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Global Economy Chartbook March 2014

Global Economy Chartbook March 2014. Charles Collyns Chief Economist & Managing Director Felix Huefner Deputy Director, Global Macroeconomic Analysis Saacha Mohammed Research Assistant. Key Messages.

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Global Economy Chartbook March 2014

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  1. Global Economy ChartbookMarch 2014 Charles Collyns Chief Economist & Managing Director Felix Huefner Deputy Director, Global Macroeconomic Analysis Saacha Mohammed Research Assistant

  2. Key Messages • 2014 is expected to see a global acceleration, led by mature economies, although the recent data flow has been mixed. • A bumpy Fed exit and contagion to emerging markets are key downside risks. • The U.S. economy is poised to gather pace as the fiscal drag fades. • Euro Area growth has been positive since 2013Q2, but the recovery is slow and still damped by financial strains. • The Japanese economy picked up pace in 2013, propelled by aggressive policy stimulus, but will slow in 2014 as fiscal policy tightens. Greater reform momentum is crucial. • China is seeking to maintain growth, while advancing reforms to rebalance its economy. • Capital flows to EMs have been volatile, and market access will remain under stress for countries with policy gaps. • In addition to cyclical weakness and a tightening of external financial conditions, EM economies need to deal with structural challenges to lift longer-term growth.

  3. Table of Contents Global Business Cycle Overview Economic Policy and Financial Conditions Capital Flows to Emerging Economies Under Pressure U.S.: Achieving a Smooth Exit from Policy Stimulus Euro Area: Still Work to Do Japan: Will Abenomics Work? Challenges for Emerging Economies Page 4 Page 12 Page 16 Page 22 Page 27 Page 31 Page 35

  4. Global Business Cycle Overview

  5. Signs of a Pick-up in the Global Economy Real GDP Growth Rate Consumer Prices % q/q, saar % oya Sources: IIF, Datastream Last Observation: Q4 2013 Sources: IIF, Datastream Last Observation: Jan. 2014

  6. Stronger Growth in MEs, But EM Performance Has Been Mixed Mature Economies: Real GDP Growth Rate Emerging Economies: Real GDP Growth Rate % q/q, saar % q/q, saar Sources: IIF, Datastream Last Observation: Q4 2013 Sources: IIF, Datastream Last Observation: Q4 2013

  7. Business Confidence Has Softened Manufacturing PMI Industrial Production % change, 3m/3m saar index, breakeven=50 Sources: IIF, Datastream Last Observation: Dec. 2013 Sources: Datastream, Markit Economics, Bloomberg Last Observation: Feb. 2014

  8. Exports and Retail Sales Have Picked Up Merchandise Exports Retail Sales %3m/3m, saar %3m/3m, saar Sources: IIF, Datastream Last Observation: Dec. 2013 Sources: IIF, Datastream, Bloomberg Last Observation: Dec. 2013

  9. Top 6 Risks for the Global Economy Sources: IIFGlobal Economic Monitor, February 2014

  10. Emerging Market Risk Scenarios EM Risk Premia Shock: Long-Term Government Bond Yields A Spike in EM Risk Premia: Impact on GDP %; GDP-weighted EM aggregate % change from baseline GDP level by the end of 2015 Sources: Oxford Economics, IIF Sources: Oxford Economics, IIF

  11. Global Risk Aversion Scenario Global Risk Shock (EM Risk Premia and Global Stock Market Decline): Impact on GDP U.S. Stock Market Scenarios: S&P 500 index % change from baseline GDP level by the end of 2015 Sources: Oxford Economics, IIF Sources: Oxford Economics, IIF

  12. Economic Policy and Financial Conditions

  13. Financial Conditions Remain Easy Global Equity Markets Goldman Sachs Financial Conditions Index* Index, Jan 2010 = 100 Index, value greater than 100 implies tightening Source: Goldman Sachs,*Weighted sum of short-term bond yield, a long term corporate yield, the exchange rate and a stock market variable Source: Bloomberg

  14. Smaller Fiscal Headwinds In 2014, Except For Japan • Change in Cyclically Adjusted Fiscal Balances • Emerging Economies • Mature Economies • % of potential GDP • % of potential GDP • Source: IMF Fiscal Monitor October 2013, IIF • Source: IMF Fiscal Monitor October 2013

  15. Monetary Policy Remains Easy in ME, But is Tightening in EM Trends in Official Policy Rates Bank Lending to Private Sector %, GDP-weighted average (both scales) % oya • Source: Datastream, Bloomberg • Source: IIF, IMF

  16. Capital Flows to Emerging Economies Under Pressure

  17. Capital Flows Have Been Volatile Recently • Net Inflows into EM Funds • Emerging Market External Bond Issuance* • $ billion • $ billion • Source: EPFR Source: Thomson Financial; IIF calculations. * Includes bonds issued in an external market, for the 30 major EM countries covered in the IIF's Capital Flows to EM report.

  18. Capital Inflows to EM Under Pressure • Exchange Rate Changes: Then and Now • Current Account Balances and Exchange Rate Changes • Sources: Bloomberg, IIF. • . • Sources: Bloomberg, IIF. • Current Account Balance is 2014 estimate.

  19. IIF Capital Flow Trackers Show Resilience • Portfolio Debt Inflows to EMs • Portfolio Equity Inflows to EMs • $ billion, IIF group of 30 economies • $ billion, IIF group of 30 economies Sources: IIF, EPFR, National Sources. Sources: IIF, EPFR, National Sources.

  20. Capital Flows Outlook Likely to be Choppy • Emerging Market Capital Inflows • Emerging Market Private Capital Inflows, Net • $ billion, quarterly data • $ billion % of GDP • Forecast • Source: IIF Capital Flows Report January 2014 • Source: IIF Capital Flows Report January 2014

  21. Drivers For EM Capital Flows • Financial Globalization and Deepening (2002-2012) • GDP Growth Differential EM/Mature Economies • percentage points • total financial assets in % of GDP • (foreign assets + foreign liabilities) / GDP • Source: IIF • Source: IIF Capital Flows Report October 2013

  22. U.S.: Achieving a Smooth Exit From Policy Stimulus

  23. U.S. Fiscal Consolidation Underway U.S. Federal Budget Balance U.S. Public Debt percent of GDP percent of GDP • Source: Congressional Budget Office • Source: Congressional Budget Office

  24. Housing Sector Turned Around, Balance Sheets Improved • Housing Starts and Prices • U.S. Corporate Profits and Household Net Worth • % of GDP(both axes) • millions of homes index, Jan 2000=100 • Source: Datastream • Source: Datastream

  25. Labor Market Challenges Remain U.S. Labor Market • U.S. Unemployment Rate percent • % of labor force • Extrapolation • *Mid-point of central tendency projections • Source: Datastream • Source: Datastream

  26. Fed Tapering is Underway • Fed Funds Target Rate during Fed Tightening Cycles • Fed Holdings of Securities • $ trillion • %, t in months • *Market expectations estimated from fed funds future and Eurodollar contracts • Sources: Bloomberg, CME Group, IIF • Source: Fed

  27. Euro Area: Still Work to Do

  28. Euro Area Recession has Ended… Manufacturing PMIs Real GDP Growth index, 50=breakeven % q/q, saar • Source: Bloomberg • Source: Datastream, IIF

  29. …But Fragmentation Continues… Cross-Country Dispersion in Business Sentiment and Bank Lending Rates Youth Unemployment % of youth labor force Stand. Dev., 3mma; DE, FR, IT, ES; all maturity and size • Source: Datastream, IIF • Source: ECB, European Commission

  30. …And Disinflation Remains A Concern Euro Area Headline Inflation and Projections HICP Inflation Rates Percentage change over a year ago Percentage change over a year ago • Source: ECB, Datastream • Source: Eurostat, National Sources

  31. Japan: Will Abenomics Work?

  32. Inflation and Inflation Expectations are Rising CPI Inflation Inflation Expectations % oya %, 1-month moving average Source: Bloomberg Source: Ministry of International Affairs & Communication

  33. Labor Reforms Key for Abenomics Success Base Wage Growth Remains Weak Gender Gap in Prime-Age Labor Force Participation (Male – Female) percent, 2012 percent, oya Source: Ministry of Health, Labor and Welfare Source: OECD

  34. Fiscal and Structural Challenges Remain Net Government Debt in Advanced Economies Potential Growth % of GDP % y/y Source: IMF Source: BoJ, IIF

  35. Challenges for Emerging Economies

  36. Chart on GDP growth per EM region from 2000 • A Broad – Based Slowdown • GDP Growth in Emerging Economies • GDP Growth in Emerging Economies • percent, y/y • percent, y/y • Source: IIF • Source: IIF

  37. EM Challenge 1 – Rising Debt Credit Intensity of Growth • Change in Non-Financial Private Sector Debt Ratio of private credit to GDP (%) • percentage points, difference between 2007Q1 and 2013Q1 • Source: BIS, IMF, IIF • Source: BIS, IMF, IIF

  38. EM Challenge 2 – Aging Populations • BRICS: Age Old Dependency • Emerging Markets: Growth in Population Aged 15-64 • ratio of people aged 65+ over population aged 15-64 • Percent, average annual growth • Source: UN, IIF • Source: UN

  39. Challenge 3 – Fading Drivers of Growth • Investment to GDP Ratio • Investment Efficiency • Investment to GDP ratio divided by GDP growth rate • Difference between 2012 and 2007 level • Source: IIF • Source: IIF

  40. Challenge 4 – Domestic and External Imbalances General Government Overall Balance Trends in Current Account Balance percent of GDP percent of GDP • Source: IIF • Source: IMF

  41. IIF EM Bank Lending Survey: Tighter Conditions EM Lending Conditions by Category Overall EM Bank Lending Conditions Diffusion index (below 50=easing, above 50=tightening) Diffusion index (below 50=easing, above 50=tightening) • Source: IIF Emerging Market Bank Lending Conditions Survey • Source: IIF Emerging Market Bank Lending Conditions Survey

  42. China: Looking for a Soft Landing Short-term Indicators Credit, Investment and GDP Growth • diffusion index (50=neutral) %, oya • %, oya Sources: Datastream, IIF. Sources: Datastream, IIF.

  43. China: Rebalancing Challenges • share of GDP • share of GDP • Source: Datastream, IIF • Source: Datastream, IIF

  44. References • Global Economic Monitor, February 2014: http://www.iif.com/emr/resources+3351.php • Emerging Markets Bank Lending Conditions Survey- 2013Q4, January 2014: http://www.iif.com/emr/resources+3333.php • Capital Flows to Emerging Market Economies, January 2014: http://www.iif.com/emr/capflows201401.php • Japan: Abenomics Faces A Tougher Second Year, January 2014: http://www.iif.com/emr/resources+3291.php • Structural Challenges to Emerging Market Growth, October 2013: http://www.iif.com/emr/resources+3080.php • China: Tale of Three Bears, September 2013: http://www.iif.com/emr/resources+3055.php

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