The Global Economy Heightened drisks RISI Asian Forest Products Summit 22 June, 2016 David Katsnelson Director, Macroeconomics
Agenda 1. Global Snapshot A Two-Track World 2. China Slowing, Not Crashing 3. USA Steady Growth 4. Europe Growing Slowly 2
Global Economy Growing Moderately, with Heightened Risks Annual Real GDP Growth Euro Area USA 09% 0.9% 15% 1.5% 16% 1.6% 14% 1.4% 2.4% 2.4% 1.9% 2.4% 14 15 16 17 14 15 16 17 China 7.3% 6.9% 6.4% 6.1% Latin America 14 15 16 17 13% 1.3% 0.2% % 0.6% 17% 1.7% 14 15 16 17 Source: IMF, RISI 3
Developed Economies Leading 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 Russia India China South Africa 10% 5% 2014 2015 2016 2017 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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
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 7
Debt Continues to Increase Debt, Percentage of GDP, Second Quarter 2014 300 250 200 150 100 50 0 282 264 Government 251 65 42 Corporate 64 Household 36 Financial Sector 76 151 135 129 76 6 19 15 125 12 109 9 6 91 21 76 45 65 71 20 46 55 55 66 46 50 40 22 Source: McKinsey Global Institute 8 8
But a Debt Crisis Is Unlikely Foreign Reserves, Million US Dollars; Foreign Debt Ratio, Percent of GDP 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Foreign Reserves Foreign Debt Ratio 100 90 80 70 60 50 40 30 20 10 0 Source: CEIC 9 9
Industrial Side of Economy Slowing Fixed Asset Investment, Year over Year Percent Change; Industrial Production, Year over Year Percent Change 50% Industrial Production Growth Y/Y 40% Fixed-Asset Investment t Growth Y/Y 30% 20% 10% 0% -10% 05 06 07 08 09 10 11 12 13 14 15 16 Source: PBC, CEIC 10
But Services Side of Economy Performing Better Purchasing Managers Index Manufacturing, Services 65 PMI Manufacturing 60 PMI Services 55 50 45 40 35 07 08 09 10 11 12 13 14 15 16 Source: PBC, CEIC 11
Real Estate Makes a Comeback Real Estate Climate Index, 2000=100; Floor Space Under Construction, Buildings Sold, Year over Year Percentage Change 108 106 104 102 100 98 96 94 92 RECI (L) Floor Space Under Construction (R) Buildings Sold (R) 100% 80% 60% 40% 20% 0% -20% -40% Source: CEIC 12
Lending Growing Very Strongly New Bank Loans, Aggregate Financing, Billion Renminbi; Money Supply, Year over Year Percent Change 4,500 4,000 3,000 2,500 2,000 Bank Loans Aggregate Financing 3,500 Money Supply (R) 40% 35% 30% 25% 20% 1,500 1,000 500 0-500 5 6 7 8 9 10 11 12 13 14 15 16 15% 10% 5% 0% Source: NBS, Dragonomics 13
Trade Remains Weak Exports and Imports, Year over Year Percent 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 14
Industrial Imports Near All Time Highs Three Month Average of Imports by Quantity, Index 2005 = 100 450 400 Iron Ore 350 300 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 15 Source: CEIC
China s Economy Continues to Slow Real GDP Growth, Annual Percent 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 16
Increasing Volatility for the Renminbi 9.0 8.5 8.0 RMB/USD 7.5 70 7.0 6.5 6.0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Fed, RISI 17
Asia Developed Annual Real GDP Growth 20 15 10 Japan South Korea Taiwan Hong Kong Singapore 5 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-5 -10 18
Asia Developing Annual Real GDP Growth 12 10 8 Indonesia Phillipines India Thailand Malaysia 6 4 2 0-2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-4 19
The US Economy USA Oasisof 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 20
2015 Was Another Year of Healthy Job Growth Change in US Total Payroll Employment, Millions 5.0 4.0 3.0 2.0 10 1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 2016 Annualized 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 21
Consumption Growth Driving US Economy Real Consumption Expenditure, Annualized Percentage Change; Unemployment Rate 11% 10% 9% 8% 7% 6% 5% 4% 3% 1% 0% 1% 2% 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 22
Strong Dollar, Weak External Environment, Oil Pressuring Manufacturing Index of Industrial Production, January 2000 = 1.00; PMI 1.20 65 1.10 100 1.00 60 55 50 090 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 23
Dollar Strong on Decent Growth and Tighter Monetary Policy Trade Weighted US Dollar Index: Broad, March 1973 = 100 130 125 120 115 110 105 100 95 90 85 Source: Federal Reserve 24
Low Natural Gas Prices Helping US Manufacturers Landed Prices of LNG February 2016, Dollars per MMBtu $5 $5 $4 390 3.90 402 4.02 4.20 4.27 4.35 4.35 4.38 4.52 4.55 4.57 $4 $3 $3 $2 $2 1.56 $1 $1 $0 Source: Federal Energy Regulatory Commission 25
US Economy Growing, But Growth is Unimpressive Real GDP Growth, Annualized Percent Change 9% 8% 7% 6% 5% 4% 3% 2% 0% 1% -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 26
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 27
Eurozone Economy Growing, But Weakly Annual Real GDP Growth 5.0 4.0 3.0 2.0 10 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 28
Consumer Leading the Recovery Real Consumption Expenditures, Year over Year Percent 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 Source: Eurostat 29
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 30
Bank Lending Supporting Growth Bank Loans to Households and Non Financial Corporations, M3, Year over Year Percent Change 20% 15% Non-Financial Corporations Households Money Supply 10% 5% 0% -5% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: ECB 31
Industrial Production Growth Tepid Industrial Production Indices, January 2010=1 125 1.25 1.20 115 1.15 1.10 105 1.05 1.00 0.95 0.90 0.85 0.80 0.75 Euro Area Germany France Italy 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Eurostat 32
Deflation Still a Risk CPI, Core CPI; Year over Year Percent 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% 10% Source: Eurostat 33
Euro Will Weaken Versus Dollar on Continuing Central Banks Actions USD/EUR $1.60 $1.50 $1.40 $1.30 $1.20 $1.1010 $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 34
Conclusions Slower growth for emerging g markets, with the exception of India 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 35
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 36
Thank you for your attention! For more information: Monthly Economic Commentary www.risi.com/mec 37