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09 July 2010
Research
Global: Growth is bound to slow but by how much?
Growth is bound to slow down in the second half of 2010, as the balance between
tailwinds and headwinds turns less favourable. Equity markets from tailwind to
headwind
The key question though is how much will growth slow. We still don’t expect 40 %
%
40
30 30
growth to go below potential growth over the coming quarters, but a pick-up in 20 S&P500 index, 2mth change 20
10 10
employment soon and no new setbacks in financial markets are key assumptions 0 0
-10 -10
behind this forecast. -20 -20
-30 -30
Should current headwinds get stronger we will have to re-evaluate our outlook. -40 -40
-50 -50
06 07 08 09 10
mentioned developments. We already see some tentative signs of this – see Global
Source: Reuters Ecowin
Business Cycle Monitor: Further declines in leading indicators. It will be crucial for
sentiment and the outlook for 2011 how much growth actually slows.
For now we will sketch some of the factors that will shape the slowdown. After the Metal prices and freight rates also
summer break we will quantify these effects more rigorously to gauge the risk of a point to slowing activity
12000 Index Index 4500
double-dip scenario more precisely.
10000 4000
LME metal price index >>
8000 3500
The balance of tailwinds and headwinds is turning 6000 3000
Judging the short-term swings in the growth rates is about estimating the changes in 4000 2500
2000 2000
short-term impulses that hit the economy (tailwinds and headwinds) and the development << Baltic Dry index
0 1500
in the inventory cycle. It is key to understand that it is the change in the tailwind that will jan maj sep jan maj sep jan maj
08 09 10
affect the change in the growth rate. This corresponds to riding a bike: A stronger
Source: Reuters Ecowin
tailwind means you can go faster. If the tailwind fades so will your speed – even though
the wind is still helping you.
Chief Analyst
Allan von Mehren
+45 4512 8055
alvo@danskebank.dk
www.danskeresearch.com
Research
The strength of the labour market and potential pent up demand/over-investment will
determine whether an economy can stay on a recovery track when tailwind factors The boost to growth from inventories
disappear. has peaked
4
US inventories,
Using this approach it seems evident that a wide range of factors point to a weakening of 3
contr. to GDP growth, q/q AR
2
growth going forward: 1
0
The inventory cycle helped boost growth in 2009 and 2010, but there are signs -1
now that this effect has peaked and that the growth contribution from -2
-3
Grey bars mark recession periods
inventories will decline from here on. Increased uncertainty could force a -4
sharper decline of this growth contribution, as companies become wary of 00 01 02 03 04 05 06 07 08 09
Fiscal policy provided a decent tailwind in 2009 and 2010. This tailwind is
slowly fading, though, and will become a not insignificant headwind in 2011 in
both Europe and US. US fiscal policy tightening ahead in
2011
Monetary policy has provided a substantial tailwind to the economy as rates
4 % of GDP % of GDP 4
were slashed to very low levels in 2008 and early-2009. This has led to a sharp 2 US, cyclically adjusted primary deficit 2
(Office of Management and Budget)
reduction in financing costs and thus increased disposable incomes and 0 0
corporate earnings. While low rates are still providing a tailwind for new -2 -2
-4 -4
investments and consumption the effect on incomes and earnings was a one-off -6 -6
increase and hence the growth impact will fade going forward. The tailwind is -8 -8
04 05 06 07 08 09 10 11 12
still there but it is getting smaller.
Source: Reuters Ecowin
Emerging Markets growth provided a major boost to exports in 2009 and in
the first half of 2010 as Asia especially witnessed a sharp V-shape recovery.
Asia has been growing above its potential growth rate though and policymakers
Interest rates: Both level and change
have tightened policy to slow growth down. We are already seeing signs of this
matters
happening in China, where recent indicators such as PMI could indicate a
7 7
somewhat stronger and earlier slowdown than envisaged. Hence this strong 5
G3 3m libor rate, %
5
tailwind for the developed countries also looks bound to become smaller. 3 3
1 1
The development in risky assets worked as a strong tailwind in 2009, as
-1 -1
equities rallied strongly and corporate yields declined substantially. This
-3 -3
reduced financing costs for companies, increased wealth for consumers and -5
G3 3m libor, y/y change, % point
-5
worked to boost overall sentiment. However, this tailwind has unexpectedly 00 02 04 06 08 10
turned into a headwind as risk markets have sold off strongly over the past 2½
Source: Reuters Ecowin
months.
2| 09 July 2010
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Research
It is paramount that we see stronger job growth in the US soon. If economic growth slows
Scenarios for ISM depending on
too much before job gains have picked up the momentum in the labour market could fade
financial market developments
again by the end of the year, leaving little support for the economy. We still expect this to
65 Index 65
Before shock Index
come through, but the recent data has of course raised some uncertainty in this area. 60 60
55 55
ISM
Lean corporate sector means increased resilience 50
45
Global crisis
50
45
40 Current shock 40
On a positive note, the corporate sector is in much better shape this time, compared with (no improvement)
35 35
2008, for example. The crisis led to enormous cutbacks in employment, investment and 30 30
07 08 09 10 11
inventories. The corporate sector is therefore extremely lean now and inventories are at a
very low level. Should global growth slow more strongly, there is no extra layer of fat Source: Reuters Ecowin
that will need to be cut away this time. This in itself would put a limit on any new decline
in growth rates.
For more on the effects of the euro crisis see also Research US: Euro crisis could speed
up manufacturing slowdown, where we look at different scenarios for the US
manufacturing sector depending on the development in financial markets.
3| 09 July 2010
www.danskeresearch.com
Research
Disclosure
This research report has been prepared by Danske Research, which is part of Danske Markets, a division of
Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The author of
this report is Allan von Mehren, Chief Analyst.
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Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
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