This year is different

Transcription

1 Global Economic Research May 213 This year is different Bruce Kasman Chief Economist (1-212) JPMorgan Chase Bank NA See the end pages of this presentation for analyst certification and important disclosures.

2 Main points The global economy is lifting but 1H performance to remain subpar Two constraints hold back lift: Fiscal drag (concentrated in the US) and poor corporate performance (in Europe and EM) Early year industry bounce is now fading. This moderation will not produce a growth scare With tail-risks removed monetary policy gains traction We have removed macro tail risks: EM overheating; China hard landing; Euro area breakup; the US fiscal cliff Supports from asset price appreciation and rising sentiment are a defense against a spring swoon. They build the base for strong growth later this year Global inflation moves lower reflecting legacy of weak growth Low inflation redistributes growth towards consumers and the DM The Fed s narrative is a major US export The BoJ has reached a Volcker moment. Success requires altering expectations and failing to generate 2% inflation The ECB is in search of a narrative and tools as the Euro area needs demand stimulus. Its response to building pressure is the key policy call 2

3 The outlook: Forecasting a rebound that slowly gains traction Global GDP %q/q, saar Global potential growth rate (3.%) Source: J.P. Morgan Global GDP %q/q H13 2H13 Global (3.) DM (1.6) US (2.2) Euro area (1.3) Japan (.5) UK (1.5) EM (5.5) China (8.) EM Asia ex China (5.2) Latam (3.8) Brazil (3.8) Note: Trend growth in parentheses Source: J.P. M organ, national statistics agencies 3

4 Last year s drags: credit tightening and fear Bank lending standards Net %, above zero indicates tightening 35 3 G-3 capital goods orders and global PMI employment %3m, saar Orders DI, sa Euro area EM US -2 Global all-industry PMI employment Source: IIF bank survey, FRB, ECB Source: J.P. Morgan 9

5 The outcome: Lousy growth and rotation toward the US Real GDP growth EM capex and consumer spending %oya; both scales Dev Mkt excl. US EM US %oya; both scales Retail sales Capex Source: J.P. Morgan Source:J.P.Morgan 2 5

6 Weakness produces low inflation Headline CPI, global %oya. Core consumer prices %oya 2.5 US PCE Actual/JPM fcst 2.5 Central bank target (upper bound) 1. Euro area HICP Model forecast Source: J.P. Morgan Source: BEA, Eurostat 6

7 Give the Fed credit where credit is due US 1yr real yield and inflation breakeven % Composition of US growth %oya Inflation breakeven 1 Interest sensitive demand Real exports of goods and services Real yield -1 Jan-7 May-8 Sep-9 Feb-11 Jun-12 Source: J.P. Morgan -2 Gov't expenditures Source: Bureau of Economic Analysis 7

8 ECB needs to address regional demand shortfall Euro area unemployment and inflation % %oya Unemp rate 12 Euro area bank lending standards Net % of banks reporting tighter lending standards 8 Corporates Household mortgages HICP Source: Eurostat Source: ECB 8

9 Fading drags provide fuel for lift Euro area interest rates % p.a Italy, NFC borrowing rate Italy, 1yr govt bond yield Business sentiment Indexes, sa, both scales 2 Japan: Reuters Tankan 25 US: Fed capex outlook 3 Core, NFC borrowing rate Source: Eurostat, Bloomberg EM bank local funding conditions Net %; above zero indicates tightening Source: IIF 1-1 GER: IFO mfg exp Source: Reuters, IFO, regional Federal Reserve banks

10 There are constraints limiting lift DM fiscal drag Percent of GDP.5 EM prices and wages %oya Producer prices Hourly compensation Source: BLS, J.P. Morgan EM bank non-performing loans Net %, above zero indicates more NPLs Source: J.P. Morgan Source: IIF 1

11 Early year growth bounce is fading Global real GDP %q/q, saar; Boxes are JPMorgan fcst 3 2 Nowcaster Global PMI and mfg output DI, sa Mfg output PMI Source:J.P.Morgan JPM global PMI mfg DI, sa; both scales 56 Finished goods 5 inventories Mfg output %3m, saar Actual/fcst 1 Jan11 Jun11 Nov11 Apr12 Oct12 Mar13 Source: JPMorgan New orders Source: J.P. Morgan

12 This year is different: No midyear growth scare Oil price and global retail sales %3m, saar; Fcst assumes Brent at $13/bbl -2 Oil (inverted) -1 US employment %ch saar over 3 mos, both scales Goods Services Jan 12 May 12 Oct 12 Mar 13 Source: BLS US initial jobless claims 's, sawr 1. 2 Retail sales (volume) Source: Platts, J.P. Morgan Jan 12 Jul 12 Jan 13 Source: BLS 12

13 This year is different: Central banks gain traction Central bank balance sheet % of GDP; Fcst Mar13 through Dec Source:J.P.Morgan, FRB, BoJ BoJ Fed Global credit spreads and equities bp 5 JPM global HY spread to Treasuries MSCI World Source: J.P. Morgan, MSCI Index The Fed narrative provides a recipe for easing under ZIRP The BoJ delivers regime shift, the ECB is moving slowly With tail risks removed, easy money can generate significant traction through financial conditions and sentiment 13

14 China to rebound but faces structural slowing China PMI and real GDP DI, sa 6 58 PMI GDP Source: NBS China retail sales breakdown %oya, ytd %q/q, saar China total social financing and nominal growth %oya Total social financing Total retail sales 15 1 Nominal GDP 1 8 Source: NBS Catering Source: NBS 1

15 The US demographic path is troubling Growth in resident working age population % 2.5 Net international migration Mn projection projection projection Source: Census Bureau Current (212) projection Source: Census Bureau 15

16 Practical issues in tracking the global business cycle 16

17 Global economic research footprint Economics research headcount Russia 1 UK 9 US 8 Mexico 2 Turkey 1 India 1 Japan 3 Korea 1 HK 3 Brazil 2 South Africa 1 Singapore 3 Australia 3 17

18 Using products to drive process Common global requirements: Forecast and review data releases Forecast key macro and policy variables Taking stock once a week In-depth research Common global products: Defines set of relevant variables Highlights forecast changes and errors Allows for peer group comparisons Generates a team and a global effort 18

19 Global Data Watch interactive 19

20 Global Data Watch interactive 2

21 Feb 8 Feb 15 Feb 22 Mar 1 Mar 8 Mar 15 Mar 22 Mar 28 Apr 5 Apr 12 Apr 19 Apr 26 May 3 May 1 The top down bottom up balancing act It is important to look at the global business cycle from a top down perspective An interaction between our top-down and bottom-up analysis is central to our process Global real GDP %q/q, saar; Box is JPMorgan fcst 1Q13 These two perspectives are highlighted in our research Nowcaster Nowcaster: 1Q13 %q/q, saar Nowcaster JPM forecast Source:J.P.Morgan 3 2 Actual/fcst 1 Jan11 Jul11 Jan12 Jul12 Jan13 Source: JPMorgan 21

22 Producing a top-down global growth forecast Impact of economic indicators on global GDP growth: The Kalman gain %-pt, annualized (PMI's are 1-pt chg, all else are 1%- pt chg on m/m growth rate); kalman gain scaled by impact of factor on global GDP growth.8 Cumulative impact on change in forecast standard error %-pt, annualized (variables cumulated over data calendar).7 12% 5%.6 17% %. 15% % Labels report the % of the total reduction in the standard error.1. Retail Mfg sales output Source: J.P. Morgan PMI, Mfg PMI, Srv Cap. Ship. Auto sales PMI, mfg Source: J.P. Morgan PMI, srv Autos Ret sales Cap ship Mfg 22

23 The conversation for today JPM global aggregates Quarters are %3m/3m,saar (PMIs avg level); Months are %m/m (PMIs level) 1Q13 2Q13 Mar 13 Apr 13 May 13 Jun 13 Global PMI manufacturing DI, sa, both scales PMI, mfg PMI, serv IP Retail sales Auto sales New orders 8 Finished goods inventories 7 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Source: J.P. Morgan Global CPI %oya Cap. Order Nowcast Note. Shaded values show forecasts computed by the Kalman filter estimates from the dynamic factor model. Underlined values are our estimates based on available data and our judgment. Source: J.P. M organ, M arkit, and national statistical agencies Source: J.P. Morgan Central bank target (upper bound) Actual/JPM fcst Model forecast 23

24 Appendix 2

25 The US expansion: A different sideways and backwards focus Comparing US recoveries Total decline Gain 1st 1 qtrs (%) of recovery (%) GDP per capita 1Q27= US Euro area UK Japan Average Source: BEA Source: National statistical agencies 25

26 US outlook hinges on healthy corporates US corporate profits and net lending % of corporate value added, both scales 2 22 Profit margin 2 Net lending Source: BEA, FRB ECI private compensation %oya, both scales US private sector employment and productivity %oya, both scales 2-2 Employment Source: BLS Productivity (inverted) Source: BLS 8 26

27 The housing recovery rests on normalizing household formation Household formation and net new housing supply Ch from year ago, 's 225 Net new housing 1875 supply Household formation Source: Census Bureau Housing starts Mn units, saar, both scales Multi-family starts Single-family starts Source: Census Bureau avg avg formation Housing vacancy rates %, nsa, both scales 12 Rental 11 vacancy rate Homeowner vacancy rate Source: Census Bureau Months supply of existing homes and house prices Sa by J.P. Morgan, 2-qtr mov avg Months' supply (inverted scale) Case-Shiller national house price index Source: S&P/Case-Shiller, National Association of Realtors %oya

28 Near-term consumption dynamics are a wild card Components of US household leveraging % of DPI (-qtr mov avg) 16 Investment rate Source: BEA US debt and debt service burden Sa Financial obligations ratio Debt to disposable income Source: FRB, BEA Saving rate Rising debt Percent US real consumption and savings %3m/3m, saar Saving rate Jan 12 Jul 12 Jan 13 Jul 13 Source: BEA US household impulses %-pts, saar addition to PCE growth % 2.5 Wealth effect Median year-ahead income expectations Source: BEA, FRB, University of Michigan Consumption Percent, sa

29 Energy sector lift remains a side show Oil and gas extraction % of nominal GDP 2.5 Value added, oil and gas extraction Petroleum trade balance Bn $, sa, 3mma Bn 25 $, sa, 3mma -6 Nominal Priv investment in O&G structures, equipment -2-3 Real Source: BEA Source: BLS

30 Fiscal debate moves away from factors affecting near-term growth Evolution of US federal deficit % of GDP, for fiscal year Cliff and sequestration Source: CBO, J.P. Morgan No cliff, no sequestration Evolution of US federal debt % of GDP, for fiscal year Source: CBO, J.P. Morgan No cliff, no sequestration Cliff and sequestration Publicly-held debt to GDP % CBO estimate with policy before New Year's deal CBO estimate with policy after New Year's deal Source: CBO 3

31 The big question is how much room there is to run Real potential GDP, assumption Index, 1Q = 1; Data through Q Real potential GDP, assumption US EMU UK Japan US EMU UK Japan Growth (%,ann rate) 1Q to 2Q Q8 to Q Reduction in level, Q12 (%) Memo: Potential growth, Output gap, Q Source: J.P. Morgan Source: JPMorgan 31

32 US participation rate looks cyclically depressed Participation rate %, annual average Participation rate, ages Source: J.P. Morgan, BLS, CBO %, both scales Source: BLS Male Actual Apr Female CBO JPM * College enrollment % of population age 16 to 2 enrolled in college Source: BLS Marginally attached workers out of the labor force Share of labor force; searched for work during last 12 months and available to work now Source: BLS 32

33 OMT fixes Euro area structural flaw but there is much work to be done Euro area required primary positions Required 215 primary positions, % of GDP Required primary positions Euro area unit labor costs 1Q = 1 1 ITA 13 FRA ESP 12 PRT Primary position 212 Maastricht vision, debt at 6% of GDP r>g by 2bp OMT allows r=g, debt still at 6% of GDP OMT allows r=g and debt at 8% of GDP 11 1 DEU France Italy Spain Ireland Portugal Greece r refers to average borrowing cost on sovereign debt, g refers to nominal GDP Source: J.P. Morgan Source: Eurostat Institutional change and integration loses momentum Clash over timing of individual country structural change vs. institutional change at regional level Divide on burden sharing of legacy assets for banks and sovereigns Disagreement on speed of move toward banking union, role of ECB and need for shared deposit guarantee schemes 33

34 Euro area remains weak and divergent Euro area composite PMI and real GDP DI, sa (monthly) %q/q, saar 6 Euro area composite PMIs DI, sa GDP Germany PMI -1 Periphery Source: J.P. Morgan, Markit, Eurostat Source: Markit, J.P.Morgan 3

35 Japan decides deflation has done too much damage Japan slack and inflation Core inflation, %oya 3. 1Q9 to Q Q9 to Q Q to 3Q Output gap, % Source: MIAC Central bank assets % of GDP; Fcst Mar13 through Dec Domestic demand: US vs Japan US/Japan; Indexed 198= Capex Consumption Source: BEA, ESRI Export market performance Index BoJ Germany US 25 Fed Source:J.P.Morgan, FRB, BoJ 1.8 Japan Source: OECD 35

36 Success will come with growth; achieving 2% inflation target would be a failure Japan: government deficit and debt % of GDP, both scales 25 Debt Source: OECD Japan inflation swaps and JGB yields %, both scales Deficit 1yr JGB yield 1yr inflation swap BoJ needs to produce shift in expectations and financial conditions that generate growth Large fiscal adjustments and structural changes are coming With inflation below 2% the BoJ has room to provide ongoing support for needed change Source: J.P. Morgan

37 JPMorgan CB forecast Official Current Change since (bp) Forecast Forecast (%pa) rate rate (%pa) 5-7 av g Trough 1 Last change Nex t mtg Jul 11 nex t change Jun 13 Sep 13 Dec 13 Mar 1 Jun 1 Sep 1 Dec 1 Global ex cluding US Developed Emerging Latin America EMEA EM EM Asia The Americas United States Fed funds Dec 8 (-87.5bp) 19 Jun 13 On hold Canada O/N rate Sep 1 (+25bp) 29 May 13 3Q 1 (+25bp) Brazil SELIC O/N Apr 13 (+25bp) 29 May May 13 (+25bp) Mex ico Repo rate Mar 13 (-5bp) 7 Jun 13 On hold Chile Disc rate Jan 12 (-25bp) 16 May 13 Nov 13 (+25bp) Colombia Repo rate Mar 13 (-5bp) 31 May 13 Nov 13 (+25bp) Peru Reference May 11 (+25bp) 9 May 13 On hold Uruguay Reference Dec 12 (+25bp) 2Q 13 2Q 13 (+25bp) Europe/Africa Euro area Refi rate May 13 (-25bp) 6 Jun 13 On hold United Kingdom Bank rate.5-5 Mar 9 (-5bp) 9 May 13 On hold Czech Republic 2-w k repo Nov 12 (-2bp) 27 Jun 13 On hold Hungary 2-w k dep Apr 13 (-25bp) 28 May May 13 (-25bp) Israel Base rate Dec 12 (-25bp) 27 May 13 On hold Poland 7-day interv Mar 13 (-5bp) 8 May 13 8 May 13 (-25bp) Romania Base rate Mar 12 (-25bp) 1 Jul 13 1 Jul 13 (-25bp) Russia Repo rate 5.5 N/A N/A N/A 13 Sep 12 (+25bp) May 13 2Q 13 (-25bp) South Africa Repo rate Jul 12 (-5bp) 23 May 13 On hold Turkey Effctv e rate N/A² 16 May 13 N/A² Asia/Pacific Australia Cash rate Dec 12 (-25bp) 7 May 13 Nov 13 (-25bp) New Zealand Cash rate Mar 11 (-5bp) 13 Jun 13 Sep 13 (+25bp) Japan O/N call rate Oct 1 (-5bp) 22 May 13 On hold Hong Kong Disc. w ndw Dec 8 (-1bp) 2 Jun 13 On hold China 1-y r w orking Jul 12 (-31bp) - 1Q 1 (+25bp) Korea Base rate Oct 12 (-25bp) 9 May 13 9 May 13 (-25bp) Indonesia BI rate Feb 12 (-25bp) 1 May 13 2Q 13 (+25bp) India Repo rate May 13 (-25bp) Jun 13 3Q 13 (-25bp) Malay sia O/N rate May 11 (+25bp) 9 May 13 On hold Philippines Rev repo Oct 12 (-25bp) 13 Jun 13 On hold Thailand 1-day repo Oct 12 (-25bp) 29 May 13 On hold Taiw an Official disc Jun 11 (+12.5bp) 2Q 13 1Q 1 (+12.5bp) Refers to trough end-quarter rate from 29-present ² Effectiv e rate adjusted on daily basis 3 BoJ targets 5-6tn/y ear ex pansion in monetary base Source: JPMorgan Bold denotes mov e since last GDW and forecast changes. Underline denotes policy meeting during upcoming w eek. Aggregates are GDP-w eighted av erages. 37

38 JPMorgan US forecast Q12 1Q13 2Q13 3Q13 Q13 1Q1 2Q Gross domestic product Real GDP Final sales Domestic Consumer spending Business inv estment Equipment Structures Residential investment Gov ernment Net ex ports ($bn, chained $25) Ex ports (goods and serv ices) Imports (goods and serv ices) Inv entories (ch $bn, chained $25) Contribution to real GDP grow th (% pts): Domestic final sales Net ex ports Inv entories Income and profits (NIPA basis) Adjusted corp profits Real disposable personal income Sav ing rate Prices and labor cost Consumer price index Core Producer price index Core PCE deflator Core GDP chain-ty pe price index S&P/C-S house price index (%oy a) Productiv ity Other indicators Housing starts (mn units, saar) Industrial production, mfg Capacity utilization, mfg. (%) Light v ehicle sales (mn units, saar) Unemploy ment rate Pay roll employ ment (ch, 's, samr) Nominal GDP Current account balance ($bn) % of GDP Federal budget balance ($bn) % of GDP Entries are average level for the period. Federal balance figures are for fiscal years. May 3 2Q13 3Q13 Q13 1Q1 Interest rate forecast (end of period) Fed funds target mo LIBOR y r Treasury y r Treasury y r Treasury y r Treasury %q/q, saar %q/q %y /y Source: JPMorgan 38

39 Global Economic Outlook Summary Real GDP Real GDP % over a year ago % o ver previo us perio d, saar % over a year ago Q12 1Q13 2Q13 3Q13 Q13 1Q1 2Q1 Q12 2Q13 Q13 2Q1 Q1 The Americas United States h 1.3 h Canada Latin America Argentina Brazil Chile i 5. h 5. h 5. h i 2. i Colombia Ecuador Mex ico Peru h 2.6 h Uruguay Venezuela Asia/Pacific i 5. i 5.1 i i Japan Australia New Zealand Asia ex Japan i 6.7 i 6.6 i i. i China Hong Kong India Indonesia i 5. h h 5. i 5.2 i h 6.9 h..5 Korea i i.5. i i 1.9 i Malay sia i 5.3 i i.8 i 5. i 5.5 i i 1.7 i Philippines i 3.1 i Singapore i 3.8 i h 6.6 i i 2.9 i Taiw an i 3.9 h i 3. h.5 h.8 h Thailand i i. i 1. i. i i 1. i Africa/Middle East Israel South Africa Europe i 2.1 i Euro area i 1.2 i Germany i 1.5 i France i Italy i 1. i Spain i. i.. United Kingdom Emerging Europe Bulgaria Czech Republic Hungary Poland Romania Russia Turkey Global i i Dev eloped markets i 1.3 i Emerging markets i 5.5 i 5.6 i i.3.1 Memo: Global PPP w eighted i i h 2.8 i *Underline indicates beginning of JPMorgan forecast Source: JPMorgan Consumer prices 39

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