Global Macro Outlook 2014-15 Subdued Growth, Tail Risks Diminishing ANNE VAN PRAAGH, MANAGING DIRECTOR, SOVEREIGN RATINGS OCTOBER, 2014
Agenda 1. Economic Strength: o Global Growth Lower, But EMs Approaching The Bottom? o US : A Surprisingly Haltering Recovery o China: Gradual And Protracted Rebalancing 2. Fiscal and Institutional Strength: o LatAm s fiscal position strengthens, but institutions remain weaker 3. Exposure to Event Risk: o External Resilience Persists in LatAm 2
1 Global Growth Lower, But EMs Approaching The Bottom? 3
Downward Revisions Dominate Global Outlook» Downward revisions dominate our recent outlook, in both developed and emerging markets» G20 growth 2014 forecast unchanged at 2.8%, similar to 2013.» 2015 GDP growth will still be below pre-crisis averages Forecasts for GDP growth, % 2013 2014F 2015F Argentina 3.0-2.5/-1.5-0.5/0.5 Brazil 2.5 0.5/1.5 0.5/1.5 China 7.7 6.5/7.5 6.5/7.5 France 0.2 0.0/1.0 1.0/2.0 Germany 0.4 1.5/2.5 1.0/2.0 Italy -1.9-0.5/0.5 0.5/1.5 Mexico 1.3 1.5/2.5 2.5/3.5 Russia 3.8-1.5/-0.5-0.5/0.5 South Africa 1.9 1.0/2.0 2.5/3.5 Turkey 4.0 2.5/3.5 2.5/3.5 UK 1.7 2.5/3.5 2.0/3.0 US 1.9 1.5/2.5 2.5/3.5 Euro Area -0.4 0.5/1.5 1.0/2.0 LatAm 8 2.5 1.0/2.0 1.5/2.5 G-20 All 2.7 2.5/3.5 3.0/4.0 G-20 Advanced 1.4 1.5/2.5 2.0/3.0 G-20 Emerging 5.1 4.0/5.0 4.5/5.5 Source: MIS. Orange (green) shading denotes recent negative (positive) revision 4
Low Yield Environment Expected to Continue» Tapering likely to complete in Q4 this year. First rate rise expected mid-2015» Rate increases relatively slow initially (200 basis points in 2 years) Fed funds rates % Source: MIS Macroboard, August 2014 5
Emerging Markets Growth Outlook Revised Down» Weak data on economic activity at the beginning of the year» and no indication that the drivers of growth are improving» led to further downward revisions in the growth outlook for EMs GDP growth EMs ex China, % year 2002-07 annual average growth Source: MIS Macroboard, August 2014 6
2 US: A Surprisingly Haltering Recovery 7
US$ Billion USA Rating Outlook Is Stable, Social Spending Will Rise» Budget deficits expected to continue to decline through 2016, growth picking up and resilient to reductions in growth of government spending» Debt-to-GDP ratio will decline by more than Moody's expected when we had a negative outlook in 2011 and 2012» Without further fiscal consolidation, deficits will resume over the longer term largely due to growth social spending, which could pressure the Aaa rating US Deficits Under CBO Baseline Scenario and Administration Proposal $1.200 CBO Administration $1.000 $800 $600 $400 $200 $0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Sources: US Congressional Budget Office, The Budget and Economic Outlook: 2014 to 2024 and Budget of the United States Government, Fiscal Year 2015 8
Growth around 3% ( old normal ) in H2 2014 and 2015» Strong employment growth signals corporates confidence in the recovery» Positive wealth effects to boost consumption» Strong corporate balance sheets to foster investment Non-farm payrolls, 3-month average Household and corporate wealth, % of GDP Source: Haver Analytics Source: Haver Analytics 9
But weak recovery could indicate lower potential growth» This recovery phase is much weaker than average. Possible reasons: Underestimating the negative effects of demographic changes? Previous recoveries involved financial deepening/credit booms? Private sector still deleveraging? US GDP Trough=100 Source: Haver Analytics, Moody s Investors Service 10
3 China: Gradual And Protracted Rebalancing 11
China: Credit Strengths Offset by Latent Risks» World s second largest economy, high domestic savings, rising GDP per capita» Considerable official FX reserves ($3.95 trillion)» Very strong government finances, high capacity to absorb shocks even once offbalance sheet activities are taken into account» Potential risks coming from: Local government contingent liabilities Rapid credit growth to the private sector and SOEs intermediated by the shadow banking system 12
2006 2007 2008 2009 2010 2011 2012 2013e % of GDP Economy Largely /Credit Debt Driven Since 2008» Corporations slow to adjust to the new domestic and external economic realities» Though households remain lightly leveraged, with ample financial buffers Debt-to-GDP Ratio, % Household Corporate Government 250 200 150 100 50 0 Private credit to GDP, % Private credit vs. Income levels, % of GDP and US$ per person China S. Korea Hungary UK Canada GDP per capita Source: Moody s Investors Service, Bank for International Settlements, International Monetary Fund, Haver Analytics Source: BIS, Moody s Investors Service 13
Growth is stabilising» Targeted stimulus measures seem to have had a positive impact already» Although investment has slowed markedly» And property slowdown shows no sign of abating China: Manufacturing PMI, Index, average of HSBC and CFLP PMIs China: Fixed assets investment, % year Source: Haver Analytics, Moody s Investors Service Source: Haver Analytics 14
Marked Slowdown in Property Sector Underway» GDP stabilised in Q2 but property slowdown shows no signs of abating. Building activity not reduced in line. Inventories building to high levels.» Deep property downturn could shave between 1.5ppt and 2.25ppt from growth, mainly through supply chain linkages. Though policy space exists to mute the impact. 15
Rebalancing Will Be Gradual and Protracted» 2014 growth close to 7.5% target, 6.5%-7.5% in 2015. Deep property downturn could shave 1%-2% off growth, mainly through supply chain linkages. Even then, policy space exists to mute the impact.» Strong fiscal and external position. Government has demonstrated willingness to exercise control over key policy levers interest rate, exchange rate, credit.» But deleveraging and rebalancing will be gradual and protracted. Leading to more volatile growth than in the recent past China: GDP growth, % year Source: Moody s Investors Service 16
4 Fiscal and Institutional Strength: LatAm Contrasts with Europe 17
EMs Carrying Lower Debt Loads Post-Crisis» Euro Area sovereigns carry higher debt loads, particularly in the periphery. EMs (including LatAm) face pressures but are in a stronger fiscal position.» Reversals of previous downgrades in Euro Area partly reflect forward view on reversal of debt trajectory. View carries risks given low growth and inflation. 18
But Institutional Strength Is Also Lower in EMs» European institutions are much stronger, supporting higher ratings per unit of debt» The crisis exposed institutional weaknesses in the euro area overall» Euro area ratings will not return to pre-crisis levels in the foreseeable future» And positive institutional developments in Lat Am, eg Mexican structural reforms which will enhance both economic and institutional strengths 19
5 Event Risk: External Resilience Persists in LatAm 20
Taper Tantrum Overblown, Blown Over?» Volatility and currency pressures in early 2014 showed the vulnerability of some EM sovereigns to an extended period of uncertainty/volatility 21
But Capital Flows Have Held Up Fixed-Income and Equity Flows LATAM 4*, $ US Billions Capital flows in largest emerging markets, $ billion Source: Institute of International Finance, Moody s Investors Service 22
Overall, Risks Remain. But Not a Broad EM problem.» Vulnerability specific and dispersed. High external imbalances, reliance on external funding, weak policy frameworks are most vulnerable to monetary normalisation. Vulnerability Indicators Policy Space Issuer Chile China Poland Malaysia Mexico Russia Thailand South Africa Peru Brazil Colombia Philippines India Indonesia Turkey Hungary Argentina Venezuela Ukraine Current Account External Balance, % of GDP Vulnerability (2014F) Indicator (2014F) Gross Borrowing Govt. FC Requirement, % of Debt/Total Govt. GDP (2014F) Debt, % (2014F) CPI Inflation, % (2014F) General Govt. Debt, % of GDP (2014F) Sources: Haver Analytics, Moody s 23
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