déjà vu, again: china, oil, the fed andrdhawan.com/robinson/conf_may16/global.pdf ·...
TRANSCRIPT
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
3000
3500
4000
4500
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
Jan‐08
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
2000
2500
3000
3500
4000
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. $/b. Source: DS
Forwards Jun 15
Sep 15
Mar 16
Oil is unambiguosly a positive supply shock forEurope
0
20
40
60
80
100
120
140
Jan‐71
Jan‐74
Jan‐77
Jan‐80
Jan‐83
Jan‐86
Jan‐89
Jan‐92
Jan‐95
Jan‐98
Jan‐01
Jan‐04
Jan‐07
Jan‐10
Jan‐13
Jan‐16
Dec 15
Although the market volatility generatedmay have negative repercussions
13
Drop in oil pricesChina’s slowdown
Fed and “other” central banks
2016
Caught in the cross-fire between positive and negative factors
Geopolitics
14
Oct. 13
Discussion continues to be center around the Fed
“Ain
’tno
fre
e lu
nch”
15
Fed: End of QE. Time for normalizing the abnormal?
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
mar‐06
mar‐07
mar‐08
mar‐09
mar‐10
mar‐11
mar‐12
mar‐13
mar‐14
mar‐15
mar‐16
mar‐17
Fed
ECB
First mover advantage?
Source: DS. Fed (in US$) 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
Dec‐89
Dec‐91
Dec‐93
Dec‐95
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
0.5
1.0
1.5
2.0
2.5
3.0
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
300
400
50080 85 90 95 00 05 10 15
300
350
400
450
500
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.