Confidence to be bold - Allianz · Saudi Arabia 1.7 -0.7 1.7 = 2.0 = Africa 1.3 3.2 3.7 0.1 3.8 0.1...

© Copyright Allianz

Economic Research Department

Global Economic Outlook

June 2018

Confidence

to be bold

Ph

oto

co

urt

esy

: O

loE

etu

on

Un

spla

sh


2019

Latest forecast

Revision(pps)

Latest forecast

Revision(pps)

World GDP growth 2.6 3.2 3.3 = 3.1 =

United States 1.5 2.3 2.9 = 2.4 =

Latin America -0.9 1.2 2.0 -0.3 2.4 -0.4Brazil -3.5 1.0 1.9 -0.6 2.5 -0.5

United Kingdom 1.9 1.7 1.4 -0.1 1.3 0.1

Eurozone members 1.7 2.6 2.1 -0.2 1.9 -0.1Germany 1.9 2.5 2.2 -0.3 1.9 =France 1.1 2.3 1.8 -0.3 2.0 0.1Italy 1.0 1.6 1.2 -0.2 0.8 -0.4Spain 3.3 3.1 2.7 0.2 2.4 0.1

Russia -0.2 1.5 1.8 -0.1 1.8 =Turkey 3.2 7.4 3.7 -0.9 3.0 -1.0

Asia 5.0 5.2 5.1 0.1 4.9 =China 6.7 6.9 6.6 0.1 6.3 0.1Japan 1.0 1.7 1.2 = 1.0 =India 7.1 6.7 7.3 = 7.3 =

Middle East 4.3 1.3 2.4 -0.3 2.5 -0.5Saudi Arabia 1.7 -0.7 1.7 = 2.0 =

Africa 1.3 3.2 3.7 0.1 3.8 0.1South Africa 0.6 1.3 2.0 = 2.5 =

* Weights in global GDP at market price, 2017

NB: The revisions refer to the changes in our forecasts since the last quarterFiscal year for India

2016 2017 2018

Global GDP growth forecasts (%) 1. World GDP growth remains on a solid footing albeit being less synchronized

Three shocks since Q1: stronger than expected yields, higher commodity prices

and higher (geo)political risk

i. The growth peak seems behind us

ii. Diverging growth engines as:

i. Political risk is expected to persist

ii. The Fed will continue pushing global rates higher

iii. Effects from old fiscal stimulus measures start to fade

away (China, Japan, US) but new one kicks-in (Europe)

iv. Multi-speed normalization of monetary policies will

diverge the trend in financial conditions

v. FDI flows soften amid higher protectionism

2. The markets are likely to increasingly sanction the weakest in the loop:

Stress for currencies in the some of the vulnerable emerging markets: Turkey and

Argentina

3. Brent oil prices at 72 USD/bbl in 2018 and 69 USD/bbl in 2019. Spot price mid-

June 2018 at 75 USD/bbl.

4. A temporary surge in inflation expected in Q3 18 on the back of higher oil

prices and depreciating currencies.

5. USD to further appreciate in the next 6 months (+4.5%). EUR/USD: 1.10 at end-

2018; 1.17 at end-2019.

Sources: IHS. Euler Hermes. Allianz Research2

GLOBAL GROWTH: HEALTHY ALBEIT LESS SYNCHRONIZED


GLOBAL INSOLVENCIES DIVERGING REGIONAL FORECASTS

3

We expect our Global Insolvency Index to remain oriented on the upside for a second consecutive year in a row in 2018 (to +8% from +6% in 2017) and to keep on

increasing in 2019 (+4%). However, this global trend will reflect different trends by regions and countries: the decrease in insolvencies to loose momentum in North

America and Western Europe, but to soften faster in Western Europe than in the US ; the improvement in Latam to be more obvious in 2019 than in 2018; the surge in

insolvencies to continue in China, notably re ‘zombie companies, and to boost the regional overall figures; the quasi-stabilization in Central and Eastern Europe to mask

an increase in Poland and Turkey.

EH Global and Regional Insolvency Indices

(yearly change in %)

Sources: National statistics, Euler Hermes, Allianz Research

Insolvency Heat Map 2018

(*) Historical data are not fully consistent because of changes in law or national figures

Sources: National statistics, Euler Hermes, Allianz Research

Romania (+12%) Poland (+10%) Finland (+6%) Slovakia (+80%) *

China (+50%)

strictly more Luxembourg (+12%)

than +5% Denmark (+11%)

Colombia (+8%) *Morocco (+8%)

Chile (+7%)

UK (+5%) Sweden (+2%) Switzerland (+1%) Turkey (+5%)Taiwan (+5%) Singapore (+0%) Norway (+5%)

+0% to +5% New Zealand (+2%) Estonia (0%) Australia (+3%)

Austria (+2%) Belgium (+3%)

Canada (0%) Spain (0%)

Japan (+0%)

Russia (0%)

South Africa (-1%) Bulgaria (-5%)

Latvia (-2%)-5% to -1% US (-2%)

Brazil (-3%)Germany (-4%)

The Netherlands (-5%)

South Korea (-5%)Hong-Kong (-5%)

Greece (-9%) Czech Rep (-17%) * Italy (-6%) Hungary (-7%)

France (-7%) Ireland (-10%)strictly more Portugal (-10%)

than -5% Lithuania (-18%)

Very low level Low level High level Very high level

(more than 10% below the 2003-2007 level)

(between 0% and 10% below the 2003-

2007 level)

(between 1% and 10% above the 2003-

2007 level)

(more than 10% above the 2003-2007

level)

Strongly improving

Strongly deteriorating

Improving

Deteriorating or stable

6%

-4%

17%

-5%

6%

2%

33%

8%

-2%

4%

-1%

1%

6%

31%

4%

0%

-9%

-1%

2%

5%

14%

-20% -10% 0% 10% 20% 30% 40%

GLOBAL INSOLVENCY INDEX

North America Index

Latin America Index

Western Europe Index

Central & Eastern Europe Index

Africa & Middle East Index

Asia-Pacific Index

2019

2018

2017


50

55

60

65

70

75

80

85

90

Low scenario

Base scenario

High scenario

Oil forecasts Global Inflationary pressure index

4

OIL PRICES TO DECLINE TO 69 USD/BBL IN 2019

We expect oil prices to be broadly stable until

the end of 2018 and decline thereafter on the

back of abundant supply absorbing net losses

linked to Venezuela and Iran situation

Our global inflationary pressure index

suggests that the upcoming surge of global

inflation should be temporary as the

contribution of energy prices is significant

Sources: IHS, Bloomberg. Allianz Research Sources: IHS, Bloomberg. Allianz Research Sources: IHS, Bloomberg. Allianz Research

Copper to oil ratio vs world current activity index (y/y, %)

-6

-4

-2

0

2

4

6

-6

-4

-2

0

2

4

6

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Copper to oil ratio World current activity index

The copper to oil ratio is a good advanced indicator of

global activity. Our 2019 GDP growth scenario suggests

that the market will anticipate a deceleration of global

demand and therefore exert downward pressures on

oil prices

-5

-4

-3

-2

-1

0

1

2

3

4

5

13 14 15 16 17 18

Job conditions

Currencies

Producer prices

Energy prices

Inflationary Pressure Index

© Copyright Allianz 5

US: CLOSER TO OVERHEATING DUE TO FISCAL STIMULUS

25.00

30.00

35.00

40.00

45.00

50.00

70 75 80 85 90 95 00 05 10 15

US corporate debt (as % of GDP)

Sources : Euler Hermes, Allianz Research

US non-financial corporate sector is

already stretched in terms of debt,

suggesting an elevated sensitiveness to

any shock on interest rates

US unemployed to jobs openings ratio

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Amid a favorable investment cycle, demand

for jobs is strong. For the first time since

1970s the number of US job offers is above

the number of unemployed people, meaning

that this unemployment is frictional only


-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Co

nsu

mp

tio

n

No

n R

esi

de

nti

al

inve

stm

en

t

Re

sid

en

tia

l in

ve

stm

en

t

Inve

nto

rie

s

Go

ve

rnm

en

t sp

en

din

g

Ne

t e

xp

ort

s

GD

P

2016 2017 2018 2019

US GDP growth is expected at 2.4% y/y in 2019

compared with 2.9% y/y in 2018. Higher rates

will weigh on consumption and residential

investment at a 2-year horizon


Contribution to US GDP growth (%, y/y)


Financial de-regulation inflates bubbles.

This time, small banks (and therefore

SMEs depending on their financing)

heavily exposed to commercial real

estate, are particularly exposed 6

US: FINANCIAL DE -REGULATION TO INCREASE RISK

Significant rules within 1 year of Presidency


President Trump issued four Executive Orders

(EOs) in 2017 directing federal agencies to

repeal two regulations for every new regulation

-4

-3

-2

-1

0

1

2

0

20

40

60

80

100

120

1952 1962 1972 1982 1992 2002 2012

Non-bank credit (% of GDP), lhs

Financial deregulation index, rhs

US ongoing de-regulation move is expected to

free up USD 60bn per year of new credit. Past

de-regulation moves have contributed to inflate

the size of shadow banking, which is much less

regulated and controlled

US de-regulation and shadow banking US financial de-regulation– US total deregulation

-200

-150

-100

-50

0

50

100

85 90 95 00 05 10 15

Financial regulation spread

Times of bubble inflation

Sources : Euler Hermes, Allianz Research Sources : Euler Hermes, Allianz Research

0

15

30

45

G. W. Bush Obama Trump

Other

Health and Human

Services

Transportation

EPA


US: FED GOES FASTER IN TIGHTENING

7


The US monetary policy will remain

expansionary in 2018 but turn restrictive in

2019. This tightening of the monetary policy

will have notable effects on foreign economies

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

09 10 11 12 13 14 15 16 17 18 19 20

ECB deposit rate ECB refi rate

ECB lending rate Fed policy rate

BOJ policy rate World Interest rate

Key interest rates

The Fed is expected to hike twice in 2H18 and

2019. The US 10-yr Treasury yield should reach

a level of 3.8% at the end of 2019 based on a

progressive tightening of the monetary policy

and increasing public deficit


0

1

2

3

4

5

6

0

1

2

3

4

5

6

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Fed Funds Target rateUS 10Y Treasury yield

Forecast

US 10Y Treasury yield (%) Capital inflows into the US (USD bn)

Sources: IHS Global Insight. Allianz Research

Capital flow back to the US. Yet

beware of their nature

0

500

1000

1500

2000

2500

3000

10 11 12 13 14 15 16 17

Other

Portfolio

FDI


PROTECTIONISM: BETWEEN TRADE GAMES AND TRADE FEUD

Trade feud

(40%)

Trade War

(5%)

� Global trade slows down (-2pp)� US growth cut by -0.5pp� US inflation durably up by +0.1 pp� US CA deficit: -0.9pp to -3.3% of GDP(*)� US fiscal deficit: -1.6pp to -5.0% of GDP� Europe growth cut by -0.6pp� China growth cut by -0.3pp, CNY depreciation similar to 2015 (-10%)

� Negligible on global trade (>4% volume)� US real GDP growth cut by -0.1pp; negligible impact on US inflation� US current account deficit: -0.6pp to -3.0% of GDP� US fiscal deficit: -1.1pp to -4.5% of GDP in 2019� Europe’s ongoing recovery not impacted � China remains on soft landing trajectory

� Global trade contracts (-6pp from +4%)� US growth cut by -1.7pp � US inflation durably up by +0.4pp� US CA deficit: +0.7pp to -1.7% of GDP (*)� US fiscal deficit: -4.6pp to -8.0% of GDP� Europe growth cut by -1.9pp� China growth cut by -1pp only on the back of stabilizing policies; CNY depreciation

(-20%)� EM broad recession

Source: Euler Hermes scenarios

Trade game(55%)

3.5%

4.0%

6.0%

Current US tariff

4.5%

11.2%

MilestoneUSD50bn of Chinese imported products at 25% tariffs & 25% import tariffs on steel imported products & 10% import tariffs on aluminum imported products

MilestoneUSD50bn of Chinese imported products at 25% tariffs & USD200bn of Chinese imported products at +10% import tariffs or

USD200bn of US automotive imports targeted by +25% import tariffs in addition to the USD50bn of Chinese imports and USD10bn of steel and aluminum

Milestone: USD500bn of Chinese products targeted by the US by +25% import tariffs & USD200bn of US automotive imports targeted by +25% import tariffs


GLOBAL TRADE: NO REGIME-CHANGE DESPITE RISKS

Global trade of goods and services China current account and China imports US trade deficit (USD bn)

Global trade is expected to decelerate to 4.1%

in volume in 2018 and to 3.7% in 2019, but to

grow at a healthy pace

China tends to absorb a growing share

of world demand despite its domestic

deceleration via an increasing opening

of its market

Front-loading strategies have been

clearly at work before the

implementation of tariffs in the US

explaining the deepening of deficit

Sources: IHS, Datastream, Allianz Research Sources: IHS, Datastream, Allianz Research

-60

-55

-50

-45

-40

-35

-30

-60

-55

-50

-45

-40

-35

-30

10 11 12 13 14 15 16 17 18

3.0%3.6%

3.8%

2.8% 2.3%4.9% 4.1% 3.7%

1.4%2.8%

2.1%

-10.2%

-1.5%

9.5%

7.7% 5.5%

-15%

-10%

-5%

0%

5%

10%

15%

12 13 14 15 16 17 18 19

Volume

Price in local currency

Currency impact

Value in USD

6%

8%

10%

12%

0%

4%

8%

12%

07 09 11 13 15 17

Current Account (lhs)

China import (% global) (rhs)

Sources: IHS, Datastream, Allianz Research


Divergence : Countries with wider current account deficits (Argentina and Turkey) have suffered the most. Second-round effects should trigger more depreciation in China, but in a benign way (-2%). USD is expected to appreciate by +4% against most currencies over the 6 coming months

Diversion : What goes to the US (more short-term capital flows), no longer goes to the Emerging Markets (EM). Capital flows to EMs went below historical average from February (after a record level in January)

MARKETS SANCTIONED EMERGING MARKETSEmerging market currencies change in %Capital flows to Emerging Markets (USD bn)

0.3%

-2.8%

-3.9%

-4.4%

-6.9%

-7.1%

-10.5%

-10.8%

-12.7%

-24.7%

-48.8%

-60% -40% -20% 0% 20% 40%

China

Indonesia

South Korea

Mexico

Poland

India

Russia

South Africa

Brazil

Turkey

Argentina2018

2017

2016

Disruption: EM Exchange rates and

commodity prices show the same kind of

disconnect than during the US Fed tapering

aftermath. EM exchange rates and

commodity prices should converge in the

medium-run

Sources: Bloomberg. Allianz Research

Commodity prices vs. EM exchange rate

40

42

44

46

48

50

52

54

56

58

60200

300

400

500

600

700

800

11 12 13 14 15 16 17 18

Emerging Markets' exchange rate (vs. USD, right)

Commodity prices (S&P GSCi, left)

Depreciation

Sources: IHS Global Insight. Allianz Research Sources: Bloomberg. Allianz Research


EMERGING MARKETS: WHO’S NEXT?Foreign exchange reserves in Emerging Markets, in % of liquidity needs

0%

50%

100%

150%

200%

250%

High

Very weak

Adequate

Weak

* Total excluding China and Russia

Sources: IHS, Bloomberg. Allianz Research

Liquidity gaps: Weak foreign reserve levels expose countries to the risk of

sudden disruptions. The usual suspects are there: Ukraine, Pakistan. Other

economies like Hungary, Poland and Turkey are also in the vulnerability area.

The dilemma is depreciation pressures vs. monetary policy tightening in

overheating economies or with a maturing cycle

Emerging Markets foreign currency debt (% of GDP)

Sources: IHS, Euler Hermes, Allianz Research

0%

10%

20%

30%

40%

50%

60%

Arge

ntin

a

Hun

gary

Turk

ey

Chi

le

Pola

nd

Cze

ch R

ep.

Col

ombi

a

Mex

ico

Sout

h Af

rica

Rus

sia

Mal

aysi

a

Indo

nesi

a

Sout

h Ko

rea

Braz

il

Saud

i Ara

bia

Thai

land

Indi

a

Chi

na

Foreign denominated public debt (%GDP)

Foreign-denominated NFC debt (% GDP)

Refinancing needs : Argentina is topping foreign currency denominated (FCD) public debt ranking and the announced USD 50bn IMF program tackled it through direct fiscal support. Turkey shows the highest FCD corporate debt, but Hungary and Chile are not far


Argentina

Brazil

Guatemala

Colombia

Costa Rica

Dominican Republic

Chile

Mexico

Panama

Peru

Uruguay

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3%

Cur

rent

acc

ount

bal

ance

Fiscal balance

2017 2019

2017 2019

2017 2019

2017 20192017 2019

2017 2019

2017 2019

2017 2019

2017 2019

A1

B3

D4

Brazil

Venezuela

Argentina

Chile

BB1 Peru

BB2 Mexico

BB2Uruguay

1.4%2.9%

3.1% 3.0%

1.9%1.0%

1.5%

3.9%

3.4% 4.0%

1.8% 2.5%

2.0% 2.1%

-13.0 -8.0%

C3

2017 2018

Low risk

Medium risk

Sensitive risk

High risk

2019

2.5%

3.2%

1.7%

2.8%

2.5%

-4.0%

2017 2018 2019

2017 2018 2019

2017 2018 20192017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

EcuadorC33.0% 2.4% 2.0%

ColombiaBB1

3.1%

2.5%

• Downside revision of regional growth by -0.36pp to

+2.0% in 2018 (after +1.2% in 2017) and by -0.4pp to

+2.4% in 2019

• Due to downside revisions in Brazil and Argentina

despite acceleration in Chile and Colombia

(desynchronization)

• Argentina, case in point: twin deficits and high inflation; Now under control:

(i) IMF USD 50bn stand-by arrangement to increase reserve adequacy and

help provide for the country’s financing needs; (ii) Argentina back in the MSCI

emerging markets index, which rewards Macri’s reforms

• Tight fiscal consolidation (achieve primary balance by 2020), persistent

inflation (> 25%), less favorable global and local financial conditions and

heightened political uncertainty should slow growth

LATIN AMERICA: VOLATILITY & DOWNGRADED OUTLOOK

12

Country risk and economic growth

Sources: IMF, Euler Hermes, Allianz Research

Fiscal and current account balances (% of GDP)

Sources: IHS, Euler Hermes, Allianz Research


• Resilient 2018: no more slack in the

economy: wage growth has accelerated,

unemployment has reached lows (3.40%)

• Industrial production still at a high level

thanks to US cycle, but confidence starts

receding

• Volatility continues, but sound policy

management helps (rates up at 7.75%)

• Left-wing candidate expected to win, but

fiscal slippage to be institutionally

constrained. Main risk for 2019: mind

NAFTA & energy sector where reforms

could be unwound

• Brazil recovery took a hit, public finances

are weak. But Brazil should prove resilient

to volatility in 2018 thanks to strong

external position and central bank buffers

(20 months of import cover)

• Policy uncertainty remains: we should

monitor official campaign this summer

LATIN AMERICA: MEXICO AND BRAZIL UNDER THE RADAR

13

Mexico: Industrial Production Index and business

confidence

Mexico: exchange rate, inflation and central bank policy rate

Brazil: public debt, fiscal and primary balance (% GDP)

40%

45%

50%

55%

60%

65%

70%

75%

80%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

07 08 09 10 11 12 13 14 15 16 17 18

Gross general government debt (% ofGDP, right scale)Fiscal balance (12m, left scale)

Primary balance (12m, left scale)

President Temer's

mandate

Sources: IHS, Euler Hermes, Allianz ResearchSources: IHS, Euler Hermes, Allianz ResearchSources: IHS, Euler Hermes, Allianz Research

15

16

17

18

19

20

21

22

2%

3%

4%

5%

6%

7%

8%

9%

16 17 18

Inflation rate (y/y)Monetary policy rateExchange rate (MXN/USD)

Inflation target: 3% +/-1pp

NAFTA likely delayed to 2019 and US yields goup. Markets price in a victory of AMLO

Election of Donald Trump

60

65

70

75

80

85

90

95

100

105

110

95

97

99

101

103

105

107

11 12 13 14 15 16 17 18

Industrial Production index

Business confidence


CHINA: A MULTIFACETED STRATEGY IN RESPONSE TO THE US

14

• Anti–US campaign and boycott of US products (as done with South Korea), tighterregulation at the borders and different treatment for US corporates

Economic patriotism

• Partnership against US strategy to increase (with Asian markets such as Japan andSouth Korea, with the EU)

• Potential leverage on Korean Peninsula issue

Diplomatic retaliations

• Measures to reduce trade deficit in services to be considered. First in line would befinancial services.

Protectionism on services

• Currency depreciation to be used carefully to keep national purchasing power incheck.

• Marginal depreciation expected with RMB/USD at 6.6 in H2 2018 (-4% from H1) and

6.7 in 2019

Mild RMB depreciation with RMB per USD kept below 6.9

• Threats (some turbulences) but no significant sell off is expectedThreats on US Treasuries


Households: solid income growth

(8%+) will continue to support

private consumption

Corporates: strong balance sheet

will act as a buffer for debt

repayments and tighter financing

conditions

Policymakers to adopt a defensive strategy :

• Fiscal support to increase

• Central bank to keep liquidity in-check (RRR cut) but

maintain deleveraging efforts through regulation

• Capital liberalization progress to be maintained but with

further moves on inflows (financial opening)

CHINA: THE ECONOMY WOULD BE ABLE TO MAINTAIN A

GROWTH AROUND +6.5%

15

Nominal disposable per capita income

Sources: IHS, Allianz Research Sources: IHS, Allianz Research* For large banksSources: IMF, Allianz Research

2017 2018 2019

Fiscal policy Gen. Gov. Net lending (% GDP) -3.9 -4.0 -4.2

Monetary Policy

Benchmark lending rate (eop) 4.35 4.35 4.60

7 days - Reverse Repo (eop) 2.50 2.60 2.70

M2 growth 9.7 8.7 8.7

Reserve requirement ratios* 16.5 15.5 15.5

RMB per USD (average) 6.8 6.6 6.7

RMB per USD (eop) 6.5 6.7 6.7

Capital accountliberalization progress

Inward Modest Significant Significant

Outward Neutral Modest Modest

Policy tracker

5

6

7

8

9

10

11

12

14 15 16 17 18 -20

-10

0

10

20

30

40

14 15 16 17 18

Total industrial profits (YTD, y/y)

Industrial revenues (YTD, y/y)

Producer prices (y/y)


ASIA: A SHELTER IN THE STORM OF EMERGING?

Sources: IHS, Allianz Research

JapanA1

ChinaB2

Hong KongA2

TaiwanA2

ThailandB1

South KoreaBB1

MalaysiaBB2

SingaporeAA2

IndonesiaB1

5.2%

AustraliaAA1

PhilppinesB1India

B1

LowriskMedium riskSensitive riskHigh risk

APAC: 4.9%

ASEAN-6*

1.2% 2.9%

3.6% 2.6%

2.7%

2.8%

New Zealand

AA1

6.6%

6.8%7.3%**

3.8%

5.4%

3.0%

5.0%

Activity - Economic growth is set to slow to +4.9% in 2018 (revised up from

+4.8%) and +4.8% in 2019 as China’s soft landing continues, Japan’s fiscal

stimulus effects fade away. Emerging ASEAN to maintain firm growth rate

supported by strong domestic demand solid export growth

Financing conditions - Financing conditions tighten to reduce debt (China,

e.g.), because of inflation (South Korea, Malaysia, Philippines, e.g.) and to

reduce pressure on the currency (India, Indonesia).

Inflation – Upward pressures to increase especially from the second half of

the year as a result of (i) currency depreciation, (ii) oil prices, and (iii)

tight(er) job markets.

Countries vulnerabilities check-up. Risk on growth is limited in large

economies thanks to solid buffers, high in frontier markets more vulnerable.

• Currency risk - Twin deficits countries to remain under pressure (India,

Indonesia). Risk of policy mistakes in Malaysia and Philippines is also

under watch.

• Confidence and risk on growth – This concerns frontier and twin deficits

markets such as Sri Lanka and Pakistan as buffers to keep growth in

check are really thin.


ASIA: CURRENCY TURBULENCES BUT LIMITED IMPACT ON

GROWTH

17

N.B. Fiscal balance refers to general government balance (IMF definition) Sources: IMF, Allianz Research

Expect some turbulences on the currencies of twin deficits markets. Yet, pre-emptive tightening should ease tensions going forward.

Moreover, if push were to shove, the region has enough buffer to keep growth in-check

Current account balance vs fiscal balance


Public debt vs import cover (goods)


Australia

India

Taiwan

South

Korea

Hong Kong

China

Malaysia

Philippines

Singapore

Thailand

Indonesia

Vietnam

Pakistan

JapanBangladesh

New

Zealand

Sri lanka

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-10% -5% 0% 5% 10% 15% 20%

Fis

ca

l B

ala

nce

CA Balance

China

Pakistan

Vietnam

PhilippinesIndia

Indonesia

Sri lanka

Bangladesh

Malaysia

Thailand

0

2

4

6

8

10

12

14

16

18

0% 20% 40% 60% 80% 100%

Impo

rt C

over

(mon

ths)

Public debt (% GDP)

Monetary policy rates (eop)

17 18 19

Australia 1.50 1.75 2.00

China 4.35 4.35 4.60

India 6.00 6.50 6.75

Indonesia 4.25 5.00 5.00

Japan -0.10 -0.10 0.10

South Korea 1.50 1.75 2.00

Malaysia 3.00 3.25 3.50

Philippines 3.00 3.50 3.75

Taiwan 1.375 1.375 1.500

Thailand 1.500 1.500 1.750


1.7%

2.1%

2.2%

2.6%

2.9%

3.0%

11.7%

1.4%

2.0%

2.3%

2.5%

2.6%

2.8%

5.4%

12.1%

0% 5% 10% 15%

Poland

Serbia

Czechia

Bulgaria

Lithuania

Estonia

Ukraine

Croatia

Slovenia

Latvia

Russia

Slovakia

Hungary

Romania

Turkey

May 2018

End-2017

4.8%

4.8%

6.5%

6.9%

7.1%

7.7%

8.4%

8.6%

8.6%

12.4%

12.7%

14.8%

0% 5% 10% 15%

Croatia

Slovenia

Slovakia

Poland

Bulgaria

Estonia

Lithuania

Czechia

Latvia

Hungary

Romania

Turkey

-14.1%

-5.3%

-2.2%

-2.0%

-0.4%

0.1%

0.3%

1.1%

0.7%

8.7%

-16.2%

-6.8%

-3.6%

-3.5%

-1.7%

-1.2%

-1.0%

-0.2%

0.8%

7.3%

-20% -15% -10% -5% 0% 5% 10%

Turkey

Russia

Hungary

Poland

Czech Republic

Romania

Serbia

Kazakhstan

Croatia

Ukraine

LCU vs. USD LCU vs. EUR

29-Jun-18 18

EMERGING EUROPE: WHO IS THE MOST VULNERABLE (1)

Sources: National statistics, IHS Markit, Allianz Research

Nominal wage growth Q1 2018 (% y/y) Local currency vs. USD and EUR

(% YTD; “-” indicates depreciation)

CPI inflation (% y/y)

Sources: National statistics, IHS Markit, Allianz Research Sources: National statistics, IHS Markit, Allianz Research

• Nominal wage growth has been well above productivity growth in most Emerging European countries

• So far, wage growth has not yet stoked inflation as firms have absorbed higher wage costs by accepting smaller profit margins, rather than raising their prices.

• The exceptions are Turkey and Romania where inflation is now well above targets. In Turkey, sharp currency depreciation has contributed as well. Hungary

needs to be watched

• Ukraine has been in crisis for many year and will remain so. 18


EMERGING EUROPE: WHO IS THE MOST VULNERABLE (2)

Sources: National statistics, IHS Markit, Allianz Research

Fiscal and current account balance Gross external financing requirement* (% of FX reserves)

Sources: National statistics, IMF, IHS Markit, Allianz Research

Poland

Czechia

Romania

Hungary

Slovakia

Bulgaria

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5%

CroatiaEstonia

Russia

Lithuania

Latvia

Ukraine

Serbia

Turkey

Slovenia

Cur

rent

acc

ount

bal

ance

(% o

f GD

P)

Fiscal balance (% of GDP)

6%

38%

75%75%

102%

134%136%

219%

270%

0%

100%

200%

300%

* Defined as sum of current account deficit and external debt maturing within the next 12 months.

• Turkey, Ukraine and Romania have relatively large twin deficits and very high external financing requirements in relation to their FX reserves

• Hungary has a current account surplus and acceptable fiscal deficit. Its external financing needs are also adequate

• Poland has external financing requirements in relation to its FX reserves but otherwise relatively solid macro fundamentals (e.g. twin surplus, low inflation)


RUSSIA – HIGHER OIL PRICES MORE THAN OFFSET ANY

IMPACT FROM NEW US SANCTIONS

12-Jun-2018 20

Exchange rate and Brent oil price

• The latest sanctions (imposed by US on 6 April) seem to be the first ones that have an impact on the USDRUB rate.

• But markets have calmed as President Trump drew back from further new sanctions (which many had expected) in mid-April.

• RUB has stabilized around 62-63 vs. USD which is adequate and supportive for exports.

• The imposed sanctions will certainly affect the targeted companies, but Russian authorities have pledged to help if needed.

• And the higher oil price is positive news for the Russian economy. Activity indicators point to strengthening momentum in Q2.

• Overall, we forecast GDP growth of +1.8% in both 2018 and 2019 (after +1.5% in 2017).

Source: IHS Markit, Allianz Research

+2.5% in Apr-May

+3.8% in Apr-May

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12 13 14 15 16 17 18

Retail sales growth

Industrial production growth20

25

30

35

40

45

50

55

60

65

70

75

80

850

10

20

30

40

50

60

70

80

90

100

110

120

130

140Brent (USD/bbl; left scale)RUB per USD (right scale)

Rapid decline inoil prices

March 2014: Crimean annexationMarch-July 2014: phases 1&2&3 of sanctions against RussiaAugust 2014: Russian counter-sanctions

RUB exchange rate crisis

Renewed currency

weakness in H2 2015 as oil price drops again

6 April 2018:New, tougherUS sanctions

imposed

2 August 2017:Expanded soft US sanctions

take effect

Industrial production and real retail sales

growth (y/y; quarterly averages)

Source: National statistics, IHS, Allianz Research


Fiscal and External Balance in the GCC Public and External Debt in the GCC

• After sharply deteriorating in the wake of low oil

prices in 2014-2017, fiscal and external accounts

are rebalancing in 2018 as oil prices are rising

• Bahrain and Oman are weaker and laggin

Sources: IMF, IHS, Allianz Research Sources: IMF, IHS, Allianz Research forecasts

GCC: GRADUAL FISCAL AND EXTERNAL REBALANCING IS

UNDERWAY, BUT MIND THE WEAKER SPOTS

Public debt (% of GDP)

Ext

erna

l deb

t (%

of G

DP

)

Cur

rent

acc

ount

bal

ance

(% o

f GD

P)

Fiscal balance (% of GDP)

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

UAE

Bahrain

KuwaitOman

Qatar

Saudi Arabia

UAE

0%

20%

40%

60%

80%

100%

120%

140%

160%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

External debt service

(% of exports earnings)

Sources: IHS Markit, Allianz Research

0%

5%

10%

15%

20%

25%2014

2018

Bahrain Kuwait

Oman

Qatar

Saudi Arabia

UAE

Bahrain

Kuwait

Oman

Qatar

Saudi ArabiaUAE

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

-25% -20% -15% -10% -5% 0% 5%

2018f

2016

• Likewise, public and external debt levels have

risen markedly since 2014 across the GCC.

• Debt risks in UAE and Qatar are offset by large

SWFs which make them net external creditors

• Again, Bahrain and Oman are the weak spots as

their smaller SWFs provide less cushio

2014

2018f

• Principal and interest payments

have risen over the past years but

are still adequate on average (12%

of export earnings)

• Bahrain with an external debt

service ratio of 21% is borderline


AFRICA: KEEP ON RUNNING, TRULY, MADLY, BLINDLY

22

Growth in Africa, per region

Sources: Allianz Research

Growth is accelerating in Africa, particularly

in key Eastern and Western economies.

2015 2016 2017 2018 2019Africa* 3.4 2.0 3.4 3.9 4.3

North* 3.9 3.2 3.4 3.6 3.7Algeria C3 3.7 3.3 2.0 2.7 2.5Morocco B1 4.5 1.2 4.0 3.0 3.0Egypt C2 4.4 4.3 4.2 5.2 5.8Tunisia C4 1.1 1.0 1.9 2.5 2.5

West 3.0 0.1 2.5 4.0 4.7Cote d'Ivoire C2 8.9 8.4 7.8 8.2 8.5Ghana B1 3.8 3.5 8.4 9.0 7.5Nigeria D3 2.7 -1.6 0.8 2.5 3.5Senegal C2 6.5 6.7 7.2 7.2 7.5

East 7.2 6.2 7.1 7.3 7.1Ethiopia D3 10.4 8.0 10.9 9.0 9.5Kenya C2 5.7 5.9 4.8 6.5 5.7Tanzania C3 7.0 7.0 7.1 7.2 7.5Uganda C3 5.7 2.3 4.5 6.0 5.0

Central 2.8 0.5 1.0 1.9 2.9Cameroon C3 5.8 4.5 3.0 3.7 4.0Congo, DR D4 6.9 2.4 3.0 3.5 4.0

Southern 3.1 1.0 2.1 2.5 3.8South Africa B2 1.3 0.6 1.3 2.0 2.5Angola D3 3.0 -0.8 0.7 2.0 3.0Zambia C3 2.9 3.7 3.9 4.5 4.7

*Egypt is included to Africa; Lybia excluded from regional average

Public debt, % of GDP

Sources: World Bank, Allianz Research

However, too much financing through debt

may derail the growth momentum.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Ango

laBe

nin

Burk

ina

Faso

Cam

eroo

nC

ARC

had

Con

go re

pC

ote

d'Iv

oire

Egyp

tEt

hiop

iaG

abon

Gam

bia

Gha

naG

uine

aKe

nya

Mad

agas

car

Mal

awi

Mal

iM

ozam

biqu

eN

iger

Nig

eria

Rw

anda

Sene

gal

Sout

h af

rica

Tanz

ania

Uga

nda

Zam

bia

2002

2018

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Ang

ola

Ben

inB

urki

na F

aso

Cam

eroo

nC

AR

Cha

dC

ongo

Cot

e d'

Ivoi

reE

gypt

Eth

iopi

aG

abon

Gam

bia

Gha

naG

uine

aK

enya

Mad

agas

car

Mal

awi

Mal

iM

ozam

biqu

eN

iger

Nig

eria

Rw

anda

Sen

egal

Sou

th a

frica

Tanz

ania

Uga

nda

Zam

bia

2000

2018

External debt, % of GDP

Countries with the poorest liquidity levels

are vulnerable to capital flows reversals.

Sources: Euler Hermes

Exchange rate vulnerability

BFA

DZAGAB

GNQ

CMRCOD

NGACIV

GHAEGY

MAR

MLI

COG

SEN

-35%

-25%

-15%

-5%

5%

15%

25%

0% 20% 40% 60% 80%

Cur

rent

acc

ount

bal

ance

(% G

DP

)

Commodity exports (% GDP)

currency appreciation/ stability vs. USD

7+ months5-7 months4-5 months0-4 months

BWA

AGO

NAMRWA

KEN

ETHLSO

MUS ZAF

MDG

UGA ZMB

7+ months4-5 months5-7 months0-4 months

-15%

-10%

-5%

0%

5%

10%

15%

20%

0% 20% 40% 60% 80%

Cu

rre

nt a

ccou

nt b

ala

nce

(%

G

DP

)

Commodity exports (% GDP)

Currency appreciation/stability vs. USD

Size of the bubble : currency depreciation

60%40%

Color of the bubble:

North & West

East & South


EUROPE: SLOWER GROWTH BUT STILL ABOVE POTENTIAL

The soft-patch is not as severe as it may

seem: Manufacturing PMIs remain in

expansionary territory and suggest

moderate growth in activity

Source: IHS, Euler Hermes Allianz Research Source: IHS, Euler Hermes Allianz Research

Manufacturing PMI Index Extra and intra-EU exports GDP growth and components

Intra-EU trade shows more resilience and

offsets part of the external trade shock,

partly linked to protectionism

Source: IHS, Euler Hermes Allianz Research

Boosting the domestic engines: public

spending in Germany is expected to

accelerate in 2019 while the European

reform agenda is back in the forefront

40

45

50

55

60

65

14 15 16 17 18

Eurozone Germany

France Spain

Italy

-2%

0%

2%

4%

6%

8%

10%

01

/15

04

/15

07

/15

10

/15

01

/16

04

/16

07

/16

10

/16

01

/17

04

/17

07

/17

10

/17

01

/18

04

/18

Extra-EU exports, 12m/12m

Intra-EU exports, 12m/12m

1,8

2,6

2,1

1,9

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2016 2017 2018 2019

Net exports Stocks

Investment Public Spending

Consumer Spending GDP growth

Do

me

stic

de

ma

nd

+1

.8p

p

Do

me

stic

de

ma

nd

+1

.4p

p


EUROPE: STILL ENOUGH BUFFERS

24

Margins remain at a relatively

high level, but they are expected

to have peaked at end-2017,

notably in Spain and Italy.

Non-financial corporations margins,

% of value added

Sources: IHS, Euler Hermes Allianz Research

Turnover growth has cooled

down but remains above

pre-crisis average. Spain

enjoys high growth.

Source: IHS, Euler Hermes Allianz Research

Manufacturing turnover growth,

12m/12mEurozone: government spending

vs primary balance

Europe becomes more fiscally

expansionary, notably in 2019.

This is the case for Germany.

Europe is at the start of the WS/PS

loop which will allow households to

benefit from higher real purchasing

power starting in H2 2018. This is the

case for France.

Eurozone: consumer spending

and disposable income

Source: IHS, Euler Hermes Allianz Research Source: IHS, Euler Hermes Allianz Research

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

-1%

0%

1%

2%

3%

4%

5%

6%

08 09 10 11 12 13 14 15 16 17 18 19

Government spending, y/y - lhs

Primary balance, change in pp - rhs

-4%

-3%

-2%

-1%

0%

1%

2%

3%

07 08 09 10 11 12 13 14 15 16 17 18 19

Real consumer spending (y/y)

Households' real disposable income (y/y)

32%

34%

36%

38%

40%

42%

44%

46%

48%

20

07

Q1

20

07

Q4

20

08

Q3

20

09

Q2

20

10

Q1

20

10

Q4

20

11

Q3

20

12

Q2

20

13

Q1

20

13

Q4

20

14

Q3

20

15

Q2

20

16

Q1

20

16

Q4

20

17

Q3

Eurozone Germany

Spain Italy

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

12 13 14 15 16 17 18

Germany France

Italy Spain


GERMANY, FRANCE AND SPAIN: GROWTH ENGINES

25

Spain: Policy uncertainty index and GDP growth (y/y)

Spain: Political uncertainty has a

negligible impact on activity. +3.1% in

2017, expect +2.7% in 2018 and +2.4% in

2019. Moderate deceleration of private

consumption in sight. Fiscal policy a bit

more expansionary in the next 2 years

Sources: IHS Global Insight. Allianz Research

France : Unemployment, wages and inflation

France: Household consumption was hit

hard by inflation. Wage growth

acceleration should close the purchasing

power gap from H2 and drive GDP

growth to +1.8% in 2018 and +2% in 2019.

-1%

0%

1%

2%

3%

4%

6%

7%

8%

9%

10%

11%

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Unemployment rate (%, left)

Wages (y/y change in %, right)

Inflation (y/y, right)

Germany: Economic soft-patch temporary.

Employment growth, tax relief and additional

monetary social benefits key drivers of strong

rise in disposable income and thus of private

consumption

4.2

3.7

4.13.8

2.0

4.2

2.72.9

3.4

1.6

4.4

4.0

2.5

3.8

1.9

0

1

2

3

4

5

6

2017 2018 2019

Monetary welfare benefits

Disposable income, nominal

Net wages and salaries

Operating profits, property and

entrepreneurial income

Disposable income, real

Germany: Nominal income and selected

components (percentage change y/y)

Sources: IHS Global Insight. Allianz ResearchSources: IHS Global Insight. Allianz Research

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

50

70

90

110

130

150

170

190

210

08 09 10 11 12 13 14 15 16 17 18 19

Policy uncertainty (left-handscale)GDP growth (y/y, right-handscale)

Forecasts


EUROPE: AREAS OF TENSION

Diverging growth prospects

and monetary policy should

drag the EUR/USD to 1.10 at

end-2018

EUR/USD German 10-year vs ECB key rates

Contained inflation (+1.7% in

2018-19) and softer growth

justify a progressive

normalization by the ECB


10-year spreads vs Bund

Bond spreads are contained

(except in Italy as they reflect the

political stress). Downside risk could

come from a generalized spread

widening

Bank interest rates for SMEs

(1 to 5 year maturity)

The private sector should still

enjoy very low interest rates

until H2 2019

Sources : Euler Hermes, Allianz ResearchSources : Euler Hermes, Allianz Research Sources : Euler Hermes, Allianz Research

26

0

200

400

600

800

1000

1200

16 17 18

Italy

France

Spain

Greece

Portugal

1,0

1,1

1,2

1,3

1,4

1,5

1,6

1,7

07 08 09 10 11 12 13 14 15 16 17 18 19

end-2018: 1.10; average 2018: 1.17

end-2019: 1.17; average 2019: 1.14

-1

0

1

2

3

4

5

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

German 10-year bund

Refi rate

Deposit rate

1

2

3

4

5

6

7

07 08 09 10 11 12 13 14 15 16 17

Spain

Italy

Germany

France


ITALY: FINANCIAL STRESS IS HERE TO STAY

Sources: Bank of Italy, Allianz Research

Source: Allianz Research

Economic and financial scenarios Portfolio net inflows vs ECB QE Italian bond purchases

0%

10%

20%

30%

40%

50%

Ge

rma

ny

Th

e N

eth

erl

an

ds

Fin

lan

d

Sp

ain

Au

stri

a

Fra

nc

e

Po

rtu

ga

l

Ire

lan

d

Be

lgiu

m

Ita

ly

Theoretical ratio capital key amount/Total sovereign debt

Actual ratio amount bought/Total sovereign debt

27


EUROPEAN REFORM ROADMAP: A FIRST COMPROMISE -

THE MESEBERG DECLARATION BY MACRON AND MERKEL

EU Summit:

28-29 June

•ESM goes EMF which will allow

faster financial interventions

•Agreement on an Eurozone budget as part of the EU multi-

annual budget to be implemented by 2021

•Agreement to establish a

European unemployment stabilization fund

•Security: Agreement on giving

more resources to the EU border police, Frontex — and to create a

common European asylum system

•Agreement to work on a common corporation tax regime

•Agreement on majority voting instead of unanimity when

making foreign policy decisions so

as to increase the effectiveness of

EU policymaking

EU Summit:

18-19 October

•Agreement on the size of the Eurozone budget

•Agreement on the Single Bank Resolution being part of the EMF

•Progress on Capital Market Union

•European Defense Fund

EU Summit:

13-14 December

•Agreement on a time schedule for

implementing the Common Deposit Guarantee Scheme once

the EBA stress tests prove the reduction of banking risk across all

Eurozone banks

•Agreement on the financing sources of the Eurozone budget (regular transfers made by

individual countries or a tax on financial transactions or a levy on

digital companies)

•Agreement on the Brexit deal

June 22:

The

Eurogroup

agreed on

further

debt relief

for Greece

and the

right to use

the

EUR24.1bn

cash buffer


UNITED KINGDOM: SOFTER BREXIT LIKELY

29

The BoE relatively hawkish stance to limit

the downward move on the currency: -4%

depreciation of the GBP vs. the USD and

-1% vs. the EUR at end-2018

GBP/EUR and GBP/USD

Sources: Bloomberg, Allianz Research

Royaume-Uni Weight 2016 2017 2018 2019

GDP 100% 1.9 1.8 1.4 1.3

Consumer Spending 66% 2.9 1.7 1.0 1.0

Public Spending 19% 0.8 0.1 1.6 1.4

Investment 21% 1.0 4.5 2.9 1.0

Construction 9% 2.5 6.8 2.8 1.4

Business investment 9% -0.5 2.4 1.1 1.4

Stocks * -4% 0.4 -0.9 -0.1 0.1

Exports 28% 2.3 5.7 1.3 1.9

Imports 30% 4.8 3.2 1.6 1.7

Net exports * -2% -0.8 0.6 -0.1 0.0

Current account ** -114 -83 -81 -69

Current account (% of GDP) -5.8 -4.1 -3.9 -3.2

Unemployment rate 4.9 4.5 4.2 4.0

Wages 2.4 2.2 2.9 2.7

Inflation 0.9 2.7 2.4 2.3

General government balance (% of GDP) -3.0 -1.9 -2.2 -2.4

Public debt (% of GDP) 88.2 87.7 87.4 87.3

Nominal GDP ** 1963.3 2037.6 2096.3 2158.8

Change over the period, unless otherwise indicated: * contribution to GDP growth

** mds de £

Slowest GDP growth since 2009 with below

potential consumer spending

Economic forecasts

Higher probability of a soft Brexit

• Brexiters showed they are capable to compromise and avoid a political deadlock as they showed during the last two

‘meaningful votes’ in the Parliament

• The Parliament will have a say on the deal before it goes to the European Parliament.

• The ultimate deadline for a deal fixed to end-2018 to allow enough time for ratification

• An EU Association Agreement (Ukraine-style) is likely. It will sets the framework but

gets the details later. This would concern topics like trade, internal security, thematic cooperation, external security and defense.

Extensive FTA ?

• The UK needs to publish the White Paper explaining their preferred position. Staying in the Custom Union would be an easier fix

to the Northern Ireland issue

• EU takes a pragmatic stance and looks capable for compromise

0,0

0,5

1,0

1,5

2,0

2,5

07 08 09 10 11 12 13 14 15 16 17 18

GBP/USD GBP/EUR

1.34

1.12


THANK YOU!

Ph

oto

by

ra

wp

ixe

l.c

om

on

Un

spla

sh

Economic Research Department

26.06.2018

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