global economic outlook - nacm · outlook •global slowdown likely; mild recession possible by...

November 2018 Byron M. Shoulton A 1

Byron M. Shoulton International Economist

GLOBAL ECONOMIC OUTLOOK

November 2018

World of Risks

– Trade tensions stiffen. Tariffs new weapon. – Modest slowdown in trade flows forecast.– Anti-trade sentiment grows – Globalization in

Reverse?– 2019 Global GDP growth 3%. Down from 5% this time in

2017. Trade growth slows.– Higher U.S. budget deficits. Pressure to fund U.S.

debt will increase in 2020-22.– Demand ‘crowd out’ private sector competing for

liquidity. – Interest rates begin rise.– Global economy – Enters New Phase. Slower pace of

growth.


Outlook

• Global slowdown likely; mild recession possible by 2020. Global growth currently 3% Vs. 5% a year ago.

WHY?• Chinese growth slows. Trade growth declines.• Emerging economies – weakened currencies;

debt servicing difficulties foreseen.• High levels of Foreign currency debt.• Affects both public and private sector debtors.• Equity markets correction reflects: Revaluation

of assets. Doubts on future earnings growth.


Era of Change


• Era of Great, Rapid Change. Reverses 70-years lower tariffs; promote globalization.

• U.S. changes approach to global trade relationships.

• Trump pledge to review & rewrite global trade policy. America First!

• Brexit vote – Shift against the EU status quo.

• Tariffs useful to get concessions. Will they be lifted once deal reached?

• LATAM, Africa, Mideast – Seek fresh start!!

Fundamental Backdrop


• Tariffs, Protectionism rises- U.S. Leads charge.

• Price spikes: Result of rising trade barriers.

• U.S. farmers, exporters seek protection from tariff retaliation by China, elsewhere.

• Threat: Global demand undermined by trade tensions. U.S. goods COULD face boycott?

• Threat to global stability?

• Stock market sell-off: Reflects loss of confidence; Weaker future earnings growth.

Challenges


• U.S. pushes for fairer trade agreements. Squares off with China. Elephant in the room.

• To succeed U.S. needs support from other countries hurt by China.

• U.S. Resists multilateral agreements. • U.S. Interest rates rising gradually.• U.S. growth stands out against slowdown

elsewhere. Note: U.S cannot be the only engine of global growth!

Trump Era

• America First! Push nationalist agenda.

• Distrustful of multilateral Trade Agreements.

• Promotes “Fair trade” versus free-trade.

• USMCA: Canada & Mexico cements trade with U.S.- Great achievement!!

• Tariff war with China, others – Retaliation ongoing.

• U.S. Prefers bilateral agreements. Exits TPP.


Overview

Global factory activity begin easing. Inflation strengthens.

Consumer & Business confidence uncertain. U.S.- China differences looms large.

Cross-Border trade: Hit by tariffs and retaliation. Effects could hurt.


Growth Drivers

• Demand for new technologies – leads investment.

• Application & adaptation of new technologies: Across all geographic regions.

• Impacts service sectors: High-speed rail, agro-industry, broadband, AI; transport; Port facilities, roads, mining technology; manufacturing.

• Technological advances: boosts factory output, Agricultural output; improves construction processes.


Trends


Labor, skills shortage.

Demand grows for seasonal migrant

workers.

Interest rates rise-Gradually? Wage growth picks-up.

Emerging markets: Currencies weaken.

Uncertainty over Trade War.

GDP growth –Likely to begin slipping.

Global Trade Pattern

Trade at center of debate. Trade momemtumwanes due to uncertainty.

2009-14: Pace of trade slows – barely kept pace with GDP growth.

1985-2005: Trade growth double pace of global GDP


USA

Households - resilient. Consumer confidence: strong.

GDP growth steady. Robust jobs market.

Business investment up. Mining & manufacturing activity steady.

Housing, construction sectors – Peak..

U.S. attracts capital inflows. Strong $ - U.S. goods uncompetitive.

November 2018 Byron M. ShoultonA 12

USA

• 2018- GDP expands 2.9%.

• 2019: 2.2%-2.5%.

• Inflation subdued: 2%-2.3%. Unemployment: 3.7%. 2019: 3% .

• Fed raised short-term interest rates 3rd

time in 2018. Trump says ‘not so fast’.

• Further modest hikes forecast for 2019.


USA

• Investments by S&P 500 companies increased to $341 billion – first six months of 2018 [19% increase over 2017].

• If sustained, would be fastest capex in 25 years.

• True during 1st half 2018- Slowed since.

• Consumer & corporate confidence at highest level since 2000. Cools.

• ~Market sell-off indicative of weakening!


USA

Deregulation – Boost to businesses confidence.

Tax cuts – Further boost! Now tailing off.

Some “Uncertainty”: Tariffs & retaliation Reasons to holdback on capital expenditure?

U.S. deficits to grow massively over next decade!


What are Tariffs?

• Tariffs are taxes imposed by governments on imports or exports.

• Barrier to trade. Inflates import prices

• Economic Nationalism rises.

• Governments attempt to protect domestic producers.

• Foreign goods artificially more expensive.


Effects of Tariffs

• Revenue windfall for U.S. Treasury.

• Hurts U.S. diplomatically. Encourages retaliation & boycotting of U.S. goods.

• Hits some exporters pocketbooks.

• Influences price Increases.

• U.S. goods appear cheaper; more attractive. Inflates import prices.


Crossroads

Manufacturing at 10-year high. Demand for goods, raw materials slacken. Tariffs to weaken growth.

Real economy stable - Central banks raise interest rates. Global economy at crossroads. China slows. U.S. Relations tense. Global trade flows ebbs.

Investment in infrastructure: Help sustain growth in developed & emerging economies. Private/public partnerships likely?

Confidence weakens? What will help renew confidence?

Positive results to trade talks. Doubts persists over U.S.-EU, US-China deals.

U.S. Demands not unreasonable. What’s the motivation to cut a deal?


Crossroads

• Shifting Loyalties – Companies seek suppliers in lower or non-tariff locations!

• EU-U.S. trade deal hinges on EU concessions! U.S. threatens imposition of tariffs on European autos!!!

• U.S. China deal – Most difficult of all.


China


Economy faces crisis.

Slowest growth - in 2 decades. Huge debt

pile-up!

Brace for U.S. Trade War; Tense U.S. relations.

Will China agree/make concessions to U.S.?

Change tact: Boost government spending; Pump up bank lending to corporate sector.

Seek to stimulate growth.

China-U.S.

• Accused of stealing intellectual property.

• Forced technology transfers- Trading unfairly.

• Aggressive expansion abroad.

• U.S. concerned how far China has come –In relatively short time. Seek thaw in ambitions for global dominance.

• Viewed as an adversary. Changed attitude from Washington.


China

Need to re-kindle Domestic

demand. No longer low cost

producer.

Currency weakens. Fears of

capital flight.

Government eases control on

credit access.

Debt overhang -Major concern.

China’s wealth Fund: buys non-Chinese assets: Confirms

unease - Hard landing for domestic

economy?


China

February 2018 Byron M. Shoulton A 23

World’s #2 economy – large role in application of advanced technology in manufacturing, industry, services.

Strong player in cross-border FDI. Belt-Road Initiative to boost China’s influence; trade in Eurasia. U.S aims to check China’s advance.China’s Trade & infrastructure financing to developing countries: Puts some countries in debt trap!

Competes with U.S. for access/influence globally. Influence grows. Purchasing western assets. Foothold on technology transfers

. Pushback ongoing

Confrontation with U.S. Intellectual property theft. Negotiated settlement sought on tariffs. Will be a long battle.

Loosen capital controls? Payment delays.

China

CONFRONTATIONAL relationship with U.S. U.S. Administration confronts unfair Chinese trade practices; intellectual property theft.

• 5%-25% tariffs imposed on $230 billion Chinese exports to U.S. Without a deal, remaining $200 billion will be taxed.

• Resistance grows to Chinese companies buying U.S./Western assets. Demands technology transfer. Pushback grows!

• China being watched – Aggressive buying binge ofU.S., Western assets. Technology investments.

• Faces stringent reviews.China vulnerable – If U.S. forms United Front with nations feeling aggrieved by Chinese policies.


Rewrite Global Order

• U.S. shakes up global trading system.Trade continues.

• Despite discomfort among trading partners – U.S. appears to gain concessions.

• Expect major adjustments to system. Now inevitable.

• Some uncertainty over future impact.


Global Tensions Rise

• Pressure on U.S.-China relationship. • NATO adjusts to U.S. demands – Raise

spending levels.• Combating cyber warfare, espionage.• Trust levels among nations – Decline!• Sanctions remain on Russia. U.S. Threatens

to withdraw from missile treaty.• Relationship WORSENS.• Middle East rivalry sharpens.


Latin America

• Changing political landscape. Leftists out in Brazil, Argentina. New leadership to address corruption.

• Venezuela – severe crisis. Study in mismanagement.

• Spending on regional infrastructure; other investments. Key in order to return to growth

• Search on for regional political stability.

• Region heavily dependent on raw material exports for growth.

• Exports: Chile, Peru, Colombia – best economic performers.

November 2018 A 27Byron M. Shoulton

Brazil

2019- New right-wing government takes control.

Change afoot!!

Industrial production to increase -follows 3-years of decline. Private

sector to regain central role.

Manufacturers invest again: capital goods imports up - 1st rise since

2014.

High consumer, corporate debt. Interest rates ease.

Corruption hurts

confidence.

High government fiscal deficit. Big policy changes

expected.


Brazil

• LATAM largest economy – population: 207.6 million; GDP $1.07 trillion. Beset by graft, crime.

• Attempt recovery from steepest recession in 60 years. Reduce government’s role in economy.

• Unemployment: 12% [unofficially higher]-highest in 30 years.

• 2014-17: Economy lost 10% of output. To limp out of recession in 2019. Private sector regains heft slowly.

• Public debt 80% of GDP; well above countries with similar credit rating.


Brazil

• Expect sell-off of state-sector.

• Banking sector well supervised–mostly well capitalized.

• Investors may return – Once confidence in new regime grows.

• Uncertainty dominates outlook.

• Well diversified economy; major trading nation. Needs investment boost!!


Brazil

Industrial exports competitive; benefits from weak exchange

rate.

GDP projection – 2019 private sector grows 2%.

New policies on crime fighting. Corruption will be

under attack.

Renewed private sector – Attracts

investment flows?November 2018 Byron M. Shoulton A 31

Brazil

• Important raw material supplier; manufacturer. Trade central to growth.

• New Government to attack the root causes of corruption – Needed to regain credibility with creditors.

• Bolsonaro’s platform – law & order. Military officers to be placed in control of major corporations.


Argentina


Receives IMF lifeline : $57.1

billion

On brink of 2nd

recession since 2015.

MACRI government-

approval rating down!

Argentina

Country to regain access to international capital

markets?

Pledges elimination of fiscal deficit in 2019.

Argentines distrustful of IMF policies.

Tax on exports; cuts to subsidies.


Argentina

• Recession to continue in 2019.• IMF credit facility to help stabilize currency

& break economy’s fall.• Government pledges to eliminate fiscal

deficit in 2019. Creditors want to support Macri agenda. Agenda unpopular at home.

• Tax on exports. Cuts to transport & electricity subsidies.

• CB to refrain from intervening in currency market.


Mexico

• Economy set for take-off. Depends on AMLO gov’t.• Free market currency; market friendly policies to

remain. New USMCA removes uncertainty!• Exchange rate: supports exports; attracts

investments. • Energy reforms – paying dividends: Huge oil find in

Gulf of Mexico.• 80% of exports to U.S.

• 2019 – AMLO takes office as President. Some degree of ‘Wait-and-see’ expected.


Mexico

Trade agreement with US, Canada & EU expands reach of Mexican producers.

Lower production costs attract factory relocation from China, elsewhere.

Mexico pursues pragmatic policies to avoid risk of recession, anti-trade backlash.

Will AMLO government endorse USMCA ?


USMCA

• Replaces 25 year-old Nafta. Business Roundtable- biggest U.S. companies encouraged. New pact welcomed!

• Kept prices low; free movement of goods & capital tariff-free; expanded production in all 3 member countries.

• U.S. pushed renegotiation. Agreement includes IP rights.

• Local content rules for autos – revised.• Canadian dairy sector pried open.


USMCA

• Early resolution – Unexpected. Benefits U.S. businesses. All 3 countries remain!

• Incoming Mexican government – To implement new deal.

• Without disruption of supply chain; companies breathe easier.

• Regional Trade security achieved.


UK Brexit- EU

• Huge risks to UK economy: Bureaucracy. Gridlock. Disrupted supply chains.

• Tough negotiations. U.K. businesses need years adjusting to new rules. Bureaucracy.

• EU growth: Factories pullback. Uncertainty over Brexit - Hits domestic demand. Exports grow!

• EU Investments UNCERTAIN. German companies pessimistic. Regional growth: weakens.

• Financial sector relocates from London.November 2018 A 40Byron M. Shoulton

Brexit

• Brexit : A years-long process.

• Both the UK and EU economy suffers.

• Level of dislocation and complexity –should deter others planning to exit EU!!

• Costly for companies; disruptive for society. Was it worth it?

• On display: EU dysfunction; weaknesses.


Beyond Brexit

UK-seek special trade/

financial relationships. Seek access to single market.

UK economic outlook-Unclear.

GDP growth of 1.8%.

London looses role as financial gateway to E.U. Ireland border free

or not?

UK pushes for trade

deals-with rest of the world. EU

“No deal” a possibility!!

UK gov’t contingency

plans.

Byron M. Shoulton A 42November 2018

Eurozone


Outlook mixed. Manufacturing to weaken.

Unemployment 6.2% average; down from 12.6%.

Consumer/business – confidence uncertain.

Inflation close to target!

Eurozone

Businesses say “Future unclear”.

2019 GDP growth 1.7 %

Manufacturing exports – competitive. Demand remains strong.

Economic momentum weakens – Amidst drift

toward nationalism.


U.S. tariffs feared–Especially on autos! Decline of moderate

political parties..- Major concern

as rightist gain support.

Eurozone

Business investments –MODEST.

ECB to slowly remove stimulus.

Inflation on target. Long-run growth - supply chains:

Uncertain!


Labor shortage-Region needs migrant

workers.

Eurozone

German business confidence weakens. GDP growth 2%.

Germany’s trade surplus under fire. Need to spend more; pay more!

Anti-immigrant parties gain strength across region!

Tough EU stance against unfair trade – i.e. cheap Chinese imports.

Stiffens rules on Chinese investments.

A 46Byron M. ShoultonNovember 2018

Eurozone

Unemployment 6-9%. From highs of

12.6%.

- Industrial production

stable.

2019 Domestic demand, exports=

2.3% GDP growth.

Banking sector –outlook mixed.


Eurozone recovers

Spain: employment

gains. Retail sales rise - Housing sector

recovers.

Reforms worked–Symbol of regional turn around. Large government debt load holds back

recovery.

EU economy M/T confidence revolves around ‘deal’ with

U.K. No deal?

Italy’s shift to nationalism – Sign of EU drift toward

extremism.

Challenge: Prevent more departures

from E.U.

KEY GOAL –Preserve Union !


Central Europe


Poland, Hungary, Czech Republic growth steady.

Boost to private sector. GDP growth 4%.

Lower unemployment than West-Europe. Importing labor to fill positions.

Turkey

U.S. tariffs on Steel, Aluminum. Hits confidence. Economy suffers. Growth falls by half.

Weakened lira - Falls 30% against US$ in 2018.

Strains develop with West. Reduces import of U.S. cotton.


Turkey

Growth slows by half in 2018.

No recovery expected in 2019.

Foreign investment

inflows – slow.

Will Turkey attract enough foreign capital

to finance deficits in 2019?

Central bank under intense pressure-to not raise rates!


Turkey

Economy relies on foreign

capital inflows to finance fiscal

& current-account deficits.

Country downgraded.

Higher costs to access credit.

Relationship with West

strained. Tilt to Russia? U.S

Reviews relationship.

Turkey’s geopolitical importance -

Access to foreign credit

crucial.

Sovereign rating; banking sector outlook revised. Banks

mostly well capitalized.


Asia

ASIAN economies readjusts as Chinese demand slows.

Boosts trade with rest of the world. Sensitive to U.S. tariffs. S- Korean exports to U.S. weaken.

Hong Kong, Taiwan, Singapore, South Korea, Australia, Mongolia: Experience decline in trade flows with China.

Expand trade with Latin America, India, U.S., Canada.

Southeast Asia – experience growth uptick – supported by domestic demand and boost in exports.


Southeast Asia


Ind

on

esi

a Largest regional economy: GDP growth 5.2%

Ph

ilip

pin

es GDP

growth 7%; fastest pace in 3 years

Vie

tnam

Vietnam, Malaysia, Thailand, Bangladesh, Cambodia –Attract investments in manufacturing for export.

India

Modi government –Reform agenda. Experience mild setbacks.

Looking toward 2019 election.

Currency stable but weak. Interest rates rise. Inflation moderate – Capital

inflows grow.

Subsidies cut -support to farmers reduced.


India

Banks face $65B capital shortage by

2019

Weak capital

positions –influence

Indian banks weak

viability Ratings

State banks account for

90% of shortage –

with limited options to

raise capital


Credit Focus

High Need to ‘KNOW’ customers –

crucial.

Reassess financial health of EM’s

companies.

EM companies face difficulties meeting

foreign debt obligations.

Expect claims/slow payments in 2019.

FOCUS


Russia

Recession. Sanctions delay

recovery.

Lack of access to Western capital

takes toll.

Commodity dependent economy–

benefits from price recovery.

Hit by U.S. & EU SANCTIONS

Relief unlikely!

Higher oil & gas prices -supports

2019 growth.

Less reasons to cooperate with

U.S./West.


Middle East

• Oil, gas producers: withhold production- oil prices climb.

$80- $90 per barrel over 2019

Saudi: new leadership – Under scrutiny. Massive build-up of debt over 3 years.

• Liquidity strains grow in Oman, Bahrain.

• GCC countries resort to strict fiscal consolidation to contain budget deficits.

• U.S. shale as counter-balance Saudi production.

November2018 A 59Byron M. Shoulton

Middle East


Governments keen to maintain social spending – to prevent political unrest.

Regional governments boost bond issues. Funds used to offset revenue declines.

Heightened state of political risks. Saudi-Iran rivalry heightened.

Saudi Arabia

• New leadership – Credibility suffers!!

• Anti- corruption drive. Internal dissent. Iran.

• GDP shrunk 3 consecutive years. Seeks diversification away from crude.

• Companies struggle to cope in troubled economic environment.

• Leads opposition to Qatar. Charges Qatar with aiding terrorism.

Byron M. Shoulton A 61November 2018

Egypt

• Downgraded to ‘very high risk’.

• Economy kept afloat by aid from Gulf countries & $3bn World Bank structural adjustment program.

• President Sisi – firm control over opposition; Muslim Brotherhood. Re-election ASSURED in 2019. All credible opposition candidates removed.

• Seek to attract FDI: manufacturing & tourists.

• Tourism sector hard hit - major setback to recovery.– FX rationing causes payment delays. To ease in 2018.– Public sector dominates: power, transport, heavy

industry, insurance. Need for Privatization: urgent.


Africa

• Nigeria, South Africa – Economies benefit from oil/commodity price hike. Recession to ease.

• Leadership; corruption – WEAK confidence: Overshadows opportunities for investment.

• Kenya, Ghana, Gabon, Botswana, Angola, Ethiopia. Attracting foreign investments: minerals, mining, agriculture.

• L/C’s, secured payment terms; government guarantees preferred.

• Reports of payment delays by Ethiopian, Angolan, Nigerian state-owned entities.


South Africa

• Economy weakened by low investment inflows. Strong desire to attract investment.

• Need for new government to rebuild confidence in fiscal, economic management.

• New leader attempts to set new growth path. Escom – leading corporate: downgraded.

• Elections due in 2019 – investors watch for new direction.


Africa

Potential for

population to double by 2050.

Vital market.

Ripe investment destination.

Tech application.

China leads charge to develop

infrastructure; exploit raw materials/ minerals.

South Africa & Zimbabwe: Will Political

changes usher in new

beginning?


Global Forecast


Despite elevated POLITICAL RISKS: cross-border trade continues. Demand high. Will

China’s downturn hit confidence?

U.S. Asia, Europe, LATAM – Attempt to stimulate global activity in 2019.

Abundance of capital – seek higher returns. Global trade, service opportunities plentiful .

EMERGING MARKETS – Weakened currencies pose threat to debt servicing ability.

Caution justified

Can pace of trade hold up – Despite tensions? Caution in order!

Need for informed decision- making.

Take pains to identify risks. Understand changes & likely impact on customers.

Acceptable risks still found in difficult markets. Unacceptable risks found even in highly rated countries.


Trade Negotiations

• U.S. attempt to set new trade rules – EU, China will need convincing. Expect pushback.

• USMCA achieves goal in short timeframe. A plus for 3 countries.

• U.S demands on China, EU may not be unreasonable. Contentious!

• Brexit-EU impasse hurts M/T confidence.


CONCLUSION

Global growth to weaken by 2020?• Upward pressure on prices: crude, some

commodities. EM’s grow slowly. • U.S. pushes strong case against China on

intellectual property; technology transfers. • United Front with other countries needed.• U.S. seek rebalancing of global trade

system!• Rules of WTO to be rewritten with a view

toward fairer trade.


SUMMARY

Global Economy face challenges.

• Pace of growth uncertain. Debt build-up source of caution. Global asset sell-off: Hits confidence.

• Emerging markets deserves close monitoring – expanded debt levels.

• EM entities cope with weak currencies, high debt service obligations & possible slowdown! Understand impact.


SUMMARY

• Trade remains lifeblood of the global economy. New rules add layers of bureaucracy.

• Exports/Imports takes place under any & all conditions. Even with uncertainties!

• Building relationships with customers REMAINS key. Caution warranted.

• Keep abreast of changes impacting flow of goods; payments. Essential to survive!


global economic outlook - nacm · outlook •global slowdown likely; mild recession possible by...

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