GLOBAL ECONOMIC OUTLOOK As good as it gets in 2018? Oliver Salmon Lead Economist

Transcription

1 GLOBAL ECONOMIC OUTLOOK As good as it gets in 2018? Oliver Salmon Lead Economist March 2018

2 Global synchronized upturn continues 2

3 as trade growth maintains healthy momentum Advanced Econs: Goods trade volumes Index 60 % 6m/6m Global manufacturing PMI (Adv 4 months, LHS) World trade volumes (RHS) Source : Oxford Economics/Haver Analytics -15.0

4 Looser credit conditions are supportive of growth 4

5 Global investment continues to improve G-3: Investment indicators % year, 3mma Standardised indicator 3 Survey-based indicator, advanced 2 3 months (RHS) G-3* investment goods orders indicator (LHS) Source : Oxford Economics/Haver Analytics * US, Germany, Japan -4 5

6 Strongest post-crisis economic growth in

7 while Inflation pressures remain contained 7

8 Global risks remain skewed on the downside 8

9 US policy and market turmoil represent largest concerns 9

10 US: The Great Rotation

11 The triple rotation in the US economy 1. On the macroeconomic front, business investment and exports will be stronger engines of growth, while consumer spending trends will reflect a maturing economy. 2. On the policy front, the Trump administration delivered on its fiscal stimulus promises, with a plan worth $1.5 trillion. Congress meanwhile pushed through a substantial spending bill (worth $300bn on paper, but up to $1.2tn in practice). 3. On the Federal Reserve front, a more hawkish Fed will react to stronger inflation with four rate hikes in

12 Soft data is off the chart at 13-year high 12

13 Consumer spending remains solid around 2.5% 13

14 Investment rebound, partly coming from energy 14

15 but the stronger global backdrop has been key 15

16 In 2018, ongoing rotation to business investment 16

17 Policy mix becoming more pro-growth, risks linger Tax Cuts Government spending Infrastructure Less regulation Political uncertainty Trade protection Immigration 17

18 Tax Cuts & Jobs Act of 2017: $1.5 trillion 18

19 Bipartisan Budget Act of 2018: $300bn -> $1.2 trillion? Congress passed a sweeping spending bill this morning that boosts discretionary spending by $300 billion and provides $90 billion in disaster relief. The Bipartisan Budget Act would boost the deficit by $320 billion over the next 10 years, with the budget shortfall breaching the symbolic $1 trillion-mark next year the largest deficit since the Great Recession. Importantly, we believe Congress would not allow for substantial budget cuts in 2020 (as mandated by the sequester caps from the Budget Control Act of 2011), especially in an election year. As such, we estimate the legislation will add $1.2 trillion to the budget deficit over the next decade. 19 Caps on discretionary budget authority, in billions Fiscal 2018 Prior law BBA 2018 Increase Defense $549 $629 $80 Nondefense $516 $579 $63 Total $143 Fiscal 2019 Prior law BBA 2018 Increase Defense $562 $647 $85 Nondefense $529 $597 $68 Total $153 Source: Oxford Economics;

20 Congress spending spree: $2.5tn in 50 days! 20

21 Higher oil prices and weaker dollar push inflation 21

22 Markets expecting more inflation and tighter Fed 22

23 Fed balance sheet normalization: passive & predictable 23

24 Risks to the outlook Financial market stress. Stronger wage growth to accelerate monetary policy normalisation. Savings dip US households spending beyond their means, eroding buffers to insulate against potential future crisis. Trade war potentially self-defeating for US industry. Fiscal profligacy to weigh on future growth. Tighter immigration policy would weigh on growth in labour supply and long term growth potential. 24

25 Household Savings dip 25

26 Financial market stress 26

27 Surging wage growth could spell trouble 27

28 Trade winds intensifying Unilateral US exit from NAFTA is a real possibility. US exit from NAFTA would reduce real GDP growth by 0.5pp in 2019, but the impact would diminish over time. 28

29 Fiscal overdrive and growth exhaustion When the stimulus fades out, higher borrowing cost and reduced fiscal pace will pose a real risk for the US economy.

30 Europe: A sustained period of above-trend growth

31 European PMIs pointing to yet faster growth 31

32 Employment growth strongest since

33 and continuing improvement in investment 33

34 Inflation lagging behind Eurozone: CPI Inflation (Bottom-up f'cast model) % y/y / contribution Core Energy Food alcohol and tobacco Headline Source : Oxford Economics/Haver Analytics Forecast 34

35 underpinned by muted wage growth 35

36 ECB to keep rates unchanged till

37 Risks to the outlook Return of populism? Italian elections deliver hung parliament with populist tilt. New elections still possible. Brexit cliff-edge scenario remains a distinct possibility, no agreement over regulatory alignment the Irish border. Strong Euro sharp rise in Euro could potentially choke off export recovery. ECB tightening rising wages and inflation could prompt a quicker pace of normalization. Trade War Eurozone seems most willing to engage Trump in tit-for-tat tariffs. Weak periphery and slow reform process. 37

38 Return of populism? Italy elections Italian elections delivered a hung parliament with a populist flavor (first major EU country to deliver populist victory). Centre-right alliance has won the most seats (remember Berlusoni!?!), but Five Star Movement emerged as the largest single party and now has right to try and form government. Options include a coalition with the defeated Democratic Party the biggest losers from Sunday s vote or the League. New elections still on the table. Populist agenda likely to be scaled back in coalition government, but so will important fiscal consolidation and structural reform. 38

39 Where are we now on Brexit? Phase one (separation issues) now complete, but only after a fudge on the issue of the Irish border. Next step a transitional deal: UK will remain bound to EU rules during this period. The EU would like the transitional deal to end by December UK will cease to be party to third-party FTA s by March Phase 2 trade talks will begin, though by the end of the Article- 50 period we are only likely to have a heads of agreement. If we proceed down the FTA route it is very unlikely to be ready by the end of the transitional period. 39

40 Canada-style FTA is the most likely outcome UK: Brexit scenario probabilities Remain in EU 10% EEA 20% No deal, WTO rules & 2019 'cliff edge' 30% FTA 40% 'Softer' 'Harder' Source : Oxford Economics 40

41 China: Policy-induced slowdown to continue

42 China stimulus kickstarted global upturn China housing starts and global commodity prices % yoy Floor space started, 6mma Metals and minerals prices Non-energy prices Source: Oxford Economics, CEIC Data, World Bank 42

43 and benefitted from pick-up in external demand 43

44 but real estate momentum is cooling 44

45 And policy shifting towards less expansionary policy 45

46 In all, we expect the economy to cool in

47 No major change policy stance in coming years No material change on how to balance growth with reform and deleveraging in the coming years. Recent National People s Congress confirmed gradual shift towards greater emphasis on quality over quantity of growth. Commitment to target of doubling GDP between 2010 and 2020 remains growth target of around 6.5%. Focus on reducing financial risks and deleveraging parts of the financial system while aiming for a gradual slowdown of credit growth in the coming two years. Supply-side reform and SOE reform to continue, albeit with Chinese characteristics. 47

48 Asia ex China: Ongoing broad strength despite moderating China

49 Slower Chinese imports matter most to Asia 49

50 but domestic demand remains key Asia-ex India, China & Japan: Growth drivers % year Forecast 15 Domestic demand Exports Source : Oxford Economics/Haver Analytics

51 Fiscal policy to range from neutral to supportive 51

52 Monetary policy rising gradually 52

53 Healthy growth to continue 53

54 Benign inflationary conditions 54

55 No major pressures on Asian FX markets 55

56 India: Growth firing on all cylinders 56

57 Japan: Solid external and domestic conditions in 2018 Japan: Exports and world trade % year World trade F'cast World: Global 10-year government yields % US Japan Germany Forecast -30 Export volumes Source: Oxford Economics Source : Oxford Economics/Haver Analytics 57

58 Risks to the outlook Faster pace of policy tightening in China, impact on trade and commodity prices. Global trade war to hit trade-dependant Asian economies. Rising levels of indebtedness could potentially weigh on growth in the future. Political uncertainty Indonesia, Malaysia, Thailand, India entering election cycle in Geo-political risks in Korea? Faster pace of US tightening leading to capital outflows and rising interest rates. 58

59 Tighter policies to reign in growth 59

60 China sneezes and the world catches a cold! 60

61 Trumps protectionist stance Safeguard tariffs on solar panels and washing machines. 25% tariff on steel and 10% tariff on aluminium imports. National Security threat under Section 232. Renegotiation of NAFTA and KORUS FTA s. Section 301 investigation into alleged Chinese theft of intellectual property. EU drawing up a retaliatory response (tariffs on US imports of 100 products). South Korea already lodged a complaint with the WTO. Trade war good for US : Trump 61

62 US China trade tensions likely to worsen 62

63 Risks of escalated trade war have subsided 63

64 and US protectionism self-defeating 64

65 but global impact still significant 65

66 Asia has been on a credit splurge 66

67 Asia has been on a credit splurge 67

68 THANK YOU! Any questions?