The Global Rise of Populism. Economic Update Robert Lavigne April 27, 2017

Transcription

1 The Global Rise of Populism Economic Update Robert Lavigne April 27, 2017

2 Outline 1. Economic outlook 2. Global Populism 3. Implications for Canada and OMERS

3 Key Takeaways 1. Global reflation is here A global upswing is underway - expect rising growth, interest rates and inflation this year Canada should surprise on the upside Get ready for reflation and rising uncertainty 2. So is higher uncertainty Taking Trump seriously and literally Trumponomics adds fuel to the fire, but douses flames over time Trump legislative flops may be a blessing in disguise Geopolitical risks on the rise 3. We need to adjust to the new environment Canada must negotiate shifting geopolitical plates Implications for OMERS: stay alert, focus on quality, consider large EMEs

4 1. Economic Outlook 3.0% G7 Averages 3.0% The world economy is reflating Growth surprising on the upside Deflation risk has passed Monetary policy very easy in 2017: 2 more Fed hikes ECB to taper in % 2.0% 1.5% 1.0% 0.5% 0.0% Real GDP Growth Total CPI inflation Jan/2012 Sep/2012 May/2013 Jan/2014 Sep/2014 May/2015 Jan/2016 Sep/ % 2.0% 1.5% 1.0% 0.5% 0.0%

5 Jan/2012 Apr/2012 Jul/2012 Oct/2012 Jan/2013 Apr/2013 Jul/2013 Oct/2013 Jan/2014 Apr/2014 Jul/2014 Oct/2014 Jan/2015 Apr/2015 Jul/2015 Oct/2015 Jan/2016 Apr/2016 Jul/2016 Oct/2016 Jan/2017 A shift from bonds to equities post US Elections Markets are up on more than Trump 3.0% 2.5% Post-election rally maybe running out of steam on concerns about Trump s ability to deliver 2.0% 1.5% 1.0% G7 10-year yields G7 MSCI But equities still supported by solid growth outlook 0.5% 900 Yields up on Fed tightening, inflation 0.0% 700

6 A Made in China global upswing 30% 28% China Household Loans (y/y%) AE Exports to China (y/y%) 60% 40% 25% Chinese stimulus is has significant international spillovers: 23% 20% Higher commodity prices 20% 0% Capital exports up 18% Goods inflation rising 15% -20%

7 US Labor Markets US is at full employment 3.5% 8.0% 3.0% Hourly Earnings 7.0% Wages are rising, not yet in overheating territory. 2.5% 6.0% Income and spending are strong, but households are surprised by higher inflation 2.0% 1.5% Unemployment Rate 5.0% 4.0% Confidence is at record highs 1.0% 3.0%

8 US domestic demand remains strong 2.6% domestic demand growth vs. 1.9% GDP Q1 17 could see a temporary slowdown in trade and inventory build-up. Investment turning around? 6% 5% 4% 3% 2% 1% 0% -1% -2% U.S. real GDP growth (Q/Q saar) Real GDP Domestic Demand

9 What to expect? 25 Investment in the US 120 Investment momentum should continue 20 Capex Plans US Investment is turning the corner High investor and CEO confidence Shipments, new orders, capex plans all up 5 0 ISM Index Jan 2015=100 Capex Shipments Jan 2015=

10 Canada could surprise on the upside Low expectations, in spite of great data US investment is great for our exports Domestic demand supported by AB recovery, strong ON, QC, BC 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Canadian real GDP growth (Q/Q saar) BoC on hold (for now) -2.0% 10

11 WTI EOP, Bil. Bbl Oil prices to recover in WTI Oil Markets Balance of Inventories Supply minus Demand World Inventories (Millions) Supply growth is shrinking (OPEC, collapsed investment) but demand is rising Prices held back by high inventories Prices should rise to $55-60/bbl by year end Q2/2014 Q4/2014 Q2/2015 Q4/2015 Q2/2016 Q4/2016 Q2/2017 Q4/

12 Outlook for the loonie C$ and WTI Upside: Stronger than expected growth Oil to recover The Trump-Trudeau handshake was good Downside: The Fed is hiking I expect a stronger loonie by year-end West Texas Spot, Avg, $/bbl (LHS) 20 US/CAD Exchange Rate (RHS) 0 Jun/2002 Jun/2004 Jun/2006 Jun/2008 Jun/2010 Jun/2012 Jun/2014 Jun/

13 2. Rising Populism New mercantilism Neither left nor right Anti-elite Short-term policy focus National sovereignty over multilateralism Reduce immigration

14 Populism is on the rise globally Why? Erosion of middle class jobs Rising inequality Mistrust of elites Fear of immigration Security concerns Great countries loosing their way? Social media echo 24% 22% 20% 18% 16% 14% 12% 10% US Manufacturing (% of GDP)

15 What is Trumponomics? Domestic economic policy Fiscal stimulus: tax cuts, military & infrastructure spending Deregulation: Healthcare, Dodd-Frank, environmental Ad hoc deal-making over consistent policy-making Foreign economic policy America first policies to shrink the trade deficit Pay your way security policy Art of the Deal : mixing economics and politics to reach a grand bargain

16 Trumponomics: short-term boost, longer-term cost Greater uncertainty, with downside bias Short-term fiscal boost Higher interest rates and USD will dampen growth eventually Protectionism and geopolitical tensions are rising US real GDP growth (y/y%) Mean forecast Defeating secular stagnation? Fiscal boost Tighter financial conditions Protectionism, Geopolitical Tensions? Range of outcomes

17 % of GDP REER CPI Based (2010=100) What to expect? We ve seen this before Resurging twin deficits Policy incoherence: Fiscal expansion + Monetary tightening improving trade balance CA Balance Plaza Accord (1985) Twin Deficits Louvre Accord (1987) REER Recipe for USD appreciation Could take 2 years, expect more trade measures then Budget Deficit

18 % of GDP % of GDP What to expect? Trumponomics could balloon debt 170 Public Debt-to-GDP Forecasts Surging deficits just as demographics bite Trump scenario Term premium risk Structural reforms are necessary Current law Source: Committee for a Responsible Federal Budget

19 What if Trump s agenda stalls? Typical business cycle By some measures, the US is in the late stages of the business cycle The US near full employment, rising inflation, tightening Fed Some are worried that without a big fiscal stimulus the US will slow down + % from trend growth - Where is the US? Time I am not Recovery Growth Slowdown Recession

20 The US economy doesn t need a large fiscal stimulus More inflation Less fiscal stimulus Post-Crisis, the business cycle is more drawn-out and shallow The US expansion still has some legs But a big fiscal stimulus could bring forward the turning point + % from trend growth - Time Post-crisis business cycle Hawkish Fed Big fiscal stimulus Recovery Growth Slowdown Recession

21 Geopolitical risks on the rise Pax Americana is fading Regional powers will fill the void Confrontation with China to come? Populist contagion to Europe

22 Chinese reserves (Billions) vs. RMB/USD The greatest danger lies in deteriorating Sino- US relations Reserves (USD billions) RMB/USD China s financial system is wobbly A trade war could provoke financial turmoil Using geopolitics to get better trade deal is dangerous

23 1-Feb 3-Feb 7-Feb 9-Feb 13-Feb 15-Feb 17-Feb 21-Feb 23-Feb 27-Feb 1-Mar 3-Mar 7-Mar 9-Mar 13-Mar 15-Mar 17-Mar 21-Mar 23-Mar 27-Mar 29-Mar 31-Mar 4-Apr 6-Apr 10-Apr 12-Apr 14-Apr 18-Apr 20-Apr Final Strong populist pressures in EU 30 French Poll Results (Ifop) Le Pen Macron 25 Le Pen unlikely to win, but policy shifts to the right 20 Fillon Merkel is fading, Italian elections are a wildcard EU exit risk would cause global financial crisis A hard Brexit is in store, with difficult negotiations Mélenchon FRE-GER spread

24 G20 Absolute Value of Current Account Balance (% of GDP, ) 3. Implications for Canada and OMERS G20 Openness to Trade (exports + imports)/gdp, % 10% 20% 30% 40% 50% 60% 70% 80% 0% Protectionism on the rise Small open economies running external deficits are most vulnerable 1% 2% 3% Argentina Japan Indonesia India US China Brazil Russia Canada EU Mexico Tariffs on Mexico, China? 4% Australia UK South Africa Adjustable border tax: tariff on everyone Collateral damage is a key risk 5% 6% 7% Turkey Increasing Vulnerability

25 Jan/1997 Aug/1998 Mar/2000 Oct/2001 May/2003 Dec/2004 Jul/2006 Feb/2008 Sep/2009 Apr/2011 Nov/2012 Jun/2014 Jan/2016 Jan/2007 Oct/2007 Jul/2008 Apr/2009 Jan/2010 Oct/2010 Jul/2011 Apr/2012 Jan/2013 Oct/2013 Jul/2014 Apr/2015 Jan/2016 Oct/2016 Softwood lumber dispute we ve seen this before 4.0% Softwood Lumber Exports to US as % Merchandise Exports 400 Lumber Prices Index (Jan-72=100) 3.5% US placed a 20% tariff on softwood, as expected 3.0% 360 The dispute is an old one We can weather this: 2.5% 320 Canada has a competitive advantage and prices are rising 2.0% 280 Softwood exports account for only 1.3% of total exports 1.5% 1.0% 240 We have won four court cases in a row we ll probably win again 0.5%

26 CAN-US Dairy trade $600 Dairy Exports (Mil., CAD) Our supply management system is protectionist But the real problem is massive overproduction of milk in Wisconsin $550 $500 $450 $400 $350 US to Canada Border farmer votes are political gold for Trump $300 $250 Canada to US Dairy and softwood say more about Trump s negotiating style than his intent for NAFTA $200 $150 $100 $50 $

27 Canada must make its case $2 bn/day in trade in a complex supply chain matrix Many US jobs and firms depend on cross-border trade Bilateral trade is fair and balanced Politically, tariffs on Canada would hurt more than on Mexico

28 Reasons for optimism Trump is focused on Mexico & China, allowed Keystone 35.0% 30.0% 25.0% Canada has been losing US market share to Mexico and China (Country share of exports to US/Total US imports) Canada could do well in bilateral deal 20.0% Canada China Sore points: softwood lumber, dairy, rules of origin 15.0% 10.0% Mexico 5.0% 0.0%

29 What does this mean for OMERS? Key market calls Higher global growth, yields & inflation in Investment should drive US growth Canada and CAD could surprise on the upside Key risks Geo-politics: Sino-US relations, EU integrity Protectionism: Canada-US free trade is crucial Investment implications We need to be nimble and alert Focus on quality assets Consider large, domestically driven EMEs