global Markets Research
11
03
05
domestic credit
%
o/n rates
0.7
0.6
0.5
4
1100
900
%
yoy
0.4
0.3
0.2
-2
0.1
-4
1999 2000 2001 2002 2003 2004 2005 2006
-0.1
Sources: Haver, DB Global Markets Research
Euroland facing headwinds from abroad…
Euro real effective exchange rate on upward trend
150
2000=100
US
15.00
140
Japan
130
Euro area
120
China
% yoy
10.00
5.00
110
0.00
100
-5.00
90
80
-15.00
70
60
1995
EUR REER
-10.00
-20.00
1997
1999
2001
2003
2005
96
97 98
Source: Haver, DB Global Markets Research
12
99
00
01 02
03
04
05 06
07
... and at home
Fiscal policy becoming more restrictive…
0.80
0.60
% of
GDP
tightening
…as monetary conditions tighten
105
DB Euroland MCI
95-06=100
f'cast
0.40
5.5
%
ECB refi rate (rhs)
5.0
4.5
100
0.20
4.0
0.00
3.5
95
-0.20
easing
-0.40
3.0
fiscal impulse (= change
in cyclically adjusted
primary budget balance
-0.60
-0.80
2.5
90
85
-1.00
1998
2000
2002
2004
2006
2008
1.5
99
00
Source: ECB, OECD, DB Global Markets Research
13
2.0
MCI base = sample mean
01
02
03
04
05
06
07
Slower export growth likely to affect investment
8
% yoy
% yoy
Investment
6
16
14
12
Exports (rhs)
10
4
8
6
2
4
0
2
0
-2
-2
-4
1999
-4
2000
2001 2002
2003
2004 2005
2006
Source: Eurostat, Haver, DB Global Markets Research
14
Employment and compensation growth leaving
consumption growth behind
5
% yoy
% yoy
4.5
2.5
4
Consumption
Compensation
Employment (rhs)
3.5
3
2
1.5
0.5
1.5
in real terms
0
1999
0
-0.5
0.5
-1
2000 2001 2002 2003 2004 2005 2006
Source: Eurostat, Haver, DB Global Markets Research
15
2
1
2.5
1
3
Euroland growth likely to slow in 2006 - 2008
Slower investment – moderate consumption
4.0
3.5
3.0
contributions to real annual GDP growth, pp
government
consumption
stocks
investment
GDP
net trade
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
forecast
-1.0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Eurostat, Haver, DB Global Markets Research
16
Euroland core inflation to rise 2007 while headline
slows
3.3
% yoy
2.8
HICP
core (total excl energy, food, alc, tob)
2.3
1.8
1.3
forecast
0.8
2001
2003
2005
2007
Source: Eurostat, Haver, DB Global Markets Research
17
Central banks to react to mid-cycle slow-down
7
%
f'cast
ECB refi rate
Fed funds rate
BoJ call rate
6
5
4
3
2
1
0
99
00
01
02
03
04
05
06
Source: Haver, DB Global Markets Research
18
07
08
Fed comforted by slower inflation
4.0
% yoy
3.5
3.0
Core PCE
Core CPI
Fed core PCE comfort zone
Forecast
2.5
2.0
1.5
1.0
0.5
2001
2002
2003
2004
2005
2006
2007
Sources: BEA, BLS, DB Global Markets Research
19
BoJ to move towards more normal rates as deflation
subsides
0.9
%
yoy
%
0.8
0.7
0.6
2.5
BoJ rate
2
inflation (rhs)
1.5
1
0.5
0.5
0.4
0
0.3
-0.5
0.2
-1
0.1
-1.5
0.0
-2
96 97 98 99 00 01 02 03 04 05 06 07
20
3
Source: Haver, DB Global Market Research
ECB initially worried by wage inflation and money
growth…
Stronger GDP growth in 06 likely to
boost wage growth in 07
3.0
% yoy
%
2.8
2.6
Strong money growth despite higher
rates
2.5
12
2
11
private loans
M3
10
refi rate (rhs)
contract wages
1.5
output gap (-1y) (rhs)
1
0.5
2.4
0
-0.5
2.2
-1
-1.5
2.0
-2
1.8
1999
-2.5
2001
2003
2005
2007
2009
% yoy
9
5.0
4.5
4.0
8
3.5
7
3.0
6
2.5
5
4
3
1999 2000 2001 2002 2003 2004 2005 2006
Source ECB, OECD, DB Global Markets Research
21
%
2.0
1.5
…and reassured by past signs of robust growth…
PMI in rate hike territory
0.6
65
0.4
Change in ECB refi rate (pp, lhs) 63
61
Euroland composite PMI
59
0.2
57
55
0.0
53
-0.2
51
49
-0.4
47
45
-0.6
1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: ECB, DB Global Markets Research
22
…but then stopped out by lower growth and inflation
Taylor rule points to lower rates in 07H2 and 08
5.5
5.0
T_GDPY
4.5
3M EURIBOR
4.0
3.5
3.0
2.5
2.0
1.5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver, DB Global Markets Research
23
Euroland bonds to outperform US bonds on currency
7.0
German 10y
6.5
US 10y
f'cast
6.0
5.5
5.0
4.5
4.0
3.5
3.0
99
00
01
02
03
04
05
06
Source Haver, DB Global Markets Research
24
07
08
Financial Forecasts
US
Jap
Euro
UK
Sw e
Sw iss
Can
Aus
NZ
Actual
5.36
0.66
3.84
5.54
3.43
2.22
4.35
6.37
7.45
Rates
M ar07
DB forecasts futures
5.30
5.34
0.65
0.74
3.90
4.05
5.55
5.71
3.40
3.61
2.25
2.45
4.37
4.37
6.37
6.45
7.90
7.91
5.30
5.27
4.90
5.02
0.75
0.80
0.95
0.98
3.90
4.15
3.60
4.16
5.80
5.75
5.60
5.68
3.60
3.73
3.90
3.93
2.25
2.59
2.25
2.68
4.37
4.37
4.37
4.29
6.37
6.49
6.12
6.46
7.90
7.90
7.90
7.60
2Y Gov’t 2
Actual
Bond
M ar07
Yields/
forw ards
Spreads3
Jun07
DB forecasts forw ards
& Forw ards Dec07
forw ards
4.86
4.80
4.81
4.80
4.75
4.65
4.67
0.82
0.85
0.90
0.95
0.98
1.25
1.13
3.98
3.90
3.98
3.85
3.99
3.75
3.97
5.38
5.35
5.37
5.30
5.35
5.10
5.29
3.67
3.80
3.76
3.85
3.84
3.95
3.97
2.42
2.50
2.48
2.55
2.52
2.55
2.56
4.11
4.00
4.11
4.00
4.10
4.00
4.08
6.15
6.05
6.15
6.05
6.15
5.75
6.12
6.62
6.75
6.68
6.75
6.55
6.40
6.35
10Y Gov’t 2
Actual
Bond
M ar07
Yields/
forw ards
Spreads3
Jun07
DB forecasts forw ards
& Forw ards Dec07
forw ards
4.73
4.80
4.74
4.80
4.74
5.00
4.75
1.66
1.85
1.73
1.90
1.78
2.10
1.87
4.09
4.00
4.07
4.00
4.08
3.85
4.09
4.93
4.90
4.90
4.90
4.87
4.80
4.86
3.91
3.90
3.90
3.95
3.92
3.85
3.96
2.60
2.60
2.65
2.70
2.67
2.65
2.70
4.13
4.25
4.19
4.25
4.20
4.00
4.23
5.80
6.00
5.79
6.00
5.78
5.50
5.75
5.98
6.00
5.88
6.00
5.83
5.75
5.77
EUR/
USD
USD/
JPY
EUR/
GBP
GBP/
USD
EUR/
CHF
CAD/
USD
AUD/
USD
NZD/
USD
1.31
1.33
1.34
1.35
121
118
115
102
0.67
0.68
0.71
0.73
1.96
1.95
1.89
1.85
EUR/
SEK
SEK
9.30
1.63
1.57
1.57
1.56
1.16
1.14
1.12
1.10
0.79
0.78
0.76
0.73
0.71
0.69
0.67
0.62
3M Interest
1
& Futures
Exchange
Rates
Jun07
futures
Dec07
futures
Actual
3M
6M
12M
9.03
8.98
8.90
(1) Future rates calculated from the M arch, June and December 3M contracts. Forecasts are for the same dates. Central bank rates for the CE-4.
(2) Forecasts in this table are produced by the regional fixed income strategists. 10-year forw ards estimated from the asset sw ap curve. (3) Bond yield spreads
are versus Euroland.
Source: Bloomberg, DB Global M arkets Research. Revised forecasts in bold type. All current rates taken as at Friday 11:00 GM T.
25
23/2/07
Appendix
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has
not and will not receive any compensation for providing a specific recommendation or view in this report. Thomas Mayer
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