© Copyright Allianz
Economic Research Department
Global Economic Outlook
June 2018
Confidence
to be bold
Ph
oto
co
urt
esy
: O
loE
etu
on
Un
spla
sh
© Copyright Allianz
2019
Latest forecast
Revision(pps)
Latest forecast
Revision(pps)
World GDP growth 2.6 3.2 3.3 = 3.1 =
United States 1.5 2.3 2.9 = 2.4 =
Latin America -0.9 1.2 2.0 -0.3 2.4 -0.4Brazil -3.5 1.0 1.9 -0.6 2.5 -0.5
United Kingdom 1.9 1.7 1.4 -0.1 1.3 0.1
Eurozone members 1.7 2.6 2.1 -0.2 1.9 -0.1Germany 1.9 2.5 2.2 -0.3 1.9 =France 1.1 2.3 1.8 -0.3 2.0 0.1Italy 1.0 1.6 1.2 -0.2 0.8 -0.4Spain 3.3 3.1 2.7 0.2 2.4 0.1
Russia -0.2 1.5 1.8 -0.1 1.8 =Turkey 3.2 7.4 3.7 -0.9 3.0 -1.0
Asia 5.0 5.2 5.1 0.1 4.9 =China 6.7 6.9 6.6 0.1 6.3 0.1Japan 1.0 1.7 1.2 = 1.0 =India 7.1 6.7 7.3 = 7.3 =
Middle East 4.3 1.3 2.4 -0.3 2.5 -0.5Saudi Arabia 1.7 -0.7 1.7 = 2.0 =
Africa 1.3 3.2 3.7 0.1 3.8 0.1South Africa 0.6 1.3 2.0 = 2.5 =
* Weights in global GDP at market price, 2017
NB: The revisions refer to the changes in our forecasts since the last quarterFiscal year for India
2016 2017 2018
Global GDP growth forecasts (%) 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
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
3. Brent oil prices at 72 USD/bbl in 2018 and 69 USD/bbl in 2019. Spot price mid-
June 2018 at 75 USD/bbl.
4. A temporary surge in inflation expected in Q3 18 on the back of higher oil
prices and depreciating currencies.
5. USD to further appreciate in the next 6 months (+4.5%). EUR/USD: 1.10 at end-
2018; 1.17 at end-2019.
Sources: IHS. Euler Hermes. Allianz Research2
GLOBAL GROWTH: HEALTHY ALBEIT LESS SYNCHRONIZED
© Copyright Allianz
GLOBAL INSOLVENCIES DIVERGING REGIONAL FORECASTS
3
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.
EH Global and Regional Insolvency Indices
(yearly change in %)
Sources: National statistics, Euler Hermes, Allianz Research
Insolvency Heat Map 2018
(*) Historical data are not fully consistent because of changes in law or national figures
Sources: National statistics, Euler Hermes, Allianz Research
Romania (+12%) Poland (+10%) Finland (+6%) Slovakia (+80%) *
China (+50%)
strictly more Luxembourg (+12%)
than +5% Denmark (+11%)
Colombia (+8%) *Morocco (+8%)
Chile (+7%)
UK (+5%) Sweden (+2%) Switzerland (+1%) Turkey (+5%)Taiwan (+5%) Singapore (+0%) Norway (+5%)
+0% to +5% New Zealand (+2%) Estonia (0%) Australia (+3%)
Austria (+2%) Belgium (+3%)
Canada (0%) Spain (0%)
Japan (+0%)
Russia (0%)
South Africa (-1%) Bulgaria (-5%)
Latvia (-2%)-5% to -1% US (-2%)
Brazil (-3%)Germany (-4%)
The Netherlands (-5%)
South Korea (-5%)Hong-Kong (-5%)
Greece (-9%) Czech Rep (-17%) * Italy (-6%) Hungary (-7%)
France (-7%) Ireland (-10%)strictly more Portugal (-10%)
than -5% Lithuania (-18%)
Very low level Low level High level Very high level
(more than 10% below the 2003-2007 level)
(between 0% and 10% below the 2003-
2007 level)
(between 1% and 10% above the 2003-
2007 level)
(more than 10% above the 2003-2007
level)
Strongly improving
Strongly deteriorating
Improving
Deteriorating or stable
6%
-4%
17%
-5%
6%
2%
33%
8%
-2%
4%
-1%
1%
6%
31%
4%
0%
-9%
-1%
2%
5%
14%
-20% -10% 0% 10% 20% 30% 40%
GLOBAL INSOLVENCY INDEX
North America Index
Latin America Index
Western Europe Index
Central & Eastern Europe Index
Africa & Middle East Index
Asia-Pacific Index
2019
2018
2017
© Copyright Allianz
50
55
60
65
70
75
80
85
90
Low scenario
Base scenario
High scenario
Oil forecasts Global Inflationary pressure index
4
OIL PRICES TO DECLINE TO 69 USD/BBL IN 2019
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
Our global inflationary pressure index
suggests that the upcoming surge of global
inflation should be temporary as the
contribution of energy prices is significant
Sources: IHS, Bloomberg. Allianz Research Sources: IHS, Bloomberg. Allianz Research Sources: IHS, Bloomberg. Allianz Research
Copper to oil ratio vs world current activity index (y/y, %)
-6
-4
-2
0
2
4
6
-6
-4
-2
0
2
4
6
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Copper to oil ratio World current activity index
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
-5
-4
-3
-2
-1
0
1
2
3
4
5
13 14 15 16 17 18
Job conditions
Currencies
Producer prices
Energy prices
Inflationary Pressure Index
© Copyright Allianz 5
US: CLOSER TO OVERHEATING DUE TO FISCAL STIMULUS
25.00
30.00
35.00
40.00
45.00
50.00
70 75 80 85 90 95 00 05 10 15
US corporate debt (as % of GDP)
Sources : Euler Hermes, Allianz Research
US non-financial corporate sector is
already stretched in terms of debt,
suggesting an elevated sensitiveness to
any shock on interest rates
US unemployed to jobs openings ratio
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
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
Sources : Euler Hermes, Allianz Research
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Co
nsu
mp
tio
n
No
n R
esi
de
nti
al
inve
stm
en
t
Re
sid
en
tia
l in
ve
stm
en
t
Inve
nto
rie
s
Go
ve
rnm
en
t sp
en
din
g
Ne
t e
xp
ort
s
GD
P
2016 2017 2018 2019
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
Sources : Euler Hermes, Allianz Research
Contribution to US GDP growth (%, y/y)
© Copyright Allianz
Financial de-regulation inflates bubbles.
This time, small banks (and therefore
SMEs depending on their financing)
heavily exposed to commercial real
estate, are particularly exposed 6
US: FINANCIAL DE -REGULATION TO INCREASE RISK
Significant rules within 1 year of Presidency
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
-4
-3
-2
-1
0
1
2
0
20
40
60
80
100
120
1952 1962 1972 1982 1992 2002 2012
Non-bank credit (% of GDP), lhs
Financial deregulation index, rhs
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
US de-regulation and shadow banking US financial de-regulation– US total deregulation
-200
-150
-100
-50
0
50
100
85 90 95 00 05 10 15
Financial regulation spread
Times of bubble inflation
Sources : Euler Hermes, Allianz Research Sources : Euler Hermes, Allianz Research
0
15
30
45
G. W. Bush Obama Trump
Other
Health and Human
Services
Transportation
EPA
© Copyright Allianz
US: FED GOES FASTER IN TIGHTENING
7
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
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
09 10 11 12 13 14 15 16 17 18 19 20
ECB deposit rate ECB refi rate
ECB lending rate Fed policy rate
BOJ policy rate World Interest rate
Key interest rates
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
Sources : Euler Hermes, Allianz Research
0
1
2
3
4
5
6
0
1
2
3
4
5
6
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Fed Funds Target rateUS 10Y Treasury yield
Forecast
US 10Y Treasury yield (%) Capital inflows into the US (USD bn)
Sources: IHS Global Insight. Allianz Research
Capital flow back to the US. Yet
beware of their nature
0
500
1000
1500
2000
2500
3000
10 11 12 13 14 15 16 17
Other
Portfolio
FDI
© Copyright Allianz 8
PROTECTIONISM: BETWEEN TRADE GAMES AND TRADE FEUD
Trade feud
(40%)
Trade War
(5%)
� 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%)
� 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
� 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
Source: Euler Hermes scenarios
Trade game(55%)
3.5%
4.0%
6.0%
Current US tariff
4.5%
11.2%
MilestoneChinese imported products: USD50bn at 25% tariffs
& 25% import tariffs on steel imported products
& 10% import tariffs on aluminum imported products
MilestoneChinese imported products: USD50bn at 25% tariffs & USD200bn at 10% tariffs
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
© Copyright Allianz 9
GLOBAL TRADE: NO REGIME-CHANGE DESPITE RISKS
Global trade of goods and services China current account and China imports US trade deficit (USD bn)
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
China tends to absorb a growing share
of world demand despite its domestic
deceleration via an increasing opening
of its market
Front-loading strategies have been
clearly at work before the
implementation of tariffs in the US
explaining the deepening of deficit
Sources: IHS, Datastream, Allianz Research Sources: IHS, Datastream, Allianz Research
-60
-55
-50
-45
-40
-35
-30
-60
-55
-50
-45
-40
-35
-30
10 11 12 13 14 15 16 17 18
3.0%3.6%
3.8%
2.8% 2.3%4.9% 4.1% 3.7%
1.4%2.8%
2.1%
-10.2%
-1.5%
9.5%
7.7% 5.5%
-15%
-10%
-5%
0%
5%
10%
15%
12 13 14 15 16 17 18 19
Volume
Price in local currency
Currency impact
Value in USD
6%
8%
10%
12%
0%
4%
8%
12%
07 09 11 13 15 17
Current Account (lhs)
China import (% global) (rhs)
Sources: IHS, Datastream, Allianz Research
© Copyright Allianz 10
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
Diversion : What goes to the US (more short-term 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)
MARKETS SANCTIONED EMERGING MARKETSEmerging market currencies change in %Capital flows to Emerging Markets (USD bn)
0.3%
-2.8%
-3.9%
-4.4%
-6.9%
-7.1%
-10.5%
-10.8%
-12.7%
-24.7%
-48.8%
-60% -40% -20% 0% 20% 40%
China
Indonesia
South Korea
Mexico
Poland
India
Russia
South Africa
Brazil
Turkey
Argentina2018
2017
2016
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
Commodity prices vs. EM exchange rate
40
42
44
46
48
50
52
54
56
58
60200
300
400
500
600
700
800
11 12 13 14 15 16 17 18
Emerging Markets' exchange rate (vs. USD, right)
Commodity prices (S&P GSCi, left)
Depreciation
Sources: IHS Global Insight. Allianz Research Sources: Bloomberg. Allianz Research
© Copyright Allianz 11
EMERGING MARKETS: WHO’S NEXT?Foreign exchange reserves in Emerging Markets, in % of liquidity needs
0%
50%
100%
150%
200%
250%
High
Very weak
Adequate
Weak
* Total excluding China and Russia
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
Emerging Markets foreign currency debt (% of GDP)
Sources: IHS, Euler Hermes, Allianz Research
0%
10%
20%
30%
40%
50%
60%
Arge
ntin
a
Hun
gary
Turk
ey
Chi
le
Pola
nd
Cze
ch R
ep.
Col
ombi
a
Mex
ico
Sout
h Af
rica
Rus
sia
Mal
aysi
a
Indo
nesi
a
Sout
h Ko
rea
Braz
il
Saud
i Ara
bia
Thai
land
Indi
a
Chi
na
Foreign denominated public debt (%GDP)
Foreign-denominated NFC debt (% GDP)
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 far
© Copyright Allianz
Argentina
Brazil
Guatemala
Colombia
Costa Rica
Dominican Republic
Chile
Mexico
Panama
Peru
Uruguay
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
-10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3%
Cur
rent
acc
ount
bal
ance
Fiscal balance
2017 2019
2017 2019
2017 2019
2017 20192017 2019
2017 2019
2017 2019
2017 2019
2017 2019
A1
B3
D4
Brazil
Venezuela
Argentina
Chile
BB1 Peru
BB2 Mexico
BB2Uruguay
1.4%2.9%
3.1% 3.0%
1.9%1.0%
1.5%
3.9%
3.4% 4.0%
1.8% 2.5%
2.0% 2.1%
-13.0 -8.0%
C3
2017 2018
Low risk
Medium risk
Sensitive risk
High risk
2019
2.5%
3.2%
1.7%
2.8%
2.5%
-4.0%
2017 2018 2019
2017 2018 2019
2017 2018 20192017 2018 2019
2017 2018 2019
2017 2018 2019
2017 2018 2019
2017 2018 2019
EcuadorC33.0% 2.4% 2.0%
ColombiaBB1
3.1%
2.5%
• 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)
• 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
LATIN AMERICA: VOLATILITY & DOWNGRADED OUTLOOK
12
Country risk and economic growth
Sources: IMF, Euler Hermes, Allianz Research
Fiscal and current account balances (% of GDP)
Sources: IHS, Euler Hermes, Allianz Research
© Copyright Allianz
• 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
• 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
• 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
LATIN AMERICA: MEXICO AND BRAZIL UNDER THE RADAR
13
Mexico: Industrial Production Index and business
confidence
Mexico: exchange rate, inflation and central bank policy rate
Brazil: public debt, fiscal and primary balance (% GDP)
40%
45%
50%
55%
60%
65%
70%
75%
80%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
07 08 09 10 11 12 13 14 15 16 17 18
Gross general government debt (% ofGDP, right scale)Fiscal balance (12m, left scale)
Primary balance (12m, left scale)
President Temer's
mandate
Sources: IHS, Euler Hermes, Allianz ResearchSources: IHS, Euler Hermes, Allianz ResearchSources: IHS, Euler Hermes, Allianz Research
15
16
17
18
19
20
21
22
2%
3%
4%
5%
6%
7%
8%
9%
16 17 18
Inflation rate (y/y)Monetary policy rateExchange rate (MXN/USD)
Inflation target: 3% +/-1pp
NAFTA likely delayed to 2019 and US yields goup. Markets price in a victory of AMLO
Election of Donald Trump
60
65
70
75
80
85
90
95
100
105
110
95
97
99
101
103
105
107
11 12 13 14 15 16 17 18
Industrial Production index
Business confidence
© Copyright Allianz
CHINA: A MULTIFACETED STRATEGY IN RESPONSE TO THE US
14
• Anti–US campaign and boycott of US products (as done with South Korea), tighterregulation at the borders and different treatment for US corporates
Economic patriotism
• Partnership against US strategy to increase (with Asian markets such as Japan andSouth Korea, with the EU)
• Potential leverage on Korean Peninsula issue
Diplomatic retaliations
• Measures to reduce trade deficit in services to be considered. First in line would befinancial services.
Protectionism on services
• Currency depreciation to be used carefully to keep national purchasing power incheck.
• Marginal depreciation expected with RMB/USD at 6.6 in H2 2018 (-4% from H1) and
6.7 in 2019
Mild RMB depreciation with RMB per USD kept below 6.9
• Threats (some turbulences) but no significant sell off is expectedThreats on US Treasuries
© Copyright Allianz
Households: solid income growth
(8%+) will continue to support
private consumption
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)
CHINA: THE ECONOMY WOULD BE ABLE TO MAINTAIN A
GROWTH AROUND +6.5%
15
Nominal disposable per capita income
Sources: IHS, Allianz Research Sources: IHS, Allianz Research* For large banksSources: IMF, Allianz Research
2017 2018 2019
Fiscal policy Gen. Gov. Net lending (% GDP) -3.9 -4.0 -4.2
Monetary Policy
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
Capital accountliberalization progress
Inward Modest Significant Significant
Outward Neutral Modest Modest
Policy tracker
5
6
7
8
9
10
11
12
14 15 16 17 18 -20
-10
0
10
20
30
40
14 15 16 17 18
Total industrial profits (YTD, y/y)
Industrial revenues (YTD, y/y)
Producer prices (y/y)
© Copyright Allianz 16
ASIA: A SHELTER IN THE STORM OF EMERGING?
Sources: IHS, Allianz Research
JapanA1
ChinaB2
Hong KongA2
TaiwanA2
ThailandB1
South KoreaBB1
MalaysiaBB2
SingaporeAA2
IndonesiaB1
5.2%
AustraliaAA1
PhilppinesB1India
B1
LowriskMedium riskSensitive riskHigh risk
APAC: 4.9%
ASEAN-6*
1.2% 2.9%
3.6% 2.6%
2.7%
2.8%
New Zealand
AA1
6.6%
6.8%7.3%**
3.8%
5.4%
3.0%
5.0%
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
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).
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.
Countries vulnerabilities check-up. Risk on growth is limited in large
economies thanks to solid buffers, high in frontier markets more vulnerable.
• Currency risk - Twin deficits countries to remain under pressure (India,
Indonesia). Risk of policy mistakes in Malaysia and Philippines is also
under watch.
• 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.
© Copyright Allianz
ASIA: CURRENCY TURBULENCES BUT LIMITED IMPACT ON
GROWTH
17
N.B. Fiscal balance refers to general government balance (IMF definition) Sources: IMF, 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
Current account balance vs fiscal balance
Sources: IHS, Allianz Research
Public debt vs import cover (goods)
Sources: IHS, Allianz Research
Australia
India
Taiwan
South
Korea
Hong Kong
China
Malaysia
Philippines
Singapore
Thailand
Indonesia
Vietnam
Pakistan
JapanBangladesh
New
Zealand
Sri lanka
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-10% -5% 0% 5% 10% 15% 20%
Fis
ca
l B
ala
nce
CA Balance
China
Pakistan
Vietnam
PhilippinesIndia
Indonesia
Sri lanka
Bangladesh
Malaysia
Thailand
0
2
4
6
8
10
12
14
16
18
0% 20% 40% 60% 80% 100%
Impo
rt C
over
(mon
ths)
Public debt (% GDP)
Monetary policy rates (eop)
17 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
© Copyright Allianz
1.7%
2.1%
2.2%
2.6%
2.9%
3.0%
11.7%
1.4%
2.0%
2.3%
2.5%
2.6%
2.8%
5.4%
12.1%
0% 5% 10% 15%
Poland
Serbia
Czechia
Bulgaria
Lithuania
Estonia
Ukraine
Croatia
Slovenia
Latvia
Russia
Slovakia
Hungary
Romania
Turkey
May 2018
End-2017
4.8%
4.8%
6.5%
6.9%
7.1%
7.7%
8.4%
8.6%
8.6%
12.4%
12.7%
14.8%
0% 5% 10% 15%
Croatia
Slovenia
Slovakia
Poland
Bulgaria
Estonia
Lithuania
Czechia
Latvia
Hungary
Romania
Turkey
-14.1%
-5.3%
-2.2%
-2.0%
-0.4%
0.1%
0.3%
1.1%
0.7%
8.7%
-16.2%
-6.8%
-3.6%
-3.5%
-1.7%
-1.2%
-1.0%
-0.2%
0.8%
7.3%
-20% -15% -10% -5% 0% 5% 10%
Turkey
Russia
Hungary
Poland
Czech Republic
Romania
Serbia
Kazakhstan
Croatia
Ukraine
LCU vs. USD LCU vs. EUR
11-Jul-18 18
EMERGING EUROPE: WHO IS THE MOST VULNERABLE (1)
Sources: National statistics, IHS Markit, Allianz Research
Nominal wage growth Q1 2018 (% y/y) Local currency vs. USD and EUR
(% YTD; “-” indicates depreciation)
CPI inflation (% y/y)
Sources: National statistics, IHS Markit, Allianz Research 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 19
EMERGING EUROPE: WHO IS THE MOST VULNERABLE (2)
Sources: National statistics, IHS Markit, Allianz Research
Fiscal and current account balance Gross external financing requirement* (% of FX reserves)
Sources: National statistics, IMF, IHS Markit, Allianz Research
Poland
Czechia
Romania
Hungary
Slovakia
Bulgaria
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5%
CroatiaEstonia
Russia
Lithuania
Latvia
Ukraine
Serbia
Turkey
Slovenia
Cur
rent
acc
ount
bal
ance
(% o
f GD
P)
Fiscal balance (% of GDP)
6%
38%
75%75%
102%
134%136%
219%
270%
0%
100%
200%
300%
* Defined as sum of current account deficit and external debt maturing within the next 12 months.
• 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
RUSSIA – HIGHER OIL PRICES MORE THAN OFFSET ANY
IMPACT FROM NEW US SANCTIONS
12-Jun-2018 20
Exchange rate and Brent oil price
• 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.
• Overall, we forecast GDP growth of +1.8% in both 2018 and 2019 (after +1.5% in 2017).
Source: IHS Markit, Allianz Research
+2.5% in Apr-May
+3.8% in Apr-May
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12 13 14 15 16 17 18
Retail sales growth
Industrial production growth20
25
30
35
40
45
50
55
60
65
70
75
80
850
10
20
30
40
50
60
70
80
90
100
110
120
130
140Brent (USD/bbl; left scale)RUB per USD (right scale)
Rapid decline inoil prices
March 2014: Crimean annexationMarch-July 2014: phases 1&2&3 of sanctions against RussiaAugust 2014: Russian counter-sanctions
RUB exchange rate crisis
Renewed currency
weakness in H2 2015 as oil price drops again
6 April 2018:New, tougherUS sanctions
imposed
2 August 2017:Expanded soft US sanctions
take effect
Industrial production and real retail sales
growth (y/y; quarterly averages)
Source: National statistics, IHS, Allianz Research
© Copyright Allianz 21
Fiscal and External Balance in the GCC Public and External Debt in the GCC
• 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
Sources: IMF, IHS, Allianz Research Sources: IMF, IHS, Allianz Research forecasts
GCC: GRADUAL FISCAL AND EXTERNAL REBALANCING IS
UNDERWAY, BUT MIND THE WEAKER SPOTS
Public debt (% of GDP)
Ext
erna
l deb
t (%
of G
DP
)
Cur
rent
acc
ount
bal
ance
(% o
f GD
P)
Fiscal balance (% of GDP)
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE
Bahrain
KuwaitOman
Qatar
Saudi Arabia
UAE
0%
20%
40%
60%
80%
100%
120%
140%
160%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
External debt service
(% of exports earnings)
Sources: IHS Markit, Allianz Research
0%
5%
10%
15%
20%
25%2014
2018
Bahrain Kuwait
Oman
Qatar
Saudi Arabia
UAE
Bahrain
Kuwait
Oman
Qatar
Saudi ArabiaUAE
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
-25% -20% -15% -10% -5% 0% 5%
2018f
2016
• 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
2014
2018f
• 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
service ratio of 21% is borderline
© Copyright Allianz
AFRICA: KEEP ON RUNNING, TRULY, MADLY, BLINDLY
22
Growth in Africa, per region
Sources: Allianz Research
Growth is accelerating in Africa, particularly
in key Eastern and Western economies.
2015 2016 2017 2018 2019Africa* 3.4 2.0 3.4 3.9 4.3
North* 3.9 3.2 3.4 3.6 3.7Algeria C3 3.7 3.3 2.0 2.7 2.5Morocco B1 4.5 1.2 4.0 3.0 3.0Egypt C2 4.4 4.3 4.2 5.2 5.8Tunisia C4 1.1 1.0 1.9 2.5 2.5
West 3.0 0.1 2.5 4.0 4.7Cote d'Ivoire C2 8.9 8.4 7.8 8.2 8.5Ghana B1 3.8 3.5 8.4 9.0 7.5Nigeria D3 2.7 -1.6 0.8 2.5 3.5Senegal C2 6.5 6.7 7.2 7.2 7.5
East 7.2 6.2 7.1 7.3 7.1Ethiopia D3 10.4 8.0 10.9 9.0 9.5Kenya C2 5.7 5.9 4.8 6.5 5.7Tanzania C3 7.0 7.0 7.1 7.2 7.5Uganda C3 5.7 2.3 4.5 6.0 5.0
Central 2.8 0.5 1.0 1.9 2.9Cameroon C3 5.8 4.5 3.0 3.7 4.0Congo, DR D4 6.9 2.4 3.0 3.5 4.0
Southern 3.1 1.0 2.1 2.5 3.8South Africa B2 1.3 0.6 1.3 2.0 2.5Angola D3 3.0 -0.8 0.7 2.0 3.0Zambia C3 2.9 3.7 3.9 4.5 4.7
*Egypt is included to Africa; Lybia excluded from regional average
Public debt, % of GDP
Sources: World Bank, Allianz Research
However, too much financing through debt
may derail the growth momentum.
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Ango
laBe
nin
Burk
ina
Faso
Cam
eroo
nC
ARC
had
Con
go re
pC
ote
d'Iv
oire
Egyp
tEt
hiop
iaG
abon
Gam
bia
Gha
naG
uine
aKe
nya
Mad
agas
car
Mal
awi
Mal
iM
ozam
biqu
eN
iger
Nig
eria
Rw
anda
Sene
gal
Sout
h af
rica
Tanz
ania
Uga
nda
Zam
bia
2002
2018
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Ang
ola
Ben
inB
urki
na F
aso
Cam
eroo
nC
AR
Cha
dC
ongo
Cot
e d'
Ivoi
reE
gypt
Eth
iopi
aG
abon
Gam
bia
Gha
naG
uine
aK
enya
Mad
agas
car
Mal
awi
Mal
iM
ozam
biqu
eN
iger
Nig
eria
Rw
anda
Sen
egal
Sou
th a
frica
Tanz
ania
Uga
nda
Zam
bia
2000
2018
External debt, % of GDP
Countries with the poorest liquidity levels
are vulnerable to capital flows reversals.
Sources: Euler Hermes
Exchange rate vulnerability
BFA
DZAGAB
GNQ
CMRCOD
NGACIV
GHAEGY
MAR
MLI
COG
SEN
-35%
-25%
-15%
-5%
5%
15%
25%
0% 20% 40% 60% 80%
Cur
rent
acc
ount
bal
ance
(% G
DP
)
Commodity exports (% GDP)
currency appreciation/ stability vs. USD
7+ months5-7 months4-5 months0-4 months
BWA
AGO
NAMRWA
KEN
ETHLSO
MUS ZAF
MDG
UGA ZMB
7+ months4-5 months5-7 months0-4 months
-15%
-10%
-5%
0%
5%
10%
15%
20%
0% 20% 40% 60% 80%
Cu
rre
nt a
ccou
nt b
ala
nce
(%
G
DP
)
Commodity exports (% GDP)
Currency appreciation/stability vs. USD
Size of the bubble : currency depreciation
60%40%
Color of the bubble:
North & West
East & South
© Copyright Allianz 23
EUROPE: SLOWER GROWTH BUT STILL ABOVE POTENTIAL
The soft-patch is not as severe as it may
seem: Manufacturing PMIs remain in
expansionary territory and suggest
moderate growth in activity
Source: IHS, Euler Hermes Allianz Research Source: IHS, Euler Hermes Allianz Research
Manufacturing PMI Index Extra and intra-EU exports GDP growth and components
Intra-EU trade shows more resilience and
offsets part of the external trade shock,
partly linked to protectionism
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
40
45
50
55
60
65
14 15 16 17 18
Eurozone Germany
France Spain
Italy
-2%
0%
2%
4%
6%
8%
10%
01
/15
04
/15
07
/15
10
/15
01
/16
04
/16
07
/16
10
/16
01
/17
04
/17
07
/17
10
/17
01
/18
04
/18
Extra-EU exports, 12m/12m
Intra-EU exports, 12m/12m
1,8
2,6
2,1
1,9
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2016 2017 2018 2019
Net exports Stocks
Investment Public Spending
Consumer Spending GDP growth
Do
me
stic
de
ma
nd
+1
.8p
p
Do
me
stic
de
ma
nd
+1
.4p
p
© Copyright Allianz
EUROPE: STILL ENOUGH BUFFERS
24
Margins remain at a relatively
high level, but they are expected
to have peaked at end-2017,
notably in Spain and Italy.
Non-financial corporations margins,
% of value added
Sources: IHS, Euler Hermes Allianz Research
Turnover growth has cooled
down but remains above
pre-crisis average. Spain
enjoys high growth.
Source: IHS, Euler Hermes Allianz Research
Manufacturing turnover growth,
12m/12mEurozone: government spending
vs primary balance
Europe becomes more fiscally
expansionary, notably in 2019.
This is the case for Germany.
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.
Eurozone: consumer spending
and disposable income
Source: IHS, Euler Hermes Allianz Research Source: IHS, Euler Hermes Allianz Research
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
-1%
0%
1%
2%
3%
4%
5%
6%
08 09 10 11 12 13 14 15 16 17 18 19
Government spending, y/y - lhs
Primary balance, change in pp - rhs
-4%
-3%
-2%
-1%
0%
1%
2%
3%
07 08 09 10 11 12 13 14 15 16 17 18 19
Real consumer spending (y/y)
Households' real disposable income (y/y)
32%
34%
36%
38%
40%
42%
44%
46%
48%
20
07
Q1
20
07
Q4
20
08
Q3
20
09
Q2
20
10
Q1
20
10
Q4
20
11
Q3
20
12
Q2
20
13
Q1
20
13
Q4
20
14
Q3
20
15
Q2
20
16
Q1
20
16
Q4
20
17
Q3
Eurozone Germany
Spain Italy
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
12 13 14 15 16 17 18
Germany France
Italy Spain
© Copyright Allianz
GERMANY, FRANCE AND SPAIN: GROWTH ENGINES
25
Spain: Policy uncertainty index and GDP growth (y/y)
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
Sources: IHS Global Insight. Allianz Research
France : Unemployment, wages and inflation
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.
-1%
0%
1%
2%
3%
4%
6%
7%
8%
9%
10%
11%
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Unemployment rate (%, left)
Wages (y/y change in %, right)
Inflation (y/y, right)
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
4.2
3.7
4.13.8
2.0
4.2
2.72.9
3.4
1.6
4.4
4.0
2.5
3.8
1.9
0
1
2
3
4
5
6
2017 2018 2019
Monetary welfare benefits
Disposable income, nominal
Net wages and salaries
Operating profits, property and
entrepreneurial income
Disposable income, real
Germany: Nominal income and selected
components (percentage change y/y)
Sources: IHS Global Insight. Allianz ResearchSources: IHS Global Insight. Allianz Research
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
50
70
90
110
130
150
170
190
210
08 09 10 11 12 13 14 15 16 17 18 19
Policy uncertainty (left-handscale)GDP growth (y/y, right-handscale)
Forecasts
© Copyright Allianz
EUROPE: AREAS OF TENSION
Diverging growth prospects
and monetary policy should
drag the EUR/USD to 1.10 at
end-2018
EUR/USD German 10-year vs ECB key rates
Contained inflation (+1.7% in
2018-19) and softer growth
justify a progressive
normalization by the ECB
Sources : Euler Hermes, Allianz Research
10-year spreads vs Bund
Bond spreads are contained
(except in Italy as they reflect the
political stress). Downside risk could
come from a generalized spread
widening
Bank interest rates for SMEs
(1 to 5 year maturity)
The private sector should still
enjoy very low interest rates
until H2 2019
Sources : Euler Hermes, Allianz ResearchSources : Euler Hermes, Allianz Research Sources : Euler Hermes, Allianz Research
26
0
200
400
600
800
1000
1200
16 17 18
Italy
France
Spain
Greece
Portugal
1,0
1,1
1,2
1,3
1,4
1,5
1,6
1,7
07 08 09 10 11 12 13 14 15 16 17 18 19
end-2018: 1.10; average 2018: 1.17
end-2019: 1.17; average 2019: 1.14
-1
0
1
2
3
4
5
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
German 10-year bund
Refi rate
Deposit rate
1
2
3
4
5
6
7
07 08 09 10 11 12 13 14 15 16 17
Spain
Italy
Germany
France
© Copyright Allianz
ITALY: FINANCIAL STRESS IS HERE TO STAY
Sources: Bank of Italy, Allianz Research
Source: Allianz Research
Economic and financial scenarios Portfolio net inflows vs ECB QE Italian bond purchases
0%
10%
20%
30%
40%
50%
Ge
rma
ny
Th
e N
eth
erl
an
ds
Fin
lan
d
Sp
ain
Au
stri
a
Fra
nc
e
Po
rtu
ga
l
Ire
lan
d
Be
lgiu
m
Ita
ly
Theoretical ratio capital key amount/Total sovereign debt
Actual ratio amount bought/Total sovereign debt
27
© Copyright Allianz 28
EUROPEAN REFORM ROADMAP: WHAT COULD WE EXPECT
NEXT?EU Summit:
28-29 June
• 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
EU Summit:
18-19 October
• Agreement on a framework on Brexit exit and trade deal
EU Summit:
13-14 December
• Agreement on an Eurozone budget as part of the EU multi-annual 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
June 22:
The
Eurogroup
agreed on
further
debt relief
for Greece
and the
right to use
the
EUR24.1bn
cash buffer
© Copyright Allianz
UNITED KINGDOM: SOFTER BREXIT LIKELY
29
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
GBP/EUR and GBP/USD
Sources: Bloomberg, Allianz Research
Royaume-Uni Weight 2016 2017 2018 2019
GDP 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
Stocks * -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
Net exports * -2% -0.8 0.6 -0.1 0.0
Current account ** -114 -83 -81 -69
Current account (% of GDP) -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
Nominal GDP ** 1963.3 2037.6 2096.3 2158.8
Change over the period, unless otherwise indicated: * contribution to GDP growth
** mds de £
Slowest GDP growth since 2009 with below
potential consumer spending
Economic forecasts
Higher probability of a soft Brexit
• 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 (Ukraine-style) 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.
Extensive FTA ?
• 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
0,0
0,5
1,0
1,5
2,0
2,5
07 08 09 10 11 12 13 14 15 16 17 18
GBP/USD GBP/EUR
1.34
1.12
© Copyright Allianz
THANK YOU!
Ph
oto
by
ra
wp
ixe
l.c
om
on
Un
spla
sh
Economic Research Department
26.06.2018