Zero rates and their impact on savings and growth

Transcription

1 Zero rates and their impact on savings and growth TISA Conference, London 24 November 2016 John Greenwood Chief Economist, Invesco Ltd This presentation is for Professional Clients only and is not for consumer use. Please do not redistribute. 1

2 Outline Zero Rates: Their Impact on Savings & Growth 1 US 2 Brexit 3 Bubbles & UK: Debt and the Need for QE & Savings Trends and the Business Cycle 2

3 US & UK: Debt and the Need for QE

4 Two overlapping bell curves Model of a debt crisis in three phases Private and public sector debt ratios 170 Phase 1 Phase 2 Phase Debt/GDP % Private sector Public sector 70 Source: Invesco for illustrative purposes only 4 50 Time

5 US private sector deleveraging slows; US public sector debt now 101% of GDP US: Ratio of private & government debt-to-gdp (%) Phase % Phase ?? Private sector 101% Public sector 2008 Q % at 2016 Q2 Source: Macrobond as at 15 November

6 UK private sector deleveraging slows; UK public sector net debt now 83% of GDP UK: Public & private sector debt as % GPD Private sector Public sector 2008 Q4 Source: Thomson Datastream as at 15 November

7 US financial & household sectors de-leveraging relative to GDP US: Ratios of debt-to-gdp of all sectors (%) Financial Govt. Households Non- Financial 2008 Q4 Source: Thomson Datastream as at 15 November

8 UK financial & household sectors Less de-leveraging relative to GDP UK: Ratios of debt-to-gdp of all sectors (%) Non- Financial Financial Households Public 2008 Q4 Source: Thomson Datastream as at 15 November

9 Since the 2008 crisis, money and credit growth have slowed, so has inflation OECD Money Growth & Inflation (%) Av Money Growth: 8.0% yoy % yoy Av CPI 3.6% yoy 1.6% yoy Source: Thomson Datastream as at 6 September

10 Bond yields and nominal GDP growth have plunged US Nominal GDP & TSY 10y Bond Yield (%) Bond Yields Nominal GDP Source: Thomson Datastream as at 15 November

11 Economic growth expectations The lacklustre outlook continues Major economies Real GDP growth forecasts (%) e 2016f 2017f US Eurozone Japan UK China Source: Consensus Economics as at 30 June Forecasts are not reliable indicators for future returns. This must not be seen as investment advice. 11

12 Central banks to near zero, and even negative rates in some cases Europe: Key Central Bank Interest Rates (%) UK Eurozone Sweden Switzerland Source: Thomson Datastream as at 15 November

13 and central banks expanded their balance sheets US: Federal Reserve Assets (US$ bn) Total Assets US Treasuries MBS Source: Thomson Datastream as at 15 November

14 The US monetary problem in Money growth rates in the United States, % 40% 30% 20% Monetary Base M1 10% 0% -10% -20% -30% Source: Friedman & Schwartz, A Monetary History of the United States 14 M2 Cumulative decline in M2, : -38% Cumulative decline in M1, : -32% M1 %YOY M2 %YOY Monetary Base %YOY

15 In , US bank lending fell by 14% US commercial bank loans & leases, adjusted % yoy US loans & leases Cumulative decline in bank lending, : -14% Source: Macrobond as at 15 November

16 How the Fed s QE prevented a repeat of US: Contributions to growth of money supply M2 (% yoy) Op Twist QE1 QE2 QE3 M2 Other items Bank Loans Bank Reserves Source: Macrobond as at 15 November QE is Quantitative Easing, or Fed asset purchases.; Op Twist was $667 billion via Operation Twist, Sept 2011-Dec

17 How the Bank of England s QE Limited the Contraction in M4x UK: Contributions to growth of money supply M4x (% yoy) QE1 QE2 QE3 M2 Other items Bank Loans Bank Reserves Source: Macrobond as at 15 November

18 US commercial banks mostly back to normal Lending is growing at healthy pace US commercial bank total loans & C&I loans (% yoy) C&I Loans Total Loans & Leases Source: Macrobond as at 15 November

19 UK commercial banks only recently resumed increasing loans UK: M4x lending & M4x (GBP Bn) M4x M4x lending Source: Macrobond as at 15 November

20 But Eurozone banks are far behind - Pitifully slow growth of bank balance sheets 40 Assets Liabilities Assets Liabilities Assets Liabilities EUR Tn Assets: 0 Jun-08 Jun-11 Jun-16 Liabilities: Source: Macrobond at dates shown. 20

21 Brexit & savings trends

22 Customs union versus free trade The EU is a customs union, with common external tariffs, not a region practising free trade with the rest of the world EEC/EU Total cost to UK of EU protection estimated at 4.1% of GDP FARMING Agricultural products face 18% PSE* and 80% NCS+ Value:10% of farm output in 2020(est d) MANUFACTURING NTBs# substituted for tariffs: 1. Ex China, EU 21% vs US 6.5% (2002) 2. Inc China, 10% by 2020 * Producer subsidy equivalent + Non commodity support (e.g. compensation for non-use of land) # Non-Tariff Barriers (e.g. anti-dumping duties, quotas etc) Source: Evaluating European Trading Arrangements by P. Minford (published November 2015). 22

23 UK GDP growth accelerated relative to EEC economies from mid-1990s UK & Eurozone Real GDP Source: Thomson Datastream as at 28 June All data rebased to UK GDP values in 1995 Q , UK joins the EEC German, French, Italian GDP growth exceed UK growth Margaret Thatcher elected UK GDP growth exceeds EU, German, French, & Italian growth From mid-1990s: UK growing faster than EU UK REAL GDP EUROZONE GDP GERMAN GDP FRENCH GDP ITALIAN GDP

24 Possible models for Brexit Several existing templates, but UK deal likely to be unique Single market 24 Votes on EU law Contributes to EU budget Tariff-free trade in goods & services Customs union (Same external tariffs) Same Regulations for Businesses Free movement of people Subject to European Court of Justice Full EU Member EEA (non-eu) e.g. Norway Switzerland (bilateral) Turkey (bilateral) Canada (bilateral) WTO rules * ~ * ~ ~ ~ ~ * ~ ~ ~ ~ ~ ~ Full ~ Partial/voluntary/special arrangement None Better economic deal Further away from status quo Source: HM Government, Deutsche Bank Research as at 30 June Note: *Norway outside Single Market for agriculture. Country contributes to EU budget but less than a full EU member; it also adopts around 75% of EU regulation.

25 Brexit timeline A lengthy and uncertain process June 2016 Referendum March 2017 March 2019 Article 50 of the Lisbon Treaty activated Two years to negotiate the terms of withdrawal. The UK formally exits the EU at earliest. 2025? Negotiations with EU and Rest of World to replace treaties that no longer apply Source: Invesco Perpetual and Global Counsel as at 24 June

26 UK household savings first increased, but have now fallen as % of GDP since the crisis of UK personal savings rate model Household savings Savings model Source: Macrobond as at 15 November

27 On a national basis, gross national savings have been falling continuously since 1970 UK: Gross & Net national savings ratio (% GDP) Gross Savings Net Savings Source: Thomson Datastream as at 15 November

28 Bubbles and the Business Cycle

29 Two types of bubble 1. Rapid credit growth with high leverage 2. Low interest rates high asset prices, and high interest rates low asset prices 29

30 Prospects for the Business Cycle in the developed economies Interest rates fall as money accelerates Interest rates low Interest rates normalise Interest rates rise as money tightened Interest rates high Interest rates decline Interest rates fall as money accelerates Bonds Bonds Equities & Risk Assets Cash Source: Invesco. For illustrative purposes only. 30 The business cycle

31 Emerging markets business cycle superimposed on developed markets business cycle Developed Markets Interest Rate Cycle Interest rates fall as money accelerates Interest rates low Interest rates normalise Interest rates rise as money tightened Interest rates high Interest rates decline Interest rates fall as money accelerates Emerging Developed Source: Invesco. For illustrative purposes only. 31 Developed economies business cycle Emerging economies business cycle

32 Donald Trump s economic programme Trump s Contract with the American Voter Tax Reforms Trade Reforms Regulatory Reforms Energy Reforms Infrastructure Immigration Reforms Cut Personal and Corporate Income Tax to boost growth and repatriate capital from abroad Renegotiate NAFTA and TPP. Limit Offshoring; stop currency manipulation ; stop import of below-market, subsidized steel etc. Reduce regulatory burden of $2 tn; reduce restrictions on US business Lift restrictions on shale, oil, natural gas and clean coal. Allow Keystone & XL pipelines to lower energy prices PPPs and private investment to spur $1 tn over 10 years thousands of jobs in construction, steel, water, energy etc. Cancel contributions to UN climate change. End funding to sanctuary cities and corporate-driven immigration system; enforce deportation Health Care Reforms Source: Real Clear Policy, 30 October Repeal Obamacare to reduce part-time jobs

33 Summary and conclusions Developed economies still in recovery from debt crisis of Low nominal GDP, but rates have turned; the Trump effect Fed/BOE QE strategies worked But BOJ/ECB QE failing to create new purchasing power Implication: US major locomotive for the world economy Brexit short term shock, but markets have recovered (except GBP) Long term impact on UK/Eurozone depends on future policy mix Developed economies still in early phases of upswing No extended commodities rally without China revival Business cycle intact, but divergence between DM & EM Source: Invesco as at September

34 Important information This presentation is for Professional Clients only and is not for consumer use. Please do not redistribute. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns. Where John Greenwood has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of Invesco/Invesco Perpetual investment professionals. Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase, hold or sell. Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. 34