GLOBAL OUTLOOK ECONOMIC WATCH July 2017
Positive global outlook, with projections revised across areas The global outlook remains positive. Our BBVA-GAIN model estimates global GDP growth at 1% QoQ in, slightly higher than in the previous quarter, with signs of stabilization. Stronger growth in China has supported the recovery of trade and investment. Across advanced economies there is some rebalancing from the US towards Europe. Confidence and global trade growth seem to stabilize at high levels, supporting the ongoing recovery of the industrial sector. The rebound in retail signals the resilience of consumption. Our new GDP forecasts for 2017-18 show some changes by areas. The Eurozone and China are revised upwards while US is revised downwards. Inflation remains subdued in a context of restrained wage pressures and weaker than expected oil prices. Major central banks in a process of very gradual normalization, while liquidity will be reduced. Risks remain tilted to the downside, easing in the US and Europe but unabated in China. 2
SHORT-TERM INDICATORS
Global GDP growth accelerated in driven by EMs (especially China) and Europe, despite the slowdown in the US GDP: Selected Regions (SAAR, %) 7.5 6.6 7.3 7.2 5.5 4.8 3.5 1.5 2.1 1.4 1.2 2.1 2.3 1.1 2.2 2.7 2.6 2.9 2.7 0.6-0.5-2.5 USA EZ CHN RUS IND MA3 LA7 Source: BBVA Research and national sources LA7: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela. MA3: Indonesia, Japan, Korea 4
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Current Est. Last month Global growth tends to stabilize in, according to our BBVA-GAIN nowcast model (around 1.0% QoQ) 1.2 World GDP Growth Forecast based on BBVA-GAIN (%, QoQ) World GDP Growth: Change in forecast QoQ, % 1.0 0.86 1.01 0.76 0.96 1.00 1.03 0.8 0.6 0.4 Forecast CI 20% CI 40% CI 60% Point Estimates Period average Source: BBVA Research and CPB * Forecast and nowcast based on BBVA-GAIN 5
2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 Industrial output picked up again in May World Industrial Production (%, QoQ) World Industrial Production (MoM, %) 2.5 2.0 1.5 1.0 0.5 0.0 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Feb-17 Mar-17 Apr-17 May-17 DM WLD EM -0.5-1.0 WLD DM EM Across DM, the upswing is gaining ground, mainly in EZ and US In EM s, the quarterly slowdown was concentrated in China while the rest of Asia exhibited a strong growth in Source: BBVA Research and national sources 6
driven by Europe and US, with some a slowdown in Latam Industrial Production: Selected Regions (YoY, %) 8 6 6.8 6.2 4 2 0 0.6 2.1 1.3 2.6 3.5 3.6 0.3-0.2-2 -4-6 USA EZ CHN MA4 LA7 calculated using data for April for USA and CHN. Source: BBVA Research and national sources LA7: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela. MA4: India, indonesia, Japan, Korea 7
2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 Global manufacturing PMIs remained solid and stable in June World Manufacturing PMI (Level ± 50) 55 54 53 World Manufacturing PMI (Level ± 50) 55 54 53 52 52 51 51 50 49 Mar-17 Apr-17 May-17 Jun-17 50 DM WLD EM 49 48 According to PMI s, backlogs of work and employment rose again despite slightly weaker increase in new orders DM WLD EM In June, cost pressures moderated while output prices accelerated suggesting some improvement in manufacturing margins Source: BBVA Research and Markit 8
with clear gains in the Eurozone and Latam over the quarter Manufacturing PMI: Selected Regions (Level ± 50) 58 57.0 56 55.6 54 54.2 52.5 52 51.3 51.2 51.6 51.1 50 50.1 48 48.9 46 USA EZ CHN MA4 LA7 Source: BBVA Research and national sources LA7: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela. MA4: India, indonesia, Japan, Korea 9
2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 June services PMIs continue to show an expansion at a solid pace World Services PMI (Level ± 50) 57 56 55 World Services PMI (Level ± 50) 55 54 53 54 53 52 51 50 52 51 49 Mar-17 Apr-17 May-17 Jun-17 DM WLD EM 50 49 48 Higher inflows of new work led to a new increase in backlogs of work and further job creation DM WLD EM Both input costs and output charges accelerated in June Source: BBVA Research and Markit 10
Service sector activity improved strongly in Eurozone while in US and China softened Services PMI: Selected Regions (Level ± 50) 57 56 55 55.1 56.0 54 54.0 53.6 53 52 52.6 52.0 52.2 52.0 52.1 51 50.9 50 49 48 USA EZ CHN MA4 EAG Source: BBVA Research and national sources MA4: India, indonesia, Japan, Korea EAG (Eagles): Bangladesh, Brazil, China, Egypt, India, Indonesia, Iran, Malaysia, Mexico, Nigeria, Pakistan, Philippines, Russia, Turkey, Vietnam 11
2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 Retail sales slowed in May but still point to a strong quarterly growth World Retail Sales (%, QoQ) World Retail Sales (MoM, %) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 EM: Avg 2000-16 DM: Avg 2000-16 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2 Feb-17 Mar-17 Apr-17 May-17 DM WLD EM In EM, higher quarterly rates were driven by China and to a lesser extend by emerging Asia DM WLD EM Private consumption in DM s remains resilient and is likely to continue underpinning growth Source: BBVA Research and national sources 12
2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 Goods exports seem to stabilize at high levels in World Exports of Goods (YoY %, constant prices, Index Jan-12=100) 9 8 7 6 World Exports of Goods (MoM, %, constant prices) 1.4 1.2 1.0 0.8 0.6 0.4 0.2 5 4 3 0.0-0.2-0.4 Feb-17 Mar-17 Apr-17 May-17 BBVA-Goods Exports CPB-Goods Exports 2 1 0 BBVA-Goods Exports CPB-Goods Exports May boost in exports was mainly supported by developed economies Mixed performance in EM. Poor figures in Asia contrast with a significant improvement in Latam * Based on BBVA-Trade Index Source: BBVA Research and CPB 13
May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 Freights index continue to point to positive signs in global trade RWI/ISL Container Throughput Index (Index, 2010=100) Baltic Exchange Dry Index (Index, Jan-05=100) 135 130 125 120 115 110 105 100 95 90 85 45 40 35 30 25 20 15 10 05 00 Original value Seasonally adjusted Baltic Exchange Dry Index Source: Institute of shipping economics and logistics * The Baltic Dry Index (BDI) is an economic indicator issued daily by the Londonbased Baltic Exchange Source: London Baltic Exchange and BBVA Research 14
2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 Exports of services seem to start recovering after softening since mid- 2016 World Exports of Services (Constant prices) (YoY %, Index Jan-12=100) 10 9 World Exports of Services (Constant prices) (MoM, %) 2.0 1.5 8 7 6 5 4 3 1.0 0.5 0.0-0.5-1.0 Feb-17 Mar-17 Apr-17 May-17 BBVA-Services Exports 2 1 0 BBVA-Services Exports Still limited data for May, mainly figures for developed economies, point to an ongoing improvement in * Based on BBVA-Trade Index Source: BBVA Research and CPB 15
Limited inflationary pressures Inflation expectations and Oil prices (%, $/bbl) The moderation of commodity prices has reduced inflation expectations. Lower oil prices in 1H17 driven by supply factors 2.2 2.1 2.0 US inflation expectations % (LHS) Brent oil price $/barrel (RHS) 70 65 60 Despite narrowing labor market slack wage inflation is still subdued 1.9 1.8 1.7 55 50 In this context, core inflation remains low so far 1.6 1.5 EMU inflation expectations % (LHS) 45 40 1.4 35 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Source: BBVA Research and national sources 16
Jan-17 Feb-17 Mar-17 Apr-17 May-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 with recent easing across the board Headline and Core Inflation: Selected Regions (YoY, %) 6 5 4 4.44.5 4.3 4.1 3 2 1 2.2 1.9 1.9 1.7 1.4 1.3 1.0 1.2 2.2 2.2 1.6 1.5 2.3 2.7 2.8 1.9 0 USA EZ CHN MA4 LA7 Headline CPI Core CPI Source: BBVA Research and national sources 17
NEW PROJECTIONS & GLOBAL RISKS
Global momentum remains positive Ongoing global growth driven by China Early signs of stabilization Some rebalancing from the US towards Europe Both in macro terms and in the political outlook Still subdued inflation Restrained wages and lower commodity prices Central banks towards a gradual normalization Withdrawing liquidity and rate hikes will be gradual, accommodating to the cycle 5 Still complacent financial markets Low volatility and supportive central banks encourage risk taking Risks Risks are easing in Europe while building up in China 19
The rebalancing from the US towards Europe supports the euro United States Eurozone A bit-worse-than-expected economic performance Lower probability of a (large) fiscal stimulus Economic policy uncertainty continues Stronger-than-expected cyclical impulse Lower political risks foster capital inflows Likely progress expected on the European project after German elections 20
Still complacent financial markets Volatility Index (VIX) vs S&P (Index, 2010=100) 40 35 30 25 20 15 10 2500 2400 2300 2200 2100 2000 1900 The reversion of the US reflationary expectations has kept long-run rates low Very low volatility and financial tensions despite high uncertainty Capital inflows in Europe and emerging markets The normalization of monetary policy is not risk-free 5 1800 Jan-16 Jul-16 Jan-17 Jul-17 VIX Index S&P (RHS) Source: BBVA Research and Bloomberg 21
Major central banks are normalizing monetary policy Overall Fed ECB Central Banks communication is slightly more hawkish, pointing more clearly towards normalization (except BoJ). Beyond inflation, CB s are sounding increasingly worried about collateral effects of abundant liquidity (asset price levels). The Fed expects to raise interest rates another 75 bp until the end of 2018 and begin to reduce its balance before the end of the year Markets discount a much slower normalization process It has taken the first steps in the process of normalization, changing its communication, but still cautiously (taking care of forward guidance) The discussion about the reduction of bond purchases will be announced after the summer; rate hikes will only take place towards the end of 2018 EM s Footprint CB s (except Mexico and Turkey) have lowered rates a bit faster than expected given poor data and moderating inflation. Looking forward, they have room to continue decoupling from the Fed s decisions as inflation comes down 22
Stronger global demand add to supportive policies, but low commodity prices weigh on Latam US Low expectations of a fiscal impetus Solid domestic fundamentals Supportive monetary policy Better investment outlook Eurozone Stronger domestic factors Lower political uncertainty Accommodative monetary policy Slightly expansive fiscal policy Recovery of global demand Low oil prices Latam Lower commodity prices Weak confidence Political noise and uncertainty Supportive monetary policy Domestic demand-led recovery China Expansionary fiscal policy Prudent monetary policy Tight regulations to tacked domestic vulnerabilities Weaker real effective exchange rate 23
Upward GDP growth forecasts in Europe and China Eurozone U.S. 2.0 1.7 2.1 Mexico 2.2 1.6 2.0 Spain 3.3 2.8 Turkey 5.0 4.5 6.5 China 6.0 Colombia 1.5 2.0 Peru 2.2 3.9 World Chile 1.3 2.4 3.3 3.4 Argentina 2.8 3.0-1.0 2017 2018 Upward revision Downward revision Source: BBVA Research & Bloomberg 24
US: Short expectations on fiscal stimulus US: GDP growth (YoY, %) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2.4 2.6 Source: BEA and BBVA Research 1.6 2.1 2.2 2014 2015 2016 2017 2018 Current Previous GDP growth revised down slightly: Policy measures not fast and strong enough Ongoing rebalancing between consumption and investment Fed: Solid labor markets and inflation convergence to 2% justify normalization One more rate increase in 2017 and two more in 2018 Balance sheet: roll-out in 4Q17 with gradual increase in caps Risks: Global cycle, protectionism and geopolitical instability Disinflation and asset price correction Policy uncertainty; erosion of institutions and populism 25
CHINA: Stimulus have borne fruit in the short-run China: GDP growth (YoY, %) 7.5 7.0 6.5 6.0 5.5 5.0 7.3 6.9 6.7 6.5 6.0 GDP growth slowdown is set to continue but at a slower pace Still debt-fuelled and investment-driven growth Slightly upward revision to our projections to 6.5% in 2017 (from 6.3%) and to 6.0% in 2018 (from 5.8%). Prudent monetary policy with slight tightening bias in H1, while fiscal policy remains progrowth. 4.5 4.0 2014 2015 2016 2017 2018 Current Previous Risks: Domestic financial vulnerabilities (debt and shadow banking) Policy missteps could lead to a disorderly deleveraging process The RMB depreciation and capital outflows Source: CEIC and BBVA Research 26
Eurozone: Clear improvement, but with limits Eurozone: GDP growth (YoY, %) 2.5 2.0 1.5 1.0 0.5 0.0-0.5 1.3 1.9 1.7 2.0 1.7 2014 2015 2016 2017 2018 Current Previous Current data and statistical revisions lead to an upward GDP growth revision in 2017 Strong exports and investment, while consumption remains resilient Tailwinds from high confidence, low oil prices and a depreciated euro Lower inflation due to oil but core inflation is still expected to increase gradually The ECB s moving cautiously towards normalization, exiting from QE in 2018 and hiking rates by end of that year Risks: European political hurdles eased, but have not disappeared: Italy, Brexit, etc Geopolitical issues stemming from the Middle East, Russia Source: Eurostat and BBVA Research 27
Macroeconomic forecasts Gross Domestic Product YoY average, % Inflation YoY average, % 2015 2016 2017 2018 United States 2.6 1.6 2.1 2.2 Eurozone 1.9 1.7 2.0 1.7 Spain 3.2 3.2 3.3 2.8 LatAm * -0.4-1.3 0.8 1.6 Argentina 2.6-2.2 2.8 3.0 Brazil -3.8-3.6 0.6 1.5 Chile 2.3 1.6 1.3 2.4 Colombia 3.1 2.0 1.5 2.0 Mexico 2.7 2.0 1.6 2.0 Peru 3.3 3.9 2.2 3.9 Eagles ** 4.7 5.0 5.0 5.1 Turkey 6.1 2.9 5.0 4.5 Emerging Asia 6.7 6.7 6.2 6.0 China 6.9 6.7 6.5 6.0 World 3.3 3.2 3.3 3.4 2015 2016 2017 2018 United States 0.1 1.3 2.0 1.8 Eurozone 0.0 0.2 1.6 1.4 Spain -0.5-0.2 1.9 1.7 LatAm * 17.4 30.9 40.6 49.5 Argentina 26.7 41.2 27.3 16.0 Brazil 9.0 8.8 3.8 4.4 Chile 4.4 3.8 2.4 2.9 Colombia 5.0 7.5 4.5 3.3 Mexico 2.7 2.8 5.9 3.9 Peru 3.5 3.6 2.9 2.0 Eagles ** 5.0 4.4 4.4 4.3 Turkey 7.7 7.8 10.5 7.6 Emerging Asia 2.6 2.8 2.8 3.0 China 1.4 2.0 1.7 2.0 World 3.7 4.7 5.8 6.3 Source: BBVA Research 28
- Probability in the short term + Global risks: China s risks continue to build up while those in the EZ and the US recede March June Signs of financial stress (tighter funding conditions, lower liquidity & financial leverage) Authorities strategy ( two steps forward - monetary and regulatory prudence; one step backwards -liquidity injections) Imbalances (cumulative indebtedness) EZ US China US EZ China Political controversy (inability to pass reforms) US cyclical slowdown ( reflation-off, geopolitical tensions) Fed s exit strategy (faster normalization) EM EM Political hurdles (Italy, Greece, Brexit) Banking concerns ECB s exit strategy (debt in periphery) - Severity + Global uncertainty Delays in investment projects Electoral cycle in Latam Source: BBVA Research 29
GLOBAL OUTLOOK ECONOMIC WATCH July 2017