The world in 2017 and beyond - Populists, protectionism and potential

Transcription

1 The world in 2017 and beyond - Populists, protectionism and potential Dr Simon Baptist Chief Economist The Economist Intelligence Unit Citi s Treasury and Finance Conference April 6th 2017 Singapore

2 Global outlook

3 Key global themes for 2017 World economic growth to quicken from 2.2% in 2016 to 2.6% in 2017 Monetary policy divergence Cheap credit remains key support for global economy Central banks reaching limit of capabilities in Japan and Europe, where rates will stay low We expect two more Fed rate hikes in 2017 and another two in 2018 Capital flowing out of EMs; China credit risk Global economic growth US will remain engine of growth in the OECD Question mark over Trump s fiscal plans and impact of strong dollar Euro zone weighed down by political issues and US policy changes Brazil and Russia return to growth Possible sharp slowdown in China coming Political realignment Traditional parties being challenged as the leftright axis breaks down Strong impact of megatrends such as globalisation, technology, demographics etc US to reduce its international commitments Rise of protectionism in movement of people, goods and capital (data?) 3

4 Hotspots for financial risk Indonesia, Philippines and Vietnam have elevated risk in Asia 4

5 Pressures of populism The anti-mainstream revolt will continue What has happened What we think will happen What should politicians do? Traditional left and right parties shifted to the technocratic middle ground Parties became increasingly estranged from the electorate Left-right divide became less important, voters battle lines were open vs closed Many of these issues ignored by mainstream parties, opening up space for populists Some mainstream parties move onto populist ground even in Germany and the Nordics More grand coalitions between the traditional parties of left and right Increase in nationalism in developed countries International migration to become more difficult Foreign investors to face higher risks Face head-on the uncomfortable debates on racism, prejudice and nationalism Put national sovereignty back at the heart of policymaking (this can still allow international co-operation), stop blaming outside forces for hard decisions Have the debate about what to do about low productivity, poor infrastructure, education and technology Make provisions for those who will lose out 5

6 As good as it gets? Global economic growth is expected to accelerate this year to 2.6%, but will then slow down in 2018 and Real GDP growth; % change, year on year. As of March Source: The Economist Intelligence Unit. China s economy will slow down US to drive OECD growth in US business cycle will turn in 2019 Japan, EU ageing shrinking workforce, tight immigration policy 6

7 Asia GDP growth India will be Asia's fastest-growing large economy over the next five years Average growth for ASEAN 7

8 Growth of consuming class Average annual growth of the consumer class ( ) Source: C-GIDD. Note: consuming class includes upper, upper middle, middle, lower middle and lower class 8

9 Swings and roundabouts: LCU vs US$ Downward pressure on EM currencies, but growing demand for exports 9

10 Ready for reflation? We forecast global inflation of 4.6% in 2017, the highest rate since 2011 Consumer price inflation 10

11 Major risks in Events may diverge from our forecast in ways that affect global business operations; the following scenarios represent the main risk Risk Scenarios Level of Risk Level Of Impact China suffers a disorderly and prolonged economic slump High Very High One or more countries withdraw from the euro zone Moderate Very High Beset by external and internal pressures, the EU begins to fracture Currency depreciation and higher US interest rates lead to an emerging-market corporate debt crisis Rising threat of jihadi terrorism destabilises the global economy Moderate Moderate Moderate Very High Clash of arms in East Asia Moderate High US introduces a border-adjustment tax Low Very High High High UK fails to reach agreement with the EU and reverts to WTO rules A collapse in investment in the oil sector prompts a future oil price shock Moderate Very Low Low High Very high risk = greater than 40% probability high = 31-40%; moderate = 21-30%; low = 11-20%; very low = 0-10% 11

12 Global commodity markets

13 Oil prices No big surprises expected Supply overhang will cap the rise in oil prices in 2017 OPEC likely to extend production deal by another six months Following the OPEC deal announcement Members have met 90% of their pledged production cuts in January and February Compliance of non-opec members with production cuts remains uncertain F F BRENT; US$/B Brent: Prices rise (US$55-57/b) in Dec 2016 Global prices will be higher in 2017, but only weak upward pressure Rise in US crude oil production and an unclear energy policy Weaker demand in China and the US to affect prices in Output curbs will accelerate rebalancing in 1H F F F

14 Commodity markets A sharp slowdown in China in 2018 will result in softer price growth 14

15 Everything is negotiable The US economy in the age of Trump

16 Trumponomics: Transforming US economy? Fiscal surge could help temporarily, but growth of 4% will be out of reach Productivity growth has halved in the US since the 1990s Productivity has slowed in many rich countries Slower labour force growth Surge in women entering the workforce in the 1970s-1990s will not be repeated Investment has been slowing for some time More regulation, weaker returns Rapid growth would be inflationary Fed would lift rates to slow pace 16

17 How will Trump s policies affect business? The biggest risk to the global economy posed by the new US administration is to international trade Businesses must take precautions The US will experience a mild business-cycle recession in 2019 Exporters to the US should be familiar with the impact of border-adjustment tax (BAT); high probability it will not become law, but some degree of US tax reform should be assumed The Trump administration's apparent enthusiasm for protectionist tax reform may lead to the potential flouting of World Trade Organisation (WTO) rules Businesses reliant on external financing should prepare for stronger dollar and higher interest rates Exporters to US should attempt to measure impact of discretionary import taxes, possibly as high as 35%; although likely to fall afoul of NAFTA and WTO rules, will prove disruptive even if temporary 17

18 Who s afraid of Donald Trump? A slight rise in protectionism will inhibit trade in The Trump administration will adopt protectionist measures targeted at specific sectors and goods within certain economies rather than a broad increase in tariffs across the board Such a protectionist rhetoric (blanket tariff on Chinese goods, branding China a currency manipulator) will leave little room for cooperation with China Mr Trump s protectionist agenda may lead to retaliatory actions (tariffs targeting a narrow range of US exports, greater scrutiny of US firms) from other countries and evolve into a trade war NAFTA is likely to be renegotiated; prospects for major multilateral trade deals like the TPP are limited 18

19 America first, more military Focus away from the US Is the US a reliable ally? More distant yet unpredicta ble force Aid to fall Iran in the freezer? Embolde ned, but might not get on Asian US allies less important Worse relations with China Politicians under pressure look to China US allies uncomfor table Foreign affairs under Trump China likes less human rights, less US action in Asia China doesn t like Protectionism (in other countries!), Taiwan and SCS stance, disregard for established norms

20 Key regional/country profiles

21 China: Hard landing in 2018? China will have a larger influence on global standards and norms Rebalancing, but not as the party intended! The fiscal deficit will widen in 4-5 years as China seeks to prop up growth by raising spending Use of economic diplomacy to dampen tensions stemming from regional territorial disputes, but only with partial success Slowdown to affect trade, investment and credit flows with Africa; domestic industrial restructuring will hurt various Asian economies US-China ties: China s toolkit Bar state-owned enterprises from doing business with US firms Deny key components to supply chains Dump US financial instruments Drag feet on new agreements and implementation of existing pacts copyright violations, IPR Media campaign against US firms OBOR promises significant boost in Chinese overseas direct investment in Central, South-east and South Asia (might prove slow to implement); agreement over RCEP appears a long way off The renminbi s value will depreciate to an annual average of Rmb7.44:US$1 in 2019, before a rebound to average Rmb7.08:US$1 in

22 India: All systems go? GDP growth will accelerate after the shock of demonetisation Others Real GDP growth (%) F 2018F 2019F 2020F 2021F India World Asia & Australasia Composition of the upper house of parliament BJP BJP allies We estimate that real GDP growth slowed from 7.5% in 2015/16 to 6.5% in 2016/17 due to demonetisation, but will recover and average 7.6% a year in 2017/ /22 Inflation to trend upwards averaging 5% a year in Political stability (NDA BJP and its allies will return to office in 2019), but constrained by lack of majority in the upper house Structural reforms to progress but controversial land and labour reforms are unlikely to be implemented before 2019 Fluctuations in India s urban housing market tied to money and credit growth not rising household incomes Congress allies Congress 22

23 ASEAN outlook Growth will remain buoyant in emerging South-east Asian economies Thailand New constitution; 2018 elections? Pivot towards China and Russia Corruption and conflict-based distortions of interest Vietnam Above 6% growth in Deeper ties with India and the US; South China Sea dispute Labour woes Philippines Around 5.8% growth in Environmental crackdown Human rights concerns Malaysia Budget deficit to widen to 3.5% of GDP by 2021 Pursuing HIC status under 11MP Threat of Islamic terrorism Indonesia Slow progress on reforms Focus on infrastructure and FDI China s slowdown affects local currency 23

24 Key global themes for 2017 World economic growth to quicken from 2.2% in 2016 to 2.6% in 2017 Monetary policy divergence Cheap credit remains key support for global economy Central banks reaching limit of capabilities in Japan and Europe, where rates will stay low We expect two more Fed rate hikes in 2017 and another two in 2018 Capital flowing out of EMs; China credit risk Global economic growth US will remain engine of growth in the OECD Question mark over Trump s fiscal plans and impact of strong dollar Euro zone weighed down by political issues and US policy changes Brazil and Russia return to growth Possible sharp slowdown in China coming Political realignment Traditional parties being challenged as the leftright axis breaks down Strong impact of megatrends such as globalisation, technology, demographics etc US to reduce its international commitments Rise of protectionism in movement of people, goods and capital (data?) 24

25 Any questions? Dr Simon Baptist Chief Economist Managing Director Asia The Economist Intelligence Unit Subscribe to my weekly newsletter by scanning this QR code!