déjà vu, again: china, oil, the fed andrdhawan.com/robinson/conf_may16/global.pdf ·...

Déjà Vu, Again: China, Oil, the Fed and …

May 26, 2016

Manuel BalmasedaCX Economics

2Fuente: CX- Economics and Consensus Forecast

Stability in the developed world, though no reasons to party. Challenging for EMs

Growth forecasts 2015

Stagnant

Recession

Mild growth

Strong growth

3Fuente: CX- Economics and Consensus Forecast

Stagnant

Recession

Mild growth

Strong growth

Stability in the developed world, though no reasons to party. Challenging for EMs

Growth forecasts 2016

4

Drop in oil pricesChina’s slowdown

Fed and “other” central banks

2016

Global activity in the cross-fire of shocks

Geopolitics

5

China generates volatility in markets

Global financial markets have become more sensitive to changes in China’s economic and financial conditions and policies

27 Aug 201511 July

2015

2500

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5000

5500Jun‐15

Jun‐15

Jul‐1

5

Aug‐15

Aug‐15

Sep‐15

Oct‐15

Oct‐15

Nov‐15

Dec‐15

Dec‐15

Jan‐16

0

1000

2000

3000

4000

5000

6000

7000Jan‐05

Jan‐06

Jan‐07

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Jan‐10

Jan‐11

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Jan‐15

Jan‐16

2000

2500

3000

3500

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4500

5000

5500Jan‐14

Mar‐14

May‐14

Jul‐1

4

Sep‐14

Nov‐14

Jan‐15

Mar‐15

May‐15

Jul‐1

5

Sep‐15

Nov‐15

Jan‐16

6

Sharp correction of Chinese stock market

Will China manage a soft landing?

7

Disequilibria built up during recent years will finally take its toll

• Excess capacity in some sectors

• Excessive leverage in the private sector,

• Episodes of irrational exuberance in asset markets (stock market, real estate)

Authorities will not be able to manage or “soften” the bursting of the bubbles

The slowdown is the byproduct of the shift towards a more sustainable growth model (increasing the weight of consumption and services)

Availability of policy space and many tools to manage the transition • Relatively healthy public sector balance sheet,

• Large domestic savings,

• Still important role of the state

Optimistic Pessimistic

Achieving a ‘soft landing’ of the economy while addressing vulnerabilities and advancing structural reforms will be challenging

Will China manage a soft landing?

The two visions

8

Corporate debt increase in emerging markets may be a source of risk(particularly in China, but not only)

Higher leverage has also been associated with, on average, rising foreign currency exposures

‐20 ‐15 ‐10 ‐5 0 5 10 15 20 25 30

CHNTUKCHLBRZINDPERTHAMEXKORPHPINDOCOLMALARGRUSPOLSAF

ROMBULHUN

Total China debt. In USD amd % of GDP Change in corporate debt: 2007-2014 (in % of GDP)

23%45% 55%7%

24%

65%83%

72%

125%

8%

20%

38%

0%

50%

100%

150%

200%

250%

300%

2000 2007 2Q14

Households

Non‐financial corporate

Financial institutions

Government

Total debt(USD tn) 2.1 7.4 28.2

(Debt-to-GDP)

Source: IMF (Global Financial Stability Report) and Mackinsey Global Institute Analysis

Will China manage a soft landing?

0

50

100

150

200

250

300

0

50

100

150

200

250

300

9

Collateral effects of the Chinese landing: commodity price drop

Strong EM commodity

demand

Commodity prices have fallen sharply, particularly energy and metals

Oversupply

Upswing in commodity

prices

Incentives for capacity build out and technology innovation

Commodity prices downswing

Softening of EM commodity demand+

EnergyMetals

Food

Raw Materials

10

Will China manage a soft landing?

11

Drop in oil pricesChina’s slowdown

Fed and “other” central banks

2016

Caught in the cross-fire between positive and negative factors

Geopolitics

20

30

40

50

60

70

80

Jan‐15

Feb‐15

Mar‐15

Apr‐15

May‐15

Jun‐15

Jul‐1

5Au

g‐15

Sep‐15

Oct‐15

Nov‐15

Dec‐15

Jan‐16

Feb‐16

Mar‐16

Apr‐16

May‐16

Jun‐16

Jul‐1

6Au

g‐16

Sep‐16

Oct‐16

Nov‐16

Dec‐16

12

Has oil finally bottomed out?

Brent oil price. $/b. Source: DS

Forwards Jun 15

Sep 15

Mar 16

Oil is unambiguosly a positive supply shock forEurope

0

20

40

60

80

100

120

140

Jan‐71

Jan‐74

Jan‐77

Jan‐80

Jan‐83

Jan‐86

Jan‐89

Jan‐92

Jan‐95

Jan‐98

Jan‐01

Jan‐04

Jan‐07

Jan‐10

Jan‐13

Jan‐16

Dec 15

Although the market volatility generatedmay have negative repercussions

13

Drop in oil pricesChina’s slowdown

Fed and “other” central banks

2016

Caught in the cross-fire between positive and negative factors

Geopolitics

14

Oct. 13

Discussion continues to be center around the Fed

“Ain

’tno

fre

e lu

nch”

15

Fed: End of QE. Time for normalizing the abnormal?

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5.0

mar‐06

mar‐07

mar‐08

mar‐09

mar‐10

mar‐11

mar‐12

mar‐13

mar‐14

mar‐15

mar‐16

mar‐17

Fed

ECB

First mover advantage?

Source: DS. Fed (in US$) and ECB (in €) Balance Sheet. Trillions

$Trillio

ns

€Trillio

ns

21,3% PIB

20,7% PIB

Interest rate rises are unlikely to go as smoothly

"Long-term interest rates are at very low levels, and […] when the Fed decides it's time to begin raising rates […] term premiums could move up, and we could see a sharp jump in long-term rates."Janet Yellen May 7th 2015

“Low market liquidity may act as a powerful amplifier of financial stability risks” IMF May 2015

‐4

‐2

0

2

4

6

8

10

12

Dec‐85

Dec‐87

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Dec‐97

Dec‐99

Dec‐01

Dec‐03

Dec‐05

Dec‐07

Dec‐09

Dec‐11

Dec‐13

Dec‐15

16

Normalization needed sooner or later …

Where will the next bubble show up?

Nominal GDP growth

2y rate

Housing bubble forming in the US, EMs bubble

Interest rates need to normalize

Stock bubble?

17Source: DS

ECB’s target

Inflation expectations

Headline inflation

Eurozone Inflation far below ECB’s target

• Disanchoring inflation expectations• Debt deflation spiral

• Negative interest rates scenario distorting financial markets• Uncertain consequences for the banking sector

Risk of not acting further

Risk of acting further

‐1.0

‐0.5

0.0

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1.0

1.5

2.0

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3.5

4.0

Oct‐10

Jun‐11

Feb‐12

Oct‐12

Jun‐13

Feb‐14

Oct‐14

Jun‐15

Feb‐16

Core inflation

ECB policy: “do whatever it takes”. Will it be enough?

Rather do too much than too little

18

Deflation, collateral damage in Europe

Deflation

Risk of default

Break-up risk

• More difficult to repay debt• Fiscal adjustment more severe• Contraction of activity (shy consumption and investment)

• Increase in spreads• More necessity of real adjustment (fall in demand)• Social unrest reignites (austerity fatigue in periphery - rescue fatigue in the core)

• Higher increase in spreads • “Sudden stop” risk• Credit crunch• Economic contraction and necessity of restoring public finance

19

Chinese landingLower commodity

prices

Lower Chinese demand (imports)

Oil supply shock

Fed’s tightening

US Dollar appreciation

Capital outflows from EMs

Negative for countries with high external

financing needs and high USD debt

Negative for countries with

strong trade ties with China and

commodity exporters

Positive for oil importers

Increased risk aversion

Déjà vu, “old” shocks keep acting up

20

Drop in oil pricesChina’s slowdown

Fed and “other” central banks

2016

Caught in the cross-fire between positive and negative factors

Geopolitics

21

Can we predict the unpredictable? Geopolitical risk

Geopolitical risk with economic roots, but not anticipated by economists

22

Drop in oil pricesChina’s slowdown

Fed and “other” central banks

2016

Caught in the cross-fire between positive and negative factors

Geopolitics

23

Drop in oil pricesChina’s slowdown

Fed and “other” central banks

2016

Caught in the cross-fire between positive and negative factors

Geopolitics

24

Is the US expansion coming to an end?

No such thing as a “normal” cycle

Peak month Trough month

November 1948 October 1949 37July 1953 May 1954 45August 1957 April 1958 39April 1960 February 1961 24December 1969 November 1970 106November 1973 March 1975 36January 1980 July 1980 58July 1981 November 1982 12July 1990 March 1991 92March 2001 November 2001 120December 2007 June 2009 73

79

Duration of expansions in

months

Recessions

Assumming December 15 as peak -6.5

-5.5

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

Nov

-70

Nov

-73

Nov

-76

Nov

-79

Nov

-82

Nov

-85

Nov

-88

Nov

-91

Nov

-94

Nov

-97

Nov

-00

Nov

-03

Nov

-06

Nov

-09

Nov

-12

Nov

-15

Above trend growth

Recessions

This expansion has been very weak, almost no quarters of growth above trend

CX US Activity Indicator. 40% available information in November. Source: CX and NBER

No recession but 2% economy

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

2012 2013 2014 2015 2016

25

GDP observed growth and Consensus Forecast expectations

Source: CF and CEMEX

Example: for 2015 growth

t-24: CF as of Jan. 14

t-18: CF as of June 14

t-6: CF as of June 15

US

Observed

US: Déjà vu, again

US continues to disappoint expectations

26

US: Déjà vu, again. Sound fundamentals, but …

Oct. 12

27

Healthy consumers: PCE at 2.5%-3.0% growth. Financial stability remains a concern (precautionary saving)

0

100

200

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50080 85 90 95 00 05 10 15

300

350

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450

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80 85 90 95 00 05 10 15

Financial assets

Non financial assets

Net worth

Hou

seho

lds’

bal

ance

she

et (

% G

DP)

PER ratio

1 st dev.

0

20

40

60

80

100

80 85 90 95 00 05 10 15

Liabilities

Source: Fed and CX

Justified by economic fundamentals or result

of excess liquidity?

50

70

90

110

130

150

80 85 90 95 00 05 10 1528

Investment: Healthy NFC’ balance sheets also, despite debt accumulation

NFC’ balance sheet (% GDP)

Assets

Liabilities

Net worth

Source: Fed and CX

But growth weighed

down by low CAPEX

50

100

150

200

250

80 85 90 95 00 05 10 15

40

50

60

70

80

90

100

80 85 90 95 00 05 10 15

29

Lack of CAPEX oil related. Ex-energy investment is doing OK but probably not strong enough

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

71 80 89 98 07 16

‐5%

‐3%

0%

3%

5%

8%

10%

Mar‐13 Mar‐14 Mar‐15 Mar‐16

Ex energy

Total

Ex energy

Total

Total Business Investment (yoy)

Source: BEA and CX

Ex Energy excludes mining exploration, shafts, and wells structures and mining and oilfield machinery.

“Core investment” (ex energy) does not anticipate a recession in the

short termEnergy weight (%)

15 33 10 5 6 3

30

Excess saving more than lack of investment. Although, latest data shows a slow return to “normality”

‐4%

‐2%

0%

2%

4%

6%

8%

10%

12%

60 65 70 75 80 85 90 95 00 05 10 15

NFC: Net Lending (% GDP)

Net Lending

Saving

Investment

Europization (or Germanizing) of the US? It seems not

Dotted lines: Pre-crisis Avg. 60-07

31

In sum: corporate savings are not being (fully) channeled to productive investment, as they were before the crisis

NFC Liquid assets/short term liabilities

Source: Fed and CX

0%

20%

40%

60%

80%

100%

120%

Dec‐70

Dec‐73

Dec‐76

Dec‐79

Dec‐82

Dec‐85

Dec‐88

Dec‐91

Dec‐94

Dec‐97

Dec‐00

Dec‐03

Dec‐06

Dec‐09

Dec‐12

Dec‐15

Avg. 70-00

Recessions

Source: S&P

25000

75000

125000

175000

225000

50000

80000

110000

140000

170000

200000

230000

260000

Mar‐09

Mar‐10

Mar‐11

Mar‐12

Mar‐13

Mar‐14

Mar‐15

Mar‐16

S&P 500: Operating profits (M$)Ex energy

Total (left)

Ex-energy profits barely flat

Buyback stocksWhat are companies

doing with the saving glut?

Pay dividendsM&A

Cash hoarding

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

t‐24

t‐12 t‐6

2012 2013 2014 2015 2016

32

GDP observed growth and Consensus Forecast expectations

Source: CF and CEMEX

Example: for 2015 growth

t-24: CF as of Jan. 14

t-18: CF as of June 14

t-6: CF as of June 15

US Eurozone

Observed

US: Déjà vu, again

US continues to disappoint expectations

33

-7

-6

-5

-4

-3

-2

-1

0

1

2

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

Euro AreaUS

-1.5

-1

-0.5

0

0.5

1

1.5

abr-1

3

jul-1

3

oct-1

3

ene-

14

abr-1

4

jul-1

4

oct-1

4

ene-

15

abr-1

5

jul-1

5

oct-1

5

ene-

16

abr-1

6

Euro Area

US

Activity in Europe seems to be more dynamic than in US

US: Déjà vu, again

34

Reasons for optimism:

Financial stability (negative rates weigh down on the banking

system) and political/institutional risks remain as the

key threats

• Low oil prices

• Credit finally expanding

• Weaker Euro

European treasuries: the best financingconditions ever

DEFR

IR

ITES

2Y yields (%) Source: Datastream

Is Europe “really” growing?

• ECB actions

35

Large intra euro imbalances still remain

00 05 10 15

-4

0

4

General Government

Financial corporations

Households

NFC

Current account

Eurozone

Net lending/borrowing (%GDP) Spain

Germany10

5

0

-5

-10

02 06 12 1509

10

5

0

-5

-10

Source: ECB

Political Economy dominates over Economic Policy:Myopia

Structural reforms across Europe, predominantly in theperiphery (competitiveness) but not only

Dominance of domestic politics 36

Institutional reform/Fiscal reform

• Lender of last resort (ECB)

• Fiscal integration (European Treasury) and Eurobonds

Incentive mechanisms (fiscal, regulatory, etc.)

Banking Union• Pan-European banking resolution

• European Deposit Insurance Institution

• Regulation and supervision

Eurozone remains an unfinished project.

Political Economy dominate over Economic Policy: Political risks

37

BREXIT

Political polarization / Populism

Greece: Back to 2012?

Refugees

38

But, all in all …

39

“Sir, the following paradigm shifts occurred while you were out.”

Notwithstanding,

Manuel Balmaseda

CEMEX

Thank you.