Fly me to the moon. Image courtesy of pixabay.com, CC0. Economic Research Paris, December 2017

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1 Fly me to the moon Image courtesy of pixabay.com, CC0 Economic Research Paris, December

2 World growth: Let s get it started Growth on a higher print for a second quarter in a row. These are the best two consecutive quarters since 10. Growth is revised up almost everywhere, particularly in the US, and Europe. Exceptions are in the Middle East, Africa and the UK. World GDP growth, q/q annualized Global GDP growth forecasts (%) Fragile four are Brazil, Russia, Turkey and South Africa 6% Others APAC ex China ex Japan Japan China World aggregate 5% Fragile Four India Europe US Q3: +3.8% 4% 3% 2% 1% 0% -1% 10Q1 11Q1 12Q1 Q1 Q1 Q1 Q Latest Revision Latest Revision Latest forecast (pps) forecast (pps) forecast Q1 World GDP growth United States Latin America Brazil = United Kingdom Eurozone members Germany France Italy Spain Russia Turkey = Asia China Japan India = = Middle East Saudi Arabia Africa South Africa * Weights in glob al GDP at market price, NB: The revisions refer to the changes in our forecasts since the last quarter Sources: Bloomberg, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 2

3 was about growth acceleration, despite numerous policy nudges Dutch Elections (March) US-North Korea Crisis Iranian Elections (April) (May) Qatar Diplomatic Crisis (June) Article 50 Activated (Brexit) (May) (September) New Crown Prince of Saudi Arabia: MBS FED Balance Sheet Normalization (June) (September) Global GDP growth accelerated by +0.6pp to 3.2% Trade flows recovered more than expected by +7.5% in value A synchronized growth momentum in the US, the Eurozone and Asia Recession in some (Brazil, Russia, South Africa) Emerging Markets ended (November) 19th National Congress of the CPC (October) World insolvencies finally increased by +1% (big insolvencies particularly on the rise) Increased protectionism from the US to China The Middle East crisis worsened Negative surprises Positive surprises (March) French Elections OPEC confirms Decision to Curb Output German Elections 3

4 18 should remain quite a busy year Q1 18: NAFTA renegotiations scheduled to end or US withdrawal October 18: ECB begins winding down QE program Q1 18: German coalition talks New elections October 18: Finalization of Brexit transition deal and preliminary trade negotiations H1 18: Italian election Inconclusive election and political gridlock March 18: Russian presidential elections Putin renews mandate April 18: Hungarian election Emergence of CEE populist block Risk of No-deal Brexit November 18: US Midterm Elections January 18: US Tax Reform House/Senate majorities remain largely unchanged Election Season: Brazil, Colombia, Costa Rica, Paraguay, Venezuela July 18: Mexican Elections Election Season: Thailand, Cambodia, Pakistan, Malaysia Moderate Stance will continue October 18: First Round of Brazilian Presidential Elections Return to the past possible March 18: Inauguration of the th National People s Congress & New Governor of PBOC Election Season: Egypt, South Africa (in 19, but with regional impact in 18) Middle East main tension points: - Saudi v. Iran, incl. Straits of Hormuz - Yemen, Sunni v. Shia - Qatar v. Saudi Arabia, UAE, Bahrain, Egypt (blockade) NB: In Italic our baseline assumptions Source: Euler Hermes 4

5 Prices in a nutshell: No big changes Oil: Average oil prices are revised up to 62 $/bbl in 18. Downside risk limited by good growth momentum. Exchange rates: Increasing interest rate divergence to nurture dollar appreciation, to USD 1. / EUR on average in 18 Oil price, brent $/bbl Exchange rate, USD/Euro Last data, as of Dec. 12th Last data, as of Dec. 12th USD appreciating Sources: Euler Hermes, Allianz Research Sources: Euler Hermes, Allianz Research 5

6 Agenda 1 Global themes: Walking on the moon 2 Regional outlooks: What to watch in the US, Europe, China and Emerging Markets 6

7 Theme #1: Trade, driving faster Global Trade is levelling off to a new regime characterized by a recovery of prices and an improvement in volume. Growth in Global Trade of Goods and Services (in %) Strong demand growth will benefit to (and come from) the Eurozone and Asia. Nominal exports gain (in GDP point) for selected economies on 18 0% 1% 2% 3% 4% 5% Germany Spain Italy France Indonesia South Korea Russia Mexico Canada India China United Kingdom Australia Saudi Arabia United States Sources: IHS, Euler Hermes, Allianz Research Sources: Chelem, Euler Hermes, Allianz Research 7

8 Weigh #1: A marked slow-down in, though the US are heading the opposite way Among the top 10 most protectionist countries, only the US has deployed more measures in compared to. Agrifood, Metals and Chemicals are the most impacted sector. Some others industries don t see much attention (Retail, Commodities..) New protectionist measures Protectionist measures against specific sectors World=404. World=762. World=944. World= Software & IT services 3 Retail Commodities 300 Sources: GTA, Euler Hermes, Allianz Research Paper Pharmaceuticals Automotive suppliers Household Equipment Electronics Transport Computers & Telecom Services Automotive manufacturers Textiles Construction Energy Machinery & Equipment United Kingdom Japan Chemicals Metals -12 Belarus -8 China -1 Indonesia Brazil India US Argentina - Russia 3 Agrifood Sources: GTA, Euler Hermes, Allianz Research

9 Trend #1: Trade and growth, they live together New exports orders are growing at an increasing pace for most countries. Compare trade openness to growth q/q Q3 figures (scatter plot) to show how open economies are driven by the momentum PMI manufacturing: new export orders sub-indices Trade openness and GDP growth in Q3 (q/q) (%) China apr-may-jun Malaysia India GDP growth in Q3 (q/q) sep-oct-nov Korea Philippines Indonesia Poland 1.0 Germany United States Switzerland 50 Italy Japan 0.5 Canada 45 France United Kingdom Russia Brazil 0.0 Mexico Taiwan Korea Turkey Brazil UK Italy France Germany Spain Japan China US Level of openess (exports in % of GDP) Sources: IHS, Euler Hermes, Allianz Research Sources: Euler Hermes, Allianz Research 9

10 Theme #2: Goodbye slack, Hello nominal growth No more slack in the Eurozone, some leeway to grow without inflation in emerging markets. Corporate turnover growth kept accelerating, particularly in the Eurozone. Level of Capacity Utilization Turnovers growth in manufacturing (%) (%, y/y) 10% 90 Germany France Italy Spain % 5.5% 5% 4.4% 0% 70 Italy Spain 65 France Germany -5% US UK 90 China Japan 6.6% % % US UK Brazil Turkey % 0% 1.1% -6% Sources: IHS, Bloomberg, Euler Hermes, Allianz Research 10 Sources: IHS, Bloomberg, Euler Hermes, Allianz Research

11 Weigh #2: Cost pressures are mopping up the value chain Margins can be squeezed by the return of cost pressures: Corporates saw input prices increasing faster than output prices. And producer prices inflation did not translated into higher consumer prices. PPI CPI PMI: Input prices vs. output prices (%, y/y) PMI output prices (sep to nov - sep to nov ) Output prices expectations positive while input s negatives % Output prices expectations growing faster than input s Producers' prices outpacing consumers' 10% Input prices expectations growing faster than output s 10 Germany 5% 0% Italy 5 Singapore Turkey -5 Mexico Neutral -5% Spain UK -10 Taiwan Korea France Japan US Indonesia Brazil India 0 Russia China Input prices expectations positive while output s negatives -5 US Eurozone China Japan -10% Consumers' prices outpacing producers' -% PMI input prices (sep to nov - sep to nov ) Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research 11

12 Trend #2: Monetary policy to be tightened, since financial and economic conditions improved Global liquidity is up, particularly since dollar Labor markets conditions are significantly tightening globally recession is over. World monetary and financial conditions Unemployment rate in developed economies (%) Contribution by country 80 EM China United States FCI 60 United Kingdom Japan Euro Area Unemployment rate in advanced economies average 8,5 8,5 40 8,0 8,0 7,5 7,5 7,0 7,0 6,5 6,5 6,0 6,0 5,5 5, IMF Forecast ,0 5,0 90 Sources: IHS, Euler Hermes, Allianz Research Sources: Euler Hermes, Allianz Research

13 Theme #3: Growth is in-sync Super 8: Industrial production is growing in each of the 8 key economies. In Emerging Markets, PMI kept accelerating and reached its best level since February 11 Industrial production growth (y/y, %, 3-month average) 10% Emerging Markets aggregate manufacturing PMI % 3.7% 3.2% 1.0% 5% 0% 58 November France -5% Germany 54 Italy -10% Spain 52 -% % % China Japan US UK 48 10% 6.3% 4.5% 2.6% 2.2% 5% 0% -5% % Sources: IMF, Euler Hermes, Allianz Research Source: Bloomberg, Euler Hermes, Allianz Research

14 Weigh #3: Growth is not only about good cholesterol Compared to the last growth cycle (11), the debt intensity of growth increased. Equity valuation increased and capitalization surged to new peaks. Credit intensity market US Market Capitalization in % of Nominal GDP Units of debt needed to generate one unit of GDP Calculation made on a 4-quarters basis q q Indonesia Turkey Brazil Italy UK Japan France China US Sources: IMF, Euler Hermes, Allianz Research Sources: Bloomberg, Euler Hermes, Allianz Research

15 Trend #3: Emerging Markets are ready to grow faster The Emerging Markets are entering in a new credit cycle: External and domestic conditions are improving at the same time. Is the Emerging consumer back in town? Retail sales growth shows acceleration of consumer spending in most EMs Credit conditions: external vs. domestic Retail sales growth (y/y, 3-month average) External: Net capital flows, USD bn (excl. China and Russia) Domestic: IIF Bank Lending Conditions index (read it as a PMI) 0 60 Capital flows (lhs) Domestic credit conditions (rhs) 0 % Q3 Q % Q3 10.3% 10% 50-threshold 7.1% % % 4.1% 4.4% 4.0% % % 0% % % 09Q4 10Q4 11Q4 12Q4 Q4 Q4 Q4 Q4 Q4 South Africa Brazil Vietnam Turkey Poland Russia Mexico* China South Korea *Q2 was used for Mexico as the economy contracted temporarily in Q3 due to natural disasters Sources: IMF, Euler Hermes, Allianz Research Sources: Bloomberg, Euler Hermes, Allianz Research

16 Insolvencies: Come as you are, but big is not beautiful Good growth momentum (Europe and North America) means less insolvencies. Less good momentum took its toll in Emerging Markets EH Global and Regional Insolvency Indices (yearly change in %) Source: Euler Hermes Majors failures surged, e.g. +32% in Western Europe to 101 units representing a cumulative turnover of EUR21.4bn (vs EUR 9.8bn in ) Major failures* in Western Europe as of Q3 YTD (number of companies, by size of turnover in million of EUR) (*) Companies with a turnover exceeding EUR50mn Source: Euler Hermes

17 Agenda 1 Global themes: Walking on the moon 2 Regional outlooks: What to watch in the US, Europe, China and Emerging Markets

18 US: Both the Senate s and House s version of the fiscal reform would add USD 1.4 tn of debt The net effect on budget could be less devastating taking into account the acceleration of growth However, a certain pessimism on the size of this growth impact means further accumulation of debt compared to current legislation Arguments of those seeing low impact on growth of the US fiscal reform Federal budget balance as % of GDP (fiscal year data) Actual Forecast Estimated budget effects of possible tax reform proposal (USD bn) Conventional estimate Effects resulting from macro analysis Net Total ,4-224,5-926,3 -,2 9,9 35, ,5-28,5-188,8-756,8-1006,7 Sources: Joint Committee of Taxation, Euler Hermes Muted domestic demand, resulting from insufficiently redistributive fiscal policy Profit repatriation is expected to nurture dividends and share buybacks Potential of growth unlikely to be sufficiently impacted if individual tax cuts are not permanent: no sustained increase in labor supply Companies with higher effective tax rates, likely to benefit more from the reform, have relatively lower interconnections with the rest of the economy The private equity industry and fiscal advantages of private activity bonds could be penalized by the reform, what could significantly hamper infrastructure projects The reform could have a negative impact on residential investment Static impact: increase of USD 1,4 trillion of the US debt Dynamic impact on growth produce USD 458 bn of fiscal revenues Fed reaction s tightening policy would impact growth and reduce fiscal revenues by USD 51 bn Total net impact of fiscal reform on US debt: USD 1 trillion at the horizon of Taxation expects Sources: IHS, Euler Hermes, Allianz Research 18

19 US: Further growth acceleration in 18 some loss of momentum in 19 Fiscal policy expected to add 0.2 to 0.4pp to growth in 18/19 via tax relief, but higher interest rates will act as a counterbalance as the Fed likely will progressively hike rates to avoid overheating. The unemployment rate is already below the level generating inflation. GDP growth Unemployment rate (y/y, %) (%) Sources: Euler Hermes, Allianz Research Sources: Datastream, Federal Reserve, Euler Hermes, Allianz Research 19

20 Eurozone: Private consumption continues to power the upswing in 18/19 while export growth tapers off Private consumption to remain relatively resilient supported by favorable labor market outlook and only a modest rise in inflation Private consumption (y/y, in %) Sources: Thomson Reuters Datastream, Euler Hermes, Allianz Research Eurozone export growth looks set to cool in 18/19 in line with a weakening of global trade Exports (y/y, in %) Sources: Thomson Reuters Datastream, Euler Hermes, Allianz Research

21 The ECB will keep financial conditions favorable The ECB to end asset purchases in October 18, keep assets level unchanged thereafter and deliver first rate hike in 19Q2. ECB balance sheet, total assets (EUR bn) The ECB will need to keep buying bonds after October 18 in order to replace matured bonds. ECB redemptions/reinvestments (EUR bn, after November ECB forecasts) ABSPP: Asset-Backed Securities Purchase Program; CBPP3: 3rd Covered Bond Purchase Program; CSPP: Corporate Sector Purchase Program; PSPP: Public Sector Purchase Program Sources: Allianz Research, Euler Hermes, Datastream Sources: Allianz Research, Euler Hermes, ECB 21

22 Germany: The boom goes on, with real GDP expanding by 2.6% in and by 2.5% in 18 Sharp upward trend in business expectations signals robust upswing to continue Ifo index: Manufacturing (05=100) Above-average and rising capacity utilization finally translates into higher investment spending Capacity utilization* (manufacturing, %) and investment (chain index, sa) * Dotted line: Average since Source: Thomson Reuters Datastream Sources: Thomson Reuters Datastream, Allianz Research

23 France: Investment is booming and sectors are in-sync Industry: Manufacturing confidence increased to its best level since 01. The service sector is also accelerating and wholesale trade expected activity outlook is the best one since September 00. France, manufacturing: Confidence and production 1 10% France: Wholesale trade 10 5% 110 0% % % % -60 Manufacturing confidence Index (left) Manufacturing production index (YoY, 3-months moving average, right) -% Activity outlooks for the next three months -80 Expected workforce evolution in the next three months Sources: IMF, Euler Hermes, Allianz Research -25% Sources: Euler Hermes, Allianz Research 12 23

24 Italy: Economic recovery finally gaining traction (1.6% in & 1.3% in 18) but structural weaknesses will limit cyclical upswing GDP growth rate highest since 10 thanks to ongoing recovery in domestic demand and favorable export demand Italian GDP growth (y/y) & business confidence Sources: Istat, Thomson Reuters Datastream, Allianz Research But structural problems still loom large: To exit the low-growth/high-debt/fragile-banks trap Italy is in dire need of more reform Potential GDP (%) Sources: European Commission, Thomson Reuters Datastream, Allianz Research 24

25 Italian elections likely to bring more of the same : Rising political fragmentation bodes ill for political stability and reform Political fragmentation bodes ill for political stability and economic reform outlook, but reduces odds of Italexit Coalition games based on Ipsos poll (November) Italexit is a tailrisk as it requires a long-lived, stable government but cannot be ruled out completely given Italy s inability to reform and growing euro-fatigue Path to Italexit Parliament approves changes to the Constitution (Art. 75 prohibits referendums on internal treaties) If a qualified majority is not reached, the government has to confirm the constitutional changes via a referendum. If a majority votes yes, the Italian constitution can be amended. The Italian government calls a referendum on euro (and/or EU)-membership. A majority votes in favor of exiting the Eurozone/European Union Sources: Istat, Ipsos Thomson Reuters Datastream, Allianz Research FI: Forza Italia; Fdl: Fratelli d Italia; LN: Lega Nord; PD: Partito Democratico; AP/CP: Alternativa Popolare; M5S: Movimento 5 Stelle 25

26 UK: GDP growth will slow to +1.5% in and +1.0% in 18 in line with cooling domestic demand UK consumers face double-whammy blow: High inflation and sluggish wage growth put a squeeze on living standards Headline inflation, retail price inflation, core inflation & compensation per employee (y/y, in %) Sources: Thomson Reuters Datastream, Allianz Research. External sector not making up for slowing domestic demand with exporters responding to weak Sterling by raising export prices putting profit before volume GBP/EUR (lhs) & export prices index ( =100, rhs) Sources: Thomson Reuters Datastream, Allianz Research. 26

27 China #1: Taming risks Financial risk: macroprudential measures bring some improvement Over-capacity: Efforts to cut excess Capacity bear fruit with continued producer reflation Producer prices and Investment in mining Financial risks indicators 40 Credit to Non-Financial Corporations (% GDP, left) Non-performing loans ratio (right) Resident capital outflows 30 Non resident capital inflows Urban Investment in mining (YTD y/y) Net capital flows plus errors and omissions Net capital flows Producer prices in mining (y/y) Capital flows (and currency) get back under control with tighter regulation Sources: IHS, Euler Hermes, Allianz Research 12 27

28 China #2: Building (future) growth foundations Rebalancing: domestic demand/services growth remain firm and well oriented Upgrading: efforts to modernize and improve productivity are accelerating Consumer and business survey (3 months rolling average) Robots sales (units) Non Manufacturing PMI official (right) Share in China s total goods exports Consumer Confidence Index (left) Connecting: Belt and Road initiative enlarge exports opportunities % f United States 28% BRI countries % % % % 0 18% % Sources: IHS, IFR, Euler Hermes, Allianz Research 28

29 China #3: Preparing for turbulences Turbulence #1: More difficult access to financing as monetary policy tightens Turbulence #2: Operating pressure for credit intensive sectors: construction related and heavy industries Domestic credit growth Construction and related sectors (real value added growth) Policy rate assumption (year end) : : : : Turbulence #3: Adverse impacts from SOEs restructuration SOEs snapshot Debt level Real Estate services (y/y) Construction (y/y) Corporate performance Industry (y/y) 10 Share Leverage of total ratio* 25 Total corporate debt Private enterprise 8 6 Return on assets State Owned Zombie firms** * leverage ratio is measured by total liabilities total owners' equity ** State council definition Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research Sources: IHS, Euler Hermes, Allianz Research Sources: IMF Working paper Resolving China s Zombies: Tackling debt and raising productivity 29

30 Asia-Pacific: Solid growth expected Regional economic growth to remain firm at +4.8% in 18, underpinned by firm growth in China, Japan and stronger performance in India; and solid export performance. Asia-Pacific* USD denominated exports Asia Pacific: country risk and economic growth growth in 18 in light grey APAC: 4.8% Japan (%, 3mo y/y) 50% South Korea A1 BB1 1.2% 3.0% 40% 30% China B2 Hong Kong Taiwan A2 A2 6.4% 2.7% % 2.6% 10% Philppines India B1 B1 7.3%** 0% 6.8% Thailand B1-10% 3.6% AA1 Australia Malaysia BB2 5.0% Singapore 2.6 B1 5.3% AA2 Low risk Medium risk Sensitive risk High risk 2.9% -% Indonesia AA1 New Zealand -30% 2.6% -40% ASEAN-6* % ** Fiscal year Sources: IHS, Euler Hermes, Allianz Research *China, Japan, South Korea, Hong Kong, Taiwan, India, ASEAN-6, Australia, New-Zealand Sources: IHS; Euler Hermes, Allianz Research 30

31 Latin America: Ready for take-off, with +1.4% growth in, +2.4% in 18, +2.8% in 19 Regional activity accelerates as national growth rates converge. (Geo)political uncertainty still drags growth down. For the first time in 4 years, bank lending conditions have eased in Latin America in Q3 and are projected to ease further Country risk and economic growth in, 18 and 19 Latin America: IIF Bank Lending Survey 70 BB2 Mexico 2.1% 2.0% 2.4% 18 IIF Forecasts D4 Venezuela -1.4% -4.1% -8.0% % 2.7% 3.1% BB2 Colombia C4 Ecuador 0.7% 1% % 50 B3 Brazil Peru BB1 3.8% 3.8% 2.6% Low risk Medium risk Sensitive risk High risk 2.5% 3.0% % 18 Uruguay BB % 2.8% 2.8% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q Chile A2 1.6% 2.8% 3.2% Argentina C3 2.9% 3.2% 3.0% As of Q4-35 An index > 50 means credit conditions are easing < 50 means credit conditions are tightening Sources: IMF, Euler Hermes, Allianz Research Sources: IIF; Euler Hermes, Allianz Research 31

32 Emerging Europe: After strongly accelerating in, regional growth will remain robust in 18 The region as a whole is forecast to grow +3% in 18 (after +3.7% in ), with EU members rising by an average +3.7%, while Russia will post a more modest +1.9%. Monetary policy set to diverge in 18 between EU members (gradual tightening) and Russia (further easing) GDP growth in and 18 (forecast) and short-term country risk as of Q4 Source: National sources, IHS, Euler Hermes Monetary policy interest rates Sources: National sources, IHS, Euler Hermes 32

33 Middle East and Africa: Growth should be up, but that s not a green light Shades of Africa & Middle East: Reforms are paying off in Egypt, growth to recover progressively in Nigeria and South Africa. Middle East & Africa: country risk and economic growth growth in 18 in light grey But the commodity price shock has driven external debt higher (but no to 02 peaks), weighing on small economies. Sub-Saharan Africa aggregate and country-level external debt (as % of GDP) 70 Though far from 90's peaks, External debt (% of GDP) is on upward trajetory again Yemen % 0% 00 0% 1% 100% 80% 60% 40% % Angola Benin Burkina Faso Cameroon CAR Chad Congo Egypt Ethiopia Gabon Guinea Ghana Gambia Kenya Mali Malawi Madagascar Mozambique Niger Nigeria Senegal Rwanda South africa Tanzania Uganda Zimbabwe Zambia 0% Source: Bloomberg, Euler Hermes, Allianz Research WorldBank, Euler Hermes Sources:Sources: Bloomberg, Euler Hermes, Allianz Research 33

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