The Global Economy Heightened Risks RISI North American Conference 5 October, 2016 David Katsnelson Director, Macroeconomics
Agenda 1. Global Snapshot 2. USA Steady Growth 3. Europe Growing Slowly 4. China Slowing, Not Crashing 2
Global Economy Growing Moderately, with Heightened Risks Annual Real GDP Growth Euro Area USA 0.9% 1.5% 1.6% 1.2% 2.4% 2.6% 1.6% 2.4% 14 15 16 17 Latin America 14 15 16 17 China 7.3% 6.9% 6.4% 6.1% 14 15 16 17 1.3% 0.2% 0.7% 1.7% 14 15 16 17 Source: IMF, RISI 3
Developed Economies Supporting Global Growth Global Real GDP* Growth 10 8 6 4 2 0 2 4 6 *Measured at purchasing power parity exchange rates Source: IMF, RISI Advanced Emerging World 4
While Emerging Markets Have Slowed Annual Real GDP Growth 20% 15% Brazil India South Africa Russia China 10% 5% 0% -5% -10% Source: IMF, RISI 5
Oil Prices Staying Low on Oversupply West Texas Intermediate, Brent North Sea Crude Oil, Price per Barrel 130 120 110 100 90 80 70 60 50 40 30 20 10 0 WTI Brent 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Copyright 2014 RISI, Inc. All rights reserved. Source: Energy Information Administration, RISI 6
The USA and Canada USA Moderate Improvement Partially decoupling from the rest of the world Domestic based growth is healthy Employment and wage growth Cheap energy Housing Non domestic side of economy struggling Manufacturing Exports Canada Modest Growth 7
Job Growth Remains Healthy in 2016 Change in US Total Payroll Employment, Millions 5.0 4.0 3.0 2.0 1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 2016 Annualized 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Source: Bureau of Labor Statistics 8
Job Openings at All Time High Job Openings and Labor Turnover, Thousands 6,000 5,500 5,000 Job Openings Hires Quits 4,500 4,000 3,500 3,000 2,500 2,000 1,500 05 06 07 08 09 10 11 12 13 14 15 16 9
Wage Growth Accelerating Average Hourly Earnings, All Employees, Year over Year Percent Change 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 07 08 09 10 11 12 13 14 15 16 Source: Bureau of Labor Statistics 10
Productivity Growth Worryingly Low Non farm Real Output Per Hour, Year over Year Percent Change 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1.0% 2.0% 3.0% Productivity Five Year Average 48 53 58 63 68 73 78 83 88 93 98 03 08 13 11
Consumption Growth Driving 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 17 Source: Bureau of Economic Analysis, RISI 12
Revolving Credit Growth Continues to Show Increased Credit Card Usage Consumer Credit, Year over Year Percentage Change 15% 10% 5% 0% 05 06 07 08 09 10 11 12 13 14 15 16-5% -10% Revolving Credit Non-Revolving Credit 13
Housing Recovery Progressing Existing and New Home Sales and Housing Starts, Millions of Units 8.0 7.0 6.0 5.0 4.0 3.0 Existing Home Sales (Left) Housing Starts (Right) New Home Sales (Right) 2.5 2.0 1.5 1.0 2.0 1.0 0.0 05 06 07 08 09 10 11 12 13 14 15 16 0.5 0.0 14
Strong Dollar, Weak External Environment, Oil Pressuring Manufacturing Index of Industrial Production, January 2000 = 1.00; PMI 1.20 65 1.10 1.00 60 55 50 0.90 0.80 0.70 Industrial Production PMI 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 45 40 35 30 Source: Federal Reserve, Institute for Supply Management 15
Dollar Strong on Decent Growth and Potential for Tighter Monetary Policy Trade Weighted US Dollar Index: Broad, March 1973 = 100 130 125 120 115 110 105 100 95 90 85 Source: Federal Reserve 16
Low Natural Gas Prices Helping US Manufacturers Landed Prices of LNG June 2016, Dollars per MMBtu $6 $5 $4 4.68 4.81 4.83 4.91 4.98 4.98 4.98 5.21 5.23 5.23 $3 $2 2.36 $1 $0 Source: Federal Energy Regulatory Commission 17
US Economy Growing, but Growth Is Unimpressive 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 17 Source: Bureau of Economic Analysis, RISI 18
Canada Benefiting from Improving US Economy and Weaker Currency Real GDP Growth, Real Private Fixed Investment, 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 17 19
Canadian Dollar Remains Weak $1.10 $1.00 $0.90 USD/CAD $0.80 $0.70 $0.60 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 20
Europe Slow and Steady The Positives Growth positive and steady Oil prices and the euro Bank lending improving The Negatives Risk of deflation Unemployment remains high Reforms have stalled The Risks Russia Quantitative Easing Migration crisis Brexit fallout 21
Eurozone Economy Growing, but Weakly Annual Real GDP Growth 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0-6.0-7.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Germany France Italy UK Eurozone Source: IMF, RISI 22
Consumer Leading the Recovery Real Consumption Expenditures, Year over Year Percent Change 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% Germany UK France Italy Spain 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Eurostat 23
Unemployment Improving, but Still High Outside of Germany Harmonized Unemployment Rate 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% Eurozone Germany Greece Spain France Italy Portugal 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Eurostat 24
Industrial Production Growth Tepid Industrial Production Indices, 2010=1 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 Euro Area Germany 0.80 France Italy 0.75 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Eurostat 25
Deflation Still a Risk CPI, Core CPI; Year over Year Percentage Change 5.0% 4.0% 3.0% CPI Core CPI ECB Target 2.0% 1.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-1.0% Source: Eurostat 26
Bank Lending Supporting Growth Bank Loans to Households and Non Financial Corporations, M3, Year over Year Percent Change 20% 15% Non-Financial Corporations Households Money Supply 10% 5% 0% -5% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: ECB Copyright 2016 RISI, Inc. Proprietary Information 27
Euro Remains Relatively Weak USD/EUR $1.60 $1.50 $1.40 $1.30 $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 17 Source: Fed, RISI 28
China in Transition Economy undergoing major restructuring Investment led growth to consumer based growth Days of 9 10% growth in the past Some financial liberalization Fiscal stimulus waning Increase in infrastructure spending New mechanisms for financing But how effective will it be? Debt has become a serious issue, and it is still rising Bank non performing loans near 20% Increased volatility for renminbi 29
Industrial Side of Economy Slowing Fixed Asset Investment, Year over Year Percent Change; Industrial Production, Year over Year Percent Change 50% 40% Industrial Production Growth Y/Y Fixed-Asset Investment Growth Y/Y 30% 20% 10% 0% -10% 05 06 07 08 09 10 11 12 13 14 15 16 Source: PBC, CEIC 30
But Services Side of Economy Performing Better Purchasing Managers Index Manufacturing, Services 65 60 PMI Manufacturing PMI Services 55 50 45 40 35 07 08 09 10 11 12 13 14 15 16 Source: PBC, CEIC 31
Lending Slowing in Past Few Months 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) 05 06 07 08 09 10 11 12 13 14 15 16 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: NBS, Dragonomics 32
Trade Improving 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 16-40% -60% Source: China National Bureau of Statistics, CEIC 33
Industrial Imports Near All-Time Highs Three-Month Average of Imports by Quantity, Index 2005 = 100 450 400 350 300 Iron Ore Copper 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 Jul-15 Jan-16 Jul-16 Source: CEIC 34
China s Economy Continues to Slow 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 17 Source: NBS, RISI 35
Increasing Volatility for the Renminbi 9.0 8.5 RMB/USD 8.0 7.5 7.0 6.5 6.0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Fed, RISI 36
Conclusions US economy growing moderately Improving employment should support increased spending Housing market still presents upside risk Manufacturing side of the economy struggling Europe growing, but slowly Potential growth rate is lower QE helping somewhat Threat of deflation present, but low Risks around the world have increased 37
Conclusions Slower growth for emerging markets, with the exception of India China s growth will be an important driver for other emerging economies Slowdown will continue, but no hard landing Increasing risks for emerging markets from the strong US dollar 38
Thank you for your attention! For more information: Monthly Economic Commentary www.risi.com/mec 39