The Goldman Sachs Group, Inc. Forces driving the world economy and global macro markets The global panorama November 2017 Huw Pill Chief European Economist Goldman Sachs International +44-20-7774-8736 huw.pill@gs.com Andrew Benito Goldman Sachs International +44-20-7501-4004 andrew.benito@gs.com Alain Durré Goldman Sachs Paris Inc et Cie +33-(1)-4212-1127 alain.durre@gs.com Lasse Holboell Nielsen Goldman Sachs International +44-20-7774-5205 lasseholboell.nielsen@gs.com Adrian Paul Goldman Sachs International +44-20-7552-9958 adrian.paul@gs.com Pierre Vernet Goldman Sachs International +44-20-7552-0428 pierre.vernet@gs.com Dylan Smith Goldman Sachs International +44-20-7552 0411 dylan.smith@gs.com Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-us affiliates are not registered/qualified as research analysts with FINRA in the U.S..
Forces driving the world economy and global macro markets Cyclical Reflation / recovery Monetary policy normalisation Structural / secular Globalisation Technological change Demographics Productivity Populism 2
Growth in the advanced economies is (finally) beating our expectations Outturns are exceeding our earlier forecasts for G-7 growth G7 Real GDP, %change yoy, quarterly which we expect to reach ~2%pa in 2017-18 G7 Inflation, %change yoy, quarterly 3 % 2017 2018 2019 GS Cons. GS Cons. GS 2.5 G7 2.0 1.9 2.0 1.9 1.6 2 US 2.1 2.1 2.5 2.4 1.7 UK 1.6 1.6 1.2 1.4 2.0 1.5 Japan 1.6 1.4 1.2 1.1 1.3 1 Germany 2.3 1.8 1.9 1.8 1.6 France 1.6 1.6 1.7 1.6 1.6 0.5 GS Quarterly Forecasts Current Forecast Actual 0 2012 2013 2014 2015 2016 2017 2018 Italy 1.4 1.2 0.9 1.0 0.9 Canada 2.7 2.9 2.3 2.0 1.8 Source: Goldman Sachs 3
and recent revisions to consensus growth forecasts have been positive rather than negative 2.6 2.4 2.2 2.0 Historically, consensus GDP forecasts have been too optimistic, although perhaps that is changing GS G7 Real GDP, forecast, % % 2011 2012 2013 2014 2015 2016 2017 2018 0.05 0.00-0.05 But in 2016, China s impulse was better than expected China impulse to Euro area growth, pp pp Difference between actual and expected impulse 1.8 1.6-0.10 Actual impulse to Euro area growth 1.4 1.2-0.15 Expected impulse to Euro area growth, as of the beginning of 2016 1.0 2010 2011 2012 2013 2014 2015 2016 2017-0.20 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 Source: Goldman Sachs Source: : Goldman Sachs 4
Global growth is looking more resilient, even as China is poised to slow somewhat Real GDP Growth Percent Change yoy 2015 2016 2017 (f) 2018 (f) GS Cons* GS Cons* US 2.9 1.5 2.1 2.2 2.4 2.3 Japan 1.1 1.0 1.5 1.5 1.2 1.1 Euro Area 1.9 1.7 2.2 2.1 1.7 1.8 Germany 1.5 1.9 2.2 2.1 1.7 1.8 France 1.0 1.1 1.6 1.6 1.7 1.6 Italy 0.7 1.0 1.4 1.4 0.9 1.1 Spain 3.2 3.2 3.1 3.0 2.5 2.5 UK 2.2 1.8 1.6 1.5 1.2 1.2 China 6.9 6.7 6.8 6.7 6.3 6.4 India** 7.2 7.1 7.5 7.3 7.8 7.6 Russia -2.8-0.2 2.0 1.6 3.3 1.6 Brazil -3.8-3.6 0.7 0.5 2.1 2.2 Developed Markets Emerging Markets World 2.3 1.7 2.2 2.2 2.1 2.0 4.6 4.6 5.2 5.0 5.3 5.2 3.5 3.2 3.7 3.5 3.9 3.5 * Bloomberg consensus forecasts as of September. ** Fiscal year basis, 2016 is India FY17 (Q2 2016 - Q1 2017). Source: Goldman Sachs 5
with turn in manufacturing cycle supporting growth in world trade after hiatus Source: Goldman Sachs 6
No matter how you measure it, global trade has begun to recover % yoy growth in the 3m average of the displayed measure 30% 20% High and sustained global trade growth during the "trade boom" of the 2000s......and, over the past year, an encouraging rebound 10% 0% -10% -20% -30% -40% value: USD value index: TWI value index: local currency volume index, 'direct': seafreight volume index, 'direct': airfreight volume index, 'indirect'...was followed by years of post-crisis stagnation... '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Goldman Sachs, Haver Analytics, CPB World Trade Monitor. 7
Jan-'14 Feb-'14 Mar-'14 Apr-'14 May-'14 Jun-'14 Jul-'14 Aug-'14 Sep-'14 Oct-'14 Nov-'14 Dec-'14 Jan-'15 Feb-'15 Mar-'15 Apr-'15 May-'15 Jun-'15 Jul-'15 Aug-'15 Sep-'15 Oct-'15 Nov-'15 Dec-'15 Jan-'16 Feb-'16 Mar-'16 Apr-'16 May-'16 Jun-'16 Jul-'16 Aug-'16 Sep-'16 Oct-'16 Nov-'16 Dec-'16 Jan-'17 Feb-'17 Mar-'17 Apr-'17 May-'17 Jun-'17 Jul-'17 Global trade in 2017: more volatile, still strong % yoy growth in the displayed measure 14% 12% 10% value index: TWI value index: local currency volume index, 'direct': seafreight volume index, 'direct': airfreight volume index, 'indirect' average: value, 'direct' volume and 'indirect' volume measures 8% 6% 4% 2% 0% -2% -4% -6% Source: Goldman Sachs, Haver Analytics, CPB World Trade Monitor. 8
Global trade in 2017: more volatile, still strong bilateral trade flows relative to global total Source: Goldman Sachs, Haver Analytics 9
Global trade in 2017: more volatile, still strong bilateral trade flows relative to global total Source: Goldman Sachs, Haver Analytics 10
US and Chinese growth matter most for the Euro area economy total impact of 1pp decline in growth on Euro area growth Source: Goldman Sachs 11
US and Chinese growth matter most for the Euro area economy total impact of 1 standard deviation decline in growth on Euro area growth Source: Goldman Sachs 12
We also see the first signs of a modest revival of inflation, but price pressure is (very) moderate Inflation remains stubbornly below the 2% target of most G7 Central Banks G7 Inflation, %change yoy, quarterly 3 a trend we continue to forecast globally into 2019 G7 Inflation, %change yoy % 2017 2018 2019 GS Cons. GS Cons. GS 2.5 G7 1.7 1.7 1.6 1.7 1.8 2 US 2.0 2.0 2.0 2.0 2.1 UK 2.7 2.7 2.6 2.6 2.2 1.5 Japan 0.5 0.5 0.6 0.8 1.0 1 Germany 1.6 1.7 1.3 1.6 1.4 0.5 GS Quarterly Forecasts Current Forecast Actual 0 2012 2013 2014 2015 2016 2017 2018 France 1.1 1.1 1.0 1.2 1.2 Italy 1.4 1.4 0.9 1.2 1.3 Canada 1.8 1.6 1.8 1.9 1.9 Source: Goldman Sachs 13
and the German Phillips curve has become flatter over time A lower equilibrium rate of unemployment U* has shifted the German Phillips curve over time German Phillips curves (the trade-off between labour market slack and inflation) and U* through time 2.00 1.75 1.50 1.25 German 'macro' inflation* (π t ), year-on-year % Phillips Curve assumed in 2017Q1 forecast round German Phillips curves: 2003-2007 2008-2009 2010-2012 2016-Now SPACE Migration towards new Phillips curve Equilibrium unemployment rate, U* 1.00 0.75 March 'Real-time' Phillips Curve 2012-13 (Euro area debt crisis) 2008-09 (Germany in recession) 0.50 0.25 4.0 6.0 9.8 0.00 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 German unemployment rate (u t ), % SA -0.25 Source: Goldman Sachs, Eurostat, Note: * Macro inflation controls for large relative price changes as well as changes in VAT and excludes highly volatile energy and food prices; Core inflation simply excludes energy food alcohol and tobacco prices from the headline measure 14
leading to significant missing German wage growth German wage growth has remained muted despite large falls in unemployment %yoy, dynamic out of sample forecast Source: Goldman Sachs 15
Central banks have faced constraint of lower bound on policy rates Estimated real time Taylor rule, % 7 6 5 % Eonia (post ECB monetary policy meeting) Model w. real time gap, core infl, pmi & unr (sample Jan 2002 - Nov 2011) Model w. real time gap, core infl, pmi, unr & Staff CPI 1yr fcast (sample Jan 2002 - Nov 2011) 4 3 Out-of-sample forecast 2 1 0-1 -2-3 ECB meeting Jun 2013 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Goldman Sachs, ECB 16
leading to introduction of various supportive balance sheet policies such as QE Although the US may be leading the way to a reduction in balance sheet size and the ECB will reduce APP in the coming year Central Bank balance sheet as a percentage of GDP, % 100 90 80 % Start of ECB % US Federal Reserve 'Whatever sovereign Bank of England it takes' asset European Central Bank purchases Bank of Japan 100 90 80 70 60 Failure of Lehman 70 60 50 50 40 40 30 30 20 20 10 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Goldman Sachs, US Federal Reserve Board, Bank of England, Eurostat, Bank of Japan, Ministry of Finance Japan 0 17
but also keeping rates lower for longer, in part via offering forward guidance Estimated real time Taylor rule, % 7 6 5 % Eonia (post ECB monetary policy meeting) Model w. real time gap, core infl, pmi & unr (sample Jan 2002 - Nov 2011) Model w. real time gap, core infl, pmi, unr & Staff CPI 1yr fcast (sample Jan 2002 - Nov 2011) 4 3 Out-of-sample forecast 2 1 0-1 -2-3 ECB meeting Jun 2013 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Goldman Sachs, ECB 18
Central banks have been keeping their key rates low, but US Fed has started to normalise The US appears to be paving the way to policy normalization and we expect the other central banks to follow key Central Bank policy rates, % 3.5 3.0 2.5 % % BoE: Official Bank Rate GS Forecast US: Fed Funds Target Rate ECB: Main Refinancing Rate 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2.0 1.5 1.0 0.5 0.0 Source: Goldman Sachs, Bank of England, European Central Bank, US Federal Reserve Board 19
Core inflation gap (%) as it approaches (dual) mandate, whereas others remain more distant from objectives 0.5 Deviation from Central Banks' Goals 0.0-0.5 Q1 2012 Q1 2012 Q1 2017-1.0 Q1 2017-1.5-2.0-2.5 US Q1 2012 Q1 2017-3.0 Euro Area Japan -3.5-3.5-3.0-2.5-2.0-1.5-1.0-0.5 0.0 0.5 Employment gap (%) Source: Goldman Sachs, Bank of England, European Central Bank, US Federal Reserve Board 20
Forward inflation assessments have risen from their mid-2016 lows, but not back to pre-crisis levels Market pricing has consistently re-evaluated expected inflation downwards Implied HICP inflation curves and GD forecast, %yoy 5.0 % Indexed swap rates implied inflation curves for the Euro area Latest swap based inflation curve (May) % 5.0 GS Forecast (Headline HICP inflation ex-tobacco) 4.0 Realized annual Euro area HICP inflation excluding tobacco (unrevised) 4.0 3.0 Forward inflation curve as of August 2014 (Jackson Hole, where Mr Draghi signals ECB QE) 3.0 2.0 2.0 1.0 1.0 Forward inflation curve low - July 2016 0.0 0.0-1.0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Source: Goldman Sachs, Bloomberg -1.0 21
S&P 500 European HY US HY MSCI World SXXP MSCI EM Topix US IG European IG Germ. Bond Gold US Bond Japan Bond US Nominal GDP EU Nominal GDP US wages European wages US CPI US House Price European CPI EA House Price Commodity By design, asset prices are at elevated (and therefore perhaps vulnerable) levels Total return performance in local currency since January 2009 300% 250% Financial asset prices Real economy prices 200% 150% 100% 50% 0% -50% -100% Source: Datastream, Haver Analytics, Goldman Sachs 22
Compared with the aftermath of the Great Depression, inflation performance has not been bad The deflationary traps of the 1930s are conspicuous in their absence from the post-2007/08 experience Cumulative change in the level of consumer prices during recovery A decade on from the nadir of the 2007/08 financial crisis, the recovery in output has been anaemic Cumulative change in real GDP during recovery 55 50 45 40 35 30 % change, t-1 to t+8 Second quaritle Third quartile Mean Bottom decile Top decile 2% annual inflation 60 55 50 45 40 35 % change, t-1 to t+8 Third quartile Second quartile Mean Bottom decile Top decile 25 20 15 10 5 0-5 -10 30 25 20 15 10 5 0-15 -5-20 -10-25 2007/08 crises 1930s crises Other crises -15 2007/08 crises 1930s crises Other crises Source: Goldman Sachs Source: Goldman Sachs 23
but policy mix has been different (easier monetary policy, less expansionary fiscal policy) Government spending grew relatively more after the crisis of the 1930s Nominal government spending Quantitative easing after 2008 drove long rates lower for longer than in the 1930s Nominal long-term interest rates Source: Goldman Sachs Source: Goldman Sachs 24
with significant distributional implications that have political consequences Income inequality evolved similarly in the aftermath of crises in 2007-08 and the 1930s Income accruing to top 1% of earners but inequalities in wealth have risen significantly since the 2007-08 crisis by contrast with the 1930s Wealth held by 1% wealthiest Source: Goldman Sachs Source: Goldman Sachs 25
Drivers of Brexit more social than economic It is not (only) cyclical economic factors that have driven the recent rise in (European) populism Source: Goldman Sachs 26
with sharp urban / rural divide in France Votes for Le Pen in 2012 first round presidential election Cities do not support Le Pen Source: Goldman Sachs 27
Despite rapid technological change, productivity (in the UK) has stagnated over the past decade index Output per hour in the UK Source: ONS, Goldman Sachs 28
an even starker break when viewed from a long-run perspective back to the mid 19 th century Source: ONS, Goldman Sachs 29
Disclosure Appendix October 27, 2017 30
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