global economic outlook › content › dam › deloitte › jp › documents … · waiting for...

April 2015

Global economic outlook

What to expect in 2015 and beyond Presented by Dr. Ira Kalish

Chief Global Economist

Deloitte

© 2015. For information, contact Deloitte Touche Tohmatsu Limited. 2

Lower oil prices

Big global issues

• Due to fracking, weak global demand,

Saudi policy

• Boosts consumer spending globally

• Creates disinflationary pressure

• Hurts oil exporters (Russia, Iran,

Venezuela)

40

50

60

70

80

90

100

110Brent oil price, dollars per barrel

4000

5000

6000

7000

8000

9000

10000

1980 1984 1988 1992 1996 2000 2004 2008 2012

US Oil Production 1000s barrels per day


Higher oil prices?

Big global issues

Yes No Likely scenario

• Rig usage is down

• Capital expenditures by

energy companies is

falling

• Production will peak soon

• Demand will pick up in

Europe, China

• Production rising despite

drop in rig usage

• Massive glut of inventories

• If price rises modestly,

production will pick up

quickly

• Prices mostly fall in 2015

• Prices begin to rebound in

2016

• Stabilize between $50 and

$75

• Wild cards: Iran, Saudi

Arabia, China


Rising US dollar

Big global issues

• Reasons:

− Lower oil prices

− Strong US economy, expected higher interest rates

− Aggressive monetary policy in ECB, Japan, China

• Impact:

− Lower inflation in US, compels Fed to wait

− Hurts US exports, US corporate profits

− Higher inflation in EMs, leads to higher interest rates

− Hurts external debtors in emerging markets


Has the dollar peaked?

Big global issues

80

90

100

110

120

130

140

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Trade Weighted Value of the Dollar

Index 1997=100 Yes No

• Oil cannot get much

lower and will soon rise

• High dollar is hurting US

trade balance

• US inflation is and will

be higher than

elsewhere

• Foreign central banks

are selling dollars

• The dollar hasn’t

actually risen that much

• Oil could still fall further

• Monetary policy shifts

are not yet finished

• US growth is better than

elsewhere


Chinese slowdown

Big global issues

• Chinese investment slows

• Weak commodity prices

• Negative impact on

commodity exporters

• Negative impact on Asian

countries that are in China’s

supply chain

• China is third largest export

market for the US and EU 6%

13%

16%

18%

27%

30%

31%

37%

44%

45%

45%

48%

0% 10% 20% 30% 40% 50%

Natural Gas

Crude Oil

Wheat

Meat

Corn

Soybeans

Rice

Sea Food

Coal

Aluminium

Copper

Cotton

In %

China’s share in global commodity markets

Source: ABN AMRO

China share of commodity markets


Rise of global middle class

Big global issues

0 5 10 15 20 25

USA

Japan

China

India

Germany

0 5 10 15 20 25

USA

Japan

China

India

Germany

0 5 10 15 20 25

USA

Japan

China

India

Germany

Share of global middle class spending by country

2009 2020 2030


USA


USA

Waiting for the Fed

− Fed targets inflation and

unemployment

− Inflation expectations are declining

− Labor market retains slack, but job

growth is strong

− Lower oil prices creating a

temporary hiatus

− Expect increase in rates late in 2015

Inflation expectations 10 year bond yield minus TIPS yield

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


USA

Consumer spending

− Increased wealth

− Reduced debt

− Improved cash flow

− More jobs

− Lower energy prices

− Yet:

− Worsening of income inequality

− Consumers more prone to save


USA

Business investment

• Investment collapsed during

financial crisis

• Strong rebound still leaves

investment low as share of GDP

• Hoarding cash as profits soar

• Weakness due to:

− Fears of deflation

− Excess capacity in some industries

− Weak overseas demand

− The cloud

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Domestic investment as share of GDP


USA

Financial conditions are better

− Banks holding fewer bad assets

− Partly due to rise in property prices

− Lending to the private sector has

accelerated

− Credit availability for small

businesses is up considerably

− This party explains the strength of

employment growth


USA

Outlook

− No headwinds from fiscal policy

− Fed has limited impact this year

− Low energy prices

− Pent up demand for new homes

− Improved credit markets

− Risk comes from Europe/China


Eurozone

Why are credit markets weak?

− Banks are selling assets and

cutting back on lending to

recapitalize

− Businesses reluctant to invest

due to fear of deflation, weak

demand

− Risk spreads due to fear of

Eurozone failure

− Yet, things are clearly improving

Source: Federal Reserve


Eurozone

ECB aims to reflate

− Very low interest rates

− Charge banks for holding cash

− Lend euros to banks (although

banks are not very interested)

− Purchase securitized assets

− Quantitative easing (with some

restrictions)

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&docid=zLI1_6uIraX-YM&tbnid=wMsyJdoeLTcExM:&ved=0CAUQjRw&url=http://www.centralbanking.com/central-banking-journal/feature/2321730/governor-of-the-year-mario-draghi&ei=JP_GU7ryK5GgogTp-oLYDg&bvm=bv.71198958,d.cGU&psig=AFQjCNESjQYXXuhsPXgQDvVZsXzpwCwYkA&ust=1405636753281172


Eurozone

Signs of improvement

− Employment starts to grow

− Rising retail sales

− Stronger consumer confidence

− Positive impact of cheap oil

− Credit market conditions improve

− Rebound in industrial sector

− Strength in Germany, Spain, Ireland

− Still a long way to go

Eurozone household spending & income


Eurozone

Europe still divided

− Risk spreads remain elevated, even

as borrowing costs decline

− Reflects fear of Eurozone failure.

Greek situation doesn’t help

− Bank lending in periphery continues

to decline

− QE alone will not solve this problem


Eurozone

Outlook

− Modest growth likely in 2015

− Risks:

− Greece

− Russia

− Rise of anti-euro and anti-EU parties in

France, Spain, UK

− Failure to reform in Italy and France

− Failure of ECB to halt deflation

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.oilempire.us/euro.html&ei=s9WqVO_dJtb8oQTemoJ4&bvm=bv.82001339,d.cGU&psig=AFQjCNGa8JtBvPd7ZDj1ZImNFgen9wIzVw&ust=1420568363660454

© 2014 Deloitte Global Services Limited

China

Growth

• Growth in 2014 was the lowest

since 1990

• Deceleration due to weak exports

and weakening investment. FDI

declining

• True growth may be lower

• Outlook is for further slowdown.

Government target is 7.0 percent

6

7

8

9

10

11

12

13

14

15

1991 1994 1997 2000 2003 2006 2009 2012

China: real GDP growth


China

Unsustainable imbalances

− Excessive investment driven by debt

− $6.8 trillion in waste

− Possible collapse of property market

− Could lead to financial crisis

− End result would be slower growth

− Reforms can help


China

Demographics

• Declining working age

population boosts wages,

reduces competitiveness,

reduces growth

• Creates demographic imbalance

in the future

• Boosts importance of internal

migration

China: demographic trends


China

Challenges and opportunities

Challenges Opportunities

• Excess supply of residential property

leading to declining prices

• Excess supply of heavy industry leading

to producer price deflation

• Rising capital outflows leading to

downward pressure on the currency

• Rising wages leading to exit of

manufacturing capacity

• Plenty of room to continue easing of

monetary and fiscal policy

• Growing global profile, including setting

up AIIB

• Acceleration of financial market

liberalization

• World’s largest reserves of shale


Japan

QE is not enough

• Lower yen helps exporters, but hurts

domestic producers

• Inflation is up, but wages are not

• Business investment fell in the last

three quarters

• Deflationary psychology remains

• Retail spending stagnant


Japan

On the other hand…

• Business confidence is way up

• Lending conditions have

improved

• Unemployment is down

• Wealth has increased


Japan

What will the government do?

• Focused on female labor force

participation

• Negotiating TPP with US and 10 other

countries

• Looking at reforms of labor market,

agriculture, other industries


India

A positive story

• Lower oil prices, combined with tight

monetary policy, bring down inflation

• Central bank eases policy and government

eases fiscal policy

• Government reduces subsidies

• Investors boost confidence

• Growth accelerates this year

• Longer term, favorable demographics bode

well for growth


Southeast Asia

A mostly positive story

• Philippines

− Strongest economy in region. Off-shored services show promise

• Indonesia

− Commodity revenues diminish, but lower oil prices give the government room to cut

subsidies

− Manufacturing shows promise, especially with cheaper currency

• Malaysia

− Lower oil price creates challenges, domestic demand remains strong

• Thailand

− Political instability hurts investment, tourism strong due to Chinese visitors. Exports

weak due to Chinese slowdown


Russia

A negative story

• Sanctions limit investment, contribute to

downward pressure on ruble

• Decline in oil prices exacerbates currency

depreciation

• Central bank raised, then lowered, interest

rates. Sold foreign currency reserves

• Inflation is high, investment is declining,

capital is flowing out, and real GDP is

shrinking

• Outlook: rebound in oil will help, but unless

sanctions are lifted, growth will be slow

350

375

400

425

450

475

500

2011 2012 2013 2014

Russian foreign currency reserves Billions $US


Latin America

A mixed picture

• Mexico is promising

− Wage restraint, productivity gains

− Liberalization of energy, telecoms

• Brazil is in trouble

− Loss of competitiveness

− Declining commodity prices

− High inflation, high interest rates, fiscal

tightening, ossified labor market

− Growth outlook is poor


Impact of global economy on Japan

30

Region/country Impact on Japan

China

• Slow Chinese growth hurts Japanese

exports

• China moves up value chain, attempts to

develop global brands that can compete in

Japan

Europe

• European revival could boost Japanese

exports

• Instability in Europe could boost yen

USA

• Strong US economy will fuel Japanese

exports

• TPP could compel Japan to accelerate

domestic reforms


Expectations

The world in 2020

− Eurozone could start to come apart

− US economy overheating, on path

toward next recession

− China at crossroads with slower

growth, inadequate reforms

− Strong markets: India, Southeast Asia,

Mexico, Andean region, Africa

− Weak markets: Russia, Brazil, Central

Europe, Middle East, Japan

31

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.luxuo.com/luxury-locations/exuma-private-island-cave-cay.html&ei=59OpVPiBNoSyoQThnYGACw&bvm=bv.82001339,d.cGU&psig=AFQjCNHrU1Q-39GGGLiKwt3gF8uAHiWkdw&ust=1420502346871813

global economic outlook › content › dam › deloitte › jp › documents … · waiting for...

Documents