US, China and emerging markets: What s next for the global economy? Commercial Cards & Payments Leo Abruzzese October 2015 New York
Overview
Key points for 2015-16 Global economy struggling to gain traction and grow sustainably Developed countries US economic growth is solid, but uneven Jobs market remains healthy Consumer, investment spending picking up Europe, Japan: still fragile but recovering China: Continued decent growth, but 30% chance of hard landing Economy has been softening for some time; will slow even more Growth diversifying; more services, less manufacturing Emerging markets very soft; little good news Commodity prices weak from surpluses, over-supply Financial stress, but no emerging market catastrophe c.1997-98
Recent market developments
Global stockmarkets have had a rough few months 500 The capitalisation of global equity markets has fallen by around 13% since the start of June. 460 420 380 Global stockmarkets 340 300 Jan 03 2011 May 23 2011 Oct 10 2011 Feb 27 2012 Jul 16 2012 Dec 03 2012 Apr 22 2013 Sep 09 2013 Jan 27 2014 Jun 16 2014 Nov 03 2014 Mar 23 2015 Aug 10 2015 FTSE Global All Cap US$ Stock Price Index. Source: FTSE
..led by a 40% decline in China s Shanghai market 4300 3900 3500 As bad as this was, it should be kept in context: the Shanghai market rose 150% between June 2014 and June 2015. China s real economy didn t soar during this massive run-up it actually slowed so should we expect the economy to collapse now that equities have slumped? No, because the linkages are not strong. 3100 2700 2300 1900 1500 Aug 10 2015 Mar 23 2015 Nov 03 2014 Jun 16 2014 Jan 27 2014 Sep 09 2013 Apr 22 2013 Dec 03 2012 Jul 16 2012 Feb 27 2012 Oct 10 2011 May 23 2011 Jan 03 2011 Shanghai SSE Composite Index: Source: Haver Analytics
Global growth no better in 2015 than in 2014 US economy will grow by 2.5%, up from 2.4% last year Volatility, but strong on balance Europe hardly booming, but growth of around 1.5% this year and next China slowing but will still manage around 7% growth (officially) Brazil, Russia in recession Bad news for commodity producers 2016 only slightly better than 2015 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Global GDP 2010 2012 2014 2016 Real GDP, % change. Source: Economist Intelligence Unit
United States
US economy has been solid but erratic 5 4 3 2 Real GDP, % change US economy amazingly volatile In four of last seven quarters, growth has been around 4% In two other quarters, GDP was flat or contracted; soft in 3Q Why? Weather, one-off factors, business uncertainty; stats issues 1 0-1 GDP growth of around 2.6% in 2016 Foundations look solid, though Jobs market strong, housing improving, energy prices low, consumer spending climbing, investment reviving, debt low -2 2013 - Q4 2014 - Q1 2014 - Q2 2014 - Q3 2014 - Q4 2015 - Q1 2015 - Q2 Fed rate rises will be very gradual Source: Economist Intelligence Unit, Bureau of Economic Analysis.
US: Jobs machine still healthy; unemployment falling 450 Jobs change Unemployment rate 8.5 400 8.0 350 7.5 300 7.0 250 6.5 200 6.0 150 100 60 straight months of job growth 5.5 5.0 50 4.5 0 4.0 2012 - Jun 2012 - Sep 2012 - Dec 2013 - Mar 2013 - Jun 2013 - Sep 2013 - Dec 2014 - Mar 2014 - Jun 2014 - Sep 2014 - Dec 2015 - Mar 2015 - Jun 2015 - Sep Non-farm payrolls, thousands, monthly net job change, lh scale; Unemployment rate, %, rh scale. Source: Bureau of Labour Statistics
Car sales have surged as fuel prices have stayed low Gasoline, average regular, US$/gallon, lh scale. Car sales, monthly at annual rate, rh scale. Sources: AAA and Bloomberg
Borrowing from banks has returned to a more normal level 15 10 as jobs have increased and loan officers have eased lending standards. But the pattern is nothing like the sky high borrowing before the crisis!! 5 0-5 -10-15 2015 - May 2014 - Sep 2014 - Jan 2013 - May 2012 - Sep 2012 - Jan 2011 - May 2010 - Sep 2010 - Jan 2009 - May 2008 - Sep 2008 - Jan 2007 - May 2006 - Sep 2006 - Jan 2005 - May 2004 - Sep 2004 - Jan Commercial bank credit to the private sector, % change year on year. Source: Federal Reserve
and consumers are paying their credit card bills on time Payment rates on credit cards are well below pre-recession levels % delinquent more than 90 days, credit cards. Source: Bloomberg.
Market interest rates have remained remarkably low Exceptionally low inflation and a reluctant Fed have kept bond yields on the floor. The 10-year Treasury will rise in the next year, but won t reach 3% before end of 2016. %, US 10-year Treasury bond. Source: Bloomberg
Given all that, when do we expect the Fed to raise rates? Fed will not raise interest rates in December Fed is risk averse; inclined to be cautious Can t ignore China & emerging markets; impact on US growth is not clear There is no compelling reason, in the Fed s view, to raise rates right now Inflation is contained, wage growth is muted, dollar is strong Potentially epic mistake if they raise rates and it sends a shock through the global economy; won t take that chance That said, the Fed wants to begin the process of normalisation By some measures, US GDP is growing by 3-4% Fed will act in the first quarter of 2016
Euro zone
Euro zone: Improvements starting to appear EZ economy grew surprisingly fast in 1Q of 2015 But slower growth in 2Q Debt levels remain high But debt starting to be paid down Greek default risk gone for now But risks remain longer term Bank lending is rising again 14 12 10 8 6 4 2 0-2 -4 Lending by euro zone banks has finally begun to rise after years of falling almost 2% year on year Bank lending Spain, others on periphery, doing much better -6 2008 - Jan 2008 - Dec 2009 - Nov 2010 - Oct 2011 - Sep 2012 - Aug 2013 - Jul 2014 - Jun 2015 - May Monetary financial institution lending, euro zone, % change YoY. Source: ECB, Haver Analytics.
Commodities and currencies
Commodities prices have plunged, straining many producers Source: Economist Intelligence Unit commodity price indices.
2018 2017 2016 2015 2014 2013 2012 2011 2010 Oil price will stay low for now, then trend higher Plenty of supply in the market But less from US shale producers Price will still be volatile in 2015 Daily surplus in the oil market at 1.6m b/d vs long-term avg of 1m b/d Saudi: robust production continues Iran returning to the market Less oil demand from China But not as big as supply glut 120 110 100 90 80 70 60 50 40 Crude oil Always risk, though, that political turmoil could push price back up 30 US$ per barrel, dated Brent. Source: Economist Intelligence Unit
We expect the dollar to peak in 2016 1.40 1.30 US dollar will continue to rise against the euro and many emerging market currencies this year and next year, then retreat slowly starting in 2017 1.20 1.10 1.00 0.90 0.80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US$: 1 exchange rate, historical and forecast. Source: Economist Intelligence Unit
China and emerging markets
Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Five reasons to worry about China Industrial output growth has slowed dramatically Growth rate has halved in recent years Debt levels are alarmingly high Bad loans rising Exports are stumbling Government depreciated the currency Competitive devaluation? 20 18 16 14 12 10 8 6 4 Industrial production Stockmarket plunged and response by authorities to this and other stresses has been clumsy 2 0 Industrial production, % change year on year. Source: National statistical agency, Haver
Five reasons not to panic about China Manufacturing has slowed but the service sectors are doing well Services are now a larger share of economy Stockmarket not crucial to economic growth or consumer confidence Stockmarket small relative to size of economy Less than 1/5 household wealth is in shares Property market is rebounding House prices are rising Income and wages rising strongly Incomes up 8-9% year on year Government has tools to respond Room to ease monetary policy
Years of rapid credit growth in many emerging markets and countries are now paying the price as bubbles burst, defaults rise and currencies fall. Market value of credit to the non-financial sector from all sectors, % of GDP. Source: Bank for International Settlements
Emerging market currencies have been plunging Companies will be hurt as they repatriate foreign earnings from emerging market economies. Local currencies per US$1. Indexed to 2008
Is another emerging markets crisis likely? EMs far better able to handle reduced capital inflows Most have stronger currentaccount positions, larger FX reserves, less debt 10 8 6 4 Brazil and Russia in trouble Fewer EM currency pegs; global interest rates are still low 2 0 Many EM economies have developed own local currency bond markets -2-4 -6 Brazil Russia But many companies took on debt, and may struggle to repay -8-10 2007 Real GDP (% change, year on year) 2015 2014 2013 2012 2011 2010 2009 2008 2016
Where s the growth? 8 2014 2015 2016 4 0-4 -8 Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of September 2015. Source: Economist Intelligence Unit, CountryData.