Economic outlook Thoughts on what to expect in Dr. Ira Kalish Chief Global Economist, Deloitte

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1 Economic outlook Thoughts on what to expect in 2018 Dr. Ira Kalish Chief Global Economist, Deloitte

2 USA Strong job market Full employment Employment rising faster than needed to absorb new entrants into the labor force Wage growth starts to accelerate Average hourly earnings % change Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 2 Source: US Federal Reserve

USA Consumer spending might become constrained Spending fueled by job growth, improved cash flow, access to credit Income decelerates Consumers retain strong spending

3 USA Consumer spending might become constrained Spending fueled by job growth, improved cash flow, access to credit Income decelerates Consumers retain strong spending growth through borrowing, reduced savings. Subprime lenders start to boost loan loss reserves Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 3

4 USA Trade is driving growth Overseas growth is accelerating, boosting demand for US exports The value of the dollar has fallen in the past year, boosting export competitiveness Protectionist actions represent a threat to strong exports Trade-weighted dollar exchange rate January 1997=100 I II III IV I II III IV I II III Source: Federal Reserve/Haver Analytics Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 4

5 USA Inflation, expectations, and consequences Core inflation has decelerated, but expectations of inflation have increased Wages are starting to accelerate The Fed has started to raise rates Bond yields rose after tax cut Expectation of five year inflation Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 5

6 USA The Fed and its impact Fed s job is to target both inflation and employment. We are at full employment and inflation is starting to rise The tax cut will stimulate an economy already at full employment Expect the Fed to continue tightening Yield on ten year Treasury bond Federal Funds Rate Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 6

7 USA Administration fiscal policy Tax reform: Budget Deficit as Share of GDP Cuts corporate rate, boosts after tax profits Temporary 100 percent expensing of investment will temporarily boost investment Territoriality will reduce cash held overseas, boost outbound investment Lower household rates will boost consumer spending temporarily Increase in budget deficit, especially if cuts are made permanent Possible problems in housing market Big impact on some state and local governments Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 7

8 USA Administration trade policy Policy Impact Withdraw from TPP Retain tariffs on 18,000 traded goods Hurt Japan s ability to implement structural reforms Reduce leverage with China Enhance China s geopolitical footprint Withdraw from NAFTA Revert to WTO tariffs between Mexican and US US-Canada trade reverts to old free trade deal North American supply chains to be restructured Uncertainty about whether US Congress must agree Impose tariffs on China Raise prices on US imports from China Divert trade to other countries China retaliates, hurting US exports Trade volume declines, economic growth decelerates Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 8

9 USA What have financial markets done? Global equity index FTSE 100 in US dollars Equity prices rose strongly in the past year Improving global economy Very low interest rates Herd mentality creates a bubble Fed tightening might break the bubble Bond yields have started to rise Could rise further if investors expect higher inflation Could be suppressed if Fed action implies that inflation will be muted Stable bond yields and rising short term rates could create inverted yield curve Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 9

10 USA What about the next downturn? Recoveries don t die of old age, but this one is quite old Recessions come about due to: Fed policy tightening Sharp rise in commodity prices Popping of asset price bubble Stress in financial markets What current events might eventually lead to recession? Fed tightening Stress in financial markets End of asset price bubble Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 10

14 Least educated have seen a sharp drop in participation Sources: US Bureau of Labour Statistics; Council of Economic Advisers Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 14

15 Decline in female participation is unique to the US US female participation now lower than in Japan Participation of working age women by country One explanation is the nature of family leave and child care policies Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 15

17 Productivity growth has been slow, not just in the US 6 Productivity growth in the last three recoveries Percent, annual average Germany Japan Korea United Kingdom Source: OECD/Haver Analytics United States Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 17

18 What can make economies grow faster? What about tax policy? Probably not although a better tax code is a good idea Tax policy will not influence labor force size Tax reform is meant to boost investment, which would help productivity Yet many countries have low tax rates and slow productivity growth Companies have low borrowing costs, lots of cash, and profits are strong Other factors can boost productivity growth: Government R&D Deregulation Investment in human capital Freer trade and capital flows Some policies can hurt economic growth Protectionism Immigration restrictions Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 18

19 Why are businesses investing so modestly? Excess capacity, deflation, political uncertainty, shock of new technologies Business investment in OECD countries Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 19 Source: Oxford Economics

20 The rest of the world Growth in major economies Country/region Outlook Risks Eurozone Growth accelerating Inflation low Monetary policy easy UK Growth decelerating Inflation high Policy uncertainty China Growth stabilizing Inflation rising Property investment strong Japan Improved growth Very low inflation High unemployment reduces political support for structural reform Brexit could lead to reduced inbound investment Too much debt could lead to financial difficulties Lack of significant reforms Very poor demographics Deflationary psychology Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 20

21 Where are there opportunities for growth? Countries with: Favorable demographics Open markets Strong institutions Productive investment Innovation and entrepreneurship Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 21

22 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see to learn more about our global network of member firms. Copyright 2017 Deloitte Development LLC. All rights reserved. 36 USC

Global economy in charts

Global economy in charts Ian Stewart, Debapratim De, Tom Simmons & Peter Ireson Economics & Markets Research, Deloitte, London Summary 1. Global activity easing 2. Slowdown most apparent in euro area 3.