No boom, (probably) no bust

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1 No boom, (probably) no bust Global Economic & Market Outlook Riga May 10, 2016 Harald Magnus Andreassen

2 The global economy: Growth is normal 3

3 OK, growth in rich countries sligthly below normal but faster growing EMs are getting larger, lifting the global average to normal 4

4 Unemployment has come down to a normal level However: Potential growth has come down: Actual growth is below average, still unemployment is declining 5

5 The tide has turned (even in Norway, the wrong way...) 6

6 Productivity: Was 2. Is 1, at the best. And will stay there? May be. Have investments been too low? But may be technolgy... or aging, education, or inequality. Or miscalculation? 7

7 But look to Sweden! High growth in GDP -> high productivity growth! 8

8 Wage inflation is low, but is accelerating And given slow productivity growth, 2,5% wage inflation is not that low anymore! 9

9 And guess what: Inflation is normal as well! Ex the one off decline in the oil price which is now on the way up 10

10 Core inflation is not that low anymore either At least outside the EMU 11

11 Are Americans finally returning to the labour market? Just in time, unemployment is very low 12

12 Labour force: USA is a special case (and even worse than Norway) France does not impress either. But look to Germany & Sweden Labour market reforms works! 13

13 When to search for the shelter? The BIG 3 macro risk factors 1) High investments/high consumption 2) High debt/low savings current account deficits 3) High inflation The main risk for investors, not macro : High asset prices 14

14 When to search for the shelter? The BIG 3 macro risk factors 1) High investments/high consumption 2) High debt/low savings current account deficits 3) High inflation The main risk for investors, not macro : High asset prices What is usually not that important cycle-wise? Not small wars, not oil prices, not plague, cholera (or ebola or zika) Not Iraq, Iran, IS or North Korea... and most likely not Ukraine or Crimea or Syria or terrorism or a refugee crisis Or Grexit But what about Brexit? And less globalisation (Trump)? 15

15 The World economy the big picture Where are we in the debt/investment cycle? The Baltics? Sweden USA Germany UK China Spain EMU India Russia Brazil 19

16 The World economy the big picture Where are we in the debt/investment cycle? Spain Households Sweden USA Germany UK EMU Mainland bus. India Norway China Oil Russia Brazil 20

17 Some are building more than normal, most not 21

18 Debt is not that popular anymore (most places) 22

19 Prisene falt de fleste steder og stiger nå overalt Noen steder ser de fryktelig høye ut 23

20 China is an outlier Indonesia is exposed too? India has managed a soft landing 24

21 25

22 Can India save the party? Not, at least not in the short term 26

23 The rest of the world: Flat (almost) 2% 2% 28

24 Not all data are weak, not in China, not in the rest of the world 29

25 World trade has not halted, nor has retail trade But manufacturing production has slowed 30

26 The global economy: All right, until February 31

27 USA the main culprit, EMU not Chinese PMIs up, other Emerging Markets stabilised, below 50 32

28 Or some cyclical explanations? EMU vs. the US - Higher interest rates - No QE - A stronger F/X - More fiscal austerity - No bank cleanup - No credit growth - No shale revolution - Ukraine nearby as is Russia.. & Greece is a member And everything has changed now? Most of it 34

29 Finally, credit is growing in Europe too European banks were regrettably not forced to recapitalise, like in the USA They are still vulnerable, not only in Italy 35

30 The cycle in the US is maturing but is not yet mature Business investments are quite high, but no weakness outside oil Housholds are not stretched, debt ratios down, savings higher than normal Probably somewhat more to go in the labour market 36

31 A 70 % decline in oil investments expains the overall slowdown Equals a 0.6pp drag on GDP growth past 4 quarters! 38

32 Commodities: Sure, it was a Supercycle! Now: Investments are cut, demand was not/is not the problem! 39

33 A Supercycle in energy as well 40

34 Prices below cash cost for some & huge cuts in investments Production will very likely decline further, at least ex Saudi & Iran 41

35 Still too much oil in the market but.. The gap is rapidly closing! 42

36 Norway: Oil is not the only cyclical sector! The good news: Limited downside in Mainland business investments, they are usually more volatile than oil investments. Housing investments are more exposed; are rather high. Public investments not at risk 43

37 USA: Corporate profits under pressure Back below a normal level in Q1? Most likely Higher wages, slow productivity growth, low price inflation (energy) 44

38 High profits was not a global phenomena Profits in other rich countries mostly below par. Thus, the downside is limited Norway: Mainland (ex oil) businesses 45

39 Still, earnings are sagging, stock markets exposed? Oil & Mining explains some of the weakness in earnings but not all MSCI All-Country World Index and 12m fwd P/E band 46

40 What about the central banks? Extreme policies, in special times Has the extreme policy worked? Growth has been above trend, unemployment is falling everywhere Inflation is not that low anymore Just a few housing/debt bubbles are blown up, while most markets are in check Exchange rates have adjusted, in due time (not all can be weak at the same time) Will it create problems in the future? The normal interest rate is probably lower than before (productivity, population growth) - But it is not zero If policies are not normalised when the old problems are solved, new problems will be created, no doubt Anyway, we need much stronger banks 47

41 The EUR is strong vs. the USD, not that strong, in total The USD is marginally on the weak side If anything: Sell EUR May 2014 Source: 48

42 F/x: I think the EUR is weak enough Buy! May

43 Now: More to go, both for the USD & the EUR However, probably not short term May

44 The others? Many stories. Buy SEK, NOK, RUB China does not need a weaker currency 51

45 No boom, (probably) no bust Global Economic & Market Outlook Riga May 10, 2016 Harald Magnus Andreassen

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