September - Blogpost global economic outlook

Macro Research
September 2015
The world economy: clear signs of hesitation but doom predictions seem overdone
Recent worries about the Chinese economy have caused a lot of financial market turbulence (graph 1) with some
observers warning for a major economic downturn. Even though the downward risks are substantial, we believe
the global recovery will not end abruptly and instead continue at a moderate pace. This is also consistent with the
picture portrayed by current global confidence indicators (graph 2). The decline in global trade witnessed during
the spring has been reversed and the recent evolution looks set to continue (graph 3). The fall in commodity prices,
while painful for several countries, should support economic activity in many others. Core inflation is still modest
(graph 4) and a swift acceleration is unlikely. Therefore, despite the upcoming first policy rate hike in the US, global
monetary policy will remain very loose in the foreseeable future.
US economy continues its steady recovery
Following the growth stall in the first months of the year (largely due to temporary factors), economic activity
accelerated during the spring (3.7% QoQa) Leading indicators have held up nicely over the summer with solid
consumer and service sector confidence. Moreover, incoming data continue to confirm our ongoing recovery
scenario (graph 5).
The recovery in the labor market continues. In the first half of the year 211K monthly new jobs were created on
average. Survey indicators remain upbeat in this respect (graph 6). In addition, other indicators including initial
jobless claims and job openings all point to further labor market strength.
Headline inflation, currently at 0.2%, looks set to mimic the witnessed volatility in oil prices (graph 7). It’s
actually more useful to look at underlying measures of inflation. At 1.8% and 1.2% for core inflation and core PCE
(personal consumption expenditures) inflation respectively, underlying inflation remains below the Fed’s 2%
target (graph 8). In fact, over the last five years the Fed has failed to deliver on this front. Looking forward,
however, underlying inflation is set to pick up modestly from current levels. Importantly, leading indicators
suggest that wage growth will accelerate further (graph 9). Without seeing acceleration in productivity growth at
the same time (an assumption which remains to be tested) this will translate into both higher unit labor costs
and core inflation (graph 10).
Against the back of a continuing recovery and upward inflation pressures the Fed is still on course to start hiking
interest rates before the end of the year. Fed officials are not in a hurry though. Recent market turmoil and the
fact that inflation remains below the Fed’s target imply that the Fed will adopt a cautious approach. As things
currently stand, an increasingly tighter monetary policy stance can be expected in the years thereafter but the
Fed is likely to proceed gradually and only if the underlying economic momentum remains strong enough.
Eurozone economic rebound remains tepid
Earlier ECB stimulus measures resulting in lower interest rates and EUR depreciation, reduced budgetary
tightening efforts and lower oil prices are driving a cyclical recovery. This is encouraging following years of
stagnation. Business confidence indicators hold up nicely for the Eurozone (graph 11) as a whole but with
significant regional divergence. Other leading indicators are softening a touch. All in all, despite the
improvement witnessed in recent months, the recovery is still nothing to cheer about (graph 12). Moreover, the
positive effects stemming from temporary tailwinds may soon start to fade.
The Greek situation remains problematic in several ways. A third follow-up program for Greece has started and
will make sure that the country’s funding issues are resolved at least temporarily. That said, the agreement
between Greece and its creditors still looks very unbalanced. Against the back of a deepening economic
depression (graph 13), it’s very unlikely that Greece will be able to meet the conditions. Unless Greece’s
creditors loosen their stance and allow for more budgetary flexibility (an assumption that seems not very
plausible at the moment), a Geek exit from the monetary union is close to inevitable.
Macro Research Contact
Hans Bevers | Senior Economist |+ 32 2 229 62 33 | [email protected]
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Headline inflation in the Eurozone will pick up in the second half of the year as the base effects linked to the
decline in energy prices slowly fade. Underlying inflation, although set to pick up from the current 1%, is likely to
stay low by historical standards. The ECB has been completely missing its 2% inflation target over the last couple
of years and it remains unlikely that the ECB will achieve it anytime soon (graph 14).
In the Eurozone, the ECB’s QE program has already had a substantial impact on equity markets, interest rates
and the euro. Criticism about the negative consequences of this policy has been increasing. In combination with
improving economic data, this has put pressure on the ECB to reduce the program prematurely. However, given
the still fragile recovery and the presence of massive challenges in the Eurozone, the chances that this will
happen remain small. If anything, the main risk is that QE efforts will have to be increased (graph 15).
Japanese economy lacks momentum and EM growth still disappointing
In Japan, most leading indicators point towards a small improvement in economic sentiment. That is reassuring
following the decrease in confidence witnessed since begin 2014. As a result, industrial production growth is
likely to jump back into positive territory (graph 16). That said, economic momentum is still modest at best. The
3.6% annualized growth rate seen in the first three months of the year was followed by negative growth in the
second quarter (-1.6% QoQa). Growth figures in the next couple of quarters are likely to make clear that growth
is still fairly weak.
In Japan, inflation has come down quite significantly as the base effect from the April 2014 tax hike has
disappeared from the numbers. On the other hand, household’s expectations about future inflation remain
clearly positive and survey indicators suggest wage growth will accelerate somewhat in the next couple of
quarters. Despite all this, we remain far from convinced that the Bank of Japan will structurally achieve its 2%
inflation target (graph 17). Therefore, it’s a clear possibility that monetary policymakers will scale up the pace of
the current asset purchase program.
Disappointing Chinese economic data, the recent stock market crash and especially the (still minor) RMB
devaluation (graph 18) have all caught the attention of international investors. To be sure, there are reasons to
worry about economic activity in China. On the other hand, this is not new and policymakers have acknowledged
this since they started to ease monetary policy late last year. Confidence in the manufacturing sector slides
down further (graph 19) but consumer and service sector confidence hold up nicely (graph 20). Moreover, the
housing market is showing clear signs of stabilization (graph 21). Both earlier and additional policy measures
should soon ease the current hard landing fears. The recent RMB depreciation is probably not the start of a
broad based attempt to boost exports, in turn triggering monetary retaliation efforts by other central banks. As
market forces will be allowed to play a more important role in the future, it cannot be excluded however that
the RMB will see further minor and gradual depreciation in the foreseeable future.
Economic activity in EM is still very sluggish (graph 22-26). Several observers argue that the ongoing market
turbulence will trigger a 1997-style crisis. However, this is not our scenario because there are several important
differences. But a full-blown emerging market crisis seems unlikely for several reasons: (a) more flexible
exchange rates (overcoming the “fear of floating”), (b) less pro-cyclical fiscal policies allowing larger budget
deficits in times of crisis, (c) less debt in foreign currency (the original sin) avoiding a currency and maturity
mismatch between domestic revenues and foreign liabilities, and (d) significantly more international reserves
that can be run down to mitigate currency depreciation. The latter is important because for heavily indebted
countries with liabilities in foreign currency, FX depreciation can be contractionary instead of expansionary.
Further EM currency depreciation would of course increase inflation and FX debt risks. Several EM deal with
above target inflation (Brazil, Russia, Turkey) while inflation stays below target in many others including
Thailand, Poland, Hungary, Korea, Philippines and China (graph 27-28). For reasons explained earlier, we think
most of the EM (except Turkey and S. Africa which remain vulnerable in this respect) will embrace currency
weakness and will not (need to) tighten monetary policy in order to stem capital outflows. At the same time, this
implies that in general there is not much scope to loosen monetary policy either (graph 29-30).
In general, the currency depreciation seen in most EM should have expansionary effects over time. China’s
slowdown, the backslide on structural reforms seen in many countries and low commodity prices, on the other
hand, are likely to make sure that economic activity will remain subdued for the time being.
Macro Research Contact
Hans Bevers |Senior Economist |+ 32 2 229 62 33 | [email protected]
Graphs
1.
80
Volatility spikes again
70
60
50
2.
Signs of hesitation in economic confidence
1.6
6
1.4
5
2.0
1.2
4
1.0
1
3
0.8
2
0.6
1
0.4
0
0.2
-1
0
-2
0.0
40
30
20
10
Vix (lhs)
Citi macro-risk index (Long-term, rhs)
0
Aug-95
25
3.
Aug-00
Aug-05
Aug-10
-0.2
Aug-15
Global trade growth back in positive territory
20
-3.0
Global GDP (Real, YoY in %, lhs)
Global Composite Confidence Indicator (rhs)
3.0
8
2.5
4.
Q3 2000
Q3 2005
Q3 2010
-4.0
Q3 2015
Underlying inflation pressures remain modest
G7 countries
7
10
2.0
5
6
1.5
0
5
-5
1.0
-10
4
-15
3
Trade volume (yoy, lhs)
-20
-25
Aug-95
6
-2.0
-3
Q3 1995
9
15
-1.0
5.
Trade volume expectations next 6m (Ifo WES, rhs)
Aug-00
Aug-05
Aug-10
2
Aug-15
Sustained growth prospects in the US
65
4
60
2
55
0
50
-2
45
-4
40
-6
Q3 1999
GDP (yoy, lhs)
Business confidence (ISM average, rhs)
Q3 2003
Q3 2007
Q3 2011
0.5
Core prices (YoY)
Core prices (6Mo6Ma)
0.0
Q3 1995
600
Q3 2000
6.
Q3 2005
Q3 2010
Q3 2015
US labor market recovery continues
65
400
60
200
55
0
50
-200
45
-400
40
-600
35
-800
35 -1000
Q3 2015
Aug-00
Macro Research Contact
Hans Bevers |Senior Economist |+ 32 2 229 62 33 | [email protected]
Change in non-farm payrolls (3mma, lhs)
Employment prospects (ISM average, rhs)
Aug-03
Aug-06
Aug-09
Aug-12
30
25
Aug-15
7
7.
inflation heavily impacted by oil price
volatility
6
80
5
60
Underlying inflation still below target
2.5
4
40
3
2
20
2
1.5
0
1
-20
0
1
-40
-1
0.5
-2
-60
Headline inflation (lhs)
Oil price (YoY, rhs)
-3
Aug-00
4.5
8.
3
100
Aug-03
9.
Aug-06
-80
Aug-09
Aug-12
0
Aug-00
Aug-15
Wage growth set to accelerate
Core PCE
Core CPI
Aug-03
Aug-06
Aug-09
Aug-12
Aug-15
10. Unit labor costs and core inflation
25 14
12
4.0
20
10
3.5
8
15
3.0
6
2.5
10
4
2
2.0
5
1.5
1.0
Q3 1991
6
ECI wages private sector (annual change in %)
Plans to raise compensation (NFIB, 3Q earlier)
Q3 1997
Q3 2003
Q3 2009
0
-2
0
Q3 2015
11. Business confidence holds up
-4
Q3 1965
Unit Labor Cost (YoY, 2qma)
Core inflation
Q3 1975
Q3 1985
Q3 1995
Q3 2005
Q3 2015
12. Eurozone recovery still nothing to cheer about
120
120
Real GDP, Q2 2008 = 100
115
4
110
110
2
100
0
105
100
90
-2
95
90
80
-4
-6
Q3 2000
85
GDP (annual change in %)
Economic sentiment (EC, rhs)
Q3 2003
Q3 2006
Q3 2009
Q3 2012
70
Q3 2015
Eurozone
US
80
Q3 2000 Q3 2003 Q3 2006 Q3 2009 Q3 2012 Q3 2015
Macro Research Contact
Hans Bevers |Senior Economist |+ 32 2 229 62 33 | [email protected]
10
13. The Greek depression drags on
3
120
8
115
6
110
4
5
2.5
3
105
2
14. ECB completely missing its inflation target
2
1
100
0
95
1.5
-1
-2
90
-4
80
-8
-10
-12
Q3 2000
550
500
1
85
-6
GDP (real, YoY in %, lhs)
Economic Sentiment (rhs)
Q3 2003
Q3 2006
Q3 2009
Q3 2012
BoJ
Fed
BoE
ECB
400
350
0
Aug-00
70
Q3 2015
15. ECB balance sheet expansion lagging
behind
450
0.5
75
-3
-5
Core inflation (lhs)
Output gap (rhs)
Aug-03
Aug-06
-7
Aug-09
Aug-12
Aug-15
40
16. Economic momentum in Japan remains weak80
30
60
20
40
10
20
0
0
300
250
200
-10
-20
150
-20
-40
-30
-60
Industrial production (yoy, lhs)
Business confidence (Tankan, 12-month change, rhs)
-80
Aug-03
Aug-06
Aug-09
Aug-12
Aug-15
100
50
January 2008 = 100
0
Jan-08
4
Jan-10
Jan-12
Jan-14
-40
Aug-00
Jan-16
17. The BoJ’s 2% inflation target far out of sight
6
7
3
4
6.8
2
2
6.6
1
0
6.4
0
-2
6.2
-1
-4
6
-2
-6
5.8
-8
5.6
-3
Headline inflation
Output gap (rhs)
-4
-10
Q3 1985 Q3 1990 Q3 1995 Q3 2000 Q3 2005 Q3 2010 Q3 2015
5.4
Jan-11
Macro Research Contact
Hans Bevers |Senior Economist |+ 32 2 229 62 33 | [email protected]
18. The recent RMB devaluation
Apr 2012: trading widened to + 1%
Mar 2014: trading widened to + 2%
USD/CNY
Trading band
Reference rate set by PBoC
Jan-12
Jan-13
Jan-14
Jan-15
65
19. Manufacturing confidence slides down
further
20. Consumer confidence holds up nicely
120
115
60
110
55
105
50
100
45
95
Manufacturing
40
Aug-05
15
Services
Aug-07
Aug-09
Aug-11
Aug-13
Aug-15
21. Signs of stabilization in Chinese housing market
Actual
Expectations
90
Aug-05
25
Aug-07
Aug-09
Aug-11
Aug-13
Aug-15
22. EM economic activity remains weak
Industrial production (real, YoY in %)
20
10
15
10
5
5
0
0
-5
-5
-10
-10
House prices (yoy, lhs)
-15
Aug-12
2.0
-15
House prices (moma, rhs)
Aug-13
Aug-14
Aug-15
23. No signs of a near-term recovery in EM
Economic confidence (Z-score, LT-average = 0)
-20
Aug-03
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
Aug-05
Aug-07
Aug-09
Aug-11
Aug-13
Aug-15
24. BRICS lag behind
Economic confidence (Z-score, LT-average = 0)
-2.0
-2.0
-2.5
Asia
CEE
Latam
Emerging Asia
CEE
Latam
-3.0
Q3 2003 Q3 2005 Q3 2007 Q3 2009 Q3 2011 Q3 2013 Q3 2015
-2.5
-3.0
Q3 2003
Macro Research Contact
Hans Bevers |Senior Economist |+ 32 2 229 62 33 | [email protected]
BRICS
Non-BRICS
Q3 2006
Q3 2009
Q3 2012
Q3 2015
1.0
25. EM commodity exporters suffer
1.0
Economic confidence (Z-score, LT-average = 0)
0.5
26. Great divergence in EM economic confidence
Economic confidence (Z-score, LT-average = 0)
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
Q3 2015
-1.5
Q2 2015
Net Commodity exporters
Net Commodity importers
-2.5
Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015
8
27. Regional inflation rates
6
28. National inflation rates
18
Latam
Asia
CEE
7
-2.0
BRA
MYS
RUS
CHN
TUR
CHL
ZAF
PER
MEX
IDN
IND
KOR
THA
POL
HUN
ROM
CZR
PHL
-2.0
16
Headline inflation
14
Core inflation
12
Inflation target (range)
10
5
8
4
6
3
4
2
2
0
1
29. Regional monetary policy rates
10
6
5
8
4
6
3
4
Latam
Asia
CEE
Macro Research Contact
Hans Bevers |Senior Economist |+ 32 2 229 62 33 | [email protected]
THA
CZR
H…
THA
KOR
CHL
PHL
MEX
ZAF
Aug-15
CHN
Aug-13
IND
Aug-11
TUR
Aug-09
IDN
0
RUS
Aug-07
2
BRA
0
Aug-05
POL
Current
-6m
-12m
12
7
1
HUN
14
8
2
KOR
PHL
CHN
MEX
IND
30. National monetary policy rates
16
9
CHL
Aug-15
ZAF
Aug-13
IDN
Aug-11
TUR
Aug-09
BRA
Aug-07
POL
10
-4
RUS
0
Aug-05
-2
Economic forecasts
2014
GDP
2015
2016
2014
Inflation
2015
2016
US
2.4
2.2
2.3
1.6
0.1
1.8
2.3
2.7
0.3
2.1
Eurozone
0.9
1.4
1.3
0.4
0.1
1.2
1.4
1.7
0.2
1.3
0.1
1.6
UK
3.0
2.2
2.2
2.6
2.4
Japan
-0.1
0.9
1.0
0.9
1.4
China
7.4
6.5
6.0
6.9
6.7
Brazil
0.1
-1.6
0.5
-1.8
0.4
Russia
0.6
-3.4
0.5
-3.6
0.5
India
7.1
7.4
7.7
7.4
7.6
1.5
0.2
1.5
2.8
0.8
0.9
0.8
1.1
2.0
1.4
1.7
1.5
2.0
6.3
8.4
5.7
8.8
6.1
7.8
15.2
7.8
15.0
7.0
5.6
5.7
6.2
5.3
6.7
Petercam forecasts, consensus forecasts between brackets
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Macro Research Contact
Hans Bevers |Senior Economist |+ 32 2 229 62 33 | [email protected]