Title line 1 Title line 2 The Global Economy Modest Improvement Name David Katsnelson, Director Title, date RISI Macroeconomic Service 3 June, 2015 1
Agenda 1. Global Snapshot 2. China 3. External Environment with Focus on USA and Europe 2
Global Economy Growing Unevenly Annual Real GDP Growth Euro Area USA -0.4% 0.9% 1.5% 1.8% 2.3% 2.4% 2.6% 3.0% 13 14 15 16 13 14 15 16 China Latin America 7.7% 7.4% 6.9% 6.7% 13 14 15 16 2.9% 1.3% 0.8% 2.3% 13 14 15 16 Source: IMF, RISI 3
Developed Economies Leading Global Growth Global Real GDP* Growth 6% 5% 4% 3% 2% 1% 0% -1% -2% *Measured at purchasing power parity exchange rates 95 97 99 01 03 05 07 09 11 13 15 Source: IMF, RISI 4
While Emerging g Markets Have Slowed Annual Real GDP Growth 20% 15% Brazil India South Africa Russia China 10% 5% 0% -5% -10% Source: IMF, RISI 5
Emerging Economies Dependent on US and EU Demand Year-over-Year Percent Change 30% 25% 20% 15% 10% 5% 0% -5% -10% 15% US Real Imports -15% EU Real Imports -20% -25% Emerging Asia Ind. Prod. 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 6
Oil Prices Staying Lower for Longer Brent North Sea Crude Oil; US Dollars, Euros per Barrel 135 120 105 90 Brent Brent $ 75 60 45 30 15 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Copyright 2014 RISI, Inc. All rights reserved. Source: Energy Information Administration, RISI 7
China in Transition Economy undergoing major restructuring Investment-led growth to consumer-based growth Trade still important, supporting economy in the near term Days of 9-10% growth in the past Financial liberalization Monetary policy now becoming more accommodative Interest rate cuts and RRR cuts to support growth Targeted support for key industries, especially real estate Greater regulation of shadow banking Debt has become an issue Increased volatility for renminbi 8
55 50 45 40 35 30 25 20 Consumption Needs to Be Increased Household Consumption and Fixed Asset Investment as Percentage of GDP Consumption FAI 1980 19811 1982 1983 1984 1985 1986 1987 19888 19899 1990 19911 1992 1993 1994 1995 1996 1997 1998 19999 20000 2001 20022 2003 2004 2005 2006 2007 2008 2009 20100 20111 20122 9
Trouble Brewing Debt, Percentage of GDP, Second Quarter 2014 300 250 200 150 100 50 0 282 264 Government 251 65 42 Corporate 64 Household 36 Financial Sector 76 151 135 129 76 6 19 15 125 12 109 9 6 91 21 76 45 65 71 20 46 55 55 66 46 50 40 22 10
But a Debt Crisis is Unlikely Foreign Reserves, Million USD; Foreign Debt, Percent of GDP 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Foreign Reserves Foreign Debt 100 90 80 70 60 50 40 30 20 10 0 11
Overcapacity Slowing Investment and Production Fixed Asset Investment, Year-over-Year Percent Change; Industrial Production, Year-over-Year Percent Change 50% Industrial Production Growth Y/Y 40% Fixed-Asset Investment Growth Y/Y 30% 20% 10% 0% -10% 05 06 07 08 09 10 11 12 13 14 15 Source: PBC, CEIC 12
Real Estate a Major Risk for the Economy Real Estate t Climate Index, 2000=100; Floor Space Under Construction, Buildings Sold, Year-over-Year Percentage Change 108 106 104 102 100 98 96 94 92 RECI (L) Floor Space Under Construction ti (R) Buildings Sold (R) 100% 80% 60% 40% 20% 0% -20% -40% Source: CEIC 13
Monetary Policy Becoming More Accommodative New Bank Loans, Aggregate Financing, Billion Renminbi; Money Supply, Year-over-Year Percent Change 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0-500 Bank Loans Aggregate Financing Money Supply (R) 5 6 7 8 9 10 11 12 13 14 15 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: NBS, Dragonomics 14
Overall Trend of Trade Is Down Exports and Imports, Year-over-Year Percent Change 100% 80% Exports Imports 60% 40% 20% 0% -20% 05 06 07 08 09 10 11 12 13 14 15-40% -60% Source: China National Bureau of Statistics, CEIC 15
Recent Export Numbers Improving on Higher US Demand Exports and Imports, Year-over-Year Percent Change 60% 50% 40% 30% 20% 10% Exports Imports 0% -10% 13 14 15-20% -30% Source: China National Bureau of Statistics, CEIC 16
Industrial Imports Remain Strong Three-Month Average of Imports by Quantity, Index 2005 = 100 400 350 Iron Ore Copper 300 Crude Oil 250 200 150 100 50 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 17 Source: CEIC
China s Economic Reforms Slow Growth Real GDP Growth, Annual Percent Change 14% 12% 10% 8% 6% 4% 2% 0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: NBS, RISI 18
Increasing Volatility for the Renminbi 9.0 8.5 8.0 CNY/USD 7.5 70 7.0 6.5 6.0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Fed, RISI 19
The USA and Europe Copyright 2014 RISI, Inc. All rights reserved. 20
The USA USA Accelerating US economic growth has been slow Different recession, different recovery But is improving Employment and wage growth Manufacturing Cheap energy Housing 21
2014 Job Growth Best Since 1999 Change in US Total Payroll Employment, Millions 5 4 3 2 1 0-1 -2-3 -4-5 -6 2015 Annualized 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: Bureau of Labor Statistics 22
Consumption Growth Helping Drive US Economy Real Consumption Expenditure, Annualized Percentage Change; Unemployment Rate 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% Consumption Unemployment Rate 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Bureau of Economic Analysis, RISI 23
Manufacturing Weakness in Near Term, But Continues to Support Economy Index of Industrial Production, Jan 2000 = 1.00; PMI 1.20 65 1.10 60 55 100 1.00 50 0.90 45 40 0.80 Industrial Production PMI 35 0.70 30 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: Federal Reserve, Institute for Supply Management 24
Low Natural Gas Prices Helping US Manufacturers Landed Prices of LNG January 2015, Dollars per MMBtu $8 $7 $6 $5 $4 6.65 6.73 6.74 6.80 6.80 6.85 6.85 7.05 7.16 7.30 $3 $2 2.36 $1 $0 Source: Federal Energy Regulatory Commission 25
Dollar Stronger on Expectation of Rate Hike and Stronger Growth Trade Weighted US Dollar Index: Major Currencies, March 1973 = 100 95 90 85 80 75 70 65 Source: Federal Reserve 26
US Economy Showing Consistent Growth Real GDP Growth, Annualized Percent Change 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% -7% -8% -9% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Bureau of Economic Analysis, RISI 27
Europe From Crisis to Malaise to Growth? The Positives Growth positive, although still weak Oil Prices and the euro Bank lending declining The Negatives Some economies still contracting Risk of deflationary spiral Debt ratios worsening Unemployment remains high The Risks s Greece Russia Quantitative Easing 28
Eurozone Growth Improving Annual Real GDP Growth 5.0 4.0 3.0 2.0 1.0 0.0-1.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-2.0 Germany -3.0-4.0-5.0-6.0 60 France Italy UK Eurozone Source: IMF, RISI 29
Sentiment Indicators Have Improved, And Consumer, Industrial Confidence 10 5 0-5 -10-15 -20-25 -30-35 -40 Consumer Industrial Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 30
Some Hard Data Following Industrial Production Indices, January 2010=1 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 080 0.80 0.75 Euro Area Germany France Italy 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: Eurostat 31
Bank Lending Stabilizing Bank Loans to Households and Non-Financial i Corporations, M3, Year-over-Year Percent Change 20% Non-Financial Corporations Households 15% Money Supply 10% 5% 0% -5% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: ECB 32
Unemployment Still a Problem Harmonized Unemployment Rate 28% 26% Eurozone Germany Greece Spain 24% France 22% Portugal 20% 18% 16% 14% 12% 10% 8% 6% 4% Italy 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: Eurostat 33
QE What Is It? Will It Help? What is it? ECB will purchase 60 billion of bonds every month Open-ended Increase balance sheet by at least 1.1 1 trillion What will it do? Put pressure on the currency Hopefully increase inflation Hopefully increase bank lending Will it help? Yes, but only marginally Complex arrangement Problematic transmission channel 34
Euro Weakness Versus Dollar on Continuing ECB Action $1.60 $1.50 $1.40 $1.30 USD/EUR $1.20 $1.10 $1.00 $0.90 $0.80 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Fed, RISI 35
Conclusions Slower growth for emerging markets, but no crisis China s growth will be an important driver for other emerging economies Monetary policy becoming more accommodative in China Dollar-denominated debt a risk for emerging economies US economy accelerating Employment and low energy prices help spending Housing and manufacturing key drivers of economy Europe growing, g, but slowly Potential growth rate is lower QE may help somewhat Deflation is here, but may be temporary Sovereign debt crisis in remission, but risks remain Overall, some improvement 36
Thank you for your attention! For more information: Monthly Economic Commentary www.risi.com/mec 37