IHS ECONOMICS Global Economics & Country Risk Conference
The global economic outlook Back to the future? Lower oil prices and a US-centric global recovery … …But can a lost decade be avoided? 11 November 2014
Nariman Behravesh, Chief Economist, +1 781 301 9101,
[email protected] © 2014 IHS
ihs.com
Global Economics & Country Risk Conference / November 2014
Back to the future? • The US is a locomotive of global growth, after an eight-year
hiatus. • US oil production will exceed that of Saudi Arabia for the
first time since 1991. • Oil prices are at their lowest levels since the end of the
recession. • A strengthening dollar is helping many other economies,
much like the 1980s, 1990s and 2000s. • Is there a new “cold war”? • Is the “peace dividend” eroding?
© 2014 IHS
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Global Economics & Country Risk Conference / November 2014
The world economy: Reasons for optimism • Global growth has been remarkably stable at 2.5% - not great, but not
bad either. • Lower oil prices will likely boost 2015 growth by 0.2 to 0.4 percentage
points. • Monetary stimulus by the Bank of Japan (aggressive), People’s Bank of
China (small so far), and the European Central Bank (promised, but not delivered yet) will support growth. • US and UK economic growth remains solid (at around 2.5% to 3%). • Japan’s growth will be sustained but weak. • The Chinese government will do whatever it takes to prevent growth
from collapsing. • India is a bright spot. • World trade growth is beginning to pick up (very) modestly. © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
The world economy: Reasons to be concerned • Europe’s growth has stalled, and Germany has not been immune. • Deflation is a growing menace in the Eurozone. • Some large emerging markets (notably Brazil and Russia) are in • • • • •
recession, and the prospects do not look good. Debt levels in many parts of the world (Europe, Japan, China, other emerging markets) are dangerously high. The risks of policy mistakes (too much austerity, botched central bank “exit strategies”, and lack of structural reforms) are elevated. In particular, apprehensions regarding the Chinese governments ability to juggle its multiple challenges are rising. Geopolitical troubles could reverse the recent drop in oil prices. Longer-term, the probability of “secular stagnation” in may parts of the world (especially the Eurozone and some large emerging markets) is higher now than before.
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Global Economics & Country Risk Conference / November 2014
Purchasing managers’ indexes for manufacturing show the US leading the expansion (Index, over 50 indicates expansion) Purchasing managers’ indexes Index, over 50 signals expansion
60 55 50 45 40 35 30 25 2006
2007
2008
2009
United States
2010 Eurozone
2011
2012
China
2013
2014
Japan
Sources: Institute for Supply Management (US), Markit, National Bureau of Statistics (China)
© 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Purchasing managers’ indexes for services also point to a strong US (Index, over 50 indicates expansion) Purchasing managers’ indexes Index, over 50 signals expansion
65 60 55 50 45 40 35 30 2006
2007
2008
2009
United States
2010 Eurozone
2011
2012
China
2013
2014
Japan
Sources: Institute for Supply Management (US), Markit, National Bureau of Statistics (China)
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Global Economics & Country Risk Conference / November 2014
After a slow start to 2014, global real GDP is rising at a moderate pace Real GDP q/q % change, annual rate
6 4 2 0 -2 -4 -6 -8 2007
© 2014 IHS
2008
2009
2010
2011
2012
2013
2014
2015
2016
7
Global Economics & Country Risk Conference / November 2014
The emerging markets growth premium is the lowest since the early 2000s Real GDP 10
Percent change
8 6 4 2 0 -2 -4 1990
1993
1996
World
© 2014 IHS
1999
2002
2005
Advanced countries
2008
2011
2014
2017
Emerging markets
8
Global Economics & Country Risk Conference / November 2014
Real GDP growth in the United States, Eurozone, and Japan Real GDP 6
Percent change
4 2 0 -2 -4 -6 1998
2000
2002
2004
2006
United States
© 2014 IHS
2008
2010
Eurozone
2012
2014
2016
2018
Japan
9
Global Economics & Country Risk Conference / November 2014
Real GDP growth in key emerging markets Real GDP 15
Percent change
10 5 0 -5 -10 1998
2000
2002
2004 China
© 2014 IHS
2006 India
2008
2010
Brazil
2012
2014
2016
2018
Russia
10
Global Economics & Country Risk Conference / November 2014
Asia-Pacific (excluding Japan) and Sub-Saharan Africa will achieve the fastest growth in real GDP Real GDP
Annual percent change
8 6 4 2 0 -2 NAFTA
© 2014 IHS
Other Western Emerging MideastSubAmericas Europe Europe N. Africa Saharan Africa 2012 2013 2014 2015 2016-20
Japan
Other AsiaPacific
11
Global Economics & Country Risk Conference / November 2014
Growth in world trade volume is beginning to pick up Real GDP and trade 16
Percent change
12 8 4 0 -4 -8 -12 1975
1980
1985
1990
1995
Real exports
© 2014 IHS
2000
2005
2010
2015
202
Real GDP
12
Global Economics & Country Risk Conference / November 2014
The pace of globalization has slowed after exceptional gains in the 1994-2008 period World imports’ share of GDP
Percent of world GDP
35
30
25
20
15 1980
© 2014 IHS
1985
1990
1995
2000
2005
2010
2015
2020
2025
13
Global Economics & Country Risk Conference / November 2014
Some current-account imbalances persist Current-account balance 750
Billions of dollars
500 250 0 -250 -500 -750 -1,000 2000
2002
United States
© 2014 IHS
2004
2006
2008
Western Europe
2010 Japan
2012
2014
2016
Asia exc. Japan
2018
2020
Middle East
14
Global Economics & Country Risk Conference / November 2014
Oil prices have retreated as strong supply growth eclipses geopolitical concerns • The continuing boom in US oil production is lowering prices and
stabilizing global oil markets. • Weak global oil demand (especially from China), high Saudi Arabian
production, and a surge in Libyan production have contributed to recent price declines. • Downside risks: OPEC is slow to react, the Saudis fight for market
share, and global demand remains lackluster. • Upside risks: Stronger demand growth (thanks to lower prices),
renewed disruptions in Libya, slower production growth in North America, and rising geopolitical tensions. • Bottom line: prices will likely remain in the mid-$80s (for Brent, and
mid-$70s for WTI), but there could be a lot of volatility.
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Global Economics & Country Risk Conference / November 2014
Industrial materials prices are falling as new supplies are sufficient to meet demand growth Industrial materials prices IHS weekly indexes, 2002:1=1
6 5 4 3 2 1 0 2002
2004
2006
All industrial materials
© 2014 IHS
2008
2010
Chemicals
2012
2014
Nonferrous metals
16
Global Economics & Country Risk Conference / November 2014
US crude oil: A big drop – but for how long?
140
14
120
12
100
10
80
8
60
6
40
4
20
2
0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Crude oil, WTI (Left scale)
Dollars/million Btu
Dollars/barrel
Crude oil and natural gas prices
0
Natural gas, Henry Hub (Right scale)
Source: IHS Energy
© 2014 IHS
1717
Global Economics & Country Risk Conference / November 2014
Crude oil prices will rise in the long run Price of Dated Brent crude oil 150
Dollars/barrel
125 100 75 50 25 0 2000
2003
2006
2009
2012
Current US dollars
2015
2018
2021
2024
2013 US dollars
Source: IHS Energy
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Global Economics & Country Risk Conference / November 2014
Winners and losers from low oil prices • Winners: • • • • •
US consumers are likely the biggest winners – with a “tax cut” worth at least $70 billion. European consumers will benefit proportionally less because of high gasoline taxes. Emerging market consumers will also benefit less because of large fuel subsidies. Energy-intensive industries (e.g. agriculture and transportation). Governments in oil-importing countries with large fuel subsidies.
• Losers: • US producers (although IHS estimates that current break-even point is well below
current prices). • Major oil exporters – especially those with difficult public finances, where the “fiscal break-even point” is above $100, including Iran, Russia, and Venezuela.
• Net effect: • In the US, the net effect on consumers and producers of oil is still a small positive,
despite rising US production. • Similarly, the net effect on oil-importing and oil-exporting countries around the world will be a small boost to growth.
© 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Consumer price inflation varies by region, but is not a threat Consumer price inflation
Annual percent change
10 8 6 4 2 0 -2 NAFTA
Other Western Emerging Mideast- SubAmericas Europe Europe N. Africa Saharan Africa 2012
© 2014 IHS
2013
2014
2015
Japan
Other AsiaPacific
2016-20 20
Global Economics & Country Risk Conference / November 2014
Fiscal and monetary policies • Austerity remains in force in the Eurozone and will likely become more intense
in Japan next year. • The US, UK, and Japan have had tight fiscal policies but loose monetary
policies – the Eurozone has had tight fiscal and monetary policies … • … This helps to explain why the single currency area is doing so poorly. • Not only are the ECB’s policies tight, they have de facto become tighter. • Japan has once again provided big monetary stimulus because of weak growth
and anticipated fiscal tightening in 2015. • The Fed and the Bank of England have stopped expanding their balance
sheets, but any interest rate hikes are still a long way off (summer of 2015 at the earliest). • In the final analysis the benefits of QE (lower interest rates, improved bank
balance sheets, higher asset prices, and a boost in confidence) have outweighed the potential costs (inflation, financial instability, and increased inequality). © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Fiscal deficits are diminishing in North America, Western Europe, and Japan Federal budget balance 6
Percent of GDP
3 0 -3 -6 -9 -12 NAFTA
© 2014 IHS
Other Western Emerging Mideast- SubAmericas Europe Europe N. Africa Saharan Africa 2011 2012 2013 2014 2015
Japan
Other AsiaPacific
22
Global Economics & Country Risk Conference / November 2014
Eurozone fiscal deficits are shrinking – dramatically in some cases Fiscal balance 0
Percent of GDP
-3 -6 -9 -12 -15 Eurozone
Italy 2011
© 2014 IHS
2012
Spain 2013
Greece 2014
Portugal
Ireland
2015
23
Global Economics & Country Risk Conference / November 2014
The Bank of England will likely lead the upturn in policy interest rates Policy interest rates
Percent, end of quarter
6 5 4 3 2 1 0 2007
2008
2009
2010
United States
© 2014 IHS
2011
2012
Eurozone
2013 Japan
2014
2015
2016
2017
United Kingdom
24
Global Economics & Country Risk Conference / November 2014
Policy interest rates in key emerging markets will hold steady or decline Policy interest rates
Percent, end of quarter
14 12 10 8 6 4 2 2007
2008
2009
2010 Brazil
2011
2012
Russia
2013 India
2014
2015
2016
2017
China*
* One-year loan rate
© 2014 IHS
25
Global Economics & Country Risk Conference / November 2014
Long-term government bond yields will rise from exceptionally low levels 10-year government bond yields 14 12
Percent
10 8 6 4 2 0 1965
1970
1975
1980
1985
United States
© 2014 IHS
1990
1995
Germany
2000
2005
2010
2015
2020
Japan
26
Global Economics & Country Risk Conference / November 2014
CPI inflation rate - monthly Inflation % change from a year earlier
6 5 4 3 2 1 0 -1 -2 -3 2005
2006
2007
United States
© 2014 IHS
2008
2009
2010
United Kingdom
2011
2012
Eurozone
2013
2014
Japan
27
Global Economics & Country Risk Conference / November 2014
CPI inflation rate - annual Inflation % change from a year earlier
5 4 3 2 1 0 -1 -2 2005
2006
2007
United States
© 2014 IHS
2008
2009
United Kingdom
2010
2011
Eurozone
2012
2013
Japan
28
Global Economics & Country Risk Conference / November 2014
Real short-term interest rates – a risk for the Eurozone and the UK Short-term interest rate 2 1
Percent
0 -1 -2 -3 -4 -5 Jan-11
Jul-11
Jan-12
United States
© 2014 IHS
Jul-12
Jan-13
United Kingdom
Jul-13 Eurozone
Jan-14
Jul-14
Japan
29
Global Economics & Country Risk Conference / November 2014
Central bank balance sheets – shrinking in the Eurozone Real GDP Index, January 2007=100
600 500 400 300 200 100 0 Jan-07
Jan-08
Federal Reserve
© 2014 IHS
Jan-09
Jan-10
Bank of Japan
Jan-11
Jan-12
Jan-13
European Central Bank
Jan-14
Bank of England
30
Global Economics & Country Risk Conference / November 2014
The dollar: Rising, but still competitive Real trade-weighted dollar index 1.6
Index, 2009 = 1.0
1.4 1.2 1.0 0.8 0.6 1980
1984
1988
1992
1996
Major trading partners
© 2014 IHS
2000
2004
2008
2012
2016
2020
Other important trading partners
31
Global Economics & Country Risk Conference / November 2014
Exchange rates per US dollar Canadian dollar 1.8 1.6 1.4 1.2 1.0 0.8 0.6 1998 2001 2004 2007 2010 2013 2016
Japanese yen
Euro 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 1998 2001 2004 2007 2010 2013 2016
Chinese renminbi
140
9
120
8
100
7 6
80
5
60 1998 2001 2004 2007 2010 2013 2016
4 1998 2001 2004 2007 2010 2013 2016
Quarterly averages © 2014 IHS
32
Global Economics & Country Risk Conference / November 2014
Many emerging-market currencies have depreciated and are vulnerable
USD/local currency, 2013:1=100
Weekly exchange rate index 105 100
© 2014 IHS
95 90 85 80 75 Jan-13
Apr-13
Jul-13
Oct-13
China
India
Brazil
Jan-14 Russia
Apr-14
Jul-14
Oct-14
South Africa
33
Global Economics & Country Risk Conference / November 2014
Vulnerable countries depend on external financing: Current-account and fiscal balances External financing Percent of GDP, 2013 Turkey South Africa Brazil Indonesia India Mexico Poland Russia China -10.0
-7.5
-5.0
Current-account balance
© 2014 IHS
-2.5
0.0
2.5
Fiscal balance
34
Global Economics & Country Risk Conference / November 2014
The US economy is gaining momentum • Accelerations in consumer spending and homebuilding, along with continued
robust capital spending, will support growth. • The oil price decline, if sustained, will add around 0.2 to 0.4 percentage point to
growth. • Consumers will cautiously boost spending in response to gains in employment
and real disposable income, lower oil prices and improved finances. • The recovery in homebuilding is proceeding slowly, as young adults delay
household formation and homeownership. • Global market growth, strong cash flow, replacement needs, and technological
advances reinforce capital spending. • Interest rates will rise over the next three years as monetary accommodation is
withdrawn. • The stronger dollar is still low by historical standards and not (yet) a big threat.
© 2014 IHS
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Global Economics & Country Risk Conference / November 2014
US real GDP growth will be sufficient to bring further reductions in the unemployment rate 6
10.0
3
8.8
0
7.6
-3
6.4
-6
5.2
-9
4.0 2006
2008
2010
Real GDP growth (Left scale)
© 2014 IHS
2012
2014
Percent
Annual percent change
Real GDP and unemployment
2016
Unemployment rate (Right scale)
36
Global Economics & Country Risk Conference / November 2014
US household deleveraging continues on the mortgage side – lowest debt ratio since 2002
Percent of disposable income
Household liabilities 140 130 120 110 100 90 80 70 60 1980
© 2014 IHS
1985
1990
1995
2000
2005
2010
2015
2020
37
Global Economics & Country Risk Conference / November 2014
US investment shares are recovering Real spending 14
Percent of GDP
12 10 8 6 4 2 0 2000
2002
2004
2006
Information equipment Other equipment Source: People’s Bank of China
© 2014 IHS
2008
2010
2012
2014
2016
2018
Intellectual property & software Structures * IHS forecast
38
Global Economics & Country Risk Conference / November 2014
The secret isn’t out yet in Washington: The federal budget deficit is unproblematic Federal budget balance sheet 25
Percent of GDP
20 15 10 5 0 -5 -10 2007
2008
2009
2010
Revenues Source: IHS
© 2014 IHS
2011
2012
Expenditures
2013
2014
2015
2016
Deficit © 2014 IHS
39
Global Economics & Country Risk Conference / November 2014
US federal debt ratio to stabilize just under 75%–but the biggest problems come later, as the population ages Publicly held federal debt 80
Percent of GDP
70 60 50 40 30 20 1980
© 2014 IHS
1985
1990
1995
2000
2005
2010
2015
2020
40
Global Economics & Country Risk Conference / November 2014
Unconventional sources of oil and natural gas are boosting US energy supplies US energy supply and demand 120
Quadrillion Btu
100 80 60 40 20 0 2004
2007
2010
Oil & gas supply US energy supply © 2014 IHS
2013
2016
Other energy supply Energy imports
2019
2022
Energy demand
41
Global Economics & Country Risk Conference / November 2014
The US current-account deficit: Thanks to falling oil imports going, going, gone? Current-account balance 200
1.5
0
0.0
-200
-1.5
-400
-3.0
-600
-4.5
-800
-6.0
-1,000
-7.5 1980
1985
1990
1995
2000
2005
Current-account balance (LS, billions USD)
© 2014 IHS
2010
2015
2020
Balance as % of GDP (RS)
42
Global Economics & Country Risk Conference / November 2014
North American business cycles are synchronized Real GDP 6
Percent change
4 2 0 -2 -4 -6 2000
2002
2004
2006
2008
United States
© 2014 IHS
2010 Canada
2012
2014
2016
2018
Mexico
43
Global Economics & Country Risk Conference / November 2014
Canada will achieve moderate, balanced growth • Real GDP growth picked up in the second quarter, led by surging
exports, auto sales, and homebuilding. • The net impact of the oil price decline will be a small positive (around
0.1 percentage point). • Gains in employment and income will support household spending, but
rising debt burdens will restrain it. • The Bank of Canada will begin to raise interest rates in late 2015. • Continued development of the oil sands is raising energy production. • The drop in oil prices has put downward pressure on the Canadian
dollar, which will remain below parity with the US dollar. • Western provinces, led by Alberta, will achieve the fastest growth,
although weaker oil prices will knock a few points off growth. © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Economic reforms shape Mexico’s outlook • Mexico is benefiting from solid growth in the US economy through
trade, capital inflows, and remittances. • The construction cycle is bottoming out; exports and public investment
(including transportation infrastructure) will support 4% growth. • The oil price drop will likely shave off 0.2 percentage off 2015 growth. • Global automakers are investing in substantial new capacity in Mexico. • Consumer spending growth will pick up in response to income gains. • Constitutional changes will open Mexico’s oil and gas industries to
foreign investment and eventually reverse the decline in oil production. • President Peña Nieto’s agenda also includes reforming education and
labor markets, increasing competition in communications industries, and broadening the tax base. © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Western Europe has turned the corner, but risks of deflation are rising • After a protracted recession, the Eurozone economy is growing again – though
growth this year will only be around 0.8%. • Rising consumer and business confidence, low interest rates, improving export
markets, and pent-up demand for durables will support growth. • Lower oil prices will add about 0.2 percentage point to growth • Extended fiscal austerity, still-significant banking sector problems, and weak
consumer finances will restrain growth in several countries. • The United Kingdom, Ireland, Germany, and Sweden will lead the region’s
growth, while Italy, Spain, Greece, and Portugal will lag. • The ECB averted a meltdown, but has done little for growth—moreover falling
inflation is becoming a bigger risk (there is already deflation in Italy, Spain, Greece, Portugal, Cyprus and Slovakia), pushing up real interest rates and the euro. • Western Europe is vulnerable to a further escalation of the crisis in Ukraine. © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Eurozone confidence indexes are rising Positive replies minus negative replies 40
Percent of total
30 20 10 0 -10 -20 -30 -40 2000
2002
2004
Consumers
2006
2008
Industrial sector
2010
2012
2014
Services sector
Source: European Commission
© 2014 IHS
47
Global Economics & Country Risk Conference / November 2014
The Eurozone economy will slowly recover Real GDP 6
Percent change
4 2 0 -2 -4 -6 1990
© 2014 IHS
1993
1996
1999
2002
2005
2008
2011
2014
2017
48
Global Economics & Country Risk Conference / November 2014
Real GDP growth in Europe’s major economies Real GDP 6
Percent change
4 2 0 -2 -4 -6 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Germany
© 2014 IHS
UK
France
Italy
Spain
49
Global Economics & Country Risk Conference / November 2014
European unemployment rates have diverged Unemployment rate
Percent of labor force
14 12 10 8 6 4 2 2005
2007 France
© 2014 IHS
2009 Germany
2011 Italy
2013
2015
2017
United Kingdom
50
Global Economics & Country Risk Conference / November 2014
Japan’s economy on a better but sluggish growth path • The sales tax increase from 5% to 8% in April is creating economic volatility:
After a surge in the first quarter, consumer spending fell in the second, but is expected to rise in the third quarter. • IHS expects 1.1% growth this year and 1.2% in 2015, and a small boost from
lower oil prices (0.1 to 0.2 percentage point) • The Bank of Japan’s aggressive monetary stimulus and sales tax increases will
spark consumer price inflation of 3% this year and 2% in 2015 – this spring the core CPI rose the fastest since 1991 • Future growth will depend on how effectively the new Abe administration
implements reforms in labor and product markets – so far there is been very timid. • The recent stimulus by the Bank of Japan make it more likely that the October
2015 (second round) sales tax hike will go through. • The huge cash hoards of Japanese companies are both a source of concern
and a potential basis of strength. © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Japan’s economy has limited growth potential Real GDP 7.5
Percent change
5.0 2.5 0.0 -2.5 -5.0 -7.5 1986
© 2014 IHS
1990
1994
1998
2002
2006
2010
2014
2018
52
Global Economics & Country Risk Conference / November 2014
Corporate cash holdings Corporate cash holdings Percent of GDP, latest available Japan
South Korea
Germany
United States 0
10
20
30
40
50
Source: National Statistics
© 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Asia-Pacific will achieve solid, not spectacular, growth • Asia’s performance will be shaped by political transitions and the pace
of domestic macroeconomic reforms. • India’s economy is reviving, but the new BJP government has been
slow to use its mandate to launch essential economic reforms. • Indonesia’s new government seems on track to enact reforms such as
the reduction of fuel subsidies. • Political turmoil and the military coup in Thailand are undermining
economic performance and foreign investment in manufacturing. • As the global economy improves, South Korea, Taiwan, and Vietnam
will see faster growth, supported by rising high-tech exports. • The region’s outlook for consumer spending is bright, thanks to robust
income growth and deepening financial markets. • Risks include a China hard landing, slow progress on economic
reforms, and territorial disputes in the South China Sea. © 2014 IHS
54
Global Economics & Country Risk Conference / November 2014
Real GDP growth in Asia-Pacific Real GDP
Annual percent change
8
6
4
2
0 China
India 2012
© 2014 IHS
Australia 2013
2014
South Korea 2015
Indonesia
Taiwan
2016-20
55
Global Economics & Country Risk Conference / November 2014
China’s economic growth has slowed • Real GDP increased 7.3% year on year in the third quarter, down from
7.5% in the second quarter and the slowest pace since early 2009. • Lower oil prices will only add about 0.2 percentage points to growth
next year. • Persistent weakness in real estate and related heavy industry was
offset by strength in exports and consumer spending. • The recent easing of liquidity conditions will have little real impact on
new financing due to tightening bank regulations. • A hard landing triggered by a financial crisis is not the biggest threat
facing China; a more serious concern is prolonged low growth. • In the medium term, China will need to reform state-owned enterprises
and the financial sector – otherwise a Japan-style scenario with lots of “zombie” companies is a big risk. © 2014 IHS
56
Global Economics & Country Risk Conference / November 2014
China’s economic growth will downshift in the long run Real GDP and industrial production 25
Percent change
20 15 10 5 0 1980
1985
1990
1995
2000
Real GDP
© 2014 IHS
2005
2010
2015
2020
2025
2030
Industrial production
57
Global Economics & Country Risk Conference / November 2014
China’s lending has stabilized at a high level Lending flows 18
Trillion CNY
15 12 9 6 3 0 02 03 04 05 Bank loans (LCU and FX)
06 07 08 Other financing
Bank acceptance bills
Trust loans
Source: People’s Bank of China
© 2014 IHS
09
10
11 12 13 Entrusted loans
14*
* IHS forecast
58
Global Economics & Country Risk Conference / November 2014
India’s growth recovery remains tentative • Relapses in manufacturing production suggest continued weakness in
consumer spending and private investment. • Agricultural output is likely to suffer from poor monsoon rains. • Wholesale price inflation subsided to a five-year low of 2.4% year on
year in September, while consumer price inflation moderated to 6.5%. • The Reserve Bank of India is likely to hold interest rates steady into
2015 because of potential price pressures from currency depreciation. • The BJP’s initial policy steps have been cautious. Much needs to be
done to open markets, upgrade infrastructure, reduce food and fuel subsidies, and raise productivity. • The recovery in economic growth will be gradual, but long-term growth
potential is high if reforms are implemented. • Growth will be boosted (0.3-0.4 percentage point) by lower oil prices. © 2014 IHS
59
Global Economics & Country Risk Conference / November 2014
South America: Deteriorating investment climates • The region’s economic growth has slowed in 2014, with Argentina, Venezuela,
and Brazil in recession. • Falling prices for oil and other commodities are hurting export income. • Low oil prices will help Argentina, Brazil and Chile, but hurt Colombia, Ecuador
and Venezuela. • In Argentina, a sovereign debt default, high inflation, foreign-exchange controls,
and import restrictions are obstacles to growth. • Venezuela faces a long recession with soaring debt-servicing costs, high
inflation, product shortages, and political unrest • In Colombia and Peru policy stimulus and resource development are
supporting robust growth. • Tax increases are slowing Chile’s growth. • The region’s long-term challenges include inadequate infrastructure, restrictive
business environments, and income inequality. © 2014 IHS
60
Global Economics & Country Risk Conference / November 2014
Real GDP growth in South America Real GDP
Annual percent change
6 4 2 0 -2 -4 -6 Brazil
Argentina 2012
© 2014 IHS
Colombia
2013
2014
Venezuela 2015
Chile
Peru
2016-20
61
Global Economics & Country Risk Conference / November 2014
Brazil’s economy faces competitive challenges • High labor and capital costs, an overvalued currency, complex taxation,
and inadequate infrastructure are hurting competitiveness. • Fixed investment has been declining since mid-2013. • High debt burdens and slow job growth are restraining consumer
spending. • Industrial production began to recover in July and August, suggesting
that the economy is stabilizing after a mild two-quarter recession. • The re-election of Dilma Rousseff means more of the same in terms of
failed policies – which is not encouraging for growth prospects. • As a net importer of oil, Brazil will see a small positive impact from the
recent drop in oil prices.
© 2014 IHS
62
Global Economics & Country Risk Conference / November 2014
The Ukraine crisis influences Emerging Europe • The Eurozone’s gradual recovery will help the economies of Central
Europe and the Balkans by increasing trade and capital flows. • The Russia-Ukraine conflict brings the risk of trade and energy-supply
disruptions. Ukraine’s economy will contract 7% in 2014. • Russia’s aggression in Ukraine and the resulting sanctions will do long-
term damage by discouraging investment in Russia. • Despite weak export markets, Poland’s economy is benefiting from
monetary stimulus and a revival of domestic demand. • In Turkey, policymakers’ efforts to reduce the large current-account
deficit and stabilize the economy will dampen economic growth. • Both these large Central European countries will see a boost (of up to
0.5 percentage point) in 2015 growth from lower oil prices.
© 2014 IHS
63
Global Economics & Country Risk Conference / November 2014
Real GDP growth in Emerging Europe Real GDP
Annual percent change
5 4 3 2 1 0 -1 -2 Russia
Turkey 2012
© 2014 IHS
Poland 2013
2014
Czech Republic 2015
Romania
Hungary
2016-20
64
Global Economics & Country Risk Conference / November 2014
Russia’s outlook deteriorates as sanctions increase and oil prices fall • Russia’s incursions in Ukraine have led to new sanctions, capital flight,
reduced credit availability, and declining investment. • The central bank has raised its policy rate from 5.5% to 9.5% in 2014
and has effectively stopped intervening in currency markets to support the fragile rouble. • High inflation is eroding consumer purchasing power and confidence. • Real GDP is projected to decline 0.3% in 2014, followed by a bigger
drop of 1.7% in 2015 due to the cumulative impact of lower oil prices and sanctions. • Sanctions will reduce access to oil field technology and Western
capital, leading to a decline in oil production in 2016 and beyond. • Unfavorable demographics, outmoded manufacturing capacity, and an
overburdened infrastructure will limit medium- and long-term growth. © 2014 IHS
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The Middle East and North Africa • Regional political instability and the war against the Islamic State and
Khorasan cloud the economic outlook. • Lower oil prices will hurt Saudi Arabia, Kuwait, Iran, UAE, and Libya,
but help Jordan, Lebanon, Morocco, and Tunisia. • After two years of contraction, Iran’s economy is stabilizing – sanctions
on the energy and financial sectors will likely remain in place. • Political and security risks limit Egypt’s economic growth. • Addressing job creation, economic diversification, and competitiveness
will be critical to regional stability over the medium term.
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Real GDP growth in the Middle East and North Africa Real GDP
Annual percent change
9 6 3 0 -3 -6 -9 Saudi Arabia
UAE 2012
© 2014 IHS
Israel 2013
2014
Iran 2015
Egypt
Iraq
2016-20
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Sub-Saharan Africa will sustain rapid growth • Commodity export revenues remain a key driver of growth. • Expanding domestic markets, income gains, and regional integration
will support 5-6% economic growth in the decade ahead. • Macroeconomic management is improving substantially, poverty is
declining, and foreign direct investment is rising. • Poor infrastructure (especially power generation), political instability,
and corruption remain obstacles to economic development. • An end to mining strikes in South Africa is bringing renewed growth,
but producers face strong labor and electricity cost pressures. • Lower oil prices will help South Africa and Zambia, but hurt Angola,
Mozambique and Nigeria.
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Real GDP growth in Sub-Saharan Africa Real GDP
Annual percent change
10 8 6 4 2 0 Nigeria
South Africa 2012
© 2014 IHS
2013
Angola 2014
Ghana 2015
Ethiopia
Kenya
2016-20
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IHS ECONOMICS Global Economics & Country Risk Conference
Long-term trends Can a lost decade be avoided? ihs.com
© 2014 IHS
IHS Board Meeting/ August 2014
What could bring about much slower global growth? • US – growth in the labor force, capital expenditures, and
productivity remain anemic for an extended period. • Secular stagnation and persistent deflation in Europe –
especially in the crisis economies. • Lack of structural reforms and further degradation of growth in
the emerging world – including China and India. • Further slowdown (reversal?) in globalization. • Onerous regulatory and tax environments. • Badly conceived (and implemented) energy and environmental
policies that could thwart the development of unconventional energy. © 2014 IHS
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IHS Board Meeting/ August 2014
Not all the long-term risks are on the downside • Inherent resilience of the US economy manifests itself. • Unconventional energy revolution goes global. • Progress on European structural reforms payoff. • Success of Abenomics leads to a Japanese economic
renaissance. • Key emerging markets develop effective reform plans. • Globalization becomes an engine of growth again. • Tax and regulatory reforms are implemented in key economies. • Existing and emerging technologies pay off in terms of higher
productivity growth.
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Long-term world economic growth by region Real GDP
Annual percent change
8
6
4
2
0 NAFTA
Other Western Emerging Mideast & SubAmericas Europe Europe N. Africa Saharan Africa 1993-2003
© 2014 IHS
2003-13
2013-23
Japan
Other AsiaPacific
2023-33 73
Global Economics & Country Risk Conference / November 2014
Population growth is slowing across regions Population
Annual percent change
3
2
1
0
-1 NAFTA
© 2014 IHS
Other Western Emerging Mideast & SubJapan Americas Europe Europe N. Africa Saharan Africa 1993-2003 2003-13 2013-23 2023-33
Other AsiaPacific
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Labor force growth Labor force
Decade average growth rate
2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 80s United States
90s Canada
00s United Kingdom
10s Germany*
20s France
30s Italy
* German data starts in 1992 Source: IHS Global Link Model © 2014 IHS
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Labor force growth (continued) Labor force
Decade average growth rate
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 80s
90s Japan
00s China
Russia*
10s India
20s
30s
Brazil*
* Russia data starts in 1995; Brazil starts in 1996 Source: IHS Global Link Model © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Capital stock growth Capital stock
Decade average growth rate
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 80s United States
90s Canada
00s United Kingdom*
10s Germany*
20s France*
30s Italy*
* German data starts in 1991; UK, France, and Italy in 1986 Source: IHS Global Link Model © 2014 IHS
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Capital stock growth (continued) Capital stock
Decade average growth rate
12 10 8 6 4 2 0 80s
90s Japan*
00s China
10s Russia*
India
20s
30s
Brazil
* Japan data starts in 1986; Russia in 1996 Source: IHS Global Link Model © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Total factor productivity growth Total factor productivity
Decade average growth rate
3.0 2.5 2.0 1.5 1.0 0.5 0.0
-0.5 80s United States
90s Canada
00s United Kingdom*
10s Germany
20s France*
30s Italy
* United Kingdom data starts in 1989; France in 1986 Source: IHS Global Link Model © 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Total factor productivity growth (continued) Total factor productivity
Decade average growth rate
5 4 3 2 1 0 -1 80s
90s Japan
00s China
10s Russia
India
20s
30s
Brazil
Source: IHS Global Link Model
© 2014 IHS
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Global Economics & Country Risk Conference / November 2014
Loss of potential economic output Potential output Percent reduction, 2007-13 Greece Ireland Spain Portugal United… Italy Japan Canada Sweden France Netherlands United States Germany Australia 0
5
10
15
20
25
30
Source: Laurence Ball, “Long-Term Damage from the Great Recession in OECD Countries”
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Global Economics & Country Risk Conference / November 2014
Implications of global economic trends • Global growth will be more US-centric. • Europe and Japan will do a little better, but not as well as the US. • The sharp deceleration in emerging markets is worrisome, and a
return to the boom years of the 2000s is unlikely—but another crisis is also unlikely. • Emerging markets will not enjoy another resurgence without stronger
productivity growth. • China’s locomotive role is diminishing. • Lower oil prices, more monetary stimulus, and more solid US growth
will provide the foundations for a modest acceleration of global growth. • Europe and some emerging markets have the highest risk of secular
stagnation. © 2014 IHS
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Thank you! ihs.com
© 2014 IHS
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