GLOBAL
The Global Macro Outlook Divergences become chasms Whilst weak resource prices are battering many countries, consumers benefit. We have beneath consensus 2016 real GDP growth forecasts for Canada, South Africa and Australia, but this month modestly revise up our 2016-17 growth forecasts for China (to 6.7% and 6.5%, from 6.5% and 6.0%, respectively). Please see pages 9-11 for the latest insights from Colin Hamilton and the Macquarie global commodities team. There has been another round of significant forecast cuts this month.
Key forecasts, changes this month 1) Tables for real GDP growth, CPI, interest rates, currencies and commodity prices are on pages 7-9. Online access to our global macro forecasts is available on request 2) The ongoing weakness in commodities/energy prices has led to some further cuts in 2016-17 forecast real GDP growth for resource-rich economies, South Africa in particular 3) The same factor supports consumers. This month, our China growth forecasts have been revised up modestly 4) Emphasizing economic strength, we expect the US Fed to begin a succession of Fed Funds increases
Supported by large falls in energy prices, service sector-PMIs remain buoyant in advanced economies (85% of employment in two-thirds of the world). Broad money and credit growth are now growing moderately in advanced economies.
US: PMI Indices; an unusual divergence 65
Index: above 50=expansion
Manufacturing
Non manufacturing
60 55 50 45 40 35 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Analyst(s) Macquarie Capital Securities (Japan) Limited Peter Eadon-Clarke +81 3 3512 7850
[email protected] Macquarie Capital Markets Canada Ltd. David Doyle, CFA +1 416 848 3663
[email protected] Macquarie Securities (Australia) Limited James McIntyre, CFA +61 2 8232 8930
[email protected] Macquarie Capital Securities Limited Larry Hu PhD +852 3922 3778
[email protected] Jerry Peng +852 3922 3548
[email protected] Macquarie Capital Securities (Malaysia) Sdn. Bhd. PK Basu +603 2059 8993
[email protected] Macquarie Capital Securities India (Pvt) Ltd Tanvee Gupta Jain +91 22 6720 4355
[email protected] Macquarie Equities South Africa (Pty) Ltd) Elna Moolman +27 11 583 2570
[email protected] Macquarie Capital (Europe) Limited Matthew Turner +44 20 3037 4340
[email protected] Colin Hamilton +44 20 3037 4061
[email protected]
14 December 2015
Source: Bloomberg, Macquarie Research, December 2015
Our 2015, 2016 and 2017 global real GDP growth forecasts are 2.6%, 2.8% and 2.8% respectively, implying a continuation of our “the long grinding cycle” forecast of 2.5% to 3.0% pa global growth. We expect neither global lift-off, nor global slump. There are two core forecasts underpinning our outlook: 1) We believe the US is on track for a gradual trajectory of Fed Funds rate increases. Our base case calls for this to begin on 16 December 2015, with the Fed emphasizing economic strength. We are forecasting the Fed Funds rate increasing 25bp each quarter until autumn 2017. Nonetheless, US real GDP growth is forecast to remain above 2% in both 2016 and 2017. 2) We believe the Chinese authorities have the desire & ability to maintain control of the RMB, which we forecast will depreciate only another 2-3% versus the US$ through end-2016 RMB6.60/US$. We expect the RMB to appreciate modestly in 2017. The US$ in 2016: After a period of broad US$ strength in 2015, we believe 2016 will see individual currencies at different times pass their lows versus the US$. Whilst relative monetary policy stances will remain important, resulting capital flows now have to exceed mounting current account surpluses in Japan and the Euro-zone (partially reflecting the falls in oil and other resource prices). On our forecasts the Yen bottoms first (1Q 2016), and then the Euro (2Q 2016).
Please refer to page 83 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Macquarie Research
The Global Macro Outlook
The Global Macro Outlook Our 2015, 2016 and 2017 global real GDP growth forecasts are 2.6%, 2.8% and 2.8% respectively, implying a continuation of our “the long grinding cycle” forecast of 2.5% to 3.0% p.a. global growth. Investors should remain cautious, but we believe that it is not a time for fear. There are multiple secular headwinds to trend growth: High leverage levels, demographic factors, low productivity growth and suboptimal global policy making...
...and currently there are cyclical downside risks
We are monitoring closely: Brazil, Turkey, Russia, Venezuela, Nigeria, and the Middle East
Trend growth rates: we believe the pace of the current expansion should continue to prove to be structurally lower than in previous cycles as high leverage levels, demographic factors, low productivity growth and sub-optimal global policy making are likely to remain as headwinds in the years ahead. 1)
“The long grinding cycle continues” is discussed from page 25
2)
“Sub-optimal global policy making” is discussed from page 37
Cyclical downside risks to “the long grinding cycle” include: A) Private investment (capital investment and residential investment), which as a ratio of global GDP is currently at elevated levels; please see Fig 76 and Fig 77. The adjustment here is also expected to diminish FDI. Global trade experienced an air pocket in 1H 2016, as the rebalancing in China away from an investment-led model began in earnest. 3)
“Global private investment indicators” are presented from page 46
4)
“FDI inflow indicators” are introduced from page 52
5)
“The global air pocket” is discussed from page 56
B) The ongoing weakness in commodity exporters and emerging economies. We are monitoring closely: Brazil, Turkey, Russia, Venezuela, Nigeria, and the Middle East. Negative spillovers could come via: 1) trade; 2) credit risk spreads; and 3) machinery orders and a sharp decline in global capital expenditures. 6)
Fixed & semi-fixed exchange rates, are discussed from page 63
7)
Global credit risk indicators are introduced from page 71
The best single indicator to monitor for these cyclical downside risks, we believe, is the OECD LI, below. Negative YoY and falling, it is indicating concern, but the distances beneath the zero line and the rate of deterioration are both currently mild. The vertical scale is calibrated in OECD GDP growth points, so at present the forecast is for OECD real GDP growth in 6-9 months’ time to be 0.6% beneath trend (estimated by the OECD at 2.4% pa).
Fig 1 The vertical scale is calibrated in OECD GDP growth points, so at present the forecast is for OECD real GDP growth in 6-9 months’ time to be 0.6% beneath trend
6
OECD LI, YoY%, 2000 to latest (%) OECD LI YoY
4 2
0 -2 -4 -6
Note: A reading beneath zero implies sub-trend growth in six to nine months’ time. The latest reading for October 2015 was negative 0.60%. Fig 183 has the component series for the major countries. The OECD is projecting trend OECD real GDP growth at around 2.4% pa Source: OECD. Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
High frequency data is heavily skewed to the manufacturing sector. Below we present the monthly PMIs for manufacturing and services. Moderate growth in advanced economies is being offset by marked weakness in commodity exporters and emerging economies. Supported by large falls in energy prices, service sector-PMIs remain buoyant in advanced economies (85% of employment in two-thirds of the world) and neutral in EM economies.
Fig 2 Manufacturing PMIs. Advanced economies remain positive, EM remain in contraction
Manufacturing PMI 60
58
56
54
52
50
Note: Over 50 indicates expansion, under 50 indicaets contraction
48
46 Global 44 01/13
05/13
09/13
01/14
05/14
09/14
EM 01/15
US 05/15
Euro Area 09/15
Source: Bloomberg, Macquarie Research, December 2015
Fig 3 Services sector PMIs: Advanced economies remain strong, EM are neutral
Services PMI 62
60
58
56
54
52
50 Note: Over 50 indicates expansion, under 50 indicaets contraction 48
46
44 01/13
Global
05/13
09/13
01/14
05/14
09/14
EM
01/15
US
05/15
Euro Area
09/15
Source: Bloomberg, Macquarie Research, December 2015
14 December 2015
3
Macquarie Research
The Global Macro Outlook
Fig 4 shows industrial production cycles in the US and the Euro-zone. Perhaps reflecting the movements in the Euro/US$ exchange rate, US industrial production is now fading, whilst that of the Euro-zone has seen a pick-up. This is a relative trend also visible in the manufacturing PMIs, Fig 2.
Fig 4 Industrial Production (% y/y): US and Euro-zone 10
Perhaps reflecting the movements in the Euro/US$ exchange rate, US industrial production is now fading, whilst that of the Euro-zone has seen a pick-up
6 2 -2
-6 -10 -14 US
Euro Zone
-18
2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015
-22
Source: Datastream, Macquarie Research, December 2015
Given the relative availability and frequency of other data on the manufacturing sector (industrial commodity prices, freight indices, exports, and industrial production) it is easy to lose sight of trends in the service sector
Given the relative availability and frequency of other data on the manufacturing sector (industrial commodity prices, freight indices, exports, and industrial production) it is easy to lose sight of trends in the service sector. The following two charts provide some perspective.
Fig 5 US personal consumption expenditure shares: services and goods 80% Share of personal consumption expenditures Services
70%
67% 60% 50% 40%
Goods 33%
30% 20% 10% 1947
1957
1967
1977
1987
1997
2007
Source: Bureau of Economic Analysis, Macquarie Research, November 2015
Fig 6
Manufacturing employment as % of total employment US
1980 1992 2000 2014 2024
18.9 14.2 12.6 8.3 8.1
Japan Germany 22.5 22.5 18.7 14.8 12.7
NA 24.3 19.6 17.5 16.5
France
Italy
Spain
S. Korea
Australia
Canada
20.9 16.0 13.4 9.8 8.4
27.8 23.1 21.2 17.6 17.1
23.2 19.4 18.3 11.4 10.4
NA 25.6 19.8 16.9 15.0
NA 13.8 12.1 8.0 6.7
18.9 14.2 15.2 9.6 9.2
Source: INSEE, Federal Statistics Office Germany, Insituto Nacional de Estatistica, Instituto Nazionale di Statistica, Oxford Economics, Macquarie Research, December 2015
A proxy for service sector growth in China
14 December 2015
A possible high-frequency proxy for service sector growth in China is shown below. Please note that overall electricity consumption in China is not a good indicator for the rebalancing of the economy as 58% of electricity consumption is by heavy industry. Service industries, highlighted in grey, have a 13.0% share, whilst the residential sector is another 13%. 4
Macquarie Research
The Global Macro Outlook
Fig 7 Chinese electricity power consumption, 2015 YTD, (TWh) Sector
Sep-15
YoY ch
Oct-15
YoY ch
10M15
68
6.9%
57
4.7%
614
4.6%
13.4%
10 313 65 388
5.1% -2.9% 6.2% -1.3%
7 330 55 393
6.6% -1.9% 4.6% -1.1%
88 3,286 596 3,970
3.0% -1.1% 7.1% 0.2%
1.9% 71.7% 13.0% 86.6%
456
-0.2%
449
-0.2%
4,584
0.7%
100.0%
Sub-industries within manufacturing industry - Light industry 57 -0.8% - Heavy industry 249 -3.4%
54 271
-3.5% -1.5%
556 2,673
1.2% -1.5%
12.1% 58.3%
Residential Industries: - Primary (Agriculture) - Secondary (Manufacturing) - Tertiary (Service)
Total
YoY ch % of total
Source: NEA, Macquarie Research, December 2015
Whilst it is not a perfect indicator for the service sector, we follow the growth in private sector non-financial sector credit growth as a broad proxy. Debt is not inherently a problem. Intermediated by the financial system, it is the main way that savers earn returns. Savers, to be sustainably paid, require debt to be deployed into debtserviceable activities. Fig 8 is reassuring, suggesting a steady but persistent increase in borrowing by the US private sector in response to the low nominal and real interest rates on offer there.
Fig 8 Private sector nonfinancial credit is growing faster than GDP for the first time since 2008 (YoY% change) 12
Private nonfinancial credit
Nominal GDP
10
Debt is not inherently a problem Intermediated by the financial system, it is the main way that savers earn returns
8 6 4
2 0 -2
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-4
Source: Federal Reserve, Macquarie Research, December 2015
The US household sector experienced a severe balance sheet shock when property prices fell during the Global Financial Crisis. The ability to service debt was pressurized by the subsequent fall in the employment rate. As a result, Fig 9 is another reassuring chart.
Fig 9 The end of US household deleveraging: household debt in US$ trillions 16 14 12
10 8
6 4 1995
Household Debt (trillions) 1996
1998
2000
2001
2003
2005
2006
2008
2010
2011
2013
2015
Source: Federal Reserve, CEIC, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
Next follow charts for the Euro-zone, the UK and Japan. The common theme is moderate recovery, with the UK lagging the most. Whilst US private sector non-financial credit growth first went positive YoY in 2011 (Fig 8), this only occurred in late 2014 in the Euro-zone (Fig 10). Japan’s private sector deleveraging completed, in our opinion, in 2005, and bank lending began to expand again after seven years of contraction. 3-4% pa growth rather than 6-8% pa growth
Fig 10
Reflecting the above, our advanced economies’ private sector non-financial credit growth aggregate, Fig 13, is now growing at a moderate pace. We are not expecting a sustained period of premium to nominal GDP credit growth, but rather an extended period of slow real and nominal growth in credit, in line with our long grinding cycle forecast for GDP growth: 34% pa growth rather than 6-8% pa growth.
Euro-zone: broad money and credit
Fig 11 35
UK private non-financial credit vs. nom. GDP
(YoY % change)
Private nonfinancial credit
Nominal GDP
25
15
5
-5
Source: Oxford Economics, Macquarie Research, December 2015
Fig 12 20
Source: Oxford Economics, Macquarie Research, December 2015
Japan: private sector non-financial credit growth versus nominal GDP (YoY % change)
Private nonfinancial credit
Nominal GDP
15
10 5
0 -5 -10 1981
1983
1986
1989
1992
1995
1998
2000
2003
2006
2009
2012
2015
Source: Datastream, December 2015
Fig 13 14
Advanced economies’ private sector non-financial credit growth
(%)
12
10 8 6 4 2
0 -2 -4 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Note: Advanced economies are an aggregate of the US, the Euro-zone, the UK and Japan, using fixed weights of are 48%, 30%, 8% and 14%. Source: Federal Reserve, Macquarie Research, December 2015
14 December 2015
6
Macquarie Research
The Global Macro Outlook
Forecasts and revisions Fig 14 and Fig 15 present our principal real GDP forecasts and revisions. With the exception of South Africa, forecast changes this month have been minor. South African growth over 2016-18 has been cut to 1.0%, 1.2% and 1.7% respectively, from 1.4%, 2.4% and 3.1% respectively. The 2016-17 real GDP growth forecasts for China have been modestly revised up, to 6.7% and 6.5% from 6.5% and 6.0% respectively. For 2016, we are significantly beneath consensus on South Africa, Canada, & Australia, and moderately so on the Euro-zone, UK, Japan and India. We are above consensus in our 2016 forecasts for ASEAN and China.
Fig 14 Macquarie’s real GDP forecasts 2014
For 2016, we are significantly beneath consensus on South Africa, Canada, & Australia, and moderately so on the Euro-zone, UK, Japan and India
US Euro-zone Japan UK Canada Australia New Zealand
We are above consensus in our forecasts for ASEAN and China
Calendar Year YoY (%) 2015 2016 2017
2018
2014
4Q on 4Q (%) 2015 2016 2017
2018
2.4 0.9 -0.1 2.9 2.4 2.7 3.3
2.5 1.5 0.5 2.4 1.3 2.3 2.2
2.4 1.5 1.1 2.2 1.3 2.0 2.6
2.4 1.7 0.5 2.3 2.2 2.3 3.0
2.1 1.6 0.3 2.1 2.0 2.7 2.4
2.5 0.9 -0.8 2.9 2.5 2.5 3.5
2.2 1.5 0.5 2.4 0.7 2.5 1.9
2.5 1.7 1.2 2.2 1.5 1.9 2.9
2.3 1.6 0.5 2.3 2.3 2.5 2.7
2.0 1.6 0.3 2.3 1.8 2.8 2.4
China S. Korea Taiwan Hong Kong Indonesia Malaysia Singapore Philippines Thailand India
7.3 3.3 3.8 2.5 5.0 6.0 2.9 6.1 0.9 7.1
7.0 2.5 2.1 2.3 4.8 5.0 2.2 5.8 2.7 7.2
6.7 2.9 2.5 2.6 5.5 6.1 2.7 6.6 3.3 7.5
6.5 3.0 2.7 2.6 5.8 5.8 3.2 6.5 3.6 7.6
6.0 2.7 3.0 2.8 6.1 5.3 3.1 6.6 3.5 7.5
7.3 2.7 3.1 2.4 5.0 5.7 2.2 6.7 2.1 6.6
7.0 2.6 1.2 2.6 5.0 4.8 2.1 6.3 2.5 7.0
6.7 2.8 4.0 2.5 5.6 6.5 2.5 6.5 3.6 8.0
6.3 3.1 3.0 2.6 6.0 5.5 3.1 6.7 4.0 7.5
6.0 2.7 3.0 2.8 6.0 5.3 2.9 7.0 3.5 7.5
South Africa
1.5
1.3
1.0
1.2
1.7
1.3
1.3
1.0
1.2
1.3
Source: Macquarie Research, December 2015
Fig 15
Macquarie’s real GDP forecasts: revisions, and versus consensus Previous Macquarie forecast (***) (1)
2015 YoY (%) Current Consensus Macquarie Forecast (2) (3)
Spread (2) versus (3) (4)
Previous Macquarie forecast (***) (5)
2016 YoY (%) Current Consensus Macquarie Forecast (6) (7)
Spread (6) versus (7) (8)
US (*) Euro-zone Japan UK Canada (*) Australia New Zealand
2.2 1.6 0.5 2.4 0.8 2.2 2.1
2.2 1.5 0.5 2.4 0.7 2.3 2.2
2.2 1.5 0.6 2.5 0.7 2.3 2.2
0.0 0.0 -0.1 -0.1 0.0 0.0 0.0
2.5 1.7 1.1 2.4 1.5 2.0 2.4
2.5 1.5 1.1 2.2 1.5 2.0 2.6
2.5 1.7 1.3 2.4 2.2 2.6 2.3
0.0 -0.2 -0.2 -0.2 -0.7 -0.6 +0.3
China S. Korea Taiwan Hong Kong Indonesia Malaysia Singapore Philippines Thailand India (**)
7.0 2.6 2.1 2.3 4.8 5.1 2.1 5.8 2.7 7.2
7.0 2.5 2.1 2.3 4.8 5.0 2.2 5.8 2.7 7.2
6.9 2.5 1.0 2.2 4.7 4.8 1.8 5.6 2.6 7.5
+0.1 0.0 +1.1 +0.1 +0.1 +0.2 +0.4 +0.2 +0.1 -0.3
6.5 3.4 2.5 2.6 5.5 6.1 2.8 6.0 3.3 7.6
6.7 2.9 2.5 2.6 5.5 6.1 2.7 6.6 3.3 7.6
6.5 2.9 2.3 2.2 4.9 4.6 2.2 5.9 3.2 7.8
+0.2 +0.0 +0.2 +0.4 +0.6 +1.5 +0.5 +0.7 +0.1 -0.2
South Africa
1.4
1.3
1.5
-0.2
1.4
1.0
2.0
-1.0
Note: Calendar year numbers for all countries bar the US and Canada, marked with a (*) which are 4Q on 4Q, and India, marked with a (**) which is fiscal year (to FY3/16 and FY3/17). Consensus numbers for calendar year countries are from Consensus Economics, otherwise the numbers are from Bloomberg. (***) November 2015 Source: Consensus Economics, Bloomberg, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
In line with the continuation of moderate real and nominal global real GDP growth, The Long Grinding Cycle as we describe it, our interest rate forecasts are commensurately subdued. Please note that we are forecasting the US 10-year bond yield to have a cycle high of only 2.70%.
Fig 16 Macquarie’s interest rate forecasts Year end
The US 10-year bond yield to have a cycle high of only 2.70%
Policy or cash rate (*) (%) 2014 2015 2016 2017
2018
2014
US Euro-zone Japan UK Canada Australia New Zealand
0.00 0.05 0.07 0.50 1.00 2.50 3.50
0.25 0.05 0.10 0.50 0.50 2.00 2.50
1.25 0.05 0.10 0.75 0.50 1.50 2.50
2.00 0.05 0.10 1.25 1.00 1.75 3.00
2.00 0.25 0.30 1.75 1.50 2.75 4.00
2.17 0.54 0.33 1.79 1.79 2.81 3.67
China S. Korea Taiwan Hong Kong Indonesia Malaysia Singapore Philippines Thailand India
5.60 2.00 1.88 0.50 7.75 3.25 0.50 4.00 2.00 8.00
4.35 1.50 1.75 0.75 7.25 3.25 1.25 4.00 1.50 6.75
3.85 1.75 1.88 1.50 6.75 3.25 1.50 3.75 1.50 6.50
3.85 2.00 2.25 2.50 6.50 3.00 1.80 3.50 2.25 6.00
3.85 2.25 2.90 2.50 6.50 3.00 2.00 3.50 2.75 6.00
South Africa
5.75
6.25
7.25
7.50
7.75
10-year bond yield (%) 2015 2016 2017 2.40 0.75 0.40 2.05 1.80 2.80 3.50
2.65 1.10 0.60 2.30 2.00 2.80 3.50
2.70 1.20 0.80 2.60 2.00 3.00 3.70
2018 2.70 1.40 1.20 2.80 2.00 3.30 3.75
Note: (*) Policy or cash rate, US: Fed Funds rate, Euro-zone: EMU Refi Rate, Japan: overnight call rate, UK: Repo rate, Canada: Cash rate, Australia: Cash rate, New Zealand: Official cash rate, China: 1-year working capital, South Korea: Overnight call rate, Taiwan: Official discount rate; HK: discount window base; Indonesia: 1-month SBI rate, Malaysia: Overnight policy rate, Singapore: 3-month interbank rate, Philippines: Reverse repo rate, Thailand: 14-day repo rate, India: Repo rate, South Africa: Repo rate Source: Macquarie Research, December 2015
We are not forecasting deflation After a period of broad US$ strength in 2015, we believe 2016 will see individual currencies at different times pass their lows versus the US$ Whilst relative monetary policy stances will remain important, resulting capital flows now have to exceed mounting current account surpluses in Japan and the Euro-zone On our forecasts the Yen bottoms first (1Q 2016), and then the Euro (2Q 2016
We are forecasting calendar year 2016 CPI of 1.9% YoY in the US, 1.0% YoY in the Eurozone, and 1.6% YoY in China: so moderate inflation, but not deflation. After a period of broad US$ strength in 2015, we believe 2016 will see individual currencies at different times pass their lows versus the US$. Whilst relative monetary policy stances will remain important, resulting capital flows now have to exceed mounting current account surpluses in Japan and the Euro-zone (partially reflecting the falls in oil and other resource prices). On our forecasts the Yen bottoms first (1Q 2016), and then the Euro (2Q 2016).
Fig 17 Macquarie’s CPI and currency forecasts Year end 2014
CPI (%, YoY) 2015 2016 2017
2018
US Euro-zone Japan UK Canada Australia New Zealand
1.6 0.4 2.8 1.5 1.9 2.5 1.2
0.2 0.1 0.6 0.1 1.2 1.5 0.3
1.9 1.0 0.5 1.1 2.3 3.0 0.8
2.4 1.7 1.4 1.8 2.2 2.7 1.4
2.4 1.5 1.1 1.9 2.1 2.5 2.1
China S. Korea Taiwan Hong Kong Indonesia Malaysia Singapore Philippines Thailand India
1.5 1.3 1.2 4.4 6.4 3.1 1.0 4.2 1.9 6.7
1.4 0.7 0.0 3.3 6.5 2.1 -0.4 1.4 -0.8 5.0
1.7 1.5 1.2 3.1 5.2 2.5 0.7 1.8 0.2 5.5
2.0 2.2 1.6 2.8 4.9 2.8 1.4 2.8 1.7 5.1
2.5 2.1 2.0 2.8 5.0 2.6 1.4 3.3 2.2 5.0
South Africa
6.1
5.0
6.2
5.9
5.6
Currency versus US$ (Year end) 2014 2015 2016 2017 2018 1.21 119.8 1.56 1.16 0.82 0.78
1.06 122.0 1.48 1.38 0.71 0.66
1.09 120.0 1.52 1.41 0.63 0.58
1.15 116.0 1.52 1.39 0.64 0.58
1.15 112.0 1.54 1.37 0.68 0.61
6.20 6.40 6.60 6.40 6.20 1,099 1,200 1,200 1,200 1,150 31.60 32.60 33.60 34.00 34.00 7.75 7.76 7.80 7.80 7.80 12,440 14,200 13,900 13,200 13,000 3.50 4.15 3.80 3.70 3.70 1.31 1.43 1.39 1.36 1.32 44.73 47.30 47.50 46.50 46.00 32.92 36.15 36.55 35.80 35.00 62.71 66.50 66.36 66.80 67.13 11.57
15.00
14.80
14.00
13.50
Note: The currency forecasts are presented in the most common format. Normally, this is per US$, but exceptions where it is US$ per other currency include: the Euro, Sterling, Australia and NZ dollars Source: Macquarie Research, December 2015
14 December 2015
8
Macquarie Research
The Global Macro Outlook
The latest Macquarie commodity team commodity price forecasts follow. Please see pages 10 and 11 for commentary.
Fig 18
Macquarie commodity price forecasts 2014 CY
2015 Q3
2015 Q4
2016 Q1
2016 Q2
2015 CY
2016 CY
2017 CY
2018 CY
2019 CY
2020 CY
LT 2015
$/tonne $/tonne $/tonne $/tonne $/tonne $/tonne
6,862 1,867 2,164 16,867 2,096 21,893
5,515 1,658 1,942 11,827 1,790 16,062
4,700 1,380 1,600 9,000 1,720 14,000
5,200 1,450 1,780 10,000 1,810 14,000
5,100 1,375 1,900 10,000 1,750 14,500
5,200 1,375 2,050 11,000 1,680 14,500
5,050 1,395 1,833 10,000 1,740 14,250
5,263 1,363 2,313 12,000 1,653 15,000
4,700 1,363 2,593 14,000 1,598 16,000
4,500 1,413 2,825 15,000 1,778 17,000
5,300 1,413 2,640 16,000 1,979 18,000
6,285 1,350 2,600 17,000 1,950 18,000
$/t CFR $/t FOB $/tonne
97 126 544
55 102 370
48 82 290
52 78 300
52 75 300
48 75 300
50 78 298
45 80 300
55 90 320
60 100 335
60 110 345
60 105 380
$/barrel $/barrel $/MMBTU $/t FOB $/lb
100 93 4.4 71 33
54 50 2.9 59 37
53 48 2.9 53 36
55 48 2.7 50 36
60 53 3.1 48 37
65 61 3.4 46 37
58 53 3.0 49 36
67 61 3.6 43 39
80 74 4.8 44 43
78 72 4.8 47 45
80 74 5.4 47 48
71 66 4.8 48 43
1,266 19 1,384 803
1,157 16 1,051 692
1,140 15 925 600
1,125 15 875 625
1,150 15 900 650
1,160 16 950 700
1,144 15 913 644
1,219 18 1,075 713
1,319 20 1,219 788
1,400 22 1,325 800
1,400 23 1,400 825
1,250 18 1,400 800
19972000=100 $/t FOB $/t FOB $/t FOB USc/kg c/lb c/lb
182
151
148
151
154
157
153
297 316 492 171 106 204
302 273 386 136 69 202
275 255 320 110 55 160
250 240 320 120 62 185
250 230 310 110 55 170
260 225 300 105 50 155
259 238 313 111 56 168
265 240 290 121 58 210
270 250 280 124 59 215
308 328 402 127 61 220
316 338 429 130 62 226
280 300 380 115 55 200
$/t FOB $/mtu CIF c/lb
330 4.5 119
302 2.9 107
220 1.9 92
240 1.9 95
220 2.0 90
220 2.0 90
225 2.0 92
220 2.3 96
233 2.5 100
223 2.8 105
243 3.0 110
235 2.8 105
Unit Base Metals Copper Aluminium Zinc Nickel Lead Tin Steel and Raw Materials Iron ore - 62% Fe Hard coking coal Steel - Export HRC Energy Crude Oil - Brent Crude Oil - WTI Henry Hub Gas Thermal coal – Aus. spot Uranium Precious Metals Gold Silver Platinum Palladium Agriculture MacPI Potash Urea Ammonia Natural Rubber Feeder Cattle Lean Hog Others Alumina Manganese ore Ferrochrome (EU contract)
$/oz $/oz $/oz $/oz
Source: Macquarie Research, December 2015
Based on a simple up/down ratio, 2016 is expected to be another challenging year of trying to align supply with sluggish demand growth, Fig 19.
Fig 19
Macquarie commodity price forecasts, YoY simple up/down ratio
YoY, number of forecasts up YoY, number of forecasts down YoY, number of forecasts unchanged
2015
2016
2017
2018
2019
2020
1 27 0
12 15 1
21 6 0
23 3 1
20 4 1
22 1 4
Source: Macquarie Research, December 2015
14 December 2015
9
Macquarie Research
The Global Macro Outlook
Commodities 2015 is certainly a year commodity producers will want to forget. Unfortunately, 2016 looks equally as bad or perhaps even worse. The disinflationary cycle pervading industry cost structures and dragging down pricing has shown little sign of abatement, and supply cuts are coming only reluctantly. Meanwhile, market sentiment, whether it be associated with analysts, producers or even commodity consumers is now skewed to further downside.
The disinflationary cycle pervading industry cost structures and dragging down pricing has shown little sign of abatement, and supply cuts are coming only reluctantly
The fact that global manufacturing is clearly in a bad way certainly doesn’t help. A plunge in the US manufacturing PMI in November has taken our global manufacturing PMI measure to its lowest in over two years, while industrial production figures point to a negative growth environment emerging. Compounding this has been another leg down in Chinese demand through November – it appears to us that China is now falling in line with the usual patterns of a northern hemisphere industrial economy, amplifying the natural apparent demand cycle. For us, 2016 will be the year of the three D’s for commodities: destock, divestment and desperation. Unfortunately not demand. While supply cuts can stabilise the cycle, they are by their very nature reactive. History shows demand is needed to lead a sustained recovery. Destock of inventory through downstream value chains as the pressure of low margins forces thrifting of working capital. This will reduce the call on refined materials at the basic commodity level, and whether this phase passes quickly or slowly depends on the success of consumer reflation policies to boost demand. Meanwhile, we also expect the destocking of oil inventories to commence, an important stage in dragging all commodities through the cycle. Divestment and desperation relate to commodity producers. Across all commodities, whether it be farmers or resource extractors, the pressure of low and falling prices is causing pain. In past cycles we would have seen more failures, but the availability of cheap capital in the current financial environment has buffered against this. However, this is just one of the reasons producers are reluctant to cut operational capacity. The fundamental imbalances we are seeing cannot last forever. In our view, financial markets will start to play a key role in determining which commodity producers survive. In order to buy themselves time, we believe H1 2016 will mark the Great Divestment Cycle for commodity producers, as the majority look to offload non-core assets, all at the same time. The problem is, it is difficult to see enough buyer appetite, leading to the desperation phase where producers seek ever more novel ways of financial engineering to stay alive; some will succeed, many will fail.
The Great Divestment Cycle for commodity producers
In metals and bulk commodities, we have made further aggressive cuts to our price outlook, reflecting both the growing duration of expected overcapacity and falling industry cost structures. Long run prices have also been cut as the need to incentivise any new projects in the foreseeable future diminishes.
Fig 20 Our forecasts show pricing for all major metals down YoY in 2016
Fig 21 Long run prices have been pared back significantly since the peak of the commodity cycle Changes to our LR price forecast since 2012
2016 average price vs. 2015 0%
50%
-1%
40%
-3%
39% 32%
30%
-6%
20%
-9%
10%
-11%
4%
0%
-13% -15% -16%
-3%
-10%
-17%
-20%
-14%
-20%
-19%
-22%
-30%
-25%
-25%
-27%
-30%
Nickel
Steel
Iron Ore
Tin
Platinum
Uranium
Copper
Lead
Gold
-50% Zinc
Hard Coking Coal
Steel
Thermal Coal
Aluminium
Nickel
Platinum
Tin
Source: LME, Platts, Bloomberg, Macquarie Research, December 2015
14 December 2015
-32%
-24% Iron Ore
Copper
Zinc
Lead
Gold
-25%
Uranium
-40%
-44%
-44% Aluminium
-15%
Thermal Coal
-8%
-10%
Hard Coking Coal
-3%
-5%
Source: Macquarie Research, December 2015
10
Macquarie Research
The Global Macro Outlook
In terms of metals and bulk commodity strategy for 2016, we prefer exposure to zinc and nickel to play an end to industrial destocking theme as the year progresses. Copper and iron ore, while generally underperforming, will offer leverage to Chinese seasonality – weak through Chinese New Year, rallying out of it before fading in H2. We also see an ‘anti-coal’ trade emerging from the utilities angle, with exposure to silver and uranium looking more preferable to thermal coal and its derivative aluminium, which we see below current levels in 2020. In our view, agricommodities will continue to suffer from oversupply and sluggish demand in 2016. In the market for softs, farmers globally have faced significant margin pressure, which has discouraged them from investing into their crops (in inputs, such as fertilisers and crop protection). This is notably the case in South America and the Black Sea region where the purchasing power of many farmers has been reduced this year because of FX moves. We retain a pessimistic outlook for fertiliser demand during 2016 on this basis. Moreover, because of reductions in input investments, we also make conservative forecasts for crop yields next season. Soft commodity producers are often able to make fast supply adjustments in response to the market environment and enable price recovery in relatively short order. We do not see any upside in the short term, however, and are instead waiting to see how the transition goes into next year when we believe the impact of supply cuts may start to emerge. We have significantly downgraded our nitrogen forecasts for the coming years, and now foresee all fertiliser, livestock and natural rubber prices below current spot levels and end2016.
Fig 22 Corn producers in Mato Grosso, Brazil continue to face significant margin pressure $R/bag 26
Fig 23 In Ukraine, corn will likely to lose areas to sunflower – the most profitable crop in 2015/16 Farm economics in Ukraine, 2015 MY
Brazil Centre West Corn Farmer Margin 120%
24
100%
22
CofP, YoY % change EXW price, YoY % change Margins
99%
20
80%
18
62%
16
60%
60%
56%
57%
56%
53%
14
12
40% 24%
10
8 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Northern Parana price Sorriso MT price
Cost of Production
0% Corn
Source: IMEA, Reuters, Macquarie Research, December 2015
19%
20%
Wheat
Sunflower seeds
Source: Govt Data, APK-Inform, Macquarie Research, December 2015
In terms of energy, we remain bearish global crude oil through the balance of this year and into 1Q16. Our expectation is that Brent crude will remain in the low to mid US$40 per barrel range through February 2016. However, our analysis suggests that rebalancing is occurring and that we are on track for a full rebalance to seasonal norms by YE2016. We are looking for small draws this December and January as milestones towards a rebalance. Even much smaller than seasonally normal draws will be viewed positively, in our view and will quell market fears on storage containment in the near term. Demand growth, appears solidly in the 1.3+ million BPD range for 2016, led by the light end of the barrel. Production growth in most regions has either stopped or is in decline 14 December 2015
At this point, the market is not discounting the supply-demand rebalancing that has already begun to occur. We believe this is short-sighted. Demand growth, appears solidly in the 1.3+ million BPD range for 2016, led by the light end of the barrel. Production growth in most regions has either stopped or is in decline and accelerating base declines have only begun to make their impression felt. These factors together are consistent with a steady albeit slowly rebalancing oil market. In terms of natural gas, the coming surge in LNG production growth is now very close, with potential for global output to double through 2020. Much of this growth will be sold into the emerging spot market – the first step in the path to oil de-linkage. 11
Macquarie Research
The Global Macro Outlook
United States Growth continues to persist at an abovetrend pace driven in particular by robust consumer spending, improving residential construction, and strengthening services activity
Growth continues to persist at an above-trend pace driven in particular by robust consumer spending, improving residential construction, and strengthening services activity. Each of these areas is driven by US final demand and is resilient against any relative weakness in global activity. Recent data have supported this view as auto sales have reached a new 10-year high in 4Q and broad consumer spending trends remain firm. Housing related indicators have also remained strong with household formation growth having accelerated in 2015, mortgage credit improving, and mortgage purchase application volumes growing at more than 25% year over year. Headline business investment indicators have been mixed, a development driven largely by a large negative shock from a nearly $70 billion decline in energy investment through the first three quarters of 2015, representing a nearly 50% decline YTD. Looking ahead, we believe the impact of weak energy investment will lessen, allowing for a firmer trend in aggregate business investment to emerge.
At its 16 December meeting, we expect the Federal Reserve will commence a rate hike cycle and that this should prove gradual, cautious, and supportive of risk taking
At its 16 December meeting, we expect the Federal Reserve will commence a rate hike cycle and that this should prove gradual, cautious, and supportive of risk taking. The pace of hikes should prove to be 25 bps per quarter and occur until the Fed Funds rate reaches our forecasted terminal level of 2% late in 2017.
The pace of hikes should prove to be 25 bps per quarter and occur until the Fed Funds rate reaches our forecasted terminal level of 2% late in 2017
Accompanying a moderation in the pace of jobs growth should be a continued improvement in the pace of wage growth, a development that has become increasingly apparent in 2015.
Alongside this outlook, we see only very limited further upward pressure on the 10-year Treasury yield, believing it has peaked for the current expansion and is likely to rise to only 2.7%. Labour slack is likely to continue to diminish going forward. Our measure of the unemployment rate, which accounts for workers that may return to the labour force, has fallen to a new cycle low of 5.4%. With the US economy only requiring somewhere between 55K and 100K jobs per month to keep pace with labour force growth, the current ~200 to 250K per month pace of jobs growth is likely to moderate towards 125K to 175K over the next twelve months.
Fig 24
Macquarie’s estimate of the unemployment rate continues to push lower
Unemployment rate 11%
10%
9%
8% Macquarie estimate (accounts for returnees to labour force)
7%
6% u-3 5.36%
5%
5.05%
September FOMC estimate of stuctural unemployment = 4.9% 4% Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: Bloomberg, BLS, Macquarie Research, December 2015
14 December 2015
12
Macquarie Research
The Global Macro Outlook
China Stable but soft growth momentum
Mixed macro data, soft economic growth: China’s economy in November looks similar to October, i.e. stabilization at the bottom. Meanwhile, financial data such as money growth remained strong as a result of policy easing. The divergence between soft economic and robust financial data indicates a lack of confidence, as corporates are hoarding cash instead of spending it. GDP growth in 4Q15 could be largely flattish vs. the previous three quarters at around 7% YoY. After big cycles (before 2010) and mini-cycles (2010-2013), the Chinese economy in the past two years might be remembered for having no cycles (Fig 25).
Strong dollar and falling commodity prices weigh on business confidence
Headwinds and tailwinds: Currently, the economy is traipsing a subtle balance between various headwinds and tailwinds. Headwinds include: 1) weak property investment; 2) commodity price deflation; 3) weak business confidence. Tailwinds include: 1) policy easing; 2) resilient growth in consumption and the service sectors; 3) pick-up in discretionary spending such as auto sales following improved property sales. Confidence is key: In normal times, current risks are tilted toward the upside. Why? Because leading indicators, such as strong money growth, improving funding conditions for FAI and low inventory levels, all point to a cyclical rebound in the near term. However, now is not normal. The Fed is set to hike rates in December. The dollar has regained strength and commodity prices have crashed again. Though we believe China has more than enough policy tools to weather the storm, all this could still put huge pressure on business confidence. As a result, growth recovery this time is weaker than in the previous cycles.
Mini-stimulus to continue in 2016: We expect policy makers to maintain the mini-stimulus approach. Monetary policy would continue the easing bias in 2016, but the room for interest rate cuts is more limited compared with 2015. For 2016, we expect two benchmark rate cuts (25bp each) and 300bp RRR cuts. For 2016, we expect a more expansionary fiscal stance. The actual fiscal deficit could widen further to 3.0% of GDP. The Ministry of Finance could announce another RMB4-5tr local government debt swap for 2016, having conducted a RMB3.2tr swap in 2015. Meanwhile, policy banks, as quasi-fiscal institutions, would keep playing an important role.
Annual GDP growth forecast
% , yoy
Real GDP growth
16 14
12.7 11.3 8.4
8.3
9.1
10.6
10.0 10.1
9.6
9.5
9.2
7.7
8
7.7
7.3
7.0
6.7
6.5
2017F
12
10
Forecast
14.2
2016F
Fig 25
2015F
Policy easing to continue
Economic outlook for 2016: We expect China’s real GDP growth to moderate to 6.7% YoY in 2016 from 7.0% in 2015. Quarterly growth could exhibit a smooth trajectory of 6.6%, 6.7%, 6.7% and 6.7%. In terms of growth momentum, 1H16 would be weaker than 2H16. Inflation pressure will remain muted in 2016. We expect average CPI to edge up to 1.6% YoY in 2016 from 1.4% in 2015. For PPI deflation, it could improve to -3.5% from -5.2% in 2015. Growth of exports and imports could improve to +1% and -2% in 2016, vs. -3% and -15% in 2015, while trade surplus could widen further.
2014
GDP growth to slow to 6.7% in 2016
6 4 2
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Source: CEIC, Macquarie Research, November 2015
14 December 2015
13
Macquarie Research
The Global Macro Outlook
Property sector to be less a growth drag in 2016
A modest uptick in property investment in 2016: The biggest drag to growth in 2015 was property investment, which slowed to 2% YoY in the first ten months, after growing 11% in 2014. Due to the inventory overhang, new starts were extremely weak, falling 14% YoY after an 11% drop in 2014. Both President Xi and Premier Li recently emphasized the property inventory overhang and more policy support could come shortly. This could include: 1) lower down payment ratio; 2) lower mortgage rate; 3) lower transaction tax; 4) less strict criteria for Hukou in lower-tier cities; 5) government purchase of new homes for social housing purposes. With the policy easing in place, we expect property investment to improve in 2016. That said, we do not expect a significant rebound given the persistent inventory overhang in lower-tier cities. Overall, we forecast property investment to edge up to 5% YoY in 2016 from 2% in 2015.
RMB depreciation mainly reflects broad US$ strength
RMB is more driven by US$ than domestic factors: In our view, the most important determinant for the RMB is not domestic factors, but the strength of the US$. If the US$ strengthens, the RMB will most likely weaken against it. But the RMB will most likely be stronger than the Euro, Yen and other EM currencies, because the PBoC also values currency stability due to capital outflow concerns. Related to this, the other factor relevant to the RMB is China’s capital outflows. If capital outflows are huge like in 3Q15, we are confident that the PBoC would intervene. Otherwise, the PBoC would give the market more freedom in determining the RMB. Our baseline forecast for RMB is a gradual depreciation to 6.6 against the US$ by end-2016.
China to have orderly unwinding of hot money flows
Capital outflows are manageable: China has lost over US$400bn in FX reserves and it could lose a similar amount in 2016. People might be concerned whether China has enough reserves to cope with capital outflows. We are more sanguine. Given the current pace of capital flows, China’s FX reserves could be sustained not for months, but for years. Meanwhile, policy makers have enough tools, including capital controls, to fight capital outflows. Down the road, we expect to see rising two-way capital flows and higher volatility for the RMB.
Financial reforms to lead other reforms
What’s next after SDR inclusion: As expected, the IMF announced it would include the RMB in the SDR basket, effective from 1 October 2016. The weight for the RMB is 10.9%, below the US$ (41.7%) and Euro (30.9%) but higher than the Yen (8.3%) and sterling (8.1%). The inclusion is a milestone in China’s financial opening up, but doesn’t confer any meaningful benefit in the short term. Going forward, we believe that financial reform will continue to lead other major reforms in the coming years, largely because it faces less resistance from vested interests compared with SOE or Hukou reforms. Specifically, progress in areas such as the SZ-HK Stock Connect, IPO registration system, and QDII2 could be made in the next six months.
Searching for new growth drivers and quality urbanization
Fig 26 RMB is mostly driven by US$ strengthening
105
DXY index
6.50
USD/CNY (RHS)
6.45
100
6.40
95
6.35
90
6.30 6.25
85
6.20
80
6.15 6.10
75
Dec-15
Oct-15
6.00 Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Apr-13
Jun-13
6.05
70
Source: Bloomberg, Macquarie Research, October 2015
14 December 2015
14
Macquarie Research
The Global Macro Outlook
Euro-zone At its 3 December policy meeting, the European Central Bank (ECB), as we predicted, did not manage the tricky task of positively surprising a market that was expecting to be positively surprised. In fact what it did announce even disappointed those of us who were calling for a disappointment. Unsurprisingly, the market reaction was severe – EUR/USD by midDecember was trading at 1.10, up from 1.06 before the meeting. Draghi disappointed even those expecting a disappointment
We continue to argue that the markets in time will focus more on what has been delivered than whether it met expectations, and as we have an ECB that is easing policy in the face of a recovery (and of course a Fed that is tightening), that should mean a weaker euro. Nevertheless, we have to acknowledge the case is now less clear given the confusion that the ECB’s relative inaction has caused. A lot hinges on why the ECB did not do as much as President Draghi and other board members hinted. One explanation, favoured by the ECB itself, is the markets simply misread its intentions. We have some sympathy with this given we read those intentions less dovishly, but it is hard to square with the fact that Draghi had seen the market reaction to his 20 November speech and did nothing to counter it. What seems more likely is that either Draghi had planned to do more easing in November, but the economic data internally and externally improved sufficiently by December that he and others felt it was unnecessary, or he wanted to do more easing but could not carry a majority on the Governing Council.
Fig 27 Service sector PMIs continue to suggest reasonable growth 60 58
Eurozone Germany Spain
France Italy
Fig 28
Euro-zone car sales, % change YoY
15%
10%
YoY change Working day adjusted
5%
56
0%
54 (5%) 52
(10%)
50
(15%)
48 46 Jan-14
(20%) Jul-14
Jan-15
Jul-15
Source: Markit, Macquarie Research, December 2015
(25%) 2010
2011
2012
2013
2014
2015
Source: Macrobond, Macquarie Research, October 2015
The first explanation is a possibility. 3Q GDP grew at a modest 0.3%, slightly below expectations, with net trade a drag, but PMI data (see Fig 27) suggests 4Q should see slightly faster growth. Monetary indicators continue to improve and there are other positive signs – Euro-zone car sales, a good indicator of the health of the underlying economy, accelerated to around 15% YoY growth in November (Fig 28). The ECB’s mandate is inflation, however, and here there has been a setback. Headline inflation in November was just 0.1%, while “core” inflation fell back to 0.9%, from 1.1% in October. In the ECB’s latest macroeconomic projections, their 2017 inflation forecast was cut slightly, to 1.6% from 1.7%, some way beneath its target of ‘near but below 2%’. This points towards other members of the ECB blocking further easing. Lower oil prices mean headline inflation to remain low
14 December 2015
The market consensus is the ECB is now done with easing. We think this could be premature, especially given the current weak oil price almost guarantees low headline inflation for a while – the ECB’s projections were done when oil was €42/barrel and their forecasts use figures of €48/barrel in 2016 and €53/barrel in 2017 – yet the current price is just €36/barrel. In time this should boost core inflation down the line (as economic activity is boosted), but in the short term it will further Draghi’s concern that inflation expectations might weaken.
15
Macquarie Research
The Global Macro Outlook
United Kingdom The Bank of England at its December policy meeting surprised no-one by keeping interest rates unchanged for the 84th month in a row. It also allows us a chance to take stock of recent developments in the real economy. And the news is largely good. Not great, but pretty good. As with the Euro-zone, the UK economy slowed in 3Q 2015, though it continues to outpace its bigger neighbour. GDP growth was 0.5% QoQ, down from 0.7% QoQ in 2Q. Household consumption and business investment were both strong, but there was a very large offset from net trade (note though that while the UK’s trade deficit is a concern, this data series has been unusually and suspiciously volatile recently) – see Fig 29. At its release the 0.5% QoQ raised concerns that the UK’s relatively strong growth performance was coming to an end, something that had been fanned by weaker PMI data These fears have been eased by a bounce in October/November (Fig 30), and this and other data suggest an acceleration in GDP growth to 0.6% QoQ in 4Q.
Fig 29
UK GDP growth, QoQ, by component, %
4%
2%
Consumption
Govt
Investment
Inventories
Exports
Imports
Fig 30
UK PMI surveys, > 50 = expansion
GDP, %
0%
(2%) Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Q4 14
Q1 15
Q2 15
Q3 15
Source: ONS, Macquarie Research, December 2015. Excludes alignment adjustment so bars do not always sum to line
Growth to continue in 2016 at a moderate pace
Source: Markit, Macquarie Research, December 2015
Looking ahead to 2016, we think the economy will grow between those 0.5% and 0.6% QoQ figures, with an annual rate of 2.2%, down from 2.4% expected this year. Factors contributing to this modest slowdown in growth are: The continued tightening of the government’s fiscal stance (though it should be noted that in the November Autumn Statement the UK finance minister did allow a near-term increase in borrowing). Weak external demand given sluggish global growth, though UK exports to the European market, the most important, are strong. Oil production is likely to stabilise or fall after increasing this year. Gains in employment will be harder to come by given the record employment rate, meaning output will rely on productivity increases. That last factor remains the crucial one, not just for growth but inflation and interest rates too. The tightening of the labour market was most clearly shown by the increase in wage growth, with private real wages increasing by the most in seven years up to August. The impact on inflation has been ameliorated by productivity growth finally picking up, meaning unit labour costs have been rising more slowly. Nevertheless the key upside risk to inflation in 2016 seemed to be wage growth continuing but productivity growth slowing. More recent wage data, however, suggests a slackening in pay rises, something highlighted in the Bank’s December meeting minutes. This seems at odds with the low unemployment rate and might just be statistical noise. But if it turns into a trend, 2016 might be a very different year than we expected.
14 December 2015
16
Macquarie Research
The Global Macro Outlook
Japan We are forecasting 1.1% YoY real GDP growth in 2016, following on from 0.5% YoY forecasted growth this year
After contracting by 0.1% in 2014 under the influence of the April 2014 consumption tax rate increase (to 8% from 5%), we are forecasting 0.5% YoY real GDP growth in 2015, 1.1% YoY growth in 2016, and 0.5% in 2017 (burdened by the next consumption tax rate increase). Export volume growth has also been disappointing. 2014 on 2013 was 0.6% YoY, whilst 2015 CYTD (to October) on the same period in 2014 has seen negative growth of 0.4% (1Q 3.8% YoY, 2Q -0.5% YoY, 3Q -2.8% YoY, October -4.6% YoY). Our 2015 and 2016 export volume growth forecasts are 1.0% for both years. The strong Yen over 2008-12 has led to shrinkage in Japan’s manufacturing productive capacity, Fig 31. From the November 2008 high to the July 2014 low, Japan’s industrial base contracted by 6.9%. The restructuring trend now appears to have completed.
Fig 31 Domestic manufacturing production capacity in Japan, 1987 to latest (CY 10=100) 110
FY 03-07 ave: 97.6 High November 2008 at 102.0
105
100
95 Production capacity 90 1987
1989
1991
1993 1995
1997
1999 2001
2003
2005
2007 2009
2011
2013 2015
Source: METI, Macquarie Research, December 2015
In contrast Japanese companies are investing overseas at record rates. Gross FDI outflows are running at around 2.5% of GDP. Nonetheless, we are not forecasting another leg down in the value of the Yen versus the US dollar. The Yen is already very low/cheap on a REER, chart below, the current account surplus has improved from around zero in 2014 to near 3% this year (mainly due to lower energy prices), and the BOJ is reluctant to increase its already considerable monetary stimulus (¥80tr JGB buying compares to a fiscal deficit of ¥35tr – so more than 2x effective monetization).
Fig 32
Japan’s real effective exchange rate (REER), 1980 to latest
150
140
We are not forecasting another leg down in the value of the Yen versus the US dollar
(2010=100)
Median: 97.9 St.Dev.: 15.4
130 120 110 100
90 80 70
Sep: 75.1
60
Note: the Yen traded on the high side of its long-term averages over most of the 1990s. 15 years of mild deflation was evidence of the tightness of monetary policy over this period, inappropriately so in our opinion Source: BIS, Macquarie Research, December 2015
14 December 2015
17
Macquarie Research
The Global Macro Outlook
Canada We have a more cautious view on the outlook than consensus and recently modestly downgraded our outlook for Canada’s real GDP forecast in 2016
Economic indicators have continued to suggest that Canada is gradually emerging from a 1H15 contraction, albeit with weak growth. Looking ahead, we have a more cautious view on the outlook than consensus and recently modestly downgraded our outlook for Canada’s real GDP forecast in 2016. Strength should come from net exports and government spending while residential investment, business investment, and consumer spending should remain challenged, reflecting very weak private sector final demand. While there are positive forces at work within Canada such as a boost to government infrastructure spending, tailwinds for non-energy exports, and accommodative monetary policy, the impact should be somewhat limited. In particular, Canada’s competitiveness continues to be challenged, putting a cap on the boost from non-energy exports. Indeed, since 2010, much of the growth in the new firms has occurred in the construction and real estate sectors as manufacturing continues to appear to be in secular decline (Fig 33).
Fig 33 New firm creation in Canada has been concentrated in construction and real estate 1.20
Number of employer enterprises in the business sector (1Q 2010 = 1.0) Construction and real estate (CAGR = 2.6%)
1.15
1.10
All other private businesses (CAGR = 0.7%)
1.05
1.00
Manufacturing (CAGR = - 0.5%) 0.95
2010
2011
2012
2013
2014
2015
Source: Statistics Canada, Macquarie Research, December 2015
While the election of a Liberal majority may mean federal government spending should increase, this represents just 30% of total government spending in Canada and may be partially offset by continued pressure on municipal and provincial government budgets. The headwinds to Canada’s growth outlook
On top of reduced expectations for these positive forces, there are several headwinds to Canada’s growth outlook. Ongoing declines in energy capital investment in resource-intensive provinces are likely to persist in 2016. Moreover, elevated household debt and stretched residential investment mean the consumer lending and housing investment cycles have never been more desynchronized from the United States. Finally, we anticipate that real wage growth should be significantly negative in Canada in 2016 as labour slack keeps wage growth low and a weaker currency leads to higher inflation. This dynamic should put increasing pressure on household budgets and lead to weak consumer spending growth.
14 December 2015
18
Macquarie Research
The Global Macro Outlook
Australia Australia’s income challenge has increased over the past month, with commodity prices continuing to push lower. We have downgraded our 2017 growth outlook to reflect the impacts of additional commodity price weakness. But in the near term (4Q15, 1H16), our GDP forecasts are marginally higher. This reflects the stronger than expected 3Q15 GDP outcome, which was released during the month. The 3Q15 growth outcome once again highlights the reliance of Australia’s economy on resource exports. Australia’s economy grew by 0.9%QoQ in 3Q15. However, resource exports contributing 1.1%pts to GDP growth, and net exports overall contributed 1.5%pts. Internal demand contracted, in line with the further deterioration in the terms of trade. Movements in iron ore prices, and oil, since the end of 3Q15 point to a further deterioration in Australia’s terms of trade into year end. Iron ore prices have pushed below US$40, and in A$ terms are below the assumption underpinning the federal government’s 2014/15 Budget. Along with weaker wage and salary earnings, and GDP outcomes, lower iron ore prices will weigh on revenues, widening the deficit and reducing appetite for fiscal stimulus. Australia’s labour market outcomes have surprised, renewing concerns around data quality.
Whilst domestic demand, and domestic income, growth has been weak, Australia’s labour market has delivered unexpected strength. Following surprisingly strong jobs growth in October, Australia’s labour market delivered an even stronger employment outcome in November. Although the ABS highlighted that a good proportion of the jobs outcomes reflected sampling errors, the firmer labour market tone will add to perceptions that – despite an explicit easing bias – the hurdle for further rate cuts from the RBA is relatively high. We have adjusted our expectations for further easing from the RBA, shifting our forecast for two further 25bp rate cuts out to May and August 2016 (previously February and May). The delayed divergence in RBA-Fed monetary policy outcomes has affected our outlook for the A$, with our deterioration forecast delayed slightly. In line with the weaker outlook for commodity prices (iron ore and coal) we have pushed out the expected A$ recovery.
The firmer labour market raises the bar to further RBA easing. We have delayed our rate cut forecast to 2Q16.
Ultimately we have not changed our overarching outlook for the Australian economy over the past month. Whilst the tone has lifted, the fundamentals have not shifted. Weak income growth and the acceleration of the downswing in mining capex will challenge the outlook through 2016. The economy is rotating from mining to non-mining growth, but that is occurring within a slowly growing (or shrinking) demand profile. Further A$ weakness is needed to secure the economy’s rebalancing, with rate cuts most likely required in order to achieve the required fall. Ultimately, the extent to which the RBA needs to deliver further rate cuts is dependent on the extent of downward adjustment in the A$, or the emergence of additional demand (e.g. fiscal stimulus) in the economy.
Fig 34 Australia’s 3Q15 GDP outcome was stronger than expected, with resource exports masking domestic weakness.
5
%
Australia: GDP g rowth (% ch an ge)
To tal (y%ch )
4
3
%
3Q15 o utco me
Exclud ing resource exp o rts (y%ch)
5
4
3
2
2
1
1
0
0
-1 Dec-07
Quarterly g rowth Dec-09
Dec-11
Dec-13
-1 Dec-15
Source: ABS, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
New Zealand On 10 December 2015, the RBNZ announced a 25bp cut to the Overnight Cash Rate, taking the OCR to 2.50%. The inflation outlook was downgraded but the easing bias was watered down from explicit to conditional. The lack of an explicit easing bias from the RBNZ risks placing unwanted upside pressure on an already elevated NZ$, and could further delay the broadening in the economy and return of CPI inflation to the target band. Whilst the RBNZ has delivered a widely anticipated cut, they’ve once again managed to deliver an unexpected surprise – a signal in the 90-day bill strip and the Governor’s Statement that rate cuts are finished
Whilst the RBNZ has delivered a widely anticipated cut, they’ve once again managed to deliver an unexpected surprise – a signal in the 90-day bill strip and the Governor’s Statement that rate cuts are finished. We suspect we are not alone in finding the adoption of a conditional, or broadly neutral, bias for rates at the same time as downgrading the outlook for inflation as a curious outcome. We had expected that an easing bias would remain in place, given the unwanted, or in the RBNZ’s words “unhelpful”, strength in the NZ$. The risk remains tilted towards rate cuts in 2016. The RBNZ has shifted the timing of the expected return of CPI inflation to the mid-point of the 1-3% target band out by a full 15 months, from 3Q16 to 4Q17. Whilst the transitory impacts of lower oil prices are a factor in the near term, the extended delay highlights to us the other factors holding back inflation and the challenge for the economy in absorbing the large terms of trade decline. A lower for longer inflation profile is more in line with our view on the likely timing of the RBNZ’s monetary policy normalisation. Our current forecast has the RBNZ not beginning to raise rates until 2H2017. Factors that the RBNZ point to as supporting growth in 2016 include a less negative outlook for export prices, stronger net migration and an expectation that increases in house prices will drive a wealth effect. The RBNZ expects growth in consumption to exceed growth in labour income. This is similar to the RBA’s expectation for Australian consumers. The trajectory for house prices, and consumer confidence, is the key to spending growth holding up in both economies – until a sustained pickup in national income or lower exchange rate emerges. The NZ$’s trajectory holds the key to future rate cuts. In our view, if the NZ$ does not fall – in the absence of a material recovery in NZ commodity prices (unlikely) – the RBNZ will be cutting in 2016. Whilst we have boosted the near term NZ$ profile, we maintain our forecast for the NZ$ to push below US$0.60 in 2016 and have extended the period of NZ$ weakness into 2017. Whilst we see rates on hold, we remain of the view that an additional 50bp of cuts in mid-2016 is a significant risk.
Fig 35 Unhelpful strength in the NZ$ is weighing on the economy. The expected decline is now more modest.
84
In d ex
New Zeal an d : Trade W eighted Index (In d ex, RBNZ forecasts)
In d ex
84
RBNZ fo recasts 79
79 Mar-15
74
74 Jun -15
Dec-15
69
69
Sep -15 64 Jun -10
64 Jun -12
Jun -14
Jun -16
Jun -18
Source: RBNZ, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
South Africa The recent negative actions by two of the three major credit rating agencies – namely, S&P putting SA’s BBB- rating on a negative outlook and Fitch downgrading SA’s rating to BBB(but with a stable outlook) – brought the structural growth constraints in the SA economy into the limelight again. Both agencies seemed reasonably comfortable with SA’s fiscal decisions and gradual consolidation, but are concerned about the weak trend growth (with 2016 likely to be the third consecutive year of at most 1.5% growth) and particularly the lack of policy reform to improve this. The recent surprise change in Finance Minister was a very negative signal in terms of policy certainty
We remain cautiously optimistic that there is more traction with gradually starting to implement SA’s National Development Plan than is generally perceived to be the case, but 1) the progress is very incremental, and 2) the plan was designed as a long-term strategy, and neither intended nor likely to underpin a near-term growth improvement.
It seems likely that SA will be below investment grade by at least one of the rating agencies in the next six months
For now, weak commodity demand and prices, subdued global growth, as well as tightening monetary and fiscal policy, suppresses the economic growth outlook. This, in turn, weighs on the rand. The rand also reacted very negatively to the announcement of the change in Finance Minister.
Ultimately the rating agencies would require some evidence that trend growth will eventually improve from current levels. The recent surprise change in Finance Minister was a very negative signal in terms of policy certainty and will likely accelerate the negative rating actions that we have been anticipating. It seems likely that SA will be below investment grade by at least one of the rating agencies in the next six months.
Ultimately, this will likely be a watershed for the ANC and in turn for SA. The rand is very weak, but a recovery will, in our view, only happen once there is more clarity on how the recent political events will end. There are many possible scenarios, but at this stage we struggle to see how any of them could resolve the situation in the next six months, and it would most likely require even more time. Our current rand forecasts assume that the situation starts to improve in a year’s time, which gives marginal support to the rand. We then assume this will be followed by a recovery in commodities, which should provide further support to the rand. Overall, in response to these events, we have weakened our rand forecasts, lifted our inflation forecasts, accelerated the forecast monetary policy tightening, and lowered our growth forecasts. Unless there is a political improvement in the next couple of months, the risks are biased towards an even weaker rand, weaker growth and higher inflation and interest rates.
Fig 36
SA’s sovereign credit rating history
Fig 37
Rand (index: lower = weaker)
Rand
ABBB+ BBB
105 100
95 90
BBB-
85
BB+
80
BB
75 70 Jan-14
Moody's S&P Fitch Average Source: Bloomberg, Macquarie Research, December 2015
14 December 2015
Apr-14
Jul-14
Oct-14
Nominal effective rand
Jan-15
Apr-15
Jul-15
Oct-15
R/$ (indexed, lower = weaker)
Source: Bloomberg, Macquarie Research, December 2015
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Macquarie Research
The Global Macro Outlook
India There have been policy efforts over the past few months to revive projects in the roads, railways, mining and power sectors
The good …: As we have been highlighting, there are some green shoots emerging, especially on the public capex front and urban consumption. There have been policy efforts over the past few months to revive projects in the roads, railways, mining and power sectors by: 1) easing investment bottlenecks, including facilitating environmental and forest clearances, ensuring coal availability, steps toward labour market reforms, etc; 2) a cumulative 125bp cut in policy rates; and 3) encouraging capex spending by cash-rich PSUs. We believe these have helped to provide a bounce in investment activity picking up on a low base. Similarly, the upcoming revision in salaries under the 7th Pay Commission, effective January 2016, contained inflationary pressures and subdued global commodity prices that will help support private consumption over the coming months, especially in urban areas. … and the bad: The corporate earnings downgrade cycle continues, with the street having downgraded Nifty estimates by around 15–17% since the beginning of the year. Bank credit growth remained sluggish at 9.3% YoY for the Sept-15 quarter. Banking sector pressure continues, with nearly 13–15% of the book being stressed. Private corporate capex is yet to bounce back meaningfully, and rural consumption has slowed significantly, led by weak monsoons and curtailment in government spending. A weak global economy, too, is holding back capacity utilisation in the manufacturing sector and exports.
We believe a gradual sequential improvement in growth will be visible over the coming months
A modest cyclical recovery to be underway in FY17 (FY3/17): We believe a gradual sequential improvement in growth will be visible over the coming months. However, the growth recovery will neither be broad-based nor match investors’ optimism for a quick economic turnaround. For a sustainable economic revival, India needs a pick-up in the investment cycle, led by the private corporate sector (looks difficult before 2017) and a supportive global economy (our base-case scenario for 2016 is that it will be another year without global growth engines, see Viktor Shvets’ report). Based on the new GDP series, we continue to expect a 40bp pick-up in India’s GDP growth, to 7.6% YoY in FY17 vs. 7.2% YoY estimated in FY16. We note that our estimates are much below consensus GDP growth at 7.5% YoY for FY16 and 7.8% YoY for FY17. We believe India needs continuity of policy action as well as faster implementation of structural reforms, including GST, bankruptcy law, PSU banks recapitalisation, land and labour reforms, etc, for a sustainable pick-up toward a high growth path.
Fig 38
Fig 39 Much below consensus on GDP growth for FY16 and FY17
India real GDP growth trend
YoY% 8%
7.6%
7.3%
7.2%
FY15E
FY16E
6.9% 7% 6% 5.1% 5% 4% 3% 2% 1% 0% FY13
FY14
FY17E
Note: Macquarie estimates Source: CEIC, Macquarie Research, December 2015
14 December 2015
Source: Consensus Economics, Macquarie Research, December 2015
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Macquarie Research
The Global Macro Outlook
ASEAN Investment recovery gained ground in Indonesia and the Philippines, but lost momentum in Thailand
The green shoots of a rebound in fixed-investment spending – and particularly public investment – were evident in September-November across much of ASEAN, with the exception of Thailand where the mild September rebound lost momentum by October. Indonesia began using the fiscal headroom provided by its smaller deficit in 1H 2015 (1.6% of GDP) to spur a rebound in public spending in July-August. When accompanied by a turnaround in bank lending (+10.9% YoY in September, from 9.6% YoY in July), this translated to a rebound in cement consumption in August-October 2015 (with positive and strengthening YoY growth for each of those three months, following seven months of contraction), and a mild turnaround in sales of cars and motorcycles (which had been slumping precipitously since December 2014 in response to the 30% increase in average petroleum-product prices on November 17, 2014). Similarly, the Philippines responded to its fiscal surplus in 1H 2015 with a burst of government spending in 3Q 2015 (+19.3% YoY, the fastest pace of quarterly government spending growth since 2Q 2009), which enabled real GDP to accelerate to 6% YoY growth in 3Q 2015.
Fig 40
ASEAN begins clawing back US goods-import market share (12mma)
(%) 3.0
ASEAN begins clawing back US goods-import market share (12mma)
2.5 2.0 1.5 1.0
0.5 0.0 Sep-95
Sep-97
Sep-99
Sep-01
Sep-03
Sep-05
Sep-07
Sep-09
Sep-11
Sep-13
Malaysia exports: mkt share in US
Indonesia exports: mkt share in US
Philippines exports: mkt share in US
Thailand exports: mkt share in US
Singapore exports: mkt share in US
India exports: mkt share in US
Sep-15
Source: CEIC, Macquarie Research, December 2015
Exports to the US gained more ground, but not enough to offset the weakness of intraASEAN and China demand
Exports remained weak across ASEAN, as intra-ASEAN demand succumbed to a feedback loop from the slump in China’s imports over the past 15 months. Broadly, however, trade and current account balances have improved, as the mirror image of weaker intra-ASEAN demand is a sharper decline in imports than exports virtually everywhere in the region. ASEAN countries, having lost market share in goods exports to the US over the past 15 years, have begun clawing back some market share in 2015 – led by Malaysia, Thailand and Singapore. This will have an incrementally positive impact on export growth over the medium term, but less so in the near term, because China has become a far bigger export destination than the US for all ASEAN economies (other than the Philippines). As investment spending begins to recover across the region, however, intra-ASEAN imports should strengthen too, boosting headline export performance for the region collectively. With the US seeing a sustained recovery in its labour market, the EU likely to benefit from an even more expansionary monetary stance from the ECB next month, and China’s import volumes likely to decline only 0-2% YoY in 2016, ASEAN’s headline exports are poised to resume growing in 2016.
14 December 2015
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Macquarie Research
Indonesia’s abating inflation allows room for 75bp of rate cuts in 1H 2016
The Global Macro Outlook
In Indonesia, CPI inflation abated to 4.89% YoY in November 2015. Headline inflation had been high ever since the November 17, 2014 hike of 30% in fuel product prices; with the base effect beginning to fade this November, the headline inflation rate was bound to abate. In December 2015, the impact will be even clearer: we expect headline inflation to be just over 3.5% YoY this month. Indonesia’s current account deficit continued to decline (to US$18.5bn or 1.8% of GDP in 3Q, the smallest quarterly deficit in 3 years), as oil and non-oil imports declined. October 2015 marked the 11th consecutive month of trade surplus, and this improvement paved the way for a modest monetary easing in November – via a 50bp reduction in the reserve requirement, which should allow the rebound in bank lending to gain additional momentum. We expect the policy rate to decline by 75bp in 1H 2016; if the rupiah stays stable until the next BI meeting, the first cut in interest rates could be in December itself. That sharp decline in interest rates should help to spur the economic recovery, which will be supported by the weakened Rupiah. We retain our 2016 real GDP growth forecast of 5.5%.
Fig 41 Indonesia: real policy rate is +2.6% now
20
18 16 14 12 10 8 6 4 2
0 Nov-05
Nov-07
Nov-09 BI policy rate: %
Nov-11
Nov-13
Nov-15
CPI inflation: YoY%
Source: CEIC, Macquarie Research, December 2015
We continue to expect the two ASEAN currencies that have weakened the most this year – MYR and IDR – to recover a modest amount of ground in 2016, while the PHP and THB depreciate more after rising in real effective terms in 2015 (and seeing their exports weaken). The ringgit’s rebound will be constrained by the renewed slump in crude oil prices – which we do not expect to be sustained into 2016. The AEC, albeit still a work in progress, should facilitate complementary capital flows within ASEAN, helping to lift all national economic boats over the medium term
14 December 2015
The November 2015 ASEAN Summit in Kuala Lumpur proclaimed the creation of the ASEAN Economic Community (AEC), which envisages free movement of goods, many services, most capital and substantially all skilled-labour across the ASEAN economies. Thus far, only goods trade is genuinely free (with a few specific exceptions for each country), but the complementarities between the current account surplus economies (Singapore, Thailand, Malaysia, Philippines, Brunei) and the deficit ones (Indonesia, Vietnam, Myanmar, Cambodia, Laos) should facilitate substantial flows of capital that lift all national boats in ASEAN. Over the past decade, Malaysia’s corporate sector has vastly increased its investments overseas (primarily in the rest of ASEAN, with FDI outflows exceeding FDI inflows to Malaysia by more than 1ppt of GDP each year for the past decade), and Thailand’s corporates have been ASEANizing in the past 5 years (with their net FDI outflows now exceeding FDI inflows), as have some Philippines corporates in the past 2-3 years. Singapore, ironically, still remains a massive net recipient of FDI inflows – and its excess capital is invested (mainly in developed markets) by the Government of Singapore Investment Corp (GIC). But once the AEC gains legitimacy, Singapore corporates and banks can be expected to join their Malaysian, Thai and Filipino counterparts in spreading their wings across ASEAN – and these complementary flows of capital should help lift the whole of ASEAN’s growth potential.
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Macquarie Research
The Global Macro Outlook
The Long Grinding Cycle continues We believe the pace of the current expansion should continue to prove to be structurally lower than in previous cycles, as high leverage levels, demographic factors, low productivity growth and sub-optimal global policy making are likely to remain as headwinds in the years ahead. Our 2015, 2016 and 2017 global real GDP growth forecasts are 2.6%, 2.8% and 2.8%, respectively
Fig 42 Real GDP growth for 10 advanced economies and 6 emerging market economies, in current US$ 12 10
(%)
8 6 4
2 0 -2 -4 Advanced
-6 2000
2002
2004
2006
2008
Emerging
2010
2012
16-Total
2014
2016
2018
2020
Note: Global real GDP growth (10-Advanced & 6-Emerging) is forecast to be 2.6% in 2015, 2.8% in 2016, and 2.8% in 2017. Macquarie forecasts where available. Please see Fig 58 and Fig 59 for the constituents & weights used. The above uses market exchange rates. Using PPP weights would boost the numbers by about 0.6% pa Source: IMF, World Bank, OECD, Macquarie Research, December 2015
Attention is increasingly focussed on trend growth rates
One of David Doyle’s key themes has been lower potential growth for the United States, of around 2%
As the years pass after the 2008-10 turbulence, attention is increasingly focussed on trend growth rates. Two quotes from the IMF’s April 2015 World Economic Outlook: 1)
“Assessing the medium-term trajectory of potential output is critical for the conduct of monetary and fiscal policy”
2)
“In advanced economies, lower potential growth will make it more difficult to reduce high public and private debt ratios. It is also likely to be associated with low equilibrium real interest rates, meaning that monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialize”
One of David Doyle’s key themes has been lower potential growth for the United States, of around 2%.
Fig 43 The US labour force growth has been in a multi-decade decline
The US labour force growth has been in a multi-decade decline
Source: Bureau of Labour Statistics, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
This is a key building block to his view that the US 10-year yield should only rise to 2.7% by end-2017. David’s 5 September 2014 US Economics: Lower potential, rising wages, and demographics is recommended. There and subsequently, David has presented the limits of US potential growth. Due to an ageing population (Fig 44, Fig 45), the unemployment rate can be reduced by jobs growth as low as 55,000–115,000 per month, Fig 46. In his 8 May 2015 US Economics: Weak wages point to lift-off delay, David concludes that at the current trend rate of 180,000-220,000 jobs growth per month, slack is being eliminated rapidly. It is only a matter of time before wage growth starts to trend back to a 3% YoY pace. With continued low productivity growth, David believes this pace of wage growth is all that is needed for underlying inflation to reach the FOMC’s 2% target. David expects the tightening cycle to be gradual, cautious
Nonetheless, David expects the tightening cycle to be gradual, cautious, and supportive of risk-taking. This suggests an ongoing “policy put” will remain in place for 2015-16, just in a different form compared with recent years when slowdowns were responded to with more forward guidance, an asset purchase program announcement or a delay in tapering. In the quarters ahead, any economic slowdowns or disruptive volatility in markets amidst tightening are likely to be responded to by delaying or pausing further tightening.
Fig 44 Demographics and other structural factors explain close to 80% of the decline in participation
Source: Bureau of Labour Statistics, Macquarie Research, December 2015
Fig 45 The demographic headwinds for participation are set to persist Average annual population change by age group (000s) 2,000
1,500
2014 2015-22 p ro jected
1,000
500
0
-500 16-24
25-34
35-44
45-54
55-64
65+
Source: Bureau of Labour Statistics, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
Fig 46
The Global Macro Outlook
As few as 55,000 jobs per month may be needed to reduce overall slack 140
Projected monthly labour force growth (in thousands) 120
2
... even assuming an aggressive rebound in participation
3 There is a low threshold for jobs growth to reduce the unemployment rate ...
A cyclical rebound in participation should provide a boost for the next 4years.
100
4
1 80
An aging population will keep underlying labour force growth subdued for the next decade
60
35 115 90
40
55 20
0 LF growth with no cyclical rebound in participation
Impact of workers gradually returning over next 4 years
Total
Total (more aggressive rebound in participation)
Source: Bureau of Labour statistics, Macquarie Research, December 2015
Only between 50,000 and 75,000 jobs per month will be needed to maintain an unchanged unemployment rate
Fig 47
A research paper from the US Federal Reserve, available at the link below, found a similar result, suggesting that much of the decline in participation is structural and that “over the next decade somewhere between 50,000 and 75,000 jobs per month will be needed to maintain an unchanged unemployment rate”. http://www.federalreserve.gov/pubs/feds/2014/201464/201464pap.pdf It is noteworthy that the US Federal Open Market Committee has progressively reduced their estimate of longer-term growth, below, with a current forecast of just a little above 2% pa.
US FOMC growth projections continue to march lower
FOMC real GDP growth projections (4Q on 4Q) - midpoint of central tendency 4.0%
2013
2014
3.5%
3.0%
2.5%
2016
Lo n g er-run
2017 2.0%
2015
1.5% Apr-11
Nov-11
Apr-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Timing of projection
Source: US Federal Reserve, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
Fig 48 comes from a FRB of San Francisco research paper. It shows that labour productivity, the lighter shading, is around 1.5% pa. The authors conclude: “Information technology fuelled a surge in US productivity growth in the late 1990s and early 2000s. However, this rapid pace proved to be temporary, as productivity growth slowed before the Great Recession. Furthermore, looking through the effects of the economic downturn on productivity, the reduced pace of productivity gains has continued and suggests that average future output growth will likely be relatively slow.
Fig 48 Contributions to business-sector output growth
Note: From the 9 February 2015 FRBSF Economic Letter: The recent rise and fall of rapid productivity growth by John Fernald and Bing Wang. Data from the Bureau of Economic Analysis, Bureau of Labour Statistics. Source: FRB San Francisco Economic Letter noted above, Macquarie Research, December 2015
Some reality checks Labour productivity growth at around 1.5% pa appears a reasonable rule of thumb
Labour productivity growth at around 1.5% pa appears a reasonable rule of thumb to this author. To build confidence in this statement, Fig 49 provides a very sweeping historical context. GDP per capita growth since 1870 has fluctuated around 1.5% to 2.0%.
Fig 49 Period 1870-1913 1913-1950 1950-1973 1973-2003
Economic growth in Western Europe and the US (percent per year) GDP Europe 2.1 1.2 4.8 2.2
US 3.9 2.8 3.9 2.9
GDP per capita Europe 1.3 0.8 4.0 1.9
US 1.8 1.6 2.5 1.9
Note: The leaderless economy (2013) by Peter Temin & David Vines, page 117 Source: Maddison (2007), pp.380, 382 as cited in the book noted above, Macquarie Research, December 2015
As Peter Temin & David Vines note in their book The leaderless economy, the 1950–1973 growth spurt was augmented by the return to globalization that had been interrupted during 1913-50. International trade promotes industrialization, reallocating resources from agriculture to manufacturing, boosting labour productivity growth. A second reality check is the experience of Japan before and subsequent to its late 1980s credit bubble extremes. With the benefit of hindsight, investment was too strong in the 1980s (the growth in the capital stock measure), which has taken two decades to unwind, Fig 50. The growth decomposition undertaken by the Bank of Japan is extensive. There is an emerging trend in Japan for Japanese workers to willingly work modestly fewer hours than previously. As Fig 52 shows, there is still a long way to go to reach OECD averages. Japan’s potential GDP growth rate has faded to around 0.8% pa, broadly composed of 1.1% labour productivity growth and a trend 0.3% shrinkage in the working population. Another important lesson from the Japan experience was the difficulty that economic forecasters had adjusting their expectations to the abrupt step-down in Japan’s trend growth rate, Fig 51. 14 December 2015
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Macquarie Research
Fig 50
The Global Macro Outlook
Potential growth rate – Japan (production function approach), FY1980-2014
Source: BOJ, Macquarie Research, December 2015
Excessive private sector investment took a decade to absorb; private sector balance sheet adjustments after a credit boom became the priority. Credit-fuelled investment-driven growth has characterized emerging markets/China over the last decade. Please see the private investment charts over pages 46 through 49. Economic forecasters had difficulty adjusting their expectations to the abrupt stepdown in Japan’s trend growth rate
Fig 51
Japan: IMF 5-year growth forecasts, and the outturn, (1990-2009)
Average GDP growth rate, next 5 years, % 5 IMF forecast
Outturn
4 3 2
1 0 -1
Source: Oxford Economics, Macquarie Research, December 2015
Japan and Germany Employees in Japan generally work long hours, whilst being relatively unproductive
We agree with the conventional image of employees in Japan generally working long hours, whilst being relatively unproductive, Fig 52. What has surprised this writer is that the OECD is not very complimentary about German service sector labour productivity either. To quote from the May 2014 OECD Economic Surveys: Germany: Labour productivity, measured in total hours worked, has developed favourably in manufacturing, rising at an annual growth rate of 2.6% between 2000 and 2011. At the same time, measured labour productivity growth in the service sector has been slightly below 1%. In comparison to other OECD countries, telecommunication services as well as professional, scientific and technical services have performed especially poorly. Measured labour productivity for the latter actually decreased, at an annual rate of -2.0%.
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Macquarie Research
The Global Macro Outlook
This is interesting because Germany is part of the European Union, which has open borders, freedom of capital movements and a strong reputation for harmonizing rules and regulations. A possible explanation is that there are durable ‘intangible’ barriers to entry in any economy that derive from historical and cultural factors that entrench the position of incumbents.
Fig 52 Japan’s per capita income is in line with the OECD average, despite working relatively long hours. Labour productivity is relatively poor. Japan and the OECD average relative to the top half of OECD countries in 2012*
Note:* compared to the simple average of the 17 OECD countries with the highest rankings. GDP per capita is based on 2012 purchasing power parities (PPPs). Source: OECD National Accounts, Economic Outlook and Employment Outlook Databases, Macquarie Research, December 2015
Japan’s and Germany’s productivity records are quite similar
Japan’s and Germany’s overall productivity records are quite similar, Fig 53. In terms of GDP per hour worked (row 1), Japan has done a little better over 1995-2012 because of superior performance over 2007-12.
Labour productivity growth of around 1.5% pa seems a reasonable assumption for Japan and Germany in the future
Fig 53
In line with the US FRB San Francisco conclusion on the previous page, labour productivity growth of around 1.5% pa seems a reasonable assumption for Japan and Germany in the future.
Productivity indicators (%, pa) Japan
Germany
US
19952012
20012007
20072012
19952012
20012007
20072012
19952012
20012007
20072012
1 2 3
GDP per hour worked Labour utilisation GDP per capita
1.53 -0.84 0.69
1.63 -0.15 1.47
0.89 -0.97 -0.09
1.33 0.00 1.33
1.60 -0.19 1.41
0.29 0.54 0.83
1.92 -0.49 1.42
2.02 -0.39 1.63
1.27 -1.51 -0.26
4 5 6 7
Labour input ICT capital Non-ICT capital Multifactor productivity
-0.88 0.57 0.44 0.62
-0.03 0.48 0.00 1.12
-1.28 0.26 -0.22 0.46
0.01 0.27 0.21 0.87
-0.15 0.24 0.15 1.13
0.39 0.13 0.13 0.03
0.32 0.51 0.27 1.27
0.46 0.41 0.27 1.41
-1.05 0.23 0.12 0.82
Contribution of capital deepening 9 MFP growth 10 Labour productivity growth
0.81
0.49
0.47
0.48
0.45
0.14
0.73
0.45
0.14
0.74 1.54
1.12 1.61
0.33 0.78
0.88 1.37
1.14 1.59
0.05 0.25
1.27 1.99
1.14 1.59
0.05 0.25
11 Growth in capital services per hour worked
-1.38
-0.15
-0.77
-0.49
-0.16
-0.36
-1.66
-1.06
-1.37
12 Labour productivity 13 Labour compensation per hour worked 14 Unit labour costs
1.22 -0.65
1.64 -1.17
0.58 0.12
1.18 1.67
1.89 1.05
0.32 2.40
1.38 3.32
1.60 3.85
1.04 2.53
-1.82
-2.76
-0.41
0.52
-0.82
2.12
1.93
2.22
1.49
8
Source: OECD Compendium of Productivity Indicators 2013, Macquarie Research, December 2015
14 December 2015
30
Macquarie Research
The Global Macro Outlook
Asia For a discussion on potential growth rates in Asia, please see the 10 July 2013 PEC’s strategy weekly: Asia’s core 2014 issue arrives early. The ADB forecasts employ a conventional factor approach (labour, capital, MFP), below. The ADB’s estimates for China and India, 2011-20, on unchanged policies, are 6.09% and 4.67% pa respectively. For the ASEAN-5 it is 4.90% pa. Potential growth rates can be regarded as the gravitational pull rate of growth unless structural reform policies are implemented
Fig 54 The Asian Development Bank’s (ADB) GDP projections, % pa Baseline Projections 2011-20
(% pa) China Hong Kong India Korea Taiwan ASEAN-5
6.09 4.40 4.67 4.39 3.68 4.90
Reform Scenario Projections 2011-20 2021-30
2021-30 4.98 2.83 4.28 3.42 2.48 4.17
7.00 4.62 6.13 4.65 3.89 5.58
6.23 2.92 5.78 3.70 2.73 5.28
Note: ASEAN-5 weights are 2011 nominal GDP (US$, IMF) Source: ADB, Macquarie Research, December 2015
The Economic Complexity Project, also generates forecasts of future growth. Please see: http://atlas.cid.harvard.edu/media/atlas/pdf/HarvardMIT_AtlasOfEconomicComplexity_Part_I. pdf A relatively new approach to economic analysis, the methodology is presented in the 10 July 2013 PEC’s strategy weekly: Asia’s core 2014 issue arrives early; pages 4-9, link above. Expected 2009-2020 GDP growth rates are: 1) 4.66% pa for China 2) 5.51% pa for India 3) 4.33% pa for the ASEAN-5 Potential growth rates can be regarded as the gravitational pull rate of growth unless structural reform policies are implemented. The projected potential growth rate divergence between China and India is partially a reflection of demographic trends, Fig 55.
Fig 55
Global changes in working age populations (2025 less 2015)
Persons mn 140 100 100 53
60
44
39
35
28 14
20
1
0 -1
-20
-5 -29
China
Affluent Asia
Eastern Europe
Russia
Western Europe
North America
Central & South America
South Asia
Developing Asia
Africa
North Africa & Middle East
India
-60
Note: To calculate working age population we have used the definition of 15-64 years for economies including Africa, Central & South America, Developing Asia, India, North Africa & Middle East and South Asia. For the rest, we have used the definition of 15-74 years to calculate working age population as the life expectancy in these countries is higher Source: Global Demographics, Macquarie Research, December 2015
14 December 2015
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Macquarie Research
The Global Macro Outlook
Finally, consistent with the foregoing, the IMF is forecasting advanced economies to grow at 1.5% pa 2015-2020, and emerging economies at 5.1% pa 2015-2020. In both cases, this is a lower forecast growth rate than that achieved over 2001-2007, before the Global Financial Crisis.
Fig 56 2.5
Lower potential growth rate: Advanced
Evo lution o f p otential o utput g rowth : Ad vanced Economies % % To tal facto r p roductivity growth
Fig 57 Lower potential growth rate: Emerging 2.5
Cap ital g rowth
7.0 6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
8.0
Po ten tial employment growth 2.0
Evo lution o f p otential o utput g rowth : Emerg ing Economies % % 9.0 To tal facto r p roductivity g rowth Po ten tial employment growth 8.0 Cap ital g rowth Po ten tial output g rowth 7.0
9.0
2
Po ten tial output g rowth 1.5
1.5
1.0
1
0.5
0.5
0.0
0 2001–2007
2008–2014
2015–2020
Source: IMF, Macquarie Research, December 2015
2.7% pa global real GDP growth
0.0
0.0 2001–2007
2008–2014
2015–2020
Source: IMF, Macquarie Research, December 2015
Implicitly, the IMF is forecasting 2.7% p.a. global real GDP growth over 2015-20 (1.5% times 0.66 = 0.99 plus 5.1% times 0.34 = 1.73). The OECD is forecasting trend growth for the OECD to be around 2.4% p.a.
3.3% pa global real GDP growth
Using the OECD forecast rather than the IMF’s 1.5%pa forecast for advanced economies generates a global real GDP growth per annum over 2015-20 forecast of 3.3% (2.4% times 0.66 = 1.58 plus 5.1% times 0.34 = 1.73). “The long grinding cycle” implies global real GDP growth of around 2.5% to 3.0%, capped by the world’s trend growth rate, and generally performing a little beneath this.
14 December 2015
32
GDP in current US$ for 10-Advanced countries and 6-Emerging market economies
Country Name
% of % of % of % of % of % of % of % of % of % of % of % of % of % of % of 2000 total 2001 total 2002 total 2003 total 2004 total 2005 total 2006 total 2007 total 2008 total 2009 total 2010 total 2011 total 2012 total 2013 total 2014 total
10-Advanced countries (GDP in trillion) United States 10.3 38% 10.6 40% 11.0 40% 11.5 37% 12.3 36% 13.1 35% 13.9 35% 14.5 33% 14.7 31% 14.4 32% 15.0 30% 15.5 29% 16.2 29% 16.8 30% 17.4 29% Japan 4.7 18% 4.2 16% 4.0 14% 4.3 14% 4.7 13% 4.6 12% 4.4 11% 4.4 10% 4.8 10% 5.0 11% 5.5 11% 5.9 11% 6.0 11% 4.9 9% 4.6 8% Germany 1.9 7% 1.9 7% 2.1 7% 2.5 8% 2.8 8% 2.9 8% 3.0 8% 3.4 8% 3.7 8% 3.4 8% 3.4 7% 3.8 7% 3.5 6% 3.7 7% 3.9 7% France 1.4 5% 1.4 5% 1.5 5% 1.8 6% 2.1 6% 2.2 6% 2.3 6% 2.7 6% 2.9 6% 2.7 6% 2.6 5% 2.9 5% 2.7 5% 2.8 5% 2.8 5% Italy 1.1 4% 1.2 4% 1.3 5% 1.6 5% 1.8 5% 1.9 5% 1.9 5% 2.2 5% 2.4 5% 2.2 5% 2.1 4% 2.3 4% 2.1 4% 2.1 4% 2.1 4% Spain 0.6 2% 0.6 2% 0.7 3% 0.9 3% 1.1 3% 1.2 3% 1.3 3% 1.5 3% 1.6 3% 1.5 3% 1.4 3% 1.5 3% 1.4 2% 1.4 2% 1.4 2% United Kingdom 1.5 6% 1.5 6% 1.7 6% 1.9 6% 2.3 7% 2.4 7% 2.6 7% 3.0 7% 2.8 6% 2.3 5% 2.4 5% 2.6 5% 2.6 5% 2.7 5% 2.9 5% Australia 0.4 2% 0.4 1% 0.4 1% 0.5 2% 0.6 2% 0.7 2% 0.7 2% 0.9 2% 1.1 2% 0.9 2% 1.1 2% 1.4 3% 1.5 3% 1.6 3% 1.5 2% Canada 0.7 3% 0.7 3% 0.8 3% 0.9 3% 1.0 3% 1.2 3% 1.3 3% 1.5 3% 1.5 3% 1.4 3% 1.6 3% 1.8 3% 1.8 3% 1.8 3% 1.8 3% S. Korea 0.6 2% 0.5 2% 0.6 2% 0.7 2% 0.8 2% 0.9 2% 1.0 3% 1.1 3% 1.0 2% 0.9 2% 1.1 2% 1.2 2% 1.2 2% 1.3 2% 1.4 2% (Advanced)
23.3 87% 23.1 87% 23.9 86% 26.6 86% 29.4 85% 30.9 84% 32.4 82% 35.0 79% 36.7 77% 34.8 76% 36.3 74% 38.8 71% 39.0 71% 39.1 69% 39.8 67%
6-Emerging market economies (GDP in trillion) Brazil 0.6 2% 0.6 2% 0.5 Mexico 0.7 3% 0.7 3% 0.7 Russian Federation 0.3 1% 0.3 1% 0.3 Turkey 0.3 1% 0.2 1% 0.2 India 0.5 2% 0.5 2% 0.5 China 1.2 4% 1.3 5% 1.5 (Emerging) Total
Macquarie Research
14 December 2015
Fig 58
3.5 13% 26.9
3.6 13% 26.7
2% 3% 1% 1% 2% 5%
3.8 14% 27.7
0.6 0.7 0.4 0.3 0.6 1.6
2% 2% 1% 1% 2% 5%
4.3 14% 30.9
0.7 0.8 0.6 0.4 0.7 1.9
2% 2% 2% 1% 2% 6%
5.1 15% 34.5
0.9 0.9 0.8 0.5 0.8 2.3
2% 2% 2% 1% 2% 6%
6.1 16% 37.0
1.1 1.0 1.0 0.5 0.9 2.7
3% 2% 2% 1% 2% 7%
7.2 18% 39.6
1.4 1.0 1.3 0.6 1.2 3.5
3% 2% 3% 1% 3% 8%
1.7 3% 1.1 2% 1.7 3% 0.7 2% 1.2 3% 4.5 10%
1.6 4% 0.9 2% 1.2 3% 0.6 1% 1.4 3% 5.0 11%
2.1 4% 1.1 2% 1.5 3% 0.7 1% 1.7 3% 5.9 12%
2.5 5% 1.2 2% 1.9 4% 0.8 1% 1.8 3% 7.3 13%
2.2 4% 1.2 2% 2.0 4% 0.8 1% 1.8 3% 8.2 15%
2.2 4% 2.3 4% 1.3 2% 3.5 6% 2.1 4% 0.2 0% 0.8 1% 0.8 1% 1.9 3% 2.1 3% 9.2 16% 10.4 18%
9.1 21% 10.9 23% 10.7 24% 13.1 26% 15.5 29% 16.3 29% 17.5 31% 19.3 31% 44.1
47.5
45.5
49.4
54.3
55.3
56.7
59.1
Source: IMF, World Bank, Macquarie Research, December 2015
The Global Macro Outlook
33
Country Name Advanced US Japan Germany France Italy Spain UK Australia Canada S. Korea 10-Total Emerging Brazil Mexico Russia Turkey India China 6-Total 16-Total ASEAN Indonesia Malaysia Singapore Philippines Thailand
Real GDP growth (annual %), totals weighted by GDP in current US$ shares, Macquarie where available (shaded in grey) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
1.9 5.6 5.3 2.9 2.0 3.8 0.5 3.5 0.1 9.3
-0.1 3.3 5.1 1.0 1.5 2.5 -1.2 -0.4 -2.1 9.7
3.6 0.8 1.9 1.6 0.8 0.9 0.4 0.4 0.9 5.8
2.7 0.2 -1.0 -0.6 -0.9 -1.0 2.6 4.0 2.6 6.3
4.0 0.9 2.5 2.3 2.2 2.4 4.0 4.0 4.6 8.8
2.7 1.9 1.7 2.1 2.9 2.8 2.5 3.9 2.7 8.9
3.8 2.6 0.8 1.4 1.3 2.7 2.7 3.9 1.7 7.2
-4.3 1.5 -0.5 4.7 5.3 4.4 2.1 5.1 4.2 3.6 4.1 4.7 -5.8 5.9 -3.0 -5.0 -14.5 -8.7 -12.6 -4.1 -3.6 9.3 0.7 5.0 7.7 -4.7 7.9 7.4 5.5 1.1 5.5 4.8 6.7 7.6 7.5 3.8 9.2 14.2 14.0 13.1 10.9 10.0
9.0 8.9 9.0 9.5 10.0 6.7 3.0 -0.6 11.2 8.6
7.2 7.3 7.5 8.9 9.9 9.2 7.1 11.5 10.9 0.3 2.1 4.4 8.1 8.3 9.0
4.5 4.5 4.8 1.6 -2.0 -0.2 1.8 2.0 2.0 2.3 3.6 3.4 1.8 1.6 1.6 3.7 4.3 4.5 2.6 3.5 3.2 3.9 4.4 5.0 4.3 4.1 5.0 5.8 -5.7 10.7
4.1 2.3 3.0 3.9 3.7 5.3 3.8 3.9 5.1 8.8
1.0 0.4 1.7 2.0 1.8 4.0 2.7 1.9 1.7 4.5
1.8 2.8 0.3 1.7 0.0 -0.7 1.1 0.8 0.3 0.2 2.9 3.2 2.5 4.3 3.9 3.1 2.8 1.9 7.4 2.9
3.8 2.4 1.2 2.8 1.6 3.2 2.5 4.2 3.1 4.9
3.3 1.3 0.7 1.6 0.9 3.7 2.8 3.2 3.2 3.9
2.7 1.7 3.7 2.4 2.0 4.2 3.0 3.0 2.6 5.2
1.8 2.2 3.3 2.4 1.5 3.8 2.6 3.8 2.0 5.5
3.7
1.3
1.5
3.0
2.5
2.7
2.3
3.4 0.0 0.3 4.3 1.3 7.0 4.7 2.7 5.3 -0.6 1.4 -5.3 6.4 10.0 5.1 7.6 2.3 -3.4 6.8 -5.7 4.0 6.2 8.8 3.8 4.8 9.3 7.8 7.6 8.4 8.3 6.4 3.9 4.1 1.7
8.4 7.6 4.7 9.8 10.0 7.3 7.0 7.5 8.3 4.7 5.8 5.2 9.2 5.9 -1.4
-13.1 -7.4 -2.2 -0.6 -10.5
0.8 6.1 6.1 3.1 4.4
4.9 3.6 8.9 0.5 8.9 -1.0 4.4 2.9 4.8 2.2
2.1
-0.3 -1.0 1.1 0.2 -1.0 1.1 -0.3 3.7 1.2 2.8
-2.8 -5.5 -5.6 -2.9 -5.5 -3.6 -4.3 1.7 -2.7 0.7
0.1 -3.6
2.5 1.6 2.3 2.2 2.2 4.7 -0.5 1.8 1.6 0.4 4.1 3.6 0.4 0.4 1.6 2.0 2.1 0.3 0.7 0.2 1.7 0.6 -2.3 -1.7 -0.4 0.0 -0.6 -2.1 -1.2 1.4 1.9 1.6 0.7 1.7 3.0 2.0 2.3 3.7 2.5 2.7 3.4 2.5 1.7 2.0 2.4 6.5 3.7 2.3 3.0 3.5
2.5 0.5 1.5 1.2 0.8 3.1 2.4 2.2 0.7 2.6
2.5 1.1 1.6 1.5 1.3 2.5 2.4 2.0 0.7 3.4
2.1 0.5 1.5 1.6 1.2 2.2 2.5 2.5 0.7 3.5
2.0 0.3 1.5 1.6 1.2 2.2 2.5 2.8 0.7 3.5
2.0 0.8 1.3 1.9 1.1 1.9 2.5 3.0 0.7 3.5
2.0 0.8 1.3 1.9 1.0 1.8 2.5 3.0 0.7 3.5
2.9
1.5
1.4
1.5
1.7
1.9
2.1
1.8
1.8
1.8
1.8
2.7 1.1 5.7 3.2 4.0 6.1 0.1 1.4 4.3 3.0 5.0 3.1 4.7 7.3 7.2 6.4 8.2 8.5 6.2 5.3 9.4 8.4 6.9 4.7 3.8 7.9 7.9 9.3 9.3 9.8 9.1 10.0 10.1 11.3 12.7 14.2 5.2 6.5 7.9 7.8 8.8 9.6 2.0 2.7 3.7 3.4 3.9 3.8
5.2 1.4 5.2 0.7 3.9 9.6 6.2 1.5
-0.3 7.5 -4.7 5.1 -7.8 4.5 -4.8 9.2 8.5 10.3 9.2 10.4 3.8 8.8 -1.8 4.5
2.7 4.0 4.3 8.8 6.6 9.3 6.9 3.0
1.0 4.0 3.4 2.1 5.1 7.7 5.4 2.6
2.7 1.4 1.3 4.2 6.9 7.7 5.6 2.8
0.1 -3.0 -1.0 2.1 2.3 2.8 0.6 -3.8 -0.6 2.9 3.0 2.9 5.4 7.2 7.5 7.3 7.0 6.5 4.7 3.9 4.3 2.7 2.6 2.8
2.3 3.1 1.0 3.7 7.6 6.0 4.7 2.8
2.3 3.1 1.0 3.7 7.5 6.0 4.7 2.7
2.5 3.3 1.5 3.5 7.5 6.0 4.8 2.8
2.5 3.3 1.5 3.5 7.5 6.0 4.8 2.8
4.5 5.4 4.2 3.6 5.3
6.0 4.6 6.2 4.8 -1.5 7.4 1.8 -0.6 15.2 4.2 1.1 7.6 2.5 -2.3 7.8
6.5 5.2 6.1 3.7 0.1
6.3 5.6 2.5 6.8 7.7
5.8 4.7 3.9 7.2 1.8
5.0 6.0 2.9 6.1 0.9
5.8 6.3 3.2 6.5 3.6
6.1 5.3 3.1 6.6 3.5
6.0 5.3 2.8 6.5 3.3
6.0 5.3 2.8 6.5 3.3
4.8 5.8 4.4 5.0 7.1
5.0 6.8 9.5 6.7 6.3
5.7 5.3 7.5 4.8 4.6
5.5 5.6 8.9 5.2 5.1
6.3 6.3 9.1 6.6 5.0
4.8 5.1 2.1 5.8 2.7
5.5 6.1 2.8 6.6 3.3
Macquarie Research
14 December 2015
Fig 59
Note: Totals are weighted by the respective year ‘GDP in current US$’ weights from Fig 58. 2015-16 use 2014 weights. Source: IMF, World Bank, Macquarie Research, December 2015
The Global Macro Outlook
34
Country Name
CPI, YoY, - forecasts Macquarie where available (shaded in grey), totals weighted by GDP in current US$ shares 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Advanced US 5.4 4.2 3.0 3.0 2.6 2.8 Japan 3.0 3.3 1.7 1.3 0.7 -0.1 Germany 5.1 4.4 2.7 1.7 France 3.4 3.2 2.4 2.1 1.7 1.8 Italy 6.5 6.3 5.1 4.5 4.0 5.2 Spain 6.7 5.9 5.9 4.6 4.7 4.7 UK 7.0 7.5 4.3 2.5 2.0 2.7 Australia 7.3 3.2 1.0 1.8 1.9 4.6 Canada 4.8 5.6 1.5 1.8 0.2 2.2 S. Korea 8.6 9.3 6.3 4.7 6.3 4.5 10-Total Emerging Brazil 2948 433 952 1928 2076 66.0 Mexico 26.7 22.7 15.5 9.8 7.0 35.0 Russia 874.6 307.6 197.5 Turkey 60.3 66.0 70.1 66.1 106.3 88.1 India 9.0 13.9 11.8 6.4 10.2 10.2 China 3.1 3.5 6.3 14.6 24.2 16.9 6 -Total 16-Total ASEAN Indonesia 7.8 9.4 7.5 9.7 8.5 9.4 Malaysia 2.6 4.4 4.8 3.5 3.7 3.5 Singapore 3.5 3.4 2.3 2.3 3.1 1.7 Philippines 12.7 18.5 8.6 6.9 8.4 6.7 Thailand 5.9 5.7 4.1 3.3 5.0 5.8
2.9 0.1 1.4 2.0 4.0 3.6 2.5 2.6 1.6 4.9
2.7 3.4 0.0 -0.3 1.7 1.5 2.1 1.7 2.2 2.0 3.0 3.4 1.3 2.0 2.3 2.7 1.9 2.2 3.6 2.8 2.0 2.3
3.2 0.2 1.6 1.7 2.1 3.5 2.3 3.5 2.0 2.2 2.4
2.9 0.1 2.3 1.5 1.8 2.8 2.3 2.3 2.1 2.5 2.2
15.8 6.9 3.2 4.9 7.0 6.8 8.5 14.7 6.6 6.9 34.4 20.6 15.9 16.6 9.5 6.4 5.0 4.5 4.7 4.0 47.7 14.8 27.7 85.7 20.8 21.5 15.8 13.7 10.9 12.7 80.3 85.7 84.6 64.9 54.9 54.4 45.0 25.3 10.6 10.1 9.0 7.2 13.2 4.7 4.0 3.7 4.4 3.8 3.8 4.2 8.3 2.8 -0.8 -1.4 0.3 0.7 -0.8 1.2 3.9 1.8 9.4 7.9 6.6 6.9 5.7 5.2 3.0 2.8 2.0 2.5 2.5 2.8
4.2 3.6 9.7 9.6 6.1 1.5 4.5 2.7
3.6 5.7 4.9 5.0 4.0 5.1 5.3 4.2 9.0 14.1 11.7 6.9 8.8 10.4 6.3 8.6 6.4 8.4 10.9 12.0 4.8 5.9 -0.7 3.3 5.6 7.6 3.9 5.5 2.9 4.2 0.9 2.5
6.6 3.4 8.4 6.5 8.9 5.4 6.3 3.6
5.4 6.2 4.1 3.8 5.1 6.8 8.9 7.5 9.3 10.9 2.7 2.6 4.5 4.8 2.6 2.4
6.4 2.0 2.1 2.9 2.2
5.4 3.2 5.3 4.6 3.8
4.3 1.7 4.5 3.2 3.0
8.0 3.5 1.4 7.5 5.8
2.3 1.8 1.9 1.2 2.0 2.0 1.8 0.3 1.6 4.4
1.6 2.2 3.4 2.8 1.6 0.7 -0.3 -0.7 -0.8 -1.3 0.9 0.6 1.5 2.0 1.4 0.6 0.5 1.7 1.6 1.9 2.0 1.7 2.5 2.8 2.5 1.8 2.3 3.4 3.6 3.1 1.6 1.3 0.8 1.2 1.3 0.9 1.5 4.5 4.4 3.0 1.0 1.7 2.7 2.5 2.3 7.5 0.8 2.3 4.1 2.8 2.1 2.0 1.3
6.2 58.4 20.5 2.7 5.3 2.7 2.0 -0.3 0.0 5.6 9.3 5.9 5.6 8.0 0.3
3.7 11.5 11.9 1.5 1.4 1.8 1.4 1.0 -0.4 4.0 5.3 2.7 1.6 1.6 0.7
2.3 0.2 1.0 2.1 2.7 3.0 1.4 2.8 2.8 3.5 1.8
6.6 1.0 0.5 2.3 1.8
6.2 10.5 13.1 1.5 3.0 3.6 1.7 0.4 1.0 4.8 6.5 5.5 2.8 4.5 4.6
3.8 -0.4 1.6 3.2 1.4 -1.3 -0.7 -0.3 2.6 0.3 1.1 2.1 2.8 0.1 1.5 2.1 3.4 0.8 1.5 2.7 4.1 -0.3 1.8 3.2 3.6 2.2 3.3 4.5 4.4 1.8 2.8 3.4 2.4 0.3 1.8 2.9 4.7 2.8 3.0 4.0 3.2 0.0 1.4 2.5
9.8 4.8 5.4 0.6 6.5 0.6 8.3 4.2 5.5 -0.8
5.1 1.7 2.8 3.8 3.3
2.1 0.0 2.0 2.0 3.0 2.4 2.8 1.8 1.5 2.2 1.8
1.5 1.6 0.3 0.4 2.8 0.4 1.5 0.8 0.2 0.9 0.6 0.1 1.2 0.2 0.2 1.4 -0.2 -0.3 2.6 1.5 0.2 2.4 2.5 1.6 0.9 1.9 1.3 1.3 1.3 0.9 1.4 1.5 0.4
6.4 2.1 2.4 3.0 2.2
2.4 0.5 1.2 1.0 0.7 0.9 1.6 2.9 2.2 1.9 1.7
2.4 1.4 1.5 1.1 1.0 1.0 1.8 2.9 2.1 2.3 1.9
2.4 1.1 1.6 1.3 1.1 1.2 1.8 2.6 2.1 2.5 1.9
2.4 1.2 1.8 1.5 1.2 1.4 1.8 2.5 2.1 2.5 2.0
2.4 1.2 1.9 1.7 1.3 1.5 2.0 2.5 2.1 2.6 2.0
6.3 8.9 4.0 2.8 7.8 15.8 8.9 7.4 6.7 5.0 1.5 1.9 4.0 5.1 2.3 1.8
6.3 3.0 8.6 7.0 5.5 2.2 4.1 2.5
5.2 3.0 7.3 6.5 5.1 2.5 3.9 2.5
5.0 3.0 5.0 6.5 5.0 2.5 3.6 2.5
4.8 3.0 4.0 6.5 5.0 2.5 3.5 2.4
4.6 3.0 4.0 6.5 5.0 2.5 3.4 2.5
6.4 6.7 3.1 2.1 1.0 -0.4 4.2 1.4 1.9 -0.8
5.3 2.5 0.7 1.8 0.2
4.9 2.8 1.4 2.8 1.7
5.0 2.6 1.4 3.3 2.2
5.0 2.8 1.5 3.5 2.3
5.0 2.8 1.5 3.5 2.3
Macquarie Research
14 December 2015
Fig 60
Note: On the above data, for advanced countries the CPI increases at 1.8% pa1999-2020, emerging economies 5.3% and the 16-Total 2.6%. Brazil’s inflation 1990-1994 has been rounded to the nearest percent. Source: World Bank, IMF, Macquarie Research, December 2015
The Global Macro Outlook
35
Country Name
GDP deflator (annual %), totals weighted by GDP in current US$ shares 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Advanced US Japan Germany France Italy Spain UK Australia Canada S. Korea
3.7 2.3 3.4 2.7 8.9 7.3 8.7 6.1 3.4 10.4
3.3 2.6 3.1 2.6 7.6 6.9 6.7 3.1 3.1 10.2
2.3 1.6 5.3 2.0 4.4 6.7 3.8 1.5 1.5 7.9
2.4 0.4 4.1 1.6 3.9 4.5 2.7 0.9 1.3 6.4
2.1 0.1 2.2 0.9 3.5 3.9 2.1 1.0 1.4 7.7
2.1 -0.7 2.0 1.1 4.9 4.9 3.4 2.2 2.2 7.5
1.8 -0.6 0.6 1.4 4.6 3.5 4.0 2.7 1.8 5.0
1.7 0.6 0.2 0.9 2.6 2.4 2.5 1.2 1.1 3.9
1.1 -0.1 0.6 1.0 2.5 2.5 1.5 1.3 -0.2 5.0
1.4 -1.3 0.3 0.2 1.6 2.7 1.1 0.3 1.9 -1.0
2.3 -1.2 -0.5 1.5 2.0 3.3 2.4 2.6 4.3 1.0
2.3 -1.2 1.3 2.0 3.0 4.1 1.1 4.7 1.6 3.7
1.5 -1.6 1.3 2.1 3.4 4.1 2.7 2.9 1.2 3.1
2.0 -1.7 1.2 1.9 3.2 3.9 2.2 3.1 3.3 3.4
2.7 -1.4 1.1 1.6 2.5 3.9 2.9 3.3 3.3 3.0
3.2 -1.3 0.6 1.9 1.9 4.1 2.8 3.7 3.2 1.0
3.1 -1.1 0.3 2.2 1.9 4.0 2.7 5.1 2.7 -0.1
2.7 -0.9 1.7 2.6 2.4 3.3 2.9 5.0 3.2 2.4
1.9 -1.3 0.8 2.4 2.5 2.1 2.9 4.5 3.9 3.0
0.8 -0.5 1.8 0.1 2.0 0.3 2.0 4.9 -2.1 3.5
1.2 -2.2 0.7 1.1 0.3 0.2 3.2 1.0 2.6 3.2
2.1 -1.9 1.1 0.9 1.5 0.1 2.1 6.2 3.2 1.6
1.8 -0.9 1.5 1.2 1.6 0.2 1.7 1.9 1.7 1.0
1.5 -0.5 2.1 0.8 1.4 0.7 1.7 -0.3 1.3 0.7
1.5 1.6 1.7 0.6 0.9 -0.5 1.8 1.6 1.8 0.6
1.3
1.6
1.3
1.6
1.9
2.1
2.1
2.2
1.7
0.8
0.8
1.4
1.2
1.1
1.4
6.2 10.8 37.7 49.2 3.6 2.0
9.0 5.4 16.5 52.9 3.2 2.1
10.6 5.6 15.5 37.4 3.7 0.6
13.7 6.0 13.8 23.3 3.9 2.6
8.0 8.3 20.3 12.4 5.7 6.9
7.2 5.4 19.3 7.1 4.2 3.9
6.2 6.3 15.2 9.3 6.4 3.8
5.9 4.9 13.8 6.2 5.8 7.6
8.3 6.0 18.0 12.0 8.7 7.8
7.2 3.5 2.0 5.3 6.1 -0.6
8.2 4.5 14.2 5.7 9.0 6.6
7.0 5.3 15.9 8.6 6.4 7.8
4.9 3.2 7.5 6.9 7.6 2.0
7.6 2.0 5.9 6.1 6.3 1.7
6.9 3.6 7.2 8.5 3.8 0.8
6 -Total
10.9
7.9
6.9
7.4
9.1
6.8
6.8
7.6
9.6
2.4
7.9
8.3
4.0
3.7
2.5
16-Total
2.6
2.5
2.1
2.4
3.0
2.9
2.9
3.3
3.5
1.2
2.7
3.4
2.0
1.9
1.7
20.4 8.9 3.7 5.7 1.3
14.3 -1.6 -2.2 5.5 2.1
5.9 3.1 -1.2 4.2 0.8
5.5 3.3 -1.7 3.2 1.3
8.6 6.0 4.2 5.5 3.1
14.3 8.9 2.2 5.8 4.5
14.1 4.0 1.7 4.9 5.2
11.3 4.9 5.9 3.1 3.5
18.1 10.4 -1.5 7.5 3.9
8.3 -6.0 3.5 2.8 1.9
8.3 4.1 0.0 4.2 3.7
8.1 5.6 0.8 4.0 4.2
4.4 0.7 1.5 1.9 0.2
4.4 0.0 0.1 2.0 2.8
6.9 2.3 0.2 3.1 1.3
10-Total Emerging Brazil Mexico Russia Turkey India China
ASEAN Indonesia Malaysia Singapore Philippines Thailand
2736 414.2 968.2 2001 2252 93.5 28.1 23.3 14.4 34.1 8.2 31.6 15.9 128.6 1490 887.8 307.3 144.0 58.2 59.2 65.2 68.4 104.7 86.0 10.7 13.8 9.0 9.9 10.0 9.1 5.8 6.9 8.2 15.2 20.6 13.7
7.7 3.8 4.7 13.0 5.8
8.8 3.6 4.4 16.5 5.7
5.4 2.4 1.0 7.9 4.5
8.9 4.0 3.4 6.8 3.3
7.8 3.9 3.7 10.0 5.2
9.7 3.6 3.3 7.6 5.6
17.1 29.2 45.8 77.2 7.6 6.4
8.9 3.7 1.5 7.7 4.0
7.6 4.2 17.8 15.1 15.1 18.5 81.5 138.0 6.5 8.0 1.5 -0.9
12.6 3.5 1.0 6.2 4.1
75.3 8.5 -1.4 22.4 9.2
8.5 17.7 72.4 54.2 3.1 -1.3
14.2 0.0 -3.9 6.6 -4.0
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Fig 61
Note: On the above data, for advanced countries the GDP deflator increases at 1.5% pa1999-2014, emerging economies 6.8% and the 16-Total 2.5%. Brazil’s inflation 1990-94 in the table has been rounded to the nearest percent Source: IMF, World Bank, OECD, Macquarie Research, December 2015
The Global Macro Outlook
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The Global Macro Outlook
Sub-optimal global policy making Most commentators agree that within the Euro-zone, greater fiscal spending by Germany would lead to faster overall Euro-zone growth. That current policies are sub-optimal reflects a political constraint: the legislated balance budget requirement in Germany. Globalisation of trade and capital flows has led to all national policies being interdependent
Globalisation of trade and capital flows has led to all national policies being inter-dependent. Sub-optimal policy making at the global level is impacting global growth. A framework for thinking about all the interactions follows; first we provide a simple indicator of sub-optimal policy making, and a measure of lost global growth as a consequence (from UNCTAD). UNCTAD estimates potential gains to global real GDP growth of 1.1% pa 2015-2019 and 1.7% pa 2020-2024, (Fig 64, next page).
A simple indicator of sub-optimal global policy making Under fixed exchange rates, money creation/credit cycles are dictated by the external surplus, movements in foreign exchange reserves. Since this applies to most emerging economies, a simple aggregate of current balances is a proxy of stable growth or global credit boom/busts.
Fig 62 Global current account imbalances, IMF data and forecasts
Notes: CHN+EMA = China and emerging Asia (Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, Thailand); DEU+EURSUR= Germany and other European advanced surplus economies (Austria, Denmark, Luxembourg, Netherlands, Sweden, Switzerland); OCADC = other European pre-crisis current account deficit countries (Greece, Ireland, Italy, Portugal, Spain, United Kingdom, WEO group of emerging and developing Europe); OIL = Norway and WEO group of emerging and developing economy fuel exporters; ROW = rest of world. Source: IMF, Macquarie Research, December 2015
The World Bank provides a longer historical perspective, Fig 63. Imbalances are still narrowing from the 2007 highs.
Fig 63 Global current account imbalances*
*: Defined as the sum of absolute current account positions for 120 countries as a percent of global GDP Source: World Bank, Macquarie Research, December 2015
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A measure of lost global growth UNCTAD simulates scenarios with:
The potential gains to global real GDP growth are 1.1% pa 2015-2019 and 1.7% pa 2020-2024
1)
Consumption-enhancing policies (rebalancing in China, median household real income growth in advanced economies);
2)
Greater government spending by fiscal surplus nations
The potential gains to global real GDP growth are 1.1% pa 2015-2019 and 1.7% pa 20202024 (grey shaded cells in Fig 64). This is an indication of potential benefits, an upper limit to global policy coordination. These numbers are very material. The benefits are also widely spread, with developed economies, the US, etc, all seeing at least 1.0% uplift to growth forecasts relative to the baseline forecast.
Fig 64 GDP growth in selected regions and countries, 1990–2024 Average annual growth of GDP (%) Scenario World Developed economies Of which: US CIS
The gains to global real GDP growth are 1.1% pa 2015-2019 and 1.7% 20202024...
Developing Asia Of which: China Of which: India Africa
...and the benefits are widely spread
LA & Caribbean Memo item World, based on market exchange rates
1990-2014
2015-2019
2020-2024
Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth
3.3
3.4 4.7 1.8 2.8 2.3 3.3 2.0 3.3 5.5 6.7 7.1 8.1 5.8 7.5 3.9 6.1 2.9 4.5
3.6 5.5 2.0 3.5 2.6 3.7 2.1 4.9 5.4 7.2 6.7 8.3 6.0 7.9 3.9 7.0 3.0 5.7
Baseline Balanced growth
2.7
2.8 3.9
3.0 4.7
1.9 2.5 2.7 6.3 9.8 6.3 3.8 3.1
Note: average annual growth of GDP uses PPP weights in constant 2005 international dollars unless otherwise stated. Please note that global real GDP growth weighted by market exchange rates is around 0.6% less than the estimate based on PPP weights. This reflects the much larger weight given to China in the latter methodology. CIS includes Georgia. UNCTAD secretariat calculations, based on the GPM—a fully endogenous framework based on water-tight accounting without “black-holes” and without unexplained residuals. Please see the UNCTAD Trade and Development report, 2014 page 38, and point 21 for more. Source: UNCTAD, Macquarie Research, December 2015
Forecast global current account imbalances are substantially reduced...
...and public debt to GDP ratios improved
14 December 2015
The superior growth scenario is called “balanced growth” because in addition to utilising “fiscal space” the forecast global current account imbalances are substantially reduced, Fig 65, light blue shading, by approximately 1.5% of world GDP. In the context of Fig 63, this would be a little beneath the lowest reading of the 20 years. In addition, the faster growth enables an improved public debt to GDP ratio versus the baseline forecast, pale red highlights in Fig 65. This is around 10% better over 2020-2024 for developed countries and the US, and 3-5% better for developing and China. The improvement for India is estimated to be much greater at around 18%.
Note: the US and ‘exorbitant privilege’ Since the US$ is the de facto global reserve currency, the US needs to run a current account deficit to satisfy the need from other countries for reserve assets. However, this is probably only of the order of 0.5% to 1% of US GDP per annum.
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Fig 65
The Global Macro Outlook
Financial variables for selected regions and countries, 1990–2024 (average in % of GDP) Public sector balance 1990- 201520202014 2019 2024
Scenarios Developed economies
Baseline Balanced growth Baseline Balanced growth
-4.0
CIS
Baseline Balanced growth
Developing Asia
Public debt 199020152014 2019
-4.0 -3.3 -4.5 -3.6
-2.7 -2.8 -3.1 -3.0
79.2
-0.6
1.9 -1.2
3.0 -1.2
Baseline Balanced growth Baseline Balanced growth Baseline Balanced growth
-2.2
-1.3 -1.2 0.7 -0.2 -7.0 -3.9
Africa
Baseline Balanced growth
-2.1
LA & Caribbean
Baseline Balanced growth
-3.0
Of which: US
Of which: China Of which: India
-4.3
-1.8 -7.7
Private sector Current account balance balance 2020- 1990- 2015- 2020- 1990- 201520202024 2014 2019 2024 2014 2019 2024
96.2 91.2 87.1 83.1
89.8 79.7 78.7 72.5
3.2
57.7
22.7 26.6
22.2 27.2
-1.2 -1.2 1.9 -0.0 -6.5 -3.0
40.1
44.5 43.6 29.0 28.8 77.6 69.4
-3.8 -2.8
-4.0 -1.9
59.1
-4.3 -3.0
-3.5 -2.4
51.4
71.1
16.3 76.0
2.5 2.3 0.3 0.8
0.2 1.7 -3.1 0.7
-0.5
4.3
2.5 1.5
4.3 0.9
48.7 43.9 32.4 29.3 80.3 62.2
4.2
3.6 2.5 2.7 1.7 5.1 2.4
4.3 2.3 3.8 1.5 5.4 2.9
59.6 57.8
64.3 55.9
2.6
0.3 -0.0
0.4 0.4
54.5 51.0
53.5 48.2
1.1
1.7 0.7
1.9 1.5
1.4
5.1 7.2
-1.2 -0.7 -4.2 -2.8
-2.1 -0.8 -6.2 -2.3
3.8
4.4 2.7
7.3 2.9
2.0
2.8 1.7 3.4 1.5 -2.0 -1.4
3.5 1.3 5.8 1.5 -1.1 -0.1
0.3
-3.6 -2.8
-3.6 -1.5
-1.9
-2.6 -2.4
-1.6 -0.9
-2.9
3.3 -0.5
Notes: CIS includes Georgia, UNCTAD secretariat calculations based on the GPM (please see the Fig 64 footnote) Source: UNCTAD, Macquarie Research, December 2015
Ideal globally coordinated policy making To summarize the foregoing, and to show how difficult it is to expect improved global policy coordination, the following table outlines desired national policies for the three major economies/regions of the world. If most countries try to grow through exports, by tapping into other countries’ domestic demand, rather than introducing policies to stimulate demand at home, then the world will continue to have weak growth
Fig 66 Desired national policies and reality
Euro-zone China US
Ideal policies for global growth
Probability
Current account surplus countries introduce pro-consumption (*) and fiscal expansion policies Pro-consumption (*) and fiscal expansion policies. Targeting a lower current account surplus through a persistently high REER Pro-consumption policies (*), tighter fiscal policy, a depreciation in the REER leading to a shrinkage of the current account deficit
Unlikely Possible Unlikely
Note: (*) this could include higher real returns to savers/households (less expansionary monetary policy, a reduction in financial repression), tax policies that bolster median household incomes Source: Macquarie Research, December 2015
If most countries try to grow through exports by tapping into other countries’ domestic demand, rather than introducing policies to stimulate demand at home, then the world will continue to have weak growth.
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The impediments to global policy making Understanding how economists conceptualise global policy coordination illustrates the many impediments to currently achieving it. The diagrams below are Swan diagrams. Please see the book The Leaderless Economy (2013) by Peter Temin & David Vines pages 257 to 273 for a more detailed explanation.
Executive summary National priorities and the loss of efficiency of traditional policy instruments have resulted in the following impediments. China’s external policy goal is probably still a substantial current account surplus, achieved through the RMB/US$ exchange rate as a policy instrument. The Euro-zone has constrained the use of fiscal policy. Balance sheet recessions following on from credit/financial booms undermine the potency of monetary policy. Its effect on real domestic demand is considerably diminished.
The global policy making framework We begin with the “External balance”, which for now is defined as a current account balance of around zero, i.e. exports and imports in balance.
Fig 67
External balance
Fig 68 Internal balance REER
REER
Internal balance
Less competitive
Less competitive
C/A deficit Unemployment
Inflation
C/A surplus
More competitive
More competitive
External balance
External balance
Real domstic demand
Real domstic demand
Note: REER is the real effective exchange rate. Real domestic demand = C+I+(G-T)+(X-M) where C=Consumption, I=Investment, G=Government expenditure, T=Taxes, X=Exports, M=Imports
Note: REER is the real effective exchange rate. Real domestic demand = C+I+(G-T)+(X-M) where C=Consumption, I=Investment, G=Government expenditure, T=Taxes, X=Exports, M=Imports
Source: Macquarie Research, December 2015
Source: Macquarie Research, December 2015
External balance
Please look at Fig 67. The stronger real domestic demand becomes, the bigger imports become. The more competitive the exchange rate, the bigger exports become. To maintain external balance (X-M) as imports become bigger, exports need to become bigger, the external balance line is downward-sloping. To the left of the line there is a current account surplus, the exchange rate is too low, producing exports in excess of implied imports. To the right of the line there is a current account deficit, the exchange rate is too high, producing insufficient exports relative to implied imports.
Domestic balance: full employment, broad price stability
There is an increased awareness of external balances after the ‘global imbalances’ that led through the global credit boom of 2004-07 to the Global Financial Crisis of 2008-09. Nonetheless, policymakers’ primary focus is domestic balance: full employment, broad price stability. Please look at Fig 68. An economy has limited resources. If real domestic demand is too low there is unemployment, if too high, inflation. Boosting real domestic demand from internal balance, by say cutting taxes, will lead to inflation and the REER becoming less competitive such that (X-M) deteriorates to offset the higher (G-T). The internal balance line slopes upwards.
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Fig 69
The Global Macro Outlook
The global policy-making framework
REER
Internal balance
Less competitive
REER
Internal balance
Less competitive
4) Unemployment C/A deficit
USA
X
X Euro Zone
3) Unemployment C/A surplus
More competitive
Fig 70 Global positioning at the start of 2015
1) Inflation C/A deficit
2) Inflation C/A surplus
X More competitive
China External balance
External balance
Real domstic demand
Real domstic demand
Note: REER is the real effective exchange rate. Real domestic demand = C+I+(G-T)+(X-M) where C=Consumption, I=Investment, G=Government expenditure, T=Taxes, X=Exports, M=Imports
Note: REER is the real effective exchange rate. Real domestic demand = C+I+(G-T)+(X-M) where C=Consumption, I=Investment, G=Government expenditure, T=Taxes, X=Exports, M=Imports
Source: Macquarie Research, December 2015
Source: Macquarie Research, December 2015
There is a need to make explicit the global interdependence of policy making
There is a need to make explicit the global inter-dependence of policy making.
Inter-dependence: the US and the Euro-zone, a floating exchange rate regime The US and the Euro-zone are linked through a floating exchange rate. Deep, open capital accounts mean that the external balance (in theory) can be left to the market, and the market determined nominal exchange rate (Euro/US$). This means that to avoid massive capital flows, interest rates have to be broadly similar. To reiterate, monetary policy in the US and the Euro-zone, and the Euro/US$ exchange rate are jointly determined. The exchange rate is part of the interest rate transmission process. Attempts by the ECB to suppress Euro-zone interest rates (and future market expectations thereof) beneath US interest rates should result in a marked fall in the Euro, and have. The policy is full of tensions. The constraining of fiscal policy in the Euro-zone has led to the ECB being co-opted as the principal policy manager of domestic balance.
Interdependence: a China policy-determined RMB/US$ The RMB/US$ exchange rate influences output/the domestic balance in all three regions (as does the Euro/US$). A fixed RMB/US$ absent capital controls would result in Chinese interest rates similar to the US. China still maintains partial capital controls, allowing some divergence. An undervalued RMB versus the US$ takes demand away from both the US and the Eurozone, leading to the US Fed and the ECB easing monetary policy. It is mutually interdependent and complex
The distribution of the deterioration of the US and Euro-zone current account positions depends on the relative monetary policy easing and its impact on the Euro/US$ exchange rate, and the US and Euro-zone’s export industries’ sensitivity to the increased Chinese demand growth, and the increased demand generated by a lower global interest rate. In other words, it is mutually interdependent and complex.
The wisdom of austerity depends on the starting point Please look back to Fig 69. Moving horizontally from right to left in ‘Zone 1’: inflation, current account deficit’ will help to reduce both inflation and the current account deficit. The UK has been an example of this. The ‘PIIGS’ countries began in ‘Zone 4’: Unemployment, current account deficit’ such that austerity has improved the external balance (reducing the current account deficit), but has worsened the domestic balance (increasing unemployment).
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Fiscal austerity in the Euro-zone As Euro-zone private savings increase, the market real interest rate is depressed, leading to the Euro depreciating versus the US$ and the RMB. The Euro-zone runs a current account surplus; the US runs a current account deficit. China’s current surplus declines. The US Fed responds by lowering US interest rates, the Chinese resist the downward pressure on their interest rates. US domestic demand recovers to the benefit of both the Euro-zone and Chinese current accounts. The US current account deficit becomes bigger still. There might be approximate domestic balance in all three regions, but there is a major external imbalance in the US current account deficit. This is not the end of the story, as the US current account imbalance has spill-over effects into fixed exchange rate currency regimes, triggering credit boom/bust cycles.
Beyond the US, the Euro-zone and China 1)
Japan and the UK should be treated as floating exchange rate economies, in the same group as the US and the Euro-zone.
2)
Small commodity exporters/emerging economies often operate on fixed or semi-fixed exchange rates.
Fixed exchange rates and capital mobility Under fixed exchange rates, monetary base creation is dictated by the movement in foreign exchange reserves This fuels the domestic credit cycle
Whilst capital mobility and floating exchange rates mean that the US and the Euro-zone can ignore balance of payments issues, this does not apply to nations on fixed or semi-fixed exchange rate regimes. Given the interconnectedness of all policy outcomes, the US and the Euro-zone cannot ignore the spill-over consequences of the tendency for capital mobility and fixed exchange rate regimes to generate boom/bust credit cycles. Under fixed exchange rates, monetary base creation is dictated by the external surplus (current account and private sector capital flows), the movement in foreign exchange reserves. This fuels the domestic credit cycle. The consequence of falling foreign exchange reserves, currently the case in emerging markets/commodity exporters, is either or both of: a) deflation, b) devaluation. It appears that policymakers in emerging market economies are currently choosing devaluations.
Fig 71
Emerging Market currencies (nominal)
120
Emerging Market Currencies (nominal)
110 100 90 80
70 60 1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Bloomberg, Macquarie Research, December 2015
Please see from page 63 for more on fixed & semi-fixed exchange rate regimes.
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The Global Macro Outlook
Prospects for 2015-2018 Global positioning at the start of 2015 Please look at back Fig 70. The Euro-zone
The Euro-zone has a current account surplus and material unemployment. The Euro-zone has ruled out fiscal stimulus (G-T) and in aggregate there is still a tendency to go ‘the wrong way’ with austerity pushing from right to left.
China
China’s external balance goal is probably still a current account surplus of some 2% of GDP. Whilst internal balance is broadly achieved, there is no urgency to change.
The US
The US has been relying heavily on monetary policy to accomplish domestic balance, whilst the external balance is left to the markets. The potency of monetary policy is greatly diminished in the US and the Euro-zone with interest rates having reached the nominal zero interest rate bound. The transmission mechanism into C+I is therefore minimal. This leaves unconventional monetary policies and their impact on the REER.
Policy spill-over headwinds to global growth are forecast to persist 1) The Euro-zone: In 2014, Germany had a US$288bn current account surplus, equal to 7.5% of its GDP
The constitutional requirements and budget laws across the Euro-zone mandating near zero fiscal deficits are causing the Euro-zone’s structural adjustments to spill over onto the rest of the world through a mounting current account surplus. The latter is now over 3% of Euro-zone GDP, whilst it averaged around zero prior to the Global Financial Crisis, Fig 72. In 2014, the Euro-zone current account surplus was US$313bn. In 2014, Germany had a US$288bn current account surplus, equal to 7.5% of its GDP. Unless the private sector becomes more risk tolerant and starts to narrow their savings-investment balances, these current account surpluses could expand further. The Euro-zone fiscal deficit is still over 2% of GDP.
Fig 72 Spill-overs to the rest of the world, as an expanding Euro-zone current account surplus requires matching capital outflows
Fig 73 The increase in the Euro-zone current account surplus over 2008-14 is partially from the core, but mainly from the periphery
Source: Oxford Economics, Macquarie Research, December 2015
Source: Oxford Economics, Macquarie Research, December 2015
2) China: A real effective exchange rate depreciation in an economy with a large current account surplus would not be helpful
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The rebalancing in China away from an investment-led model is now well underway, but the consequent step-down in imports has resulted in a record China trade surplus, and is keeping China’s overall current account surplus high. China had a trade account surplus of US$306bn in January-July 2015 versus US$150bn in the same period last year. The rebalancing of the China economy to consumption-led growth is expected to be a slow three- to five-year process. A stepped up fiscal expansion program would be welcomed. A real effective exchange rate depreciation in an economy with a large current account surplus would not be helpful. A high real effective exchange rate is part of the mechanism that induces a rebalancing from an investment-led growth model to a consumption-led growth model. 43
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Fig 74 BIS Real Effective Exchange Rate (2010=100) 140
China
Japan
US
EU
130 120 110 100 90 80 70 60
Source: BIS, Macquarie Research, December 2015
Manufacturing assembly operations are highly absorptive of low skilled labour
An additional uncertainty relates to the slackness in the Chinese labour market, since there are no regular, reliable statistics available. One explanation for the new RMB policy of 11 August 2015 is that was intended to slow the relocation of manufacturing assembly operations out of China. Manufacturing assembly operations are highly absorptive of low-skilled labour.
3) Oil/energy/commodity prices: The large decline in oil/energy/commodity prices so far in 2015 is resulting in a very significant terms of trade effect to the benefit of oil/energy/commodity importing nations and regions, e.g. Japan, Europe, the US. Unfortunately, the result is increased current surpluses in countries such as Japan and Germany, which have been historically slow to address the opportunities and responsibilities in having sizable current account surpluses.
Conclusion The following quote from Oxford Economics sums it up succinctly: If everyone wants to save and no one wants to invest, activity will slump; if everyone wants to invest and nobody wants to save, the result is overheating. Currently, the world’s problem is more the former, than the latter. Overall, global imbalances remain large.
Fig 75 Books used in the preparation of this section Peter Temin & David Vines Michael Pettis James K. Galbraith
The Leaderless Economy The Great Rebalancing The End of Normal
Source: Macquarie Research, December 2015
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The Global Macro Outlook
An afterword on oil prices One key question is the impact that plunging oil prices will have on economic growth and the OECD LI. The conventional wisdom amongst academic economists
The conventional wisdom amongst academic economists, which most readers will probably struggle to believe, is that higher oil prices have a modest and delayed impact on real GDP growth, whilst lower oil prices have no statistically measurable impact on growth. The ECB working paper #362 of May 2004, Oil price shocks and real GDP growth: Empirical evidence for some OECD countries, was the definitive paper at the time. To quote: As a first step, our use of Granger causality-type tests allows us to conclude that the interaction between oil prices and macroeconomic variables is found to be significant, with the direction of causality going in at least one direction in all countries, and in both directions in most countries. The effect of an increase in oil prices on real GDP growth are found to differ substantially from those of an oil price decrease, providing evidence against the linear approach that assumes that oil prices have symmetric effects on the real economy. We find that oil price increases have an impact on GDP growth of a larger magnitude than that of oil price declines, with the latter being statistically insignificant in most cases. More recently, the OECD 2011, ‘The effects of oil price hikes on economic activity and inflation’ OECD Economic Department Policy Notes No.4 concluded: Accordingly, a $10 increase in the price of oil could reduce activity in the OECD area in the second year after the shock by 0.2% and raise inflation by roughly 0.2% in the first year and by another 0.1% in the second year. Based on the above paragraph, and assuming against the evidence that the economic response is symmetric, then the impact on real GDP growth over the next year from the recent plunge in the oil price is still likely to be minor. For more on the oil market, please see the 8 September 2015 A long road back to balance: Revising down crude oil price forecasts by Vikas Dwivedi. Vikas’s oil price forecasts are shown in Fig 18.
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Global private investment indicators Includes residential investment Please note that at the global level, private investment is already at elevated levels.
Fig 76 25
World investment (US$tr)
Fig 77 World investment (% of current GDP) (%)
World investment
(US$tr)
World investment, % of GDP
26
20
25
15
24
23
10 22
5 21
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Source: IMF WEO database, Macquarie Research, December 2015
Fig 79 Advanced economies’ investment (% of current GDP)
Advanced economies’ investment (US$ tr)
Fig 78 12
Source: IMF WEO database, Macquarie Research, December 2015
Advanced economies, investment
(US$tr)
27
10
25
8
23
6
21
4
(%)
Advanced economies, investment, % of GDP
19
2
17
Source: IMF WEO database, Macquarie Research, December 2015
Source: IMF WEO database, Macquarie Research, December 2015
Fig 80
Fig 81 Investment by US, % of GDP US investment
(US$tr)
26
4.5
(%)
US investment, % of GDP
24
4.0
22
3.5 3.0
20
2.5
18
2.0
16
1.5
14
1.0
12
0.5
14 December 2015
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
Source: IMF WEO database, Macquarie Research, December 2015
1980
10
0.0
1982
5.0
Investment by US
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
15
1980
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Source: IMF WEO database, Macquarie Research, December 2015
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Anxiety normally revolves around China, which is the difference between a currently strong level of world investment activity, Fig 77, and the depressing picture presented in Fig 79. As Fig 80 and Fig 81 show, the IMF has very positive 2015-16 growth forecasts for the US.
Fig 82
(US$tr)
25
Fig 83 World investment by economic groups (% of current GDP)
World investment by economic groups Emerging and developing economies investment
35
Advanced economies, investment
33
(%)
Advanced economies, investment, % of GDP Emerging and developing economies investment, % of GDP
31
20
29 27
15
25
23
10
21 19
5
17
Source: IMF WEO database, Macquarie Research, December 2015
Source: IMF WEO database, Macquarie Research, December 2015
Fig 84 Emerging & developing economies’ investment (US$tr)
Fig 85 Emerging & developing economies’ investment (% of current GDP)
12
2016
(%)
Emerging and developing economies investment
(US$tr)
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1980
15
0
34 10
Emerging and developing economies investment, % of GDP
32
8
30
6
28 26
4
24 2
22
Source: IMF WEO database, Macquarie Research, December 2015
Source: IMF WEO database, Macquarie Research, December 2015
China’s investment
Fig 86
20 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Fig 87 China’s investment, % of GDP
(US$tr)
China's investment
(%GDP)
6.0
50
5.0
45
China's investment, % of GDP
4.0 40
3.0 35
2.0 30
1.0 0.0
Source: IMF WEO database, Macquarie Research, December 2015
14 December 2015
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
25
Source: IMF WEO database, Macquarie Research, December 2015
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The Global Macro Outlook
Whilst China is still growing in absolute terms (Fig 86. previous page), rebalancing of the economy is underway (Fig 87). EM ex China has been stagnant, 2011-15, Fig 88.
Fig 88 Emerging and developing economies ex China investment 6.0
Fig 89 Emerging and developing economies ex China investment, % of GDP (%)
Emerging and developing economies ex China
(US$tr)
Emerging and developing economies ex China, % of GDP
29 5.0
27 25
4.0
23
3.0
21 2.0
Source: IMF WEO database, Macquarie Research, December 2015
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
Source: IMF WEO database, Macquarie Research, December 2015
India’s investment
Fig 90
1980
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
15 1984
0.0 1982
17
1980
1.0
1982
19
Fig 91 India’s investment, % of GDP
(US$tr)
(%GDP)
India's investment
0.8
India's investment, % of GDP
40
0.7 35
0.6 0.5
30
0.4 25
0.3
0.2
20
0.1 0.0
Source: IMF WEO database, Macquarie Research, December 2015
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
Source: IMF WEO database, Macquarie Research, December 2015
Brazil’s investment
Fig 92
1980
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
15
Fig 93 Brazil’s investment, % of GDP
(US$tr)
(%GDP)
Brazil's investment
0.6
24
0.5
22
Brazil's investment, % of GDP
20
0.4
18
0.3 16
0.2
Source: IMF WEO database, Macquarie Research, December 2015
14 December 2015
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1980
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
10
1982
0.0
1980
12
1982
14
0.1
Source: IMF WEO database, Macquarie Research, December 2015
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The Global Macro Outlook
Russia’s investment
Fig 94
Fig 95 Russia’s investment, % of GDP
(US$tr)
(%GDP)
Russia's investment
Russia's investment, % of GDP
40
0.5
35
0.4
30 0.3
25 0.2
20 0.1
15
Source: IMF WEO database, Macquarie Research, December 2015
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: IMF WEO database, Macquarie Research, December 2015
Indonesia’s investment
Fig 96
10
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0.0
Fig 97 Indonesia’s investment, % of GDP
(US$tr)
(%GDP)
Indonesia's investment
0.35
60
0.30
50
0.25
Indonesia's investment, % of GDP
40
0.20 30 0.15
Source: IMF WEO database, Macquarie Research, December 2015
Source: IMF WEO database, Macquarie Research, December 2015
Fig 98
Fig 99 Investment by World ex China, % of GDP
20
Investment by World ex China
27
(US$tr) Investment by World ex China
18
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1980
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
0
1984
0.00
1982
10
1980
0.05
1982
20
0.10
(% GDP)
26
16
25
14 24
12 23
10 8
22
6
21
4
20
2
19
Source: IMF WEO database, Macquarie Research, December 2015
14 December 2015
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Investment by World ex China, % of GDP
18
Source: IMF WEO database, Macquarie Research, December 2015
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The Global Macro Outlook
Lead indicators of capital expenditure We are unaware of any composite global machinery order indicators. We present indicators for the US, China, Germany and Japan. The former two have been weakening, the latter two are modestly positive. We believe Germany is the key series to follow, Fig 102, below (bottom), for the reasons shown in Fig 100 and Fig 101. On the basis of exports as a percentage of that countries’ GDP, Germany is the most exposed to emerging markets, at around 11.0%, Fig 100. Japan has the highest exports to GDP ratio to China, but emerging markets in total is just 7%. The US is around 5%.
Fig 100
Emerging Market export exposures
Source: Oxford Economics/Haver Analytics, Macquarie Research, December 2015
Fig 101
Germany: Goods exports to China
Source: Oxford Economics/Haver Analytics, Macquarie Research, December 2015
Fig 102 shows trends in Germany, which are currently around zero.
Fig 102 30%
Germany VDMA plant & machinery orders, 1999 to latest (YoY%, 3mma)
Germany Plant&Machinery Orders
20%
10% 0% -10% -20% -30% -40%
Source: VDMA, Bloomberg, Macquarie Research, December 2015
Fig 103 is the well known US non-defence capital goods orders (excluding aircraft). The case for excluding aircraft orders relates to both the lumpiness of orders historically, and the long lag between order receipt and the start of work on such orders. Energy and other commodity-related capital expenditures are expected to stay weak.
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Fig 103 20
US non-defence capital goods orders (excluding aircraft), 2000 to latest
(YoY%, 3mma)
Non-defence capital goods orders, ex aircraft
15 10 5 0 -5 -10 -15 -20 -25 -30
Source: US Census Bureau, Macquarie Research, December 2015
Japanese machinery orders are also recovering moderately; Fig 104 and Fig 105. Domestic orders are stronger than overseas orders. For Larry Hu’s latest insights on the China business cycle, please see the 16 November 2015 Macro Monday. Fig 106 and Fig 107 come from that report.
Fig 104
Japanese machinery orders: total (¥tr)
(¥tr)
3.0
Fig 105 (¥tr)
1.6
Machinery orders (total, SA)
2.8
...and by geography (¥tr)
1.4
2.6
1.2
2.4 1.0
2.2 2.0
0.8
1.8
0.6
1.6
0.4
1.4
Domestic
Overseas
0.2
Source: CAO, Macquarie Research, December 2015
Source: CAO, Macquarie Research, December 2015
Fig 106
Fig 107
Chinese fiscal spending
03/15
08/14
FAI
33
35
01/14
Chinese Fixed asset investment
% yoy
% yoy 40
06/13
11/12
04/12
09/11
02/11
07/10
12/09
05/09
10/08
03/08
08/07
01/07
06/06
11/05
0.0
04/05
04/15
10/14
04/14
10/13
04/13
10/12
04/12
10/11
04/11
10/10
04/10
10/09
04/09
10/08
04/08
10/07
04/07
10/06
04/06
10/05
04/05
1.2
Overall FAI
Manufacturing
Infrastructure
Real Estate
34%
Fiscal spending
28
30
23
25 20
18
2013: 10.9%
15
13
2012: 15.3%
10 5
8
2014: 8.2%
0
3
-5
14 December 2015
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Source: CEIC, Macquarie Research, December 2015
Oct-13
-2
-10
Source: CEIC, Macquarie Research, December 2015
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FDI inflow indicators Inward FDI has been one of the great growth stories of the last forty years. The following two charts put inward FDI flows into an historical context.
Fig 108
Inward FDI flows, 1970-2000
US bn$ 1600
Fig 109
Inward FDI flows, 2000-latest (2013)
2500
World
US bn$
Developing Economies
World
1400
Developing Economies
2000
1200 1500
1000 800
1000
600 400
500
200 0
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
Source: UNCTAD , Macquarie Research, December 2015
Fig 110
Source: UNCTAD, Macquarie Research, December 2015
Inward FDI (US$ at current prices, current exchange rates), UNCTAD definitions, US$ billions
CY
2000
2001
2002
2003
2004
2005
World
1,415.0
837.7
628.8
604.3
737.7
996.7 1,481.6 2,002.0 1,818.8 1,221.8 1,422.3 1,700.1 1,330.3 1,452.0
Developing economies Transition economies Developed economies
266.6 6.0 1,142.4
226.2 8.2 603.4
172.3 10.2 446.2
197.5 18.0 388.8
284.6 29.2 423.9
341.4 32.4 622.9
432.0 591.2 668.7 60.5 88.0 117.7 988.2 1,322.8 1,032.4
532.6 70.7 618.6
648.2 70.6 703.5
724.8 94.8 880.4
729.4 84.2 516.7
778.4 108.0 565.6
9.6 98.1 158.8 225.9 40.7 22.6 18.6 17.4
19.9 80.8 125.2 179.3 46.9 22.0 18.1 6.9
14.6 58.6 99.0 119.6 52.7 17.2 17.4 8.0
18.2 48.1 130.8 144.0 53.5 29.8 31.5 9.4
17.3 96.5 170.5 224.0 60.6 39.7 45.1 15.2
31.0 78.3 231.8 269.0 72.4 43.1 59.4 16.6
35.7 98.9 296.8 360.2 71.8 63.9 103.1 21.7
56.0 150.9 323.7 437.6 95.0 46.7 138.0 23.0
47.0 189.5 409.0 533.5 114.7 99.1 124.1 35.9
48.0 243.9 430.6 600.9 123.9 99.6 136.8 46.5
55.2 255.9 415.1 608.4 121.0 117.5 121.5 55.1
57.2 292.1 426.4 654.5 123.9 125.4 137.9 40.5
Developing economies: Africa Developing economies: Americas Developing economies: Asia Developing economies ex China China (implied from the above) ASEAN Major oil & gas exporters Commodity exporters ex energy
2006
2007
51.4 172.8 365.8 507.6 83.6 86.7 137.8 26.5
2008
59.3 211.1 396.0 560.4 108.3 50.3 183.1 36.1
2009
2010
2011
2012
2013
Source: UNCTAD, Macquarie Research, December 2015
Inward FDI is increasingly prized in a time of currency instability and unstable short-term capital flows. The challenge for recipient countries is to attract FDI inflows at a time of elevated investment to GDP at the global level, and whilst global growth is slowing. As highlighted in blue in Fig 110, inward FDI flows can correct severely. We believe embracing pro-market reforms and completing trade agreements like the TPP (Trans-Pacific Partnership) will be necessary to attract major foreign investment. Cheap and abundant labour is not enough
The 1 July 2015 India Insight: Attract FDI to help ‘make more in India’ report by Tanvee Gupta Jain makes useful comparisons between India and China, and what needs to be done to attract more FDI. Even though India benefits from the availability of cheap and abundant labour (labour costs are among the lowest in the world), the underdeveloped infrastructure and weak policy and regulatory environment more than offsets this competitive advantage. While India’s infrastructure spend has been largely stagnant at around 5-5.5% of GDP in the past decade (average), China has been spending close to ~15% of GDP on infrastructure during the same period, Fig 112.
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Fig 111 Average annual manufacturing wages in China are 5x that of India… US$ 8000
India
Fig 112 ... but China spends significantly more to boost infrastructure than India as % of GDP 20%
China
China
India
7000 16%
6000 5000
12%
4000 8%
3000 2000
4%
1000
2014
2013
2012
2011
2010
2009
2008
2007
2005
2004
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2006
0%
0
Note: Data for India for 2013 and 2014 are Macquarie estimates Source: CEIC, National Transport Development Policy Committee, GoI, Macquarie Research, December 2015
Source: CEIC, Macquarie Research, December 2015
Tanvee believes India needs to focus on attracting long-term capital flows to boost and improve the competitiveness of its manufacturing sector and to make it an integral part of the global value chain. According to the UNCTAD World Investment Report 2015, India’s prospective host country rank for FDI, 2015-17, rose to third place, from fourth the year before. India’s prospective host country rank for FDI, 2015-17, rose to 3rd place, from 4th the year before
rd
Fig 113 India ranks 3 amongst MNEs top 10 prospective host economies list for 2015−2017 Australia
4%
Mexico
6%
HK
6%
Germany
8%
United Kingdom
10%
Singapore
10%
Brazil
10%
India
14%
United States
24%
China
28% 0%
5%
10%
15%
20%
25%
30%
Source: UNCTAD business survey, Macquarie Research, December 2015
According to UNCTAD data, even as global FDI flows declined by 8%YoY in 2014 on weak global growth, policy uncertainty and geopolitical risks, flows to developing Asia and India continued to register growth of 15% YoY and 20% YoY, respectively. Among BRIC economies, China and India continued to see an uptick whereas Russia and Brazil saw declines, Fig 115.
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Fig 114
The Global Macro Outlook
FDI inflows to developing economies
Fig 115
FDI inflows to Developing economies: Asia, LS
US$ bn
World Real GDP growth, RS
YoY%, 3MMA 35%
YoY%, 3MMA 6%
FDI inflows comparison for the BRICs India
China
Brazil
Russia
140.0 120.0
25%
5%
100.0 80.0
15%
4%
5%
3%
60.0
40.0 20.0
2014
2012
2010
2008
2006
2004
2002
2000
1996
2014
2012
2010
2008
2006
2004
2002
2000
1998
Source: UNCTAD, IMF, Macquarie Research, December 2015
1998
-
2%
1996
-5%
Source: UNCTAD, IMF, CEIC, Macquarie Research, December 2015
Data for individual Asian countries follow.
Fig 116 CY US$m
China inward FDI Total, % of nominal GDP
Total
Japan
US
EU
2.7 2.4 2.4 1.9 1.7 1.5 1.3 1.2 1.2
72,715 83,521 108,312 94,065 105,735 116,010 111,716 117,586 119,562
4,598 3,589 3,652 4,105 4,084 6,330 7,352 7,058 4,325
2,865 2,616 2,944 2,555 3,017 2,369 2,598 2,820 2,371
5,712 4,365 5,459 5,518 5,922 5,877 6,291 6,893 na
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
There has always been some uncertainty surrounding China’s aggregate inward FDI relating to tax/regulatory arbitrage and mainland corporations. On a geographic source basis, Japan sourced FDI rose to a peak over 2011-13, and has fallen sharply since. US sourced FDI peaked in 2010, with subsequent declines. European sourced FDI has remained strong.
Fig 117 CY HK$mn
Hong Kong FDI (in local currency) Total, % of nominal GDP
Total
Japan
US
EU
0.4 0.5 0.4 0.4 0.5 0.4 0.5 0.5
5,470 8,955 6,071 7,013 8,299 8,377 9,647 10,483
96 156 159 166 181 191 174 206
266 273 222 305 296 359 295 348
N/A
2006 2007 2008 2009 2010 2011 2012 2013
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
Fig 118 CY US$mn 2006 2007 2008 2009 2010 2011 2012 2013 2014
Korea FDI Total, % of nominal GDP
Total
Japan
US
EU
1.1 0.9 1.1 1.3 1.2 1.1 1.3 1.1 1.3
11,248 10,516 11,713 11,483 13,071 13,673 16,285 14,548 19,002
2,111 990 1,424 1,934 2,084 2,289 4,542 2,690 2,488
1,705 2,329 1,328 1,486 1,975 2,372 3,674 3,525 3,609
4,970 4,345 6,339 5,297 3,196 5,031 2,714 4,802 6,504
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
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Fig 119 CY US$mn
Taiwan FDI Total, % of nominal GDP
Total
Japan
US
EU
3.6 3.8 2.0 1.2 0.9 1.0 1.1 1.0 1.1
13,969 15,361 8,237 4,798 3,812 4,955 5,559 4,933 5,770
1,591 1,000 440 246 400 445 414 409 549
883 3,148 2,857 268 319 738 405 583 148
7,510 7,096 2,139 2,085 1,231 716 1,722 687 1,478
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
Fig 120 CY US$mn
Malaysia FDI Total, % of nominal GDP
Total
Japan
US
EU
3.3 4.9 11.3 9.7 11.3 11.3 11.1 10.2 10.1
5,493 9,724 26,944 20,262 28,858 33,694 34,844 32,980 34,220
1,754 2,593 2,384 2,146 3,065 5,620 4,306 4,771 3,198
985 1,200 3,545 1,049 4,903 3,839 3,641 2,798 3,447
1,812 2,819 6,680 5,519 8,110 8,086 8,382 8,013 11,216
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
Fig 121 CY US$mn
Indonesia FDI Total, % of nominal GDP
Total
Japan
US
EU
1.5 2.2 2.6 1.9 2.1 2.2 2.7 3.1 3.2
6,012 10,356 14,883 10,816 16,215 19,475 24,565 28,618 28,530
1,008 597 1,265 685 713 1,516 2,457 4,713 2,705
66 59 159 100 931 1,488 1,238 2,436 1,300
803 1,914 840 1,746 1,302 2,180 2,574 2,567 3,983
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CEIC, Oxford Economics, Macquarie Research, November 2015
Fig 122 CY PHPmn
Philippines FDI (in local currency) Total, % of nominal GDP
Total
Japan
US
EU
2.6 3.1 2.4 1.5 2.2 2.7 2.7 2.4 1.5
165,880 214,083 182,681 121,828 196,063 258,231 289,544 274,014 186,943
20,066 38,587 16,116 70,737 58,333 78,321 69,037 44,784 35,660
38,199 36,089 19,721 12,947 13,144 79,855 39,997 55,344 17,423
N/A
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
Fig 123 CY US$mn 2006 2007 2008 2009 2010 2011 2012 2013 2014
India FDI Total, % of nominal GDP
Total
Japan
US
EU
1.6 1.4 2.6 2.1 1.3 2.3 1.9 1.8 2.0
14,212 15,921 33,027 26,818 21,007 42,669 34,056 34,166 41,252
116 670 405 1,258 1,295 3,058 1,909 1,421 2,335
732 876 1,797 2,051 1,414 1,000 639 772 1,663
N/A
Source: CEIC, Oxford Economics, Macquarie Research, November 2015
14 December 2015
55
Macquarie Research
The Global Macro Outlook
The global trade air pocket The 1980-2008 6% pa global world trade volume growth average has stepped down, in our opinion, to a new trend growth rate of 2-3% pa. This reflects: 1)
The maturing of a 50-year containerization trend
2)
The completion of the integration of China into global supply chains post its December 2001 WTO entry
3)
The move by MNCs to regionalize production to dampen exchange rate risk.
For the identification of global trade trends, we recommend the comprehensive database of the CPB Netherlands bureau for economic policy analysis. Data for both volume and price/ unit values is available geographically on a monthly basis. Importantly, the data is seasonally adjusted. Their web site is here: http://www.cpb.nl/en and their key summary table is Fig 126. The recent air pocket in emerging market economies’ import growth is clearly visible in Fig 124, red line, which uses rolling three-month average YoY data. The deceleration trend in emerging market economies’ import growth is clearly visible
Fig 124
EM & Advanced economies import volumes
LAST 3 MONTHS ON YEAR AGO 20
per 12 months % change
15
EM
10
Advanced
5
0
-5 2010
2011
2012
2013
2014
2015
Source: CPB, Macquarie Research, December 2015
Rolling three months on the preceding three months’ data helps to capture recent momentum. Please note the disturbing recent weakness in import volumes in advanced economies. Nonetheless, the global trade air pocket increasingly appears to have been a 1H 2015 event. Please note the disturbing recent weakness in import volumes in advanced economies
Fig 125 8
EM & Advanced economies import volumes
LAST 3 MONTHS ON PRECEDING 3 MONTHS per 3 months % change
6 4 2 0 -2 -4 EM
-6 2010
2011
2012
2013
2014
Advanced
2015
Source: CPB, Macquarie Research, December 2015
14 December 2015
56
Macquarie Research
Fig 126
The Global Macro Outlook
World merchandise trade (% changes) – latest month September YoY
Volumes (s.a)
QoQ
momentum (note #1)
2013
World trade
2.1
2.6
3.3
-0.8
-1.0
1.1
1.8
1.1
-0.4
-0.6
0.5
World imports
2.1
2.2
3.4
-1.2
-1.1
1.6
1.8
1.6
-0.3
0.2
-0.5
0.0 2.8 3.5 -3.3 2.8
-0.2 0.8 1.6 -0.3 -1.6
3.1 4.7 2.3 2.5 2.9
1.8 2.0 0.8 2.3 0.7
-1.2 -0.9 -1.8 -1.5 -0.5
1.5 1.9 2.6 2.0 -0.3
0.3 -0.2 1.7 0.8 -0.9
1.5 1.9 2.6 2.0 -0.3
0.2 0.0 2.2 0.6 -1.1
0.7 3.5 0.1 -1.0 1.0
1.0 -1.6 3.7 2.5 0.2
Emerging economies Asia Central & Eastern Europe Latin America Africa & Middle East
4.6 3.7 6.0 2.2 7.9
5.0 5.0 5.7 5.0 4.6
3.7 4.1 -0.3 3.0 5.3
-4.4 -5.5 -2.9 -1.1 -3.6
-1.0 -1.1 -0.8 -2.9 0.2
1.8 3.8 0.6 -0.1 -2.3
3.7 6.4 0.4 0.7 -0.6
1.8 3.8 0.6 -0.1 -2.3
-0.8 0.1 -0.8 -1.3 -3.1
-0.3 -0.1 4.4 -6.5 -0.3
-2.3 -3.6 -6.1 5.7 -0.4
World exports
2.1
3.0
3.1
-0.5
-1.0
0.7
1.7
0.7
-0.6
-1.3
1.6
0.7 3.9 -1.3 0.6 -1.1
1.5 2.6 -1.4 0.5 4.9
1.8 3.2 1.8 1.7 0.8
-0.5 -3.9 1.0 1.3 -2.7
-0.4 1.0 -3.6 -0.7 1.1
0.9 0.6 0.3 0.2 3.6
0.7 0.0 -1.4 0.3 3.4
0.9 0.6 0.3 0.2 3.6
0.3 1.4 0.8 0.2 -0.9
-0.8 -1.7 -0.3 -2.0 2.9
1.4 2.8 2.1 1.4 -0.3
3.7 3.7 7.9 4.1 0.2
4.6 5.9 1.3 2.9 1.8
4.6 5.0 5.4 4.9 0.7
-0.5 -2.4 4.1 5.9 0.5
-1.6 -2.1 -2.8 -0.3 0.6
0.4 0.4 -2.0 3.4 0.2
2.9 4.0 -1.4 3.7 0.2
0.4 0.4 -2.0 3.4 0.2
-1.5 -1.9 -2.8 1.1 -0.1
-1.9 -2.1 2.0 -6.7 0.6
1.8 2.4 -2.8 6.7 -1.1
World trade
-1.5
-1.0
-2.1
-6.6
0.0
-2.4
-0.5
-2.4
-1.8
-1.2
-0.9
World imports
-1.1
-1.2
-2.1
-6.4
-0.1
-2.6
-0.6
-2.6
-1.7
-1.3
-1.4
Advanced economies US Japan Euro-zone Other advanced economies
-1.5 0.3 -0.3 -3.9 1.7
-0.7 -1.1 -7.4 1.8 -2.7
-1.1 -1.1 -4.6 -1.5 1.5
-8.0 -5.7 -10.4 -10.5 -4.2
0.4 0.4 -3.8 0.6 1.4
-2.0 -2.0 -1.7 -2.0 -2.3
0.2 -0.5 -1.0 0.8 0.3
-2.0 -2.0 -1.7 -2.0 -2.3
-2.0 -0.9 -1.0 -3.3 -0.8
-0.9 -1.8 -0.8 0.1 -1.7
-1.4 -0.6 -3.5 -1.0 -2.4
Emerging economies Asia Central & Eastern Europe Latin America Africa & Middle East
-0.6 0.1 -4.1 0.9 -1.4
-1.8 -2.2 -3.5 -1.4 0.0
-3.2 -3.1 -7.3 -2.9 -1.7
-4.6 -5.1 -9.5 -3.0 -1.8
-0.6 0.4 -6.0 -2.1 -0.2
-3.2 -4.5 -4.6 -1.2 0.1
-1.6 -2.3 -3.8 -1.2 1.0
-3.2 -4.5 -4.6 -1.2 0.1
-1.4 -2.5 -1.3 2.7 -0.4
-1.8 -2.8 -3.9 0.3 1.7
-1.4 -0.9 0.4 -5.6 -2.3
World exports
-2.0
-0.8
-2.1
-6.9
0.1
-2.2
-0.3
-2.2
-1.9
-1.1
-0.4
Advanced economies US Japan Euro-zone Other advanced economies
-2.7 0.4 -1.7 -4.7 -0.2
0.3 -0.4 -9.2 3.0 -2.0
-0.7 -0.5 -5.2 -0.1 -0.9
-7.1 -2.7 -4.9 -9.6 -5.1
-0.1 -0.5 -1.2 0.0 0.0
-1.4 -1.6 -0.9 -0.4 -3.7
0.5 -1.0 -0.6 1.7 -1.0
-1.4 -1.6 -0.9 -0.4 -3.7
-1.8 -0.4 -0.9 -2.3 -1.9
-0.5 -1.4 -0.3 0.3 -1.8
-0.6 -0.6 -1.4 0.3 -2.6
Emerging economies Asia Central & Eastern Europe Latin America Africa & Middle East
-1.4 -0.2 -4.7 -2.9 -1.7
-2.0 -1.1 -2.3 -2.1 -3.6
-3.6 -1.4 -8.1 -6.2 -6.1
-6.6 -2.5 -13.8 -9.6 -19.5
0.3 -0.4 -1.3 -2.0 7.6
-3.2 -1.1 -5.8 -5.5 -10.3
-1.2 -0.1 -3.8 -3.4 -3.3
-3.2 -1.1 -5.8 -5.5 -10.3
-2.0 -0.8 -4.3 -2.7 -6.1
-1.8 -0.4 -5.2 -0.5 -7.4
-0.2 -0.1 4.5 -4.9 -0.8
-1.1 -0.4 -12.8 0.8 -11.8
-0.5 -1.4 -5.3 -0.8 -4.8
-0.7 -7.7 -4.3 -7.2 -3.7
-3.5 -28.8 -8.8 -26.1 -5.5
-2.4 15.5 -3.3 18.2 -0.9
1.7 -18.5 -6.6 -19.8 -8.2
0.9 -6.5 -4.2 -7.3 -5.1
1.7 -18.5 -6.6 -19.8 -8.2
0.3 -10.8 -3.0 -11.0 -3.3
1.6 -14.5 -4.4 -15.9 -5.9
0.0 0.2 -0.8 0.2 -0.8
Advanced economies US Japan Euro-zone Other advanced economies
Advanced economies US Japan Euro-zone Other advanced economies Emerging economies Asia Central & Eastern Europe Latin America Africa & Middle East
2014 2015 Q1 2015 Q2 2015 Q3
MoM
2012
2015 m08 2015m09 2015m07 2015m08 2015m09
Prices/unit values US$ (s.a.)
World prices/unit values in US$ Manufactures Fuels (HWWI) Primary commodities ex fuels Fuels, real Primary commodities ex fuels, real
Notes: (#1): average of the three months up to the report month over average of the preceding three months Source: CPB, Macquarie Research, December 2015
14 December 2015
57
World merchandise trade, Volumes (s.a.), 2005 = 100
Country Name
(values, 2005 US$ bn) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
World trade
10,469.3
40
42
43
48
52
56
62
65
69
78
78
80
85
93
100
109
116
118
104
119
126
128
132
136
World imports
10,686.2
39
41
42
47
51
56
61
64
68
76
77
80
84
93
100
108
115
117
103
117
124
127
130
134
Advanced US Japan Euro-zone Other
6,665.1 1,673.5 517.0 3,114.5 1,360.1
45 30 67 51
47 33 66 52
47 36 66 50
52 41 70 55
56 45 77 59
60 50 82 61
66 57 83 66
71 64 77 74
77 71 81 78
86 80 89 88 87
85 78 88 88 86
86 81 87 88 87
89 85 92 90 88
95 94 97 96 94
100 100 100 100 100
106 22 102 106 107
109 107 103 111 110
107 103 103 109 108
92 86 89 95 93
102 99 98 103 103
105 103 103 106 106
105 106 107 102 108
104 107 109 102 106
107 112 111 104 109
Emerging Asia Central and Eastern Europe Latin America Africa and Middle East
4,021.1 2,169.0 667.3 458.1 726.8
28 27 19 29 46
31 30 19 35 51
34 34 20 40 46
38 39 24 47 45
43 44 32 49 48
47 48 40 55 51
52 51 45 65 54
51 47 46 72 56
53 52 43 70 58
60 61 52 78 55
62 60 60 81 60
69 67 69 84 66
77 77 78 86 73
90 90 91 94 85
100 100 100 100 100
112 111 118 111 109
125 121 138 120 126
134 127 150 127 146
121 119 120 108 136
142 144 140 132 144
155 154 160 147 157
162 160 166 156 171
172 168 174 170 180
179 176 177 175 191
World exports
10,252.5
40
42
44
49
53
57
63
66
70
79
79
81
86
93
100
109
116
119
104
120
127
130
134
138
Advanced US Japan Euro-zone Other
6,025.8 901.1 594.9 3,189.5 1,340.3
48 46 56 45
50 49 58 46
51 51 59 47
56 56 60 52
61 63 62 57
65 70 63 60
71 79 70 66
75 81 69 71
78 84 72 74
87 93 79 85 94
87 87 74 87 93
88 84 79 88 93
89 86 85 90 93
96 93 95 96 96
100 100 100 100 100
107 110 111 107 105
112 117 121 113 103
112 124 124 112 100
95 107 92 96 86
107 123 117 107 94
112 132 116 112 98
113 137 114 112 97
114 141 113 113 101
116 146 115 115 101
Emerging Asia Central and Eastern Europe Latin America Africa and Middle East
4,226.7 2,293.9 700.2 509.6 723.1
30 23 25 31 63
32 26 21 33 67
34 29 23 38 69
39 33 31 41 71
43 37 35 46 72
46 39 42 51 76
51 43 44 57 80
53 45 47 63 82
58 50 51 68 84
67 60 56 77 91
67 59 64 78 87
72 66 71 83 86
80 75 80 87 91
90 88 91 93 96
100 100 100 100 100
112 115 115 107 102
122 129 126 112 104
128 136 134 111 110
118 125 118 106 101
139 155 134 118 107
149 168 148 124 108
155 173 156 132 110
162 183 159 138 112
169 194 167 142 112
Macquarie Research
14 December 2015
Fig 127
Source: CPB, Macquarie Research, December 2015
Fig 128
World Merchandise Trade, from 1992 to latest, rolling 3 months, YoY
20 15 10 5 0
-5 -10 World
-20 -25 03/92 03/93 03/94 03/95 03/96 03/97 03/98 03/99 03/00 03/01 03/02 03/03 03/04 03/05 03/06 03/07 03/08 03/09 03/10 03/11 03/12 03/13 03/14 03/15 Note: World merchandise trade is the aggregate of exports and imports Source: CPB, Macquarie Research, December 2015
58
The Global Macro Outlook
-15
World merchandise trade, Prices/unit values in US$ (s.a.), 2005 = 100
Country Name
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
World trade
87
88
84
87
94
92
87
82
79
79
76
77
85
94 100 106 114 129 114 121 137 134 133 130
World imports
89
90
85
87
95
92
87
82
80
80
77
77
85
94 100 106 115 131 115 123 139 136 135 132
Advanced US Japan Euro-zone Other
87 98 69 85
88 97 69 87
82 95 72 78
85 96 76 80
93 98 85 91
90 95 82 89
84 91 79 80
80 86 70 77
77 86 75 73
77 91 83 69 77
75 88 77 68 75
76 86 75 71 77
85 88 80 84 86
94 93 91 94 95
100 100 100 100 100
106 105 110 107 106
116 109 117 120 114
131 122 142 136 126
116 108 120 120 115
122 115 136 123 121
138 128 161 141 137
136 128 160 135 135
135 127 148 138 135
133 125 141 136 134
93 92 94 100 93 92 95 102 125 112 107 109 86 86 88 94 86 88 89 95
98 99 99 95 94
95 95 96 95 90
88 85 89 92 88
86 84 84 90 87
88 89 81 94 86
83 84 73 89 82
80 83 72 81 78
85 87 82 82 84
94 95 93 90 96
100 100 100 100 100
106 105 105 107 106
114 112 117 116 116
130 128 134 135 131
113 111 113 120 115
123 124 119 129 122
139 141 131 142 136
137 142 126 138 135
134 138 123 131 134
130 135 118 128 130
92
86
82
79
79
75
76
85
94 100 105 114 128 113 120 135 132 131 128
90 85 88 97 94 87 101 100 101 103 99 96 99 105 112 121 110 101 91 83 85 97 94 85
84 93 95 83
81 78 92 94 99 101 78 71 74
76 93 91 70 71
77 92 88 74 73
87 96 100 104 93 97 100 104 93 100 100 98 87 96 100 104 82 93 100 107
114 109 99 117 117
126 115 106 129 135
116 110 106 118 119
119 115 111 118 130
132 124 119 131 149
128 125 117 125 146
129 124 106 129 145
128 124 101 129 141
Emerging Asia Central and Eastern Europe Latin America Africa and Middle East World exports Advanced US Japan Euro-zone Other
93 91 129 87 83 86 88 103 96 87
87
83
86
94
Emerging Asia Central and Eastern Europe Latin America Africa and Middle East
79 95 72 77 55
80 97 82 76 53
78 81 88 88 86 97 100 108 107 103 76 78 86 78 77 73 79 86 86 87 51 48 53 55 55
78 95 72 81 46
75 90 65 78 46
80 91 72 82 61
75 86 66 79 57
75 85 66 75 57
81 89 75 79 65
91 96 90 90 80
100 100 100 100 100
107 103 107 111 116
114 108 120 121 128
131 117 144 138 163
111 107 115 115 117
121 113 126 133 144
137 124 145 155 179
135 124 139 148 176
133 122 138 142 171
128 120 130 136 162
Manufactures Fuels (HWWI) Primary commodities excluding fuels (HWWI) Fuels, real Primary commodities ex fuels (real)
98 39 82 39 83
99 38 80 38 80
95 34 74 35 77
93 27 79 30 86
88 35 72 40 81
84 53 74 63 88
82 47 67 57 81
83 47 67 57 81
90 54 76 60 84
97 72 92 74 95
100 100 100 100 100
103 119 129 116 126
110 133 150 120 136
119 185 160 155 134
111 117 122 104 110
114 150 159 132 140
123 197 188 161 154
121 196 164 162 136
120 194 156 161 129
119 179 149 150 125
97 105 101 32 35 40 90 102 94 33 33 40 93 97 92
95 39 94 41 99
Macquarie Research
14 December 2015
Fig 129
Source: CPB, Macquarie Research, December 2015
The Global Macro Outlook
59
Macquarie Research
The Global Macro Outlook
We also use the timely monthly data releases from Korea, Taiwan and China to check our conclusions. The global trade air pocket reflects the rebalancing underway in China away from an investment-led model
Obviously, China is a critical piece of any puzzle. The global trade air pocket, we believe, reflects the rebalancing underway in China away from an investment-led model. Larry Hu, our senior China economist, first reduced his 2015 Chinese import volume forecast in his 8 June 2015 China macro: May trade data, trade surplus to hit a new high in 2015 due to weak imports. Currently Larry is forecasting minus 4% real import volume growth for 2015 (and zero real export growth). A 3% downward revision in Chinese real imports, everything else equal, takes 0.1% off global GDP growth (imports are 25% of Chinese GDP and the latter is 15% of global GDP, current US$).
BRICs: in adjustment All four BRIC countries are now a headwind to world goods trade growth:
Fig 130
BRICs are a drag on world trade growth
Source: Oxford Economics, Macquarie Research, December 2015
Monthly trade data from Korea, Taiwan and China Economists prefer to focus on real variables (volume), but monthly statistics in value terms tend to come out more quickly
We begin with a disclaimer. The following charts and data track national monthly export releases. The year-over-year export numbers are based on value, not volume, statistics. Economists prefer to focus on real variables (volume), but monthly statistics in value terms tend to come out more quickly. For industrial economies with relatively little primary commodity exports, it should not matter much over time. Fig 131 and Fig 132 (next page) demonstrate this with the example of China. Whilst Fig 131 shows that it can matter over shorter periods, the basic direction is normally the same, including the inflection points.
Fig 131 40
China’s export indices: volume and value compared, 1981-2013
(YoY%)
Export volume index
Export value index
30
20 10
0 -10
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-20
Source: World Bank, Macquarie Research, December 2015
14 December 2015
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The Global Macro Outlook
China’s export indices, volume, value and export unit value, 2005 to
Fig 132 latest
(6mma YoY%) 40
Export value
Export volume
Export unit value
30
20 10 0 -10 -20
06/15
12/14
06/14
12/13
06/13
12/12
06/12
12/11
06/11
12/10
06/10
12/09
06/09
12/08
06/08
12/07
06/07
12/06
06/06
12/05
06/05
-30
Source: General Administration of Customs, Macquarie Research, December 2015
With that caveat in mind, Fig 133 has the recent export growth for Korea, Taiwan and China. The weakness 2015 YTD (highlighted in grey below) suggests that the slowdown in global trade growth is more than a primary commodity issue (both volumes and prices) and extends to the intermediate goods and final manufactures exported by industrial nations such as Korea and Taiwan.
Fig 133
Export growth of Korea, Taiwan and China, monthly, YoY%
Korea Taiwan China
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sept-15
Oct-15
Nov-15
3.1 -2.9 9.5
-1.0 3.4 -3.3
-3.3 -6.7 48.3
-4.5 -8.9 -15.0
-8.0 -11.7 -6.5
-11.0 -3.8 -2.8
-2.6 -13.9 2.8
-5.1 -12.0 -8.4
-14.9 -14.8 -5.6
-8.3 -14.6 -3.7
-15.9 -11.0 -6.9
-4.7 -16.9 -6.8
Source: CEIC, Macquarie Research, December 2015
Fig 134 and Fig 135 (next page) show Korea’s exports by principal destination. Exports to China (the red line) have been ex-growth for about a year now. For a more short-term indicator available weekly, please see Fig 136, and the containerized freight indices for Shanghai and China. Both of these indices have been very weak in 2015. Korea’s exports by principal destination
Fig 134 80
Exports to China have been exgrowth for about a year now
Korea’s export growth (YoY%) to China, US, EU, 2000 to latest (3mma)
(YoY%, 3mma)
China
US
EU
60 40 20 0 -20
01/15
01/14
01/13
01/12
01/11
01/10
01/09
01/08
01/07
01/06
01/05
01/04
01/03
01/02
01/01
01/00
-40
Source: Korea Customs Service, CEIC, Macquarie Research, December 2015
14 December 2015
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The Global Macro Outlook
Fig 135
Korea’s export growth (YoY%) to China, US, EU, 2011 to latest (3mma)
(YoY%, 3mma)
40
China
US
EU
30 20 10 0
-10 -20
2015
2015
2014
2014
2013
2013
2012
2012
2011
2011
-30
Source: Korea Customs Service, CEIC, Macquarie Research, December 2015
Fig 136
Shanghai and China Containerized Freight Indices
1500
Shanghai
China
1300
1100 900 700 500 11/2010
06/2011
01/2012
08/2012
03/2013
10/2013
05/2014
12/2014
07/2015
Source: Bloomberg, Macquarie Research, December 2015
Asian export growth over the past two decades has been driven by the impact of 1) global cycles (particularly 2001-02, 2009-10) and 2) the integration of China, post its entry into the WTO on 11 December 2001, into an East Asia integrated supply chain. The Asian export growth engine ended with the Global Financial Crisis
Fig 137
Disentangling these two factors is difficult, but we believe that with the latter largely complete, Asian export growth will in the future be more modest on a trend basis. Unfortunately, even our forecast for the most anaemic export growth cycle in 20 years had to be trimmed in the 15 August 2012 PEC’s strategy weekly: Seeking global insight from Korea, and there has been no reacceleration since. The Asian export growth engine ended with the Global Financial Crisis.
Asia including Japan export volume (YoY%) versus OECD LI
40 (%)
Asia ex & Japan export volume (SA, YoY%, LHS)
(%)
OECD LI - Derived 6m annualised (RHS)
7
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
-7 2003
-30 2002
-5
2001
-20
2000
-3
1999
-10
1998
-1
1997
0
1996
1
1995
10
1994
3
1993
20
1992
5
1991
30
Note: Volume data is sourced from the CPB, except India, which is sourced from the IMF Source: CPB, OECD, Macquarie Research, December 2015
14 December 2015
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The Global Macro Outlook
Fixed & semi-fixed exchange rate regimes Currently, the divide between those countries utilizing floating exchange rate, and those using fixed & semi-fixed exchange rate regimes, divides broadly into advanced economies and emerging market economies. Advanced economies have broad, deep domestic asset markets and consequently the risk of capital flight and financial system instability is relatively low. In this environment, a floating exchange rate system allows the central bank to have monetary policy autonomy i.e. the ability to use monetary policy for domestic objectives. In a world of open capital flows, fixed & semi-fixed exchange rate regimes have become associated with highly disruptive credit boom and bust cycles
Conversely, emerging market economies, without broad, deep domestic asset markets, fix their exchange rates, typically against the US$, to provide an anchor of stability. Unfortunately, in a world of open capital flows, fixed & semi-fixed exchange rate regimes have become associated with highly disruptive credit boom and bust cycles. Fig 138 has 34 countries with fixed exchange rate systems. Most other emerging market economies use semi-fixed exchange rates.
Fig 138
Fixed exchange rates, to the US$ unless marked otherwise
Bahrain Benin (E) Bosnia & Herzegovina (E) Bulgaria (E) Burkina Faso (E) Cameroon (E) Central African Republic (E) Chad (E) Cuba
Denmark (E) Djibouti Equatorial Guinea (E) Eritrea Gabon (E) Guinea-Bissau (E) Hong Kong Ivory Coast (E) Jordan
Lebanon Lesotho (ZAR) Mali (E) Namibia (ZAR) Nepal (INR) Niger (E) Oman Panama Qatar
Republic of Congo (E) Saudi Arabia Senegal (E) Swaziland (ZAR) Togo (E) United Arab Emirates Venezuela
Note: As of February 2015, countries with at least 1 million people. (E) = Euro (ZAR) = South African Rand, INR = Indian Rupee Source: Investment Frontier, Macquarie Research, December 2015
Of course, there are a mass of emerging market economies. Fig 140 has 69 countries in the table and another 83 in the footnotes, for a total of 152 countries. However, only a few matter in terms of the size of their economy relative to the global economy. Our global aggregate of 10-advanced economies and 6-emerging market economies has a 2014 current US$ GDP of US$59.1tr. Of the 152 countries, only eleven emerging market economies have 2014 GDPs above US$0.5tr, highlighted in light blue in Fig 140: Turkey, Poland, China, India, Indonesia, Mexico, Brazil, Argentina, Russia, Saudi Arabia and Nigeria. However, currency contagion speculation leads to a broader monitoring list, below. Currency contagion speculation leads to a monitoring list
Fig 139
Real effective exchange rate and foreign exchange rate versus the US$ 10-yr average REER (End REER 2014)
Latest REER
Actual Rate Latest (End 2014) Market Rate
Countries
Currencies
Turkey Poland China India Indonesia Mexico Brazil Argentina Russia Saudi Arabia Nigeria
TRY PLN CNY INR IDR MXN BRL ARS RUB SAR NGN
99.7 93.5 91.7 101.1 88.1 102.0 95.1 100.2 104.7 97.6 97.7
121.6 88.4 91.9 97.2 84.8 80.2 75.9 112.0 129.2 100.9 94.5
124.2 86.8 85.5 86.2 64.2 93.3 87.3 119.4 125.0 97.4 93.8
6.2 63.1 12385.0 14.7 2.7 8.5 60.0 3.8 183.0 1.6 6.3
6.4 66.8 13832.0 16.7 3.7 9.7 68.1 3.8 199.1 1.8 7.0
Bulgaria Croatia Czech Republic Israel Romania South Africa Ukraine
BGN HRK CZK ILS ROM ZAR UAH
95.0 95.0 93.1 98.5 100.9 88.0 100.5
91.1 98.2 91.5 95.8 100.0 78.8 72.3
90.6 104.3 78.4 94.9 101.7 77.0 75.5
22.9 3.9 2.3 3.6 3.7 11.6 15.8
24.8 3.8 2.9 4.0 4.1 14.3 23.7
Note: REER is from IMF. Those countries above the line have 2014 current US$ GDP above US$0.5tr Source: IMF, FactSet, Macquarie Research, December 2015
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Fig 140
The Global Macro Outlook
Emerging market economies mapped: GDP, consumer prices, current account balances Real GDP 2014 GDP (in current US$) US$tr
Emerging and Developing Europe (1) Turkey Poland Romania Hungary Bulgaria Serbia Croatia
2014
Consumer Prices (annual averages)
Projection 2015 2016
2014
Projection 2015 2016
Current Account balance (as a % of GDP) 2014
Projection 2015 2016
1.85 0.80 0.55 0.20 0.14 0.06 0.04 0.06
2.8 2.9 3.3 2.9 3.6 1.7 -1.8 -0.4
2.9 3.1 3.5 2.7 2.7 1.2 -0.5 0.5
3.2 3.6 3.5 2.9 2.3 1.5 1.5 1.0
3.8 8.9 0.0 1.1 -0.3 -1.6 2.1 -0.2
2.7 6.6 -0.8 1.0 0.0 -1.0 2.7 -0.9
3.7 6.5 1.2 2.4 2.3 0.6 4.0 0.9
-2.9 -5.7 -1.2 -0.5 4.2 0.0 -6.0 0.7
-2.4 -4.2 -1.8 -1.1 4.8 0.2 -4.7 2.2
-3.0 -4.8 -2.4 -1.5 4.1 -0.8 -4.7 2.0
10.36 2.07
6.8 7.4 7.2
6.6 6.8 7.5
6.4 6.3 7.5
3.5 2.0 6.0
3.0 1.2 6.1
3.1 1.5 5.7
1.3 2.0 -1.4
2.1 3.2 -1.3
2.0 3.2 -1.6
2.06 0.89 0.37 0.33 0.28 0.19
4.6 5.0 0.7 6.0 6.1 6.0
5.2 5.2 3.7 4.8 6.7 6.0
5.3 5.5 4.0 4.9 6.3 5.8
4.7 6.4 1.9 3.1 4.2 4.1
4.1 6.8 0.3 2.7 2.1 2.5
4.2 5.8 2.4 3.0 2.8 3.2
1.3 -3.0 3.8 4.6 4.4 5.4
1.1 -3.0 4.4 2.1 5.5 4.8
0.6 -2.9 2.4 1.4 5.0 4.9
Other Emerging and Developing Asia (2) Emerging Asia (3)
14.49
6.4 6.8
6.7 6.6
6.7 6.4
5.9 3.4
5.5 2.9
5.7 3.0
-2.5 1.4
-2.7 2.2
-2.7 2.1
Mexico
1.28
Emerging and Developing Asia China India ASEAN-5 Indonesia Thailand Malaysia Philippines Vietnam
2.1
3.0
3.3
4.0
3.2
3.0
-2.1
-2.2
-2.2
South America Brazil Argentina Colombia Venezuela Chile Peru Ecuador Bolivia Uruguay Paraguay
3.95 2.35 0.54 0.38 na 0.26 0.20 0.10 0.03 0.06 0.03
0.7 0.1 0.5 4.6 –4.0 1.8 2.4 3.6 5.4 3.3 4.4
–0.2 –1.0 –0.3 3.4 –7.0 2.7 3.8 1.9 4.3 2.8 4.0
1.3 1.0 0.1 3.7 –4.0 3.3 5.0 3.6 4.3 2.9 4.0
6.3 2.9 62.2 4.4 3.2 3.6 5.8 8.9 5.0
7.8 18.6 3.4 96.8 3.0 2.5 3.2 5.1 7.9 3.6
5.9 23.2 3.0 83.7 3.0 2.0 3.0 5.0 7.5 4.5
–2.9 –3.9 –0.9 –5.0 4.3 –1.2 –4.1 –0.8 0.7 –4.7 0.1
–3.5 –3.7 –1.7 –5.8 –4.7 –1.2 –4.6 –3.3 –2.8 –3.8 –1.7
–3.2 –3.4 –1.8 –4.9 –0.8 –2.0 –4.3 –3.0 –4.2 –4.1 –2.2
Central America (4) Caribbean (5) Latin America and the Caribbean (6) Excluding Argentina
0.21 0.03 4.19 3.65
4.0 4.7 1.3 1.4
4.2 3.7 0.9 1.0
4.3 3.5 2.0 2.2
3.4 4.0 7.9
2.6 3.3 9.0
3.3 4.2 7.6
–5.9 –3.1 -2.8 -3.0
–5.0 –2.4 -3.2 -3.4
–5.2 –2.7 -3.0 -3.1
Commonwealth of Independent States (7)
2.53
1.0
–2.6
0.3
8.1
16.8
9.4
2.2
2.5
3.7
Net Energy Exporters Russia Kazakhstan Uzbekistan Azerbaijan Turkmenistan
2.26 1.86 0.21 0.06 0.08 0.05
1.5 0.6 4.3 8.1 2.8 10.3
–2.4 –3.8 2.0 6.2 0.6 9.0
0.1 1.1 3.1 6.5 2.5 9.2
7.5 7.8 6.7 8.4 1.4 6.0
15.6 17.9 5.2 9.5 7.9 7.7
9.1 9.8 5.5 9.8 6.2 6.6
3.1 3.1 1.6 0.1 15.3 5.9
3.4 5.4 4.1 0.2 5.3 11.1
4.6 6.3 3.1 0.2 8.2 6.7
Net Energy Importers Ukraine Belarus Georgia Armenia Tajikistan Kyrgyz Republic Moldova Caucasus and Central Asia (8) Low-Income CIS Countries (9) Net Energy Exporters Excluding Russia
0.27 0.13 0.08 0.02 0.01 0.01 0.01 0.01
0.40
2.6 6.8 1.6 4.7 3.4 6.7 3.6 4.6 5.3 6.7 5.4
–3.7 –5.5 –2.3 2.0 –1.0 3.0 1.7 –1.0 3.2 4.2 3.4
1.6 2.0 0.1 30 . 4.1 3.4 3.0 4.2 5.0 4.4
12.3 12.1 18.1 3.1 3.1 6.1 7.5 5.1 5.8 6.9 5.9
25.2 33.5 22.1 3.0 6.4 12.8 10.7 7.5 6.9 8.7 6.9
11.4 10.6 17.4 5.0 4.0 6.3 8.6 6.3 6.6 8.2 6.7
5.7 4.0 6.1 9.6 9.2 9.1 13.7 5.5 1.7 –4.2 3.0
5.2 1.4 7.0 11.5 8.6 7.1 17.0 4.5 –3.4 –3.8 –2.6
4.2 1.3 4.2 12.0 8.6 5.8 15.2 5.4 –2.0 –3.6 –1.2
Middle East, North Africa, Afghanistan, and Pakistan
2.73
2.6
2.9
3.8
6.7
6.1
6.2
6.4
–1.9
–0.1
Oil Exporters (10) Saudi Arabia Iran United Arab Emirates Algeria Iraq Qatar Kuwait
2.21 0.75 0.42 0.40 0.21 0.22 0.21 na
2.4 3.6 30 3.6 4.1 –2.4 6.1 1.3
2.4 3.0 0.6 3.2 2.6 1.3 7.1 1.7
3.5 2.7 1.3 3.2 3.9 7.6 6.5 1.8
5.6 2.7 15.5 2.3 2.9 2.2 3.0 2.9
5.6 2 16.5 2.1 4.0 3.0 1.8 3.3
6.0 2.5 17 2.3 .04 3.0 2.7 3.6
10 14.1 3.8 12.1 –4.3 –3.5 25.1 35.3
–1.0 –1.0 0.8 5.3 15.7 –9.6 8.4 15.7
1.7 3.7 1.2 7.2 –13.2 –3.6 5.0 19.3
Oil Importers (11) Egypt Pakistan Morocco Sudan Tunisia Lebanon
0.52 na 0.25 0.11 0.07 na 0.05
3.0 2.2 4.1 2.9 3.4 2.3 2.0
4.0 4.0 4.3 4.4 3.3 3.0 2.5
4.4 4.3 4.7 5.0 3.9 3.8 2.5
9.2 10.1 8.6 0.4 36.9 4.9 1.9
7.0 10.3 4.7 1.5 19.0 5.0 1.1
6.6 10.5 4.5 2.0 10.5 4.1 2.8
–4.0 –0.8 –1.2 –5.8 –5.2 –8.9 24.9
–4.2 –3.3 –1.3 –3.4 –4.2 –6.4 22.2
–4.5 –4.3 –1.4 –3.3 –3.9 –5.2 –21.7
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Fig 140
The Global Macro Outlook
Emerging market economies mapped: GDP, consumer prices, current account balances Real GDP
Jordan Middle East and North Africa
2014 GDP (in current US$) US$tr 0.04
2014 3.1 2.4
Consumer Prices (annual averages)
Projection Projection 2015 2016 2014 2015 2016 3.8 4.5 2.9 1.2 2.5 2.7 3.7 6.5 6.2 6.4
Current Account balance (as a % of GDP) 2014 –7.0 7
Projection 2015 2016 –7.6 –6.6 –2.0 0.0
Israel (12) Maghreb (13) Mashreq (14) Sub-Saharan Africa
0.30 na na
2.8 1.0 2.2
3.5 3.3 3.9
3.3 5.6 4.2
0.5 2.5 8.9
–0.2 3.3 8.9
2.1 3.6 9.3
3.0 –8.1 –4.7
4.5 14.6 –6.2
4.4 –11.6 –6.8
1.42
5.0
4.5
5.1
6.3
6.6
7.0
–3.3
–4.6
–4.1
Oil Exporters (15) Nigeria Angola Gabon Chad Republic of Congo
0.74 0.57 0.13 0.02 0.01 0.01
5.8 6.3 4.2 5.1 6.9 6.0
4.5 4.8 4.5 4.4 7.6 5.2
5.2 5.0 3.9 5.5 4.9 7.5
7.3 8.1 7.3 4.5 1.7 0.9
9.2 9.6 8.4 2.5 3.2 3.0
9.6 10.7 8.5 2.5 2.9 2.9
1.2 2.2 –0.8 11.2 –8.7 –6.2
–1.5 0.7 –6.3 –2.3 –10.5 –11.3
–0.3 1.3 –4.2 0.9 –8.3 –3.1
Middle-Income Countries (16) South Africa Ghana Côte d'Ivoire Cameroon Zambia Senegal
0.47 0.35 0.04 na 0.03 0.03 0.02
2.9 1.5 4.2 7.5 5.1 5.4 4.5
3.2 2.0 3.5 7.7 5.0 6.7 4.6
3.6 2.1 6.4 7.8 5.0 6.9 5.1
6.0 6.1 15.5 0.4 1.9 7.9 0.5
4.8 4.5 12.2 1.2 2 7.7 1.5
5.3 5.6 10.2 1.5 2.1 6.5 1.4
–4.8 –5.4 –9.2 –3.3 –4.2 –0.2 –10.3
–4.0 –4.6 –7.0 –2.3 –4.8 0.3 –7.6
–4.1 –4.7 –6.2 –1.7 –4.8 0.9 –7.3
Low-Income Countries (17) Ethiopia Kenya Tanzania Uganda Madagascar Democratic Republic of the Congo Sub-Saharan Africa Excluding South Sudan
0.21 0.05 0.06 0.05 0.03 0.01 0.01 na
6.5 10.3 5.3 7.2 4.9 3.0 9.1 5.0
6.3 8.6 6.9 7.2 5.4 5.0 9.2 4.5
6.9 8.5 7.2 7.1 5.6 5.0 8.4 5.0
5.1 7.4 6.9 6.1 4.7 6.1 1.0 6.4
4.8 6.8 5.1 4.2 4.9 7.6 2.4 6.4
5.2 8.2 5 4.5 4.8 6.9 3.5 7.0
–11.0 –9.0 –9.2 –10.2 –7.5 –2.3 –9.6 –3.3
–11.1 –6.6 –7.7 –10.0 –8.8 –3.2 –10.7 –4.5
11.0 –6.3 –7.4 –9.5 –9.0 –3.4 –9.5 –4.1
Foot notes: Countries with 2014 GDP (in current US$) above US$0.5tr highlighted in blue, major aggregates highlighted in grey (1) – Includes Lithuania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, and Montenegro (2) - Other Emerging and Developing Asia comprises Bangladesh, Bhutan, Brunei Darussalam, Cambodia, Fiji, Kiribati, Lao P.D.R., Maldives, Marshall islands, Micronesia, Mongolia, Myanmar, Nepal, Palau, Papua New Guinea, Samoa, Solomon Islands, Sri Lanka, Timor-Leste, Tonga, Tuvalu, and Vanuatu. (3) - Emerging Asia comprises the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) economies, China, and India. - Starting in 2014 data exclude Crimea and Sevastopol. (4) – Central America comprises Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama (5) – The Caribbean comprises Antigua and Barbuda, The Bahamas, Barbados, Dominica, the Dominican Republic, Grenada, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago (6) Latin America and the Caribbean comprises Mexico and economies from the Caribbean, Central America, and South America (7) - Georgia, Turkmenistan, and Ukraine, which are not members of the Commonwealth of Independent States (CIS), are included in this group for reasons of geography and similarity in economic structure. (8) - Caucasus and Central Asia comprises Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan (9) - Low-Income CIS Countries comprise Armenia, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan. (10)- Includes Bahrain, Libya, Oman and Yemen (11) - Includes Afghanistan, Djibouti, and Mauritania. Excludes Syria because of the uncertain political situation. (12) - Israel, which is not a member of the economic region, is included for reasons of geography. Note that Israel is not included in the regional aggregates. (13) - The Maghreb comprises Algeria, Libya, Mauritania, Morocco, and Tunisia. (14) - The Mashreq comprises Egypt, Jordan, and Lebanon. Syria is excluded because of the uncertain political situation. (15) - Includes Equatorial Guinea and South Sudan. (16)- Includes Botswana, Cabo Verde, Lesotho, Mauritius, Namibia, Seychelles, and Swaziland. (17) - Include Benin, Burkina Faso, Burundi, the Central African Republic, Comoros, Eritrea, The Gambia, Guinea, Guinea-Bissau, Liberia, Malawi, Mali, Mozambique, Niger, Rwanda, São Tomé and Príncipe, Sierra Leone, Togo, and Zimbabwe. Source: IMF, World Economic Outlook, World Bank, Macquarie Research, December 2015
Central bank balance sheets in fixed & semi-fixed foreign exchange regimes The rise (and fall) of the forex reserves will drive a credit boom (and bust) cycle
14 December 2015
In either a fixed or semi-fixed exchange rate regime, intervening to prevent an overall balance of payments surplus (current account plus private sector capital account) driving an appreciation of the currency leads to an increase in the foreign exchange reserves. When the central bank purchases foreign currency from the private sector an increase in its net foreign assets appears on its balance sheet, Fig 141. The corresponding central bank liability is a local currency deposit of the commercial banks. The latter is a part of the monetary base. If the central bank takes no further action, then the rise (and fall) of the foreign exchange reserves will drive a credit boom (and bust) cycle.
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Sterilization To prevent the banking system expanding credit multi-fold, via the bank credit multiplier, the central bank takes offsetting sterilising action to withdraw the newly created excess reserves (monetary base). Fig 141 shows one technique, the selling of an existing asset, e.g. government bonds, to the private sector. This results in a decline in the deposits of commercial banks.
Fig 141
Central bank balance sheet: sterilization by selling an existing asset
Central bank Assets Net foreign assets Government bonds Loans to financial institutions
Liabilities Cash currency in circulation Deposits of commercial banks Deposits of government Net worth
Monetary base
Source: Tim Lee “Economics for Professional Investors”, Macquarie Research, December 2015
The sterilization technique followed by the quantity of domestic assets the central bank already owns. In Fig 142, the central bank withdraws the excess reserves created by its intervention in the foreign currency markets by either: a) increasing reserve requirements, or b) issuing sterilization bills/bonds.
Fig 142 Central bank balance sheet: sterilization by increasing reserve requirements or by issuing sterilization bills/bonds Central bank Assets Net foreign assets government bonds Loans to financial institutions
Liabilities Cash currency in circulation Deposits of Commercial banks Increase in reserve requirements Sterilization bills/bonds Deposits of government Net worth
Monetary base
Source: Tim Lee “Economics for Professional Investors” (1998), Macquarie Research, December 2015
For example, across Asia, since the Asian Financial Crisis, there has been a desire to hold a larger cushion of foreign exchange reserves as an insurance policy against another period of financial instability. There has also been a desire to maintain an undervalued exchange rate, as evidenced by the continued growth in foreign exchange reserves, without allowing a build up in excess reserves. To ensure the latter comprehensive sterilization policies have been followed. The examples of China and Indonesia follow. Fig 143 shows how for China total sterilization activities (in grey) have tracked the growth in forex reserves (black).
Fig 143 (US$bn) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
China: FX reserves and sterilization instruments Foreign reserves
Bond issued by PBC
Reserve deposits of banks
Total sterilization instruments
01/00 07/00 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 07/06 01/07 07/07 01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11 01/12 07/12 01/13 07/13 01/14 07/14 01/15 07/15
Total sterilization activities (in grey) have tracked the growth in forex reserves (black)
Source: CEIC, Macquarie Research, December 2015
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The PBOC has used both PBOC bonds and required reserve requirements to sterilize capital inflows. However, PBOC bonds become less attractive to issue when their interest rate cost exceeds the return on the foreign exchange reserves. This occurred after the global financial crisis with the decline in US interest rates. The emphasis then switched to using the required reserve ratio (the red line). Monetary policy management in Asia-ex is usually subordinated to exchange rate policy and the shadowing of the US$. However, one exception in recent years has been Indonesia, which stopped fully sterilizing capital inflows for a period over 2010-11 (grey versus black line, chart below) as we discussed in the 18 July 2012 PEC’s strategy weekly: Indonesia, policy choices to the fore.
Fig 144
Indonesia: FX reserves and sterilization instruments
(US$bn) 130
Foreign exchange reserves
Reserve deposits of deposit money banks
Bank Indonesia SBIs outstanding
Total sterilization instruments
110 90 70 50 30 10
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2004
2005
-10
Source: CEIC, Macquarie Research, December 2015
The period of falling foreign exchange reserves, grey shading in the chart above, reflected overly strong domestic demand and strong imports. The subsequent growth in foreign exchange reserves over 2013-14 reflects strong capital account inflows (these have been left unsterilized), both longer-term (FDI, Fig 145) and shorter-term portfolio investment flows (into the Indonesian government bond market, Fig 146). Please see Lyall Taylor’s 24 August 2015 Indonesian Strategy: Three reasons to remain underweight for more.
Strong capital account inflows
US$bn
Fig 145
Fig 146 bonds
Indonesian inward FDI flows (US$bn)
25
600
23.0
18.4
20
Foreign ownership of Indonesian government
(%)
(Rp tn)
45 40
500
18.5
16.1
35
400
30
13.8
15
25
300
20
10.2
9.3
10
9.0
200
15
6.9 4.9
4.9
10
100
5
5
Foreign holdings
Source: BKPM, Macquarie Research, December 2015
14 December 2015
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
2006 2007 2008 2009 2010 2011 2012 2013 2014 1H14 1H15
May-09
-
0
Jan-09
0
% foreign ownership
Source: Ministry of Finance, Macquarie Research, December 2015
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Lyall is concerned that Indonesia’s “long boom” during 2002-13 catalysed an extreme degree of hype about Indonesia’s future growth potential. To quote his 24 August 2015 report, link above: Commentators such as McKinsey released reports boldly predicting that Indonesia would become one of the world’s largest consumer markets by 2025, based on little more than an extrapolation of past growth rates, and with little regard to Indonesia’s complete lack of internationally competitive non-commodity industries, or major infrastructure deficits (hard and soft). This created an investment boom as corporates rushed to cash in on Indonesia’s apparent 250m-strong emerging middle class. Consequently, both DDI and FDI surged. Suzuki, Honda, and Nissan all significantly ramped up domestic auto capacity to meet anticipated booming future demand for cars, while GM opened a new factory in 2013 (which it has recently closed after incurring US$200m in losses). Global retailing giants such as H&M, Uniqlo, and Ikea flocked to Indonesia, while property companies moved to quickly develop Indonesia’s “domestic consumption infrastructure”, with high-end mall development surging, alongside a raft of high-end condo and other mix-used property developments (aided by surging prices as global liquidity poured in to Indonesia in the wake of the growing boom). It was a veritable gold rush. Unfortunately, all this investment, which we believe was based on overly-bullish growth expectations and a misunderstanding of Indonesia’s fundamentals, has left a legacy of significant oversupply in industry after industry as the commodity windfall recedes. A consequence is likely to be a protracted and severe downturn in ROEs in our view.
Private sector behaviour and debt currency mismatches There is a further complication for policymakers utilising fixed or semi-fixed exchange rate policies. During the period when the overall balance of payments is in surplus (current account plus private sector capital account) private sector expectations develop that the local currency is undervalued such that borrowing in US$ appears to offer a lower running cost (US$ interest rates are typically beneath local interest rates), and no capital risk – rather the eventual repayment could well be made in an appreciated local currency. This behaviour tends to further amplify both the credit boom and subsequent credit bust.
Cycles in monetary management In US$-shadowing economies, monetary policy rides on the back of the external accounts
In US$-shadowing economies, monetary policy rides on the back of the external accounts. In periods of sustained US$ depreciation, monetary authorities have to manage the problems of excess: from an export boom and strong capital inflows to rampant credit growth and asset bubbles. Typically the policy response is to allow both local interest rates to move higher somewhat, but not so far that it triggers more substantial net capital inflows. In periods of sustained US$ appreciation, subdued external accounts can lead to inadvertent domestic tightness. The risk is in the speed of the policy response, cutting local interest rates can lead to capital flight, pronounced currency weakness, imported inflation problems and the need to raise local interest rates. Please recall that the US$ REER depreciated almost continuously between the start of 2002 and late 2008, Fig147 shows the global boom in capital flows over 2002-07. Gross capital flows fell off a cliff in 2008, from the equivalent of over 30% of world GDP to just a few percentage points. Even activity in 2010 was only back to 1995–96 levels.
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Fig 147
The Global Macro Outlook
1
Gross capital flows as a percentage of world GDP, 1995-2010
Note: 1. Gross flows equal sum of inflows and outflows of direct, portfolio and other investments, 2: Australia, Canada, Denmark, the euro area, Japan, New Zealand, Sweden, the United Kingdom, and the United States, 3: Algeria, Angola, Azerbaijan, Bahrain, Democratic Republic of Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Kazakhstan, Kuwait, Libya, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sudan, Syrian Arabic Republic, Trinidad and Tobago, the United Arab Emirates, Venezuela and Yemen, 4; China, Chinese Taipei, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand and the 20 smaller Asian countries, 5: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Source: BIS, IMF, Macquarie Research, December 2015
As a proxy for all of the foregoing across the breadth of fixed and semi-fixed exchange rates, Fig 148 shows the quarterly changes in emerging market economies foreign exchange reserves. The acceleration into the 2008 collapse is visible, as is the subsequent recovery and fade from 2011. Recent history has much to do with the 2009-2011 commodity prices boom and subsequent fade, Fig 149. China’s fiscal expansion in 2009-10 is the main expansion for the former. China’s transition away from an investment-led growth model is the main explanation of the latter.
Fig 148
Emerging markets’ foreign exchange reserves
Fig 149
Emerging currencies, commodity prices
Note: CRB BLS Spot Index Source: Oxford Economics, Macquarie Research, December 2015
Source: Oxford Economics, Macquarie Research, December 2015
The turmoil in EM currencies has been worrying investors, with the horror scenario of the Chinese policymakers losing control of the RMB. Whilst other EM currencies are being battered, China’s US$3.6tr of foreign exchange reserves, in our opinion, leaves them in control for the foreseeable future. The following two charts come from Larry Hu’s 19 November 2015 China Macro report. 14 December 2015
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Fig 150
The Global Macro Outlook
Change in FX owned by China’s banks
Fig 151
US$ bn
Change in banks’ FX deposits
US$ bn
100
100 Change in FX deposits
80
50 60 0
40 20
-50
0
Change in banks' FX holding
-100
-20
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
1Q15
3Q14
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
1Q11
3Q10
1Q10
3Q09
1Q09
3Q08
3Q15
-29
-40
1Q08
3Q15
3Q14
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
1Q11
3Q10
1Q10
3Q09
1Q09
3Q08
1Q08
1Q15
-132
-150
Source: CEIC, Oxford Economics, Macquarie Research, December 2015
Chinese capital outflows in the 3Q of 2015 were unprecedentedly high, amounting to US$322bn. The previous biggest capital outflows in a single quarter were just US$46bn in the 4Q of 2014. The US$322bn outflow was much higher than the drop in official FX reserves (US$161bn), as China’s banks bore a large share of the burden by reducing their own FX holdings. Capital outflows turned into inflows in October, with outflows resuming in November 2015,.
China’s FX reserves could drop by another US$500bn in 2016 China, having lost over US$400bn of FX reserves in 2015, could lose a similar amount in 2016. Nonetheless, we are confident that China has the ability and willingness to cope with the capital outflows. Given the current pace of capital flows, China’s FX reserves could sustain not for months, but for years. As solutions to capital outflows, the PBoC could announce more capital controls and it could intervene in the market to engineer an RMB appreciation expectation. Meanwhile, hot money is not limitless. When China’s FX reserves peaked in June 2015 at around US$4tr, around US$1tr was from the Capital Account, which tends to be more volatile, short-term driven. The remainder was mostly from the persistent trade surplus. In the years to come, we expect more active two-way capital flows. Capital will flow out, as China’s residents are diversify their portfolios into foreign assets. Meanwhile, we believe foreign capital will continue to flow into China, given the interest rate differential and the higher economic growth prospects in China.
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Global risk indicators Credit risk measures Another early indicator of a sharp decline in global capital expenditures could be credit risk measures.
Fig 152
Moody's BAA corporate bond yield minus the U.S. 10-year yield, (%)
7 Moody's BAA Corporate Bond Yield-US 10-Year Benchmark Yield 6
5 4 3
2 1 0
Note: BAA is deemed to be “investment grade”. Monthly data Source: St. Louis Fed, Macquarie Research, December 2015
Both have moved sharply higher in 2015
Both the Moody’s BAA corporate spread to the UST 10-year and the BofA Merrill Lynch US high yield spread to the UST 10-year have moved higher in 2015. It is difficult to identify specific points when the spreads go from green to amber to red. For the Moody’s BAA corporate spread to the UST 10-year to exceed 3% would be concerning, whilst exceeding 5% would be similarly concerning for the BofA Merrill Lynch US high yield spread to the UST 10-year shown below.
Fig 153
BofA Merrill Lynch US High Yield minus the U.S. 10-year yield, (%)
20 15
10 5 0 -5 -10 1997
Bofa merrill Lynch US High Yield - US 10-Year Benchmark Yield
1999
2001
2003
2005
2007
2009
2011
2013
2015
Note: BA1 and lower is regarded as “non-investment grade”. Monthly data Source: St. Louis Fed, Macquarie Research, December 2015
Another frequently followed risk indicator is the TED spread (T = US treasury T-bills; ED is the ticker of the Eurodollar futures contract). The TED spread, being the difference between the interest rates on interbank loans and on short-term U.S. government debt, is a measure of financial industry counter-party risk, Fig 152. It is not at the lowest level ever, but appears to be currently at historically low levels. 14 December 2015
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Fig 154 6
The TED spread
(%)
TED Spread
5 4
3 2 1
2015
2014
2012
2011
2010
2009
2008
2007
2005
2004
2003
2002
2001
2000
1998
1997
1996
1995
1994
1993
1991
1990
1989
1988
1987
1986
0
Source: FRB of St. Louis, Macquarie Research, December 2015
Extended credit cycles: The BIS Financial cycle Like business cycles, financial cycles are not mechanistic, but do appear as patterns in the data
Claudio Borio in his December 2012 BIS working paper: The financial cycle and macroeconomics: What have we learnt? (http://www.bis.org/publ/work395.pdf) detailed the existence of financial cycles.
One problem is that whilst business cycles average 3-4 years, financial cycles average 16
Like business cycles, financial cycles are not mechanistic, but do appear as patterns in the data. One problem is that whilst business cycles average 3-4 years, financial cycles average 16. Averages are just that, so let's say 16 years plus or minus 5.
“Arguably, the most parsimonious description of the financial cycle is in terms of credit and property prices (Drehmann et al (2012)). These variables tend to co-vary rather closely with each other, especially at low frequencies, confirming the importance of credit in the financing of construction and the purchase of property.”
A lot depends on how policy responds in the business cycle downturns prior to the financial cycle's peak/bust. On average there will be three prior business cycle downturns, and if policy aggressively counteracts them then moral hazard/credit leverage builds. Japan provides a good example of a post credit boom-bust. Since the property bubble-bust in the early 1990s, Japan has been through a series of recessions with regulatory tightening, which increased risk aversion. Debt-deleveraging in the household and corporate sectors in Japan is well advanced, and probably completed before the 2005-06 Domestic reflation Winners extended Bull-run. We believe the private sectors of the major economies/blocs are at very different stages in this “financial cycle”, Fig 155.
We believe the private sectors of the major economies/blocs are at very different stages in this “financial cycle”
Fig 155
BIS-defined 16-year private sector “financial cycle”
Source: Macquarie Research, December 2015
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McKinsey and the BIS provide the best global debt statistics.
Fig 156
Global stock of debt outstanding, $ trillion, constant 2013 exchange rates
trillion US$ 250 household
corporate
government
Compound annual growth rate, %
financial
200
2000-07 9.4
2007-14 2.9
58
5.8
9.3
56
5.7
5.9
8.5
2.8
45
150 37 100
33
20 22
50
38
26 0
19
33
40
2000 4Q
2007 4Q
2014 2Q
Source: Bank for International Settlements; Haver Analytics; International Monetary Fund World Economic Outlook; national data; McKinsey Global Institute analysis, Macquarie Research, December 2015
The BIS is particularly thorough in providing cross-border comparable data.
Fig 157
Core debt of the non-financial sectors, as a % of GDP Level in 2014
Advanced economies (2)
Change since end-2007 (1)
Households
Corporate
Government
Total
Households
73
81
110
265
-7
Corporate Government
Total
1
41
36
Australia
119
77
35
230
11
-4
26
33
Canada
93
104
70
267
15
15
19
49
France
56
124
109
288
10
20
43
72
Germany
54
54
82
191
-7
-1
18
10
Italy
43
78
151
272
5
3
46
53
Japan
66
105
222
393
0
5
72
77
Spain
71
111
110
293
-10
-14
74
50
Sweden
83
165
47
295
18
27
7
52
120
91
34
245
13
15
-4
26
United Kingdom
87
77
107
271
-9
-11
61
41
United States
78
69
92
239
-18
-1
39
21
Euro-zone
61
103
106
270
1
4
39
45
Emerging market economies (2)
30
94
44
167
10
35
4
50
Switzerland
Argentina (3)
6
9
43
58
2
-1
-1
-1
Brazil (4)
25
49
64
139
12
18
1
32
China
36
157
41
235
17
58
6
82
Hong Kong SAR
66
217
5
287
14
85
3
103 -1
India
9
50
66
125
-1
8
-8
Indonesia
17
23
25
64
6
8
-8
5
Korea
84
105
38
228
12
14
14
40
Malaysia (3)
69
64
53
186
15
4
13
32
Mexico
15
22
33
70
1
7
13
21
Russia (3)
20
58
18
95
8
16
9
33
Singapore
61
82
99
242
22
24
13
59
South Africa
37
33
55
125
-4
-2
23
17
Thailand
69
51
30
151
25
5
7
37
Turkey
21
33
34
108
9
28
-8
30
Notes: (1): in percentage points of GDP. (2): weighted average of the economies listed based on rolling GDP and PPP exchange rates. (3): breakdown of household and corporate debt is estimated based on bank credit data. Please note that Government debt data is the BIS core debt (credit to the government) at market values except for countries where only nominal values are available. Source: BIS, Macquarie Research December 2015
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With a high quality database, the BIS publishes on a quarterly basis early warning indicators of a domestic banking crisis, Fig 156. The red shading is the most concerning; the orange is an amber signal.
Fig 158
Early warning indicators for domestic banking crisis signal ahead (1) Credit-to-GDP gap (2)
Property price gap (3)
18.3 1.6 15.7 6.5 25.4
10.4 1.5 -5.2 6.3 -6.3
2.0 0.7 4.6 1.7 5.8
4.3 4.5 6.3 5.5 9.1
-11.2 5.7 -5.9 -7.4 -3.4 -9.8 5.2 3.4 6.0 -14.7 1.5 -29.7 -2.1 -39.1 9.3 16.6 -29.0 -12.5
7.1 -11.7 9.7 4.6 NA -17.2 13.3 4.2 -4.0 -19.2 2.6 7.6 -6.2 -26.6 11.6 NA -3.1 0.9
1.2 1.4 -1.8 NA 2.1 0.8 -2.2 0.1 0.3 1.6 1.7 -0.5 -0.9 -2.2 0.4 4.1 -1.7 -1.8
2.7 4.5 0.1 NA 3.2 3.0 0.6 3.8 0.9 6.5 5.9 2.9 0.4 0.8 3.6 5.7 1.2 0.7
>10 2≤x≤10
>10
>6 4≤x≤6
>6 4≤x≤6
Asia (6) Australia Brazil Canada China Central & Eastern Europe France Germany Greece India Italy Japan Korea Mexico Netherlands Nordic countries Portugal South Africa Spain Switzerland Turkey United Kingdom United States Legend:
Debt service Debt service ratio if interest ratio (4) rates rise by 250bp (4, 5)
Notes: (1) Thresholds for red cells are chosen by minimising false alarms conditional on capturing at least two thirds of the crises over a cumulative three-year horizon. A signal is correct if a crisis occurs in any of the three years ahead. The noise is measured by the wrong predictions outside this horizon. Orange cells for the creditto-GDP gap are based on guidelines for countercyclical capital buffers under Basel 3. Orange cells for the DSR are based on critical thresholds if a two-year forecast horizon is used. For a derivation of critical thresholds for credit-to-GDP gaps and property price gaps, see M Drehmann, C Borio and K Tsatsaronis, “Anchoring countercyclical capital buffers; the role of credit aggregates”, International Journal of Central Banking, vol7(4), 2011. For DSRs, see M Drehmann and M Juselius, “Do debt service costs affect macroeconomic and financial stability?”, BIS Quarterly Review, September 2002. Simple average for country aggregates. (2) Difference of the credit-to-GDP ratio from its long-run, real-time trend calculated with a one-sided HodrickPrescott (HP) filter using a smoothing factor of 400,000, in percentage points (3) Deviations of real residential property prices from their long-run trend calculated with a one-sided HP filter using a smoothing factor of 400,000, in percentage points (4) For the DSR series and methodology, see www.bis.org/statistics/dsr.htm. Difference of DSRs from countryspecific long-run averages since 1999 or later depending on data availability and when five-year average inflation fell below 10%, in percentage points. (5) Assuming that interest rates increase 2.5 percentage points and that all other components of the DSR stay fixed. (6) Hong Kong SAR, Indonesia, Malaysia, the Philippines, Singapore and Thailand; excluding the Philippines and Singapore for the DSR and its forecast. (7) Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Russia; excluding the Czech Republic and Romania for the real property price gap; excluding Bulgaria, Estonia, Latvia, Lithuania and Romania for the DSR and its forecasts. (8) Finland, Norway and Sweden. Source: BIS, Macquarie Research, December 2015
No system trying to anticipate the behaviour of economic actors and human policy responses can be expected to be mechanically accurate. However, the BIS structure does provide a rigorous framework. Brazil
14 December 2015
If we wanted to identify an emerging market economy that is of sufficient scale to have global ramifications (please see the blue highlighted countries in Fig 140 that could experience debt sustainability issues, then the table above would support paying special attention to Brazil. Please see page 76.
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Fig 159
The Global Macro Outlook
Real residential property prices, CPI-deflated; 2010 =100
Note: Further information on the BIS property price statistics is available at www.bis.org/statistics/pp.htm Source: BIS, Macquarie Research, December 2015
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Brazil From a plunging exchange rate to an acceleration in inflation, rising country risk and falling equity prices.
Fig 160
Brazilian Real per USD, start 2013 to latest
Fig 161
4.5
Inflation (IPCA-15), start 2013 to latest
10.0 9.5
4.0
9.0 8.5
3.5
8.0 7.5
3.0
7.0 6.5
2.5
6.0
Inflation
5.5 2.0
5.0
Inflation Target
4.5
1.5
4.0
Source: CEIC, Macquarie Research, December 2015
Fig 162
Source: CEIC, Macquarie Research, December 2015
CDS spreads for Brazil, Russia, India and China, start 2012 to latest
700
Brazil
China
Russia
India
600
500 400 300
200 100 0 01/2012
07/2012
01/2013
07/2013
01/2014
07/2014
01/2015
07/2015
Note: China is available from October 2013. Source: Bloomberg, Macquarie Research, December 2015
Fig 163
iShares MSCI Brazil Index
120 iShares MSCI Brazil ETF 100 80
60 40 20
0
Source: FactSet, Macquarie Research, December 2015
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The history of premature tightening We are living in interesting times. Interest rates today appear to be the lowest in 5,000 years:
Fig 164
Short- and long-term interest rates back to Babylonian times: today appears to be the lowest ever
Note: from the speech “Stuck” by Andrew G Haldane, Chief Economist Bank of England, 30 June 2015 Source: above, Macquarie Research, December 2015
This is despite the US having learnt from Japan’s monetary policy mistakes of the 1990s, leading to policy responses to the Global Financial Crisis being markedly different from those of the Euro-zone. Please see the 17 August 2011 PEC’s strategy weekly: What the US learnt, but Europe hasn’t. It is also highly likely that the US Fed is well aware of the two BOJ premature tightening periods of August 2000 and July 2006 to February 2007, Fig 165. Having learnt from Japan’s monetary policy mistakes of the 1990’s it is likely that the US Fed is well aware of the two BOJ premature tightening periods of August 2000 and July 2006 to February 2007
Fig 165 Country
Japan Sweden
Examples of policy reversals by central banks Period of tightening
Period of loosening
Size of tightening Size of loosening (bps) (bps)
May 1989 to Aug 1990
Jul 1991 to Oct 1999
350
-600
Aug 2000
Mar 2001
25
-25
Jul 2006 to Feb 2007
Oct to Dec 2008
50
-40
Jul 2010 to Jul 2011
Dec 2011 to Mar 2015
175
-225
Euro area
Apr to Jul 2011
Nov 2011 to Sept 2014
50
-95
N. Z.
Mar to Jul 2014
Jun 2015
100
-25
Australia
Oct 2009 to Nov 2010
Nov 2011 to May 2015
175
-275
Norway
Oct 2009 to May 2011
Dec 2011 to Jun 2015
100
-125
Iceland
Aug 2011 to Nov 2012
Nov to Dec 2014
175
-75
US
Jul 1936 to May 1937
Sep 1937 to Apr 1938
Reserve Reserve requirements were requirements were increased. US decreased. Gold Treasury also sterilization began Gold programme ended sterilization programme
Note: “Stuck”, a speech by Andrew Haldane, the Chief economist of the Bank of England, 30 June 2015. Information for the US based on Velde (2009) Source: Note above, Bank of England calculations, Datastream, Macquarie Research, December 2015
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In Japan’s experience, exiting from a liquidity trap (near zero interest rates, excess reserves) has proved particularly difficult. Nonetheless, the US Fed is on the cusp of attempting it. The BOJ currently pays 10bp on excess reserves (IOER)
Since 1999, Japan has had extended periods of excess reserves and near zero interest rates, Fig 166 and Fig 167. The BOJ currently pays 10bp on excess reserves (IOER). Please note the decline in excess reserves in 2000 and 2006 and the increases in interest rates at those times. It is interesting how small the build and decline in excess reserves in 2000 appears in retrospect. The ratio of excess reserves to required reserves in Japan reached 7 times in 2003 and over 24 times recently. This contrasts to ratios in the US of 2 times in the 1930s and 20 times more recently.
Fig 166 3-Month JGB Yield and Excess Reserves:1986 to end 2011
Fig 167 3-Month JGB Yield and Excess Reserves, start 2012 to latest
9
Ratio of Reserves Held to Reserves Required
8
3-Month JGB Yield
30
Ratio of Reserves Held to Reserves Required 3-Month JGB Yield
25
7 6
0.25
0.20
20 0.15
5
15
4
0.10 3
10
2
0.05
5
1 0 1986 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: Datastream, Macquarie Research, December 2015
0
0.00
Source: Datastream, Macquarie Research, December 2015
The FRB of St Louis recently held a conference on monetary history. We believe the institutional memory of the US Fed is very long. Presented at the FRB of St Louis conference, Stephen Williamson’s “Current Federal Reserve policy under the lens of economic history: a review essay” July 2015 includes an important passage on the US policy reversal of 1937-38 (highlighted in grey in Fig 165). The US policy reversal of 1937-38
Fig 168
3-Month TB yield and Excess Reserves during the Great Depression
2.5
4 Ratio of Reserves Held to Reserves Required [Left] 3-Month Treasury Bill Yield (% per Annum) [Right]
2.0
3
1.5
2
1.0
1
0.5 1931
0 1933
1935
1937
1939
1941
1943
Note: The ratio of reserves held/required reserves (LHS) should never fall below 1.0x (an individual bank in severe financial distress might). The scale above goes down to 0.5 only to make the chart easier to read Source: FRB of St. Louis, Macquarie Research, December 2015
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That paper points out that when there is a significant amount of excess reserves in the system, interest rates are determined by the interest rate on excess reserves (IOER). Please note that interest rates were near zero (RHS) before and after the tightening of 1936-37. To quote Williamson: During the Great Depression, the interest rate on reserves was zero, so we would expect that a period when there were significant excess reserves in the system would also be a ZIRP period during the great depression. These ZIRP periods were liquidity trap periods. The July 1936 to May 1937 tightening of monetary policy was quickly followed by the US economy falling into a recession, and the monetary policy actions were reversed over September 1937 to April 1938. Today, the US Fed pays 25bp on excess reserves (IOER)
In the US, in the post war period, the ratio of reserves held to required reserves remained around 1.0 until 2009, RHS, Fig 133.
The arrival of excess reserves coincided with the arrival of near zero interest rates
Fig 169
The arrival of excess reserves coincided with the arrival of near zero interest rates. Today, the US Fed pays 25bp on excess reserves (IOER).
3-Month Treasury Bill Yield and Excess Reserves 3-Month Treasury Bill Yield (% per Annum) [LHS] Ratio of Reserves Held to Reserves Required [RHS]
140
0.7 0.6
120
0.5
100
0.4 80 0.3
60 0.2 40
0.1
20
0
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-0.1
Source: FRB of St. Louis, Macquarie Research, December 2015
We believe the US Fed is aware of the lessons of monetary history. Exiting a liquidity trap is fraught with risk. As a consequence, David Doyle is expecting the tightening cycle to be gradual, cautious, and supportive of risk-taking. Finally, the chart below shows how far away current global monetary policy settings are from traditional benchmarks.
Fig 170
Taylor rule, global
Note: weighted averages based on 2005 PPP weights. For more details, please see the BIS 85 th annual report, graph V3 Source: BIS, Macquarie Research, December 2015
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Supplementary global chart pack Fig 171 70
Caterpillar Sales Y/Y Change
Fig 172 70
(%) Caterpillar Sales Y/Y Change
50
Komatsu Sales Y/Y Change
(%)
50
30
30
10
10
-10
-10
-30
-30 Komatsu Sales Y/Y Change
-50
-50
Source: FactSet, Macquarie Research, December 2015
Source: FactSet, Macquarie Research, December 2015
Fig 173
Fig 174
Global unemployment, ILO definition
Global 10-year Government bond yield
(%)
(%) 7
6
7
5
6
4
6
3
5
2
Unemployment rate, ILO definition
5
Interest rate, 10-Year Government Bond Yield
1
Note: forecasts Oxford Economics
Note: forecasts Oxford Economics
Source: Oxford Economics, Macquarie Research, December 2015
Source: Oxford Economics, Macquarie Research, December 2015
Fig 175
Fig 176
Global FDI (inward flows), US$ trillions
(UStn$) 30
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2000
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
2001
0
4
Global FDI (inward flows, US$), YoY, %
(%) 80
25
60
20
40
Foreign direct investment, inward, US$
20
15
0 10
-20 5 Foreign direct investment, inward, US$
-40
Note: forecasts Oxford Economics
Note: forecasts Oxford Economics
Source: Oxford Economics, Macquarie Research, December 2015
Source: Oxford Economics, Macquarie Research, December 2015
14 December 2015
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-60
2001
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
80
Macquarie Research
Fig 177
The Global Macro Outlook
Global real private consumption, US$, YoY
Fig 178
(%)
Global real Gov. consumption, US$, YoY
(%) GDP per capita, PPP exchange rate, real, US$
10
5
Government Consumption, real US$
5 4
0 -5
3
-10 -15
2
-20 -25
1 -30
Note: forecasts Oxford Economics. Constant prices and exchange rate
Note: forecasts Oxford Economics, Constant prices and exchange rate
Source: Oxford Economics, Macquarie Research, December 2015
Source: Oxford Economics, Macquarie Research, December 2015
Fig 179
Fig 180 Global GDP per capita, PPP exchange rates, real, US$, 2010 prices, YoY
Global nominal GDP, US$, YoY
(%)
(%)
14
8
12
7
10
6
8
5
6
4
4
3
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
2001
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-35
GDP per capita, PPP exchange rate, real, US$
2
2
1
0
0
-2
-1
-4
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-8
2003
GDP, nominal, world, US$
2002
2001
-2
-6
Note: forecasts Oxford Economics
Note: forecasts Oxford Economics
Source: Oxford Economics, Macquarie Research, December 2015
Source: Oxford Economics, Macquarie Research, December 2015
Fig 181
Fig 182
Global GDP deflator
(%)
Global consumer price index, YoY
(%)
12
7
10
GDP deflator
6
8 6
5
4 4
2 0
3
-2 2
-4 -6
1
Consumer price index
-8
Note: forecasts Oxford Economics, index 2010 = 100
Note: forecasts Oxford Economics, index: 2000 = 100
Source: Oxford Economics, Macquarie Research, December 2015
Source: Oxford Economics, Macquarie Research, December 2015
14 December 2015
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2001
0
-10
81
OECD Composite Leading Indicators: Component series examples for OECD Countries
US
Japan
Canada
Dwellings started (number) Net new orders for durable goods (USD) Share prices: NYSE composite (2010=100) Consumer sentiment indicator (normal = 100) Weekly hours of work : manufacturing (hours) Purchasing managers index (% balance) Spread of interest rates (% p.a.)
Inventories to shipments ratio (2010=100) inverted Ratio imports to exports (2010=100) Ratio loans to deposits (%) inverted Monthly overtime hours (manuf.) (2010=100) Construction: dwellings started (2010=100) Share price index (TOPIX) Tokyo (2010=100) Spread of interest rates (% p.a.) Small business survey: Sales tendency (% balance)
Deflated money supply (m1) sa (2010 cad) Housing starts large cities sa (number) US business climate indicator (PMI) (normal=50) Consumer confidence indicator (2010=100) Spread of interest rates (% p.a.) Ratio of inventories to shipments (ratio) inverted Share prices (S&P/TSX composite index) (2010=100)
Germany
UK
Australia
IFO business climate indicator (normal=100) Orders inflow/demand (manuf.): tendency (% balance) Export order books (manuf.): expectation (% balance) New orders in manuf. industry (2010 = 100) Finished goods stocks (manuf.): level (% balance) inverted Spread of interest rates (% p.a.)
Business climate indicator (manuf.) (% balance) New car registrations sa (number) Consumer confidence indicator (% balance) Sterling 3 months interbank lending rate (% p.a.) inverted Production (manuf.): future tendency (% balance) Finished goods stocks (manuf.): level (% balance) inverted FTSE-100 share price index (2010=100)
Dwelling permits issued (number) Orders inflow (manuf.): tendency (% balance) Production (manuf.): future tendency (% balance) Employment (manuf.): tendency (% balance) S&P/ASX 200 share price index (2010=100) Terms of trade (2010=100) Yield 10-year commonwealth government bonds (% p.a.) inverted
France
Italy
Korea
New passenger car registrations (number) Consumer confidence indicator (% balance) Production (manuf.): future tendency (% balance) SBF 250 share price index (2010=100) CPI Harmonised All items (2010=100) inverted Export order books (manuf.): level (% balance) Selling prices (Construction): future tendency (% balance) Permits issued for dwellings (2010=100) Expected level of life in France (CS) (% balance)
Consumer confidence indicator (% balance) Production (manuf.): future tendency (% balance) Deflated net new orders (2010 = 100) Order books (manuf.): level (% balance) CPI All items (2010=10) inverted Imports from Germany CIF (USD)
Business situation (manuf.): future tendency (% balance) Share prices KSE KOSPI index (2010 = 100) Stocks total investment manuf. goods (volume) inverted Inventory circulation indicator (manuf.) Interest rate spread (3 years Treasury bonds less overnight rate) (% p.a.) Net Barter Terms of trade (2010=100) sa
Macquarie Research
14 December 2015
Fig 183
Country weights: are the previous year’s GDP combined on a PPP basis Source: OECD, Macquarie Research, December 2015
The Global Macro Outlook
82
Macquarie Research Important disclosures:
The Global Macro Outlook
Recommendation definitions
Volatility index definition*
Financial definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return
This is calculated from the volatility of historical price movements.
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests
Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Recommendation proportions – For quarter ending 30 September 2015 Outperform Neutral Underperform
AU/NZ 48.87% 33.44% 17.68%
Asia 59.96% 25.00% 15.04%
RSA 35.63% 39.08% 25.29%
USA 42.13% 52.55% 5.32%
CA 59.44% 37.06% 3.50%
EUR 42.11% (for US coverage by MCUSA, 3.54% of stocks followed are investment banking clients) 38.42% (for US coverage by MCUSA, 5.05% of stocks followed are investment banking clients) 19.47% (for US coverage by MCUSA, 0.51% of stocks followed are investment banking clients)
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9
Asia Research Head of Equity Research Peter Redhead (Global – Head) Matt Nacard (Asia – Head)
Software and Internet (852) 3922 4836 (852) 3922 1362
Automobiles/Auto Parts Janet Lewis (China) Zhixuan Lin (China) Amit Mishra (India) Lyall Taylor (Indonesia) Takuo Katayama (Japan) James Hong (Korea)
(852) 3922 5417 (8621) 2412 9006 (9122) 6720 4084 (6221) 2598 8489 (813) 3512 7856 (822) 3705 8661
Banks and Non-Bank Financials Matthew Smith (China) Suresh Ganapathy (India) Lyall Taylor (Indonesia) Leo Nakada (Japan) Chan Hwang (Korea) Gilbert Lopez (Philippines) Thomas Stoegner (Singapore) Dexter Hsu (Taiwan) Passakorn Linmaneechote (Thailand)
(8621) 2412 9022 (9122) 6720 4078 (6221) 2598 8489 (813) 3512 6050 (822) 3705 8643 (632) 857 0892 (65) 6601 0854 (8862) 2734 7530 (662) 694 7728
Conglomerates Gilbert Lopez (Philippines)
(632) 857 0892
Consumer and Gaming Linda Huang (China, Hong Kong) Kai Tan (China) Zibo Chen (Hong Kong) Amit Mishra (India) Fransisca Widjaja (Indonesia) Hendy Soegiarto (Indonesia) Toby Williams (Japan) HongSuk Na (Korea) Karisa Magpayo (Philippines) Somesh Agarwal (Singapore) Best Waiyanont (Thailand)
(852) 3922 4068 (852) 3922 3720 (852) 3922 1130 (9122) 6720 4084 (6221) 2598 8368 (6221) 2598 8369 (813) 3512 7392 (822) 3705 8678 (632) 857 0899 (65) 6601 0840 (662) 694 7993
Emerging Leaders Jake Lynch (China, Asia) Aditya Suresh (Asia) Neel Sinha (ASEAN) Timothy Lam (Hong Kong) Kwang Cho (Korea)
(852) 3922 3583 (852) 3922 1265 (65) 6601 0562 (852) 3922 1086 (822) 3705 4953
Industrials Janet Lewis (Asia) Patrick Dai (China) Inderjeetsingh Bhatia (India) Andy Lesmana (Indonesia) Lyall Taylor (Indonesia) Kenjin Hotta (Japan) James Hong (Korea) Somesh Agarwal (Singapore)
(852) 3922 5417 (8621) 2412 9082 (9122) 6720 4087 (6221) 2598 8398 (6221) 2598 8489 (813) 3512 7871 (822) 3705 8661 (65) 6601 0840
Insurance Scott Russell (Asia, Japan) Leo Nakada (Japan) Chan Hwang (Korea)
(852) 3922 3567 (813) 3512 6050 (822) 3705 8643
Wendy Huang (Asia) David Gibson (Asia) Hillman Chan (China, Hong Kong) Nitin Mohta (India) Nathan Ramler (Japan) Prem Jearajasingam (Malaysia)
Transport & Infrastructure (852) 3922 3378 (813) 3512 7880 (852) 3922 3716 (9122) 6720 4090 (813) 3512 7875 (603) 2059 8989
Oil, Gas and Petrochemicals James Hubbard (Asia) Aditya Suresh (Asia) Abhishek Agarwal (India) Polina Diyachkina (Japan) Anna Park (Korea) Isaac Chow (Malaysia) Trevor Buchinski (Thailand)
(852) 3922 1226 (852) 3922 1265 (9122) 6720 4079 (813) 3512 7886 (822) 3705 8669 (603) 2059 8982 (662) 694 7829
Pharmaceuticals and Healthcare Abhishek Singhal (India)
(9122) 6720 4086
Property Tuck Yin Soong (Asia, Singapore) David Ng (China, Hong Kong) Kai Tan (China, Hong Kong) Raymond Liu (China, Hong Kong) Wilson Ho (Hong Kong) Abhishek Bhandari (India) Andy Lesmana (Indonesia) William Montgomery (Japan) Aiman Mohamad (Malaysia) Kervin Sisayan (Philippines) Sam Chan (Singapore) Corinne Jian (Taiwan) Patti Tomaitrichitr (Thailand)
(9122) 6720 4093 (6221) 2598 8381 (813) 3512 7886 (822) 3705 8669
Technology Damian Thong (Asia, Japan) Allen Chang (China, Hong Kong, Taiwan) Jason Sun (China, Hong Kong) Nitin Mohta (India) David Gibson (Japan) George Chang (Japan) Daniel Kim (Korea) Soyun Shin (Korea) Patrick Liao (Taiwan) Tammy Lai (Taiwan)
(813) 3512 7877 (852) 3922 1136 (852) 3922 4674 (9122) 6720 4090 (813) 3512 7880 (813) 3512 7854 (822) 3705 8641 (822) 3705 8659 (8862) 2734 7515 (8862) 2734 7525
Telecoms Nathan Ramler (Asia, Japan) Danny Chu (China, Hong Kong, Taiwan) David Lee (Korea) Prem Jearajasingam (Malaysia, Singapore)
(852) 3922 5417 (852) 3922 1167 (603) 2059 8980 (8862) 2734 7522
Utilities & Renewables Gary Chiu (Asia) Alan Hon (Hong Kong) Inderjeetsingh Bhatia (India) Prem Jearajasingam (Malaysia) Karisa Magpayo (Philippines)
(852) 3922 1435 (852) 3922 3589 (9122) 6720 4087 (603) 2059 8989 (632) 857 0899
Commodities Colin Hamilton (Global) Jim Lennon Lynn Zhao Matthew Turner Rakesh Arora
(4420) 3037 4061 (4420) 3037 4271 (8621) 2412 9035 (4420) 3037 4340 (9122) 6720 4093
Economics (65) 6601 0838 (852) 3922 1291 (852) 3922 3720 (852) 3922 3629 (852) 3922 3248 (9122) 6720 4088 (6221) 2598 8398 (813) 3512 7864 (603) 2059 8986 (632) 857 0893 (65) 6601 0835 (8862) 2734 7522 (662) 694 7727
Resources / Metals and Mining Rakesh Arora (India) Stanley Liong (Indonesia) Polina Diyachkina (Japan) Anna Park (Korea)
Janet Lewis (Asia) Andrew Lee (Asia) Azita Nazrene (ASEAN) Corinne Jian (Taiwan)
(813) 3512 7875 (852) 3922 4762
Peter Eadon-Clarke (Global) PK Basu (ASEAN) Larry Hu (China, Hong Kong) Tanvee Gupta Jain (India)
(813) 3512 7850 (603) 2059 8993 (852) 3922 3778 (9122) 6720 4355
Quantitative / CPG Gurvinder Brar (Global) Woei Chan (Asia) Anthony Ng (Asia) Jason Zhang (Asia)
(4420) 3037 4036 (852) 3922 1421 (852) 3922 1561 (852) 3922 1168
Strategy/Country Viktor Shvets (Asia, Global) Chetan Seth (Asia) Peter Eadon-Clarke (Japan) David Ng (China, Hong Kong) Erwin Sanft (China, Hong Kong) Rakesh Arora (India) Lyall Taylor (Indonesia) Chan Hwang (Korea) PK Basu (Malaysia) Gilbert Lopez (Philippines) Conrad Werner (Singapore) Jeffrey Ohlweiler (Taiwan) Alastair Macdonald (Thailand)
(852) 3922 3883 (852) 3922 4769 (813) 3512 7850 (852) 3922 1291 (852) 3922 1516 (9122) 6720 4093 (6221) 2598 8489 (822) 3705 8643 (603) 2059 8993 (632) 857 0892 (65) 6601 0182 (8862) 2734 7512 (662) 694 7753
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US Sales
Alisaun Binder David Shirt Eileen Lee Hiroyuki Yokoyama Ken Kaneki Mark Chadwick Nick Cant Shunsuke Kuriyama
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(813) 3512 7924 (813) 3512 7922 (813) 3512 7921 (813) 3512 7822 (813) 3512 7928 (813) 3512 7827 (65) 6601 0210 (813) 3512 7919
Europe Sales London Ben Musgrave Julien Roux Aki Katagiri Miranda Gunn Geneva Thomas Renz
(44) 20 3037 4882 (44) 20 3037 4867 (44) 20 3037 4887 (44) 20 3037 4886 (41) 22 818 7712
Japan Sales Trading (1 212) 231 2496 (1 212) 231 6397 (1 212) 231 2519 (1 212) 231 2559 (1 212) 231 2422 (1 212) 231 0989 (1 617) 598 2508 (1 617) 598 2535 (1 415) 835 1239
Christopher Miller Kazuya Kuramochi Chris Reale Marc Rosa Mike Keen Matt Ryan Naoya Kikuchi Christopher Schaffner Akihiro Ohara
(813) 3512 7831 (813) 3512 7832 (1 212) 231 2616 (1 212) 231 2531 (44) 20 3037 4905 (813) 3512 7927 (813) 3512 7835 (813) 3512 7838 (813) 3512 7828
