Global Economic Scenario
Little reasons to expect higher growth rates (or a recession)
Lisbon, 15 March 2016
Jorge Sicilia, BBVA Research
2016 BBVA Seminar for Public Sector Investors and Issuers
Global Economic Scenario / 15 March 2016
Outline
Challenges ahead: little reasons to expect higher
growth rates
An anemic and fragile growth outlook
Page 2
Risks: a focus on global geopolitics
Global Economic Scenario / 15 March 2016
Page 3
Confidence is declining across the board and is unlikely to improve in the short term Manufacturing PMI by regions (pp above/below 50)
-3
-2
-1
0
1
2
3
4
5
6
Dec
-14
Ma
r-1
5
Jun-
15
Sep
-15
Dec
-15
Fe
b-1
6
Dec
-14
Ma
r-1
5
Jun-
15
Sep
-15
Dec
-15
Fe
b-1
6
USA EMU EM Asia Latam
Source: Markit and BBVA Research
-1,5
0,0
1,5
3,0
4,5
Fe
b-0
8
Fe
b-0
9
Fe
b-1
0
Fe
b-1
1
Fe
b-1
2
Fe
b-1
3
Fe
b-1
4
Fe
b-1
5
Fe
b-1
6
Developed Emerging
BBVA Research Financial Stress Index (normalized Index)
Source: BBVA Research based on Bloomberg data
Global Economic Scenario / 15 March 2016
Page 4
How much is services confidence decoupling from manufacturing… and trade?
Services vs Manufacturing Confidence PMI Source: Markit and BBVA Research
Volume of Global Trade, Goods and Services, BBVA Research Indicator, YoY (%) Source: CPB and BBVA Research
48
49
50
51
52
53
54
55
56
57
Fe
b-1
1
Fe
b-1
2
Fe
b-1
3
Fe
b-1
4
Fe
b-1
5
Fe
b-1
6
Services Manufacturing
-12,0
-6,0
0,0
6,0
12,0
18,0
Dec
-05
Dec
-07
Dec
-09
Dec
-11
Dec
-13
Dec
-15
WT Volume of Goods, BBVA Research Indicator
WT Volume of Services, BBVA Research Indicator
Global Economic Scenario / 15 March 2016
Is it the threat of risk scenarios going forward in this new world?
What can we read from recent developments in financial markets?
Page 5
Very likely! Uncertainty about China
and persistent low oil prices raised
the risk of second round effects that
could become self-fulfilling…How
worried should we be?
Is it a belated re-pricing of the Fed´s liftoff?
Is it a downward revision of the baseline global outlook?
Unlikely, but the impact of the
rebalancing is behind everything!
Not likely, the downside revisions
have been mild and indicators are
not pointing to a recession
Global Economic Scenario / 15 March 2016
China: Muddling through amidst increasing divergence of policy options (contradictions)
Page 6
However, the likelihood of this
scenario is decreasing, risks to growth
remain skewed to the downside also due
to policy blunders with the stock market
and lack of clarity about the FX policy and
the implementation of structural reforms
The most likely scenario is a
successful “soft landing” (towards 6%
growth of average in 2016-17 fueled by
highly accommodative demand policies,
(monetary and fiscal policy) that could
take this growth rate higher
China: GDP growth (YoY, %) Source: BBVA Research, BEA
7,77,4
6,96,2
0
1
2
3
4
5
6
7
8
9
2013 2014 2015 2016
Jan-16 Oct-15
Global Economic Scenario / 15 March 2016
China, the same doubts: Rebalancing and exchange rate policy
0
2
4
6
8
10
12
14
16
18
20
38%
40%
42%
44%
46%
48%
50%
52%
2006 2010 2014 2015
Industry Services
Industry (YoY, rhs) Services (YoY, rhs)
China: sectorial breakdown (nominal GDP, %)
6,0
6,2
6,4
6,6
6,8
7,02000
2300
2600
2900
3200
3500
3800
4100
Fe
b-1
0
Fe
b-1
1
Fe
b-1
2
Fe
b-1
3
Fe
b-1
4
Fe
b-1
5
Fe
b-1
6
FX Reserves CNYUSD (rhs)
China, FX reserves (Billion USD) CNY/USD
Page 7
Source: BBVA Research, Haver Source: BBVA Research, PBoC and Haver
Global Economic Scenario / 15 March 2016
China: employment breakdown, % total
Page 8
China, the same doubts: Rebalancing
Growth will converge towards
6%, expect more monetary and
fiscal stimulus, but doubts will
nevertheless linger at least until
late in the year
Urban Employment % total Increase, million
2006 40% 12.4
2010 46% 13.7
2014 51% 10.7
2015 52% 11.0
Source: China NBS
Source: BBVA Research, Haver
8.6
33.5
11.75.8
6.9
6.3
14.6
12.7
5.6
33.3
18.6
5.5
7.5
6.2
11.0
12.4 Primary sector (incl.mining)
Manufacturing
Construction
Transportation, Storage & Post
Wholesale, Retail Trade&accommodationBanking & Real Estate
Education
Other services
2014
2010
Global Economic Scenario / 15 March 2016
US: GDP growth (YoY, %)
Source: BBVA Research, BEA
US: growth around 2.5% based on consumption, but concerns increase towards lower growth
Favorable impact of low oil prices on
disposable income against the negative effect
of USD appreciation –and global uncertainty-
on exports and on investment
Page 9
A slowdown in job growth to start the year
has ignited worries of a deterioration in the
labor market which introduces downside risks to
GDP
1,5
2,4 2,42,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2013 2014 2015 2016
Jan-16 Oct-15
Global Economic Scenario / 15 March 2016
Page 10
US: Consumption relies on employment and income while deleveraging has been taking place nicely US, Labour Market: employment growth and unemployment rate (YoY, %) Source: BBVA Research, BEA
0,0
2,0
4,0
6,0
8,0
10,0
0
50
100
150
200
250
300
2011 2012 2013 2014 2015 2016 (f)
Employment, non-farm payroll, monthly increase, LHS
Unemployment rate, RHS
US, Household’s debt (GDP, %) Source: BBVA Research, BIS
40,0
50,0
60,0
70,0
80,0
90,0
100,0
110,0
Mar
-95
Mar
-97
Mar
-99
Mar
-01
Mar
-03
Mar
-05
Mar
-07
Mar
-09
Mar
-11
Mar
-13
Mar
-15
Global Economic Scenario / 15 March 2016
US, Fed rates: increasing doubts over 2016 Fed rates path but do not bet too much on rates staying so low
Page 11
US: implied probability of a rate hike Source: Bloomberg
0
10
20
30
40
50
60
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16
Implied probability of a 0.5-0.75% in Mar 2016 FOMC meeting
Implied probability of a0.5-0.75% in Dec 2016 FOMC meeting
Markets wary of Fed policy towards
normalization while other major central
banks have turned to increased easing and
even negative interest rates.
FOMC will take time to assess impact of
higher rates before 2nd increase.
Monetary policy actions remain data-
dependent but chances are high that they
will increase rates again this year…twice
Global Economic Scenario / 15 March 2016
Eurozone: Economic Growth (GDP, YoY, %)
Source: BBVA Research
Eurozone: modest growth with increasing uncertainties
The main tailwinds continue: (i) low oil
prices; (ii) a depreciated euro; (iii) ultra-loose
monetary policy; and (iv) neutral or moderately
expansive fiscal policy
Page 12
However, biases to growth are to the
downside: low investment, foreign
uncertainties and markets sell-off weigh on
growth expectations -0,3
0,9
1,5
1,8
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2013 2014 2015 2016
Jan-16 Oct-15
Global Economic Scenario / 15 March 2016
Page 13
Eurozone: … and stronger private consumption Eurozone: private consumption and real labour income (YoY, %) Source: BBVA Research
Fundamentals are supportive of an
increase in disposable income : (i) higher
employment and wage growth; (ii) inflation at
very low levels; (iii) low oil prices
-2
-1
0
1
2
3
4
1Q00
1Q03
1Q06
1Q09
1Q12
1Q15
HH disposable income Private Consumption
Global Economic Scenario / 15 March 2016
ECB: the emphasis of monetary easing shifting from negative rates to other instruments
The big question mark: would monetary policy
alone be enough? -0,6
-0,5
-0,4
-0,3
-0,2
-0,1
0
Eonia 1M 2M 3M 4M 5M 6M 7M 8M 9M
Two months ago 06/03/2016 11/03/2016
Eonia forward (%) Source: BBVA Research, Bloomberg
The ECB further ease financial conditions
favoring unconventional measures (balance sheet
expansion) over rate cuts (the ECB seems to be
aware of the potential adverse consequences of
negative rates). A welcome shift.
Liquidity provision trough TLTRs contributes
to eliminate any concern about funding for
European banks and helps to mitigate the
negative impact of negative rates on banks
Page 14
Global Economic Scenario / 15 March 2016
Page 15
World GDP(*) quarterly growth, short-term forecasts based on BBVA-GAIN (%, QoQ)
(*) based on almost 90% of World GDP Source: BBVA Research
Overall, global short term indicators seem to be losing steam at the beginning of 2016
Slowdown of manufacturing “hard
data”, higher stress in financial markets
and confidence indicators slowdown
0,4
0,6
0,8
1,0
1,2
1,4
1,6
Jun-
09
Ma
r-1
0
Dec
-10
Sep
-11
Jun-
12
Ma
r-1
3
Dec
-13
Sep
-14
Jun-
15
Ma
r-1
6
Quarterly growth
Average
Average
Annualized rate:2,6%
Global Economic Scenario / 15 March 2016
Outline
Challenges ahead: little reasons to expect higher
growth rates
Short term: An anemic and fragile growth outlook
Page 16
Risks: a focus on global geopolitics
Global Economic Scenario / 15 March 2016
Risks: Higher, to the downside and spreading but still more biased towards emerging economies
Emerging
Economies
Hard choices in a
tougher background
(Oil prices fall and
Flows rebalancing)
Source: BBVA Research
Europe
“Brexit”,
Banking
Union
Geopolitical
Risks:
refugees crisis
China Hard landing,
policy errors
Rising Holding steady Falling
Page 17
US
slowdown?
Market
volatility
1980 2015 2045
Eastern Europe
North America
Latin America
Western Europe
Africa
Middle East
Japan
Oceania
Asia exJapan
5.4%
5.4%
9.7%
6.1%
6.8%
4.8%
0.9%
0.8%
60.1%
Geopolitics: Against the backdrop of the secular process of moving to the East … The global economy’s center of gravity is moving to the East (%GDP in world economy in the next ten years) Source: BBVA Research EAGLES 2015 and Quah 2011
Page 18
Global Economic Scenario / 15 March 2016
World Conflict Intensity Index 2015-16 (Number of events related to the conflict/ Total events in each
country) Source: www.gdelt.org & BBVA Research The Ukrainian-Russian Crisis remains in
stand-by but still alive and potentially kicking
The Afghanistan permanent conflict will
challenge US involvement in the region
The Middle East conflict is really “complex”
and will take time to contain
The spillovers from the Middle East crisis
are spiraling to Europe (Refugees and
Terrorism)
The Southeastern Asian crisis is the true
Black Swan of Geopolitics
…the geopolitical situation is becoming more challenging…
Page 19
Global Economic Scenario / 15 March 2016
… with both rising indexes of protest and conflict after a long period of relative quietness
BBVA Research World Protest Intensity Index 1980-2016 (Number of protests in the world / Total events in the world) Source: www.gdelt.org & BBVA Research
BBVA Research World Conflict Intensity Index 1980-2016 (Number of conflicts in the world / Total events in the world) Source: www.gdelt.org & BBVA Research
0,026
0,036
0,046
0,056
0,066
0,076
0,086
1981
1983
1985
198
7
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
High
Low
Medium Range
0,006
0,007
0,008
0,009
0,01
0,011
0,012
0,013
0,014
0,015
0,016
198
1
198
3
198
5
198
7
198
9
199
1
199
3
199
5
199
7
199
9
200
1
200
3
200
5
200
7
200
9
201
1
201
3
201
5
High
Medium Range
Low
Page 20
Global Economic Scenario / 15 March 2016
DE
37,3%
FR
4,6%
AT
6,3% HU
13,9%
EE 0,02%
SK 0,01%
HR 0,01%
LT 0,03%
LV 0,03%
PT
0,06%
CY 0,1%
RO 0,1%
CZ 0,1%
MT 0,1%
IE
0,2%
ES
0,8%
EL 0,9%
PL 0,9%
BG 1,6%
DK 1,4%
FI
2,4%
UK
2,8% BE
3,5%
NL
3,5%
IT 6,1%
SE 12,7%
SI 0,02%
LU 0,1%
0-0,2% 0,2-0,5%
Asylum seekers as % of local population
0,5-1,5% 1,5-2%
Massive migrations in 2015 and 2016
Political tensions
In Europe, the refuges crisis could be an opportunity but its management is challenging
Asylum seekers by country (% of total 2015)
Global Economic Scenario / 15 March 2016
Outline
Challenges ahead: little reasons to expect higher
growth rates
Short term: An anemic and fragile growth outlook
Page 22
Risks: global geopolitics
Global Economic Scenario / 15 March 2016
Over long horizons, there are little reasons to expect growth rates higher than the “old normal” 3.5%...
Page 23
Economic Growth (annual change, %)
GDP, YoY,
% 80's expansion 90's soft patch
90's soft
expansion
Patch and
rebound 00's expansion Crisis and rebound Anemic expansion
World 3.8 2.6 3.7 3.7 4.4 3.2 3.3 DM 3.9 1.7 3.2 3.5 2.4 0.5 1.7
EM 3.8 3.9 4.4 4.0 6.6 5.5 4.4 Source: BBVA Research, IMF
-4
-2
0
2
4
6
8
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15(e)
16(f)
80's Expansion 90's soft patch 90's soft Expansion Patch andRebound
00's Expansion Crisis and Rebound AnemicExpansion
The BIG REBALANCING
WORLD DM EM
Source: BBVA Research forecasts
Global Economic Scenario / 15 March 2016
Page 24
Outstanding Debt (*) (% GDP)
…and probably less this time around considering the high debt levels in a low inflation environment
(*) Source: BIS, IIF
• Mature market figures cover 10 key mature market economies/regions (MM-10), i.e. Australia, Canada, Switzerland, Denmark, Euro Area, United Kingdom, Japan, Norway, Sweden, and United States.
• The EM dataset comprises 18 emerging market countries (EM-18), including Argentina, Brazil, China, Czech Republic, Hong Kong, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Saudi Arabia,
Singapore, South Africa, South Korea, Thailand, and Turkey.
• Headline debt figures for public, non-financial corporate and household sectors are based on BIS statistics on total credit to the nonfinancial sector.
• Financial sector debt statistics are derived from countries’ financial accounts via Haver. For countries that do not compile financial accounts, financial sector indebtedness is estimated as a summation of cross-
border bank loans and bond financing. As credit by non-banks is excluded, our estimates could lead to an underestimation of financial sector debt in countries with large shadow banking entities, such as China.
0,0
25,0
50,0
75,0
100,0
125,0
150,0
Jun-
95
Jun-
99
Jun-
03
Jun-
07
Jun-
11
Jun-
15
Households
Non-fin corporates
Government
Financial Corporates
Mature markets Emerging Markets
0,0
25,0
50,0
75,0
100,0
125,0
150,0
Jun-
95
Jun-
99
Jun-
03
Jun-
07
Jun-
11
Jun-
15
Households
Non-fin corporates
Government
Financial Corporates
Global Economic Scenario / 15 March 2016
…and lower global trade World Trade of Goods and Services
1992=100
Exports and Imports of Goods and Services as GDP % Source: BBVA Research, IMF
World, GDP an Trade of Goods and Services %, YoY Source: BBVA Research, IMF
40
50
60
70
80
90
100
110
120
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
0
1
2
3
4
5
6
7
8
1981-1989 1990-1999 2000-2007 2008-2014
GDP Trade
Página 25
Global Economic Scenario / 15 March 2016
Weight on Global Economy Source: BBVA Research, IMF
China, change in sectorial breakdown 2005-2015 (pp) Source: BBVA Research, IMF
Página 26
0
5
10
15
20
25
30
35
China Japan USA EU Latam 7
Exports (World share, %) GDP ( World share, %)-10,0 -5,0 0,0 5,0 10,0
Services
Industry
Agriculture
Factors behind the current slowdown are both cyclical and structural
Global Economic Scenario / 15 March 2016
20
30
40
50
60
70
80
90
100
110
198
1
198
3
198
5
198
7
198
9
199
1
199
3
199
5
199
7
199
9
200
1
200
3
200
5
200
7
200
9
201
1
201
3United States China Germany
0
5
10
15
20
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Higher
restrictions
Página 27
The impact of trade policies is not conclusive but, they seem less supportive than before Economic Restriction Index tariffs on imports, non-tariff barriers imposed on international flows and capital controls Source: BBVA Research, KOF Swiss Economic Institute
Number of new regional trade agreements Source: BBVA Research, WTO
Global Economic Scenario / 15 March 2016
135
140
145
150
155
160
165
170
Mar
-01
Mar
-03
Mar
-05
Mar
-07
Mar
-09
Mar
-11
Mar
-13
Mar
-15
How can stagnation be avoided: Cyclicality of productivity could eventually kick in and lower leverage
Non-financial private sector debt in developed economies (% GDP) Source: BBVA Research with BIS data
World economic and productivity growth Source: BBVA Research with World Bank data
Page 28
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
GDP growth, left axis
Productivity growth, TFP, right axis
Debt as % GDP
Pre-crisis
average
(2000-08)
Peak Now
Total 149 170 161
Households 70 81 74
Non Fin Corp 79 90 87Source: BIS, BBVA Research
Global Economic Scenario / 15 March 2016
Takeaways
Page 29
The most likely global scenario is an anemic growth, with DM keeping
up and EM slowing down –no meltdown-. Biases in DM are to the
downside, but the recession is not likely either.
Risks to the downside have increased, especially for Emerging
Economies: China’s rebalancing and policies; 2nd round effects of market
volatility
Over longer horizons, there are little reasons to expect growth rates
higher than “old normal” 3.5%, the pending deleveraging, lower
productivity growth and the losing steam in global trade weigh on the
outlook
Global Economic Scenario
Little reasons to expect higher growth rates (or a recession)
Lisbon, 15 March 2016
Jorge Sicilia, BBVA Research
2016 BBVA Seminar for Public Sector Investors and Issuers
Global Economic Scenario / 15 March 2016
Oil: The fundamentals, -supply, demand and views about- are behind oil prices drop and latest rebound
Oil supply stickiness to price
declines
Oil demand downward correction
Huge uncertainty about future
demand (China’s slowdown
intensity) and reaction function of
traditional players
Page 31
Change in the Oil price forecasts (Brent, USD/bbl)
0,0
20,0
40,0
60,0
80,0
100,0
120,0
Mar
-00
Mar
-02
Mar
-04
Mar
-06
Mar
-08
Mar
-10
Mar
-12
Mar
-14
Mar
-16
Mar
-18
Actual Baseline 2016.01 Upside Downside Baseline 2015.10
Modest rebound in 2H16 as
non-OPEC production declines
(lower CAPEX, tighter credit,
bankruptcies)