Except for China (& Ukraine), OK?

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1 Except for China (& Ukraine), OK? Global economic & market outlook Riga, May 28, 2014 Harald Magnus Andreassen

2 Usually, it has paid well off to be a sober optimist

3 Usually, it has paid well off to be a sober optimist The world economy is weak, and on the way down less than 15% of the time

4 Usually, it has paid well off to be a sober optimist The world economy is weak, and on the way down less than 15% of the time Equity markets are falling seriously just 10 15% of the time

5 When to search for the shelter? The BIG macro risk factors High investments/high consumption High debt/low savings current account deficits High inflation (High asset prices) By the way, does the list seem familiar to you? 5

6 When to search for the shelter? The BIG macro risk factors High investments/high consumption High debt/low savings current account deficits High inflation (High asset prices) What is usually not that important cycle-wise? Not small wars, not oil prices, not plague or cholera Not Iran or North Korea And hopefully not Ukraine or Crimea Minor policy errors 6

7 Where is the world economy now? Most countries are not in the red light district, now China is the major risk 7

8 USA & Europe The FC was a disaster in many countries Now, six years later, many problems are solved, and not too many new created Private sector consolidation is behind us Investments on the way up, but still low. Savings are high Much of the pubic sector fiscal consolidation is behind us, debt is stabilising Whatever it takes (monetary) policy measures in the US, EMU, UK and Jp. The Eurozone is fully reconstructed (fiscal policy, ESM, ECB, banking union) Global imbalances are sharply reduced (as within the EMU) Wage inflation at 1 2%. Price inflation no threat near term (nor is deflation) 8

9 Investments are not high (ex China) 9

10 Even for the largest sinners, there is hope, in the end 10

11 Private sector debt consolidation, most places EMU not that special! Could still need some more now Households' debt In % of disposable income Norway adj. for dividends Sweden UK Spain USA Finl. France Germany Corporate debt In % of GDP Spain Denmark France EMU 100 UK 90 Norway Italy USA Germany Source: Reuters EcoWin, Swedbank Source: EcoWin, Swedbank FS 11

12 Most housing markets have stabilised There is some hot air in some markets? Most likely House prices Real prices, avg. before 2000=100 Norway Austr. 175 Sweden Can. Fr. Denm. 150 UK Netherl. 125 Icl. Finl. EMU It Switzerl 100 USA Irl. 75 Germany 50 Japan Source: EcoWin, Swedbank 12

13 Fiscal policy: Much of the tightening is behind us! Look to... Greece?? 13

14 The strong fiscal headwind is slowing to a mild summer breeze An unprecedented tightening in the US in 2013, almost 3% of GDP! USA Fiscal policy Change in structural deficit, % of GDP Estimates from OECD & IMF OECD IMF Source: EcoWin, First Securities 14

15 Some current account deficits are gone The PIGS to +2% of GDP, from -10% USA to -2%, from -6% In % of GDP Current accounts Spain Greece Italy France Source: EcoWin, Swedbank FS 15

16 Draghi, economic policy & some economic results Bond yields are record low, even for ol sinners 16

17 Wage inflation productivity = Inflation Wage inflation is still low, even if unemployment is down 17

18 Structural or cyclical? Will people return to the labour market? 18

19 UK: Unemployment is falling, wages are responding? And Bank of England is already discussing when to hike... 19

20 Anyway, wage inflation is still low everywhere! But not extremely (deflationary) low either, outside Japan 20

21 Deflation now? Do not think so! 21

22 The World Economy - A Very Short Status Check 22

23 The global economy is still kicking 23

24 Regionally: A mixed bag The slowdown recent months only due to Japan (the VAT hike) 24

25 EM: Gathering at ground zero And who is at the bottom now? 25

26 EMU: So far, so good Swedbank Composite PMI business survey EMU - PMI vs. GDP GDP, q/q % (annual rate) Source: EcoWin, Swedbank 26

27 EMU: France is the big looser 27

28 Spain: Better than anybody expected? And Italy has bottomed? Italy PMI vs GDP Spain PMI vs GDP GDP q/q, ann. rate GDP q/q, ann. rate Composite PMI Composite PMI Swedbank Swedbank Source: EcoWin, Swedbank Source: EcoWin, Swedbank 28

29 No more investments?? 29

30 The European consumer is not (that) downbeat anymore Except for the Norwegians Consumer confidence St.dev, avg = 0 (from 93) Swedbank FS EMU Sweden Norway USA Source: EcoWin, First Securities 30

31 Should the EU election have been postponed by 6 months?? 31

32 Finland, Sweden not that impressive 32

33 Sweden OK, says the surveys. Finland is lagging Mobile? Paper? Too few Angry Birds? Do they need an internal devaluation? 33

34 Well, Sweden has not yet delivered that much 34

35 Where is the big risk? - Most likely in China 35

36 China: A very special growth story What if 36

37 Can China do the credit trick once again? We doubt Thus: There are some downside risks. 37

38 Following credit booms, usually no plain sailing Minksy (and many more before him) told us so 38

39 The housing market is slowing down I House prices are flattening out. Price declines in many cites in April China New Home prices 150 Index, Dec 2004=100. s.a Change m/m (ann rate), y/y Swedbank Source: EcoWin, Swedbank 39

40 The housing market is slowing down II Sales are down, housing starts are down. As is growth in steel/cement production China Housing starts, sales 140 Mill. sq.m. pr month, smoothed Swedbank New starts Sales Source: EcoWin, Swedbank 40

41 The financing cost has increased for many companies China BBB corporate bond yield 41

42 A Chinese slowdown will be felt in some raw material markets It was a super cycle most likely with the normal two legs! 42

43 And is not just a marginally slower growth in demand The supply side has finally come up to speed in many markets! As always Capitalism works because most capitalists do not understand how capitalism works 43

44 Many disappointments in China recently However, not in other Emerging markets (and the first May PMI form China was OK) 44

45 Next week: ECB must deliver, or else. The economy has turned the corner, credit markets are gradually recovering. Wages is not falling. Core inflation has stabilised. Why act now? Because it should have acted long time ago But the Germans did not accept it.. and the ECB has promised to do it, now 45

46 What will the ECB do? Additional monetary easing is (almost) announced and (certainly) expected. Will it matter? Very likely: Further rate cut Main refinancing rate close to zero Negative deposit rate But effect on bank funding relatively small Quite possible: Targeted credit easing Funding for lending: Conditional LTRO to fund SMBs Smaller amounts of asset purchases: Covered bonds, asset-backed securities But banks may not want to lend much more Still unlikely at this point: Large-scale asset purchase programmes Purchases of government bonds The economy deserves all the stimulus it can get, just as in UK, US The market has discounted action. Spesific measures to allocate credit to SMB may impress. Large QE not likely 46

47 What more can the ECB do? 47

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