the economic and financial outlook in the wake of the credit turmoil
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The economic and financial outlook in the wake of the credit turmoil. Anton Brender. June 2008 - Amsterdam. GDP growth (% year on year). Import growth (% year on year, in dollars). 14. 60. Brazil. China. 12. China. Russia. 40. 10. Russia. 8. 20. 6. 0. Korea. 4. OPEC. 2. - PowerPoint PPT PresentationTRANSCRIPT
Money does not perform. People do.
June 2008 - Amsterdam
Anton Brender
The economic and financial outlook in the wake of the credit turmoil
22
Up to now, Emerging countries have been rather resilient and have supported world growth
Source: Thomson Datastream
Import growth (% year on year, in dollars)
00 01 02 03 04 05 06 07 08-30
-20
0
20
40
60
OPEC
China Russia
BrazilChina
Russia
Korea
Brazil
GDP growth (% year on year)
0
2
4
6
8
10
12
14
04 05 06 07 08
33
This partly explains why some commodity prices – oil in particular – have continued to rise
Source: Thomson Datastream
WheatSoybeans
50
100
150
200
250
300
Jan Apr Jul Oct Jan Apr Jul2007 2008
CornRice (not included in the index)
Commodity Index(Goldman Sachs, January 2007 = 100)
Jan Apr Jul Oct Jan Apr Jul50
100
150
200
250
2007 2008
Energy
AgriculturePrecious metalsIndustrial metals
Livestock
44
OPEC has played a role in pushing oil prices higher…
-3
-2
-1
0
1
2
3
4
01 02 03 04 05 06 07 08
Production
World production
Non OPEC
Other
OPEC?
2008**from January to May 2008 (annual rate)
OPEC “iso-income” curves
10
15
20
25
30
35
50 70 90 110 130 150
OPEC oil basket price($ per barrel)
OPE
C pe
trole
um e
xpor
ts(m
illion
bar
rels
per d
ay)
$680 billion
2007
Sources: IEA, Dexia-AM
World petroleum production and consumption(million barrels per day, annual change)
-3
-2
-1
0
1
2
3
4
01 02 03 04 05 06 07 08
Consumption
World consumption
OECD
Non OECD
$950 billion
55
… but speculation also played its part
Spread spot price – 18-month forward price ($)
95 97 99 01 03 05 07-10
0
10
20
-30
0
50
100
120
WTI oil price ($) [R.H.S.]
Oil price and expectations
95 97 99 01 03 05 070
100
200
300
400
Long positions
Short positions
Non commercial positions(thousands of contracts)
Sources: CFTC, Thomson Datastream
Net speculative positionsand oil price
Oct Dec Feb Apr Jun-80
-60
-40
-20
0
20
40
60
-10
0
10
20
30
4045
2007 2008Net speculative positions(long minus short positions, thousands ofcontracts, change over 3 months)
WTI oil price(% change over 3 months) [R.H.S.]
Euro/dollar exchange rateand oil price
Jun Aug Oct Dec Feb Apr Jun2007 2008
60
80
100
120
140
1.30
1.40
1.50
1.60
1.70
Oil price ($)
Oil price (€)(indexed on the dollar oil price in June 2007)
Euro/dollar exchange rate [R.H.S.]
66
A continuing steep rise in oil prices could end up choking world growth
OPEC and Russia trade balance
($ billions, annual rate)
0
400
800
1200
00 02 04 06 08
WTI oil price rises at $150
WTI oil price falls back to $100
If oil price increases to $150 per barrel and stay there, growth can continue only if non oil exporting countries accept and manage to reduce their surpluses or increase their deficits by more than $400 billion…
$105
40
80
120
140
2006 2007 2008
Oil prices(WTI, $ per barrel)
$66 $72
0
200
400
600
94 98 02 06
Imports
Exports
OPEC
Russia
Imports
Exports
Trade balance*($ billions, annual rate)
0
400
800
1 200
1 400
94 98 02 06
(*) Assuming an oil price at $100 per barrel.
Sources: Thomson Datastream, Dexia-AM
77
The more so since the financial system has turned much less “borrower friendly”...
Bank lending standards (net percentage of banks tightening their standards)
C&I loans (medium and large firms)
Commercial real estate
Loans to firms Loans to individuals
Euro areaUnited States
Firms
House purchase Consumer credit
-20
0
20
40
60
80
03 05 07
Residential mortgages
Credit cards
Other consumer loans
-40
0
40
80
100
96 00 04 08-40
0
40
80
100
90 94 98 02 06
Sources: Thomson Datastream, ECB, Federal Reserve
88
… even if equity capital constraints do not seem to be binding
IMF estimated total losses ($ billions, as of March 2008)
Estimated losses on unsecuritized U.S. loans
225
Estimated mark-to-market loss on related securities
720
Total losses 945
0
100
200
250
UnitedStates Europe
of whichEuro area
0
100
200
Q2 Q3 Q4 Q1 Q2
2007 2008
Banks Brokers0
40
80
120United States
Sources: IMF, Bloomberg
Losses
Capital raised
Reported credit losses versus capital raised($ billions, as of May 22)
World
0
200
400
99
Despite some improvement, liquidity on the interbank market is not back to normal…
Sources: Thomson Datastream, Bloomberg, Federal Reserve
Starting beginning of August, central banks provided ample liquidity to ease tensions on the money markets. But market rates continued to spike upwards despite recent central banks’ initiatives.
3-month interbank rate minus OIS rate
(basis points)
Libor $
Euribor €
0
40
80
120
Jun Sep Dec Mar Jun2007 2008
120
Jun Sep Dec Mar Jun
Libor $
Euribor €0
40
80
2007 2008
1-month interbank rate minus OIS rate
(basis points)
TED spread(3 months Eurodollar rate
minus Tbill rate, basis points)
0
100
200
300
Jan Apr Jul Oct Jan Apr
2007 2008
1010
… and while credit spreads have recently narrowed appreciably, they still remain wider than a year ago
Municipal bonds(ML 10-year, basis points)
2007 2008
-120
-80
-40
0
40
80
120
Jun Sep Dec Mar Jun
Euro – Crossover Itraxx (5-year, basis points)
2007 2008
250
450
650
750
Jun Sep Dec Mar Jun
Euro – Investment grade Itraxx (5-year, basis points)
2007 2008
0
100
200
Jun Sep Dec Mar Jun
Commercial CMBX AAA(NA 3, basis points)
2007 2008
Subprime ABX AAA(07-01, basis points)
US - high yield (Merrill Lynch, 5-year, basis points)
2007 2008
150
350
550
750
Jun Sep Dec Mar Jun
US - Leveraged loans(LCDX NA 5-year, basis points)
2007 2008
0
200
400
500
Jun Sep Dec Mar Jun0
100
200
300
Jun Sep Dec Mar Jun2007 2008
0
400
800
1200
Jun Sep Dec Mar Jun
Sources: Thomson Datastream, JP Morgan, MarkIt
1111
Economic and financial outlook
Contents
United States: in recession… ?
Euro area: weathering the storm?
Annex
1212
Up to now, pessimists have been wrong: the US economy has not yet contracted
Contribution to GDP growth(% year on year)
Residential investment [R.H.S.]
GDP ex residential investment
-5
-1
3
7
11
55 62 69 76 83 90 97 04-2
-1
0
1
2
Unemployment rate(%)
89 93 97 01 053.5
5.5
7.58.0
Employment (year on year change, thousands)
-60
-40
0
40
80
90 94 98 02 06-300
-200
0
200
400Ex construction & finance[R.H.S.]
Construction & finance
GDP growth(% year on year)
Goldman Sachs
IMF-1
0
2
4
6
99 01 03 05 07
(% quarter on quarter, annual rate)
2008
-2
-1
0
1
2
Q1 Q2 Q3 Q4
Goldman Sachs
IMF*
(*) Quarterly profile is our best “guess”.
Sources: IMF, Goldman Sachs, Thomson Datastream, Dexia-AM
Likely
?
Likely
1313
Despite high gasoline prices and weakening consumption…
Motor vehicle sales
12
14
16
18
2021
04 05 06 07 08
(Millions, annual rate)
Jan 04 - July 07 average
Core retail sales
(% over 3 months, annual rate)
93 97 01 05-2
0
4
8
12
Consumption
03 04 05 06 07 08-1
0
1
3
5
7
-150
-100
-50
0
50
100
150
200
Consumption(% / 3 months, annual rate)
Gasoline prices(% / 3 months, annual rate) [R.H.S.]
Gasoline prices and consumption
Consumer confidence
03 04 05 06 07 0850
70
90
110
-150
-100
-50
0
50
100
150
200
Consumer confidence - expectations
Gasoline prices(% / 3 months, annual rate) [R.H.S.]
Source: Thomson Datastream
1414
… growth has not tumbled, thanks to support from the rest of the world
-15
-10
0
10
20
90 94 98 02 06-1
1
3
5
7
External demand [R.H.S.]
Exports
-30
-20
0
20
40
98 00 02 04 06 08
Canada(21%)
LatAm (17%)
Euro area(15%)
Other developed Europe (6%)
-30-20
0
20
40
60
98 00 02 04 06 08
Japan(5%)
Asia ex Japan
(19%)
Middle East (3%)
US exports by destination*(% year on year)
(*) The % in bracket is the share in US exports
Exports(% year on year)
90 94 98 02 06-15
-10
0
10
20
-15
-10
-5
0
5
10
15
Real effective exchange rate [R.H.S.]
Exports
Source: Thomson Datastream
90 94 98 02 06-10
0
10
15
-2
0
2
4
6
ImportsDomestic demand [R.H.S.]
(% year on year)
Imports Trade balance
90 94 98 02 06-1.5
-0.5
0
0.5
1.5 (contribution to real GDP growth, % year on year) +1%
-1.0
1.0
1515
In the coming quarters, front loaded fiscal stimulation should provide some additional temporary support…
In 2001, tax rebates amounted to 0.6% of disposable income ($44 billion). Three quarters of the rebates were spent (i.e. consumption was boosted by roughly 0.5%). In 2008 rebates will amount to more than 1% of disposable income. A third has been sent electronically in May.
2001
-2
2
Fiscal stimulation in two episodes(% month on month)
Real disposable income
-3
-1
0
1
32008
Real disposable income
-4
-2
0
4
8
Q2 2008 +2.6Q3 2008 +0.4Q4 2008 -3.0
How consumption might be affected
Assuming only a third of the rebates is spent this time, consumption should be boosted by 0.3% for the year as a whole… with a strong rebound in Q3 if spending takes place with a 2-month lag.
1-month lag 2-month lag
0.0+5.6-5.4
Impact on consumption(% quarter on quarter, annual rate)
Sources: Thomson Datastream, Dexia-AM
Consumption
1616
… while state and local governments’ revenue shortfalls should not significantly affect their spending, at least in 2008
Using $35 billionsof rainy day funds
0.3 0.2 -0.2
Contribution of state and local governments’ expenditures to GDP growth
2007 2008 2009
Real state & local expenditures* 2.2 -0.3 -0.3
GDP weight (in %) 12 12 12
(% year on year)
(*) Rate of growth of expenditures maintaining the same net borrowing requirement as in 2007 (-1.1% of GDP).
0.0 0.0Without using rainy day funds
0.3
Contributions to GDP
During the last few years, as revenues and economic conditions have rebounded, States have built up rainy day funds.
0
20
40
60
80
79 86 93 00 07
States’ rainy day funds($ billions)
Sources: Thomson Datastream, National Association of State Budget Officers
State and local governments
-4
-2
0
2
6
63 73 83 93 03-0.8
-0.4
0
0.4
0.8
1.210
Expenditures and the business cycle
State and local governments’expenditures share in GDP (%, year on year change) [R.H.S.]
Real GDP (% year on year)
4
8
1717
Still, there is no sign of bottoming in the housing sector…
Sources: Thomson Datastream, S&P, Bloomberg
Existing home prices
National
-30
-20
-10
10
20
30
88 92 96 00 04 08
0
S&P/CS(% year on year)
OFHEO(% year on year)
S&P/CS(% quarter on quarter, annual rate)
Futures
Home sales (thousands, annual rate)
Houses for sale to houses sold(months supply) [R.H.S]
Existing
85 89 93 97 01 052500
4500
6500
3
5
7
9
1112
New
Home sales
95 97 99 01 03 05 07500
700
900
1100
13001400
3
5
7
9
1112
By metropolitan area(% change over 3 months, annual rate)
-50
-40
-30
-20
-10
0
10
Sept. 07
Mar. 08
1818
… partly because the financial turmoil prevented mortgage rates from falling with Treasury rates
Sources: Thomson Datastream, Bloomberg
Home sales and mortgage rates
Home sales(thousands, monthly rate)
Mortgage rates (-2M, change over 4M) [R.H.S.]
Home sales (change over 3 months)
-250
-200
-100
0
100
200
250
03 04 05 06 07 08-0.8
-0.4
0.0
0.4
0.8
CDS and mortgage spreads(basis points)
Banks CDS (US libor sample)
0
80
160
200
06 07 08
Freddie Mac CDS
Freddie Mac CDS
-10
30
70
110
06 07 0890
170
250
290
30-year mortgage rate minus 10-year Treasury [R.H.S.]
Mortgage rates(as given by Bankrate, %)
3
4
5
6
7
8
06 07 08
30-year jumbo rate
30-year fixed rate
US 10-year treasury rate
1919
The Fed and the Administration are trying to make credit available to borrowers
Financing of home mortgages(billions of dollars,
change over 1 quarter at annual rate)
ABS issuers-400
0
400
800
94 96 98 00 02 04 06 08
Fed’s balance sheet and off-balance sheet selected items
(billions of dollars)
0
200
400
450
2007 2008
Term Securities Lending facility (TSLF)
Primary Dealer Credit Facility (PDCF) and discount
Term auction facility (TAF)
Repurchase agreements
The Fed is helping financial institutions
to carry their debt load…
Treasury securitiesheld outright
Reserve Bank credit
TAF[R.H.S.]
Repurchase agreements [R.H.S.]
500
600
700
800
900
2007 20080
100
200
300
400
Other loans [R.H.S.]
… without increasing global liquidity
Sources: Thomson Datastream, Federal Reserve
Commercial banks and Saving & Loans
GSE backed pools
2020
However the risk of a deep and long lasting correction in home prices has significantly increased
-11% per year
-1% per year
United States
4.6
4.9
5.2
5.5
5.8
6.1
83 89 95 01 07 13
24%
Reference level*
Home prices
OFHEO home prices(log level)
4.5
5.0
5.5
6.0
6.5
7.0
83 89 95 01 07 13
ReferenceLevel*
29 quarters
53%
30Q
25%-16%
California
Home prices
(*) The reference level is derived, state by state, by regressing local home prices on the national disposable income per household.
Home prices
Reference level*
New York State
3.5
4.5
5.5
6.5
7.0
75 83 91 99 07
OFHEO prices and home transactions
Real OFHEO(% year on year)
Home sales (per year and hundreds of households) [R.H.S.]
-8
-4
0
4
8
12
76 86 96 062.5
3.5
4.5
5.5
6.5
7.5
Sources: Thomson Datastream, OFHEO, Dexia-AM
2121
In the coming years, negative wealth effects could be a serious headwind for the economy
Mortgage equity withdrawal(% of disposable income)
-10
2
4
6
89
93 97 01 05
Cash out
Home equity borrowingTurnover related
MEW
Household wealth(% of annual disposable income)
60 70 80 90 0050
150
250
350
450
Tangible wealth
Financial wealth
Sources: Thomson Datastream, Federal Reserve
A 10% fall in home prices diminishes consumption by 1.2% after two years
0
40
80
100
91 95 99 03 07
Repayment of non-mortgage debt
Home improvements
Acquisition of assets
Personal consumption
Utilization of MEW(%)
60
20
2222
Even if the credit squeeze recedes quickly, growth should stay below potential both this year and next
Unemployment rate(%)
3.5
4.5
5.5
6.5
95 99 03 07
GDP growth(% year on year)
0
2
4
6
95 99 03 07
Source: Dexia-AM
GDP growth in the United States
Q/Qannual rate (%)
2005 2006 2007 2008
Consumption
Investment
- Residential
- Equipment
- Structures
Inventory changes($ billions)
Government
External balance ($ billions)
- Exports
- Imports
GDP
3.2 3.1 2.9 1.7
7.3 2.8 -2.5 -4.5
6.6 -4.6 -17.0 -22.3
9.6 5.9 1.3 2.1
0.5 8.4 12.9 -0.1
33.3 40.3 4.6 7.7
0.7 1.8 2.0 2.2
-618 -624 -556 -448
1203 1304 1410 1507
1821 1929 1965 1956
Q3 07
3.1 2.9 2.2 1.7
Q2 07
1.4
3.0
-11.8
4.7
26.2
5.8
4.1
-574
1380
1953
3.8
2.8
0.1
-20.5
6.2
16.4
30.6
3.8
-533
1441
1974
4.9
2009
1.6
0.2
1.4
2.3
-8.8
16.2
1.6
-365
1623
1988
2.1
Q4 07
2.3
-3.2
-25.2
3.1
12.4
-18.3
1.9
-503
1464
1967
0.6
Q1 08
1.0
-6.8
-25.5
-0.9
1.1
-14.4
2.0
-480
1474
1954
0.9
2323
But the combination of ever-increasing gasoline prices and a protracted credit crunch...
98 02 06-2
0
2
4
6
8
10
Real wagesPCE deflator
Nominal wages
Wages (% year on year)
Gasoline prices and inflation perception
03 05 074
5
6
7
130
200
300
400
Retail gasoline (cents per gallon) [R.H.S.]
Inflation in 12 months (%)
Auto loans delinquency rates(% of loans)
1.0
2.0
3.0
3.5
90 95 00 05
Direct loans
Indirect loans (through dealers)
Mortgage delinquency rates(% of loans)
8
12
16
18
98 02 061.5
2.5
3.5Subprime
Prime [R.H.S.]
98 02 061
3
5Total
Consumer prices(% year on year)
Core
Sources: Thomson Datastream, ABA
Consumer confidence (Conference board, expectations)
69 75 81 87 93 99 0540
70
100
130
2424
… would lead to a “L-shaped” slowdown
Reasonably optimistic Protracted slowdown
Housing starts(thousands units, annual rate)
700
1500
2300
93 97 01 05 09
Structures(% year on year)
-30
-20
0
20
95 99 03 07
Unemployment rate(%)
3
5
7
8
95 99 03 07
Consumption(% year on year)
0
2
4
6
95 99 03 07
OFHEO home prices(% year on year)
-15
-5
0
5
15
01 03 05 07 09
GDP growth(% year on year)
0
2
4
6
95 99 03 07
V-SHAPED
Source: Dexia-AM
L-SHAPED
2525
To sum up
After lowering its policy rate by 225 basis points since January, the Fed will stay accommodative for many months and will continue to try to alleviate credit markets’ strains.
Long term interest rates should stay below 4% as long as the housing market does not give clear signs of stabilization.
If the economic and financial outlook deteriorates significantly, the Fed will act aggressively again and the Congress will vote a new stimulus package to try to avoid a protracted stagnation of the economy. Long term rates would then fall close to 3%.
Against such a backdrop, the stock market perspectives for end of 2008 remain uncertain: 1500 for the SP500 in our reasonably optimistic scenario, but 1250 in a “L-shaped” one!
2626
Economic and financial outlook
Contents
Euro area: weathering the storm?
United States: in recession… ?
Annex
2727
Monthly surveys point to a clear slowdown in activity in the coming months
Eurozone PMI and GDP
GDP (% year on year)
PMI [R.H.S.]
0
2
4
5
99 01 03 05 0747
52
57
62
Services
40
50
60
70
99 01 03 05 07
Manufacturing
France Germany Italy Spain
PMI indices
40
50
60
70
99 01 03 05 07
Sources: Thomson Datastream, Reuters
2828
As in the United States, European households are facing strong inflation
United States
(% year on year)
99 01 03 05 07-1
0
2
4
6
7CPI-food
Contribution to the Euro CPI-food
-1
0
1
2
3
99 01 03 05 07
Bread & cereals
Meat Milk, cheese & eggs
Fruits
(% year on year)
Retail gasoline pricesUnited States(in dollars)
2007 200890
130
170
(Jan. 2007 = 100)
Wholesale gasoline pricesUnited States(in euros)
GermanyFrance
Italy
2007 200880
120
160
180
(Jan. 2007 = 100)
Sources: Thomson Datastream, Eurostat
Shares in the total CPI
Shares in the Euro CPI-food
0
10
20
30
Bread &
cerea
lsMea
t
Fish & se
afood
Milk ch
eese
& eggs
Oil & fa
tsFrui
ts
Vegeta
bles
Sugar,
Honey
…Othe
r
0
5
10
15
Food Motor fuel
United StatesEuro
%
%
GermanyFrance
Italy
Euro area
2929
But except in Spain and Ireland, employment growth has kept its momentum…
-2
0
2
4
67
99 01 03 05 07
Germany
Spain
Employment by country (% year on year)
0
2
4
6
8
99 01 03 05 07
Spain
Ireland
-2
-1
0
1
2
3
4
99 01 03 05 07
Germany
France
Netherlands
Belgium
Employment in the Euro area and the United States
(% year on year)
99 01 03 05 07-2
-1
0
1
2
3
United States
Source: Thomson Datastream
Euro area
3030
… and a progressive improvement in German consumption is to be expected
Employment and wages (2003=100)
Employment
Germany
France
03 05 0799
101
103
105 Real wages per employee
Germany
France
Euro area
03 05 0794
98
102
106
108
Sources: Thomson Datastream, Dexia-AM
Real disposable income(% year on year)
France
Germany93 99 05
-2
0
2
4
5
Real consumption and income in Germany
(% year on year)
-2
-1
0
1
2
3
4
5
93 96 99 02 05 08
Disposable income
Consumption
3131
Moreover, equipment investment in many Euro countries – in Germany in particular – seems to keep on growing
Germany
Spain
Credit to non financial corporations by country (% year on year)
04 05 06 07 08-5
0
10
20
30
35
04 05 06 07 08-10
-5
0
5
10
15
20
Germany
France
NetherlandsBelgium
Italy
Equipment investment in the Euro area and the United States
(% year on year, nominal)
-15
-5
0
5
15
99 01 03 05 07
USA
10
-10
Source: Thomson Datastream
04 05 06 07 0810
20
30
40
Ireland
Spain
Euro area
3232
The sources of Euro domestic demand growth should hence progressively become more balanced…
Sources: Thomson Datastream, Dexia-AM
Domestic demand growth(% year on year)
Euro area
-4
-2
0
2
4
6
8
96 98 00 02 04 06 08
SpainGermanyFrance
Italy
2007
0
2
4
5
Germany Spain Euro area
2008
Domestic demand growth (%, annual average rate)
Germany 26%
France 22%Italy 18%
Spain 13%
Others 21%
Shares in Eurodomestic demand
Contributions to euro area domestic demand growth
(% year on year)
-1.0
-0.5
0.0
0.5
1.0
1.5
96 98 00 02 04 06 08
3333
… while, despite the appreciation of the euro, exports should not totally falter
+3% since January 08
Extra Euro area exports
United States 12%
United Kingdom15%
Other developedEurope 13%
Other advanced 6%CEE & CIS 25%
Developing Asia 12%
Western Hemisphere 4%
Middle East 6%Africa 5%
Other 2%By country of destination (%)
Germany40%
France 15%Italy 14%
Spain 5%
Netherlands11%
Belgium 8%
Austria 4% Finland 3%
By exporting country (%)
Recent exchange rate movements
Euro / $
J FMAM J J ASOND J FMAM J J1.2
1.4
1.6
1.7
2007 2008
Real effective exchange rate (ULC based, 2007 = 100)
GermanyFrance
Italy
SpainNetherlandsBelgium
2007 200885
95
105
110
United States
United Kingdom
100
90Pound
Yen
Zloty
Czech Koruna
J FMAM J J A SOND J FMAM85
125
2007 2008
115
100
Source: Thomson Datastream
Euro effective exchange rate(indexed on the euro $ in 01/07)
3434
If the US avoids a protracted slowdown, Euro growth could stay close to potential
GDP growth in the Euro area
- Construction
- Equipment
(% Q/Qannual rate)
Consumption
Investment
- Other
Changein inventories(contribution, % GDP) Government
External balance(contribution, % GDP)
- Exports
- Imports
GDP
Q107 Q207 Q307 2004 2005 2006 2007 2008
0.2 2.6 2.1
5.3 -0.1 4.4
1.9 -1.5 0.9
4.1 0.9 2.6
-0.8 1.0 -0.6
3.3 3.6 8.4
5.3 1.3 10.2
2.7 1.3 2.9
1.5 1.6 1.8
2.0 3.1 5.3
2.0 2.0 4.6
2.8 4.2 6.5
-0.5 2.5 2.9
0.2 0.0 0.2
1.4 1.4 2.0
0.1 -0.3 0.2
6.7 4.9 8.1
6.5 5.7 7.8
1.9 1.7 2.9
1.5 1.3
4.1 3.3
1.7 1.9
6.0 4.7
4.4 2.4
0.0 0.1
2.2 1.6
0.4 -0.1
6.0 4.3
5.1 4.6
2.5 1.8
2009
1.6
2.8
0.9
4.5
1.6
-0.4
2.0
0.4
4.8
4.2
1.9
Q407
-0.3
3.4
-0.5
-0.4
-0.6
2.3
-1.2
1.5
GDP growth(% year on year)
0
2
4
5
95 99 03 07
Unemployment rate(%)
6
8
10
11
95 99 03 07
Source: Dexia-AM
3535
Still risk factors have accumulated, with fiscal policy having only a limited capacity to respond
Bank lending survey
Factors affecting demand for loans to Euro area enterprises
-60
-40
-20
0
20
40
03 04 05 06 07 08
Fixed investment
Inventories
M&A
Debt restructuring
Budgetary leeway*
Public debt(% of GDP, 2008)
Publ
ic de
ficit
(% o
f GDP
, 200
8)
-4-3-2
0
2
4
6
0 20 40 60 80 100 120
IR
FR
FN
NLSP
SL AU
IT
BG
PT
GE
LX
GR
SP IR GE
SL
Euro AU
FN BG IT LX FR PT
NL
GR
Change in cyclically adjusted primary balances
Stimulation
Restriction
-1.5
-1.0
-0.5
0.0
0.5
1.0(%, 2008)
-80
-60
-40
-20
0
20
40
03 04 05 06 07 08
Euro area
Germany
Demand for loans to enterprises
Governments’ spread vs German 10-year Bund
(basis points)
J F M A M J J A S O N D J F M A M0
20
40
60
80
Italy
Belgium
Greece
FranceSpain
(*) Bubble size proportional to weight in euro area GDP
2007 2008
Sources: Thomson Datastream, European Commission, Dexia-AM
3636
The ECB has tried its best to keep the interbank market liquid but has not changed its policy rate
Policy rate and monetary pillar
Repo rate (%) [R.H.S.]
99 01 03 05 072
6
2
3
4
5
10
14
Frontloading the distribution of liquidity
100
150
200
250
300
Jan Mar May Jul Sep Nov Jan Mar May Jul
Reserves Reservesrequirement
(€ billions)
2007 2008
Lengthening the average maturity of operations
-200
0
200
400
600
Jan Mar May Jul Sep Nov Jan Mar May Jul
Main refinancing operations
Longer-term refi. operations
Fine-tuning operations
Total net refinancing operations
2007 2008
(€ billions)
Consumer prices(% year on year)
Oil=$125
Oil=$150
Core CPI
Headline CPI
0
2
4
5
97 99 01 03 05 07 09
Cumulated deviation from the ECB inflation target
(index, 1999=100)
99
101
103
104
99 03 07
100
102
Sources: Thomson Datastream, ECB, Dexia-AM
Credit to the private sector(% year on year)
M3(% year on year)
3737
Up to now, the euro / dollar exchange rate has remained driven by expectations on monetary policies
O D F A J A O D F A J1.23
1.30
1.40
1.501.53
-1.4
-1
0
0.7
2006 2007
Sept. 08 short term rate differential (%, Euro-US) [R.H.S.]
$ against the euro
2006 2007
Expected Sept. 08Euro short term rates (%)
3.0
4.0
5.0
5.5
Oct Jan Apr Jul Oct
Memo: December 2007
Expected Sept. 08 US short term rates (%)
Sources: Thomson Datastream, Dexia-AM
Exchange rates and short term interest rates differentials
2
3
4
5
6
Oct Jan Apr Jul Oct Jan Apr
2006 2007 2008
Expected June 09US ST rates (%)
Expected June 09 Euro short term rates (%)
1.23
1.38
1.53
1.68
Oct Jan Apr Jul Oct Jan Apr-1.4
-0.8
-0.2
0.4
1.0
1.6
2006 2007 2008
1.23
1.38
1.53
1.68
Oct Jan Apr Jul Oct Jan Apr-1.4
-0.8
-0.2
0.4
1.0
1.6
2006 2007 2008
June 09 short term rate differential (%, Euro-US) [R.H.S.]
$ against the euro
3838
To sum up
With high inflation and an economy staying close to potential, the ECB is likely to stay pat this year.
Long term 10-year interest rates should stay around 4% until the end of 2008.
If financial distress increases, the ECB might contribute to global stabilization by adjusting its policy rates.
As in the US, the stock market perspectives for end of 2008 remain uncertain: the MSCI EMU should be close to 250 if growth tracks our reasonably optimistic scenario, but at 190 with a deeper slowdown.
3939
Economic and financial Outlook
Contents
Annex
Euro area: how resilient?
United States: walking on a tight rope…
4040
COMMERCIAL BANKS DELINQUENCY AND CHARGE-OFF RATES(% of loans)
Real estate delinquency rates
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
87 92 97 02 07
Total
Residential
Commercial
Delinquency rates
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
87 92 97 02 07
TotalC&I loansReal EstateConsumer loans
Charge-off rates
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
85 90 95 00 05
TotalC&I loansReal EstateConsumer loans
Consumer loans delinquency rates
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
87 92 97 02 07
Total
Credit cards
Other
Real estate charge-off rates
- 0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
85 90 95 00 05
TotalResidentialCommercial
Consumer loans charge-off rates
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
85 90 95 00 05
TotalCredit cardsOther
Delinquency rates for US commercial banks
Sources: Thomson Datastream, Federal Reserve
4141
Adjustable mortgage delinquency rates and projected ARM resets
Prime - adjustable rate
0
1
2
3
4
9899000102030405060708
30d 60d > 90d
Subprime - adjustable rate
0
2
4
6
8
10
12
9899000102030405060708
MORTGAGE DELINQUENCY RATES(% of loans)
Prime residential loans - seriously delinquent
0.4
0.9
1.4
1.9
2.4
2.9
3.4
3.9
4.4
98 99 00 01 02 03 04 05 06 07 08
PrimeFixed rateAdjustable rate
Prime residential loans - foreclosure started
0.0
0.4
0.8
1.2
98 99 00 01 02 03 04 05 06 07 08
PrimeFixed rateAdjustable rate
Subprime residential loans - seriously delinquent
0
5
10
15
20
25
98 99 00 01 02 03 04 05 06 07 08
SubprimeFixed rateAdjustable rate
Subprime residential loans - foreclosure started
0.0
1.0
2.0
3.0
4.0
5.0
6.0
98 99 00 01 02 03 04 05 06 07 08
SubprimeFixed rateAdjustable rate
Mortgage delinquency rates in the United States
Source: Thomson Datastream
4242
Selected indicators for Spain
Credit institutions’ balance sheet(year on year change, euro billions)
Ratio of doubtful loans(% of total loans)
0.0
0.4
0.8
1.2
1.6
00 02 04 06 08
Default rate curve by vintage
Housing prices (% year on year)
-5
0
5
10
15
20
97 00 03 06
Spain France
United States
Credit to the private sector (% year on year)
Liabilities
-50
0
50
100
150
200
250
00 02 04 06 08
Domestic deposits
RoW deposits
Securities other than shares
0
10
20
30
40
50
97 00 03 06 09
Households
Construction and real estate activities
Other business
-100
0
100
200
300
400
500
00 02 04 06 08
Loans
Securities other than shares
Total assets
Assets
Sources: Thomson Datastream, Central bank of Spain, Dexia-AM
Money does not perform. People do.
June 2008 - Amsterdam
Anton Brender
The economic and financial outlook in the wake of the credit turmoil