Global economic overview and the new oil price environment

IHS AUTOMOTIVE Presentation Global economic overview and the new oil price environment IHS Automotive Conference Tokyo 5 March 215 ihs.com Sara Johnson, Senior Research Director, Global Economics +1 781 31 9115, sara.johnson@ihs.com

Presenter Sara Johnson Senior Research Director, Global Economics, IHS Economics +1 781 31 9115 Sara.Johnson@IHS.com 2

Global economic overview and the new oil price environment Sara Johnson, Senior Research Director, Global Economics, HIS Economics +1 781 31 9115, sara.johnson@ihs.com 3

A gradual acceleration in the global economy Global growth will pick up in 215, supported by lower oil prices and accommodative monetary policies. The US acceleration is led by consumer spending and homebuilding. The Eurozone s modest recovery is gaining momentum, aided by monetary stimulus, euro depreciation, and pent-up demand. China s growth will slow to 6.5% in 215, restrained by imbalances in credit, housing, and industrial markets. Falling oil prices, sanctions, and capital flight are sending the Russian economy into a severe recession. Growth paths in emerging markets will depend on structural reforms that raise productivity and allocate capital more efficiently. 4

Percent change Global economic growth will gradually strengthen Real GDP and consumer spending 5 4 3 2 1-1 -2 199 1993 1996 1999 22 25 28 211 214 217 22 Real GDP Real consumer spending 5

Annual percent change 7 Asia-Pacific (excluding Japan) and Sub-Saharan Africa will achieve the fastest growth in real GDP Real GDP 6 5 4 3 2 1-1 NAFTA Other Americas Western Europe Emerging Europe Mideast- N. Africa Sub- Saharan Africa Japan Other Asia- Pacific 213 214 215 216 217-21 6

Percent, end of quarter The US Federal Reserve will take the lead in raising policy interest rates Policy interest rates 6 5 4 3 2 1 27 28 29 21 211 212 213 214 215 216 217 United States Eurozone Japan United Kingdom 7

Percent, end of quarter Policy interest rates in key emerging markets respond to inflation and exchange rate pressures Policy interest rates 18 15 12 9 6 3 27 28 29 21 211 212 213 214 215 216 217 Brazil Russia India China* * One-year loan rate 8

IHS weekly indexes, 22:1=1 Industrial materials prices are falling as sluggish demand growth leaves markets oversupplied Industrial materials prices 6 5 4 3 2 1 22 24 26 28 21 212 214 All industrial materials Chemicals Nonferrous metals 9

Oil prices have plunged in response to excess supply Rising production and weak demand growth have left the global oil market oversupplied, driving down prices. In keeping its output target of 3 million barrels per day (MMb/d), OPEC is letting markets decide the clearing price for oil. Since demand is price-inelastic in the short run, market equilibration will occur mainly through supply adjustments. A mismatch between fundamentals and financial market expectations has caused a price rally in February. Price volatility will likely remain high. As oil production growth slows in the second half of 215, prices will begin to recover. 1

Dollars/barrel Crude oil prices will reach a low in the second quarter of 215 when excess supply peaks Price of Dated Brent crude oil 125 1 75 5 25 2 22 24 26 28 21 212 214 216 218 Source: IHS Energy 11 11

Global crude oil price dynamics Downside risks Upside risks Sluggish demand growth, especially from China Increasing North American production Rising production in Iraq and Libya Fight for market share by producers Potential rise in Iranian oil exports Accelerating global demand, partly in response to lower prices Heightened geopolitical tensions and potential supply disruptions (Iraq, Libya, Nigeria, Venezuela, and elsewhere) Rising development costs 12

US China Japan India South Korea Germany France Singapore Spain Italy Taiwan Netherlands Australia Thailand Indonesia Million tons of oil equivalent Net importers of crude oil will benefit from lower prices Net crude oil imports, 213 35 3 25 2 15 1 5 13

Current account (USD/barrel) Current account and fiscal account threshold analysis reveals strong and weak oil producers Oil prices that will balance current accounts and fiscal budgets in 215 18 Libya 16 Iran Ecuador 14 Angola Venezuela 12 Iraq 1 215 oil price forecast: $47/barrel Nigeria 8 6 UAE Algeria 4 2 Kuwait Saudi Arabia OPEC core Stressed members 2 4 6 8 1 12 14 16 18 Fiscal budget (USD/barrel) Source: IHS 14

Oil price impacts in the IHS Global Link Model Energy infrastructure Prices & costs, competitiveness Energy trade flows Financial markets Potential GDP Producer prices Consumer prices Wage rates Real income Real spending Energy exports Energy imports Exchange rates Public finances Capital flows Asset prices Impact depends on resource base, production, and energy trade Impact depends on country production structure, fuel mix, taxes, and subsidies Impact varies with dependence on energy trade Impact depends on the monetary and fiscal policies 15

Annual percent change Consumer price inflation varies widely by region Consumer price inflation 14 12 1 8 6 4 2-2 NAFTA Other Americas Western Europe Emerging Europe Mideast- N. Africa Sub- Saharan Africa Japan Other Asia- Pacific 213 214 215 216 217-21 16

Exchange rates per US dollar Canadian dollar 1.6 1.4 1.2 1..8.6 1998 21 24 27 21 213 216 Euro 1.2 1..8.6.4.2 1998 21 24 27 21 213 216 Japanese yen 14 12 1 8 6 4 1998 21 24 27 21 213 216 Chinese renminbi 9 8 7 6 5 4 1998 21 24 27 21 213 216 Quarterly averages 17

Annual percent change Percent of labor force US real GDP growth and the unemployment rate Real GDP and unemployment rate 6 1. 3 8.8 7.6-3 6.4-6 5.2-9 27 29 211 213 215 217 4. Real GDP growth (Left scale) Unemployment rate (Right scale) 18

The US economy in a virtuous cycle? Income Positive forces Asset price appreciation Low oil prices Easing credit conditions Jobs Spending Negative forces Rising student debt Reduced labor-force participation rate 19

Millions of units, annual rates The US recovery in light-vehicle sales nears completion; low gasoline prices shift demand to light trucks Light-vehicle sales 2 16 12 8 4 198 1985 199 1995 2 25 21 215 22 Total Cars Light trucks 2

Percent change North American business cycles are synchronized Real GDP 6 4 2-2 -4-6 2 22 24 26 28 21 212 214 216 218 22 United States Canada Mexico 21

South America: Deteriorating investment climates The region s economic growth has slowed, with Argentina and Venezuela in recession and Brazil stagnating. Falling prices for oil and other commodities are hurting export income. In Argentina, high inflation, fragile public finances, foreign-exchange controls, and import barriers are obstacles to growth. Venezuela faces a long and deep recession with falling oil revenues, product shortages, hyper-inflation, and soaring debt-servicing costs. Tax increases have contributed to a plunge in investment in Chile. Policy stimulus and resource development are supporting Colombia. The region s long-term challenges include inadequate infrastructure, restrictive business environments, and income inequality. 22

Annual percent change Real GDP growth in South America Real GDP 6 4 2-2 -4-6 Brazil Argentina Colombia Venezuela Chile Peru 213 214 215 216 217-21 23

Percent of total Eurozone confidence indexes show slight improvement Positive replies minus negative replies 45 3 15-15 -3-45 2 23 26 29 212 215 Source: European Commission Consumers Industrial sector Services sector 24

Western Europe will achieve modest growth The Eurozone economy is slowly gaining momentum. Consumer spending is accelerating, but fixed investment remains weak. Monetary stimulus through quantitative easing, euro depreciation, expanding export markets, and low oil prices will support growth. Tight credit conditions, high unemployment, limited wage growth, and high private and public debt levels will limit progress in some countries. The United Kingdom, Ireland, Sweden, Germany, and Spain will sustain healthy economic growth. Greece faces difficult negotiations with its international creditors; the probability of an exit from the Eurozone in the year ahead is 25%. The euro is expected to reach a low of USD1.5 this summer. 25

Annual percent change Real GDP growth in Western Europe Real GDP 3 2 1-1 -2 Germany United Kingdom France Italy Spain 213 214 215 216 217-21 26

Annual percent change Real GDP growth in Western Europe Real GDP 3 2 1-1 Netherlands Switzerland Sweden Belgium Norway 213 214 215 216 217-21 27

Percent, quarterly averages Ten-year government bond yields reflect changing assessments of risk in peripheral countries 1-year government bond yields 14 12 1 8 6 4 2 27 28 29 21 211 212 213 214 215 216 217 Germany France Italy Spain Portugal Ireland 28

Emerging Europe has winners and losers from the decline in oil prices The Eurozone s gradual recovery and lower oil prices will help the economies of Central Europe and the Balkans. Poland s continuing expansion is led by robust growth in investment. In Turkey, the benefits of lower oil prices will be offset by weakness in Russian and Middle Eastern export markets. The Russia-Ukraine conflict brings the risk of trade and energy-supply disruptions; Ukraine s recession will deepen in 215. The plunge in oil prices, along with sanctions and capital flight, will send Russia into a severe recession in 215 16. With energy export revenues declining, Kazakhstan, Azerbaijan, and Turkmenistan will see a deceleration in economic growth. 29

Annual percent change Real GDP growth in Emerging Europe Real GDP 6 4 2-2 -4-6 Russia Turkey Poland Czech Republic Romania 213 214 215 216 217-21 Hungary 3

Japan s economy travels a slow growth path Economic growth resumed in the fourth quarter of 214, led by an improvement in net exports. Lower oil prices will boost consumer purchasing power, while a weaker yen will support growth in exports and corporate profits. Labor shortages will encourage capital-intensive development. The next consumption tax increase, from 8% to 1% in April 217, will trigger another spending cycle with buy-in-advance behavior. Long-term growth will depend on how the Abe administration implements reforms in labor and product markets. A declining and aging population limits Japan s long-term growth potential. High government debt may become a serious challenge. 31

Japan s outlook summary Real GDP growth (%) 6 3-3 -6 28 21 212 214 216 218 Consumer price inflation (%) 3 2 1-1 -2 28 21 212 214 216 218 Exchange rate per USD* 14 12 1 8 6 28 21 212 214 216 218 Current-account balance** 25 2 15 1 5 28 21 212 214 216 218 *Annual average, **Billions of US dollars 32

Asia-Pacific will lead all regions in growth The region is a major beneficiary of the sharp decline in oil prices. China, Japan, India, and South Korea are major net importers of oil. Weakness in prices of minerals and other commodities will, however, adversely affect Indonesia, Australia, and Malaysia. China s fixed investment is decelerating as the economy rebalances, slowing overall economic growth. India s economy is reviving, foreign investment is returning, and inflation is subsiding, enabling the central bank to cut interest rates. Indonesia s new government has reduced fuel subsidies, freeing up resources for infrastructure investment. The region s outlook for consumer spending is bright, thanks to robust income growth and deepening financial markets. 33

Annual percent change Real GDP growth in Asia-Pacific Real GDP 1 8 6 4 2 China India Australia South Korea Indonesia Taiwan 213 214 215 216 217-221 34

Annual percent change Real GDP growth in Asia-Pacific Real GDP 8 6 4 2 Thailand Malaysia Singapore Hong Kong Philippines 213 214 215 216 217-21 35

China s economic deceleration will continue in 215 China s economy will continue to decelerate in 215 in response to excesses in lending, housing markets, and industrial capacity. Inflation remains subdued, reflecting the influence of falling commodity prices and overcapacity in heavy industries. To support growth, the central bank has lowered interest rates and injected liquidity into the banking system. With the overall debt-to-gdp ratio reaching 25%, China will need to restrain debt accumulation more aggressively in the years ahead. As in the late 199s, we expect that the government will refrain from aggressive stimulus and will stay the course on economic reforms. A hard landing triggered by a financial crisis is not likely; a more serious concern is prolonged low growth. 36

Trillion CNY China s lending flows surged in the past decade and remain high Lending flows 18 15 12 9 6 3-3 22 24 26 28 21 212 214 Bank loans (LCU and FX) Other financing Entrusted loans Bank acceptance bills Trust loans Source: People s Bank of China 37

Percent change China s economic growth will downshift in the long run Real GDP and industrial production 25 2 15 1 5 198 1985 199 1995 2 25 21 215 22 225 23 Real GDP Industrial production 38

Percent change India now leads the BRICs in real GDP growth Real GDP 15 1 5-5 -1 1998 2 22 24 26 28 21 212 214 216 218 22 China India Brazil Russia 39

Annual percent change Real GDP growth in the Middle East and North Africa Real GDP 8 6 4 2-2 Saudi Arabia UAE Israel Iran Egypt Iraq 213 214 215 216 217-21 4

Annual percent change Real GDP growth in Sub-Saharan Africa Real GDP 12 1 8 6 4 2 Nigeria South Africa Angola Ghana Ethiopia Kenya 213 214 215 216 217-21 41

Summary Lower oil prices, monetary stimulus in Europe and Asia, and solid US growth will provide the foundations for a pickup in the global economy. The US expansion is led by domestic demand, as consumer spending and residential construction accelerate. The Eurozone will gradually recover; contagion from a deteriorating Greek situation will be limited. Emerging markets will not regain the peak growth rates of the 2s. The Asia-Pacific region will make the strongest contribution to global economic growth, although China s locomotive role is diminishing. Risks abound: wars in the Middle East, the Russia/Ukraine conflict, China s rising debt, and central bank exit strategies. 42

Thank you for your participation. Sara Johnson Senior Research Director Global Economics IHS Economics IHS Customer Care: Americas: +1 8 IHS CARE (+1 8 447 2273); CustomerCare@ihs.com Europe, Middle East, and Africa: +44 () 1344 328 3; Customer.Support@ihs.com Asia and the Pacific Rim: +64 291 36; SupportAPAC@ihs.com 214 IHS. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be permitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement contained herein. For more information, please contact IHS at Customer Care (see phone numbers and email addresses above). All products, company names or other marks appearing in this publication are the trademarks and property of IHS or their respective owners.