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Old Europe – New Europe Implications for Risk Management

Old Europe – New Europe Implications for Risk Management. Supply Chain Risk Leadership Council February 22, 2007. Daniel M. Hofmann Group Chief Economist Zurich Financial Services. The problem defined. A definition of supply chain risk* includes risks due to Unnatural disasters

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Old Europe – New Europe Implications for Risk Management

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  1. Old Europe – New Europe Implications for Risk Management Supply Chain Risk Leadership Council February 22, 2007 Daniel M. Hofmann Group Chief Economist Zurich Financial Services

  2. The problem defined • A definition of supply chain risk* includes risks due to • Unnatural disasters • Natural disasters • Health • Disruptions in the supply chain infrastructure • It excludes the economic framework in which we are operating, a glaring omission in a time characterized by discontinuities. • The answer to the question whether Europe can successfully deal with discontinuities arising from further integration is decisive for the treatment – and ultimate mitigation – of economic supply chain risk. *George A. Zsidisin, Business and Supply Chain Continuity, CAPS Research, January 2007

  3. A Global Boom... 10 8 6 Growth in % 4 2 … and Fastest Growth Since the Early 1970s 0 8 NIAE Developing Asia 2003 2004 2005 2006 2007 7 World Output Advanced Economies 6 5 Growth in % 4 3 Average 3.7 2 1 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 World Output Source: IMF Source: IMF

  4. Improved productivity No housing bubble 5 14 12 4 10 3 8 2 6 1 4 0 2 0 -1 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 85 90 95 00 05 US Eurozone US Eurozone Lower inflation Diversified export structure 6 45 36 4 27 2 18 0 9 -2 0 97 98 99 00 01 02 03 04 05 06 95 96 97 98 99 00 01 02 03 04 05 06 US Eurozone US Accession 10, Asia ex Japan, Russia What went right in Europe?An excellent outlook for the short term Source: Thomson Datastream Source: Thomson Datastream Source: ABN Amro Source: Thomson Datastream

  5. 2200 A Bubble in Commodities Emerging Market Bond Spreads 2000 1800 1600 1400 Oil 1200 Metal Brazil 1000 800 600 400 Food Asia Composite 200 0 2002 2003 2004 2005 2006 Source: Thomson Datastream Global Saving / Investment Imbalances Growth of Global Derivative Markets 7 400 25 (Notional Amounts Outstanding; USD trill.) 5 360 20 3 Japan NIAE Dev Asia 320 15 1 Saving - Investment in % of GDP -1 UK Euroland 280 10 USA -3 240 5 -5 200 0 -7 June 04 Dec 04 June 05 Dec 05 June 06 Total Contracts (lhs) Credit Default Swaps (rhs) Too good to be true? Signs of a liquidity-driven bubble economy… Source: Thomson Datastream …or real factors at work? Source: IMF Source: BIS

  6. Three more distinct risks • Risk one • Upside risks to inflation and interest rates • Risk two • Global imbalances and a disorderly correction • Risk three • Lagged impact of high oil prices and the US housing bubble

  7. Technology pull Market dynamics Change Governance gap Institutional capabilities;mindsets Time 1980 1990 2000 2010 A big challenge not only for Europe:Governance gap in a time of discontinuity • Discontinuities caused by • 1989 and all that (e.g. CEE enlargement) • Impacts of globalization due to • Rapid advances in technology • Financial engineering • Tight integration of capital markets • Doubling of global labor force • Geopolitical risks, terrorism • Climate change • Discontinuities create frictions and a potential for political backlash (as seen in reaction to the perceived inequality of globalization). • They are of particular concern in light of a widening governance and gap.

  8. Stock Market Capitalization GDP per capita of CEE members 80 30000 60 20000 in % of GDP 40 In USD 20 10000 0 0 EU Latvia Poland Estonia Hungary Slovakia Slovenia Lithuania EU Latvia Czech Republic Poland Estonia Hungary Slovakia Slovenia Lithuania Czech Republic Value added through CEE enlargement 250 Average 6.4 200 Average 4.3 Rest of EU 150 in EUR billion Germany 100 50 Austria 0 until 2006 by 2012 The big potential of the New EuropeAs seen through the lens of CEE enlargement Source: World Bank Source: World Bank Source: BA-CA Source: IMF

  9. Pulling it together • The medium term outlook for Europe and the global economy is excellent. • Supply chain risk may derive from economic discontinuities unleashed, for example, by the forces of globalization and EU accession. • An emerging governance gap points to potential frictions. Example are the growing resistance to trade liberalization within the framework of the Doha round and the recent political backlashes in Hungary and Poland. • Economic forces driving globalization in general, and the further integration in Europe in particular, warrant closer monitoring.

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