Global Economic Outlook What s cooking for? Macro Research Hans Bevers Chief Economist Degroof Petercam
Agenda Continuing recovery Slowflation to pick up from here Central bankers turning more hawkish Sustainable Eurozone boom? Risks on the horizon Conclusion 2
Continuing recovery 3
Global economic recovery 1) Cyclical upturn 2) Slower post-crisis trend 3) Increasing living standards 4
Global trade recovery 1) On a slower growth path 2) Global trade recovery 3) BDI only slowly creeping up 5
Global company profit recovery 1) Improving profit outlook 2) Higher profit margins 3) More to come in Europe? 6
Confidence indicators point to solid cyclical prospects for now 1) United States 2) Europe 3) China 7
The recovery looks set to continue into 2018 1) Economic policy uncertainty in decline 2) Monetary conditions still loose 3) Fiscal stance broadly neutral 8
As good as it gets? 1) Already the third-longest US expansion ever 2) Flattening yield curve points to slowdown 3) Recession odds still low for now June 2009 November 2001 March 1991 November 1982 July 1980 March 1975 November 1970 February 1961 April 1958 May 1954 October 1949 October 1945 June 1938 March 1933 November 1927 July 1924 July 1921 March 1919 December 1914 January 1912 June 1908 August 1904 December 1900 June 1897 June 1894 May 1891 April 1888 May 1885 March 1879 December 1870 December 1867 June 1861 December 1858 December 1854 Expansion in months since start recovery 12 10 12 19 33 21 18 24 20 22 27 18 21 24 22 27 22 30 36 39 45 37 36 34 44 46 50 58 0 20 40 60 80 100 120 140 73 80 92 103 106 120 Source: National Bureau of Economic Research, Degroof Petercam 9
Limited upward potential for the oil price 1) Oil price to remain lower for longer 2) US inventory levels expected to remain high 3) Shale producers getting back in business 10
Slowflation to pick up Equilibrium interest rates close to 0% Large CB balance sheets are the new norm Policy will be normalised only very gradually Sustained low rates could lead to imbalances 11
Inflation still subdued 1) Underlying inflation is low and stable 2) Inflation mostly below 2% target 3) Wage growth still subdued 12
Labour markets in the US and Japan increasingly tight 1) United States 2) Eurozone 3) Japan 13
But unemployment rates are an incomplete measure of slack 1) Core employment still significantly below pre-crisis level in US 2) Still a large amount of labour underutilisation in Europe 14
Reasons for flatter Phillips curve Globalisation and technological change Ageing of the population Inflation expectations anchored at lower level Little confidence that policy can boost inflation Income inequality Waning trade union power Part-time, temporary and flexible working 15
Reasons for flatter Phillips curve (2) 1) Digital sales rising fast 2) Lower anchored inflation expectations 3) Temporary and part-time contracts 16
NOR DNK FIN BEL AUT SWE NLD HUN GER FRA SWI POL KOR IRL CAN ITA JAP NZL AUS POR GRC ESP GBR ISR TUR USA MEX CHL OECD Rising inequality in important economic blocks 1) Net personal wealth (top 10% share) 2) Share of income going to top 10% 3) Gini coefficient, OECD 1 0.6 0.50 0.9 0.55 0.45 2014 or latest year 2007 0.5 0.8 0.45 0.40 0.7 0.4 0.35 0.6 0.35 0.30 China 0.5 United States France United Kingdom 0.4 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0.3 China United States 0.25 France United Kingdom 0.2 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0.25 0.20 Source: Wealth and Income database, OECD, Degroof Petercam 17
Central banks turning more hawkish 18
Central banks cautiously reducing stimulus 1) Equilibrium interest rates close to 0% 2) Very gradual tightening process 3) Large CB balance sheets are the new norm 19
Fed looks set to gradually increase rates further 1) More wage pressure in the pipeline 2) Inflation held down by temporary factors 3) Fed to lower dots 20
Why the ECB remains in loosening mode in 2018 1) Wage growth still subdued 2) Economic differences between countries 3) Another policy mistake would be painful 21
Risks for the USD skewed to the downside in LT-perspective 22
Sustainable Eurozone boom? 23
Eurozone recovery becoming more self-sustaining 1) Periphery back in business 2) Continuing job growth across sectors 3) Credit mechanism functioning again 24
Imbalances have declined significantly 1) Competitiveness 2) Current account 3) House prices 25
NDL LUX DNK SWE DEU CZE AUT SVN MAL EST LTU BEL FIN POL POR GBR HUN LVA EU FRA SVK IRL ESP GRE CYP HRV ROM BUL ITA But there s more than meets the eye 1) Poorest struggle to find a job 2) Divergence in satisfaction about living conditions Not in employment, education or training (Young people, 15-24) 20 18 2016 2007 16 14 12 10 8 6 4 2 Source: Eurostat 26
Divergence at the heart of the currency union remains in place 1) Living standards 2) Unemployment 3) Public debt 27
Some institutional progress 1) Pillars of a well functioning monetary union 2) Progress on various levels 3) Facing a trilemma Banking union More powerful and persuasive ECB Bail-out plans (EFSM, ESM) Economic & political Integration ECB banking supervision Fiscal union Single Resolution Mechanism (but ) Political Union More economic policy coordination - No agreement on EDIS - European Monetary Fund? - Debt mutualization? - European minister of finance? National Sovereignty Democratic Governance 28
Quo vadis Europe? 1) Are things in the EU moving in the right direction? (share of people responding yes) GRE FRA GBR ITA ESP CYP SWE AUT DNK SVN CZE SVK LUX HRV LVA EST BEL POR HUN FIN POL LTU DEU ROM NDL MAL BUL IRL 9% 13% 16% 18% 18% 22% 24% 24% 24% 25% 25% 27% 27% 29% 31% 32% 32% 33% 33% 34% 34% 35% 35% 36% 37% 37% 40% 0% 10% 20% 30% 40% 50% 60% 55% CZE GRE ITA HRV AUT SVN LVA CYP HUN GBR SVK ROM BUL FRA POR FIN ESP MAL BEL SWE LTU EST POL DNK NDL DEU IRL LUX 2) Is EU membership a good thing? (share of people responding yes) 33% 34% 35% 36% 42% 45% 45% 45% 48% 49% 50% 53% 53% 54% 54% 57% 62% 64% 64% 65% 65% 67% 71% 71% 79% 79% 81% 84% 0% 20% 40% 60% 80% 100% POR BUL GRE ESP GBR ROM POL IRL MAL FIN ITA SVK LVA SWE CYP HUN HRV LUX EST CZE AUT FRA DNK SVN LTU DEU BEL NDL 3) In favour of a multi-speed Europe? (share of people responding yes) 22% 30% 34% 36% 38% 41% 42% 42% 44% 47% 47% 48% 48% 50% 50% 52% 52% 53% 53% 54% 56% 56% 57% 63% 63% 64% 65% 69% 0% 20% 40% 60% 80% Source: EU barometer 2017, Degroof Petercam 29
The Good, the Bad and the Ugly 1) Further integration 2) Break-up of the monetary union 3) Status quo muddling through The Good The Bad The Ugly 30
Risks on the horizon 31
Potential crisis triggers Unwinding of policy measures Stretched valuations Inflation shooting up Geopolitical risks (N. Korea, Nafta, Brexit, ) Rising protectionism Renewed unrest linked to Italy China downturn 32
Sustained low rates increase the risk of financial imbalances 1) Bitcoin bubble? 2) Housing market valuations rising fast 3) Equity markets increasingly expensive 33
Better to avoid a hard Brexit 1) Weaker consumption 2) EU has the stronger hand 3) Estimated output and job loss Estimated output loss (% of GNP) Soft Hard* Belgium 0.58 2.35 EU27 0.38 1.54 UK 1.21 4.47 Estimated job loss (in '000s) Soft Hard* Belgium 10 42 EU27 284 1200 UK 140 526 * Soft assumes 0% tariffs and 2,77% NTBs, Hard assumes MFN tarriffs and 8,31% NTBs Source: Vandenbussche, H., Connell, W. and Simons, W. (2017), Degroof Petercam 34
Italian recovery but concerns look set to remain in place 1) Long-term productivity and debt concerns 2) Weakened financial sector 3) Difficult coalition formation Possible coalitions (vote share in latest polls) Source: Capital Economics 35
China still a key risk 1) Credit bubble 2) Public debt already high 2) Why China can avert a typical EM crisis Gross public debt (% of GDP) Savings > Investment Large amount of FX reserves Capital controls in place Top-down economic policy orientation Stop-and-go policy Source: Capital Economics 36
Conclusion 37
Cyclical upturn remains fairly strong going into 2018 1) Growth holding up firmly 2) Central bankers turning more hawkish 3) Risks on the horizon Confidence indicators remain strong Inflation set to pick up gradually Market psychology ~ asset prices Economic growth above potential Fed to hike rates 2-3 times in 2018 P* shooting up or CB policy mistake Fiscal stance broadly neutral ECB to continue AP until Sept 18 China slowdown creating upheavel Financial conditions remaining loose BoJ in patient wait-and-see mode Soft Brexit time is running out Nearing the end of the expansion PBoC holding on to tighter stance Renewed unrest linked to Italy 38
Outlook Economic activity GDP (YoY in %) 2017 2018 2019 US 2.2 2.4 1.6 Inflation CPI (YoY in %) 2017 2018 2019 US 2.0 2.2 2.2 Eurozone 2.3 2.1 1.6 Eurozone 1.6 1.4 1.7 Japan 1.5 1.2 1.2 Japan 0.5 0.7 1.2 UK 1.5 1.4 1.1 UK 2.7 2.3 1.9 China 6.7 6.2 5.7 China 1.6 2.2 2.3 39
Contact Hans Bevers Chief Economist Bank Degroof Petercam h.bevers@degroofpetercam.com Tel.: +32 (0)2 287 97 04 Follow our blog posts at blog.degroofpetercam.com Follow us on Twitter: @Bevers_Hans Discover our website at www.degroofpetercam.com 40