Global Economic Outlook February 2018

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1 Global Economic Outlook 2018 February

Bart van Ark Bart van Ark, Chief Economist and EVP Strategy, is The Conference Board s primary spokesperson on the economy and leads a global team of economists in New York, Brussels and Beijing, who

2 Bart van Ark Bart van Ark, Chief Economist and EVP Strategy, is The Conference Board s primary spokesperson on the economy and leads a global team of economists in New York, Brussels and Beijing, who produce a portfolio of widely watched economic indicators and growth forecasts, as well as in-depth global economic research. He oversees five of The Conference Board s expertise centers, including Global Economy, Labor Markets, Consumer Dynamics, Innovation and Productivity, and Digital Transformation. Van Ark is an expert in international comparative studies of economic performance, productivity and innovation. He has extensively published in leading national and international journals. He is also frequently featured in major international business media, including Bloomberg, CNBC, the Financial Times and The Wall Street Journal. 2

3 About The Conference Board 3

4 What is The Conference Board? The Conference Board is a global, independent businessmembership and research association, started in 1916, working in the public interest. Our mission is unique: To provide the world s leading organizations with the practical knowledge they need to improve their performance and better serve society. Our membership includes about 1,000 companies in both the advanced and the emerging markets of the world. Objective economic data and analyses that help business and policy leaders make sense of their operating environments 4

5 Our Centers of Expertise 5

6 To help business leaders understand the economic and business environment, different time perspectives are required Short-Term Forecasts Global Outlook Research Short-term (6-18 months) forecast Monitors business cycles per country Identify up- and downturns Based on coincident and leading economic indicators Helps with timing of investments in plant, people, products Medium-term (2-10 years) Focus on sources of economic growth, productivity, and technological innovation Country & sector focus on competitiveness Helps to decide where to make investments and how to improve business operations Labor Markets Consumer Markets Innovation and Productivity Digital Transformation China Center Gulf Center Scenario approach 6

7 Global Economic Outlook 2018 About The Conference Board It s not about how full or empty the glass is but rather what you fill it with 7

8 Shocks, trend and disruptions determine the outlook THE IMMEDIATE Shocks THE LONG-TERM Trend THE IMPORTANT Disruptions Business leaders and policy makers need to pay attention to all three! 8

9 The Immediate 9

10 2017 has created strong momentum to support buoyant global growth in will end up at 3.2% global growth compared to our 2.8% projection a year ago 2018 projection currently at 3.3% with significant upside potential Energy and commodity prices are recovering from a major slump Strong consumer confidence and global consumer growth Healthy recovery in Europe and even stronger numbers for Q4 High business confidence in United States leading to a pickup in investment, supported by tax plan Stimulus-related growth bonus for China only slowly wearing off Stabilization of US dollar with little sign of appreciation Long term yields beginning to strengthen Even productivity slowdown shows some signs of bottoming out All in all: pretty synchronized strengthening and low recession risk 10

11 As global economy strengthens, economic policy uncertainty eases and business confidence strengthens Economic Policy Uncertainty, Global, US and EU (12-month average) Business Confidence, OECD, US and Euro Area (long-term average = 100, Jan 2008 Nov 2017) January 18 (Global to December 17) Sources: and Baker, Bloom and Davis (2016), The Conference Board. Sources: OECD (2019), The Conference Board. 11

12 Global Leading Economic Index provides strong signal for an upward swing in GDP growth 12 Annual Growth (%) Global LEI Global GDP Note: Shaded areas represent growth cycle chronologies derived from the de-trended Global CEI; determined by The Conference Board using Bry-Boschan (1971) algorithm. Source: The Conference Board 12

13 Expansionary business cycles are strongly synchronized across US, Euro Area and China Percent Source: The Conference Board 13

The Conference Board Global Economic Outlook, GDP growth, 2017 & 2018, % Note: GDP growth for select countries with significant ICT production and trade (China, US and Japan) are revised upward to

14 The Conference Board Global Economic Outlook, GDP growth, 2017 & 2018, % Note: GDP growth for select countries with significant ICT production and trade (China, US and Japan) are revised upward to reflect ICT price declines. *Europe includes all current European Union 28 members as well as Switzerland, Iceland and Norway. **Other mature economies are Australia, Canada, Israel, Hong Kong, South Korea, New Zealand, Singapore, and Taiwan. ***Russia, Central Asia, and Southeast Europe include projections for Russia, Kazakhstan, Turkmenistan, Uzbekistan, Belarus, and Turkey. Source: The Conference Board Global Economic Outlook 2018, preliminary February 2018 update. 14

15 The Conference Board Global Economic Outlook, GDP growth, 2018 (February 18 compared to November 17 projection) Note: GDP growth for select countries with significant ICT production and trade (China, US and Japan) are revised upward to reflect ICT price declines. *Europe includes all current European Union 28 members as well as Switzerland, Iceland and Norway. **Other mature economies are Australia, Canada, Israel, Hong Kong, South Korea, New Zealand, Singapore, and Taiwan. ***Russia, Central Asia, and Southeast Europe include projections for Russia, Kazakhstan, Turkmenistan, Uzbekistan, Belarus, and Turkey. Source: The Conference Board Global Economic Outlook 2018, preliminary February 2018 update. 15

16 Accelerated contribution from mature economies expected to wane towards the second half of 2018 Source: The Conference Board Global Economic Outlook 2018, preliminary February 2018 update. 16

17 China s Economic Growth The Long Soft Fall Official GDP Data, vs. TCB Estimates & Projections 16% 14% 12% 10% 8% 6% 4% 2% 0% China Annual Real GDP Growth, %Y/Y NBS TCB Source: NBS, The Conference Board % TCB Projections % % TCB GDP series suggest an upward bias in official series: For industry: production series based on produced quantities with multi-level and multi-year pricing and using input-output table weights For non-material services: assume more modest productivity improvements (1% in 1980s and 2% since 1990s) TCB GDP series for China, suggest growth slowdown started abruptly in 2011, now around four percent, vs. NBS growth of around seven percent Moving forward, we expect Chinese GDP growth to continue to slow 17

18 Is there change in the air? A rapidly falling dollar, rising yields and a possible halt to a strong equity market Percent Ten-year treasury less two-year treasury (left side) S&P 500 (right side) Wall Street Journal Dollar Index (right side) Index, Jan-4-16= /31/ Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan Sources: S&P, WSJ, CME Group 18

19 The downside risks mostly have a low probability but high impact but the trend may well see an upside Significant probability (>25%) limited impact risks: Acceleration in inflation and wages causing faster central bank responses, with those not responding fast enough being overexposed to liquidity Low probability (<25%) high impact risks: Major financial market disruptions (> 10% correction), e.g. because of crypto currency disruption, tech discounts, disruptive capital flows or flight to safety China clamp down on capital outflows triggering a global confidence crisis Geo-political wild cards: North Korea, Middle East, Russia, Venezuela, major trade disruption (NAFTA), major political disruption in US or Europe (Germany?). Less than 25% that one of those will happen? Meanwhile the upside for 2018 (more than 3.5%) relative to the trend (< 3%) becomes more visible: U.S. tax plan could have a bigger impact on investment than anticipated and spill over positively to rest of global economy Digitization is at tipping point and productivity effects are kicking in more broadly 19

20 The Long-Term 20

21 The medium-term growth projections depend on global labor supply (slowing) and productivity (still slow) Trend: Ongoing modest growth (around 3 percent) - well below the 3.5 to 4 percent growth of two pre-crisis decades Demand-side constraints remain challenging: Long-term demand (consumption and investment) determined by unfavorable demographics Persistent low inflation and low nominal interest rates Population aging and impact on national debt Supply side constraints: Shocks Trend Disruptions Slow growth of labor supply creates challenges on cost side and raises premium on skill Weak productivity growth due to slow innovation and delayed impact of digitization 21

22 Demographic change is major source of slowdown in labor supply growth especially in mature economies Cumulative growth rate of the working age population (net of migration), and (log changes) Sources: United Nations World Population Prospects (2017 revision); The Conference Board 22

23 Productivity growth has dramatically slowed down across the world, and projected improvements look small Total Factor Productivity Growth, smoothed trend lines, and projections to Sources: Sources: Bergeaud, Cette and Lecat, Banque de France; The Conference Board Total Economy Database, November 2017; The Conference Board Global Economic Outlook

24 About The Conference Board GEO model Projections of GDP for and Model uses a supply side-based growth accounting framework which measures supply side contributions of labor, capital and productivity Trend growth is a proxy for potential output growth, which represents the level of output an economy can produce in a noninflationary way, given the size of its labor force and its potential to invest in and create technological progress Labor quantity is projected, and for labor quality, capital and productivity we estimate trends based on a regression approach We adjust the medium term projections ( ) for short-term deviations from the trend growth because of output gaps (either positive or negative) 24

25 Qualitative growth sources have strongly weakened since the global recession. Can it recover? Decomposition of sources of output growth in contributions from quantitative growth sources and qualitative growth sources, Qualitative growth sources 10% Qualitative growth sources 5% 7 13 Quantitative growth sources % Source: The Conference Board Total Economy Database, November 2017; Global Economic Outlook 2018, November

If the glass is better filled with qualitive sources, growth becomes more sustainable, even if slower than before Decomposition of sources of output growth in contributions from quantitative growth

26 If the glass is better filled with qualitive sources, growth becomes more sustainable, even if slower than before Decomposition of sources of output growth in contributions from quantitative growth sources and qualitative growth sources, (100%) 10% (100%) 24% Qualitative growth sources Quantitative growth sources 3.8 (100%) 5% /3rd of global growth comes from qualitative sources - Human capital - Innovation and digital transformation - Productivity 50% of mature markets growth comes from qualitative growth sources, especially talent growth and productivity talent shortages are critical Quantitative growth sources in emerging markets underline catch up growth potential skilled labor force should be leverage to accelerate qualitative growth Source: The Conference Board Total Economy Database, November 2017; Global Economic Outlook 2018, November

27 The Important 27

change and sustainability & transformation in energy demand and supply A change in the dynamics of global trade,

28 Disruptions can change the trend towards faster or slower growth? Disruptions: Inequality and lack of access to human capital and other qualitative growth sources The challenges of climate change and sustainability & transformation in energy demand and supply A change in the dynamics of global trade, competitiveness and global value chains Digital transformation as a key disruptor of labor markets, the business landscape and the role of governments to regulate Shocks Trend Disruptions 28

29 Global trade volumes have expanded dramatically over the past 16 months Growth rates of monthly world trade volume (exports + imports) and quarterly global GDP Source: CPB, World Trsde Monitor, December 2017, The Conference Board 29

The pullback in trade from 2011-2014 has affected both intermediates and final goods and services The Contribution of Intermediates and Final Goods to Total Trade Value Growth, 1995-2014, %

30 The pullback in trade from has affected both intermediates and final goods and services The Contribution of Intermediates and Final Goods to Total Trade Value Growth, , % Note: Contributions are obtained by weighting each component s growth rate by its relative size in total trade Source: The Conference Board calculations based on WIOD, University of Groningen, 30

31 Is the global trade recovery structural? Causes of trade slowdown since 2011: Global financial crisis impacted goods with high trade intensity most Slump in oil and commodity prices Consolidation in global supply chain following extraordinary fragmentation of value chains in 1990s and 2000s Substitution of imports by domestic goods and services in emerging markets Convergence of labor costs and increased risks of differentiation Technological advances promote reshoring and near-shoring Correction for overshooting of fragmentation since 1990s Is the current trade recovery sustainable? Sustained global growth will definitely support global trade While still much potential for global value chains, it s likely less intense Increased protectionism can become the bigger threat 31

The productivity paradox of the New Digital Economy Labor productivity growth and contributions from digital- producing and using sectors, in % Note: Most intensive ICT-using industries refer to the

32 The productivity paradox of the New Digital Economy Labor productivity growth and contributions from digital- producing and using sectors, in % Note: Most intensive ICT-using industries refer to the top half of the industries with the highest share of value of ICT investment plus purchases ICT services as a percentage of synthetic output (which is value added at industry level plus the intermediate use of ICT services ). Least intensive ICT-using sectors refer to the bottom half of industries in terms of ICT intensity. Source: Bureau of Economic Analysis; Bureau of Labor Statistics; Eurostat; The Conference Board 32

33 Productivity measurement: Lies, damned lies and statistics? Within the boundaries of how we define GDP: New products and services are never measured well. It MAY be happening faster, but positive and negative effects are offsetting each other The measured price declines of ICT goods and services have slowed more than seems reasonable, understating the pace of investment in the New Digital Economy but most countries are net importers of ICT making it a wash for GDP (except US, Japan, China and some smaller specialized economies such Ireland, Finland, South Korea, Taiwan and Singapore) Business spending on intangible assets, such as R&D, design, organizational innovations, marketing and branding is largely ignored as a productive asset, but how big is the ROI? Outside the boundaries of how we define GDP: Consumer surplus what is new? Is it bigger than it used to be? Free content should we value it and how? The (real) value of production vis-a-vis the utility we derive from it: those are NOT one and the same thing 33

The shift from investment in ICT assets to spending on ICT services happened at different times and speeds Computer services and ICT investment as a %

34 The shift from investment in ICT assets to spending on ICT services happened at different times and speeds Computer services and ICT investment as a % of GDP UNITED STATES UNITED KINGDOM GERMANY Source: Bureau of Economic Analysis; Eurostat; German Statistical Authority; EUKLEMS; The Conference Board 34

35 How will the transition from the installation to the deployment phase proceed? Installation phase Creative destruction Exploration of new markets Battle of new paradigm with the old Supply push Growth confided to small sectors Frenzy period sometimes followed by crisis Deployment phase Creative construction Consolidation & expansion of new markets Widespread acceptance Demand pull Wide benefits for the economy Source: based on Carlota Perez, Technological Revolution and Financial Capital. The Dynamics of Bubbles and Golden Ages, (Cheltenham, United Kingdom, Edward Elgar Publishing Limited),

36 CEO Challenge Survey highlights the digital challenges organizations face Strongly agree Somewhat agree Strongly agree Somewhat agree Source: The Conference Board CEO Challenge

37 Not much confidence among CEOs in leadership and employees digital skills Strongly agree Somewhat agree Strongly agree Somewhat agree Source: The Conference Board CEO Challenge

38 Business Leaders are Increasingly Focused on the Need to Build Strong Innovation Cultures 38

39 The Conference Board C-Suite Challenge In 2018 expanded survey to include other C- Suite Executives (21 functional titles, including CFO, CHRO and CMO) including respondents No longer limited to just CEOs allows us to compare functional responses and perspectives Greater granularity and data breakouts Retaining survey structure of 6 core challenges Human Capital Customer Relationships & Corporate Brand and Reputation Operational Excellence Regulation and Risk Innovation and Digitalization Sustainability C-Suite Challenge CEO Challenge In addition respondents were asked to select the five most important hot button issues more immediate and tactical events and situations that CEOs believe will require much of their attention in the coming year 39

40 C-SUITE CHALLENGE 2018 Immediate concerns of CEOs are around disruption and lack of talent and leaderships Source: The Conference Board C-Suite Challenge,

41 C-SUITE CHALLENGE 2018 An Emphasis on Innovation Culture Building (Global CEOs, n=549) Global top five strategies to meet the challenges in six key business areas Human capital Customer relationships/ Corporate brand and reputation Sustainability Innovation Operational excellence Regulation and risk 1 Communicate effectively from all levels (up, down, and across); communicate consistently and transparently Enhance quality of products/services Incorporate sustainability goals into corporate strategic objectives Create a culture of innovation that encourages cooperation across functions and business units and promotes risk taking Improve our organizational agility/flexibility Strengthen internal regulatory compliance processes 2 Enhance effectiveness of the senior management team Engage personally with key customers/clients Ensure sustainability is part of the corporate brand identity and the commercial value proposition Expand innovation ecosystem: by engaging in strategic alliances with customers, suppliers, and/or other business partners Seek better alignment between strategy, objectives, and organizational capabilities Improve our organizational agility/flexibility Provide employee training and development Encourage an open, safe, and transparent speak-up culture Improve performance management processes and accountability Develop a more outwardlooking, customer-centric culture Create more product/service customization through digital technologies Communicate corporate values to customers and key stakeholders Incorporate sustainability into company risk management strategy Engage with stakeholders to ensure outside-in perspective in market development decisions and to balance short-term performance pressures with long-term sustainability goals Emphasize sustainability values in talent recruiting and leadership development Adopt a user-centric design approach to innovation to develop deeper understanding of customer need As part of long-term vision, emphasize creativity and/or innovation as a corporate value or principle Develop managers and leaders to promote idea sharing in teams Invest more in new technologies Raise employee engagement to drive productivity Foster process of continual improvement (lean Six Sigma, etc.) Explicitly integrate long-term risk recognition into strategic planning Incorporate cyber risks into existing risk management and governance processes Update contingency plans and procedures for crises (e.g., geographical, political, relocation of employees) 41

42 The Glass Half Full or Half Empty? 42

43 So is the global growth glass half full or half empty? The glass half empty argument: Still less than convincing recovery in global investment Risks of a slowdown in consumption growth, including in China Limited contribution of global trade and overall globalization Slower medium-term growth path in emerging markets, including China Substantive list of short-term risks that can mess up any recovery. It will be half full if sufficiently filled with qualitative growth: Composition of growth is changing towards greater investment in machinery & equipment, digital assets, etc. A possible productivity upside from payoff of efforts to digitally transform business models Overall, a larger contribution from qualitative growth sources (talent, digitization and productivity) 43

44 The Conference Board Global Economic Outlook 2018 Members only: Open access: Global United States Emerging Markets Europe For data and chart tool: click here Global Economic Outlook - Charts & Tables 44

45 Appendix The Conference Board Global Economic Outlook 45

46 About The Conference Board GEO model Projections of GDP for and Model uses a supply side-based growth accounting framework which measures supply side contributions of labor, capital and productivity Trend growth is a proxy for potential output growth, which represents the level of output an economy can produce in a noninflationary way, given the size of its labor force and its potential to invest in and create technological progress Labor quantity is projected, and for labor quality, capital and productivity we estimate trends based on a regression approach We adjust the medium term projections ( ) for short-term deviations from the trend growth because of output gaps (either positive or negative) 46

47 About the labor equation (1) Labor quantity: ILO labor force and employment estimates and projections (2) Labor quality: Workforce numbers are extrapolated using data on projections of population by educational attainment from other sources Wage rates by educational attainment are projected using a regression approach based on projections of average years of schooling and their implied returns to schooling 47

48 About the two capital equations (1) Savings rate, based on: Real exchange rate Dependency rates (old & young) Service share in GDP Per capita GDP Lagged GDP growth (2) Capital services, based on: Savings rate Depreciation rate Inflation (standard deviation) Wage growth Energy growth Capital deepening Interest rates Economic globalization 48

49 About the TFP equation Labor productivity level relative to the US in recent history Corruption R&D expenditure Human Development Index (average years of schooling and life expectancy) ICT goods capital deepening Real exchange rates Lagged TFP growth 49

50 What makes us stand out from other models? Alternative estimates for Chinese growth Incorporation of ICT investment and alternative ICT prices Adjusted GDP growth for three major ICT producers (US, China and Japan) Estimates of labor composition or labor quality Chinese Annual GDP Growth, %Y/Y 16% NBS 14% TCB 12% 10% 8% 6% 4% 2% 0% Sources: National Bureau of Statistics; The Conference Board 50

The results: Global growth is projected to weaken in the long-term Average annual real GDP growth, % change Notes: GDP growth is revised upward in order to reflect faster declines in alternative ICT

51 The results: Global growth is projected to weaken in the long-term Average annual real GDP growth, % change Notes: GDP growth is revised upward in order to reflect faster declines in alternative ICT prices for countries with significant ICT production and trade, including Japan, the United States, and China; Growth rates for China reflect The Conference Board's own estimates. *Other mature economies are Australia, Canada, Israel, Hong Kong, South Korea, New Zealand, Singapore, Taiwan. **Russia, Central Asia and Southeast Europe include projections for Russia, Kazakhstan, Turkmenistan, Uzbekistan, Belarus and Turkey. Source: The Conference Board Global Economic Outlook 2018 (Preliminary version) 51

52 52

Productivity and Income Growth: Applications of the Total Economy Database World KLEMS Conference, June 4-5, Harvard University

Productivity and Income Growth: Applications of the Total Economy Database World KLEMS Conference, June 4-5, Harvard University Abdul A Erumban and Klaas de Vries Total Economy Database Originally developed