global economic scenario little reasons to expect higher ...€¦ · world conflict intensity index...

Global Economic Scenario

Little reasons to expect higher growth rates (or a recession)

Lisbon, 15 March 2016

Jorge Sicilia, BBVA Research

2016 BBVA Seminar for Public Sector Investors and Issuers

Global Economic Scenario / 15 March 2016

Outline

Challenges ahead: little reasons to expect higher

growth rates

An anemic and fragile growth outlook

Risks: a focus on global geopolitics


Confidence is declining across the board and is unlikely to improve in the short term Manufacturing PMI by regions (pp above/below 50)

-3

-2

-1

0

1

2

3

4

5

6

Dec

-14

Ma

r-1

5

Jun-

15

Sep

-15

Dec

-15

Fe

b-1

6

Dec

-14

Ma

r-1

5

Jun-

15

Sep

-15

Dec

-15

Fe

b-1

6

USA EMU EM Asia Latam

Source: Markit and BBVA Research

-1,5

0,0

1,5

3,0

4,5

Fe

b-0

8

Fe

b-0

9

Fe

b-1

0

Fe

b-1

1

Fe

b-1

2

Fe

b-1

3

Fe

b-1

4

Fe

b-1

5

Fe

b-1

6

Developed Emerging

BBVA Research Financial Stress Index (normalized Index)

Source: BBVA Research based on Bloomberg data


How much is services confidence decoupling from manufacturing… and trade?

Services vs Manufacturing Confidence PMI Source: Markit and BBVA Research

Volume of Global Trade, Goods and Services, BBVA Research Indicator, YoY (%) Source: CPB and BBVA Research

48

49

50

51

52

53

54

55

56

57

Fe

b-1

1

Fe

b-1

2

Fe

b-1

3

Fe

b-1

4

Fe

b-1

5

Fe

b-1

6

Services Manufacturing

-12,0

-6,0

0,0

6,0

12,0

18,0

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

WT Volume of Goods, BBVA Research Indicator

WT Volume of Services, BBVA Research Indicator


Is it the threat of risk scenarios going forward in this new world?

What can we read from recent developments in financial markets?

Very likely! Uncertainty about China

and persistent low oil prices raised

the risk of second round effects that

could become self-fulfilling…How

worried should we be?

Is it a belated re-pricing of the Fed´s liftoff?

Is it a downward revision of the baseline global outlook?

Unlikely, but the impact of the

rebalancing is behind everything!

Not likely, the downside revisions

have been mild and indicators are

not pointing to a recession


China: Muddling through amidst increasing divergence of policy options (contradictions)

However, the likelihood of this

scenario is decreasing, risks to growth

remain skewed to the downside also due

to policy blunders with the stock market

and lack of clarity about the FX policy and

the implementation of structural reforms

The most likely scenario is a

successful “soft landing” (towards 6%

growth of average in 2016-17 fueled by

highly accommodative demand policies,

(monetary and fiscal policy) that could

take this growth rate higher

China: GDP growth (YoY, %) Source: BBVA Research, BEA

7,77,4

6,96,2

0

1

2

3

4

5

6

7

8

9

2013 2014 2015 2016

Jan-16 Oct-15


China, the same doubts: Rebalancing and exchange rate policy

0

2

4

6

8

10

12

14

16

18

20

38%

40%

42%

44%

46%

48%

50%

52%

2006 2010 2014 2015

Industry Services

Industry (YoY, rhs) Services (YoY, rhs)

China: sectorial breakdown (nominal GDP, %)

6,0

6,2

6,4

6,6

6,8

7,02000

2300

2600

2900

3200

3500

3800

4100

Fe

b-1

0

Fe

b-1

1

Fe

b-1

2

Fe

b-1

3

Fe

b-1

4

Fe

b-1

5

Fe

b-1

6

FX Reserves CNYUSD (rhs)

China, FX reserves (Billion USD) CNY/USD

Source: BBVA Research, Haver Source: BBVA Research, PBoC and Haver


China: employment breakdown, % total

China, the same doubts: Rebalancing

Growth will converge towards

6%, expect more monetary and

fiscal stimulus, but doubts will

nevertheless linger at least until

late in the year

Urban Employment % total Increase, million

2006 40% 12.4

2010 46% 13.7

2014 51% 10.7

2015 52% 11.0

Source: China NBS

Source: BBVA Research, Haver

8.6

33.5

11.75.8

6.9

6.3

14.6

12.7

5.6

33.3

18.6

5.5

7.5

6.2

11.0

12.4 Primary sector (incl.mining)

Manufacturing

Construction

Transportation, Storage & Post

Wholesale, Retail Trade&accommodationBanking & Real Estate

Education

Other services

2014

2010


US: GDP growth (YoY, %)

Source: BBVA Research, BEA

US: growth around 2.5% based on consumption, but concerns increase towards lower growth

Favorable impact of low oil prices on

disposable income against the negative effect

of USD appreciation –and global uncertainty-

on exports and on investment

A slowdown in job growth to start the year

has ignited worries of a deterioration in the

labor market which introduces downside risks to

GDP

1,5

2,4 2,42,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

2013 2014 2015 2016

Jan-16 Oct-15


US: Consumption relies on employment and income while deleveraging has been taking place nicely US, Labour Market: employment growth and unemployment rate (YoY, %) Source: BBVA Research, BEA

0,0

2,0

4,0

6,0

8,0

10,0

0

50

100

150

200

250

300

2011 2012 2013 2014 2015 2016 (f)

Employment, non-farm payroll, monthly increase, LHS

Unemployment rate, RHS

US, Household’s debt (GDP, %) Source: BBVA Research, BIS

40,0

50,0

60,0

70,0

80,0

90,0

100,0

110,0

Mar

-95

Mar

-97

Mar

-99

Mar

-01

Mar

-03

Mar

-05

Mar

-07

Mar

-09

Mar

-11

Mar

-13

Mar

-15


US, Fed rates: increasing doubts over 2016 Fed rates path but do not bet too much on rates staying so low

US: implied probability of a rate hike Source: Bloomberg

0

10

20

30

40

50

60

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

Implied probability of a 0.5-0.75% in Mar 2016 FOMC meeting

Implied probability of a0.5-0.75% in Dec 2016 FOMC meeting

Markets wary of Fed policy towards

normalization while other major central

banks have turned to increased easing and

even negative interest rates.

FOMC will take time to assess impact of

higher rates before 2nd increase.

Monetary policy actions remain data-

dependent but chances are high that they

will increase rates again this year…twice


Eurozone: Economic Growth (GDP, YoY, %)

Source: BBVA Research

Eurozone: modest growth with increasing uncertainties

The main tailwinds continue: (i) low oil

prices; (ii) a depreciated euro; (iii) ultra-loose

monetary policy; and (iv) neutral or moderately

expansive fiscal policy

However, biases to growth are to the

downside: low investment, foreign

uncertainties and markets sell-off weigh on

growth expectations -0,3

0,9

1,5

1,8

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

2013 2014 2015 2016

Jan-16 Oct-15


Eurozone: … and stronger private consumption Eurozone: private consumption and real labour income (YoY, %) Source: BBVA Research

Fundamentals are supportive of an

increase in disposable income : (i) higher

employment and wage growth; (ii) inflation at

very low levels; (iii) low oil prices

-2

-1

0

1

2

3

4

1Q00

1Q03

1Q06

1Q09

1Q12

1Q15

HH disposable income Private Consumption


ECB: the emphasis of monetary easing shifting from negative rates to other instruments

The big question mark: would monetary policy

alone be enough? -0,6

-0,5

-0,4

-0,3

-0,2

-0,1

0

Eonia 1M 2M 3M 4M 5M 6M 7M 8M 9M

Two months ago 06/03/2016 11/03/2016

Eonia forward (%) Source: BBVA Research, Bloomberg

The ECB further ease financial conditions

favoring unconventional measures (balance sheet

expansion) over rate cuts (the ECB seems to be

aware of the potential adverse consequences of

negative rates). A welcome shift.

Liquidity provision trough TLTRs contributes

to eliminate any concern about funding for

European banks and helps to mitigate the

negative impact of negative rates on banks


World GDP(*) quarterly growth, short-term forecasts based on BBVA-GAIN (%, QoQ)

(*) based on almost 90% of World GDP Source: BBVA Research

Overall, global short term indicators seem to be losing steam at the beginning of 2016

Slowdown of manufacturing “hard

data”, higher stress in financial markets

and confidence indicators slowdown

0,4

0,6

0,8

1,0

1,2

1,4

1,6

Jun-

09

Ma

r-1

0

Dec

-10

Sep

-11

Jun-

12

Ma

r-1

3

Dec

-13

Sep

-14

Jun-

15

Ma

r-1

6

Quarterly growth

Average

Average

Annualized rate:2,6%


Outline


growth rates

Short term: An anemic and fragile growth outlook

Risks: a focus on global geopolitics


Risks: Higher, to the downside and spreading but still more biased towards emerging economies

Emerging

Economies

Hard choices in a

tougher background

(Oil prices fall and

Flows rebalancing)

Source: BBVA Research

Europe

“Brexit”,

Banking

Union

Geopolitical

Risks:

refugees crisis

China Hard landing,

policy errors

Rising Holding steady Falling

US

slowdown?

Market

volatility

1980 2015 2045

Eastern Europe

North America

Latin America

Western Europe

Africa

Middle East

Japan

Oceania

Asia exJapan

5.4%

5.4%

9.7%

6.1%

6.8%

4.8%

0.9%

0.8%

60.1%

Geopolitics: Against the backdrop of the secular process of moving to the East … The global economy’s center of gravity is moving to the East (%GDP in world economy in the next ten years) Source: BBVA Research EAGLES 2015 and Quah 2011


World Conflict Intensity Index 2015-16 (Number of events related to the conflict/ Total events in each

country) Source: www.gdelt.org & BBVA Research The Ukrainian-Russian Crisis remains in

stand-by but still alive and potentially kicking

The Afghanistan permanent conflict will

challenge US involvement in the region

The Middle East conflict is really “complex”

and will take time to contain

The spillovers from the Middle East crisis

are spiraling to Europe (Refugees and

Terrorism)

The Southeastern Asian crisis is the true

Black Swan of Geopolitics

…the geopolitical situation is becoming more challenging…

http://www.gdelt.org/


… with both rising indexes of protest and conflict after a long period of relative quietness

BBVA Research World Protest Intensity Index 1980-2016 (Number of protests in the world / Total events in the world) Source: www.gdelt.org & BBVA Research

BBVA Research World Conflict Intensity Index 1980-2016 (Number of conflicts in the world / Total events in the world) Source: www.gdelt.org & BBVA Research

0,026

0,036

0,046

0,056

0,066

0,076

0,086

1981

1983

1985

198

7

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

High

Low

Medium Range

0,006

0,007

0,008

0,009

0,01

0,011

0,012

0,013

0,014

0,015

0,016

198

1

198

3

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

High

Medium Range

Low




DE

37,3%

FR

4,6%

AT

6,3% HU

13,9%

EE 0,02%

SK 0,01%

HR 0,01%

LT 0,03%

LV 0,03%

PT

0,06%

CY 0,1%

RO 0,1%

CZ 0,1%

MT 0,1%

IE

0,2%

ES

0,8%

EL 0,9%

PL 0,9%

BG 1,6%

DK 1,4%

FI

2,4%

UK

2,8% BE

3,5%

NL

3,5%

IT 6,1%

SE 12,7%

SI 0,02%

LU 0,1%

0-0,2% 0,2-0,5%

Asylum seekers as % of local population

0,5-1,5% 1,5-2%

Massive migrations in 2015 and 2016

Political tensions

In Europe, the refuges crisis could be an opportunity but its management is challenging

Asylum seekers by country (% of total 2015)


Outline


growth rates

Short term: An anemic and fragile growth outlook

Risks: global geopolitics


Over long horizons, there are little reasons to expect growth rates higher than the “old normal” 3.5%...

Economic Growth (annual change, %)

GDP, YoY,

% 80's expansion 90's soft patch

90's soft

expansion

Patch and

rebound 00's expansion Crisis and rebound Anemic expansion

World 3.8 2.6 3.7 3.7 4.4 3.2 3.3 DM 3.9 1.7 3.2 3.5 2.4 0.5 1.7

EM 3.8 3.9 4.4 4.0 6.6 5.5 4.4 Source: BBVA Research, IMF

-4

-2

0

2

4

6

8

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15(e)

16(f)

80's Expansion 90's soft patch 90's soft Expansion Patch andRebound

00's Expansion Crisis and Rebound AnemicExpansion

The BIG REBALANCING

WORLD DM EM

Source: BBVA Research forecasts


Outstanding Debt (*) (% GDP)

…and probably less this time around considering the high debt levels in a low inflation environment

(*) Source: BIS, IIF

• Mature market figures cover 10 key mature market economies/regions (MM-10), i.e. Australia, Canada, Switzerland, Denmark, Euro Area, United Kingdom, Japan, Norway, Sweden, and United States.

• The EM dataset comprises 18 emerging market countries (EM-18), including Argentina, Brazil, China, Czech Republic, Hong Kong, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Saudi Arabia,

Singapore, South Africa, South Korea, Thailand, and Turkey.

• Headline debt figures for public, non-financial corporate and household sectors are based on BIS statistics on total credit to the nonfinancial sector.

• Financial sector debt statistics are derived from countries’ financial accounts via Haver. For countries that do not compile financial accounts, financial sector indebtedness is estimated as a summation of cross-

border bank loans and bond financing. As credit by non-banks is excluded, our estimates could lead to an underestimation of financial sector debt in countries with large shadow banking entities, such as China.

0,0

25,0

50,0

75,0

100,0

125,0

150,0

Jun-

95

Jun-

99

Jun-

03

Jun-

07

Jun-

11

Jun-

15

Households

Non-fin corporates

Government

Financial Corporates

Mature markets Emerging Markets

0,0

25,0

50,0

75,0

100,0

125,0

150,0

Jun-

95

Jun-

99

Jun-

03

Jun-

07

Jun-

11

Jun-

15

Households

Non-fin corporates

Government

Financial Corporates


…and lower global trade World Trade of Goods and Services

1992=100

Exports and Imports of Goods and Services as GDP % Source: BBVA Research, IMF

World, GDP an Trade of Goods and Services %, YoY Source: BBVA Research, IMF

40

50

60

70

80

90

100

110

120

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

0

1

2

3

4

5

6

7

8

1981-1989 1990-1999 2000-2007 2008-2014

GDP Trade

Página 25


Weight on Global Economy Source: BBVA Research, IMF

China, change in sectorial breakdown 2005-2015 (pp) Source: BBVA Research, IMF

Página 26

0

5

10

15

20

25

30

35

China Japan USA EU Latam 7

Exports (World share, %) GDP ( World share, %)-10,0 -5,0 0,0 5,0 10,0

Services

Industry

Agriculture

Factors behind the current slowdown are both cyclical and structural


20

30

40

50

60

70

80

90

100

110

198

1

198

3

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3United States China Germany

0

5

10

15

20

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Higher

restrictions

Página 27

The impact of trade policies is not conclusive but, they seem less supportive than before Economic Restriction Index tariffs on imports, non-tariff barriers imposed on international flows and capital controls Source: BBVA Research, KOF Swiss Economic Institute

Number of new regional trade agreements Source: BBVA Research, WTO


135

140

145

150

155

160

165

170

Mar

-01

Mar

-03

Mar

-05

Mar

-07

Mar

-09

Mar

-11

Mar

-13

Mar

-15

How can stagnation be avoided: Cyclicality of productivity could eventually kick in and lower leverage

Non-financial private sector debt in developed economies (% GDP) Source: BBVA Research with BIS data

World economic and productivity growth Source: BBVA Research with World Bank data

-4,0

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

GDP growth, left axis

Productivity growth, TFP, right axis

Debt as % GDP

Pre-crisis

average

(2000-08)

Peak Now

Total 149 170 161

Households 70 81 74

Non Fin Corp 79 90 87Source: BIS, BBVA Research


Takeaways

The most likely global scenario is an anemic growth, with DM keeping

up and EM slowing down –no meltdown-. Biases in DM are to the

downside, but the recession is not likely either.

Risks to the downside have increased, especially for Emerging

Economies: China’s rebalancing and policies; 2nd round effects of market

volatility

Over longer horizons, there are little reasons to expect growth rates

higher than “old normal” 3.5%, the pending deleveraging, lower

productivity growth and the losing steam in global trade weigh on the

outlook

Global Economic Scenario

Little reasons to expect higher growth rates (or a recession)

Lisbon, 15 March 2016

Jorge Sicilia, BBVA Research

2016 BBVA Seminar for Public Sector Investors and Issuers


Oil: The fundamentals, -supply, demand and views about- are behind oil prices drop and latest rebound

Oil supply stickiness to price

declines

Oil demand downward correction

Huge uncertainty about future

demand (China’s slowdown

intensity) and reaction function of

traditional players

Change in the Oil price forecasts (Brent, USD/bbl)

0,0

20,0

40,0

60,0

80,0

100,0

120,0

Mar

-00

Mar

-02

Mar

-04

Mar

-06

Mar

-08

Mar

-10

Mar

-12

Mar

-14

Mar

-16

Mar

-18

Actual Baseline 2016.01 Upside Downside Baseline 2015.10

Modest rebound in 2H16 as

non-OPEC production declines

(lower CAPEX, tighter credit,

bankruptcies)

global economic scenario little reasons to expect higher ...€¦ · world conflict intensity index...

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