Commercial Cards & Payments Leo Abruzzese October 2015 New York

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1 US, China and emerging markets: What s next for the global economy? Commercial Cards & Payments Leo Abruzzese October 2015 New York

2 Overview

Key points for 2015-16 Global economy struggling to gain traction and grow sustainably Developed countries US economic growth is solid, but uneven Jobs market remains healthy Consumer, investment

3 Key points for Global economy struggling to gain traction and grow sustainably Developed countries US economic growth is solid, but uneven Jobs market remains healthy Consumer, investment spending picking up Europe, Japan: still fragile but recovering China: Continued decent growth, but 30% chance of hard landing Economy has been softening for some time; will slow even more Growth diversifying; more services, less manufacturing Emerging markets very soft; little good news Commodity prices weak from surpluses, over-supply Financial stress, but no emerging market catastrophe c

4 Recent market developments

5 Global stockmarkets have had a rough few months 500 The capitalisation of global equity markets has fallen by around 13% since the start of June Global stockmarkets Jan May Oct Feb Jul Dec Apr Sep Jan Jun Nov Mar Aug FTSE Global All Cap US$ Stock Price Index. Source: FTSE

6 ..led by a 40% decline in China s Shanghai market As bad as this was, it should be kept in context: the Shanghai market rose 150% between June 2014 and June China s real economy didn t soar during this massive run-up it actually slowed so should we expect the economy to collapse now that equities have slumped? No, because the linkages are not strong Aug Mar Nov Jun Jan Sep Apr Dec Jul Feb Oct May Jan Shanghai SSE Composite Index: Source: Haver Analytics

7 Global growth no better in 2015 than in 2014 US economy will grow by 2.5%, up from 2.4% last year Volatility, but strong on balance Europe hardly booming, but growth of around 1.5% this year and next China slowing but will still manage around 7% growth (officially) Brazil, Russia in recession Bad news for commodity producers 2016 only slightly better than Global GDP Real GDP, % change. Source: Economist Intelligence Unit

8 United States

US economy has been solid but erratic 5 4 3 2 Real GDP, % change US economy amazingly volatile In four of last seven quarters, growth has been around 4% In two

6% in 2016 Foundations look solid, though Jobs market strong, housing improving, energy prices low, consumer spending climbing, investment reviving, debt low -2

9 US economy has been solid but erratic Real GDP, % change US economy amazingly volatile In four of last seven quarters, growth has been around 4% In two other quarters, GDP was flat or contracted; soft in 3Q Why? Weather, one-off factors, business uncertainty; stats issues GDP growth of around 2.6% in 2016 Foundations look solid, though Jobs market strong, housing improving, energy prices low, consumer spending climbing, investment reviving, debt low Q Q Q Q Q Q Q2 Fed rate rises will be very gradual Source: Economist Intelligence Unit, Bureau of Economic Analysis.

10 US: Jobs machine still healthy; unemployment falling 450 Jobs change Unemployment rate straight months of job growth Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Non-farm payrolls, thousands, monthly net job change, lh scale; Unemployment rate, %, rh scale. Source: Bureau of Labour Statistics

11 Car sales have surged as fuel prices have stayed low Gasoline, average regular, US$/gallon, lh scale. Car sales, monthly at annual rate, rh scale. Sources: AAA and Bloomberg

12 Borrowing from banks has returned to a more normal level as jobs have increased and loan officers have eased lending standards. But the pattern is nothing like the sky high borrowing before the crisis!! May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan Commercial bank credit to the private sector, % change year on year. Source: Federal Reserve

13 and consumers are paying their credit card bills on time Payment rates on credit cards are well below pre-recession levels % delinquent more than 90 days, credit cards. Source: Bloomberg.

14 Market interest rates have remained remarkably low Exceptionally low inflation and a reluctant Fed have kept bond yields on the floor. The 10-year Treasury will rise in the next year, but won t reach 3% before end of %, US 10-year Treasury bond. Source: Bloomberg

clear There is no compelling reason, in the Fed s view, to raise rates right now Inflation is contained, wage growth is muted, dollar is strong Potentially

15 Given all that, when do we expect the Fed to raise rates? Fed will not raise interest rates in December Fed is risk averse; inclined to be cautious Can t ignore China & emerging markets; impact on US growth is not clear There is no compelling reason, in the Fed s view, to raise rates right now Inflation is contained, wage growth is muted, dollar is strong Potentially epic mistake if they raise rates and it sends a shock through the global economy; won t take that chance That said, the Fed wants to begin the process of normalisation By some measures, US GDP is growing by 3-4% Fed will act in the first quarter of 2016

16 Euro zone

17 Euro zone: Improvements starting to appear EZ economy grew surprisingly fast in 1Q of 2015 But slower growth in 2Q Debt levels remain high But debt starting to be paid down Greek default risk gone for now But risks remain longer term Bank lending is rising again Lending by euro zone banks has finally begun to rise after years of falling almost 2% year on year Bank lending Spain, others on periphery, doing much better Jan Dec Nov Oct Sep Aug Jul Jun May Monetary financial institution lending, euro zone, % change YoY. Source: ECB, Haver Analytics.

18 Commodities and currencies

19 Commodities prices have plunged, straining many producers Source: Economist Intelligence Unit commodity price indices.

20 Oil price will stay low for now, then trend higher Plenty of supply in the market But less from US shale producers Price will still be volatile in 2015 Daily surplus in the oil market at 1.6m b/d vs long-term avg of 1m b/d Saudi: robust production continues Iran returning to the market Less oil demand from China But not as big as supply glut Crude oil Always risk, though, that political turmoil could push price back up 30 US$ per barrel, dated Brent. Source: Economist Intelligence Unit

21 We expect the dollar to peak in US dollar will continue to rise against the euro and many emerging market currencies this year and next year, then retreat slowly starting in US$: 1 exchange rate, historical and forecast. Source: Economist Intelligence Unit

22 China and emerging markets

23 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Five reasons to worry about China Industrial output growth has slowed dramatically Growth rate has halved in recent years Debt levels are alarmingly high Bad loans rising Exports are stumbling Government depreciated the currency Competitive devaluation? Industrial production Stockmarket plunged and response by authorities to this and other stresses has been clumsy 2 0 Industrial production, % change year on year. Source: National statistical agency, Haver

Five reasons not to panic about China Manufacturing has slowed but the service sectors are doing well Services are now a larger share of economy Stockmarket not crucial to economic growth or consumer

24 Five reasons not to panic about China Manufacturing has slowed but the service sectors are doing well Services are now a larger share of economy Stockmarket not crucial to economic growth or consumer confidence Stockmarket small relative to size of economy Less than 1/5 household wealth is in shares Property market is rebounding House prices are rising Income and wages rising strongly Incomes up 8-9% year on year Government has tools to respond Room to ease monetary policy

25 Years of rapid credit growth in many emerging markets and countries are now paying the price as bubbles burst, defaults rise and currencies fall. Market value of credit to the non-financial sector from all sectors, % of GDP. Source: Bank for International Settlements

26 Emerging market currencies have been plunging Companies will be hurt as they repatriate foreign earnings from emerging market economies. Local currencies per US$1. Indexed to 2008

27 Is another emerging markets crisis likely? EMs far better able to handle reduced capital inflows Most have stronger currentaccount positions, larger FX reserves, less debt Brazil and Russia in trouble Fewer EM currency pegs; global interest rates are still low 2 0 Many EM economies have developed own local currency bond markets Brazil Russia But many companies took on debt, and may struggle to repay Real GDP (% change, year on year)

28 Where s the growth? Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of September Source: Economist Intelligence Unit, CountryData.

Three-speed recovery. GDP growth. Percent Emerging and developing economies. World

Three-speed recovery. GDP growth. Percent Emerging and developing economies. World Three-speed recovery GDP growth Percent 1 8 6 4 2-2 -4-6 198 1985 199 1995 2 25 21 215 Source: IMF WEO; Milken Institute. Emerging and developing economies Advanced economies World Output is still below