Ian StewartDeloitte

May 2017

Thoughts on the global economy

Economics & Markets, Deloitte LLP, London Ian Stewart, Chief Economist

7

Leading indicators signal stronger global growth ahead

Deloitte Economics & Markets Team

8

Risk assets outperforming

9

Global growth nudges up in 2017, but not back to pre-crisis rates

Real GDP growth (% YoY)*

Pre-Crisis

Post-Crisis 2016 2017 2018

World 4.2 3.3 3.1 3.5 3.6

Advanced 2.8 1.0 1.7 2.0 2.0

Emerging 5.9 5.2 4.1 4.5 4.8

*Pre-crisis = 1998-2007, Post-crisis = 2008-15, Forecasts for 2017, 2018

Source: IMF World Economic Outlook, April 2017

Deloitte Economics & Markets Team

10

Consensus: ‘17 GDP Downside Upside

UK 1.7% Inflation, Brexit, corporate uncertainty and cost control

Fiscal stimulus, consumer resilience, weak £

US 2.1% Protectionism, political risk,higher rates, strong $

Pro-growth policies,wage growth

Euro area 1.7%Inflation, German

elections, Brexit, Italian banks, euro crisis III

Cheap money, consumer spending

China 6.5%Economic rebalancing, asset price falls,

US protectionism, Trump travails, end to stimulus

Strong growth in private consumption,slowdown in capital outflows

Emerging markets x China 4.6% Taper tantrums, higher inflation Indian growth, higher commodity prices,

faster global growth

Japan 1.4% Weak inflation/deflation Further monetary and fiscal easing

Change

Growth prospects vary

Economics & Markets Research, Deloitte LLP, London

Source: Consensus Economics, IMF WEO and Deloitte analysis

11

Potentially pro-growth policies:• Fiscal easing• Deregulation• Tax cuts

Risks to the market view:

• Impeachment

• Protectionism

• Congress stalling policy

• Geopolitics− Chinese retaliation

− Russian aggression in E. Europe

− Iran, North Korea

• Negative effect on EMs

• Higher rates

The good news

Political risks

Equity market view: Trump upsides > risks

12

Average annual GDP growth: Actual & IMF forecasts (% YoY)Chinese growth slowing, not crashing

Economics & Markets, Deloitte LLP, London

10.0

8.4

6.0

2.4

0.91.6

1998-2007 2008-2016 2017-2021

China G7

13

Europe: political risks moderating, and easy money kicking in

14

German industrial confidence highest on record

15

UK incomes’ squeezed…will business takes up the slack?

16

UK CFO confidence at 18-month high

Source: Deloitte CFO Survey Q1 2017

17

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Brexit: Views on near- & long-term growth

Long-term growth forecasts2020-26

US 2.1

UK 2.1 to 1.5

Canada 1.9France 1.3Germany 1.2Italy 1.2Japan 0.7

GD

P gr

owth

%Yo

Y

2.1%

1.5%

2.0%

Near-term Consensus forecasts

Range of long term forecasts incorporating

Brexit effects

Source: OBR, Consensus Forecasts, various forecasters & Deloitte calculations

18

What determines the business environment? Domestic macro and

microeconomic, political…factors

Brexit factors

Negatives? Positives?

Tariffs Better regulation

Non-tariffbarriers

Reduced Budget contributions

Migration restrictions Better FTAs

Tax policy

Monetary policy

Fiscal policy

Domestic consumption

Business investment

Global demand

FDI

Politics

Education & training

Financial conditions

Public attitudes

19

UK business environment is favourable by international standards

Heritage Foundation World BankWorld Economic

Forum#1 Hong Kong Singapore Switzerland

#2 Singapore New Zealand Singapore

#3 New Zealand Denmark United States

#4 Switzerland South Korea Germany

#5 Australia Hong Kong NetherlandsUnited

Kingdom10 6 10

Sweden 26 8 9

Spain 43 33 33

Belgium 44 43 19

France 75 27 22

Italy 86 45 43

Greece 138 60 81

WEF Global Competitiveness Index, World Bank Ease of Doing Business Index and Heritage Foundation Index of Economic Freedom

*Higher rankings indicate better, usually simpler, regulations for businesses, greater ease of doing business, stronger protections of property rights and lower corruption.

Global competitiveness rankings

20

Inflation rising globally as higher commodity prices feed through

Economics & Markets, Deloitte LLP, London

21

Little slack in UK jobs market => wage pressures?

Economics & Markets, Deloitte LLP, London

22Deloitte Economics & Markets Team

Growth forecasts: 6-10 years ahead

Long growth optimism has faded

Japan

France

USA

Germany

Source: Consensus Economics

23

Long-term decline in yields

24

US growth hasn’t flowed through to Main Street: distribution matters

Deloitte Economics & Markets Team

US equities, +2,181%

25

Millennials’ incomes no better than Gen X’s

26

• Global growth, inflation accelerating

• Synchronised upturn in emerging and developed markets

• UK activity holds up in 2017, eases slightly in 2018, no Brexit crash

• But trend growth weaker than pre-crisis, more worries about “left behinds”

• Biggest foreseeable risks: US protectionism, Euro area stress

• Post GFC normalisation + reform = better growth ahead

Conclusions

Deloitte Economics & Markets Team

27

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Economics & Markets, Deloitte LLP, London