Economic Research Department Global Economic Outlook
June 2018
© Copyright Allianz
Photo courtesy: Olo Eetu on Unsplash
Confidence to be bold
GLOBAL GROWTH: HEALTHY ALBEIT LESS SYNCHRONIZED Global GDP growth forecasts (%) 2016
2017
2018 Latest forecast
2019 Revision (pps)
Latest forecast
Revision (pps)
1. World GDP growth remains on a solid footing albeit being less synchronized Three shocks since Q1: stronger than expected yields, higher commodity prices and higher (geo)political risk i. The growth peak seems behind us ii. Diverging growth engines as: i. Political risk is expected to persist ii. The Fed will continue pushing global rates higher iii. Effects from old fiscal stimulus measures start to fade away (China, Japan, US) but new one kicks-in (Europe) iv. Multi-speed normalization of monetary policies will diverge the trend in financial conditions v. FDI flows soften amid higher protectionism
World GDP growth
2.6
3.2
3.3
=
3.1
=
United States
1.5
2.3
2.9
=
2.4
=
Latin America Brazil
-0.9 -3.5
1.2 1.0
2.0 1.9
-0.3 -0.6
2.4 2.5
-0.4 -0.5
United Kingdom
1.9
1.7
1.4
-0.1
1.3
0.1
Eurozone members Germany France Italy Spain
1.7 1.9 1.1 1.0 3.3
2.6 2.5 2.3 1.6 3.1
2.1 2.2 1.8 1.2 2.7
-0.2 -0.3 -0.3 -0.2 0.2
1.9 1.9 2.0 0.8 2.4
-0.1 = 0.1 -0.4 0.1
Russia Turkey
-0.2 3.2
1.5 7.4
1.8 3.7
-0.1 -0.9
1.8 3.0
= -1.0
Asia China Japan India
5.0 6.7 1.0 7.1
5.2 6.9 1.7 6.7
5.1 6.6 1.2 7.3
0.1 0.1 = =
4.9 6.3 1.0 7.3
= 0.1 = =
3. Brent oil prices at 72 USD/bbl in 2018 and 69 USD/bbl in 2019. Spot price midJune 2018 at 75 USD/bbl.
Middle East Saudi Arabia
4.3 1.7
1.3 -0.7
2.4 1.7
-0.3 =
2.5 2.0
-0.5 =
4. A temporary surge in inflation expected in Q3 18 on the back of higher oil prices and depreciating currencies.
Africa South Africa
1.3 0.6
3.2 1.3
3.7 2.0
0.1 =
3.8 2.5
0.1 =
* Weights in glob al GDP at market price, 2017 NB: The revisions refer to the changes in our forecasts since the last quarter Fiscal year for India
2. The markets are likely to increasingly sanction the weakest in the loop: Stress for currencies in the some of the vulnerable emerging markets: Turkey and Argentina
5. USD to further appreciate in the next 6 months (+4.5%). EUR/USD: 1.10 at end2018; 1.17 at end-2019.
Sources: IHS. Euler Hermes. Allianz Research © Copyright Allianz
2
GLOBAL INSOLVENCIES DIVERGING REGIONAL FORECASTS EH Global and Regional Insolvency Indices (yearly change in %)
Insolvency Heat Map 2018 Strongly dete riorating
14%
Asia-Pacific Index
31% 33%
5% 6%
Africa & Middle East Index
+0% to +5%
2% 1%
Central & Eastern Europe Index
Western Europe Index
Latin America Index
North America Index
2018
-1% -1% -5%
Improving -5% to -1%
-9%
4%
17%
0%
-2% -4%
Strongly improving
4%
0%
10%
20%
30%
UK (+5%) Taiwan (+5%) New Zealand (+2%) Austria (+2%) Canada (0%) Japan (+0%)
Sweden (+2%) Singapore (+0%) Estonia (0%)
South Africa (-1%)
Switzerland (+1%)
Turkey (+5%) Norway (+5%) Australia (+3%) Belgium (+3%) Spain (0%)
Bulgaria (-5%)
Latvia (-2%) US (-2%) Brazil (-3%) Germany (-4%) The Netherlands (-5%) South Korea (-5%) Hong-Kong (-5%) Greece (-9%)
40%
Czech Rep (-17%) *
Italy (-6%) France (-7%)
Hungary (-7%) Ireland (-10%) Portugal (-10%) Lithuania (-18%)
Ve ry high lev el
Very low leve l
Low level
High level
(more than 10% below
(between 0% and 10% below the 2003-
(between 1% and 10% above the 2003-
2007 level)
2007 level)
the 2003-2007 level)
Sources: National statistics, Euler Hermes, Allianz Research
Slovakia (+80%) * China (+50%) Luxembourg (+12%) Denmark (+11%) Colombia (+8%) * Morocco (+8%) Chile (+7%)
strictly more than -5%
8% 6%
-10%
Finland (+6%)
Russia (0%)
2017
GLOBAL INSOLVENCY INDEX -20%
2019 6%
Poland (+10%)
strictly more than +5%
Deteriorating or stable
2%
Romania (+12%)
(more than 10% above the 2003-2007 level)
(*) Historical data are not fully consistent because of changes in law or national figures Sources: National statistics, Euler Hermes, Allianz Research
We expect our Global Insolvency Index to remain oriented on the upside for a second consecutive year in a row in 2018 (to +8% from +6% in 2017) and to keep on increasing in 2019 (+4%). However, this global trend will reflect different trends by regions and countries: the decrease in insolvencies to loose momentum in North America and Western Europe, but to soften faster in Western Europe than in the US ; the improvement in Latam to be more obvious in 2019 than in 2018; the surge in insolvencies to continue in China, notably re ‘zombie companies, and to boost the regional overall figures; the quasi-stabilization in Central and Eastern Europe to mask an increase in Poland and Turkey. © Copyright Allianz
3
OIL PRICES TO DECLINE TO 69 USD/BBL IN 2019 Oil forecasts
Global Inflationary pressure index
Copper to oil ratio vs world current activity index (y/y, %)
90
Copper to oil ratio
Job conditions Currencies Producer prices Energy prices Inflationary Pressure Index
World current activity index
5 85
6
6
4
4
2
2
3
80 75 70
2 1 0
65
0
0
-2
-2
-4
-4
-1 -2
60 Low scenario 55
4
Base scenario High scenario
-3 -4 -5
50 -6
-6
13
14
15
16
17
18
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Sources: IHS, Bloomberg. Allianz Research
We expect oil prices to be broadly stable until the end of 2018 and decline thereafter on the back of abundant supply absorbing net losses linked to Venezuela and Iran situation © Copyright Allianz
Sources: IHS, Bloomberg. Allianz Research
The copper to oil ratio is a good advanced indicator of global activity. Our 2019 GDP growth scenario suggests that the market will anticipate a deceleration of global demand and therefore exert downward pressures on oil prices
Sources: IHS, Bloomberg. Allianz Research
Our global inflationary pressure index suggests that the upcoming surge of global inflation should be temporary as the contribution of energy prices is significant 4
US: CLOSER TO OVERHEATING DUE TO FISCAL STIMULUS Contribution to US GDP growth (%, y/y)
US unemployed to jobs openings ratio
US corporate debt (as % of GDP)
3.50 3.00 2016
2.50
2017
2018
7
7
6
6
5
5
4
4 40.00
3
3
2019
2.00
50.00
45.00
1.50 1.00 0.50 GDP
Net exports
Government spending
Inventories
Residential investment
-1.00
Non Residential investment
-0.50
Consumption
0.00
35.00
2
2
1
1 30.00
0
0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
25.00
70
75
80
85
90
95
00
05
10
15
Sources : Euler Hermes, Allianz Research
Sources : Euler Hermes, Allianz Research
Sources : Euler Hermes, Allianz Research
US GDP growth is expected at 2.4% y/y in 2019 compared with 2.9% y/y in 2018. Higher rates will weigh on consumption and residential investment at a 2-year horizon
Amid a favorable investment cycle, demand for jobs is strong. For the first time since 1970s the number of US job offers is above the number of unemployed people, meaning that this unemployment is frictional only
US non-financial corporate sector is already stretched in terms of debt, suggesting an elevated sensitiveness to any shock on interest rates
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5
US: FINANCIAL DE-REGULATION TO INCREASE RISK Significant rules within 1 year of Presidency 45
US de-regulation and shadow banking
120
US financial de-regulation– US total deregulation
Health and Human Services Transportation
Times of bubble inflation
2
Other
100
Non-bank credit (% of GDP), lhs 100
1
Financial deregulation index, rhs
50
EPA
30
80
0
0 85
15
60
-1-50
40
-100 -2
20
-150 -3
90
95
00
05
10
15
Financial regulation spread -200
0 G. W. Bush
Obama
Trump
Sources : Euler Hermes, Allianz Research
President Trump issued four Executive Orders (EOs) in 2017 directing federal agencies to repeal two regulations for every new regulation © Copyright Allianz
0
-4 1952
1962
1972
1982
1992
2002
2012
Sources : Euler Hermes, Allianz Research
US ongoing de-regulation move is expected to free up USD 60bn per year of new credit. Past de-regulation moves have contributed to inflate the size of shadow banking, which is much less regulated and controlled
Sources : Euler Hermes, Allianz Research
Financial de-regulation inflates bubbles. This time, small banks (and therefore SMEs depending on their financing) heavily exposed to commercial real 6 estate, are particularly exposed
US: FED GOES FASTER IN TIGHTENING Key interest rates
US 10Y Treasury yield (%)
Capital inflows into the US (USD bn) 3000
3.50
6
6 Fed Funds Target rate US 10Y Treasury yield
3.00
5
ECB deposit rate
ECB refi rate
ECB lending rate
Fed policy rate
BOJ policy rate
World Interest rate
Other Portfolio
2500
5
FDI
2.50
Forecast 4
4
3
3
2000
2.00
1.50
1500 1.00
2
2
1
1
1000
0.50
0.00
500 -0.50
0
0 05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
-1.00 09
Sources : Euler Hermes, Allianz Research
The Fed is expected to hike twice in 2H18 and 2019. The US 10-yr Treasury yield should reach a level of 3.8% at the end of 2019 based on a progressive tightening of the monetary policy and increasing public deficit © Copyright Allianz
10
11
12
13
14
15
16
17
18
19
20
Sources : Euler Hermes, Allianz Research
The US monetary policy will remain expansionary in 2018 but turn restrictive in 2019. This tightening of the monetary policy will have notable effects on foreign economies
0 10
11
12
13
14
15
16
17
Sources: IHS Global Insight. Allianz Research
Capital flow back to the US. Yet beware of their nature 7
PROTECTIONISM: BETWEEN TRADE GAMES AND TRADE FEUD Current US tariff
Trade game (55%)
Negligible on global trade (>4% volume) US real GDP growth cut by -0.1pp; negligible impact on US inflation US current account deficit: -0.6pp to -3.0% of GDP US fiscal deficit: -1.1pp to -4.5% of GDP in 2019 Europe’s ongoing recovery not impacted China remains on soft landing trajectory
Trade feud (40%)
Global trade slows down (-2pp) US growth cut by -0.5pp US inflation durably up by +0.1 pp US CA deficit: -0.9pp to -3.3% of GDP(*) US fiscal deficit: -1.6pp to -5.0% of GDP Europe growth cut by -0.6pp China growth cut by -0.3pp, CNY depreciation similar to 2015 (-10%)
Trade War (5%)
Global trade contracts (-6pp from +4%) US growth cut by -1.7pp US inflation durably up by +0.4pp US CA deficit: +0.7pp to -1.7% of GDP (*) US fiscal deficit: -4.6pp to -8.0% of GDP Europe growth cut by -1.9pp China growth cut by -1pp only on the back of stabilizing policies; CNY depreciation (-20%) EM broad recession
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Source: Euler Hermes scenarios
Milestone Chinese imported products: USD50bn at 25% tariffs & 25% import tariffs on steel imported products & 10% import tariffs on aluminum imported products Milestone Chinese imported products: USD50bn at 25% tariffs & USD200bn at 10% tariffs
3.5% 4.0%
4.5%
or Chinese imported products: USD 50bn at 25% tariffs & US automotive imports: USD200bn at 25% tariffs Milestone Chinese imported products: USD500bn at 25% tariffs & US automotive imports: USD200bn at 25% tariffs
6.0%
11.2%
8
GLOBAL TRADE: NO REGIME-CHANGE DESPITE RISKS China current account and China imports
Global trade of goods and services 15%
Volume Price in local currency Currency impact Value in USD
10%
12%
12% Current Account (lhs)
5.5%
8% 1.4% 3.0%
0%
3.6%
4.9% 2.3%
4.1%
4%
0% -15% 15
16
17
18
09
11
13
15
17
19
Sources: IHS, Datastream, Allianz Research
Global trade is expected to decelerate to 4.1% in volume in 2018 and to 3.7% in 2019, but to grow at a healthy pace © Copyright Allianz
-40
-45
-45
-50
-50
-55
-55
6% 07
14
-40
8%
-10.2%
13
-35
3.7%
-5%
12
-35
10%
-1.5%
-10%
-30
China import (% global) (rhs)
5% 3.8% 2.1% 2.8%
-30
9.5% 7.7%
2.8%
US trade deficit (USD bn)
Sources: IHS, Datastream, Allianz Research
China tends to absorb a growing share of world demand despite its domestic deceleration via an increasing opening of its market
-60
-60 10
11
12
13
14
15
16
17
18
Sources: IHS, Datastream, Allianz Research
Front-loading strategies have been clearly at work before the implementation of tariffs in the US explaining the deepening of deficit 9
MARKETS SANCTIONED EMERGING MARKETS Emerging market currencies change in %
Commodity prices vs. EM exchange rate
Capital flows to Emerging Markets (USD bn) 800
40
-48.8%
2018
42
-24.7%
700
2016
44
-12.7%
Turkey Brazil
46
-10.8%
South Africa
48
-10.5%
Russia
600
500
Argentina
2017
50
Depreciation
-7.1%
India
-6.9%
Poland
52 400
-4.4%
Mexico
-3.9%
South Korea
-2.8%
Indonesia
54 56 300 Emerging Markets' exchange rate (vs. USD, right)
0.3%
58
China
Commodity prices (S&P GSCi, left) 200
60 11
Sources: IHS Global Insight. Allianz Research
Diversion: What goes to the US (more shortterm capital flows), no longer goes to the Emerging Markets (EM). Capital flows to EMs went below historical average from February (after a record level in January) © Copyright Allianz
12
13
14
15
16
17
-60%
-40%
-20%
0%
20%
40%
18
Sources: Bloomberg. Allianz Research
Disruption: EM Exchange rates and commodity prices show the same kind of disconnect than during the US Fed tapering aftermath. EM exchange rates and commodity prices should converge in the medium-run
Sources: Bloomberg. Allianz Research
Divergence: Countries with wider current account deficits (Argentina and Turkey) have suffered the most. Second-round effects should trigger more depreciation in China, but in a benign way (-2%). USD is expected to appreciate by +4% against most currencies over the 6 coming months 10
EMERGING MARKETS: WHO’S NEXT? Foreign exchange reserves in Emerging Markets, in % of liquidity needs
Emerging Markets foreign currency debt (% of GDP) 60%
250%
Foreign denominated public debt (%GDP) Foreign-denominated NFC debt (% GDP)
50%
200% High
40%
150% 30%
Adequate
100%
20%
Weak 10%
50% Very weak
China
India
Thailand
Brazil
Saudi Arabia
South Korea
Indonesia
Russia
Malaysia
Mexico
South Africa
Colombia
Czech Rep.
Chile
Poland
Turkey
Hungary
Argentina
0%
0%
* Total excluding China and Russia
Sources: IHS, Euler Hermes, Allianz Research
Refinancing needs: Argentina is topping foreign currency denominated (FCD) public debt ranking and the announced USD 50bn IMF program tackled it through direct fiscal support. Turkey shows the highest FCD corporate debt, but Hungary and Chile are not © Copyright Allianz far
Sources: IHS, Bloomberg. Allianz Research
Liquidity gaps: Weak foreign reserve levels expose countries to the risk of sudden disruptions. The usual suspects are there: Ukraine, Pakistan. Other economies like Hungary, Poland and Turkey are also in the vulnerability area. The dilemma is depreciation pressures vs. monetary policy tightening in overheating economies or with a maturing cycle 11
LATIN AMERICA: VOLATILITY & DOWNGRADED OUTLOOK Country risk and economic growth
Mexico
2.0% 2.5% 2.1%
2017 2017
2018
Fiscal and current account balances (% of GDP)
5%
D4 Venezuela
4% 3%
-4.0% -13.0 2017 -8.0%2019
2019 2019
1.8%
2.5% 3.1%
2017
2018
2%
2019
BB1 Colombia 2017 2017
C3
2018
2019 2019
B3 Brazil
Ecuador 3.0% 2.4% 2.0%
1.9%
2.5%
1.0% 2017 2017
BB1 Peru
2018
2019 2019 2017 2017
3.4% 4.0% 2.5%
2018
2019 2019
2017 2017
2018
•
2017
2017
3.9%
3.2%
2017 2018 2017
2018
2019 2019
Brazil
Chile
Peru
-2%
Mexico -3%
Costa Rica
Argentina
-7% -10% -9%
Argentina C3
Colombia
Panama
-8% -7% -6%
-5% -4%
-3%
-2% -1%
0%
1%
2%
3%
2.9%
Fiscal balance
1.4% 1.7% 2019 2019
Sources: IHS, Euler Hermes, Allianz Research 2017 2017
2018
2019 2019
Downside revision of regional growth by -0.36pp to +2.0% in 2018 (after +1.2% in 2017) and by -0.4pp to +2.4% in 2019 Due to downside revisions in Brazil and Argentina despite acceleration in Chile and Colombia (desynchronization) © Copyright Allianz
Guatemala -1%
A1
1.5%
•
0%
-6%
Chile
High risk
Sources: IMF, Euler Hermes, Allianz Research
Dominican Republic
-5%
3.1% 3.0% 2.8%
2019 2019
Medium risk Sensitive risk
Uruguay
1%
-4%
Uruguay BB2 Low risk
Current account balance
BB2
•
•
Argentina, case in point: twin deficits and high inflation; Now under control: (i) IMF USD 50bn stand-by arrangement to increase reserve adequacy and help provide for the country’s financing needs; (ii) Argentina back in the MSCI emerging markets index, which rewards Macri’s reforms Tight fiscal consolidation (achieve primary balance by 2020), persistent inflation (> 25%), less favorable global and local financial conditions and heightened political uncertainty should slow growth 12
LATIN AMERICA: MEXICO AND BRAZIL UNDER THE RADAR Mexico: exchange rate, inflation and central bank policy rate
Mexico: Industrial Production Index and business confidence Industrial Production index Business confidence
107
Inflation rate (y/y) Monetary policy rate Exchange rate (MXN/USD)
110 9%
105 105
95
103
Election of Donald Trump
8%
100
NAFTA likely delayed to 2019 and US yields go up. Markets price in a victory of AMLO
Brazil: public debt, fiscal and primary balance (% GDP) Gross general government debt (% of GDP, right scale) Fiscal balance (12m, left scale)
22
Primary balance (12m, left scale)
7%
20
6%
19
4%
70
5%
18
4%
17
3%
16
65 60 12
13
14
15
16
17
•
Resilient 2018: no more slack in the economy: wage growth has accelerated, unemployment has reached lows (3.40%) Industrial production still at a high level thanks to US cycle, but confidence starts receding
© Copyright Allianz
55%
-6%
50%
-8%
45%
15 16
17
18
-12%
18
40% 07
Sources: IHS, Euler Hermes, Allianz Research
•
60% -4%
-10%
Inflation target: 3% +/-1pp 2%
11
65%
-2%
75
95
70%
0%
80
97
75%
2%
85
99
80%
6% 21
90 101
President Temer's mandate
Volatility continues, but sound policy management helps (rates up at 7.75%)
•
Left-wing candidate expected to win, but fiscal slippage to be institutionally constrained. Main risk for 2019: mind NAFTA & energy sector where reforms could be unwound
09
10
11
12
13
14
15
16
17
18
Sources: IHS, Euler Hermes, Allianz Research
Sources: IHS, Euler Hermes, Allianz Research
•
08
•
Brazil recovery took a hit, public finances are weak. But Brazil should prove resilient to volatility in 2018 thanks to strong external position and central bank buffers (20 months of import cover)
•
Policy uncertainty remains: we should monitor official campaign this summer
13
CHINA: A MULTIFACETED STRATEGY IN RESPONSE TO THE US Economic patriotism
• Anti–US campaign and boycott of US products (as done with South Korea), tighter regulation at the borders and different treatment for US corporates
Diplomatic retaliations
• Partnership against US strategy to increase (with Asian markets such as Japan and South Korea, with the EU) • Potential leverage on Korean Peninsula issue
Protectionism on services
• Measures to reduce trade deficit in services to be considered. First in line would be financial services.
Mild RMB depreciation with RMB per USD kept below 6.9
• Currency depreciation to be used carefully to keep national purchasing power in check. • Marginal depreciation expected with RMB/USD at 6.6 in H2 2018 (-4% from H1) and 6.7 in 2019
Threats on US Treasuries
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• Threats (some turbulences) but no significant sell off is expected
14
CHINA: THE ECONOMY WOULD BE ABLE TO MAINTAIN A GROWTH AROUND +6.5% Policy tracker 12
Nominal disposable per capita income
40
Total industrial profits (YTD, y/y)
11
2017
30
Fiscal policy
Producer prices (y/y)
10 20
9
Monetary Policy 10
8 7
0
6
Capital account liberalization progress
-10
5 14
15
16
17
18
Households: solid income growth (8%+) will continue to support private consumption
© Copyright Allianz
2019
Gen. Gov. Net lending (% GDP)
-3.9
-4.0
-4.2
Benchmark lending rate (eop)
4.35
4.35
4.60
7 days - Reverse Repo (eop)
2.50
2.60
2.70
M2 growth
9.7
8.7
8.7
Reserve requirement ratios*
16.5
15.5
15.5
RMB per USD (average)
6.8
6.6
6.7
RMB per USD (eop)
6.5
6.7
6.7
Inward
Modest
Significant
Significant
Outward
Neutral
Modest
Modest
-20 14
Sources: IHS, Allianz Research
2018
Industrial revenues (YTD, y/y)
15
16
17
18 * For large banks Sources: IMF, Allianz Research
Sources: IHS, Allianz Research
Corporates: strong balance sheet will act as a buffer for debt repayments and tighter financing conditions
Policymakers to adopt a defensive strategy : •
Fiscal support to increase
•
Central bank to keep liquidity in-check (RRR cut) but maintain deleveraging efforts through regulation
•
Capital liberalization progress to be maintained but with further moves on inflows (financial opening) 15
ASIA: A SHELTER IN THE STORM OF EMERGING? APAC:4.9%
Activity - Economic growth is set to slow to +4.9% in 2018 (revised up from +4.8%) and +4.8% in 2019 as China’s soft landing continues, Japan’s fiscal stimulus effects fade away. Emerging ASEAN to maintain firm growth rate supported by strong domestic demand solid export growth
Japan South Korea A1 BB1
1.2%
2.9%
Financing conditions - Financing conditions tighten to reduce debt (China, e.g.), because of inflation (South Korea, Malaysia, Philippines, e.g.) and to reduce pressure on the currency (India, Indonesia).
China Hong KongTaiwan B2 A2 A2
6.6% India B1 7.3%**
2.6%
Inflation – Upward pressures to increase especially from the second half of the year as a result of (i) currency depreciation, (ii) oil prices, and (iii) tight(er) job markets.
Philppines B1
6.8%
Thailand B1 3.8% Malaysia BB2 5.4%
Lowrisk Mediumrisk Sensitiverisk High risk
3.6%
Singapore AA2 3.0%
AA1 Australia
2.7% Indonesia B1 5.2%
Countries vulnerabilities check-up. Risk on growth is limited in large economies thanks to solid buffers, high in frontier markets more vulnerable.
New Zealand AA1
2.8%
• Currency risk - Twin deficits countries to remain under pressure (India, Indonesia). Risk of policy mistakes in Malaysia and Philippines is also under watch.
ASEAN-6* 5.0%
• Confidence and risk on growth – This concerns frontier and twin deficits markets such as Sri Lanka and Pakistan as buffers to keep growth in check are really thin.
Sources: IHS, Allianz Research
© Copyright Allianz
16
ASIA: CURRENCY TURBULENCES BUT LIMITED IMPACT ON GROWTH 8%
18
4% South Korea
New Zealand
18
19
Australia
1.50
1.75
2.00
China
4.35
4.35
4.60
India
6.00
6.50
6.75
Indonesia
4.25
5.50
5.50
Japan
-0.10
-0.10
0.10
South Korea
1.50
1.75
2.00
Malaysia
3.00
3.25
3.50
Philippines
3.00
3.50
3.75
Taiwan
1.375
1.375
1.500
Thailand
1.500
1.500
1.750
0% -2% -4%
Philippines Australia Indonesia Malaysia Bangladesh China Japan Vietnam Sri lanka
Thailand Taiwan
-6% Pakistan -8% -10%
-5%
India 0%
5% 10% CA Balance
15%
N.B. Fiscal balance refers to general government balance (IMF definition) Sources: IMF, Allianz Research
20%
China 16
Sources: IHS, Allianz Research
14 12
Import Cover (months)
Hong Kong
Fiscal Balance
17
Singapore
6%
2%
Public debt vs import cover (goods)
Monetary policy rates (eop)
Current account balance vs fiscal balance
10
8
Philippines BangladesThailand h Indonesia
6
Malaysia
4
Vietnam
India
Sri lanka Pakistan
2 0 0%
20%
40%
60%
80%
100%
Public debt (% GDP)
Sources: IHS, Allianz Research
Expect some turbulences on the currencies of twin deficits markets. Yet, pre-emptive tightening should ease tensions going forward. Moreover, if push were to shove, the region has enough buffer to keep growth in-check © Copyright Allianz
17
EMERGING EUROPE: WHO IS THE MOST VULNERABLE (1) Nominal wage growth Q1 2018 (% y/y)
Local currency vs. USD and EUR (% YTD; “-” indicates depreciation)
Turkey
LCU vs. USD
14.8%
Romania
12.7%
Hungary
12.4%
Latvia
8.6%
Czechia
8.6%
Lithuania
8.4%
Estonia
LCU vs. EUR 7.3% 8.7%
Ukraine
-0.2%
Kazakhstan Serbia
-1.0%
Romania
-1.2%
1.1% 0.3%
Poland
-3.5% -2.0%
Hungary
-3.6% -2.2%
6.9%
Slovakia
6.5%
Slovenia
4.8%
Russia
Croatia
4.8%
Turkey
0%
5%
10%
Sources: National statistics, IHS Markit, Allianz Research
15%
Slovakia
2.6%
May 2018
Russia
2.5%
End-2017
2.3% 2.0% 1.4%
Croatia
0.1%
11.7%
Ukraine Estonia
3.0%
Lithuania
2.9% 2.6%
Bulgaria
-6.8% -5.3% -16.2% -14.1%
-20% -15% -10%
2.8%
Slovenia
7.1%
Poland
5.4%
Romania
Latvia
-1.7% -0.4%
Czech Republic
12.1%
Turkey
Hungary
0.8% 0.7%
Croatia
7.7%
Bulgaria
CPI inflation (% y/y)
Czechia
2.2%
Serbia
2.1% 1.7%
Poland -5%
0%
Sources: National statistics, IHS Markit, Allianz Research
5%
10%
0%
5%
10%
15%
Sources: National statistics, IHS Markit, Allianz Research
• Nominal wage growth has been well above productivity growth in most Emerging European countries • So far, wage growth has not yet stoked inflation as firms have absorbed higher wage costs by accepting smaller profit margins, rather than raising their prices. • The exceptions are Turkey and Romania where inflation is now well above targets. In Turkey, sharp currency depreciation has contributed as well. Hungary needs to be watched • ©Ukraine has been in crisis for many year and will remain so. 18 Copyright Allianz 11-Jul-18
18
EMERGING EUROPE: WHO IS THE MOST VULNERABLE (2) Fiscal and current account balance
Gross external financing requirement* (% of FX reserves) 300%
7%
Current account balance (% of GDP)
270%
Slovenia
6% 5%
Bulgaria
219%
Hungary
4%
Croatia Estonia
3%
200%
Russia
2%
136% 134%
Czechia
1% Poland
0%
Lithuania
102%
Latvia
-1%
100%
Slovakia
75% 75%
-2% -3%
Romania
-4%
38% Ukraine
-6%
6%
Serbia
-5%
0%
Turkey
-7% -5% -4% -3% -2% -1%
0%
1%
2%
Fiscal balance (% of GDP) Sources: National statistics, IHS Markit, Allianz Research
3%
4%
5%
* Defined as sum of current account deficit and external debt maturing within the next 12 months. Sources: National statistics, IMF, IHS Markit, Allianz Research
• Turkey, Ukraine and Romania have relatively large twin deficits and very high external financing requirements in relation to their FX reserves • Hungary has a current account surplus and acceptable fiscal deficit. Its external financing needs are also adequate • Poland has external financing requirements in relation to its FX reserves but otherwise relatively solid macro fundamentals (e.g. twin surplus, low inflation) © Copyright Allianz
19
RUSSIA – HIGHER OIL PRICES MORE THAN OFFSET ANY IMPACT FROM NEW US SANCTIONS Exchange rate and Brent oil price 140 130 120 110 100 90
March 2014: Crimean annexation March-July 2014: phases 1&2&3 of sanctions against Russia August 2014: Russian counter-sanctions Rapid decline in oil prices
Brent (USD/bbl; left scale) RUB per USD (right scale)
10% 20
RUB exchange rate crisis
70 60
Renewed currency weakness in H2 2015 as oil price drops again
8%
2 August 2017: Expanded soft US sanctions take effect
6 April 2018: New, tougher US sanctions imposed
35
4%
40
2%
45
+3.8% in Apr-May +2.5% in Apr-May
0%
50 55
-2% -4%
40
65
-6%
30
70
20
75
10
80
0
85
Source: IHS Markit, Allianz Research
Industrial production growth
6%
60
50
Retail sales growth
25 30
80
• • • • • •
Industrial production and real retail sales growth (y/y; quarterly averages)
-8% -10% -12% 12 13 14 15 16 17 Source: National statistics, IHS, Allianz Research
The latest sanctions (imposed by US on 6 April) seem to be the first ones that have an impact on the USDRUB rate. But markets have calmed as President Trump drew back from further new sanctions (which many had expected) in mid-April. RUB has stabilized around 62-63 vs. USD which is adequate and supportive for exports. The imposed sanctions will certainly affect the targeted companies, but Russian authorities have pledged to help if needed. And the higher oil price is positive news for the Russian economy. Activity indicators point to strengthening momentum in Q2. © Copyright Allianz 12-Jun-2018 Overall, we forecast GDP growth of +1.8% in both 2018 and 2019 (after +1.5% in 2017).
18
20
GCC: GRADUAL FISCAL AND EXTERNAL REBALANCING IS UNDERWAY, BUT MIND THE WEAKER SPOTS Fiscal and External Balance in the GCC
External debt service (% of exports earnings)
Public and External Debt in the GCC 160%
10%
Kuwait
5%
Qatar Saudi Arabia 0%
UAE
UAE
Bahrain Saudi Arabia -5%
Bahrain
Kuwait
Bahrain
140%
External debt (% of GDP)
Current account balance (% of GDP)
2018f
Oman Qatar
-10%
-15%
2014
20%
2018
15%
100%
2018f
80%
UAE
10%
Qatar
5%
60%
UAE
Oman
Kuwait Qatar
Oman
Kuwait
2016
2014
120%
40%
-20%
Bahrain
25%
20%
0%
Saudi Arabia
Oman Saudi Arabia
-25% -25%
0% -20%
-15%
-10%
-5%
0%
Fiscal balance (% of GDP) Sources: IMF, IHS, Allianz Research
• After sharply deteriorating in the wake of low oil prices in 2014-2017, fiscal and external accounts are rebalancing in 2018 as oil prices are rising • Bahrain and Oman are weaker and lagging © Copyright Allianz
5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Public debt (% of GDP) Sources: IMF, IHS, Allianz Research forecasts
• Likewise, public and external debt levels have risen markedly since 2014 across the GCC. • Debt risks in UAE and Qatar are offset by large SWFs which make them net external creditors • Again, Bahrain and Oman are the weak spots as their smaller SWFs provide less cushio
Sources: IHS Markit, Allianz Research
• Principal and interest payments have risen over the past years but are still adequate on average (12% of export earnings) • Bahrain with an external debt 21 service ratio of 21% is borderline
AFRICA: KEEP ON RUNNING, TRULY, MADLY, BLINDLY Growth in Africa, per region
East Ethiopia Kenya Tanzania Uganda Central Cameroon Congo, DR Southern South Africa Angola Zambia
2019 4.3
C3 B1 C2 C4
3.9 3.7 4.5 4.4 1.1
3.2 3.3 1.2 4.3 1.0
3.4 2.0 4.0 4.2 1.9
3.6 2.7 3.0 5.2 2.5
3.7 2.5 3.0 5.8 2.5
C2 B1 D3 C2
3.0 8.9 3.8 2.7 6.5
0.1 8.4 3.5 -1.6 6.7
2.5 7.8 8.4 0.8 7.2
4.0 8.2 9.0 2.5 7.2
4.7 8.5 7.5 3.5 7.5
D3 C2 C3 C3
7.2 10.4 5.7 7.0 5.7
6.2 8.0 5.9 7.0 2.3
7.1 10.9 4.8 7.1 4.5
7.3 9.0 6.5 7.2 6.0
7.1 9.5 5.7 7.5 5.0
C3 D4
2.8 5.8 6.9
0.5 4.5 2.4
1.0 3.0 3.0
1.9 3.7 3.5
2.9 4.0 4.0
B2 D3 C3
3.1 1.3 3.0 2.9
1.0 0.6 -0.8 3.7
2.1 1.3 0.7 3.9
2.5 2.0 2.0 4.5
3.8 2.5 3.0 4.7
25%
180% 160%
currency appreciation/ stability vs. USD
5%
NGA CMR CIV MAR 20% 40% BFA -5% 0% COD GHA EGY MLI GAB SEN DZA -15%
2018
120% 100% 80%
60%
80% GNQ
60% 40% 20% 0%
COG -25% Commodity exports (% GDP)
-35%
External debt, % of GDP
East & South
20%
Size of the bubble: currency depreciation
15%
BWA
10%
180%
Color of the bubble: 60% 40%
Currency appreciation/ stability vs. USD
7+ months 5-7 months 4-5 months 0-4 months
160%
2000
140%
2018
120% 100% 80%
5% 0%
2002
140%
7+ months 5-7 months 4-5 months 0-4 months
15%
Angola Benin Burkina Faso Cameroon CAR Chad Congo rep Cote d'Ivoire Egypt Ethiopia Gabon Gambia Ghana Guinea Kenya Madagascar Malawi Mali Mozambique Niger Nigeria Rwanda Senegal South africa Tanzania Uganda Zambia
West Cote d'Ivoire Ghana Nigeria Senegal
2018 3.9
60%
MDG
0% MUS 20% 40% 60% AGO UGAZAF ZMB -5% KEN LSO -10% ETH NAM RWA Commodity -15% exports (% GDP)
40%
80%
*Egypt is included to Africa; Lybia excluded from regional average
20% 0%
Angola Benin Burkina Faso Cameroon CAR Chad Congo Cote d'Ivoire Egypt Ethiopia Gabon Gambia Ghana Guinea Kenya Madagascar Malawi Mali Mozambique Niger Nigeria Rwanda Senegal South africa Tanzania Uganda Zambia
North* Algeria Morocco Egypt Tunisia
2017 3.4
Current account balance (% GDP)
Africa*
2016 2.0
Current account balance (% GDP)
2015 3.4
Public debt, % of GDP
Exchange rate vulnerability North & West
Sources: Allianz Research
Sources: Euler Hermes
Sources: World Bank, Allianz Research
Growth is accelerating in Africa, particularly in key Eastern and Western economies.
Countries with the poorest liquidity levels are vulnerable to capital flows reversals.
However, too much financing through debt may derail the growth momentum.
© Copyright Allianz
22
EUROPE: SLOWER GROWTH BUT STILL ABOVE POTENTIAL 65
Eurozone
Germany
France
Spain
Extra and intra-EU exports 10%
Extra-EU exports, 12m/12m Intra-EU exports, 12m/12m
8%
60
GDP growth and components
3,0
Italy
Stocks
Investment
Public Spending
Consumer Spending
GDP growth
2,6
2,5
6%
Net exports
2,1
2,0
55
1,5
Domestic demand +1.4pp
50
1,9
1,8
4%
1,0
2%
0,5 0%
45
0,0 -0,5
Source: IHS, Euler Hermes Allianz Research
The soft-patch is not as severe as it may seem: Manufacturing PMIs remain in expansionary territory and suggest moderate growth in activity © Copyright Allianz
04/18
01/18
10/17
07/17
04/17
01/17
10/16
07/16
04/16
18
01/16
17
10/15
16
07/15
15
04/15
14
01/15
-2% 40
Domestic demand +1.8pp
Manufacturing PMI Index
Source: IHS, Euler Hermes Allianz Research
Intra-EU trade shows more resilience and offsets part of the external trade shock, partly linked to protectionism
-1,0 2016
2017
2018
2019
Source: IHS, Euler Hermes Allianz Research
Boosting the domestic engines: public spending in Germany is expected to accelerate in 2019 while the European reform agenda is back in the forefront 23
EUROPE: STILL ENOUGH BUFFERS Eurozone: consumer spending and disposable income
Eurozone: government spending vs primary balance Government spending, y/y - lhs
Real consumer spending (y/y)
Primary balance, change in pp - rhs
Households' real disposable income (y/y)
6%
3.0%
5%
2.0%
48%
12%
46%
10% 8%
44%
2%
-3.0%
0%
2%
0%
38%
-1%
0%
36%
-2%
-5.0%
-4% 07 08 09 10 11 12 13 14 15 16 17 18 19
Source: IHS, Euler Hermes Allianz Research
Europe becomes more fiscally expansionary, notably in 2019. This is the case for Germany. © Copyright Allianz
Germany
Spain
Italy
-4%
32%
-3% 08 09 10 11 12 13 14 15 16 17 18 19
-2% Eurozone
34%
-4.0%
-1%
Spain
4%
Source: IHS, Euler Hermes Allianz Research
Europe is at the start of the WS/PS loop which will allow households to benefit from higher real purchasing power starting in H2 2018. This is the case for France.
2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3
1%
Italy
40%
2% -2.0%
France
6%
1%
-1.0%
Germany
42%
0.0% 3%
Manufacturing turnover growth, 12m/12m
3%
1.0%
4%
Non-financial corporations margins, % of value added
Source: IHS, Euler Hermes Allianz Research
Margins remain at a relatively high level, but they are expected to have peaked at end-2017, notably in Spain and Italy.
-6% -8% 12
13
14
15
16
17
18
Sources: IHS, Euler Hermes Allianz Research
Turnover growth has cooled down but remains above pre-crisis average. Spain enjoys high growth. 24
GERMANY, FRANCE AND SPAIN: GROWTH ENGINES France : Unemployment, wages and inflation
Germany: Nominal income and selected components (percentage change y/y) 11%
Unemployment rate (%, left)
Spain: Policy uncertainty index and GDP growth (y/y) 4%
6
Inflation (y/y, right)
5
Net wages and salaries
4.2 4.2
4
210
4.4
Operating profits, property and Monetary welfare entrepreneurial Disposable benefits income, nominal income
4.0
10%
4% 3%
3% 170
2%
3.8
3.8
150
9%
3.4 2.7
190
Forecasts
4.1
3.7
3
5%
Policy uncertainty (left-hand scale) GDP growth (y/y, right-hand scale)
Wages (y/y change in %, right)
130
Disposable income, real
2.9
1%
2%
0%
2.5 8%
2.0
2
1%
-1%
110
1.9
-2%
1.6 90
7%
1
-3%
0% 70
0
6%
2017 2018 2019
-1% 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Sources: IHS Global Insight. Allianz Research
Sources: IHS Global Insight. Allianz Research
Germany: Economic soft-patch temporary. Employment growth, tax relief and additional monetary social benefits key drivers of strong rise in disposable income and thus of private consumption
France: Household consumption was hit hard by inflation. Wage growth acceleration should close the purchasing power gap from H2 and drive GDP growth to +1.8% in 2018 and +2% in 2019.
© Copyright Allianz
-4%
50
-5% 08
09
10
11
12
13
14
15
16
17
18
19
Sources: IHS Global Insight. Allianz Research
Spain: Political uncertainty has a negligible impact on activity. +3.1% in 2017, expect +2.7% in 2018 and +2.4% in 2019. Moderate deceleration of private consumption in sight. Fiscal policy a bit more expansionary in the next 2 years
25
EUROPE: AREAS OF TENSION 1,7
1200 Italy France Spain Greece Portugal
1000
800
end-2018: 1.10; average 2018: 1.17 end-2019: 1.17; average 2019: 1.14
Bank interest rates for SMEs (1 to 5 year maturity)
German 10-year vs ECB key rates
EUR/USD
10-year spreads vs Bund
5
1,6
German 10-year bund Refi rate Deposit rate
7
4
6
3
5
2
4
1
3
1,5 1,4
600
1,3 400
1,2 0
1,1
200
-1
1,0 07 08 09 10 11 12 13 14 15 16 17 18 19
0 16
17
2
Spain Italy Germany France
1 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
07 08 09 10 11 12 13 14 15 16 17
18
Sources : Euler Hermes, Allianz Research
Bond spreads are contained (except in Italy as they reflect the political stress). Downside risk could come from a generalized spread widening © Copyright Allianz
Sources : Euler Hermes, Allianz Research
Sources : Euler Hermes, Allianz Research
Sources : Euler Hermes, Allianz Research
Diverging growth prospects and monetary policy should drag the EUR/USD to 1.10 at end-2018
Contained inflation (+1.7% in 2018-19) and softer growth justify a progressive normalization by the ECB
The private sector should still enjoy very low interest rates until H2 2019 26
ITALY: FINANCIAL STRESS IS HERE TO STAY Economic and financial scenarios
Portfolio net inflows vs ECB QE Italian bond purchases
Sources: Bank of Italy, Allianz Research Theoretical ratio capital key amount/Total sovereign debt Actual ratio amount bought/Total sovereign debt
50% 40% 30% 20% Source: Allianz Research
10%
© Copyright Allianz
Italy
Belgium
Ireland
Portugal
France
Austria
Spain
Finland
The Netherlands
Germany
0%
27
EUROPEAN REFORM ROADMAP: WHAT COULD WE EXPECT NEXT?
June 22: The Eurogroup agreed on further debt relief for Greece and the right to use the EUR24.1bn cash buffer
EU Summit:
EU Summit:
EU Summit:
28-29 June
18-19 October
13-14 December
• Migration: Agreement on establishing disembarkation platforms to process asylum requests outside the EU; administrative procedures within the EU to reduce movement of asylum seekers within the EU • Security: PESCO, deepening of EU-NATO cooperation • ESM goes EMF which will allow faster financial interventions; agreement on the Single Bank Resolution being part of the EMF • Agreement to work on taxing digital companies • Reinforcing the WTO rules • Foster innovation in the Eurozone
© Copyright Allianz
• Agreement on a framework on Brexit exit and trade deal
• Agreement on an Eurozone budget as part of the EU multiannual budget to be implemented by 2021 • Agreement to establish a European unemployment stabilization fund • Agreement on a time schedule for implementing the Common Deposit Guarantee Scheme once the EBA stress tests prove the reduction of banking risk across all Eurozone banks • Agreement to work on a common corporation tax regime • Agreement on majority voting instead of unanimity when making foreign policy decisions so as to increase the effectiveness of EU policymaking 28
UNITED KINGDOM: SOFTER BREXIT LIKELY GBP/EUR and GBP/USD
Economic forecasts Weight
2016
2017
2018
2019
GDP
Royaume-Uni
100%
1.9
1.8
1.4
1.3
Consumer Spending
66%
2.9
1.7
1.0
1.0
Public Spending
19%
0.8
0.1
1.6
1.4
Investment
21%
1.0
4.5
2.9
1.0
Construction
9%
2.5
6.8
2.8
1.4
Business investment
9%
-0.5
2.4
1.1
1.4
-4%
0.4
-0.9
-0.1
0.1
Exports
28%
2.3
5.7
1.3
1.9
Imports
30%
4.8
3.2
1.6
1.7
Stocks
*
Net exports
*
Current account
**
-2%
-0.8
0.6
-0.1
0.0
-114
-83
-81
-69
-5.8
-4.1
-3.9
-3.2
Unemployment rate
4.9
4.5
4.2
4.0
Wages
2.4
2.2
2.9
2.7
Inflation
0.9
2.7
2.4
2.3
General government balance (% of GDP) -3.0
-1.9
-2.2
-2.4
Public debt (% of GDP)
88.2
87.7
87.4
87.3
1963.3
2037.6
2096.3
2158.8
Current account (% of GDP)
Nominal GDP
**
Change o ver the perio d, unless o therwise indicated: * co ntributio n to GDP gro wth
Higher probability of a soft Brexit
2,5 GBP/USD
GBP/EUR
2,0
1,5
1.34 1,0
1.12
0,5
Extensive FTA ?
0,0 07 08 09 10 11 12 13 14 15 16 17 18
Sources: Bloomberg, Allianz Research
** mds de £
Slowest GDP growth since 2009 with below potential consumer spending © Copyright Allianz
• Brexiters showed they are capable to compromise and avoid a political deadlock as they showed during the last two ‘meaningful votes’ in the Parliament • The Parliament will have a say on the deal before it goes to the European Parliament. • The ultimate deadline for a deal fixed to end-2018 to allow enough time for ratification • An EU Association Agreement (Ukrainestyle) is likely. It will sets the framework but gets the details later. This would concern topics like trade, internal security, thematic cooperation, external security and defense.
The BoE relatively hawkish stance to limit the downward move on the currency: -4% depreciation of the GBP vs. the USD and -1% vs. the EUR at end-2018
• The UK needs to publish the White Paper explaining their preferred position. Staying in the Custom Union would be an easier fix to the Northern Ireland issue • EU takes a pragmatic stance and looks capable for compromise 29
Economic Research Department
26.06.2018
© Copyright Allianz
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