Global economic outlook: Are we headed for another global recession? Sarah Hunter Head of Americas macro consulting

Transcription

1 Global economic outlook: Are we headed for another global recession? Sarah Hunter Head of Americas macro consulting 10 th March 2016

2 Oxford Economics forecast highlights Baseline world GDP forecast for 2016 now seen at 2.3% slowest pace of global growth since Sell-off in global financial markets since start of 2016 a factor; overall financial conditions have tightened significantly since mid Also some signs of weakness in real economy broadening from industry/commodity sector to services. Currently expect US economy to grow around 2% this year, down from a 2.6% forecast in December. Other major economies have also been downgraded; Japan (to 0.8% from 1.2%), Eurozone (to 1.6% from 1.8%), Brazil (to -3.6% from -2.6%) and Russia (to -2.4% from -0.9%). Our concern is that the financial market slump could create negative credit and confidence shocks and negative wealth effects, which will slow growth further. 2

3 Stress signals are becoming louder... US: High yield bond spread % spread, high yield-aaa corporate bond yields 18 World 16 recessions Average spread in recessions High yield bond spread Source : Oxford Economics/Haver Analytics US: Credit standards and equity prices % quarter Wilshire 5000 index (LHS) % Q Q Q Net % of banks tightening C&I loan standards (RHS, inverted) Source : Oxford Economics/Haver Analytics 60 80

4 and are starting to spill over to real activity World: PMI surveys Diffusion index, 50=neutral US composite PMI World: Economic surprise indices % G Global manufacturing PMI China Caixin manufacturing PMI Emerging markets Source : Oxford Economics/Haver Analytics Source : Oxford Economics/Citigroup 4

5 with global growth forecast weakest since 2009 World: Industrial output and recessions % quarter World: GDP % year 5 4 Long-term average Forecast World recessions G7 industrial output Source : Oxford Economics/Haver Analytics Source : Oxford Economics/Haver Analytics 2016 growth set to be the lowest since the recession year of Considerable downgrade since mid-2015 reflecting weaker incoming data and big financial market sell-off. Weakness in the world economy is still mostly centred in industry; manufacturing in the G7 is likely to be in a technical recession at the moment. And there have been tentative signs of softening activity in services too in January surveys e.g. in the US and Eurozone. Positive factors for services and consumption are low oil prices and still-solid property markets in most advanced economies but property markets have tended to move with stocks in recent years and there is weakness in some emerging and Asian property markets. 5

6 Overall picture amber alert We conclude that the situation is one of amber alert, not red alert High frequency economic data do not suggest recession but some financial market indicators are consistent with past recession periods All these indicators are fallible; the financial indicators tend to flag recessions around 50% of the time Current conditions are quite similar to , a period of weakening world growth rather than recession World growth could edge down to 2% or even below this year, a very slow pace The last time this happened, we got QE3 from the Fed. Where is the circuit-breaker this time? 6 Current risk indicators and historical context Indicator Current Average 3 months Worst point in level before recessions recessions (av.) G7 Industrial output, qoq World stocks, 6m chge Real non-oil commodity prices, 6m chge US high yield spread, % US corporate credit standards, % Source: Oxford Economics

7 What could the alternative look like? Financial fragility Chinese hard landing (15%) Housing sales slump sharply, triggering renewed house price falls and a sharp fall in housing construction. Domestic and external confidence is hit hard, resulting in lower FDI inflows, private investment and consumption The shock to growth spills over to emerging economies and sparks major currency realignment Geopolitical tensions (2%) A dramatic worsening in Saudi-Iranian relations triggers a violent reversal of recent oil price declines Crude oil prices rise back above $80 per barrel While the disruption is relatively short-lived, the global impact is material and varies hugely across countries Financial market contagion (10%) Amid signs of weakening growth, the current market gloom persists and weighs on global growth Equity price falls generate negative wealth effects, consumer and business confidence fade, and credit conditions tighten The Fed responds and reverses course; but some EMs are forced into rate hikes to defend their currencies Commodity demand weakness (10%) Oil prices fall further as global demand weakness weighs on commodity markets At current low oil prices, that drags modestly on global growth The boost to energy importers is outweighed by strains placed on exporter sovereigns and the US shale industry Emerging market commodity producers and the US are among those hit hardest Domestic demand fragility

8 US locomotive: A muffled whistle as we enter

9 Service sector still holding up, but mfg contracting 9

10 Domestic fundamentals remain quite strong Jan , , ,000 10

11 Maturing labor market will mean smaller job gains 11

12 but wage growth should pick up the income baton 12

13 Housing continues gradual recovery Drivers: Income growth Low interest rates Modest home price inflation Pent-up demand 13

14 Headwinds from strong $ and weak global growth 14

15 IP technically in a recession, but not truly Only 26% of manufacturing sector contracting in December

16 Fed to tighten at most 50bps this year 16

17 Eurozone: H2 weakness to extend into 2016 Eurozone Composite PMI & GDP Index GDP (RHS) Composite PMI (LHS) % change q/q Eurozone: Industrial production and manu. PMI Index % 3-month on 3-month Manufacturing PMI (LHS) 6 Industrial production excluding construction (RHS) Source : Oxford Economics/Haver Analytics/Markit Source : Oxford Economics/Haver Analytics 17

18 Deposit rate to move deeper into negative territory The ECB look set to implement further monetary easing this month, as inflation expectations and forecasts drop back towards zero. We think that major changes to the QE programme are unlikely and that the main policy initiative will be a 20bp reduction in the deposit rate. Given concerns about the associated tax on banks, such a change may be augmented by a tiering of the deposit rate. Eurozone: CPI Inflation (Bottom-up f'cast model) % y/y / contr ibution Core Energy Food alcohol and tobacco Headline Source : Oxford Economics/Haver Analytics Forecast 18

19 Japan: GDP growth close to 1% pa in 16 and 17 19

20 Long-term rates turn negative 20

21 as stronger exchange rate hurts profits and exports 21

22 China: Real growth slowed more than data show Real GDP growth % y/y GDP, Oxford Econmics estimate GDP, NBS Source: Oxford Economics, CEIC Data 22

23 Truly a two-track economy Real growth per sector % yoy Primary Secondary Tertiary Source: Oxford Economics, CEIC Data Nominal growth per sector % yoy Primary Secondary Tertiary Source: Oxford Economics, CEIC Data 23

24 ...with excess capacity in industry still on the rise Production and capacity in industry 2007=100 Value added in industry 250 Production capacity in industry* 200 Excess capacity (RHS) % Source: Oxford Economics, CEIC Data * From growth accounting 24

25 Financial leverage is rising Bank lending and total social financing % GDP 200 Total social financing 150 Bank loans Source: Oxford Economics, CEIC Data 25

26 and capital outflows have accelerated China: Financial capital flows US$bn Composition net financial outflows (Q3 2015) Chinese outflows other than foreign lending 16% Repayment foreign loans 23% Errors and omissions BOP -150 Foreign assets -200 Foreign liabilities Net financial flows Source : Oxford Economics, CEIC Data Foreign lending 31% Source: Oxford Economics, CEIC Data Repatriation foreign inflows 30% 26

27 Growth is expected to slow as economy rebalances 27

28 Commodity-dependent EMs continue to struggle 28

29 with Russia and Brazil in outright recessions BRICs: Manufacturing Purchasing Managers' Index Index, breakeven level= China Russia India Brazil Source : PMI/Markit/China NBS/Haver Analytics 29

30 Oil supply/demand balance not restored until 2017? Global Demand chg mb/d Global Supply chg mb/d o/w OPEC o/w US Stock Build Brent Oil Price Source: Oxford Economics/ IEA 30

31 Global forecast summary 31 World GDP growth % change on previous year Real GDP North America United States Canada Europe Eurozone Germany France Italy UK EU Asia Japan Emerging Asia, excl Japan China India World World 2005 PPPs World trade

32 What could the alternative look like? Financial fragility Chinese hard landing (15%) Housing sales slump sharply, triggering renewed house price falls and a sharp fall in housing construction. Domestic and external confidence is hit hard, resulting in lower FDI inflows, private investment and consumption The shock to growth spills over to emerging economies and sparks major currency realignment Geopolitical tensions (2%) A dramatic worsening in Saudi-Iranian relations triggers a violent reversal of recent oil price declines Crude oil prices rise back above $80 per barrel While the disruption is relatively short-lived, the global impact is material and varies hugely across countries Financial market contagion (10%) Amid signs of weakening growth, the current market gloom persists and weighs on global growth Equity price falls generate negative wealth effects, consumer and business confidence fade, and credit conditions tighten The Fed responds and reverses course; but some EMs are forced into rate hikes to defend their currencies Commodity demand weakness (10%) Oil prices fall further as global demand weakness weighs on commodity markets At current low oil prices, that drags modestly on global growth The boost to energy importers is outweighed by strains placed on exporter sovereigns and the US shale industry Emerging market commodity producers and the US are among those hit hardest Domestic demand fragility

33 Alternative 1: China hard landing Domestic financial stress buildings in China, with banks non-performing loans rising, house prices dropping sharply and the equity market undergoing further falls. Investment collapses as credit dries up and demand for housing falls, and consumers cut back on their spending as a result of falling real incomes and weaker confidence. Outflows spike, as investors pull out of China. The authorities intervene to stabilise the currency, and allow it to depreciate by 10% relative to the USD. Other emerging market currencies also depreciate, while the JPY and EUR gain on a trade-weighted basis. 33

34 China hard landing: Impact on GDP 34

35 Alternative 2: Financial market contagion With real economic indicators showing signs of weakness, this scenario assumes that conditions worsen further in financial markets. Equity prices fall, particularly in the US where stocks remain overvalued, consumer and business confidence drops and credit conditions tighten globally. The US is hit hard, as the epicentre of the scenario. But contagion means that all countries experience a deterioration in financial conditions, particularly vulnerable EMs who experience a flight away from their assets. 35

36 Financial market contagion: Impact on GDP 36

37 Alternative 3: Commodity demand weakens further In this scenario demand for commodities weakens further, increasing the pressure in commodity-dependent economies. Emerging Markets such as Russia and Saudi Arabia are badly affected, and the impact is also felt in Australia, Canada and even the US, where the extraction sector sees sharp falls in equity prices and rises in corporate spreads. The impact on the rest of the world is limited. Growth is slowed by the downturn in the US and other commodity producers, but this is broadly offset by the positive boost provided by lower commodity prices. 37

38 Commodity demand weakens further: Impact on GDP 38

39 Thank you! Any questions? Sarah Hunter: