The Global Economy Heightened Risks RISI Latin American Conference 16 August, 2016 David Katsnelson Director, Macroeconomics
Agenda 1. Global Snapshot A Two-Track World 2. Latin America Some Improvement 3. China Slowing, Not Crashing 4. The USA and Europe Growing Slowly 2
Global Economy Growing Moderately, with Heightened Risks Annual Real GDP Growth Euro Area USA 0.9% 1.6% 1.6% 1.3% 2.4% 2.6% 1.7% 2.3% 14 15 16 17 Latin America 14 15 16 17 China 7.3% 6.9% 6.4% 6.1% 14 15 16 17 1.3% 0.2% 0.6% 1.7% 14 15 16 17 Source: IMF, RISI 3
Developed Economies Supporting Global Growth Global Real GDP* Growth 10 8 6 4 2 0 2 4 6 *Measured at purchasing power parity exchange rates Source: IMF, RISI Advanced Emerging World 4
While Emerging Markets Have Slowed Annual Real GDP Growth 20% 15% Brazil India South Africa Russia China 10% 5% 0% -5% -10% Source: IMF, RISI 5
Oil Prices Staying Low on Oversupply West Texas Intermediate, Brent North Sea Crude Oil, Price per Barrel 130 120 110 100 90 80 70 60 50 40 30 20 10 0 WTI Brent 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Copyright 2014 RISI, Inc. All rights reserved. Source: Energy Information Administration, RISI 6
Latin America Some Improvement, But Environment Remains Difficult Positives Commodity prices have stabilized Inflation manageable in most countries Negatives Slowing China Consumer over indebtedness Low investment Political risk Basket case economies
Difficult External Environment and Domestic Issues Weigh on Growth Latin America Annual Real GDP Growth* 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% *Measured at purchasing power parity exchange rates 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: IMF, RISI 8
Brazil Recession Continues Annual Real GDP Growth 10 8 6 4 Brazil Chile Argentina Mexico 2 0-2 2011 2012 2013 2014 2015 2016 2017-4 -6 Copyright 2014 RISI, Inc. All rights reserved. Copyright 2015 RISI, Inc. All rights reserved. Source: IMF, RISI 9
Inflation Spikes in Argentina Consumer Price Indexes, Annual Inflation Rate 50% 40% 30% Brazil Argentina Chile Mexico 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10% 10
Brazil s Consumption Growth Negative for Five Straight Quarters Export to Import Ratio and Year over Year Percentage Change in Consumption 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 Exports/Imports (Left) Private Consumption (Right) 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Source: IBGE, BCB 11
Investment Low in Latin America Investment as a Percentage of GDP 50 45 40 35 30 25 20 15 10 5 0 Brazil Emerging Economies Emerging Asia China Latin America Source: IMF 12
Brazilian Real to Weaken Again 4.8 4.4 4.0 BRL/USD BRL/EUR 3.6 3.2 2.8 2.4 2.0 1.6 1.2 0.8 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 13
Chile s Economy Has Stabilized, But Near Term Growth May Be Slow Year over Year Change in GDP and Personal Consumption 16% 14% 12% GDP Consumption 10% 8% 6% 4% 2% 0% -2% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-4% -6% Source: BCC 14
Chilean Peso Closely Linked to Copper Price 750 700 650 600 550 500 450 400 CLP/USD Copper Inverse Scale 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 350 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 10,000 15
Mexican Economy Should Benefit from Improving US Consumption Year over Year Percentage Change in Exports and Industrial Production, Three Month Moving Average 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Exports (L) Industrial Output (R) 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Source: Inegi 16
Mexican Peso Weakness Does Not Fully Reflect Positive Fundamentals 18.0 MXN/USD 16.0 14.0 12.0 10.0 8.0 6.0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 17
China in Transition Economy undergoing major restructuring Investment led growth to consumer based growth Days of 9 10% growth in the past Some financial liberalization Fiscal and monetary stimulus being implemented Increase in infrastructure spending New mechanisms for financing But how effective will it be? Debt has become a serious issue, and it is still rising Bank non performing loans near 20% Increased volatility for renminbi, but no major devaluation 18
Industrial Side of Economy Slowing Fixed Asset Investment, Year over Year Percentage Change; Industrial Production, Year over Year Percentage Change 50% 40% Industrial Production Growth Y/Y Fixed-Asset Investment Growth Y/Y 30% 20% 10% 0% -10% 05 06 07 08 09 10 11 12 13 14 15 16 Source: PBC, CEIC 19
But Services Side of Economy Performing Better Purchasing Managers Index Manufacturing, Services 65 60 PMI Manufacturing PMI Services 55 50 45 40 35 07 08 09 10 11 12 13 14 15 16 Source: PBC, CEIC 20
Trade Remains Weak Exports and Imports, Year over Year Percentage Change 100% 80% Exports Imports 60% 40% 20% 0% -20% 05 06 07 08 09 10 11 12 13 14 15 16-40% -60% Source: China National Bureau of Statistics, CEIC 21
Industrial Imports Near All Time Highs Three Month Average of Imports by Quantity, Index 2005 = 100 450 400 350 300 Iron Ore Copper Crude Oil 250 200 150 100 50 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 22 Source: CEIC
China s Economy Continues to Slow Real GDP Growth, Annual Percentage Change 14% 12% 10% 8% 6% 4% 2% 0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: NBS, RISI 23
Increasing Volatility for the Renminbi 9.0 8.5 8.0 RMB/USD 7.5 7.0 6.5 6.0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Fed, RISI 24
The USA and Europe USA Oasis of Prosperity? Partially decoupling from the rest of the world Domestic based growth is healthy Employment and wage growth Cheap energy Housing Non domestic side of economy struggling Manufacturing Exports 25
Another Year of Healthy Job Growth in 2015 Change in US Total Payroll Employment, Millions 5.0 4.0 2016 Annualized 3.0 2.0 1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Source: Bureau of Labor Statistics 26
Consumption Growth Driving US Economy Real Consumption Expenditure, Annualized Percentage Change; Unemployment Rate 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1% 2% 3% 4% 5% 6% Consumption Unemployment Rate 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Bureau of Economic Analysis, RISI 27
Strong Dollar, Weak External Environment, Oil Pressuring Manufacturing Index of Industrial Production, January 2000 = 1.00; PMI 1.20 65 1.10 1.00 60 55 50 0.90 0.80 0.70 Industrial Production PMI 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 45 40 35 30 Source: Federal Reserve, Institute for Supply Management 28
Dollar Strong on Decent Growth and Tighter Monetary Policy Trade Weighted US Dollar Index: Broad, January 1997 = 100 130 125 120 115 110 105 100 95 90 85 Source: Federal Reserve 29
Low Natural Gas Prices Helping US Manufacturers Landed Prices of LNG May 2016, Dollars per MMBtu $5 $5 $4 $4 $3 $3 $2 $2 $1 $1 $0 1.91 4.27 4.30 4.40 4.46 4.50 4.55 4.55 4.71 4.73 4.74 Source: Federal Energy Regulatory Commission 30
US Economy Growing, But Growth Is Unimpressive Real GDP Growth, Annualized Percent Change 9% 8% 7% 6% 5% 4% 3% 2% -1% 0% 1% -2% -3% -4% -5% -6% -7% -8% -9% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Bureau of Economic Analysis, RISI 31
Europe Slow and Steady The Positives Growth positive and steady Oil prices and the euro Bank lending improving The Negatives Risk of deflation Unemployment remains high Reforms have stalled The Risks Russia Quantitative Easing Migration crisis Brexit Fallout 32
Eurozone Economy Growing, But Weakly Annual Real GDP Growth 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0-6.0-7.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Germany France Italy UK Eurozone Source: IMF, RISI 33
Consumer Leading the Recovery Real Consumption Expenditures, Year over Year Percentage Change 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% Germany UK France Italy Spain 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Eurostat 34
Unemployment Improving, But Still High Outside of Germany Harmonized Unemployment Rate 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% Eurozone Germany Greece Spain France Italy Portugal 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Eurostat 35
Industrial Production Growth Tepid Industrial Production Indices, 2010=1 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 Euro Area Germany 0.80 France Italy 0.75 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Eurostat 36
Deflation Still a Risk CPI, Core CPI; Year over Year Percentage Change 5.0% 4.0% 3.0% CPI Core CPI ECB Target 2.0% 1.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-1.0% Source: Eurostat 37
Euro Will Weaken Versus Dollar on Continuing Central Banks Actions USD/EUR $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Fed, RISI 38
Conclusions Another difficult year for Latin America China s growth will be an important driver for other emerging economies Slowdown will continue, but no hard landing Increasing risks for emerging markets from the strong US dollar Revaluation of currencies 39
Conclusions US economy growing moderately Improving employment should support increased spending Housing market still presents upside risk Manufacturing side of the economy struggling Europe growing, but slowly Potential growth rate is lower QE helping somewhat Threat of deflation present, but low Risks around the world have increased 40
Thank you for your attention! For more information: Monthly Economic Commentary www.risi.com/mec 41