Economic outlook Thoughts on what to expect in 2018 Dr. Ira Kalish Chief Global Economist, Deloitte
USA Strong job market Full employment Employment rising faster than needed to absorb new entrants into the labor force Wage growth starts to accelerate Average hourly earnings % change Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 2 Source: US Federal Reserve
USA Consumer spending might become constrained Spending fueled by job growth, improved cash flow, access to credit Income decelerates Consumers retain strong spending growth through borrowing, reduced savings. Subprime lenders start to boost loan loss reserves Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 3
USA Trade is driving growth Overseas growth is accelerating, boosting demand for US exports The value of the dollar has fallen in the past year, boosting export competitiveness Protectionist actions represent a threat to strong exports 128 126 124 122 120 118 116 114 112 Trade-weighted dollar exchange rate January 1997=100 I II III IV I II III IV I II III 2015 2016 2017 Source: Federal Reserve/Haver Analytics Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 4
USA Inflation, expectations, and consequences Core inflation has decelerated, but expectations of inflation have increased Wages are starting to accelerate The Fed has started to raise rates Bond yields rose after tax cut Expectation of five year inflation Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 5
USA The Fed and its impact Fed s job is to target both inflation and employment. We are at full employment and inflation is starting to rise The tax cut will stimulate an economy already at full employment Expect the Fed to continue tightening Yield on ten year Treasury bond Federal Funds Rate Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 6
USA Administration fiscal policy Tax reform: Budget Deficit as Share of GDP Cuts corporate rate, boosts after tax profits Temporary 100 percent expensing of investment will temporarily boost investment Territoriality will reduce cash held overseas, boost outbound investment Lower household rates will boost consumer spending temporarily Increase in budget deficit, especially if cuts are made permanent Possible problems in housing market Big impact on some state and local governments Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 7
USA Administration trade policy Policy Impact Withdraw from TPP Retain tariffs on 18,000 traded goods Hurt Japan s ability to implement structural reforms Reduce leverage with China Enhance China s geopolitical footprint Withdraw from NAFTA Revert to WTO tariffs between Mexican and US US-Canada trade reverts to old free trade deal North American supply chains to be restructured Uncertainty about whether US Congress must agree Impose tariffs on China Raise prices on US imports from China Divert trade to other countries China retaliates, hurting US exports Trade volume declines, economic growth decelerates Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 8
USA What have financial markets done? Global equity index FTSE 100 in US dollars Equity prices rose strongly in the past year Improving global economy Very low interest rates Herd mentality creates a bubble Fed tightening might break the bubble Bond yields have started to rise Could rise further if investors expect higher inflation Could be suppressed if Fed action implies that inflation will be muted Stable bond yields and rising short term rates could create inverted yield curve Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 9
USA What about the next downturn? Recoveries don t die of old age, but this one is quite old Recessions come about due to: Fed policy tightening Sharp rise in commodity prices Popping of asset price bubble Stress in financial markets What current events might eventually lead to recession? Fed tightening Stress in financial markets End of asset price bubble Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 10
Let s talk about growth Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 11 Source: US Federal Reserve
Working age population is decelerating Population aged 15 to 64, % Change Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 12
Participation declining Prime age (25-54) labor force participation Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 13
Least educated have seen a sharp drop in participation Sources: US Bureau of Labour Statistics; Council of Economic Advisers Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 14
Decline in female participation is unique to the US US female participation now lower than in Japan Participation of working age women by country One explanation is the nature of family leave and child care policies Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 15
Men and women offer different reasons for not working Reasons why working age men and women are not working Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 16
Productivity growth has been slow, not just in the US 6 Productivity growth in the last three recoveries Percent, annual average 5 4 3 2 1 0 Germany Japan Korea United Kingdom Source: OECD/Haver Analytics United States 1992-1999 2002-2007 2010-2015 Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 17
What can make economies grow faster? What about tax policy? Probably not although a better tax code is a good idea Tax policy will not influence labor force size Tax reform is meant to boost investment, which would help productivity Yet many countries have low tax rates and slow productivity growth Companies have low borrowing costs, lots of cash, and profits are strong Other factors can boost productivity growth: Government R&D Deregulation Investment in human capital Freer trade and capital flows Some policies can hurt economic growth Protectionism Immigration restrictions Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 18
Why are businesses investing so modestly? Excess capacity, deflation, political uncertainty, shock of new technologies Business investment in OECD countries Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 19 Source: Oxford Economics
The rest of the world Growth in major economies Country/region Outlook Risks Eurozone Growth accelerating Inflation low Monetary policy easy UK Growth decelerating Inflation high Policy uncertainty China Growth stabilizing Inflation rising Property investment strong Japan Improved growth Very low inflation High unemployment reduces political support for structural reform Brexit could lead to reduced inbound investment Too much debt could lead to financial difficulties Lack of significant reforms Very poor demographics Deflationary psychology Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 20
Where are there opportunities for growth? Countries with: Favorable demographics Open markets Strong institutions Productive investment Innovation and entrepreneurship Copyright 2017 Deloitte Development LLC. All rights reserved. Presentation title 21
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