global economic watch - bbva research · protectionist fears world industrial production (%,...

BBVA Research - Global Economic Watch | January 2019 / 1

Global

Economic Watch

January 2019

Mild adjustment of global growth, but more uncertain due to political

risks

Our BBVA-GAIN model suggests a rebound during 4Q18 to around 0.8%, but

with signs of stabilization ahead. Downturn more evident in developed nations,

mainly Eurozone, and Emerging Asia, while Latin America will continue to

recover, albeit more slowly.

Global growth headwinds led by a rise in general uncertainty, fueled by one-off

factors, mounting protectionism and a slowdown in China. Bulk of the recent

growth downturn led by marked deceleration in global trade.

Factory activity indicators such as IP and PMIs across many major economies point towards weakening

demand. In addition, one-off, temporary factors have exacerbated activity slowdown in the EZ.

We revise downwards our global growth forecasts by 0.1 pp to 3.5% in 2019 as the persistence of general

uncertainty continues to weigh on activity, fuel financial tensions and undermine confidence.

In the US, while growth remains robust still, we expect it to slowdown to 2.5% in 2019 and 2% in 2020

dragged by flagging external demand, waning impact of fiscal stimulus and uncertainty at home and abroad.

In the EZ, we expect a faster moderation in growth from 1.8% in 2018 to 1.4% in 2019-20. While domestic

fundamentals remain solid, reduced external support and country specific issues, such as those related to

German auto sector, Italian politics, French protests and the Brexit deadlock weigh on activity and sentiment.

We expect China’s growth to continue trending lower, from 6.5% in 2018 to 6% in 2019 and 5.8% in 2020,

weighed, in large part, by domestic deleveraging measures and protracted trade tensions with the US.

Protectionism, the increased likelihood of recession in the US and greater adjustment to growth in China are

most significant risks in the forecast horizon.

BBVA Research – Global Economic Watch | January 2019 / 3

Outline

01

02

Short term indicators

New projections


01Short term indicators


0

1

2

3

4

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

Eurozone

0

1

2

3

4

5

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

United States

China

0

2

4

6

8

10

12

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

India

0

1

2

3

4

5

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

Asia (Jap, Kor, Indonesia)

-2

0

2

4

6

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

Brazil

Latam (Arg, Chi, Col, Per, Ven)

-2-1012345

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

Mexico

GDP growth slowed in 2H18 across the board, with one-off

factors weighing on some regions (EZ, India, Japan)

GDP growth(%, SAAR)

Source: BBVA Research and National Sources

4

5

6

7

8

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

-4

-2

0

2

4

6

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18


Global GDP will likely recover somewhat in 4Q18, but the trend

is clearly downwards

World GDP Growth(Forecast based on BBVA-GAIN (%, QoQ))


World GDP growth(Forecast based on BBVA-GAIN (%, QoQ))

Our BBVA-GAIN model suggests a slight rebound in 4Q18 to around 0.8%, as some one-off effects will

fade, but growth is unlikely to return to the strong rates of the last two years.

0.85

1.000.95

0.660.74

0.78

Cu

rre

nt

Est.

La

st m

on

th

4Q17 1Q18 2Q18 3Q18 4Q18

Nowcast

0.4

0.6

0.8

1.0

1.2

De

c-1

3

Ju

n-1

4

De

c-1

4

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8

CI 20% CI 40% CI 60%

Point Estimates Period average


Manufacturing activity slowed across the board, induced by

protectionist fears

World industrial production(%, 6-month moving average)


World industrial production(%, MoM)

More evident effect of protectionism on global slowdown, especially in China (and perhaps

Germany), along with fears of higher tariffs in coming months.

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

No

v-1

4

Ma

y-1

5

No

v-1

5

Ma

y-1

6

No

v-1

6

Ma

y-1

7

No

v-1

7

Ma

y-1

8

No

v-1

8

DM GLOBAL EM

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Aug-18 Sep-18 Oct-18 Nov-18

DM GLOBAL EM


Industrial production growth held solid in the US during December

but relatively weak in China and slipped significantly in the EZ


World industrial production: selected regions(%, YoY)

Industrial production was particularly down in the EZ in November after disappointing figures across

the bloc. Output continued to grow at a solid pace in US, while mostly unchanged in China and LA7

3.0 3.4 3.4

5.0

4.2

4.1

4.0 4.0

3.1

2.4

0.7 0.9

-3.2

6.2 6

.8

6.6

6.0

5.9

5.4 5.7

4.4

4.3

2.7 2.8

3.7

1.3

2.3

2.2

1.3

0.7

-0.2

-0.3

-4

-2

0

2

4

6

8

Oc

t-1

8

Nov-1

8

Dec-1

8

Oc

t-1

8

No

v-1

8

De

c-1

8

Oc

t-1

8

Nov-1

8

Dec-1

8

Oc

t-1

8

No

v-1

8

De

c-1

8

Oc

t-1

8

Nov-1

8

Dec-1

8

4Q171Q182Q183Q18 4Q18 4Q171Q182Q183Q18 4Q18 4Q171Q182Q183Q18 4Q18 4Q171Q182Q183Q18 4Q18 4Q171Q182Q183Q18 4Q18

USA EZ CHN MA4 LA7


Looking ahead, PMI surveys anticipate a recovery in manufacturing

activity in developed markets in January*

Source: BBVA Research and Markit Economics

World manufacturing PMI(Level ± 50)

While manufacturing activity weakened in December, incoming PMI survey data for January signals a

rebound as continued strength in the US industrial sector offsets weakness in the EZ.

48

49

50

51

52

53

54

55

56

57

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

DM GLOBAL EM

50

51

52

53

54

Oct-18 Nov-18 Dec-18 Jan-19

DM GLOBAL EM

(*) Note: data available so far for around 60% of develop economies, results might change as all data are released


PMI indicators suggest further slowdown in manufacturing activity

in the EZ while it remains robust in the US


Manufacturing PMI: selected regions(Level ± 50)

The slowdown is taking root in the EZ as PMIs edge closer to stagnation while data in the US suggest

a solid start to the new year with scarce detrimental impact from the shutdown on the private sector.

55.5

56.1

55.2

54.9

54.9

58.2

55.6

54.3

51.7

50.5 51.4

51.1

50.5

50.0

52.0

51.9

51.8 52.4

52.1

51.3

51.3

51.3

45

47

49

51

53

55

57

59

61

63

Ja

n-1

9

Ja

n-1

9

Ja

n-1

9

Ja

n-1

9

Ja

n-1

9

1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19

USA EZ CHN MA4 LA7


Global services PMIs rebounded slightly in developed markets

during January


World services PMI(Level ± 50)

A pick up in services PMIs in emerging markets offset the drop in advanced economies in December.

However, January* has seen a slight improvement in developed economies’ services PMIs.

50

51

52

53

54

55

56

57

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

DM GLOBAL EM

(*) Note: data available so far for around 60% of develop economies, results might change as all data are released

50

51

52

53

54

55

Oct-18 Nov-18 Dec-18 Jan-19

DM GLOBAL EM


Services PMIs depict a sharper-than-expected slowdown in services

sector growth in the EZ while growing at a still robust pace in US


Services PMI: selected regions(Level ± 50)

Services PMI came in lower than expected in the EZ in January led by weak export orders while in the

US, services PMIs declined slightly but to a level that still suggests solid growth.

54.4 5

6.0

54.7

54.7

54.2

56.4

54.5

54.4

52.8

50.8

53.7

53.2

52.5

52.9

50.5 51.4

51.8 52.6

52.8

52.5

52.1 53.0

45

47

49

51

53

55

57

59

61

63

Ja

n-1

9

Ja

n-1

9

Ja

n-1

9

Ja

n-1

9

Ja

n-1

9

1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19

USA EZ CHN MA4 EAG


Domestic demand remains resilient, but lower growth is taking

root

World retail sales(%, 6-month moving average)


World retail sales(%, MoM)

Lower growth in both consumption and investment is taking root, amid elevated concerns regarding

the global slowdown, tariff disputes and political uncertainty

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Aug-18 Sep-18 Oct-18 Nov-18

DM GLOBAL EM

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

No

v-1

4

Ma

y-1

5

No

v-1

5

Ma

y-1

6

No

v-1

6

Ma

y-1

7

No

v-1

7

Ma

y-1

8

No

v-1

8

DM GLOBAL EM


Global trade slowdown weighed by protectionist threat,

although we expect new tariff threats to fade over 1H19

World exports of goods(Index at constant prices, Jan-12=100)


World exports of goods(%, MoM growth, constant prices)

October’s outperformance was driven by the front-loading of exports chiefly by China. However, such

adjustment effect has faded since, with trade growth expected to weaken further going forward.

95

100

105

110

115

120

125

130

135

140

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

2Q

16

4Q

16

2Q

17

4Q

17

2Q

18

4Q

18

BBVA-Goods Exports CPB-Goods Exports

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

ago-18 sep-18 oct-18 nov-18

BBVA-Goods Exports CPB-Goods Exports


Headline inflation to dip further in coming months amid easing oil

prices, while core inflation should remain contained, mainly in DMs


Headline and core inflation: selected regions(%, YoY)

1.91.6 1.8

1.7

3.9

2.2

1.1

1.7

3.6

3.2

0.00.51.01.52.02.53.03.54.04.55.0

Aug-1

8

Sep-1

8

Oct-18

Nov-

18

Dec-

18

Aug-1

8

Sep-1

8

Oct-18

Nov-

18

Dec-

18

Aug-1

8

Sep-1

8

Oct-18

Nov-

18

Dec-

18

Aug-1

8

Sep-1

8

Oct-18

Nov-

18

Dec-

18

Aug-1

8

Sep-1

8

Oct-18

Nov-

18

Dec-

18

USA EZ CHN MA4 LATAM(Mex, Bra, Chl, Per, Col)

Headline CPI Core CPI


02New projections


Worse macro outcomes

Faster slowdown than expected

(Protectionism+China+negative one-offs)

Evidence that impact from US fiscal

stimulus will fade earlier than expected

Higher financial stress

Risks of hard landing global growth

Tougher financial conditions

Three key assumptions in our projections:

1. Easing US-China trade tensions: Unchanged tariffs, but structural issues

remain

2. Tail risks in Europe are eventually resolved (orderly Brexit; Italy)

3. More dovish Fed (2 vs 3 hikes in 2019; “data dependent”) and ECB (refi-rate

hike postponed to 2020), further room for EM central banks

Soft landing in global growth (vs gloomier markets’ view), with

downward revisions across the board (except in China due to further

stimulus), but highly uncertain (policy mistakes on trade, Fed, Brexit…)

Key features of our projections: still soft landing, but more

uncertain due to dependence on politics and policies


0,0% 0,0% 0,0% 0,0%

0,5%

0,0%

0,1%

0,2%

0,3%

0,4%

0,5%

0,6%

2016 2017 2018 2019 2020

Source: BBVA Research

Balance Interest rates

The QE ended in Dec18

Enhanced forward guidance

on reinvestment: to continue

well beyond the start of

interest rate hikes

Liquidity: another TLTRO

before Jun19 is likely to be

announced to avoid liquidity cliff

in 2020.

Ongoing reduction of

the size of the balance

sheet (USD500bn in

2019)

The end of the hiking cycle

is near: two more rate hikes

in 2019 are expected instead

of three

Delay in the rate hike path

due to a less supportive

global outlook and higher

risks.

First depo rate hike

(+10bps) in Dec19 vs.

Sept19. First refi rate hike

(+25bps) in Jun20 vs Dec19

0,8%

1,5%

2,5%

3,0% 3,0%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

2016 2017 2018 2019 2020

Major central banks to alter the normalization process: the

Fed to pause earlier than expected and the ECB to delay


Upward revision

Unchanged from last ALCO

Downward revision

Downward revision in almost all footprint countries

US

2019

2.52020

2.0

Eurozone

2019 2020

1.4 1.4

2019 2020

Spain

2.4 2.0 Turkey

2019 2020

1.0 2.5

China

2019 2020

6.0 5.82019 2020

2.0 2.2

Mexico

3.0 3.3

Colombia

2019 2020

2019 2020

-1.0 2.5

Argentina

Peru

2019 2020

3.9 3.7

2019 2020

3.5 3.4

World


After the recent turmoil, Fed’s pause, China’ stimulus and US-China

talks allowed a partial recovery

Fuente: BBVA Research

The Fed’s “pause”, China’s

stimulus and hopes of easing

trade tensions spurred a relief

rally across the board

01

However, core sovereign yields

remained low (peripheral spreads

narrowed) and the JPY continued

strengthening, signaling caution on

risks surrounding the global outlook

(slowdown, trade, politics and Brexit).

03

Among the developed, US

recovered at higher pace than

European assets (due to growth

concerns) while EM coped with

recent turmoil and now, benefited

the most from Fed’s “pause”.

02

FX and Equity EM(Index)

US and Germany 10Y sovereign yields(%)

VIX (%)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2

2.2

2.4

2.6

2.8

3

3.2

3.4

Jan-1

7

Ma

r-1

7

Ma

y-17

Jul-1

7

Sep

-17

Nov-1

7

Jan-1

8

Ma

r-1

8

Ma

y-18

Jul-1

8

Sep

-18

Nov-1

8

Jan-1

9

10Y US 10Y GER (rhs)

5

10

15

20

25

30

35

40

De

c-1

6

Fe

b-1

7

Ap

r-1

7

Ju

n-1

7

Au

g-1

7

Oct-

17

De

c-1

7

Feb

-18

Ap

r-1

8

Ju

n-1

8

Au

g-1

8

Oct-

18

De

c-1

8

VIX

250

300

350

400

450

50060

65

70

75

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Jan-1

9

EM FX EMBI spread (rhs, inv)


• Downward revision to GDP on less

optimistic outlook for private

investment and public spending

• Inflation to overshoot modestly in

short-run, returning to slightly below

the Fed target in 2020

• Financial vulnerabilities and lower

growth outlook underlie revision from

three to two rate increases in 2019.

Time in between rate changes to

increase to 6-months, as Fed attempts

to fine-tune its strategy in the final

stages of this interest rate

normalization cycle

• Local risks: balanced to the downside

due to potential global headwinds and

uncertainty, and U.S. recession risk,

particularly over a 24-month horizon

Main macroeconomic indicators(% YoY, % GDP)


2.9

1.6

2.22.9

2.5

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2015 2016 2017 2018 2019 2020

Current Previous

US: downward revision to GDP, together with financial vulnerabilities,

underlie revision from three to two interest rate increases in 2019


• PBOC stepping up growth

stimulating policy easing. China’s

monetary policy to stay

accommodative in 2019.

• PBOC doing a delicate balancing

act between trying to stem flagging

economic growth without fueling

financial stability concerns amid

elevated debt levels.

• Maintain our FX forecast at 6.75

RMB to USD for Dec’19 in our

baseline scenario, under which we

expect US and China to soon

reach an agreement after the 90-

day trade war truce ending March

2019.

• Local risks: trade war uncertainty,

domestic deleveraging, housing

market slowdown, expansionary

local government debt



6.9 6.7 6.9

6.56.0 5.8

0.0

3.0

6.0

9.0

2015 2016 2017 2018 2019 2020

Current Previous

China: tackling growth slowdown assumes policy priority


• Lower oil prices and weaker euro

add to the strength of domestic

drivers, but not enough to offset the

drag of net exports

• More supportive monetary and fiscal

policy could help to prevent the

effect of worsening confidence on

private spending

• The sharp fall in oil prices will shape

inflation down clearly below the

ECB’s target earlier this year, but

core inflation should increase very

gradually

• Domestic risks tilted to the

downwards and predominantly

political (Brexit, political uncertainty)



2.0 1.9

2.5

1.8

1.4 1.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2015 2016 2017 2018 2019 2020

Current Previous

Eurozone will trend faster to potential growth as external support

fades away


Gross domestic product (annual average, YoY)

Inflation (annual average, YoY)

Macroeconomic forecasts (updated Jan-19)

2017 2018 2019 2020

United States 2.2 2.9 2.5 2.0

Eurozone 2.5 1.8 1.4 1.4

Spain 3.0 2.5 2.4 2.0

Latam* 1.9 1.6 2.1 2.4

Argentina 2.9 -2.4 -1.0 2.5

Brazil 1.1 1.2 2.2 1.8

Chile 1.5 4.0 3.4 3.3

Colombia 1.8 2.6 3.0 3.3

Mexico 2.3 2.2 2.0 2.2

Peru 2.5 3.9 3.9 3.7

Eagles ** 5.4 5.2 5.0 5.0

Turkey 7.4 3.0 1.0 2.5

Emerging Asia 6.4 6.4 6.1 6.0

China 6.8 6.6 6.0 5.8

World 3.7 3.6 3.5 3.4

(*) Argentina, Brazil, Chile, Colombia, M exico, Paraguay, Peru and Uruguay

Source: BBVA Research and IM F

(**) Bangladesh, Brazil, China, Egypt, India, Indonesia, Iran,

M alasya, M exico, Nigeria, Pakistan, Philippines, Russia, Turkey

2017 2018 2019 2020

United States 2.1 2.4 2.2 2.1

Eurozone 1.5 1.7 1.6 1.6

Spain 2.0 1.7 1.3 1.5

Latam* 6.6 7.4 7.6 5.8

Argentina 25.4 36.3 40.1 20.5

Brazil 3.3 3.9 4.1 5.0

Chile 2.2 2.5 2.8 2.9

Colombia 4.2 3.2 3.3 2.9

Mexico 6.0 4.9 4.2 3.8

Peru 2.8 1.3 2.3 2.4

Eagles ** 4.0 4.7 5.1 4.7

Turkey 11.1 16.3 18.4 13.4

Emerging Asia 2.2 2.6 2.8 3.1

China 1.5 1.9 2.3 2.5

World 3.3 3.9 3.9 3.6

(*) Argentina, Brazil, Chile, Colombia, M exico, Paraguay, Peru and Uruguay

(**) Bangladesh, Brazil, China, Egypt, India, Indonesia, Iran,

M alasya, M exico, Nigeria, Pakistan, Philippines, Russia, Turkey

Source: BBVA Research and IM F

../../../../QRES/19_01/Graf&Tables.xlsx#ALCO!AK3


Global

Economic Watch

January 2019


This document has been prepared by BBVA Research Department. It is provided for information purposes only and expresses data, opinions and estimates at the date of issue of the report,

prepared by BBVA or obtained from or based on sources we consider to be reliable, but not independently verified by BBVA. Therefore, BBVA offers no warranty, either express or implicit,

regarding their accuracy, completeness or correctness.

Estimates this document may contain have been made in accordance with generally accepted methodologies and should be considered as forecasts or projections. Results obtained in the

past, whether positive or negative, are no guarantee of future performance.

This document and its contents are subject to changes without prior notice depending on variables such as the economic context or market fluctuations. BBVA is not responsible for updating

these contents or for giving notice of such changes.

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