th January 9 GLOBAL ECONOMICS CHART BOOK The cycle is turning Many of the indicators that tend to turn first around peaks in the business cycle are now flashing red in several major economies. Admittedly, some survey measures of confidence and real activity remain at fairly high levels by past standards. But their direction of travel suggests that a synchronised slowdown is now underway. (See Chart.) We estimate that world GDP last quarter expanded at its slowest rate since, and we think that the economy will lose further momentum over the next year or so, led by slowdowns in the and China. With core inflation in the already past its peak, below-trend GDP growth should be enough to convince the Fed to begin cutting interest rates by early-. And given the headwinds in China s economy, we re expecting stimulus measures including the reserve requirement cuts announced by the PBOC today only to stabilise growth later this year, and not to drive a significant rebound. Meanwhile, there are increasing signs that euro-zone GDP growth won t be as good in 9 as it was in, raising the risk that the ECB will wait until after September before hiking rates. Output and activity indicators suggest that global GDP growth slowed further in Q. (Page.) Business surveys for December remained weak in nearly all of the major economies. (Page.) Household consumption indicators show that consumer confidence has fallen. (Page.) World trade looks to have slowed further in recent months. (Page.) Labour market indicators show that wage growth has been rising in the, UK and euro-zone. (Page.) Monetary indicators show that bank lending to firms is growing rapidly in the. (Page.) Inflation has started to decline due to lower oil prices. (Page.) Commodity prices have fallen amid growing signs of a slowdown in the world economy. (Page 9.) Financial markets have seen Y Ts rally as investors have reassessed the Fed policy outlook. (Page.) Chart: Indicators of Economic Activity (Standardised, LR Avg. = ) Adv. Econ. Consumer Confidence (Latest = Dec.) G Business Confidence (Latest = Nov.) Markit Global Manufacturing PMI (Latest = Dec.) OECD Composite Leading Indicator (Latest = Oct.) 9 9 Sources: Thomson Reuters, Markit, Capital Economics Simon MacAdam, Global Economist, + 9, simon.macadam@capitaleconomics.com Nikita Shah, Global Economist, + 9, nikita.shah@capitaleconomics.com Chart Book Page
Output and Activity Indicators After falling to around % annualised in the third quarter, we think that global GDP growth slowed a bit more in the fourth quarter (). We estimate that GDP growth fell in Q in the and the UK to around % and % annualised respectively, but was more or less unchanged in the euro-zone (). After contracting sharply in Q, Japan s economy looks to have grown by around % annualised last quarter. Meanwhile, industrial production in the rose by.% in November, due to an increase in utilities and mining output (). Manufacturing output was flat, suggesting that the stronger dollar and weaker global economic backdrop are weighing on the sector. The drop in Japan s industrial output in November dragged the year-on-year growth rate down to.% (). Although disruption to car production in the euro-zone has eased in recent months, growth in industrial production there is still weak. At just over % y/y in October, it is well below the near-% rate of growth seen in late (). Finally, we think that GDP growth slowed in China in November () and expect it to continue to do so given the headwinds from a cooling property market and slower credit growth. Chart : CE World GDP* (% q/q annualised) Chart : GDP (% q/q annualised) - - - Q & Q 9 = minus % CE estimate for Q *Index of major economies at PPP exchange rates. Uses inhouse China Activity Proxy. - - - - - - - - Q Q Q (CE estimate) Japan Euro-zone UK - - - Chart : Industrial Production ( = ) Chart : Japan Industrial Production Mining Manufacturing Utilities 9 9 9 % m/m (RHS) 9 % y/y (LHS) - - - - Latest = November - - - - Chart : Euro-zone Industrial Production Chart : CE China Activity Proxy & GDP (% y/y) % m/m (RHS) % y/y (LHS) - - Latest = October - - - Official GDP (Latest = Q) Capital Economics China Activity Proxy (Latest = Nov.) 9 9 Sources: Thomson Reuters, Capital Economics Chart Book Page
Business Surveys The global composite PMI fell to its lowest level in over two years in December and, on past form, is consistent with world GDP growth staying at around % annualised (). The composite indices fell in all the major economies during the second half of, with the exception of India (). The latest manufacturing surveys for the have been downbeat. Markit s PMI fell further in December (), while last month s sharp decline in the ISM index was the biggest monthly fall since October. Within the euro-zone, Germany s composite PMI fell further in December, to a ½-year low, while France s plunged, largely due to protests which disrupted retail trade and tourism. Italy s ticked up but remains consistent with the economy having fallen into recession in the second half of (). Turning to EMs, December s manufacturing PMI is consistent with industrial production growth of around.% y/y at the end of Q. (). Finally, Markit s future output indices, which ask about firms expectations, suggest that the global economy will lose further momentum in the coming months (). Chart : Global Composite PMI & World GDP Chart : Markit Composite PMIs (Averages) Global Composite PMI (Latest = Dec. estimate, LHS) CE World GDP Index (Latest = Q, % q/q ann., RHS) 9 9 - - - - - - H H Chart : Manufacturing Surveys Chart : Markit Composite PMIs ISM manufacturing index Markit manufacturing PMI France Germany Italy 9 Jan- Jul- Jan- Jul- Jan- Jul- Jan-9 Chart : EM Manufacturing PMI & Industrial Prod. EM Manufacturing PMI (LHS) EM Industrial Production (m Avg., % y/y, RHS) 9 9 - - - - - Chart : Global Future Output PMIs Future Composite PMI Future Manufacturing PMI Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Sources: Markit, Thomson Reuters, Capital Economics Chart Book Page
Household consumption Retail sales in advanced economies look to have risen by around.% m/m in November. Partly as a result of unusually large base effects, the year-on-year growth rate fell to a ½-year low () and points to aggregate advanced-economy consumption growth slowing in Q (). Retail sales volumes fell only in Japan in November. Even if sales were unchanged in December, though, they would have risen by about.% q/q compared to Q, which supports our view that overall consumption growth rebounded in Japan last quarter (). Meanwhile, household spending growth in Q appears to have held up very well in the, slowed in the UK and remained weak in the euro-zone (). Consumer confidence has fallen for several months in almost all advanced economies. It has dropped to a two-year low in the euro-zone and appears to have passed its peak in the (). More positively, household balance sheets are in decent shape. Debt-service ratios are below their pre-crisis peaks (), and even in economies with highly-indebted households, saving rates generally remain high by past standards (). Chart : Retail Sales Volumes in Advanced Economies. %m/m (LHS) Latest = November %y/y (RHS).... - -. - -. *Weighted average of economies -. - 9 Chart : Retail Sales & Household Consumption Latest = Q (consumption) & November (retail sales). -. Weighted -. - average of Consumption (% y/y, RHS) -. - advanced economies Retail Sales (m avg. % y/y, LHS) -. - -. 9 9...... Chart : Consumption in G Economies (% q/q ann.) Chart : Consumer Confid. (Standardised, LR avg. = ).......... -. -. -. Q Q Q Q (CE estimates) Euro-zone Japan UK.......... -. -. -. Full range* Interquartile range Euro-zone *Including advanced economies 9 9 Chart : BIS Debt-Service Ratios (%) Chart : Saving Rates (%, Q ) Economies in dashed box correspond to blue bars in Chart Pre-crisis peak Q Nld Aus Nor Can Swe UK Fin Jpn Esp Prt Fra Ger Ita Nor Can Jap UK Swe Net E-Z Aus Economies with highlyindebted households Major advanced econs. - average 9 Sources: Thomson Reuters, Capital Economics Chart Book Page
World Trade The latest data published by the CPB Netherlands Bureau suggested that global trade volumes rose by % in October, as a pick-up in exports from advanced economies outweighed a decline from EMs (). In threemonth year-on-year terms, global trade growth has stabilised recently, at just under % (). Other measures of world trade are less encouraging. Growth of air freight and sea container traffic has continued on its downward trend, and is around % y/y (). In addition, surveys remain downbeat. The new export orders components of the manufacturing PMIs fell in all the major economies during the second half of 9, with the exception of India and Russia (). For the world as a whole, the new export orders component of the manufacturing PMI dropped in December and points to trade growth slowing to around % y/y (). Finally, given the temporary ceasefire in the -China trade dispute and the countries decision to hold trade talks in January, the shares of world trade affected by the tariffs imposed last year should remain small for the time being (). Chart : Export Volumes (Jan. = ) Chart : CPB World Trade Volumes Emerging economies Advanced economies % m/m (LHS) % y/y (m avg., RHS) Latest = October 9 Jan- Jul- Jan- Jul- Jan- Jul- 9 - - Latest = October - - - - Chart : Alt. Measures of World Trade (m. % y/y) Chart : New Export Order Comp. of Mfg PMIs (Avg) IATA air freight traffic RWI container traffic CPB world trade volumes H H - - - Latest = October - - - 9 Chart : Export Order Surveys & World Trade Volumes Chart : Traded Goods on Which Tariffs Have Been Imposed, Proposed or Announced 9 Global Manufacturing PMI New Export Orders (Adv. m., LHS) World Trade Volume (m avg. % y/y, RHS) Latest = October (CPB) & December (Markit) 9 -............ LHS Implemented Steel & aluminium Washing machine & solar panels Other Tariffs on -China trade Tariffs proposed/announced RHS % of World Imports % of World GDP Sources: Thomson Reuters, Markit, RWI, IATA, UNCTAD, CE........... Chart Book Page
Labour Market Indicators Employment growth has been fairly stable recently in the and UK at around ½% and %, respectively. It has dipped in the euro-zone but continued to pick up in Japan (). The latest surveys point to a slightly slower, but still decent, pace of job creation in advanced economies in the coming months (). Steady gains in employment have kept unemployment rates below or close to their pre-crisis peaks in most major advanced economies (). The unemployment rate in the has stayed close to a 9-year low and wage growth there has continued to rise gradually (). Hourly earnings increased by.% last year. Earnings growth has also recovered in the UK, hitting around ½% y/y in October (). Although wage growth has stabilised at around % y/y in Japan, which is high by past standards, it is still not high enough to generate the BoJ s % inflation target. Finally, the continued decline in the unemployment rate in the euro-zone points to further rises in wage growth there in the coming months (). Chart : Employment (% y/y, -month rolling average) Chart : Composite PMI & Employment in Adv. Econs...... -. Latest = Dec. (), Nov. (Jap), Oct. (EZ & UK) Japan -. UK 9 Euro-zone...... -. -. Comp. Emp't PMI (Adv. m, LHS) Employment (% y/y, RHS) 9 9..... -. -. -. -. -. -. -. Chart : Unemployment Rate (%) Chart : Wages & Earnings (% y/y) 9- low Latest... Average Hourly Earnings ECI: Wages & Salaries Atlanta Fed Median Wage............ 9 9. Chart : Private Regular Earnings (m Avg. % y/y) Chart : Euro-zone Unemp t Rate & Hourly Wages......... -. -. (Latest = Dec.) UK (Latest = Oct.) Japan (Latest = Nov.) -. -. 9 9......... -. -. 9 Unemployment rate (%, inverted & adv. m., LHS) Hourly wages (%y/y, RHS) 9 9 Sources: Thomson Reuters, REC, CE.......... Chart Book Page
Monetary Indicators With the ECB having ended its asset purchases in December and the Fed still gradually running down its balance sheet, the world s major advanced economies will shrink their balance sheets, in aggregate, throughout this year (). Growth in broad money ticked down in the euro-zone in November and remains over % y/y in the. It has fallen recently in the UK and Japan but is still steady at around ½ (). Credit growth to firms has continued to pick up in the and UK in recent months and been fairly stable at around % in the euro-zone and Japan (). Within the euro-zone, lending growth remains negative in Spain and Italy (). That said, Italy s data have been skewed by banks sales of non-performing loans. The latest surveys show that a greater net share of banks eased lending standards to firms in the euro-zone in Q, and that banks are still relaxing credit standards in the and Japan. In the UK, however, banks tightened credit standards in Q (). Finally, broad credit growth in China has continued to slow steadily and points to GDP growth there of under % y/y (). Chart : Central Bank Asset Purchases ($bn) Fed ECB Total BoE BoJ CE F'casts *Converted at prevailing exchange rates - 9 9 - Latest = November Chart : Broad Money (% y/y) (M*) Euro-zone (M) UK (M) *CE Measure Japan (M) 9 Chart : Bank Lending to Firms (% y/y) Latest = November except Japan (October) - Japan - - UK - Euro-zone - - 9 Chart : Net % of Banks Relaxing Credit Stds to Firms - - - - - - - - - Tightening standards Relaxing standards Q Q Q Euro-zone Japan UK - - - - - - - - - Chart : Bank Lending to Firms in Euro-zone (% y/y) - - France - Germany - Spain - Italy - - 9 Chart : Broad Credit & China Activity Proxy (% y/y) Broad credit (adv. m, LHS) Sources: Thomson Reuters, Capital Economics Capital Economics China Activity Proxy (RHS) 9 9 - Chart Book Page
Inflation On average, core inflation in OECD economies remains low and stable, as it has been for the past seven years (). We think that it has peaked in the, has begun a gradual upward trend in Japan, and is on the cusp of a small increase in the UK as the effect of last year s depreciation in sterling feeds through (). Lower oil prices have started to drag on headline inflation. If our oil price forecasts prove correct, lower oil prices should cause inflation to fall sharply this year ( & ). Combined with broader concerns about future economic growth, lower oil prices have weighed on investors inflation expectations in the and the euro-zone (). In contrast, UK inflation expectations have risen as the perceived risk of a no deal Brexit and therefore of a further fall in the pound and looser monetary policy has risen. Lower energy prices have begun to pull down headline inflation in major emerging economies too. The exception is Russia, where higher food prices pushed it up to just below the central bank s % target in November (). Conversely, falling food prices caused inflation to drop sharply from.% to.% in India. Chart : OECD Inflation* (%, Excluding Turkey) Chart : Core CPI Inflation in G Economies (%)... Headline Latest = November Core Typical % target... UK Euro-zone Japan* CE forecasts..... *Weighted by private consumption Excluding impact of at PPP exchange rates tax hike in Japan... - - *Excludes impact of tax hike - - 9 9 Chart : Oil Price & Energy Contrib. to OECD Inflation Chart : Headline CPI Inflation in Advanced Econs. (%) Actual oil price Implied by CE f'cast Energy contrib. to OECD CPI (%-pts, lat. = Nov., m lag, RHS) % y/y (LHS) CE forecast...... *Excluding effect of planned VAT rate hike 9 forecasts... - CE Brent f'cast: - $pb end-9 -. $pb end- - -. 9.. -..... UK Fra Can Swe Ger Aus Ita Jap* Swi.... Chart : -Year/-Year Forward Inflation Swaps (%) Chart : Headline Inflation in BRIC Economies (%)...... *minus average RPI-CPI differential UK* Euro-zone...... Up to % Brazil Russia India China. -day moving averages. Jan- May- Sep- Jan- May- Sep- Jan-9.. Latest = November 9 Sources: Thomson Reuters, OECD, CE Chart Book Page
Commodity Prices Most commodity prices fell in December due to growing signs of a slowdown in the world economy. The prices of agricultural commodities fell by % and began 9 at the same level they were a year ago. Industrial metals and energy prices started the year % lower than they were at the beginning of (). The prices of Brent and WTI crude have dropped by $pb in the past three months (). The announcement in December of.m bpd of production cuts by OPEC and Russia, effective from the start of 9, was not enough to assuage concerns about oversupply. Indeed, shale output has risen so much that the is now the world s biggest oil producer (). At the same time, investors appear to be coming around to our view that global growth will slow this year, which should weigh on oil demand (). China s economy has already lost some momentum during the past year, which has gone hand-in-hand with a fall in industrial metals prices (). The gold price has bucked the trend of falling commodity prices recently due to higher safe-haven demand. Its rally began when the financial markets began discounting weaker news on the global economy back in October (). Chart : GSCI Indices ( st Jan. = ) Chart : Oil Prices ($ per barrel) 9 Energy Agriculturals Industrial metals Jan- Mar- May- Jul- Sep- Nov- Jan-9 9 Brent WTI Jan- Mar- May- Jul- Sep- Nov- Jan-9 Chart : Oil Production (Mn. BpD) 9 9 Russia Saudi Arabia 9 Chart : Global GDP Growth & Crude Oil Consumption........ Global Economic Growth* (% y/y, LHS) Change in Global Oil Consumption (Mn bpd, RHS) * Weighted by oil consumption CE Forecast -. 9 9 9 9 99 9 9......... -. -. -. Chart : China Mfg. PMI & Industrial Metals Prices Chart : CBOE VIX & Gold Price Latest = December 9 CBOE Volatility Index (%, LHS) Gold Price ($ per oz, RHS),, 9 9 Financial market sell-off begins,, Caixin Manufacturing PMI (LHS) S&P GSCI Industrial Metals (RHS) Jan- Jan- Jan- Jan- Jan-9 Mar- May- Jul- Sep- Nov- Jan-9 Sources: Thomson Reuters, EIA, Markit, Capital Economics,, Chart Book Page 9
Financial Markets Last year saw negative returns from most major financial market asset classes, with local-currency government bonds as the only source of respite (). While emerging market equities yielded the biggest negative total return in, in recent months EM equity prices have not fallen as far as their developed market peers, particularly compared to the which has fallen by % since the start of October (). The equity price falls mostly reflect a more bearish outlook for the and wider global economy. Accordingly, investors have become a lot more dovish about their expectations for Fed policy and no longer price in a hike in 9 (). This can partly explain why -year government bond yields have continued to fall in the during the past month to.%, even as they have stabilised elsewhere (). The dollar has barely changed since a month ago in trade-weighted terms. Commodity currencies have weakened against the dollar as energy prices have fallen, while the Japanese yen has rallied strongly to per dollar (). This was partly due to a flash rally that took place during thin trading recently. But even before then, the yen appears to have benefited from safe-haven demand (). Chart : % Total Returns in (Local-currency) Chart : MSCI Equity Indices ( st Oct. = ) - - - - - - EM equities DM equities EM gov bonds* DM corp bonds EM corp bonds* DM gov bonds EM gov bonds *Foreign-currency - - - - - - 9 9 9 9 MSCI EM MSCI World ex. A MSCI A Oct- Nov- Dec- Jan-9 9 9 9 9 Chart : Implied Prob. of Fed Policy Chg. by End-9 (%) Chart : -Year Government Bond Yields (%) No change Cut Hike Aug- Sep- Oct- Nov- Dec- Jan-9..... (LHS) UK (RHS) Germany (RHS).. Jan- Mar- May- Jul- Sep- Nov- Jan-9..... Chart : Major Currencies vs. $ (% Chg. since th Dec.) Stronger against dollar - - - - - Overall (Broad Index) Advanced vs. $ Emerging vs. $ Weaker against dollar - - - - - MXN JPY CHF EUR ARG Broad RMB TRY GBP CAD AUD Chart : Japanese Yen/ Dollar Exchange Rate Yen stronger against the dollar Sources: Thomson Reuters, Bloomberg, CE "Flash rally" Jan- Mar- May- Jul- Sep- Nov- Jan-9 Chart Book Page
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