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Pres powerpoint 2
- 1. 1 Revival of Inflation, Pick-up of Interest Rates, Market Correction Back to Normality or New Paradigm? Richard Brun Agence France Trésor
- 2. 2 Since 2005, inflation is apparently picking-up Yearly inflation rate -2,0 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 16,0 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 (6 m ) in% Yearly inflation rate Source: Bloomberg
- 3. 3 Inflation is mainly due to oil prices increases.. Evolution des prix du pétrole (WTI) depuis 1973 (en valeur nominale et réelle) 0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 80,00 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 $parbarril Prix nominal Prix réel 2006 Source:Bloomberg
- 5. 5 As well as increase in capacity utilisation Evolution of utilisation capacities in EU and US 74 76 78 80 82 84 86 m ars-98 sept-98m ars-99 sept-99m ars-00 sept-00m ars-01 sept-01 m ars-02 sept-02m ars-03 sept-03m ars-04 sept-04m ars-05 sept-05m ars-06 In% EU Average EU US Average US Source:Bloomberg
- 6. 6 As a consequence the Fed has consistently hiked short term interest rates Since 2004 Fed funds rates and average rate in 50 years 0 5 10 15 20 25 1954:07:00 1956:08:00 1958:09:00 1960:10:00 1962:11:00 1964:12:00 1967:01:00 1969:02:00 1971:03:00 1973:04:00 1975:05:00 1977:06:00 1979:07:00 1981:08:00 1983:09:00 1985:10:00 1987:11:00 1989:12:00 1992:01:00 1994:02:00 1996:03:00 1998:04:00 2000:05:00 2002:06:00 2004:07:00 Fed Funds US 50 Y average rate Source:Bloomberg
- 7. 7 Long term interest rates are picking-up in the US but also in the euro zone Evolution 10Y Rates and Average Rate 0 2 4 6 8 10 12 14 16 18 1954:07:00 1956:08:00 1958:09:00 1960:10:00 1962:11:00 1964:12:00 1967:01:00 1969:02:00 1971:03:00 1973:04:00 1975:05:00 1977:06:00 1979:07:00 1981:08:00 1983:09:00 1985:10:00 1987:11:00 1989:12:00 1992:01:00 1994:02:00 1996:03:00 1998:04:00 2000:05:00 2002:06:00 2004:07:00 in% 10Y monthly Average rate Source:Bloomberg
- 8. 8 Euro zone has witnessed the same evolution OAT 10Y 0,00 2,00 4,00 6,00 8,00 10,00 12,00 14,00 16,00 18,00 20,00 1957:01:00 1959:01:00 1961:01:00 1963:01:00 1965:01:00 1967:01:00 1969:01:00 1971:01:00 1973:01:00 1975:01:00 1977:01:00 1979:01:00 1981:01:00 1983:01:00 1985:01:00 1987:01:00 1989:01:00 1991:01:00 1993:01:00 1995:01:00 1997:01:00 1999:01:00 2001:01:00 2003:01:00 2005:01:00 in% OAT 10Y Source:AFT
- 9. 9 The shrinking of liquidity entails a greater credit discrimination Source: AFT
- 10. 10 It seems that we are back to the cycle in the US GDP evolution, Public Deficit et Fed Funds -10,0 -5,0 0,0 5,0 10,0 15,0 20,0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 GDP Growth Deficit/GDP Cour Fed Funds Source: Bloomberg
- 11. 11 Finally the US must adjust the exchange rate to the origin of the deficit. This seems underway… Evolution of the USD exchange rate vs main currencies 70 80 90 100 110 120 130 janv-90janv-91janv-92janv-93janv-94janv-95janv-96janv-97janv-98janv-99janv-00janv-01janv-02janv-03janv-04janv-05janv-06 base100in1998 G10 currencies Other main Currencies Average index Source:Federal Reserve
- 12. 12 Although a correction is probably underway, major changes are taking place in the global economy that are reshaping the world to come
- 13. 13 One striking symptom of this new paradigm is the muted inflation that we are actually witnessing Real oil price evolution and inflation OECD -2,0 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 16,0 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 %inflation 0 10 20 30 40 50 60 70 80 Priceperbarrilat2006prices Yearly inflation rate Oil prices in real terms Sources: Bloomberg, US Dept of Energy
- 14. 14 China is experiencing a muted inflation.. Consumer price inflation in China -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 annual%change Headline Core Sources: Bloomberg, BCA
- 15. 15 ..As well as emerging Asia.. Comparison unit labor cost in emerging Asia and US import price from Asia 80 85 90 95 100 105 110 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Base100in1994 70 75 80 85 90 95 100 105 110 Base100in1994 EA Unit labor cost US M Price from Asia
- 16. 16 …Or Europe Euro area inflation 0 0,5 1 1,5 2 2,5 3 1998 1999 2000 2001 2002 2003 2004 2005 2006 in% Headline Inflation Core Adjusted Core Adjusted Core: Core adjusted by administered prices Source: ECB Source: ECB
- 17. 17 Maybe this has to do with demographics…
- 18. 18 …But three major evolutions are underway that probably explain the present situation - There is a massive and irreversible transfer of industrial activity - There is a massive and unprecedented increase in the world active population - There is a massive ageing of the world population concerning presently the industrial world, but which will soon reach emerging economies. This situation will have dire macro economic and financial consequences
- 19. 19 There is a massive and irreversible transfer of industrial activities from industrial to emerging countries Share of industrial employment out of total employment 15,00 20,00 25,00 30,00 35,00 40,00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 In%oftotalemployment Euro area US Source:OECD
- 20. 20 Which is particularly visible in the global trade.. Share of emerging economies in world trade of manufactured products 10,0 15,0 20,0 25,0 30,0 35,0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 In% Share of X from emerging Share of M from emerging Source:COMTRADE
- 21. 21 And spectacular for a country like China Market share of China and main OECD countries exports 0 2 4 6 8 10 12 14 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 US Germany Japan France UK China Source:OMC
- 22. 22 A major shift in global production has taken place between the 1990s and the 2000s 0 2 4 6 8 10 12 14 16 18 in % China Germany Belgium France Italy Sout Korea Japan Netherland Spain UK US Contribution of countries to world exports of manufactured goods in % value 2000-2004 1992-2000 Sources: OMC, IFRI
- 23. 23 This explains partly the current account deficits in OECD countries…
- 24. 24 …And the dramatic and unusual increase of emerging countries reserves Evolution of reserves in US$ 0 500 1000 1500 2000 2500 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 InBnofUS$ Industrial countries Emerging countries Source: IMF
- 25. 25 The transfer of industries has coincided with an increase in active population unprecedented in history World active population on the market 0,0 1000,0 2000,0 3000,0 4000,0 5000,0 6000,0 7000,0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 World Population on the market End of socialist system Source: UNDP
- 26. 26 This situation has had major consequences on the macroeconomic evolution over the last few years: 1- Extreme pressure on labor cost all around the world, particularly in OECD countries, where transfer of employment continues 2- We are typically in a Keyneysian depression with increase of the level of unemployment This is due to the high level of unemployment in the agricultural sector part in the new active population. 3- As the increase of active population did not come with the equivalent capital needed, we witnessed a major increase in the marginal productivity of capital 4- This situation pushed dramatically profits of companies transfering their production to emerging economies 5- We are also witnessing an increase of world savings through transfer of revenue to countries with high level of savings (this situation, as well as a lenient monetary policy has pushed interest rates down)
- 27. 27 Another unprecedented phenomenon accentuating the present global trend, is a dramatic increase in productivity in China… Strong productivity gains in China 5000 6000 7000 8000 9000 10000 11000 1999 2000 2001 2002 2003 2004 2005 2006 PercapitaincomeinYuan 40 50 60 70 80 90 100 Base100in1999 Per capita income Manuf Unit Labor cost Source:BCA research
- 28. 28 …Entailing an unusual increase in profits in OECD countries (actually the highest since 1929) Evolution of profits as part of GDP in OECD countries 4 5 6 7 8 9 10 11 12 13 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 in%ofGDP US Japan France Allemagn e Source: NBER, Eurostat
- 29. 29 Besides this massive transfer of productive capacity between the different zones, we are now witnessing an unprecedented ageing of the world population that will have dramatic consequences on: - The financial industry -The availability of funds and world liquidity over the next 30 years
- 30. 30 This is underway in OCDE countries… Evolution of potential active population 64,00 64,50 65,00 65,50 66,00 66,50 67,00 67,50 68,00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 In%oftotalpopulation OECD Euro area EU 15 Source: OECD
- 31. 31 …But China is also going to witness an ageing that will dramatically increase the number of retired persons Evolution of Chinese population structure by age 0 100 200 300 400 500 600 700 1950 1995 2010 2025 2050 enMillionsd'individus 0-19 20-49 50+ Source:Chinese Gvt, OECD
- 32. 32 The needs for retirement funds is not matched so far in OECD countries Pension funds assets (% GDP) 0 20 40 60 80 100 120 140 Australia Belgium C zech Republic Finland G erm any Iceland Japan M exico N ew Zealand Poland Slovak R epublic Sw eden U nited Kingdom en%duPIB Pension funds assets (% GDP)
- 33. 33 Moreover most studies show that the needs for pension funds are much higher than the present level Minimum needs of pension funds in the EU in % of GDP 0,0 20,0 40,0 60,0 80,0 100,0 120,0 140,0 2000 EU 2004 2010 2020 2030 2040 2050 In%ofGDP 2000 EU 2004 2010 2020 2030 2040 2050
- 34. 34 Needs for retirement funds is even less matched in emerging economies 0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 In%ofGDP Argentina Brazil Chile Colom bia ElSalvador Fiji India Kazakhstan Pakistan Peru Russia Slovenia SriLanka Ukraine Pension funds assets in emerging economies Pension funds assets (% GDP)
- 35. 35 Financial consequences of this new macroeconomic and demographic environment • For the next 10 to 15 years, global LT interest rates could remain low due to the demand for LT sovereign bonds (as has been the case over the past few years). • For this period the excess savings of emerging economies should help finance all the needs. • However, progressively, due to the dry-up of underemployment in emerging economies, excess savings will disapear, and the level of savings should pick-up in developed countries (the Modigliani theory favoring the increase of savings late in life will be tested). • If there is not enough savings, then public deficit will increase and public debt could explode.
- 36. 36 We have been witnessing an increase of about 100 % of bond markets although LT interest rates have consistently dropped 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 InbillionUS$$ Evolution of bond market in the world Autres Corporate Govt
- 37. 37 This is particularly true in the US where the impact of asian flow of funds has been the strongest Evolution de la dette obligataire US et taux 10 ans 60,0 70,0 80,0 90,0 100,0 110,0 120,0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 En%duPIB 3 3,5 4 4,5 5 5,5 6 6,5 7 7,5 En% Total% du PIB Tx 10 ans US
- 38. 38 The XXIst century could well look alike the XIXth century Taux d'intérêt à 10 ans français et américains depuis 1800 -5 0 5 10 15 20 18 00 18 10 18 20 18 30 18 40 18 50 18 60 18 70 18 80 18 90 19 00 19 10 19 20 19 30 19 40 19 50 19 60 19 70 19 80 19 90 20 00 FRANCE ETATS-UNIS Ecart France - Etats-Unis Source : CSFB
- 39. 39 The structure of demand of securities shows that we have been progressively reverting to the situation of the beginning of the XX th century and should continue to do so Evolution of the sovereign debt structure in France 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1913 1917 1921 1925 1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 en%dutotal Concours BDF BdT à CT (jusqu'à 5ans) Engagements Divers Dette long terme obligataire Dette perpétuelle
- 40. 40 The only serious concern is the capacity of Governments to tackle the issue of savings and pension funding. If they do not succeed, then sovereign debt could explode… Sovereign debt: The unacceptable scenario 0 100 200 300 400 500 600 2005 2010 2020 2030 2040 2050 In%ofGDP Austria Belgium Czek Republic France Germany Greece Italy Japan Korea Netherland Poland Spain UK US
- 41. 41 …With inevitable consequences on ratings