ECONOMIC OUTLOOK FINALLY, SYNCHRONIZED GLOBAL GROWTH

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1 ECONOMIC OUTLOOK FINALLY, SYNCHRONIZED GLOBAL GROWTH Augustine Faucher Chief Economist November 13, 2017 Senior Economic Advisor Chief Economist

2 BETTER GROWTH THIS YEAR, AND AN UPGRADE TO 2018 World output, World Economic Outlook by forecast vintage, % change Apr '16 Oct '16 Apr '17 Oct ' '15 '16 '17F '18F Source: IMF 2

3 SYNCHRONIZED GLOBAL GROWTH 8

4 IS VERY DIFFERENT FROM LAST YEAR 7

5 DEVELOPING ECONOMIES CONTINUE TO LEAD THE WAY Real GDP, index, 2008= Developing/emerging Asia EU Latin America/ Caribbean US Japan 60 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: IMF 5

6 GLOBAL TRADE VOLUMES HAVE TURNED AROUND Global merchandise exports, U.S. $, 12-month moving sum, % change year ago '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: WTO 6

7 U.S. IMPORT GROWTH IS PICKING BACK UP Real U.S. imports, % change year ago (L) Broad U.S. $ index, % change year ago (R) '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 ' Sources: BEA, Federal Reserve 7

8 GLOBAL MONETARY POLICY DIVERGENCE GROWS 3-month government bond yield, % U.S Japan -1.0 Germany '14 '15 '16 '17 Sources: Central banks 8

9 GOOD NEWS FOR COMMODITY-PRODUCING ECONOMIES European Brent oil spot price, $/bbl (L) Moody s spot commodity price index, Jan. 2013=100 (R) '13 '14 '15 '16 ' Source: EIA, Moody s Investors Service 9

10 THIRD-LONGEST EXPANSION IN US HISTORY Length of expansion, months, by starting date of recovery /33 6/38 10/45 10/49 5/54 4/58 2/61 11/70 3/75 7/80 11/82 3/91 11/01 6/09 Source: NBER 10

11 SOLID GROWTH IN THIRD QUARTER DESPITE HURRICANES Real, annualized % change Gross domestic product Gross domestic income '14 '15 '16 '17 Source: BEA 11

12 JOB GROWTH BOUNCES BACK IN OCTOBER Payroll employment, change, 3 mo. moving average, ths J'14 A J O J'15 A J O J'16 A J O J'17 A J O Source: BLS 12

13 PRIVATE SERVICE INDUSTRIES, CONSTRUCTION DRIVING JOB GROWTH Payroll employment, change year ago, mil Government All other private Manufacturing, mining Retail Total '11 '12 '13 '14 '15 '16 '17 Source: BLS 13

14 CONSUMERS BENEFITTING FROM JOB GAINS, TAX CUTS LIKELY A PLUS IN 2018 Real, % change year ago 8 6 Personal disposable income 4 Consumer spending '12 '13 '14 '15 '16 '17 Source: BEA 14

15 SHORT-TERM INTEREST RATES WILL CONTINUE TO RISE AS FED WORRIES ABOUT INFLATION Personal consumption expenditures price index, % change year ago FOMC s 2% target Excluding food and energy Overall 0.0 '14 '15 '16 '17 '18F '19F Sources: BEA, PNC 15

16 AS WILL LONG-TERM RATES, BUT MORE SLOWLY, AS FED REDUCES BALANCE SHEET Federal Reserve assets, $ tril Treasury Bills Other Treasuries MBS/GSA Debt Other '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: BEA 16

17 SOLID ECONOMIC GROWTH THROUGHOUT 2018, WITH FULL EMPLOYMENT Real GDP, % change year ago (L) Unemployment rate, % (R) '14 '15 '16 '17 '18F '19F Sources: BEA, BLS, PNC 17

18 FED S BALANCE SHEET REDUCTION WILL HELP DOLLAR STRENGTHEN INTO PNC Forecast U.S. dollar broad index, Jan = 100 Sources: Federal Reserve, CEIC, PNC Economics

19 BREXIT S IMPACT ON GROWTH HAS BEEN MODEST SO FAR, BUT THE UK IS STILL EARLY IN THE GAME 6 Bank of England Agents' Summary of Business Conditions Consumer Services Turnover -2 Professional & Financial Services Turnover Service Sector Investment Intentions Service Sector Employment Intentions Sources: Bank of England, CEIC, The PNC Financial Services Group

20 UNCERTAINTY IS SLOWING INVESTMENT, AND THE WEAK POUND ERODES CONSUMER SPENDING 12% 10% 8% 6% 4% 2% 0% -2% -4% Gross fixed capital formation, yearover-year growth Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 8% Real Retail Sales, 7% Year Over Year Growth 6% 5% 4% 3% 2% 1% 0% -1% -2% '13 '14 '15 '16 '17 Sources: Office of National Statistics, CEIC, The PNC Financial Services Group

21 A HARD BREXIT WOULD THREATEN THE 5% OF UK GDP IN SERVICES OUTPUT SOLD TO EU CUSTOMERS 14% 12% 10% 8% Percentage of 2015 GDP Loss of market access post-brexit 6% 4% 2% 0% UK Goods Exports to EU New tariffs post-brexit UK Services Exports to EU Sources: Office of National Statistics, CEIC, The PNC Financial Services Group

22 ON THE OTHER HAND, THE UK S UNEMPLOYMENT RATE IS THE LOWEST IN 40+ YEARS 14% 12% Unemployment rate, seasonally adjusted 10% 8% 6% 4% 2% 4.3% in May % in June % Sources: Office of National Statistics, CEIC, The PNC Financial Services Group

23 FINANCIAL MARKETS EXPECT THE BANK OF ENGLAND TO RAISE ITS POLICY RATE VERY GRADUALLY 100% 90% 80% 70% 60% 50% Cumulative Interest Rate Hikes "Priced Into" Financial Markets Odds of No Hike Odds of 1 Hike Odds of More than 1 Hike 40% 30% 20% 10% 0% Dec 14 '17 Feb 8 '18 Mar 22 '18 May 10 '18 Jun 21 '18 Aug 2 '18 Sep 13 '18 Nov 8 '18 Dec 20 '18 Sources: Bloomberg World Interest Rate Probabilities and PNC Economics Calculations. Note: Probabilities are calculated based on overnight interest rate swap rates as of October 2, 2017

24 MORE DOWNSIDE THAN UPSIDE RISKS TO THE POUND 1.8 U.S. $ per U.K. pound sterling PNC Forecast Sources: Bank of England, CEIC, PNC Economics Fourth Quarter of 2017 Exchange Rate Forecasts

25 IMPROVEMENT ACROSS THE EURO ZONE Real GDP, % change Germany France Italy Euro zone '13 '14 '15 '16 '17F Sources: EuroStat, IMF 25

26 WITH RECOVERIES IN PERIPHERY LABOR MARKETS Unemployment rate, % 30 Greece Spain Portugal 10 Eurozone 5 0 '05 '10 '15 Source: EuroStat 26

27 THE ECB WILL WAIT UNTIL WELL BEYOND THE HORIZON OF QE S END BEFORE RAISING RATES 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Measures of Eurozone Inflation, Annual % Change Unit labor costs "Core" consumer prices Headline consumer prices ECB s Inflation Target -0.5% -1.0% Sources: Eurostat, CEIC, The PNC Financial Services Group

28 EURO STRENGTH REFLECTS FOOLHARDY GAMBLES THAT THE ECB WILL CHANGE ITS FORWARD GUIDANCE U.S. dollars per euro PNC Forecast Sources: European Central Bank, CEIC, The PNC Financial Services Group

29 IN JAPAN, ABENOMICS HAS CREATED THE BEST JOB MARKET SINCE THE BUBBLE BURST 7% Unemployment Rate 6% 5% 4% 3% 2% 1% 0% Ratio of Job Openings to Job Applicants, Inverted Scale Sources: Japan Statistical Bureau & Ministry of Health, Labor & Welfare, CEIC, The PNC Financial Services Group

30 THE BANK OF JAPAN IS SLOWING PURCHASES BECAUSE THEY OWN 40% OF ALL GOVERNMENT BONDS 50% 40% 30% 20% 10% 0% Bank of Japan's Ownership of Non-Financial Assets Japanese Government Bonds Share of Total Outstanding Stocks, Share of Market Capitalization 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Sources: Bank of Japan, CEIC, The PNC Financial Services Group

31 MONETARY DIVERGENCE STILL FAVORS A STRONGER DOLLAR AND WEAKER YEN 130 Japanese yen per U.S. dollar PNC Forecast Sources: Bank of Japan, CEIC, The PNC Financial Services Group

32 CANADIAN JOB GROWTH IS ON A TEAR, AND WAGE GROWTH IS RECOVERING 3% Canadian economic indicators, annual percent change 2% 1% Employment 0% -1% -2% -3% Real Average Weekly Earnings Sources: Statistics Canada, CEIC, The PNC Financial Services Group

33 THE BANK OF CANADA HAS TAMPED DOWN RATE HIKE EXPECTATIONS TO KEEP THE LOONIE WEAK PNC Forecast Canadian dollars per U.S. dollar Sources: Bank of Canada, CEIC, The PNC Financial Services Group

34 NAFTA FEARS NOW LOOK OVERDONE, BUT MEXICO S ECONOMY DID WEAKEN IN % 5% 0% -5% -10% Mexican industrial production and components, -15% Annual % change Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Industrial Production Construction Manufacturing Mining & Petroleum Sources: INEGI, CEIC, The PNC Financial Services Group

35 THE POINT OF MAXIMUM PESSIMISM TOWARD MEXICO AND THE PESO IS PROBABLY PAST Mexican Pesos per US Dollar PNC Forecast Sources: Bank of Mexico, CEIC, The PNC Financial Services Group

36 CHINESE GROWTH HAS STABILIZED, DEFLATION IS OVER 30% Chinese GDP, Year-Over-Year Growth 25% 20% Nominal 15% 10% 5% Real 0% Sources: National Bureau of Statistics, CEIC, The PNC Financial Services Group

37 LOW INTEREST RATES AND SLOWER FOREIGN RESERVE OUTFLOWS CURTAIL FINANCIAL RISKS 12% 10% 8% 6% 4% 2% 0% Average interest rates All Lending Bill Financing Mortgages $4.5 Foreign Reserve Assets, US $ Trillions $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 Sources: People s Bank of China, CEIC, The PNC Financial Services Group

38 YUAN LIKELY TO DEPRECIATE FURTHER AS DOLLAR STRENGTHENS AGAINST OTHER CURRENCIES Chinese yuan per U.S. dollar PNC Forecast Sources: People s Bank of China, CEIC, The PNC Financial Services Group

39 BRAZIL IS RECOVERING FROM THE WORST DOWNTURN IN A GENERATION 30% 25% 20% 15% 10% 5% Policy interest rate (Selic) Consumer Price Inflation (IPCA) Unemployment Rate 0% Sources: Central Bank of Brazil, IBGE, CEIC, The PNC Financial Services Group

40 THE BRAZILIAN REAL, WHICH IS STILL RELATIVELY CHEAP, COULD STRENGTHEN MORE 4.5 Brazilian real per U.S. dollar PNC Forecast 2.0 Sources: Central Bank of Brazil, IBGE, CEIC, The PNC Financial Services Group

41 BY CONTRAST, BOTH THE SPEED AND QUALITY OF INDIAN GROWTH HAVE DETERIORATED 15% 10% 5% 0% -5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Private Consumption Government Consumption Fixed Capital Formation Change in Stocks Exports Imports Statistical Discrepancy Real GDP Sources: Central Bank of Brazil, IBGE, CEIC, The PNC Financial Services Group

42 INDIA S RUPEE IS EXPENSIVE, ITS TRADE DEFICIT IS WIDE, AND US INTEREST RATES ARE RISING Indian rupees per U.S. dollar PNC Forecast Sources: Reserve Bank of India, CEIC, The PNC Financial Services Group

43 IMPROVEMENT IN 2018, ESPECIALLY IN LATIN AMERICACALLY Real GDP, % change Developing/emerging Asia 4 World 3 2 Euro Zone US Latin America/Caribbean '14 '15 '16 '17F '18F Japan Source: IMF 43

44 GLOBAL RISKS ARE TO THE DOWNSIDE President Trump Trade Geopolitical risks/terrorism Fiscal policy Monetary policy/interest rates US $ Stock markets Brexit/Europe China/emerging economies 44

45 PNC ECONOMIC OUTLOOK Q&A For more information from PNC Economics: 45

46 Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs The PNC Financial Services Group, Inc. All rights reserved. 46

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