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The 2017 Global Economic Outlook: Political Uncertainty Remains Elevated
Tim Condon, Chief Economist, Asia, ING Wholesale Banking
Manila, 25-26 January 2017
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• Will global trade recover?
• Where is the US dollar going?
• What will the Fed do?
• Will US bond yields move permanently above 3%?
• Will the Eurozone succumb to an existential crisis?
• Will Trump start a trade war with China?
Big questions
2
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Will global trade recover?
Source: ING Bank,The Netherlands Bureal of Policy Analysis (CPB), World Bank, Bloomberg
3
50
100
World Trade Volume and World Industrial Production(index with 2010 = 100, log scale)
Steady growth periods World Industrial Production World Trade Volume
Trade growth = 2.1%
IP growth = 2.6%
Trade growth = 7.5%
IP growth = 4.7%
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The end of globalization was a first shock. MAGA could be a second
• The post-WWII recovery of the advanced economies 1950s and 1960s, the emergence of the Asian tigers in the 1970s and 1980s, of the Tiger Cubs in the 1980s and 1990s and the integration of China in the 1990s and 2000s…
• …created opportunities for specialization and gains from trade, whose exploitation led to US de-industrialization and rapid trade growth
• The Asian Tigers were lucky to hit upon export-led growth to escape the middle income trap…
• … because US de-industrialization ran its course around 2010
• A big disruption could create new possibilities for specialization/gains from trade…
• …but until then countries will need to rely on domestic spending for growth Source: ING Bank, Bureau of Economic Analysis via FRED Economic Data, St. Louis Fed
4
0
5
10
15
20
25
30
35
40
US: Manufacturing Employment(in relation to total employment, %)
Actual 1965-2009 Trend (-2.4% growth, R^2 = 0.99)
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Will the US dollar continue to rally?
60
70
80
90
100
110
120
130
140
150
160
US Dollar Trade-Weighted Index(March 1973 = 100)
Shaded areas denote Republican presidencies.
5
Source: ING Bank, EMED data service
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Trump as Reagan?
• Trump’s proposes to cut marginal tax rates for all…
• …but the president only proposes
• Tax law changes must be passed by Congress
Source: CRFB
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
$0
Current Law
Trump's Tax Plan
$100k $200k $300k $500k $400k $5M $5.05M
6
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Or Trump as Hoover? S
oft
H
ard
Loose Even looser
Po
litic
al n
ati
on
alis
m
Fiscal policy
Trump as Hoover Trump Democrat
Trump as Reagan Trump-Lite
ING baseline: limited fiscal stimulus, limited
protectionism => USD neutral
Significant fiscal stimulus, limited protectionism =>
USD positive
More protectionism than fiscal stimulus => USD
negative
Significant fiscal stimulus but outweighed by
protectionism => USD negative
7
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8
ING’s view: a bit of both
0
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11
0%
1%
2%
3%
4%
5%
6%
7%
0.75 0.85 0.96 1.00 1.04 1.09 1.13 1.18 1.24 1.34
# of Analyst forecasts for EUR/USD in 4Q17 (rhs)
Market implied probability (lhs)
1 std. dev. range
1.12 ING 4Q17 forecast
• ING expects EURUSD to depreciate to 1.02 in 1Q17 on Trump’s budget proposal and European political risks…
• …then rally as the reality of Trump-Lite sinks in…
• …and markets re-price for the end of the ECB’s QE policy and reduced Eurozone political risk.
• EURUSD to 1.12 by yearend, which is at the upper end of analyst forecasts.
Source: ING Bank, Bloomberg
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What will the Fed do?
9
Market expectations Around 2 hikes currently priced in
Inflation CPI to hit 2% in early 2017 but price pressures concentrated in shelter costs
Labour market Near full employment
0
1 2
3
Low neutral rate FOMC voter Bullard has said that Fed policy is 1 hike away from being growth-neutral
Fiscal policy could force the Fed to move more quickly than otherwise
Wages Slowly approaching pre-crisis levels
European politics Brexit or election-related shocks from Europe could adversely hit US financial conditions
Balance sheet If the Fed stops reinvesting proceeds of matured bond holdings, higher yields at the short end of the curve would reduce the need for hikes
Number of 2017 rate
hikes
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Why the Fed could hike again as early as March
10
0.16 0.42 0.56 1.02 1.18 1.50 1.79 2.15
Shading reflects number of hikes priced in the USD OIS curve (as of 11 Jan)
Feb.
March May June July Sept. Nov. Dec. FOMC meetings
ING US rate hike forecasts
2 hikes ING forecast
• The Fed’s three-hike signal looks ambitious against the
decline in the neutral rate…
• …but two hikes looks about right. Rising inflation and near-full
employment should give the Fed confidence to act…
• …and could encourage the Fed to frontload its hikes before
focussing on the balance sheet later in the year.
• We forecast a hike in March…
• …but a packed European political calendar poses risk.
Source: Bloomberg
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Will US bond yields move permanently above 3%?
Source: ING Bank, EMED data service
11
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18
10-Year US Treasury Constant Maturity Rate(percent)
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Trump-as-Reagan is responsible for the recent rise in yields…
12
0
1
2
3
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5
6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Implied 10yr Inflation Implied 10yr Real Rate
2% Real yields
1.0
1.5
2.0
2.5
3.0
Jan 16 Apr 16 Jul 16 Oct 16 Jan 17
0.5% Real yields
Source: ING Bank, Bloomberg
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…but 3% will be hard to breach in Trump-Lite
0.0
1.0
2.0
3.0
4.0
5.0
Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18
Standard deviation bands (from implied vols; max +/- 2 std dev)
Treasury Market Forward
US 10Y Yield (actual)
ING Illustrative Path
US 10-year yield (%)Q1
Trump
Jump-Start
Q2Reality
Check
Q3Bund
Tailwind
Q4Fed QE
Unwind
2.75% Trump reflationary drive could see a 1Q17 surge in yields
2.25% Summer lull & some Trump realism may trigger a correction
3%
• Treasury yields to push through 2.50% in 1Q17 as Trump presents his policy wish list…
• …then retrace as Congress curtails some of his plans.
• Yields to move higher in 4Q17 on stronger growth and Fed talk of shrinking its balance sheet
• => Rollercoaster ride in US Treasury yields to drive global financial markets in 2017
13
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Will the Eurozone succumb to an existential crisis?
14
15 Mar Netherlands General election
5-8 Dec Supreme Court Brexit hearing
2017
“Early January” Brexit appeal result due
March Article 50 expected to be triggered by UK
French Presidential elections
23 Apr Round 1
7 May Round 2
11 May BoE Inflation Report We expect a rate cut
Aug-Oct German Federal election (Date to be set)
Italian Elections? Not confirmed, but Interior Minister has raised possibility
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Politics could become a headwind to growth…
15
The economy is showing resilience…
• The Eurozone economy has been looking a bit
better recently, despite the Brexit vote and
Trump’s surprise victory
• PMIs, hiring intentions, price expectations and
new orders indicators all point upward
…but political uncertainty may become a
headwind
• The far-right may have been defeated in
Austria, but the aftermath of Italy’s ‘no’ vote is
uncertain
• Throw in elections in Germany, France and The
Netherlands, alongside noise surrounding Greek
debt relief, and we think Eurozone growth will
be slow slightly in 2017
1.6% 1.5% 2016 2017
ING’s Eurozone GDP growth forecasts
2017 dragged down by political uncertainty
Our ECB expectations
QE A 3-6 month extension of QE programme at current pace
Tapering Announced June 2017 earliest
-6
-4
-2
0
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30
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50
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2006 2008 2010 2012 2014 2016
Composite PMI (lhs, 1Q lead)
Real GDP (YoY%, rhs)
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16
Economics matters…
-8
-6
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0
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08 09 10 11 12 13 14 15 16
Change in Gross Domestic Demand since Jan 2008 (percentage points)
US
UK
Eurozone
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17
…and has given EZ voters grounds for wanting change
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08 09 10 11 12 13 14 15 16
Change in unemployment rate since Jan 2008 (percentage points)
US
UK
Eurozone
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Does Italy’s “No” vote signal an “Italexit”?
18
=> The road to leaving the Euro is a long one….
Step 1: Italy elects Eurosceptic party (e.g. Five Star Movement
The Italian Constitution explicitly prohibits any referendum meant to repeal laws that ratified international treaties.
Step 2: Amend rules via a new constitutional law
Step 3: Seek approval from Senate and House of Deputies. Could take a long time and deliberations could be fraught – relies on 5* having strong majority in both chambers
Step 4: If vote fails to reach two-third majority in each house, law will be put to a constitutional referendum
Step 5: Despite referendum, law could still be blocked/slowed down by Constitutional Court
Path clear to leave
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Nexit, Frexit? What do the polls say?
19
Key European election calendar:
0
5
10
15
20
25
30
Parti
Socialiste
Front
National
Les
Republicans
Left
party
En
Marche!
Others
First round April 2017 France Presidential
election - latest poll (Jan 3)
0
10
20
30
Matteo
Renzi
PD
Beppe
Grillo
M5S
Silvio
Berlusconi
FI
Nichi
Vendola
SEL
Matteo
Salvini
Lega nord
Others
Scheduled February 2018 Italian election -
latest poll (Dec 21)
0
5
10
15
20
25
30
Geert
Wilders
PVV
VVD PvdA SP CDA D66 CU GL Others
Netherlands Mar 2017 election latest poll -
projected seats (Dec 22)
Source: Ipsos Source: Ipsos
Source: Elabe
15 March 23 April 7 May June? 3Q17
Netherlands General election France Presidential election (Round 1) France Presidential election (Round 2) Italy? Elections possible later this year Germany Federal election
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A French EU referendum is not so simple
20
• Current polls suggest Fillon is comfortably
poised to win the French presidency
• If Le Pen wins she’s promised to call an EU vote.
Can she?
• To call a referendum on new laws or
constitutional change as Nexit would imply
requires majority support from Parliament. Le
Pen would most likely have to rely on the
support of other political parties
• => the only real possibility of a referendum
would be for the Prime Minister (likely not from
Le Pen’s party) to come under political
pressure to call one (e.g. Cameron in the 2015
UK election).
• Fewer than a third of French people think
France would be better off outside the EU (see
chart on next slide)
-10-505
101520253035
Poll Actual Poll Actual Poll Actual
Fillon Le Pen Remain / Leave Clinton / Trump
% Poll lead with 4-5 months to go
?
Fillon: Insurmountable lead?
Source: Ifop-Fiducial poll
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A Nexit looks even less likely
21
• Referendums in the Netherlands are advisory
and can cover only recently-adopted laws
• => there is no legal possibility of a Nexit vote
• A majority in both houses could change
legislation to allow an EU referendum…
• …but no main party supports one…
• …and surveys suggest most of the population is
in favour of staying in the EU/Euro
PVV, 35
VVD, 23
CDA, 15 D66, 14 GL
(Greens),
14 SP, 11
50Plus, 11
PvdA , 10
Other, 9
CU, 5 SGP, 3
Projected number of lower house seats (Total 150)
Source: Peil.nl poll, 8 Jan
• While Geert Wilders leads in the polls, several
parties are expected to get more than 10
seats…
• …and most have ruled out forming a coalition
with Wilders’ PVV party
• The ruling VVD party has not ruled out a
coalition…
• …but has suggested it would have to lead one
• The most likely outcome is a coalition of 4 or 5
centre-right and centre-left parties
0%
10%
20%
30%
40%
50%
60%
70%
80%
UK IT PL HU FR DE BE NL
Total 'Agree'
Total 'Disagree'
“(Our country) could better face the future outside of the EU”
Source: Eurobarometer
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22
Will Trump start a trade war with China?
Wilbur Ross US Secretary of Commerce
• Investor and vocal critic of NAFTA • Argues tariffs benefit Mexico • China world’s biggest “trade cheater”
Robert Lighthizer US Trade Representative
Dan DiMicco Trade Advisor to Trump – former CEO of Nucor Steel
Peter Navarro Director of National Trade Council
• Lawyer who served under Reagan • Accused China of unfair trade
• Economist and strong China critic • Author of Death by China
• Author of Steeling America’s Future • Labelled China as destructive
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Trump’s vision: a US manufacturing renaissance
• The “China Shock” caused the loss of 1 million manufacturing jobs and 2.4 million total jobs between 1999 and 2011 a/
• Trump’s strategy for getting them back:
• First, eliminate push factors
• => Tax reform
• Second, work on pull factors
• => China’s currency
• a/ Autor, D., Dorn, D. and Hanson, G. “The China Shock: Learning
from Labor Market Adjustment to Large Changes in Trade,” NBER Working Paper 21906, January 2016.
Source: ING Bank, Bureau of Economic Analysis via FRED Economic Data, St. Louis Fed
23
0
5000
10000
15000
20000
25000
US: Manufacturing Employment(thousands)
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The RMB is going the wrong way
24
• Trump-adviser Anthony Scaramucci said “the new
administration does not want to have a trade war”
but the US’s huge bilateral trade deficit with China
argued for greater “symmetry” in the relation.
• Commerce Secretary-designate Wilbur Ross called
China “the most protectionist country” among major
nations: “They talk much more about free trade than
they actually practice. We would like to levelize that
playing field and bring the realities a bit closer to the
rhetoric. The No. 1 objective will be expanding our
exports.” Source: ING Bank, EMED data service
• CNY appreciation is the path of least resistance for
the world’s most important bilateral economic
relationship
• We forecast the RMB moving to 6.80 by yearend
(consensus 7.17)
• The downside for Chinese exporters is clear.
• The upside for the PBOC would be significantly
diminished CNY depreciation expectations and a
halt to FX reserve losses. Source: ING Bank, EMED data service
0
100
200
300
400
500
600
China's Total and Bilateral US Trade Surplus(US$ billions)
Total US
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
RMB per US Dollar
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25
How Trump would wage a trade war
NAFTA Implementation Act 1993
• Power to return Mexico and Canada to MFN basis
• 6 months notice • Impose additional duties after
consulting Congress
Trade Expansion Act 1962 Section 232 (b)
• Impose Tariffs / quotas to offset national security impacts
Trading with the enemy Act 1917 (and International emergency economic powers act 1977)
• For use in times of war (not necessarily with the country being restricted)
• Unlimited powers to limit trade… • …seize / freeze assets of all kinds
Trade Act 1974 Section 122 • To address serious balance of
payments deficits • Through tariffs or quotas of up to
15% for 150 days… • …or both
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RGB= 171, 0, 102
ING Lime
RGB= 208, 217, 60
ING Leaf
RGB= 52, 150, 81
ING Mid Grey
RGB= 118, 118, 118
Text Colour
RGB= 51, 51, 51
• Q: Will global trade recover? • A: No, world trade is destined to grow in line with world GDP
• Q: Where is the US dollar going? • A: Not far
• Q: What will the Fed do? • A: What people expect, 2 hikes this year
• Q: Will US bond yields move permanently above 3%? • A: Not this year, but fluctuations will be a main source of financial market volatility
• Q: Will the Eurozone succumb to an existential crisis? • A: Not this year, but the tensions behind break-up worries will get worse
• Q: Will Trump start a trade war with China? • A: No, the two sides will negotiate a deal to avoid a trade war
Our Bottom Line
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No content below the grey line
ING Orange
RGB= 255, 98, 0
ING Light Grey
RGB= 168, 168, 168
ING Indigo
RGB= 82, 81, 153
ING Sky
RGB= 96, 166, 218
Colour Guidelines
ING Fuchsia
RGB= 171, 0, 102
ING Lime
RGB= 208, 217, 60
ING Leaf
RGB= 52, 150, 81
ING Mid Grey
RGB= 118, 118, 118
Text Colour
RGB= 51, 51, 51
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Our global forecasts
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY
United States
GDP (% QoQ, ann) 0.8 1.4 3.5 2.0 1.6 3.0 2.7 3.4 3.6 2.8
CPI headline (% YoY) 1.1 1.1 1.1 1.7 1.3 2.3 2.3 2.6 2.7 2.5
Federal funds (%, eop, lower bound) 0.25 0.25 0.25 0.50 0.75 0.75 1.00 1.00
3-month interest rate (%, eop) 0.62 0.65 0.83 1.01 1.21 1.20 1.36 1.38
Eurozone
GDP (% QoQ, ann) 2.1 1.2 1.1 1.5 1.6 1.5 1.5 1.8 1.8 1.5
CPI headline (% YoY) 0.0 0.0 0.3 0.7 0.3 1.3 1.0 1.1 1.1 1.1
Refi minimum bid rate (%, eop) 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.00
3-month interest rate (%, eop) -0.22 -0.26 -0.30 -0.31 -0.31 -0.32 -0.32 -0.32
Japan
GDP (% QoQ, ann) 2.1 0.7 2.2 0.8 0.6 0.7 0.5 0.7 0.9 0.7
CPI headline (% YoY) 0.1 -0.4 -0.3 0.0 0.3 0.5 0.8 0.9
Excess reserve rate (%) -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
3-month interest rate (%, eop) 0.09 0.06 0.04 0.02 0.05 0.05 0.05 0.05
China
GDP (% YoY) 6.7 6.7 6.7 6.6 6.7 6.6 6.5 6.4 6.4 6.5
CPI headline (% YoY) 2.1 2.1 1.7 1.8 1.9 2.0 2.0 2.0 2.0 2.0
PBOC 1yr deposit rate (% eop) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
PBOC 1yr best lending rate (% eop) 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35
7-day repo rate (% eop) 2.9 2.7 2.6 2.8 2.8 2.8 2.8 2.8
2016F 2017F
No content below the grey line
ING Orange
RGB= 255, 98, 0
ING Light Grey
RGB= 168, 168, 168
ING Indigo
RGB= 82, 81, 153
ING Sky
RGB= 96, 166, 218
Colour Guidelines
ING Fuchsia
RGB= 171, 0, 102
ING Lime
RGB= 208, 217, 60
ING Leaf
RGB= 52, 150, 81
ING Mid Grey
RGB= 118, 118, 118
Text Colour
RGB= 51, 51, 51
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