Global and ASEAN Economic Outlook: Navigating the Shifting Economic Landscape

Transcription

1 Global and ASEAN Economic Outlook: Navigating the Shifting Economic Landscape Benjamin Shatil Regional ASEAN Economist Asia Economic Research J.P. Morgan

2 Asia Economic and Markets Research Global, EM Asia, and Malaysia: Economic Outlook April 217 Ben Shatil AC JPMorgan Chase Bank, N.A., Singapore Branch See end pages for analyst certification and important disclosures, including investment banking relationships. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making their investment decision.

3 Global outlook: Reflation and upside risks Reflation: Disinflationary shocks are fading: real growth and inflation on the rise Acceleration in nominal growth is rotating income back toward corporates; profits should rise 1% Manufacturing is bouncing. Following two years of less than 1.5% growth, output should rise in 1H17. Firming goods demand a key catalyst, levered by a turn in the inventory cycle. Asia a key beneficiary. US election expected to have small 217 growth impact. Broad policy changes expected, but fiscal stimulus likely small. Impact of regulatory, health care, trade, and tax reform could be large over time. A tale of two tails. There are signs of rising animal spirits in the DM. US policy a two-sided wild card. On balance, risks to growth and inflation forecasts are skewed to the upside for 1H17 Fed tightens as activity rebounds and labor markets hit full employment. US potential growth is below 1.5%; labor markets should tighten further Bias is for a more hawkish and less conventional FOMC as almost all of the FRB is expected to change by mid-218. Recent rise in growth from inventories and tech could be accompanied by 1Q17 slowdown China to slow a touch to 6.6% in 1Q17 as infrastructure and real estate offset deceleration elsewhere India s demonetization shock mitigated by agriculture and government spending Elsewhere monetary easing pushed back as US policy shift suggests volatility in capital flows Threat of China labeled as currency manipulator, Border Tax adjustment and uncertainty over One China policy are EM Asia s biggest risks 1

4 US risks: Sequencing matters Currency manipulator label. US treasury has 3 criteria for currency manipulation. These include a significant bilateral trade surplus with the U.S., a material current account surplus, and engaging in persistent one-sided intervention in the foreign exchange market. If a country is labelled as such, then the US could impose tariffs on imports from that country. Border tax adjustment. Sales outside of the US would not be subject to taxation in the US (with international companies and exporters being the largest relative winners), while companies that sell imported goods in the US would not be able to deduct their imported COGS from sales. Put another way, companies that sell imported products would be taxed on the full sale amount of such a transaction, rather than on the profit. In some cases, the taxes due would exceed the company s existing profit. This could risk sparking retaliatory tariffs from other trading partners, leading to a slowdown in global trade, similar to the aftermath of Smoot Hawley act in 193 The Homeland Investment Act 2. Provides American multinationals (MNCs) with a temporary tax relief on any additional dividends repatriated to, and consequently invested in, the United States. This could have a potentially disruptive impact on US$ liquidity in EM Asia s banks amid elevated LD ratios. 2

5 US risks: A menu of options 3

6 Agenda Global outlook 4 EM Asia outlook 2 Malaysia outlook 4 J.P. Morgan forecasts 46 4

7 Forecasting stronger growth and inflation Global real GDP %oya GDP deflator, Global %oya (LCY) Potential growth 2 Average G L O B A L O U T L O O K

8 Looking for more balanced growth Real GDP deviation from potential %oya 3. Global real GDP and manufacturing %q/q, saar; both scales 4 Real GDP Mfg output Developed Emerging Real consumption and fixed investment, DM %oya; both scales 3 Real consumption G L O B A L O U T L O O K Investment

9 Inflation takes a step higher, but reflation is nuanced in EM G L O B A L O U T L O O K 7

10 Reflation lifts profits and business spending Global nominal GDP and corporate profits %oya; both scales; 1Q17 profits is an estimate Nominal GDP Global corporate profits and capex %3m/12m %3m/3m, saar Profits Profits -2-8 Capex proxy -5 G L O B A L O U T L O O K ; MSCI earnings / Data through Feb 217 estimate -1

11 Global manufacturing tide appears to lift all boats Global IP and GDP Manufacturing output %q/q, saar %3m/3m, saar IP 6 Euro area EM 3 GDP US 1 G L O B A L O U T L O O K

12 but the tea leaves may be saying something else EM Asia exports by product EM manufacturing PMI and copper prices %3m/3m, saar, US$ terms 1 58 Index, sa %3m/3m, saar, US$ terms Mfg Commodities EM PMI Copper price Total G L O B A L O U T L O O K

13 Hint of lifting in animal spirits in DM Global consumer confidence Global business confidence Standard deviation from average 2 1 DM Std. dev from average G-4. G L O B A L O U T L O O K -1 EM Euro area confidence measures Std dev from average 3 2 Business Consumer EM US capex intentions & real capex Index Capex Fed surveys - capex intentions %q/q, saar 3 15

14 Macro outweighs politics in Europe Tracking Euro area GDP growth with the PMI 2 %q/q saar PMI-based tracker Source: Markit, Eurostat, J.P. Morgan estimates Actual GDP (1Q17 fcst) 2 Euro area bank lending to real economy %oya, adj. for loan sales/securitizations 4-2 Non-financial corporates Households G L O B A L O U T L O O K Euro area major purchases at present % bal, sa Sour ce: EC 12 UK real labor income and consumption %q/q, sa, includes J.P. Morgan forecast for income 2 Real labor income 1-1 Consumption Source: ONS, J.P. Morgan

15 US election has a small growth impact G L O B A L O U T L O O K US fiscal deficit, federal % of GDP Impact of Trump fiscal plan: JPM Forecast Tax cuts, per year Spending Personal Corporate (over 5 yrs) Trump plan ($Bn) % of GDP JPM Assumption Implemented ($Bn) % of GDP M ultiplier GDP impact (%GDP) Year 1: 2H17-1H Year 2: 2H18-1H %pt, 4Q/4Q Cumulative Source: U.S. Treasury, OECD, J.P. Morgan Forecast 13 We expect broad policy change, but fade the extremes: Net fiscal stimulus to add.2%-pt to growth in 217 and 218 No disruptive trade conflicts Impact of tax reform, regulatory reset, ACA replace, and infrastructure could be significant but won t be felt for some time. Border adjustment is necessary to get corporate tax reform. It should put upward pressure on the dollar We hold these views lightly. Possible US policy surprises are a wild card

16 US regulatory reset and tax reforms upside risk NFIB survey: biggest concern percent, sa 35 US ease of starting a new business Percentile rank relative to rest of world and OECD 1 3 Poor sales 9 Easier 25 Taxes US vs. World G L O B A L O U T L O O K Regulation 1 5 Quality of Labor Source: NFIB, J.P. Morgan 14 6 Harder 5 US vs. OECD Source: World Bank Group, J.P. Morgan Asset Management

17 US core inflation is drifting higher and that s good US measures of core inflation Rental vacancy rates and PCE tenants rent %oya 3. Percent 6 PCE- tenants rent %oya Core CPI Core PCE price index Rental vacancies (inverted) US import prices and core goods CPI US healthcare inflation G L O B A L O U T L O O K % change 6mos, saar, both scales Core goods CPI Source: BLS Non-fuel imports (3 mos ahead) %ch over 12 months Healthcare 2 Healthcare

18 Fed 217 outlook: A return to the observables G L O B A L O U T L O O K Observables: Fed Forecasts, Mar LR Real GDP as of Dec Unemp rate as of Dec PCE inflation as of Dec PCE core inflation as of Dec Fed funds as of Dec Note: Forecast are medians of FOMC participants; Source: FRB Unobservables: FOMC long-run projections y* u* r* Current, Mar ' Source: Federal Reserve Board 16 Average change in Fed "dot plot" %-pts: Contribution from:.8 Data (observables) Structure Hawkish Residual Dovish Source: Federal Reserve Board, J.P. Morgan

19 Fed turnover a major issue Two seats are open. One will likely be filled by Vice Chairman for Financial Stability US 1mo OIS, year-end 215 Percent per annum 1.5 Five or six board seats to turn over by mid-218. This includes Fed Chair Yellen and Vice Chair Fischer A bias is toward a more hawkish Fed. But the big risk is a shift to unconventional and/or political leadership G L O B A L O U T L O O K 17.3 Jan 13 Apr 13 Jul 13 Sep 13 Dec 13

20 US expansion has entered a mature phase US domestic corporate profit margin % of corporate value added US ULC and nonfarm business price deflator %chg over 8 quarters, saar 4 Nonfarm business price deflator ULC G L O B A L O U T L O O K Source: BEA, FRB

21 US recession risk: Short-term is falling, but medium-term is elevated Probability of recession within 3 years from multivariate regression model 1% 8% 6% Probability of recession within 12 months 7% 6% 5% 4% Baa spread + S&P 5 Economic data, with background risk 4% 3% 2% G L O B A L O U T L O O K 2% % % % Jan-16 Mar-16 Jun-16 Sep-16 Dec-16 Economic data, near-term composite

22 Agenda Global outlook 4 EM Asia outlook 2 Malaysia outlook 4 JP Morgan forecasts 46 2

23 1. Growth differentials are key - EM Asia lags lift elsewhere EM: growth differential and FX EM: growth differential %-pt 8 EM-US GDP growth USD FX %oya -2 %-pts 12 9 EM Asia less US EMEA less US LatAm less US E M A S I A O U T L O O K

24 EM Asia could see some payback after 1Q17 lift EM Asia-US growth/int. rate diff. & K flows % of GDP, 2qma %-pt Capital flows 6 EM Asia BoP flows US$bn, 2qma Overall Capital flows -2 Current acc. flows E M A S I A O U T L O O K EM Asia less US growth and policy rate diff Source: National sources, J.P. Morgan estimates 1Q17 estimates EM Asia K flows and FX US$bn, 2qma %oya 2 Capital flows 8 USD FX

25 2. Limited impact from tightening in financial conditions ADXY and 1-yr UST Index, inverse scale 95 %p.a. 1.1 DM manufacturing PMI and US 1-yr UST %p.a., eop Index, sa 3. 1-yr US treasury PMI ADXY yr UST and 1-yr EM Asia bond yields %p.a., eop, both scales yr UST EM Asia ex. CN/IN E M A S I A O U T L O O K US Source: Bloomberg, J.P. Morgan

26 FX, not policy rates, to flex given balance sheet structure EM Asia policy rate and ADXY EM Asia credit by currency denomination 6. %p.a. Index, inverse scale 12 % GDP 15 China local currency bank credit ADXY 1 EM Asia ex CN LC bank credit Policy rate 5 EM Asia ex CN external debt China external debt E M A S I A O U T L O O K Source: National sources and Bloomberg Source: BIS, national sources and J.P. Morgan

27 3. Growth support from cyclical lift, cresting in late 1Q17 EM Asia-4 1 manufacturing PMI and exports %3m/3m, saar, US$ terms PMI, DI, sa 3 export-weighted Exports Source: Markit, SIPMM, national sources, J.P. Morgan; 1. CN, KR, SG, TW EM Asia PMI and copper prices Index PMI %3m/3m, saar, US$ terms Source: NBS and Bloomberg Copper EM Asia 1 exports by product %3m/3m, saar, US$ terms Manufactureds Commodities Total EM Asia exports %3m/3m, saar, US$ terms 5 CN, KR, SG, TW 25 KR, TW, SG E M A S I A O U T L O O K Source: National sources, J.P. Morgan; 1. CN, KR, SG, TW Source: National sources, J.P. Morgan

28 With capex lift led mainly by North Asia EM Asia ex CN/IN fixed investment %2q, saar 2 1 Nonconstruction Construction EM Asia ex. CN/IN non-const. fixed inv. %2q, saar 2 Taiwan ASEAN -5 Korea Source: National sources Overall ASEAN non-construction fixed investment %2q, saar 2 ID 1 TH MY E M A S I A O U T L O O K Source: National sources 26-1 SG Source: BPS, DOS, NESDB, Malaysia seasonally adjusted via X-12

29 And help from a more stable China China gross FX reserves US$ billion, monthly changes China PMI and fixed asset investment %oya, YTD Index, sa FAI PMI Source: NBS China fixed asset investment %oya, YTD Public Total E M A S I A O U T L O O K Source: PBOC 27 Private Source: NBS

30 4. China s credit boom has had limited impact until 216 China credit growth and GDP China real GDP and credit impulse %oya 16 Real GDP TSF % of GDP 25 2 %oya GDP %pt. of GDP, oya 25 2 Credit impulse E M A S I A O U T L O O K Source: NBS and PBOC Source: NBS and PBOC

31 Growth stabilizes; first upward GDP revision in a while EM Asia/China GDP f'cast revision index China NBS PMI and copper prices Index, Jan 22 =1 92 Index 56 %3m/3m, saar, US$ terms PMI Copper China E M A S I A O U T L O O K EM Asia Source: NBS and Bloomberg

32 Rebalancing lightens China GDP 48 China: GDP composition % share of total GDP, 4qma 5 Tertiary industry China employment by sector %oya 1 Services Source: NBS Secondary industry Industry Source: MHRSS China composition of GDP growth China output gap by sector %pt. contribution to headline GDP growth 12 % deviation from HP-filtered trend Services 2 Services 6 E M A S I A O U T L O O K 4 2 Industry Source: NBS 3-2 Manufacturing Source: NBS and J.P. Morgan

33 Helped by FX administration and liquidity operations China trade flows and FX reserves China: sources of monetary base US$ billion, 6-month cumulative RMB trillion, change from year ago 5 FX reserves 6 NDA Trade 25 4 Base money 2-25 FX reserves less trade flows -5-2 NFA E M A S I A O U T L O O K Source: NBS and PBOC 31 PBOC regains control Source: PBOC

34 Better coordination between fiscal and monetary policy China PBOC NDA and claims on commercial banks RMB trillion, change from year ago China bank claims on govt. and PBOC claims on banks RMB trillion, change from year ago PBOC claims on commercial banks Bank claims on government PBOC NDA Source: PBOC PBOC claims on banks Source: PBOC E M A S I A O U T L O O K China: FAI by sector %oya, ytd Private Public Source: NBS 32 China: PBOC NDA and public FAI RMB trillion, change from year ago PBOC, NDA Public FAI %oya, ytd Source: PBOC and NBS

35 Focus shifts to financial stability; mindful of funding risks China: 3-month SHIBOR and NEER %p.a. Index, Dec = mo SHIBOR CFETS NEER China: market-based interest rates 3M SHIBOR % p.a 4. 7-day repo day SLF day reverse repo E M A S I A O U T L O O K 2.5 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: Bloomberg Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Source: Bloomberg, J.P. Morgan

36 5. Where has EM Asia s growth gone? 11 EM Asia: annual GDP growth %oya 5. EM Asia: quarterly GDP growth %q/q saar, both scales China Avg growth EM Asia ex. CN/IN 6. E M A S I A O U T L O O K Source: National sources and J.P. Morgan forecasts Source: National sources and J.P. Morgan 5.5

37 Weak export growth has been the critical factor World merchandise trade EM Asia: GDP and global trade %q/q saar 8-qtr mma, both scales Index, 25=1, real terms sa EM Asia GDP 1 Level Avg Avg Change 5-5 Global trade (US$) 7 6 E M A S I A O U T L O O K Source: CPB world trade monitor, J.P. Morgan Source: CEIC and J.P. Morgan 5

38 Export slowdown the biggest driver of slower growth EM Asia ex CN/IN: domestic demand and exports EM Asia ex CN fixed investment and exports %oya, both scales 8 Real GDP %q/q, saar, 4qma, real terms 14 7 Exports, NIPA basis Domestic demand, net of inventories Real exports Fixed investment EM Asia exports EM Asia: dependence on DM growth %oya, 3mma, US$ nominal terms %-pts, response of EM Asia gth to 1%-pt change in DM gth E M A S I A O U T L O O K 4 To all destinations Excluding EM Asia Source: National sources Source for all charts: J.P. Morgan Q-4Q1 1Q11-1Q15

39 US has been doing bulk of heavy lifting in G-3 Contribution to EM Asia extra-regional export growth 2 16 %pt contribution to average headline %oya growth ex. G3 G3 G-3 Contribution to EM Asia extra-regional export growth %pt contribution to average headline %oya growth US EU 1 JP E M A S I A O U T L O O K Source: National sources, J.P. Morgan Source: National sources, J.P. Morgan

40 US potential growth less than 1.5%; productivity drags Tech investment as a share of GDP Percent; both scales Software R&D US growth in productivity and working age population %chg over 2qtrs, saar 5 % year-over-year 3 2. IT equipment Working age population 2 E M A S I A O U T L O O K College enrollment and share of workforce aged % of population aged College enrollment (age 16-24) , Census Workforce aged % Nonfarm productivity Sour ce: BLS, Census Bur eau 1

41 Rise in leverage holding back growth on the margin EM Asia bank non-performing loans %-pt change, Latest less ID SG TH CN IN HK KR MY TW PH Source: national sources, latest is 1H16 for all except IN where latest is 215 EM Asia bank credit debt service cost % of GDP H E M A S I A O U T L O O K 1 5 HK SG CN TW TH KR ID PH Source: National sources 39

42 Agenda Global outlook 4 EM Asia outlook 2 Malaysia outlook 4 JP Morgan forecasts 46 4

43 Malaysia: macro view M A L A Y S I A O U T L O O K Malaysia: economic indicators Average f 217f Real GDP, % change Consumption¹ Investment¹ Net trade¹ Consumer prices, %oya % Dec/Dec Producer prices, %oya Government balance, % of GDP Merchandise trade balance (US$ bn) Exports Imports Current account balance % of GDP International reserves, (US$ bn) Contribution to growth of GDP. Source: National sources, J.P. Morgan GDP growth supported by investment, external demand looks to be turning up Inflation expected to rise in 217 due to oil price adjustment and technical factors due to base effects BNM expected to remain unchanged Changes in FX regulations 75% export conversion is potentially positive. Regulation mandates that all onshore settlements to be in MYR from April 1 onwards Indonesia s experience with similar regulation provides useful benchmark. FX reserves and M2 will be key to watch

44 Malaysia: growth firming Malaysia leading index and real GDP Malaysia CPI %oya 8 %2q, saar 12 1 %3m/3m, saar Real GDP Headline Core -4 Leading index, advanced 3 months -3 M A L A Y S I A O U T L O O K Source: DOS Source: DOS and J.P. Morgan forecasts

45 Malaysia: cyclical momentum stabilizing Exports firming, especially commodities Malaysia exports US$billion, 2mma, sa, both scales Manufactured goods Commodities Source: DOS Delivering a lift to the nominal trade balance Table 1: Malaysia natural gas and crude palm oil exports Total (1+2) % GDP LNG, US$bn Volume, mn MT Price, US$/MT CPO, US$bn Volume, mn MT Price, US$/MT Source: DOS; 1. Based on latest 3-mo. average volumes and latest prices Capital goods demand has inflected PCE also has moved up since 3Q16 M A L A Y S I A O U T L O O K Malaysia: capital goods imports US$bn, 3mma, sa %oya, 3mma 2.3 Level Change Source: DOS 43 Malaysia domestic credit billings and private consumption %3m/3m, saar %q/q, saar 2 3 PCE Credit card billings Source: BNM and DOS

46 Malaysia: policy changes help stabilize FX Domestic outflows modest despite foreign FI outflows BNM s US$ buy-sell operations understates FXR drawdown Malaysia capital flows US$billion, 3mo. sum of monthly changes 15 Foreign FI flows Domestic flows Source: BNM and DOS Malaysia FX reserves US$ billion, both scales FX reserves FX forwards Source: BNM But has helped stabilize domestic liquidity Creating incentive for local banks to even keel market Malaysia 3-mo. merchant bank depo. rates and KLIBOR %p.a., eop, both scales.7 3-mo. KLIBOR less OPR.6.5 subtitle.6.4 Malaysia commercial bank non-loan assets MYR billion, both scales Placements with BNM and other securities M A L A Y S I A O U T L O O K mo. FD rate less OPR Source: BNM Govt. bonds Source: BNM 1

47 leaving market on even keel Malaysia government bond holdings 4 MYR billion, 3-mo. rolling sum of monthly changes Banks 2-2 M A L A Y S I A O U T L O O K Foreigners Source: BNM 45

48 Agenda Global outlook 4 EM Asia outlook 2 Malaysia outlook 4 JP Morgan forecasts 46 46

49 Regional economic outlook J P M O R G A N F O R E C A S T S Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Real GDP, %-ch over 1 quarter, saar Japan Australia New Zealand Emerging Asia ex China and India China Hong Kong Taiwan Korea India Indonesia Malaysia Philippines Singapore Thailand Consumer prices, %oya, average Japan Australia New Zealand Emerging Asia ex China and India China Hong Kong Taiwan Korea India Indonesia Malaysia Philippines Singapore Thailand Source: National sources and J.P. Morgan forecasts 47

50 Regional outlook: Policy rate and exchange rate forecasts J P M O R G A N F O R E C A S T S Q16 2Q16 3Q16 4Q16 Current 1Q17 2Q17 3Q17 4Q17 Official interest rates, % p.a., end-period United States Federal funds rate Japan Overnight call rate Australia Cash rate New Zealand Cash rate China 1-year working capital Taiwan Official discount rate Korea Base rate India Repo rate Indonesia 1 BI rate Malaysia Overnight policy rate Philippines 2 Reverse repo rate Thailand 1-day repo rate Exchange rates, end-period Japan USD/JPY Australia AUD/USD New Zealand NZD/USD China USD/CNY Hong Kong USD/HKD Taiwan USD/TWD Korea USD/KRW India USD/INR Indonesia USD/IDR Malaysia USD/MYR Philippines USD/PHP Singapore USD/SGD Thailand USD/THB The BI rate for Indonesia reflects announced recalibration effective August 19, The Philippines introduced a recalibrated reverse repo rate effective June 3 at a level of 3.%. Source: National sources and J.P. Morgan forecasts 48

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