Except for China (& Ukraine), OK? Global economic & market outlook Riga, May 28, 2014 Harald Magnus Andreassen +47 23 23 82 60 hma@swedbank.no
Usually, it has paid well off to be a sober optimist
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
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
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
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
Where is the world economy now? Most countries are not in the red light district, now China is the major risk 7
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
Investments are not high (ex China) 9
Even for the largest sinners, there is hope, in the end 10
Private sector debt consolidation, most places EMU not that special! Could still need some more now 225 200 175 150 125 100 75 Households' debt In % of disposable income Norway adj. for dividends Sweden UK Spain USA Finl. France Germany 50 80 85 90 95 00 05 10 15 225 200 175 150 125 100 75 50 Corporate debt 150 150 140 In % of GDP 140 130 Spain 130 120 Denmark 120 110 France 110 100 EMU 100 UK 90 Norway 90 80 Italy 80 70 USA 70 60 Germany 60 50 50 40 40 30 30 20 20 80 85 90 95 00 05 10 15 20 Source: Reuters EcoWin, Swedbank Source: EcoWin, Swedbank FS 11
Most housing markets have stabilised There is some hot air in some markets? Most likely House prices 300 275 Real prices, avg. before 2000=100 Norway 250 225 200 Austr. 175 Sweden Can. Fr. Denm. 150 UK Netherl. 125 Icl. Finl. EMU It Switzerl 100 USA Irl. 75 Germany 50 Japan 85 90 95 00 05 10 15 20 300 275 250 225 200 175 150 125 100 75 50 Source: EcoWin, Swedbank 12
Fiscal policy: Much of the tightening is behind us! Look to... Greece?? 13
The strong fiscal headwind is slowing to a mild summer breeze An unprecedented tightening in the US in 2013, almost 3% of GDP! 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00-0.50 USA Fiscal policy Change in structural deficit, % of GDP Estimates from OECD & IMF OECD IMF 12 13 14 15 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00-0.50 Source: EcoWin, First Securities 14
Some current account deficits are gone The PIGS to +2% of GDP, from -10% USA to -2%, from -6% 5.0 2.5 0.0-2.5-5.0-7.5-10.0 In % of GDP Current accounts Spain Greece Italy France 5.0 2.5 0.0-2.5-5.0-7.5-10.0-12.5 90 92 94 96 98 00 02 04 06 08 10 12 14 16-12.5 Source: EcoWin, Swedbank FS 15
Draghi, economic policy & some economic results Bond yields are record low, even for ol sinners 16
Wage inflation productivity = Inflation Wage inflation is still low, even if unemployment is down 17
Structural or cyclical? Will people return to the labour market? 18
UK: Unemployment is falling, wages are responding? And Bank of England is already discussing when to hike... 19
Anyway, wage inflation is still low everywhere! But not extremely (deflationary) low either, outside Japan 20
Deflation now? Do not think so! 21
The World Economy - A Very Short Status Check 22
The global economy is still kicking 23
Regionally: A mixed bag The slowdown recent months only due to Japan (the VAT hike) 24
EM: Gathering at ground zero And who is at the bottom now? 25
EMU: So far, so good 65.0 62.5 60.0 57.5 55.0 52.5 50.0 47.5 45.0 42.5 40.0 37.5 Swedbank Composite PMI business survey EMU - PMI vs. GDP GDP, q/q % (annual rate) 98 00 02 04 06 08 10 12 14 16 6 5 4 3 2 1 0-1 -2-3 -4-5 Source: EcoWin, Swedbank 26
EMU: France is the big looser 27
Spain: Better than anybody expected? And Italy has bottomed? Italy PMI vs GDP Spain PMI vs GDP 65 60 GDP q/q, ann. rate 7.5 5.0 60 55 GDP q/q, ann. rate 6 4 55 2.5 50 2 50 0.0 45 0 45 40 35 Composite PMI -2.5-5.0-7.5 40 35 30 Composite PMI -2-4 -6 Swedbank 30 98 00 02 04 06 08 10 12 14-10.0 25 Swedbank 01 02 03 04 05 06 07 08 09 10 11 12 13 14-8 Source: EcoWin, Swedbank Source: EcoWin, Swedbank 28
No more investments?? 29
The European consumer is not (that) downbeat anymore Except for the Norwegians 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0-2.5-3.0-3.5 Consumer confidence St.dev, avg = 0 (from 93) Swedbank FS EMU Sweden Norway USA 03 04 05 06 07 08 09 10 11 12 13 14 15 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0-2.5-3.0-3.5 Source: EcoWin, First Securities 30
Should the EU election have been postponed by 6 months?? 31
Finland, Sweden not that impressive 32
Sweden OK, says the surveys. Finland is lagging Mobile? Paper? Too few Angry Birds? Do they need an internal devaluation? 33
Well, Sweden has not yet delivered that much 34
Where is the big risk? - Most likely in China 35
China: A very special growth story What if 36
Can China do the credit trick once again? We doubt Thus: There are some downside risks. 37
Following credit booms, usually no plain sailing Minksy (and many more before him) told us so 38
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. 130 110 90 25 Change m/m (ann rate), y/y 15 5-5 150 130 110 90 25 15 5-5 -15 Swedbank 02 03 04 05 06 07 08 09 10 11 12 13 14-15 Source: EcoWin, Swedbank 39
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 120 130 120 110 100 90 80 70 60 50 Swedbank New starts Sales 07 08 09 10 11 12 13 14 110 100 90 80 70 60 50 40 Source: EcoWin, Swedbank 40
The financing cost has increased for many companies 16 15 14 13 12 11 10 9 8 China BBB corporate bond yield 41
A Chinese slowdown will be felt in some raw material markets It was a super cycle most likely with the normal two legs! 42
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
Many disappointments in China recently However, not in other Emerging markets (and the first May PMI form China was OK) 44
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
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
What more can the ECB do? 47