A Tour of the World Economy: Global, Regional and Local Risks and Opportunities Dr Florian Kohlbacher Director, North Asia Economist Corporate Network 7 September 2016 1

Agenda

1) Global Context 2) Regional Context 3) Local Context

2

Global Context

3

Global economy – key points for 2016 • The new normal 

Lower for longer: oil and commodity prices  Lower for longer: interest rates  Lower for longer: economic growth

• Tour of the world   

US: Trump presidency? US consumers powering the global economy Europe: Brexit and immigration policy; European project in reverse? China: smooth landing not possible; choice is bumpy or hard landing

• Bright spots 

India: fastest growing large economy  Iran: rejoins global economy

4

Global context

2.1%

2.4%

Brexit Vote Slowdown in the US 5

Global context

2016 will be the fifth consecutive year in which global growth is below its long-term average of 3.7%

6

Global growth -1.3

1.6

0.5

2.0

5.8 2.0 7.1 -0.5

4.4

2.3 2.5

Policymaking once again key (-) BR, ZA, NG, RU (+) IN, VN, IR, AR

Emerging Asia the growth hotspot – again – in 2016 Real GDP growth, % 7

Global growth

8

Asia outperforms RoW

9

Poll of Forecasters

10

Risks to the global economy

11

Political risk: on the rise Is there a pattern to the latest surge? Anti-establishment

Long running disputes

12

Stagnant living standards?

Winners and losers of globalisation Global growth incidence curve (1988 – 2008) Cumulative growth rate (%) of real PPP income

80

Global elite: rich get richer!

Very poorest locked out of growth

70 60

Fast income growth in EMs (mainly China)

50 40 30 20

Stagnating incomes for middle class in rich countries

10 0 0

10

20

30

40

50

60

70

80

90

100

Percentile of global income distribution Source: Branko Milanovic

13

Trans Pacific Partnership: mission impossible? Chance of US ratifying the key policy of Obama’s Asia pivot has fallen to 30%

“The Trans-Pacific Partnership, which has some serious flaws, will not be acted upon this year.” – Mitch McConnell, US Senate majority leader

Source: Peterson Institute for International Economics

14

Monetary policy in a new normal Central banks are unprepared for the next recession “ I know you think you understand what you thought I said but I'm not sure you realise that what you heard is not what I meant”

US federal funds rate (%) 14 12 10

8 6 4

Policy options Quantitative easing Forward guidance

✓ ✓

Negative interest rates Higher inflation target Target nominal GDP Helicopter money

? ? ? ?

2 0 1983

1988

1993

1998

2003

2008

2013

Source: The Economist Intelligence Unit

15

The oil price will rise, but not by much High stocks and higher OPEC production will prevent a surge in oil price 3.5% 3.0% 2.5%

2.0% 1.5% 1.0% 0.5% 0.0% -0.5% 2013

2014

2015

2016

Production growth

2017

2018

Consumption growth

Source: The Economist Intelligence Unit

16

2019

2020

That sinking feeling: shipping in crisis Since the financial crisis, shipping has suffered from the global trade slowdown, plus too much shipbuilding and not enough scrapping. The Baltic Dry index, a measure of freight rates, has plummeted by more than 90% since 2008. Container lines might lose $10 billion this year (according to consultancy Drewry) Maersk, the world’s largest shipping firm, may break itself up to stay sea-worthy 17

Trade, a secular decline Global trade having its worst year since 2009, but will improve modestly in 2017 16

Share of global trade (%)

12 8 4 0 1991

1996

2001 China

20

2006

Germany

Japan

2011

2016

US

Global merchandise trade (% change yoy)

15 10 5 0 -5 -10 -15

Volume terms

Value terms

-20 2009m01

2010m01

2011m01

2012m01

2013m01

18

2014m01

2015m01

2016m01

Where is the growth? Higher commodity prices will support Emerging Markets in 2017 10 2015

8

2016

2017

6 4 2 0

Real GDP growth; % change, year on year Source: The Economist Intelligence Unit

19

Global

Japan

Euro zone

US

Russia

Latin America

Middle East

South Korea

ASEAN

China

-4

India

-2

A four decade slump in productivity Are our best inventions behind us?

20

Long term forecast to 2050 The rise of Asia Regional share of the global economy

Real GDP growth; % change, year on year

21

World’s largest economies in 2030 China was going to overtake the US in 2026: now 2033

35 30 25 20 15 10

TH, MY, PO drop out

5 0

Green = Lower rank since Nov 2015, Red = Higher rank, Grey = same rank Nominal GDP, US$ trn. Source: The Economist Intelligence Unit. 22 22

Regional outlooks: US, Europe, Asia

23

US election: the unpopularity contest Two of the most disliked presidential candidates in history

24

US election: the unpopularity contest We forecast Clinton presidency, Democratic Senate, Republican House

25

US economy

1.6%

26

US: a two-speed economy Consumers are driving the economy, as firms fail to invest (%) 5.0 4.0 3.0 2.0 1.0 0.0 -1.0

-2.0 -3.0 -4.0 2015 Q1

2015 Q2 Consumer spending

2015 Q3

2015 Q4

Business investment

2016 Q1

2016 Q2

Real GDP Source: Bureau of Labor Statistics

27

US: a turning point Workers are gaining power, at the expense of corporations

28

European Union

29

EU: growth and the ECB Contribution to GDP growth (%)

ECB pushing hard on stimulus

2017

2016

2015 -0.2

Cons

The EU should grow by 1.6% in 2016

0.8

Govt

1.8

Inv

・Aim to encourage banks to lend to companies ・Deposit rate cut from -0.3% to -0.4%; policy rate cut to zero ・Investment grade non-bank corporate debt added to QE programme ・Impact limited by demand side constraints and strong euro ・Political climate means ECB getting little assistance from governments or investment

External 30

Brexit: profound consequences for UK and Europe Brexit will have damaging political and economic consequences UK recession in 2017 Euro zone annual real GDP growth forecast for 2016-20 trimmed by 0.2 percentage points Contagion: boost for anti-establishment and anti-EU parties across Europe EU referendums in other countries— Netherlands and France–could trigger euro zone crisis Scotland independence, united Ireland?

31

Europe: on the brink? Italy is the next pressure point

32

China: another two-speed economy

33

China: slowing industries

Source: The Economist

34

China: difficulties ahead

35

China

36

China: global concern has eased in 2016 But fears will return quickly when the Chinese economy stutters again

37

Hard landing in China is major global risk We forecast real GDP growth of 6.6% in 2016, slowing to 4.2% in 2020

38

•

We think there is a 40% risk of a China hard landing (defined as 2ppt deceleration in real GDP growth)

•

Triggers? Banking crisis, housing crash or slump in private investment

•

Housing bubble? Property sales value up by 40% in January-Jul over the year-earlier period

•

Debt now at dizzying levels; domestic credit growing 3.2 x faster than nominal GDP

India: catching up?

Economic growth (%) Forecast

16 14 12 10 8 6 4 2

0 1990

1995

2000

2005

China

2010

2015

2020

India

39

India: catching up? •

India has overtaken China as the fastest growing large emerging market Economic growth (%)

Forecast

16 14 12 10 8 6 4 2 0 1990

1995

2000

2005

China •

2010

2015

2020

India

Source: The Economist Intelligence Unit.

40 40

India – macroeconomic trends Real GDP growth will average 7.3% a year in 2016/17 – 2020/21, well below its potential ・Constrained by overcapacity in some industrial sectors, infrastructure bottlenecks, shortages of labor in key sectors and the difficulties in shifting resources to higher-productivity manufacturing. Bankruptcy reform legislation (expected to be passed this year) will free up distressed assets and improve capital allocation. Services sector will still lead output basis.

Nationwide GST unifies India’s 29 states into a single market ・Expect huge efficiency savings for business, greater competitiveness for local firms, a wider tax base, and less administrative burden. .

41

Japan: Abenomics

42

Japan: running to a stand still • Growth in nominal yen terms has been stronger • Falling population means falling real GDP may become the norm  Per capita growth looks better • Abenomics not a long-term solution  Monetary and fiscal √  Structural reform X

43

Japan: Abenomics – Effects

44

Japan: Abenomics is not succeeding We forecast GDP growth of 0.4% in 2016, and avg of 0.3% in 2017-20 Real GDP (% change)

Consumer prices (% change)

2.5

3.0

Govt’s target growth rate

Abe in office 2.0

BOJ’s inflation target

2.5 2.0

1.5

2nd

Consumption tax rate hike

1.0

consumption tax hike (Oct ‘19); Tokyo Olympics

1.5 1.0

0.5

45

2020

2019

2018

2017

2016

2015

2014

2013

2011

2020

2019

2018

2017

2016

2015

2014

-0.5

2013

-0.5

2012

0.0

2011

0.0

2012

0.5

Japan: macroeconomic trends Expected growth of economy is 0.4% this year, compared with previous forecast of 0.8%. ・Economy predicted to fail in picking up significant momentum in 2017-2020, but Olympic Games in 2020 will help boost consumer and business confidence.

Demographic factors will be main constraint on potential GDP growth in the forecast period. ・Population and workforce to contract steadily, acting to crimp consumption and investment. Promised structural reforms will proceed haltingly, and TPP benefits for Japan’s external sector will show only after 2020.

Fiscal stimulus not as powerful as it looks ・Only around a quarter of the headline figure of \28tn constitutes new spending, and that will be spread over two years.

46

ASEAN: growth led by CLMV 10

Economic growth in ASEAN, 201620

•

CLMV countries to grow rapidly – but from a low base

•

Philippines will remain the fastest growing ASEAN-6 economy, although we lowered our forecast because of the election result

•

Indonesia’s growth will pick up because of improvements to business environment and government infrastructure investment

•

Thailand still struggling and growth will be below potential

•

Region set to benefit as China, Japan & India seek to gain influence

(% real change pa; avg)

8 6 4

2

Source: The Economist Intelligence Unit.

47

Brunei

Singapore

Thailand

Malaysia

Indonesia

Philippines

Vietnam

Cambodia

Laos

Myanmar

0

ASEAN: China’s slowdown

48

ASEAN: rising incomes and consumption

14,000

2016 2020

12,000

10,000 9,000 8,000 7,000

10,000

6,000

8,000

5,000

6,000

4,000

4,000

3,000 2,000

2,000

1,000

0

0

Source: Economist Intelligence Unit

49

2016 2020

19,910 25,590

16,000

Private consumption per head (US$) 52,150 66,280

GDP per head (US$)

ASEAN: expanding middle and upper classes

Source: Economist Intelligence Unit

50

ASEAN: Political challenges

Jokowi struggles to remain popular

Rodrigo Duterte’s war on drugs

Conflicts with China

For how long can the army hold the peace?

Najib clings on but investors are spooked

Much-needed reforms, fragile institutions

51

Regional outlook: Economic integration in Asia

52

The innovation imperative

53

The innovation imperative

54

Asia’s infrastructure imperative

55

Regional economic integration deepens

56

Regional economic integration deepens

57

Regional economic integration deepens

58

Asia Business Outlook Survey 2016: sales expectations • Annual survey of business expectations in Asia for the year ahead

What are you expecting for your company’s Asia sales performance in 2016 relative to 2015? • South-east Asia ranks 2nd (after India) in terms of sales growth expectations Source: The Economist Intelligence Unit

59

Asia Business Outlook Survey 2016: Profitability factors in SEA

• Most positive factors: economic growth (2nd in survey), technology (3rd) • Most negative factors: currency, competition Source: The Economist Intelligence Unit

60

Asia Business Outlook Survey 2016: Profitability factors in Japan

• Most positive factor: technology • Most negative factors: currency, competition 61

Source: The Economist Intelligence Unit

Longer term positives: Major trade deals ahead

• RCEP: Links ASEAN economies with major Asian economies  Pop. of 3.5 billion; 32% of world exports, 4.58% avg. GDP growth (2016-2020)  Championed by China • TPP: Links Asian economies to Americas  32% of world GDP  Championed by the US 62

Longer term positives: Major trade deals ahead

63

Longer term positives: Major trade deals ahead

64

Longer term positives: “one belt, one road”

65

Longer term positives: “one belt, one road”

66

Longer term positives: “one belt, one road”

67

Regional economic integration deepens

68

Local outlook: Korea

69

Korea: Political risk

70

South Korea: GDP

• Sluggish GDP growth • Conforming to the New Normal? • EIU forecast: GDP to grow by an average of 2.5% a year in 201620

71

South Korea: GDP growth

72

South Korea: GDP per capita

• GDP per Capita is at 84% of Japan and the gap is closing • Will exceed US$ 30,000 by 2022

73

South Korea: consumer prices

• Slowly rising consumer prices • “Inflation Report” by BoK • Inflation target 2016: 1.4% • Inflation target 2017: 2% • EIU: Inflation to average 0.8% in 2016 but will accelerate to an average annual rate of 1.8% in 2017-18

74

South Korea: household debt

•

Household debt is increasing at an alarming rate 

•

75

Total debt: KRW 1,200 trillion.

Low interest rate leads to excessive loan of household

South Korea: Foreign Direct Investment •

FDI has decreased in recent years so the government is implementing new set of policies    



76

Reduced corporate taxes New system to better protect intellectual property rights Shorter process of establishing an industrial complex Maximum amount of foreign capital that can be lent or borrowed without the need to report the transaction has been increased International financial reporting standards have been adopted

South Korea: the Won • Bank of Korea tries to keep the Won low for price competitiveness over other export-oriented economies • EIU: won to weaken from an estimated average value of W1,168:US$1 in 2016 to W1,238:US$1 in 2020

77

South Korea: Women in the economy

78

South Korea: Aging population & low birthrate

• Birth rate in 2014: 1.25 (Unit: Number of births per woman) 

Failure in policy to support working women 79

Finally

80

Five big questions for 2016 1. Will the oil price reach a bottom? 

Yes, but price rises will be gradual

2. Will the US elect Donald Trump as president? 

Probably not, but risk rises if there is a recession or terrorist attack

3. Can the EU survive the migration crisis and Brexit vote? 

Yes, but “ever closer union” is over for now

4. Can China meet its ambitious growth targets? 

No, but slower growth reduces risk of hard landing

5. Will weak currencies and low commodity prices crush EMs? 

No, but most will struggle. Gradual improvement from 2017 onwards 81

Q&A

The return of political risk Anti-establishment

Long running disputes

82

Stagnant living standards?