Industry and Sector Research

Editorial

The three questions to ask at the start of autumn 2010

09.08.2010

The period following the return from summer holidays is often more crucial for businesses than the post-Christmas period. The pace of the recovery in activity following the summer break often sets the tone for the entire winter. After the global recovery of the first half of 2010, most sectors will benefit from a fairly better autumn, as our global sectors climate report shows. All the same, in assessing whether this will prove a successful period, there are three questions that we need to seriously consider.


1.Will my business increase its sales?

The answer is rather in the affirmative, but not in all markets nor in all sectors. Consumption is now stalling in certain countries – in the US and in Europe –with the progressive start of a period of public budget austerity and of continued debt reduction by households. Very noticeable in sectors such as automaking, where the end of scrappage allowances is bringing a plunge in sales, the less dynamic household demand should lead to caution in a number of sectors: consumer electronics, construction and distribution. By contrast, in Asia and Latin America, demand should continue to grow at impressive rates. Also, there will be no relief on the public demand front, and this will hit the civil engineering and infrastructure equipment sectors.

2. Should I expect an increase in production costs?

Here, the answer is clearly ‘yes’. Prices of agricultural commodities,metals and energy have returned to their record highs of early 2008, even exceeding them in some cases. A significant production cost shock is now spreading through industry, rail equipment,
aeronautics, chemicals and steel, and this will initially act to reducemargins.

3. How do I project my business’s budget for 2011?

The relative share of your business turnover accounted for by exports to – or production in – the emerging countries is an important factor. Growth will come next year nearly entirely from the emerging regions (Asia, Latin America, etc.). Businesses that are positioned in these markets can anticipate turnover growth of more than 10%. By contrast, growth in Europe and the US will be far more modest, and undoubtedly at roughly half the average rate seen in those countries over the past ten years.

Karine Berger

Source: Economic outlook - Global sectors - Summer 2010

The domino theory

12.11.2009

Just over a year ago, every country and every sector plunged in unison into the global recession. By contrast, the different countries and sectors are now moving in scattered fashion, and by turns, onto the long road out the crisis.

The industrial upturn posted this summer offers an initial illustration of the varied pace of recovery across different parts of the world: whilst some experts are now focusing on a potential overheating in China, the UK in Q3 2009 posted another quarter in steep recession, taking GDP growth over one year to -5.3%. In China, it is true, not only are auto and steel production returning to the pre-crisis levels of the start of the year, but also the rate of growth spurred on by the government’s immense stimulus package is now higher that those achieved in the course of recent years.

In any event, the Chinese engine is clearly impacting on trade in Asia. One example of this is the 9% leap in Japanese exports this summer. And, starting from all this, a geographical spread of recovery is taking place in a kind of domino fashion. Asia has already emerged from the crisis, and the other emerging economies will revive over this autumn and winter. In the US, the rise in unemployment will cease in summer 2010. The last zone to raise its head above water – at the end of next year – will be Europe.

Looking at the different sectors, their interdependence is patently obvious, and there was no way to stem the tide. The central domino, since the beginning of the downturn, is the auto industry, due to its impact on intermediate sectors. In Asia, the upturn is also accompanied by the refiring of blast furnaces and by a revival in semiconductor production. In Europe, the improvement in the industrial outlook has more or less paralleled that in the auto sector and in intermediate goods (chemicals and plastics).

But with industry yet to stage a recovery, business services (advertising, temporary staffing) are stuck, and slowing wage gains are having secondary effects on household spending. As a result, more or less on a worldwide basis, retail and wholesale trading is entering a long period of convalescence. Lastly, the construction sector will be the final domino: reabsorbing the property bubbles formed will require the longest recovery time. Our sector outlook is inarguably a bit brighter than the one we offered last spring. but only some sectors are benefiting from the better climate. As for the others, nearly all of them are still battered by the storms.

Karine Berger

Source: Economic outlook - Global sectors - Winter 2009

No momentary crisis

The crisis of 2008-2009 has yet to receive its official name: history will be the judge, after the academicians have dissected it and decided onwhat to call it. But even without knowing its proper name, we can compare it to its elder siblings. And when we do view this crisis alongside earlier ones, we have to conclude that this year’s 2% drop in world GDP constitutes an extraordinary shock. As for earlier world recessions, the fact is that, since 1918, output has fallen on a global basis on only two occasions: first, the Great Depression of the 1930s and, next, during the Second World War. The oil price shock of 1973 was also a period of sharp slowdown, although, technically, it was not a recession. Thanks to the invaluable work of economist and statistician Angus Maddison, we now know not only how to date these crises, but also how to measure their scale. Accordingly, we can estimate that GDP in the United States fell by 25% between 1929 and 1933, and also that it took around 10 years for the US economy to recover fromthe shock, since it was only in 1939 that GDP returned to its 1929 level. In the first half of the 1940s, it was clearly Europe thatwas the most violently hit by recession. Between 1939 and 1946, it is estimated, French GDP fell by 40%, returning to its 1939 level only in 1949. German GDP fell by 60%, returning to 1944 levels in 1955. British GDP dropped by 8%. By comparison, in 1975, the only year post-1945 when GDP fell in the majority of the OECD countries, GDP in the countries of Western Europe fell by just 0.8%,while GDP in the US fell by 0.3%. But worldwide, GDP in 1975 rose by more than 1%.

In this chronicle, the recession of 2009, at undoubtedly between -3% and -4% in the OECD countries, stands out as a major and extremely rare event. As the graph below shows, US industrial output will post a decline unprecedented in the long-term record, dropping by the end of 2009 to its level of 1998. If past history can be relied on, it takes time to recover from such shocks.

The injuries suffered threaten to force businesses into a process of long and painful adaptation and also to upset the internal workings of whole economies. In this vein, the early ‘good news’ heard this spring on the macroeconomic front needs to viewed with great caution, undoubtedly representing more of a technical gain than a genuine upturn. We are in crisis, and full recovery is not yet on the menu.

Karine Berger

Source: Economic outlook - Global sectors - Spring 2009

Halting the crisis at what cost?

The instability that has taken hold in world financial markets is quickly altering the course of the world economy, tipping it from an outlook of abrupt economic downturn to one of much more profound breakdown in OECD markets. Stockmarkets in the space of a month have shed nearly 30% of their value. This would not be problematic were there none of the yo-yo fluctuations we have been seeing on ever more record scale, whether upward or downward. It is not the price volatility in the markets that is increasing, but rather the volatility of the price volatility! Behind this observation is a complex mathematical calculation, but I can express it in more prosaic terms: for very many assets, we can no longer define a price. This, by the way, is one of the points of dispute in the Paulson plan adopted after so much difficulty by the US Congress, aimed at using $700bn to buy the banking system’s bad debts, similarly to the different European plans announced on October 12. The point of the dispute: the price at which the aforesaid bad debts are to be purchased for now does not exist. It is not so much liquidity that is lacking in the market (the amounts of cash being injected each day by the central banks are equally record-breaking) as the fact that billions of assets have become illiquid. Illiquid, that is, simply because they have no price attached to them, something that in economics constitutes a serious problem. Now, of course it’s impossible for governments or heads of central banks to admit that they no longer understand very much – but with the IMF and its successively revised assessments of the cost of the financial crisis, putting it first at $1,000bn, then at $1,300bn and now at $1,400bn, what other conclusion can we draw?

For all that, how could the volatility of the price volatility of financial assets also impact on the real economy, from the international conglomerate all the way down to the small artisan business? Well, to issue credit within an economy, i.e., to lend to businesses, the banking system has to create money. The creation of this money is at a legally established ratio to a reserve of money that is issued by the central bank and traded between banks on the interbank market. Since no actor is quite certain anymore of being repaid one day by the other actors –measuring the risk is practically impossible – the interbank market has seized up, and, as a result, the financial system has to limit the credit it issues in the real economy or considerably increase the cost of credit.

The consequences of this transmission to the real economy will be severe: beyond the postponing of investment projects, there will be increasing cash flow problems, and this will lead to many bankruptcies. This issue of Global Sectors Outlook shows that every sector of the world economy is now entering into slowdown, due to both the economic crisis and the financial crisis.
How to stem the spiral? While a coordinated response by the central banks has not yet been conclusive, and while it is certain that measures taken by OECD governments (the US on one side and European nations on the other) will prove helpful, responsible behaviour on the part of every single actor is now also a key factor in the future outcome of the problem.

Karine Berger

Source: Economic outlook - Global sectors - Winter 2008

The crisis: act II?

The world economy started 2008 in a financial storm. The subprime crisis, resulting from the collapse of the real estate bubble in US and from securitisation methods, has spread to the heart of the financial markets. With the steady stream of announcements made of write-downs in bank assets by several billion dollars – losses potentially engendering systemic risk – the pressures on the financial markets have continued to mount: falling share prices and increased volatility are simply the downside of a sudden lack of liquidity.

Volatility peaked around mid-March, suggesting that the worst of the financial crisis, strictly speaking, may have passed, or in any event that Act I was over. In this environment, the performance of real economies in Q1 could come as a surprise.
With 0.2% GDP growth in the US, 0.6% in France and, especially, 1.5% in
Germany, every country posted better growth than expected, while, against all expectations, activity in the OECD countries accelerated at the close of the winter. But at same time, the expectations of those who constitute the economy – producers and consumers –were down on both sides of the Atlantic.

Businesses know that they are about to enter into a clearly more difficult stage of the cycle, facing both increasingly hard financing conditions and a slowing in demand. This is because the shock waves spread to a greater extent than anticipated to the entire business and household financial markets. The spread of the crisis to the real economy via the restriction of credit in spring 2008 was only just the beginning. Why? Because, to compensate for their refinancing costs, the banks could either increase interest rates for corporate lending or decrease lending amounts. Or both.

When a credit crunch begins in a given market – in this case, construction – economic history teaches us that it often blindly spreads to other markets. Logically, because of the overvalued state of property markets in the US, Spain and, to a lesser extent, the UK, their construction markets were the first to be hit. What is less logical, it is that credit conditions for other productive sectors also hardened to a degree during the first quarter. The Bank of France’s April survey of credit distribution shows that banks are planning not only to continue raising their margins, but also to reduce the amount and the duration of loans, both to large companies or small businesses. As to restrictions on credit to individuals, these are especially noticeable in the US; Europe, for its part, still seems little affected. Even so, consumers are in a state of readiness, and, in the euro zone, consumption slowed in the first quarter. The stage is set for Act II of the financial crisis of 2008.

Karine Berger

Source: Global sectors outlook - Spring / Summer 2008