Global & European Economic Outlook

September 14 2015

Emilio Rossi EconPartners Oxford Economics

erossi@oxfordeconomics.com emilio.rossi@econpartners.it

2

Real GDP Growth Compound annual growth rates, in %

Source: EconPartners calculations on Oxford Economics data

CA

GR

, in

%

-1

2

4

7

10

Japan NAFTA Emerging Asia

2003-2007 2007-20142014-2018

AE recovering after 2008 crisis, EM slowing

• World GDP growth in 2015 @2.5%; down from 2.9% expected at start of year – constant downward revision of economic forecasts in last several years

• US economy global engine, growth set to accelerate to 2.7% in H2, leading to Fed hike... • EZ growth to rise slowly. Investment and exports main drivers. Receded Grexit risk improves

EU confidence, weak euro helps competitiveness • China’s growth could fall below 6% in 2016, risks remain skewed to downside • High debt levels, financial market volatility, low commodity prices, weaker capital inflows,

weak EM currencies increase downside risks to global outlook, particularly for EMs

“Secular” Stagnation? Not quite, but 20y low growth likely

• Continued slow growth after 2008 crisis increases concerns for structural change in economic parameters - Significant reduction of long-term growth

• AE structural very low growth, EM slowing significantly

• Japan a worrying example

• Most analysts (including Oxford Economics) consider “Secular Stagnation” overly pessimistic…

• …but recognize the high likelihood of a global slowdown in long-term growth (including OECD, see: Policy challenges for the next 50 years)

• Several factors at play, both demand and supply side:

• Savings glut, near-zero or negative interest rates, deleveraging, slowing global trade, ageing population, slowing technical progress

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Supply side factors

4

R. Gordon: • Ageing (and expensive health

technology) leads to higher savings

• Slowing technical progress - leading to lower TFP for a sustained period - and scarce investment demand despite low rates (questionable)

• Impact of technical changes in previous industrial revolutions (steam power, electricity, combustion engine, running water…) much greater than current changes (questionable)

Demand side factors

L. Summers: • excess savings ! no attainable

interest rate that brings the economy to full employment

• CBs pushed to zero interest rates, can’t activate adequate demand

• Shortage of safe assets (QE related) • Income inequality • Trade lesser growth engine

K. Rogoff: • High debt levels and need for

deleveraging (weighing on demand)

China 4% growth? not a major threat to global economy

▪ China - transition from investment to private consumption difficult to manage ▪ IP slowed sharply in H1 2015, corporations highly leveraged, property market destocking - but

high saving rate and room for manoeuvre for China’s policy makers ▪ Stock market boosted by investors borrowing to buy shares, permitted by regulations in late

2014, subsequently suspended ▪ OE scenario - China from 7% to 4% reduces global growth by @0.5% p.a. - Bundesbank

estimates growth slowdown in Euro Area by @0.2%, JP more severe ▪ EM hardest hit, according to both OE and BdFrance, due to trade links and commodity price

dependence 6

Source: Bundesbank

7

US - confidence, labour market, credit and $ on the rise

Fed still on track to raise rates this year, but $ key

• Solid real economy indicators point to Fed maintaining its plans to lift rates • Considerations which could delay Fed’s normalization

• core PCE inflation, the Fed’s favorite inflation measure, remains subdued at 1.2% y/y, still held down by

• strong dollar, weak oil & commodity prices, slow global growth • further significant Renminbi depreciation

• A hard landing in China leading to generalized weakness across EM could delay the Fed rate hike decision into 2016

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0.0

0.4

0.8

1.2

1.6

2.0

2012 2013 2014 2015 2016 2017 2018

Oct 2014 forecast

Impact of extra QE

Source: Oxford Economics / Haver Analytics

Model-implied impact of additional QE on GDP% year

Forecast

• Since advent of Abenomics in late 2012, yen down 30% (effective), Nikkei up 135% • Strong corporate earnings support investment, minimum wage jump boosts

spending....but weak growth and near-zero inflation point to QE until 2018 • Fiscal tightening >1% of GDP will be a drag in each of next 3-years • By end-2016, QE means BoJ will own close to 40% of government debt • QE a short-term medicine - in absence of structural reforms, GDP will still be capped at

1% at best • Slowing Chinese economy, recent renminbi devaluation a downside risk

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Japan – More QE, but only short-term impact on GDP

• GDP in EM set to rise just 3.6% in 2015 – and just 2.2% ex-China (slowest since 2001)

• High debt and commodity dependence are drags on EM growth • Private sector debt ratio in emerging Asia higher than in G7, private debt in EM

(ex-China) up 20% since 2007 • Risk of a deleveraging cycle in highly indebted countries, especially in case of

external shocks10

EM growth to slow further

Which EM most at risk?

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Eurozone recovery is an ongoing obstacle course

12

• More stable banking sector: banking union, more adequate capitalisation of banks following BIS regulation and stress tests

• Low oil price, ECB QE, improved public finances, weak Euro key for better economic outlook - but GDP still expected below 2%, high unemployment, low potential output

• Temporary solution of Greece crisis buoyed markets and confidence • Solid household spending prospects, helped by low inflation

• Annual CPI raised only to 0.1% - deflation risk not entirely over yet, ECB may extend bond purchase into 2017

Eurozone investment still a question mark

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• EZ investment fell by 0.5% in Q2 after a few just-above-zero quarters and years of sluggishness

• ECB Bank Lending Survey shows clear improvement in new loans to business

• External factors plus improved confidence, easing of credit conditions (QE related) will strengthen investment spending in 2016

• Room for more aggressive investment in Germany (among the lowest in OECD), Juncker plan (Nov 2014, €21bn to leverage €300bn, mostly private)

• Progress must happen on four fronts: 1. Economic Union - to ensure each economy has the structural features to prosper

within the Monetary Union 2. Financial Union – to guarantee the integrity of our currency across the Monetary

Union and increases risk-sharing with the private sector. This means completing the Banking Union and accelerating the Capital Markets Union

3. Fiscal Union that delivers both fiscal sustainability and fiscal stabilisation 4. Political Union that provides the foundation for all of the above through genuine

democratic accountability, legitimacy and institutional strengthening • Three stages

• «Deepening by doing»: existing tools and treaties to relaunch competitiveness and convergence, responsible fiscal policies – until June 2017

• «Completing EMU» - White Book Spring 2017 - the convergence process would be made more binding through a set of commonly agreed benchmarks for convergence that could be given a legal nature

• Final stage (2025 at the latest) • Energy, digital, unification of markets of capitals, goods and services to be

completed

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Europe Five President Report (June 22, 2015)

• Favorable global context - weak oil and commodities prices, overall expansionary monetary and neutral fiscal policies

• Growth in AEs compensates for growth slowdown in EMs • Change in growth parameters

• No Secular stagnation but lower growth rates for a prolonged period • World trade loosing steam as a world growth engine

• EU needs to revise governance and Treaties to adapt them to a changed and further changing world

• In a low growth environment, fiscal policies become more difficult to balance • no space for inefficient public expenditure • need to reduce taxes and push on investment, growth

• Policies aimed at increasing potential output become even more crucial than in the past

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Summary and final considerations

Share of World GDP – Going back in time

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

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1000 1500 1820 1913 1950 2006 2012 2017 2030

Avanzati Emergenti

Source: Giovannini - A. Maddison, 2001, Groningen University data16

Advanced Emerging

Population in 1960: 3 billion Population in 2050: 9 billion

Source: E, Giovannini, Tor Vergata University17

Demography – economic growth driven by Africa and India