When and How will the Global Economy Recover ?

1. When and How will the Global Economy Recover ? Philip Suttle IIF, Director of Global Macroeconomic Analysis Garanti Masters Private Banking Conference Istanbul, Turkey April 17, 2009

2. An Organizing Framework • A different kind of global business cycle, driven by private credit, not public (monetary and fiscal) policy • The private credit cycle is global in nature, albeit with some sector, country and regional concentration • The downleg of this cycle (“the de-leveraging phase”) has come in two parts: the “strains” phase (early 2007 – Sept 2008) and the “crisis” phase (Sept 2008 – Mar 2009) • The best way to characterize our global outlook is that we are projecting a return to conditions more consistent with the “strains” phase in the months ahead

3. Global Capital Flows and the Global Business Cycle percent percent change oya, inverted scale

4. A Global Credit Boom U.S. Household Debt Growth Emerging Markets Monetary Growth Percent, q/q saar Percent change over a year ago

5. The De-Leveraging Phase Has Had Two Phases The “Strains” Phase (2007 - Sep. 2008) • Collapse of asset-backed securities market; re-intermediation of credit on to banks’ balance sheet • Slowing in U.S. growth to near-recession levels • Solid growth in other key parts of global economy (“decoupling”) • High and rising commodity prices • Increasingly supportive G7 policy stance The “Crisis” Phase (Sep. 2008 - March 2009) • Unprecedented turmoil in financial markets, break down of trust • Collapse in global industry, world trade and commodity prices • Widespread global recession • Plunge in operating levels and rise in unemployment • Policy has become very supportive and highly innovative

6. The Current Global Slump is Unprecedented: Deep and Synchronized Global Exports and Manufacturing Production Manufacturing Production Percent, 3m/3m, saar (nominal terms) Percent, 3m/3m, saar Percent, 3m/3m, saar (both axes)

7. A Rotation in the Sources of Weakness in Final Demand G3 Retail Sales Volume and Industrial Production G3 Capital Goods Orders Percent, 3m/3m, saar Percent change at annual rate, GDP weighted

8. A Significant Rise in Unemployment is in the Pipeline United States Euro Area Percent change over a year ago Change versus a year ago, %, inv. scale Percent change over a year ago Change versus a year ago, % inv. scale Change in Unemployment Rate Real GDP (left axis)

9. A Significant Rise in Unemployment is in the Pipeline (2) Japan Emerging Asia Percent change over a year ago Change versus a year ago, %, inv. scale Percent change over a year ago Change versus a year ago, % inv. scale Change in Unemployment Rate Real GDP (left axis)

10. A Significant Rise in Unemployment is in the Pipeline (3) Emerging Markets Latin America Percent change over a year ago Change versus a year ago, %, inv. scale Percent change over a year ago Change versus a year ago, % inv. scale Change in Unemployment Rate Real GDP (left axis)

11. Massive Support From Global Economic Policy U.S. Fiscal Thrust* Trends in Official Interest Rates Percent of GDP Percent, GDP – weighted regional averages - = expansion * Change in full employment budget balance

12. Fiscal Thrust in International Perspective Fiscal Stimulus Packages in Summary Percent of GDP

13. U.S. Fiscal Policy Impact of Obama Package on the Federal Deficit The Rise in the Federal Deficit Decomposed

14. Quantitative Easing is the New “New Thing” Central Bank Balance Sheets: Total Assets Index, end-June 2007=100 Current Level of Assets (% GDP) BoE 12.6% Fed 14.5% ECB 19.7% BoJ 24.1%

15. Key Unknown is How Protracted Private Sector Adjustments Will Be U.S. Personal Sector Saving Rate and Wealth/Income Ratio Percent of disposable income, average of last 8 quarters Percent, average of last 8 quarters, inv. scale

16. Relative Pessimism about Europe German Manufacturing Indicators Percent, 3m/3m, saar

17. Areas of Concern in Europe • Lack of economic flexibility • Lack of policy coordination • Extent of deleveraging ahead in banking systems remains significant • Growing public debt problems in many countries • Over-extended housing markets • Difficulties in Emerging Europe

18. Emerging Europe: The Epicenter of the Third EM Capital Flows Slump since 1980 Net Private Capital Flows by Major Region Percent of emerging market GDP Percent of emerging market GDP

19. The IMF to the Rescue IMF Credit Outstanding $ billion

20. There Are Encouraging Signs from China China: Monetary Growth Percent change over a year ago

21. Commodity Prices Appear to Have Hit Bottom, For Now CRB Commodity Price Index Index Jan. 2002 =100

22. Global Output Growth

23. Concluding Messages • The global economy has been in free-fall for six months, but there are some tentative signs that this is moderating. • In the months ahead, a return to a desynchronized global economy is likely. • A significant increase in global unemployment is now underway, however. • Massive, unprecedented, global policy easing is now underway, the long-term implications of which are somewhat unclear. • Major challenges lie ahead in Europe. • The global backdrop for Asia and Latin America remains very tough, but has improved slightly in the past few months.

24. When and How will the Global Economy Recover ? Philip Suttle IIF, Director of Global Macroeconomic Analysis Garanti Masters Private Banking Conference Istanbul, Turkey April 17, 2009