global economic outlook - abc-amega group documents/ncca...trade flows • u.s. recovery weak but...

Byron M. Shoulton 1

Byron M. Shoulton, International Economist

GLOBAL ECONOMIC OUTLOOK

September 2016

Overview

• World of uncertainty - Brexit, EU, Turkey, U.S. elections.

• Dependence on low interest rates for growth - unsustainable.

• Global GDP growth to remain sluggish, but relatively stable.

• Middle East instability at new highs.

• Regions display considerable growth volatility.

September 2016 2Byron M. Shoulton

World of Risks

September 2016 Byron M. Shoulton 3

Global Trends

• Industrial production rebounded in first half 2016. Momentum appears to have peaked.

• Level of global industrial production to continue below long-run trend.

• Real economy relatively stable; central banks extraordinarily accommodative. Bond purchases – hit new highs.


Global Trends

• Combination of below trend growth & CB bond purchases move global yields to historic lows. Unsustainable!!

• No immediate ‘correction’ seen; negative yield experiment weighs on global economy.

• Search for higher yields help push up credit risk appetite!

• Continued low commodity prices.

September 2016 Byron M..Shoulton 5

U.S.A.

• Core of economy -households - remain fairly resilient.

• Economy grew at 1.1% during 1st half. Weaker than initially thought.

• Business investment remain soft; reflect cutbacks in energy sector.

• Housing sector, construction: strong. • 2017 GDP growth forecast: 1.5%.


U.S.A.

• Strong dollar reflect investor shift to ‘safe’ heaven currencies [dollar, yen].

• Result: U.S. exports costlier for foreigners; imports cheaper.

• Strong dollar weighs on profits of U.S. multinationals.

• Inventory drawdown complete: pick-up in activity forecast over coming months.


U.S.A.

• World watches anxiously for outcome of U.S. elections.

• Fed cautious in wake of global volatility; indicate it’s time for interest rate hike.

• Global uncertainty – reinforce need for Fed caution toward raising rates.

• Fed likely to make small changes in interest rate policy.

• Seek signs of sustained global market confidence - sufficient to absorb tightening.


U.K. exits EU

• U.K. DECISION TO LEAVE EU – big surprise.• Dented confidence; while REGIONAL

ECONOMOMIC GROWTH REMAIN WEAK.

• INVESTMENTS TO SLOW.

• U.K. EXPECTED TO LOOSE BUSINESS, JOBS. ECONOMY TO SUFFER IN INTERIM.

• OTHER COUNTRIES COULD FOLLOW U.K.’S EXAMPLE - presents risk to EU’s future!


Beyond Brexit

• Prolonged negotiations with E.U. – will exceed 2-years.

• U.K. seek trade, financial relationship that maintain its access to single market.

• Doubtful E.U. members willing to agree to such liberal parameters.

• Despite gloomy U.K. outlook retailers report higher sales.


EU Beyond Brexit

• German business confidence hit. A blow to economic calm since Brexit vote.

• Investors face mixed signals about Germany’s economy since Brexit vote.

• Merkel under intense pressure.• Euro-zone growth weak & uncertain.


Beyond Brexit

• Slowdown of investments; fallout, direction to be determined.

• U.K. LOOSE STATUS AS FINANCIAL GATEWAY TO EU.

• SO FAR, U.K. ECONOMY MORE RESILIENT THAN PREDICTED.

• OTHER COUNTRIES COULD FOLLOW U.K.’S EXAMPLE - presents risk to EU’s future!


Euro-zone Outlook

• Confusing; hard data point to continued yet fragile regional growth.

• German business expectations fell to two-year lows.


EUROPE

• UNCERTAINTY SET OFF BY BREXIT VOTE will have negative impact.

• E.U. ECONOMIC STABILITY TO DEPEND ON AGREEMENT FORGED WITH U.K. GOVERNMENT.

• Challenge: PREVENTING MORE DEPARTURES FROM E.U.

• KEY GOAL – PRESERVE UNION.


U.K.

• U.K. government fail to explain Brexitstrategy, so far.

• Appear confused about what course to pursue on trade with EU.

• U.K.’s future, once it loses its role as financial gateway to the EU?

• Can the UK negotiate a good free-trade deal with EU and non-EU countries?


World of Risks

September 2016 Byron Shoulton 16

CHINA

• Economy grows at slowest pace in 25 years.• Weak Chinese demand hits Asian economies.

• Hits raw material producers e.g.Brazil, South Africa, Chile, Peru, Colombia, et al].

• Continued weak commodity prices as Chinese commodity stockpiles – overflow.

• Overcapacity in steel, copper, aluminum, et al.

September 2016 17Byron M, Shoulton

China’s role

• Weak Chinese currency – down 7% over 2 years - against currency basket.

• Downward pressure on prices globally –i.e. exporting deflation.

• Producer prices consistently weaker• Chinese stockpiles of raw materials, keep

global prices weak.


China

– Invested heavily in primary sources to access raw materials globally.

– e.g. Africa, Latam, Central America, Caribbean.Keep stockpiles close to NA market.

– Years of downward influence on prices = via control of raw material supplies.

– Net benefactor of any uptick in global demand.– Political & economic model supportive of

foreign investment to secure raw material supplies.


China

• Domestic growth spurred by huge government stimulus initiatives.

• High Chinese domestic debt load; not fully accounted for - due to significant ‘shadow’ banking activity.

• Expectation that Chinese government would selectively rescue troubled financial system.


Chinese bright spot

• Substantial Chinese car market growth –4 months in double-digits.

• One of few bright spots.• Vehicle demand spurred by tax breaks

applicable to 70% of all vehicles.

• Demand for cars remain strong.September 2016 Byron M. Shoulton 21

Trade flows

• U.S. recovery weak but consistent.• Rest of the world – yet to gain

momentum.• 4th consecutive year of weak global trade

growth – Trend continues into 2017.• Protectionism on the rise globally. • Trade wars not impossible.


Trade trends

• Global trade 2% growth: new norm. • Compares with 4% average growth in

decade prior to great recession.• China’s trade with Asia boosted regional

economies over 25 years.• Regional trade flows dipped since China’s

slowdown.• Demand has taken a dive!!


ASIA READJUSTS

• ASIAN ECONOMIES READJUSTS TO WEAK CHINESE DEMAND.

• Asia leads gentle global recovery.• Hong Kong, Taiwan, Mongolia, others

experience decline in trade flows to/from China.

• Southeast Asia enjoy upsurge in economic expansion.


SE Asia

• Indonesia, largest regional economy; GDP growth 5.2% – fastest pace in 3 years.

• Philippines GDP growth 7%; fastest pace in 3 years.

• Vietnam, Malaysia, Thailand, Bangladesh, Cambodia – attracts investment in manufacturing for export.

September 2016 Byron M .Shoulton 25

Capital Flows

• Cross-border capital flows refocus – 2017 will test high risk markets.

• Competition for new markets heats up.Partly reflected in spike in M&A!!

• Capital searches for higher returns.


Russia

• Commodity dependent economy – suffers from weak global prices.

• U.S. & EU sanctions continue to bite.• Recession has been steep; to ease slightly in

2017.• Weak oil & gas prices – constrains growth.• Lack of access to Western capital markets –

takes toll.• Europeans could seek to end sanctions on

Russia in 2017.


Russia

• Undermine Ukraine’s stability – source of continued regional unease.

• Potent force in Middle East; defender of Syrian regime; closer ties with Turkey.

• Successful strategy counters U.S./ western influence globally.

• Russia unable to attract adequate new foreign investment.

September 2016 Byron M.Shoulton 28

Turkey

• Failed coup – June 2016 unleashed backlash by President Erdogan.

• Erdogan purges military, academia, banking, corporate, religious community.

• Strains with U.S. and EU – perceived as less supportive of regime in face of coup threat.


Turkey

• Economy heavily reliant on foreign capital inflows to finance current account deficit.

• Will likely see cost increase for access to foreign capital.

• Turkey’s geopolitical importance keeps capital available from banks, international institutions.

• Sovereign outlook & for banks revised to negative – reflects likelihood of government not able to provide support.


Latin America

• Low commodity prices weigh on revenues.

• Regional slowdown in government spending growth.

• Hurts long-term capital spending e.g. Mexico & Colombia.

• Governments pare back spending on infrastructure & other key investments.


Latin America

• LATAM consumers under pressure:-High unemployment, elevated inflation & government fiscal consolidation erodes consumer purchasing power.

• Weighs on regional growth.


Short-term outlook: some pick-up in growth over next 18 months.

Brazil

• 3-WAY CRISIS

– POLITICAL MELTDOWN

– ECONOMIC RECESSION

– CORRUPTION PROBE• Expect country to ‘muddle through’


BRAZIL

• Recession ends – signs of recovery.• Industrial production increased 4th

consecutive month; after 2 years of uninterrupted decline.

• Manufacturers invest again: capital goods imports up 18% in June.

• 1st rise since 2014.


Brazil

• IMF revised 2017 GDP projection upwards – private sector grows 2%.

• Firms ‘ stocks of unsold goods starting to shrink. Goods in transit no longer falling.

• New hiring not yet occurring; but layoffs have slowed.

• Consumers less glum – consumer index rose for 3rd straight month.

September 2016 Byron M.. Shoulton 35

ARGENTINA

• MIDST OF POLICY REVERSAL – initial applause from creditors, investors.

• MACRI GOVERNMENT BEGIN TO LAY FOUNDATION FOR RETURN OF CONFIDENCE.

• SETTLED WITH HOLDOUT CREDITORS to 2001 sovereign debt default.

September 2016 36Byron ,M. Shoulton

ARGENTINA

• CREDITORS BEGIN TO CONSIDER ARGENTINE RISKS again .

• LOCAL EXPORTERS SHIP AGAIN; CAPITAL FLOWS IN & OUT OF COUNTRY WITH LESS RESTRICTION.

• ARGENTINA GAINS ACCESS TO INTERNATIONAL CAPITAL MARKETS AGAIN.

September 2016 37Byron Shoulton

Argentina

• Recent data shows economy slowed in recent months; unemployment grew –thanks to high inflation.

• Some doubt Macri’s ability to implement reforms.

• Prices keep increasing.• Massive energy subsidies – popular but

drained public purse.,


LATIN AMERICA

ARGENTINA• Step back from the brink.• New centrist leadership.• Clean up mess; attempt to

restore confidence.• Private sector responds

positively.• Example of how balanced

leadership help impact country risk profile.

VENEZUELA• A failed state.• Leadership mismanages

economy.• Crisis affecting all classes.

Private sector almost dead.• At the brink – populace on

the move; cross border to buy basic goods.

• Protests draws tens of thousands onto streets.


Ecuador

• Economy slid into recession 2016.• Growth and fiscal outlook revised to

negative.• Deterioration due to lower oil prices &

country’s higher financing needs.• Financial system profitability, credit

quality deteriorated; capitalization & provisioning remain adequate.

• Dollar as currency – major plus.

September 2016 Byron M, Shoulton 40

Cuba

• New opening – 1st in 50 years relations with U.S. being relaxed.

• Necessary to ease economic pressure.• Gradual removal of restrictions to begin.

• Eventually, investments & trade flows will pick-up. Embargo not yet lifted.

• Little chance of open-account shipments immediately; but trade will open up.


Cuba

• Opening up to U.S.– significant move; but embargo remains.

• Has potential -to attract investment.• Trade flows to grow over time.• Disciplined workforce.

• Officials appear ready to embrace new relationship.


MENA

• Oil & gas producers – suffer massive loss of income.

• Governments seek to prevent populations from violence in face of growing hardships.

• ISIS, terrorists threats multiplied.• Alerted sense of chaos – Libya, Egypt, Syria,

Iraq, among others.• Saudi: new leadership – sensitive to

challenges to regime.


MENA

• Record high government bond issues –$18bn during first-half 2016. More in pipeline.

• Funds needed to offset revenue declines caused by lower oil price.

• Heightened state of political risks.• Governments keen to maintain social

spending - fear political unrest!


AFRICA

• Nigeria, South Africa – examples of ongoing commodity driven downturns.

• Lack of confidence – dominates.

• Mismanagement, corruption, weak leadership overshadows opportunities.

• Requires secured payment terms or government guarantee of payment.


AFRICA

• ECONOMIES HARD HIT BY FALL IN COMMODITY PRICES.

• Unemployment grows; set back for middle class ascendency.

• Poor banking, poor business conditions; cost for accessing financing climbs.

• Political instability worsens.


India

• PM Modi attempt redirecting India’s economic path.

• Embarked on reform agenda – some progress made. Needs more time.

• GDP growth 6-7% - steady.• Efforts to dismantle ineffective

bureaucracy – ongoing.• More open to foreign trade and

investments than at any time in 50 years.


India

• Next frontier; attracts investments.

• Tremendous growth potential.

• Young, bright plentiful workforce

• Need to throw off old habits; dismantle backward bureaucracy.


Global Forecast

• CONFIDENCE dampened –especially toward cross border risks.

• U.S. RECOVERY AHEAD OF REST OF THE WORLD – INSUFFICIENT TO BOOST GROWTH.

• Abundance of capital – seek higher yields; compare zero or negative interest rates in advanced economies.

• EMERGING MARKETS – NOT ‘SAFE’ ALTERNATIVE TO DEVELOPED capital markets.


Forecast

• COMPETITION HEATS UP FOR ACCESS to new markets/yields.

• RELUCTANCE TO DEEPEN EXPOSURE IN SEVERAL EM COUNTRIES.

• PROLONGED DECLINE IN TRADE–tendency toward secured payment terms.


Focus

• High need to ‘KNOW’ customers – crucial.

• Weaker economic performance – hurt financial health of many EM’s companies.

• Slower growth & weakened local currencies against dollar denominated debt.

• Rise in difficulties paying foreign debt on time.


World of changes

• Adaptation to changes – adjusting to long-run slow growth environment.

• Slower global growth: new norm.

• Weak growth = lower revenues.

• Financing to remain abundant & affordable in 2017.


Challenges

• High political risks.

• Industrial production: inconsistent.• Spending cuts – barrier to fresh output.• Commodities = prolonged weak prices.

• Overproduction – Aluminum, steel, copper, et al.


Sector Analysis

– Glut of Steel, Aluminum, Iron ore, copper, silver, rubber et al.

• Overcapacity began in China; spread abroad.

• Demand growth falls for minerals, metals.

• Crude, petrochemicals, fertilizers –competition brisk; growth subdued.


Agribusiness

• Global demand growth slow but steady.

• Led by recovery in U.S., some EM’s.

• Need to wear down current glut – which keep prices low.


Challenges

• Commodity producers – increase output with prices 40% less [fall in revenues].

• Demand inconsistent – need to balance production to fit demand.

• Uncertain outlook: in some cases stagnant growth.

• Weak demand growth = lower revenues.


Challenges

• Ability to increase spending – create new jobs; increase output – Stymied by subdued global demand.

• Continued weakness in Europe, EM’s.

• Brazil, Russia, Africa, LATAM – Hit by weak global demand for minerals & raw materials.

• China under increased pressure to ease production of key commodities.


Outlook

• Domestic demand & exports - will lead growth in Latam, Central America.

• Agricultural exports to U.S, Europe, Middle East steady.

• Weak prices hurt revenue intake.


Outlook

– Manufacturing , industrial machinery & parts exports to U.S. Europe & U.K. stable.

– Helping to prevent steeper slump [given decline in demand/pricing for raw materials].

– Steady demand in U.S. market & slight pick-up in Europe forecast in 2017.


Africa

• Larger deficits to finance.• Growth dependent on demand for raw

materials.• Slow recovery over next 2 years.• Some willingness in financial markets -

to invest in individual country bonds.• Will be helpful to Sub-Saharan Africa.• Political risks – remain high.September 2016 Byron M. Shoulton 60

Middle East

• Uncertain environment: political risks remain high.– Declined revenue flows – continued weak

oil & gas prices. Force spending cuts.• Egypt – Special case requiring close

monitoring.• Economy hit by loss of tourism. • Dependent on foreign aid & IMF

support.


Saudi Arabia

In midst of transition:• New head of state – aim to cut unnecessary

spending.

– Need to secure ruling family from ISIS& prevent outbreak of internal dissent.

• Shift to raising capital on international capital markets. A first for ARAMCO.


What will spur growth ?

• Embracing innovation & new technology will determine pace, direction.

• New job creation defined by adaptation to new technologies.

• Applicable to manufacturing, finance, infrastructure expansion.

• Where new jobs are created - less to do with trade deals.

• Much to do with advanced technological application to new processes.


New growth

• Despite slow global recovery & weak demand-Application of advanced technology & innovation will determine skill sets.

- Cities, municipalities, countries that provide, produce such skills will grow.


Which countries?

– India, Eastern Europe, Caribbean, LATAM, Africa

– growth dependent on embrace, efficient application of new technologies.

– Similar to pattern set by Taiwan, South Korea & China !

– Young, tech savvy workforce required!


World of Risks

September 2016 Byron M..Shoulton 66


2017 GLOBALECONOMIC OUTLOOK

global economic outlook - abc-amega group documents/ncca...trade flows • u.s. recovery weak but...

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