The Global Economic Outlook

The Global Economic Outlook
Economics The Global Economic Outlook Back to the Future? Lower Oil Prices and a US-Centric Global Recovery 11 November 2014 Nariman Behravesh, Chief Economist, ,

The US is a locomotive of global growth, after an eight-year hiatus.
Global Economics & Country Risk Conference / November 2014 Back to the future? The US is a locomotive of global growth, after an eight-year hiatus. US oil production will exceed that of Saudi Arabia for the first time since 1991. Oil prices are at their lowest levels since the end of the recession. A strengthening dollar is helping many other economies, much like the 1980s, 1990s and 2000s. Is there a new “cold war”? Is the “peace dividend” eroding?

The world economy: Reasons for optimism
Global Economics & Country Risk Conference / November 2014 The world economy: Reasons for optimism Global growth has been remarkably stable at 2.5% - not great, but not bad either. Lower oil prices will likely boost 2015 growth by 0.2 to 0.4 percentage points. Monetary stimulus by the Bank of Japan (aggressive), People’s Bank of China (small so far), and the European Central Bank (promised, but not delivered yet) will support growth. US and UK economic growth remains solid (at around 2.5% to 3%). Japan’s growth will be sustained but weak. The Chinese government will do whatever it takes to prevent growth from collapsing. India is a bright spot. World trade growth is beginning to pick up (very) modestly.

The world economy: Reasons to be concerned
Global Economics & Country Risk Conference / November 2014 The world economy: Reasons to be concerned Europe’s growth has stalled, and Germany has not been immune. Deflation is a growing menace in the Eurozone. Some large emerging markets (notably Brazil and Russia) are in recession, and the prospects do not look good. Debt levels in many parts of the world (Europe, Japan, China, other emerging markets) are dangerously high. The risks of policy mistakes (too much austerity, botched central bank “exit strategies”, and lack of structural reforms) are elevated. In particular, apprehensions regarding the Chinese governments ability to juggle its multiple challenges are rising. Geopolitical troubles could reverse the recent drop in oil prices. Longer-term, the probability of “secular stagnation” in may parts of the world (especially the Eurozone and some large emerging markets) is higher now than before.

Global Economics & Country Risk Conference / November 2014
Purchasing managers’ indexes for manufacturing show the US leading the expansion (Index, over 50 indicates expansion) Purchasing managers’ indexes Sources: Institute for Supply Management (US), Markit, National Bureau of Statistics (China)

After a slow start to 2014, global real GDP is rising at a moderate pace Real GDP

The emerging markets growth premium is the lowest since the early 2000s Real GDP

Real GDP growth in the United States, Eurozone, and Japan
Global Economics & Country Risk Conference / November 2014 Real GDP growth in the United States, Eurozone, and Japan Real GDP

Real GDP growth in key emerging markets
Global Economics & Country Risk Conference / November 2014 Real GDP growth in key emerging markets Real GDP

Asia-Pacific (excluding Japan) and Sub-Saharan Africa will achieve the fastest growth in real GDP Real GDP

Growth in world trade volume is beginning to pick up
Global Economics & Country Risk Conference / November 2014 Growth in world trade volume is beginning to pick up Real GDP and trade

Oil prices have retreated as strong supply growth eclipses geopolitical concerns The continuing boom in US oil production is lowering prices and stabilizing global oil markets. Weak global oil demand (especially from China), high Saudi Arabian production, and a surge in Libyan production have contributed to recent price declines. Downside risks: OPEC is slow to react, the Saudis fight for market share, and global demand remains lackluster. Upside risks: Stronger demand growth (thanks to lower prices), renewed disruptions in Libya, slower production growth in North America, and rising geopolitical tensions. Bottom line: prices will likely remain in the mid-$80s (for Brent, and mid-$70s for WTI), but there could be a lot of volatility.

Industrial materials prices are falling as new supplies are sufficient to meet demand growth Industrial materials prices

US crude oil: a big drop – but for how long?
Global Economics & Country Risk Conference / November 2014 US crude oil: a big drop – but for how long? Crude oil and natural gas prices Source: IHS Energy 14

Crude oil prices will rise in the long run
Global Economics & Country Risk Conference / November 2014 Crude oil prices will rise in the long run Price of Dated Brent crude oil Source: IHS Energy 15 15

Winners and losers from low oil prices
Global Economics & Country Risk Conference / November 2014 Winners and losers from low oil prices Winners: US consumers are likely the biggest winners – with a “tax cut” worth at least $70 billion. European consumers will benefit proportionally less because of high gasoline taxes. Emerging market consumers will also benefit less because of large fuel subsidies. Energy-intensive industries (e.g. agriculture and transportation). Governments in oil-importing countries with large fuel subsidies. Losers: US producers (although IHS estimates that current break-even point is well below current prices). Major oil exporters – especially those with difficult public finances, where the “fiscal break-even point” is above $100, including Iran, Russia, and Venezuela. Net effect: In the US, the net effect on consumers and producers of oil is still a small positive, despite rising US production. Similarly, the net effect on oil-importing and oil-exporting countries around the world will be a small boost to growth.

Consumer price inflation varies by region, but is not a threat
Global Economics & Country Risk Conference / November 2014 Consumer price inflation varies by region, but is not a threat Consumer price inflation

Fiscal and monetary policies
Global Economics & Country Risk Conference / November 2014 Fiscal and monetary policies Austerity remains in force in the Eurozone and will likely become more intense in Japan next year. The US, UK, and Japan have had tight fiscal policies but loose monetary policies – the Eurozone has had tight fiscal and monetary policies … … This helps to explain why the single currency area is doing so poorly. Not only are the ECB’s policies tight, they have de facto become tighter. Japan has once again provided big monetary stimulus because of weak growth and anticipated fiscal tightening in 2015. The Fed and the Bank of England have stopped expanding their balance sheets, but any interest rate hikes are still a long way off (summer of 2015 at the earliest). In the final analysis the benefits of QE (lower interest rates, improved bank balance sheets, higher asset prices, and a boost in confidence) have outweighed the potential costs (inflation, financial instability, and increased inequality).

Fiscal deficits are diminishing in North America, Western Europe, and Japan Federal budget balance

The Bank of England will likely lead the upturn in policy interest rates Policy interest rates

Policy interest rates in key emerging markets will hold steady or decline Policy interest rates * One-year loan rate

CPI inflation rate - monthly
Global Economics & Country Risk Conference / November 2014 CPI inflation rate - monthly Inflation

CPI inflation rate - annual
Global Economics & Country Risk Conference / November 2014 CPI inflation rate - annual Inflation

Real short-term interest rates – a risk for the Eurozone and the UK
Global Economics & Country Risk Conference / November 2014 Real short-term interest rates – a risk for the Eurozone and the UK Short-term interest rate

Central bank balance sheets – shrinking in the Eurozone
Global Economics & Country Risk Conference / November 2014 Central bank balance sheets – shrinking in the Eurozone Real GDP

The dollar: Rising, but still competitive
Global Economics & Country Risk Conference / November 2014 The dollar: Rising, but still competitive Real trade-weighted dollar index

Exchange rates per US dollar
Global Economics & Country Risk Conference / November 2014 Exchange rates per US dollar Canadian dollar Euro Japanese yen Chinese renminbi Quarterly averages

The US economy is gaining momentum
Global Economics & Country Risk Conference / November 2014 The US economy is gaining momentum Accelerations in consumer spending and homebuilding, along with continued robust capital spending, will support growth. The oil price decline, if sustained, will add around 0.2 to 0.4 percentage point to growth. Consumers will cautiously boost spending in response to gains in employment and real disposable income, lower oil prices and improved finances. The recovery in homebuilding is proceeding slowly, as young adults delay household formation and homeownership. Global market growth, strong cash flow, replacement needs, and technological advances reinforce capital spending. Interest rates will rise over the next three years as monetary accommodation is withdrawn. The stronger dollar is still low by historical standards and not (yet) a big threat.

US real GDP growth will be sufficient to bring further reductions in the unemployment rate Real GDP and unemployment

US household deleveraging continues on the mortgage side – lowest debt ratio since 2002 Household liabilities

US investment shares are recovering
Global Economics & Country Risk Conference / November 2014 US investment shares are recovering Real spending Source: People’s Bank of China * IHS forecast

US federal debt ratio to stabilize just under 75%–but the biggest problems come later, as the population ages Publicly held federal debt

Unconventional sources of oil and natural gas are boosting US energy supplies US energy supply and demand

The US current-account deficit: Thanks to falling oil imports going, going, gone? Current-account balance

North American business cycles are synchronized
Global Economics & Country Risk Conference / November 2014 North American business cycles are synchronized Real GDP

Western Europe has turned the corner, but risks of deflation are rising After a protracted recession, the Eurozone economy is growing again – though growth this year will only be around 0.8%. Rising consumer and business confidence, low interest rates, improving export markets, and pent-up demand for durables will support growth. Lower oil prices will add about 0.2 percentage point to growth Extended fiscal austerity, still-significant banking sector problems, and weak consumer finances will restrain growth in several countries. The United Kingdom, Ireland, Germany, and Sweden will lead the region’s growth, while Italy, Spain, Greece, and Portugal will lag. The ECB averted a meltdown, but has done little for growth—moreover falling inflation is becoming a bigger risk (there is already deflation in Italy, Spain, Greece, Portugal, Cyprus and Slovakia), pushing up real interest rates and the euro. Western Europe is vulnerable to a further escalation of the crisis in Ukraine.

Eurozone confidence indexes are rising
Global Economics & Country Risk Conference / November 2014 Eurozone confidence indexes are rising Positive replies minus negative replies Source: European Commission

The Eurozone economy will slowly recover
Global Economics & Country Risk Conference / November 2014 The Eurozone economy will slowly recover Real GDP

Real GDP growth in Europe’s major economies
Global Economics & Country Risk Conference / November 2014 Real GDP growth in Europe’s major economies Real GDP

European unemployment rates have diverged
Global Economics & Country Risk Conference / November 2014 European unemployment rates have diverged Unemployment rate

Japan’s economy on a better but sluggish growth path
Global Economics & Country Risk Conference / November 2014 Japan’s economy on a better but sluggish growth path The sales tax increase from 5% to 8% in April is creating economic volatility: After a surge in the first quarter, consumer spending fell in the second, but is expected to rise in the third quarter. IHS expects 1.1% growth this year and 1.2% in 2015, and a small boost from lower oil prices (0.1 to 0.2 percentage point) The Bank of Japan’s aggressive monetary stimulus and sales tax increases will spark consumer price inflation of 3% this year and 2% in 2015 – this spring the core CPI rose the fastest since 1991 Future growth will depend on how effectively the new Abe administration implements reforms in labor and product markets – so far there is been very timid. The recent stimulus by the Bank of Japan make it more likely that the October (second round) sales tax hike will go through. The huge cash hoards of Japanese companies are both a source of concern and a potential basis of strength.

Japan’s economy has limited growth potential
Global Economics & Country Risk Conference / November 2014 Japan’s economy has limited growth potential Real GDP

Asia-Pacific will achieve solid, not spectacular, growth
Global Economics & Country Risk Conference / November 2014 Asia-Pacific will achieve solid, not spectacular, growth Asia’s performance will be shaped by political transitions and the pace of domestic macroeconomic reforms. India’s economy is reviving, but the new BJP government has been slow to use its mandate to launch essential economic reforms. Indonesia’s new government seems on track to enact reforms such as the reduction of fuel subsidies. Political turmoil and the military coup in Thailand are undermining economic performance and foreign investment in manufacturing. As the global economy improves, South Korea, Taiwan, and Vietnam will see faster growth, supported by rising high-tech exports. The region’s outlook for consumer spending is bright, thanks to robust income growth and deepening financial markets. Risks include a China hard landing, slow progress on economic reforms, and territorial disputes in the South China Sea.

Real GDP growth in Asia-Pacific
Global Economics & Country Risk Conference / November 2014 Real GDP growth in Asia-Pacific Real GDP

China’s economic growth has slowed
Global Economics & Country Risk Conference / November 2014 China’s economic growth has slowed Real GDP increased 7.3% year on year in the third quarter, down from 7.5% in the second quarter and the slowest pace since early 2009. Lower oil prices will only add about 0.2 percentage points to growth next year. Persistent weakness in real estate and related heavy industry was offset by strength in exports and consumer spending. The recent easing of liquidity conditions will have little real impact on new financing due to tightening bank regulations. A hard landing triggered by a financial crisis is not the biggest threat facing China; a more serious concern is prolonged low growth. In the medium term, China will need to reform state-owned enterprises and the financial sector – otherwise a Japan-style scenario with lots of “zombie” companies is a big risk.

China’s economic growth will downshift in the long run
Global Economics & Country Risk Conference / November 2014 China’s economic growth will downshift in the long run Real GDP and industrial production

China’s lending has stabilized at a high level
Global Economics & Country Risk Conference / November 2014 China’s lending has stabilized at a high level Lending flows Source: People’s Bank of China * IHS forecast

Implications of global economic trends
Global Economics & Country Risk Conference / November 2014 Implications of global economic trends Global growth will be more US-centric. Europe and Japan will do a little better, but not as well as the US. The sharp deceleration in emerging markets is worrisome, and a return to the boom years of the 2000s is unlikely—but another crisis is also unlikely. Emerging markets will not enjoy another resurgence without stronger productivity growth. China’s locomotive role is diminishing. Lower oil prices, more monetary stimulus, and more solid US growth will provide the foundations for a modest acceleration of global growth.

Economics Thank you!

The Global Economic Outlook

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The Global Economic Outlook

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