GLOBAL ECONOMIC ENVIRONMENT AND OUTLOOK

Transcription

1 19 Global Market Outlook Press Briefing GLOBAL ECONOMIC ENVIRONMENT AND OUTLOOK Alan Levenson Chief U.S. Economist November 13, 18

2 Economic Outlook Summary Global growth moderating into 19 Advanced economies broadly slower as stimulus tailwinds abate and output gaps close Mixed picture in emerging market/developing economies, with slowing in China offset by acceleration elsewhere Inflation broadly at quiescent levels, but tilting higher Risks to growth outlook skewed to the downside 1

3 Percent Change Percent Change Global Growth: A Bit Slower in 19 REAL GDP, ADVANCED ECONOMIES * 19* 3. REAL GDP, EMERGING MARKET (EM)/DEVELOPING ECONOMIES * 19* World DM U.S. Euro Area Japan EM China EM Asia ex China LATAM EM Europe CIS *18 and 19 are IMF projections Sources: International Monetary Fund October 18 World Economic Outlook database, Haver Analytics, T. Rowe Price

4 Percent Change, Year Ago Percent Change, Year Ago Global Inflation: Broadly Quiescent, but Tilting Higher As of August 31, 18 & July 31, 18 CORE INFLATION ADVANCED ECONOMIES 3 U.S. PCE Price Index Euro Area CPI Japan CPI UK CPI CPI INFLATION EM ECONOMIES EM Asia LATAM EM Europe CIS Sources: U.S. Bureau of Economic Analysis, Japan Ministry of Internal Affairs & Communications, UK Office for National Statistics, Statistical Office of the European Communities, International Monetary Fund, Haver Analytics, T. Rowe Price 3

5 Percent of Potential GDP, Year-to-Year Change Percent of GDP U.S.: Healthy Private Sector Underpinnings HEALTHY PRIVATE SECTOR FINANCIAL BALANCES 1 8 Financial balances (saving investment) 6 Household Sector Business Sector FISCAL STIMULUS STILL A TAILWIND TO GROWTH IN Structural budget deficit general government Sources: Bureau of Economic Analysis, International Monetary Fund October 18 World Economic Outlook database, Haver Analytics, T. Rowe Price

6 Percent Change, Year Ago Percent Change, Year Ago Diminishing Slack, Mixed Inflation Response 1 8 UNDERSHOOT OF FULL EMPLOYMENT LIKELY TO DEEPEN Unemployment Rate NAIRU PHILLIPS CURVE ALIVE IN WAGES. PRICES? NOT SO MUCH Average Hourly Earnings Core PCE Price Index Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Congressional Budget Office, Haver Analytics 5

7 Percent Change, Year Ago History Suggests Another 175 Basis Points of Rate Hikes FED TIGHTENING CYCLES LIFT REAL FED FUNDS RATE AT LEAST TO POTENTIAL REAL GDP GROWTH 1 Potential Real GDP* (L) 8 Real Fed Funds Rate** (R) Recession 6 Percent Median of FOMC participants forecasts (9/6/18) *** -6 *Data through 18Q3 from CBO; data from 18Q through 1Q from September 6, 18, FOMC Summary of Economic Projections. **Adjusted for PCE inflation; data from 18Q3-1Q based on median forecasts in September 6, 18 FOMC SEP. Sources: Bureau of Economic Analysis, Congressional Budget Office, Federal Reserve, National Bureau for Economic Research, Haver Analytics ***18 and 19 are IMF projections 6

8 Percent U.S. Real GDP Deviation from Control Percent U.S. Risks: Yield Curve Flattening; Trade Tensions FLATTENING YIELD CURVE DOES NOT MEAN IMMINENT RECESSION 3 17 months to recession 1 mo mo. 13 mo. Recession mo. 1s-s UST Yield - Spread IMF SIMULATION OF TRADE TENSIONS IMPACT ON THE U.S. ECONOMY? Tariffs in baseline Add China (5 percent on $67 billion) with retaliation Add cars, trucks, and parts with retaliation Add confidence effect Add market reaction *Tariffs in baseline: all those implemented to date, including increase in 19 from 1% to 5% in rate applied to $ billion of imports from China in September 18. Confidence effect: increase in uncertainty reduces U.S. investment by 1% over 18-19, with impact on other countries scaled by their trade openness relative to the U.S. Market reaction: assumes a 15% drop in U.S. corporate earnings and associated widening in U.S. and trading partner corporate bond spreads. Source: Federal Reserve, National Bureau for Economic Research, Haver Analytics, IMF staff estimates, October 18 World Economic Outlook 7

9 Percent of Disp. Income Percent of GDP Euro Area: Room to Run, but Not as Fast As of June 3, 18 MIXED PICTURE ON FINANCIAL BALANCES Financial balances (saving investment) Household Sector (L) Business Sector (R) Percent of GDP HOUSEHOLD SAVING IN REBUILD MODE? 15 1 Household Saving Rate Sources: Statistical Office of the European Communities, Haver Analytics, T. Rowe Price 8

10 Percent Change, Year Ago Percent Euro Area: Varied Margins of Slack, Little Sign of Inflation As of June 3, LABOR MARKET CLEARLY TIGHT IN GERMANY, MIXED ELSEWHERE Unemployment Rates Euro Area - 19 Germany Rest of Euro Area CORE INFLATION STILL WELL BELOW TARGET Compensation per Hour CPI Excl. Food, Energy and Tobacco Sources: Statistical Office of the European Communities, European Central Bank, Haver Analytics, T. Rowe Price 9

11 Diffusion Index: >5 = Expansion $ Billions ECB: Communications Likely to Dominate Action Inflation more likely to fall short of ECB s 1.7% forecast than to exceed it No rate increases likely at least through summer 19 Balance sheet reinvestment likely to continue into PMIS LOSING MOMENTUM INTO Q Euro Area Purchasing Managers Indexes Composite Manufacturing Services THE TANKER OF CENTRAL BANK LIQUIDITY IS TURNING 1, 1, 1, 8, 6, U.S. Federal Reserve Projections Bank of Japan European Central Bank *,, *18 and 19 are IMF projections Sources: Bank of Japan, European Central Bank, Federal Reserve Board, IHS Markit, Haver Analytics, T. Rowe Price 1

12 Percent Euro Area Real GDP Deviation From Control Euro Area Risks: Italy, Brexit, Trade Tensions Italy: Today is the deadline for Italian government to submit a revised budget Dec. is deadline for EC response Standoff likely to continue unless market pressure pushes gov t. to moderate Brexit (3/9/18): Watch for high-level agreement outline by year-end; UK gov t. plan by late- January Negotiated Brexit deal or hard would be followed by -month transition period Trade tensions: as innocent bystander, euro area stands to benefit from direct effects of mooted U.S. tariffs EURO AREA: REAL GDP IN TRADE TENSIONS SCENARIO* Tariffs in baseline Add China (5% on $67 billion) with retaliation Add cars, trucks, and parts with retaliation Add confidence effect Add market reaction * * *Tariffs in baseline: all those implemented to date, including increase in 19 from 1% to 5% in rate applied to $ billion of imports from China in September 18. Confidence effect: increase in uncertainty reduces U.S. investment by 1% over 18-19, with impact on other countries scaled by their trade openness relative to the U.S. Market reaction: assumes a 15% drop in U.S. corporate earnings and associated widening in U.S. and trading partner corporate bond spreads. Sources: IMF staff estimates, October 18 World Economic Outlook

13 Three-Month Change, Pct. of GDP (Annual Rate) Percent Change, Year Ago of Three-Month Average China Juggling Deleveraging and Growth CONTRIBUTIONS TO FIXED-ASSET INVESTMENT 5 Real Estate Manufacturing Infrastructure Other Total CHINA CREDIT IMPULSE Narrow* Broad** *Sum of depository corporations' loans to government, nonfinancial institutions, and other resident sectors. **Narrow + loans to other financial institutions. Sources: People's Bank of China, China National Bureau of Statistics, Haver Analytics, T. Rowe Price 1

14 Percent China Real GDP Deviation from Control China Growth Outlook: Risks Skewed to the Downside Policy priority is to support growth; pickup in credit impulse suggests traction in recent efforts Trade tensions with the U.S. are a substantial headwind and unlikely to go away anytime soon De-leveraging delayed, and current account buffer has dwindled, sustaining risks of RMB weakness and capital flight CHINA REAL GDP IN TRADE TENSIONS SCENARIO* Tariffs in baseline Add China (5% on $67 billion) with retaliation Add cars, trucks, and parts with retaliation Add confidence effect Add market reaction ** 19** ** *Tariffs in baseline: all those implemented to date, including increase in 19 from 1% to 5% in rate applied to $ billion of imports from China in September 18. Confidence effect: increase in uncertainty reduces U.S. investment by 1% over 18-19, with impact on other countries scaled by their trade openness relative to the U.S. Market reaction: assumes a 15% drop in U.S. corporate earnings and associated widening in U.S. and trading partner corporate bond spreads. **18 and 19 are IMF projections Sources: IMF staff estmates, October 18 World Economic Outlook 13

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