AUTOMOTIVE Assessing Risks to the Global Economy Amid Rising Political Uncertainty 8 September 2016 Detroit Nariman Behravesh, Chief Economist, +1 781 301 9101, nariman.behravesh@ihsmarkit.com. All Rights Reserved.
Outline of presentation Assessing the impacts of Brexit How serious is the retreat from globalization? Economic policies of the two US presidential candidates Global overview Economic outlook for key countries and regions
The impact of Brexit on the UK economy Weakened business confidence amid heightened, prolonged uncertainty will result in a scaling back of investment and employment plans. FDI and portfolio investment into the United Kingdom will likely suffer. More credit rating downgrades are possible. The British pound has fallen sharply more losses to come. A falling currency will likely push up inflation markedly, eroding consumer purchasing power. The weaker pound will help exports, but European/global growth will be softer. Asset market declines will mean tighter financial conditions. Bottom line: The UK economy is headed for a sharp slowdown growth will likely be about 0.6% in 2017.
The British pound will depreciate further until the terms of Brexit are clarified Exchange rate 2.2 2.0 1.8 1.6 1.4 1.2 1.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 US dollar/gbp Euro/GBP
Economic impact of Brexit on European Union Anti-EU and right-wing nationalist movements could be strengthened across the bloc. Investment in the European Union could be hit, reflecting increased concerns over its future. Business and consumer confidence has suffered. Financial market volatility has increased. Exports to the United Kingdom will be hurt countries with particularly high trade volume with the United Kingdom (e.g. Ireland) likely to be most affected. The EU reform agenda might be further delayed once Germany has lost one of its rigor allies. However, investment could be diverted from the United Kingdom to EU countries. Frankfurt and Paris could gain as financial centers. There could be greater reform urgency in the Eurozone.
Europe a la Carte? GDP, 2015 European Union 28-nation single market of free trade and shared regulation; includes free movement of goods, services, capital, and people Euro Zone 19 countries using euro currency European Economic Area Provides access to single market in exchange for payments; has emergency brake on free movement of people European Free Trade Association Free-trade zone and network of agreements with other countries Customs Union Circulates goods without duties, has uniform system for handling imports Schengen Area 26-country passport-free travel zone Source: Bloomberg
How serious is the retreat from globalization? Trade growth has slowed sharply since 2007 because of both structural and cyclical reasons. The support for globalization has ebbed and flowed in the past century Brexit and the anti-trade and anti-immigration rhetoric of the US presidential campaigns are the latest phase. While both proponents and opponents of globalization have exaggerated their case, numerous studies have shown that the net effects are positive, and much the same as the impacts of technology. Unfortunately, not enough has been done for those hurt by globalization and technology. The good news is that a majority of US voters (especially the young) are in favor of both free trade and immigration.
Why has growth in world trade slowed? Cyclical forces Structural forces Slow growth in aggregate world demand Weak capital spending Collapse in commodity markets Limited progress on trade liberalization Shift from manufacturing to services Rising trade in data and information, supplanting physical trade Shortening of global supply chains
The era of rapid growth in world trade volumes ended in 2008 World trade Percent change 16 12 8 4 0-4 -8-12 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Real world exports Real world GDP
Economic policies of the US presidential candidates Assessing what the presidential candidates will actually do, when in office, is more difficult than usual during this presidential election. The Trump trade and immigration slogans will be hard to implement and highly dangerous a trade war and mass deportations could do serious economic damage Clinton has flip-flopped on free trade, so it is difficult to assess what she might do as president. Clinton s budget raises taxes and spending, while Trumps cuts taxes and raises spending. The Trump scenario has higher deficits and interest rates. Trump s plan would boost growth initially, but hurt growth in two to three years as both interest rates and the dollar rise sharply.
Preliminary assessment of the impacts of the Clinton and Trump budget proposals Real GDP growth 4-3 Federal budget balance 3 2 1 2017 2018 2019 2020 2021-4 -5-6 2017 2018 2019 2020 2021 Real interest rate Real trade weighted value USD 4 3 2 1 0 2017 2018 2019 2020 2021 Baseline Clinton Trump 1.3 1.2 1.1 1.0 2017 2018 2019 2020 2021
World GDP growth another year in low gear Real GDP Percent change 10 8 6 4 2 0-2 -4 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 World Advanced countries Emerging markets
Real GDP growth in the developed world Real GDP Percent change 6 4 2 0-2 -4-6 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 United States Eurozone Japan
Real GDP growth in key emerging markets: Recessions in Russia and Brazil continue in 2016 Real GDP 15 Percent change 10 5 0-5 -10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 China India Brazil Russia
European and Japanese central banks will keep policy interest rates low for several more years Real GDP Percent, end of quarter 6 5 4 3 2 1 0-1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 United States Eurozone Japan United Kingdom
Industrial materials prices hit bottom in mid-january IHS weekly indexes, 2002:1=1 6 5 4 3 2 1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 All industrial materials Chemicals Nonferrous metals
US crude-oil prices and natural-gas prices Crude oil and natural gas Dollars/barrel 140 120 100 80 60 40 20 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 14 12 10 8 6 4 2 0 Dollars/million Btu Crude oil, WTI (Left scale) Natural gas, Henry Hub (Right scale)
A large US trade deficit will contribute to a retreat in the dollar s real exchange value in 2017-20 Index, 2009 = 1.0 1.6 1.4 1.2 1.0 0.8 0.6 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 Major trading partners Other important trading partners
Brexit will have a limited impact on the US economy The UK exit from the European Union will have a small adverse impact through trade channels a stronger dollar and weaker demand for US exports. Real GDP is projected to increase 1.5% in 2016 and 2.4% in 2017 (down 0.2 percentage point from pre-brexit forecast). Consumer spending will drive the expansion forward, supported by growth in employment, real incomes, and household net worth. Housing construction will continue to recover in response to pent-up demand from young adults and improved credit availability. Recent growth has been held back by an inventory cycle, the rout in the energy sector, and weak exports. The US Federal Reserve will be cautious in raising interest rates; the next increase is expected in December. Political uncertainty is beginning to take a toll, especially on business investment.
The US forecast is characterized by moderate real GDP growth and a steady unemployment rate Real GDP and unemployment Annual percent change 5.0 2.5 0.0-2.5-5.0-7.5-10.0 2007 2009 2011 2013 2015 2017 10 9 8 7 6 5 4 Percent of labor force Real GDP growth (Left scale) Unemployment rate (Right scale)
After two years of excess accumulation, US inventory investment is being curtailed Billions, annual rate, 2009 dollars 150 100 50 0-50 -100-150 -200 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
US economic growth by sector Percent change 2015 2016 2017 2018 Real GDP 2.6 1.5 2.4 2.4 Consumption 3.2 2.8 2.6 2.5 Residential investment 11.7 4.9 6.7 6.3 Business fixed investment 2.1-0.2 4.0 4.4 Federal government 0.0 0.9 0.9-1.3 State & local government 2.9 1.2 0.9 0.9 Exports 0.1-0.4 2.8 4.2 Imports 4.6 0.9 4.7 5.4
Other key US indicators Percent change 2015 2016 2017 2018 Industrial production 0.3-0.9 1.4 3.1 Payroll employment 2.1 1.7 1.2 0.9 Light-vehicle sales (Millions) 17.4 17.4 17.7 17.7 Housing starts (Millions) 1.11 1.18 1.34 1.48 Consumer Price Index 0.1 1.3 2.3 2.1 Core CPI 1.8 2.2 2.1 2.0 Brent crude oil price ($/barrel) 53 43 52 57 Federal funds rate (%) 0.1 0.4 1.0 1.7 10-year Treasury yield (%) 2.1 1.7 2.3 2.9
US services recorded the largest employment increases during the 12 months ending August 2016 Change in payroll employment, thousands Health & social services Prof. & business services Leisure & hospitality Retail trade Construction Financial services Local government Other services Education Transport & warehousing Wholesale trade Federal government Information State government Utilities Manufacturing Mining & logging Total change = 2.45 million -200-100 0 100 200 300 400 500 600
US investment in mines and wells is near a trough Billions of 2009 dollars 150 125 100 75 50 25 0 1990 1995 2000 2005 2010 2015 2020 Manufacturing Mines & wells Utilities
The US fiscal outlook will depend on the next president s plans Billions of USD, fiscal years 500 3 0-500 -1,000-1,500 0-3 -6-9 -2,000-12 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Unified budget balance (Left scale) Balance as percent of GDP (Right scale)
Europe will stay on a slow growth path After the Brexit vote, the IHS Markit forecast of Eurozone real GDP growth was reduced to 1.5% in 2016 (from 1.7%) and 1.2% in 2017 (from 1.8%). Increased uncertainty will discourage capital spending, although some investment will be diverted from the United Kingdom to Eurozone countries. Aggressive monetary stimulus, a weaker euro, and reduced fiscal headwinds will help to sustain growth. With inflation picking up only gradually, the European Central Bank (ECB) is not expected to raise interest rates until 2019. The euro is projected to bottom out near USD1.07 in mid-2017 and then gradually recover to USD1.24 by the end of 2020. Ireland, Sweden, Slovakia, and Spain will maintain relatively healthy economic growth, while the United Kingdom, Italy, and France will struggle.
Real GDP growth in Western Europe Real GDP Annual percent change 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Germany United Kingdom France Italy Spain 2015 2016 2017 2018 2019 23
Asia-Pacific will lead all regions in growth China s fixed investment is decelerating as the economy rebalances toward consumer spending and services. India s economy is outpacing China s and foreign investment is rising, but progress has been slow on Prime Minister Narendra Modi s reforms. Indonesia s growth is stabilizing in the 4 5% range; capital inflows are critical to financing the country s significant infrastructure needs. New manufacturing hubs such as Vietnam are emerging in Southeast Asia and South Asia as China loses cost competitiveness. The information technology-business process outsourcing industry is set for continued rapid growth in India, Malaysia, and the Philippines. Japan, Malaysia, and Vietnam would be major beneficiaries if the Trans-Pacific Partnership is implemented.
Real GDP growth in Asia-Pacific Real GDP Annual percent change 8 6 4 2 0 China India South Korea Australia Indonesia Taiwan Japan 2015 2016 2017 2018 2019 23
China s economic slowdown will continue in 2017 China s slowdown is most evident in mining, heavy manufacturing, and utilities; services and light manufacturing are more resilient. The impact of Brexit will be limited, and China s government will support economic growth with more fiscal and monetary stimuli. Home sales have picked up in 2016, although high inventories will continue to dampen construction activity. A determinedly weak renminbi policy is unlikely; concerns over mass capital flight outweigh potential gains in export cost competitiveness. Under China s 13th Five-Year Plan, services will account for 70% of incremental growth in 2016 20, up from about 60% in 2011 15. Vast excess industrial capacity, financed by an explosion of debt, is the biggest threat to China s growth prospects.
Other emerging markets: Room for hope With commodity prices beginning to rise again, the pressure on emerging markets has eased. Currencies have recovered some of their losses, allowing central banks to pursue less restrictive policies. These more positive trends will be of little comfort those economies with deep-seated problems (e.g. Brazil, Russia, and Venezuela). More generally, without structural reforms (to boost productivity growth), most emerging markets are unlikely to see rapid growth rates. Geopolitics (e.g. the failed coup in Turkey) are also a huge risk. On the other hand, emerging markets are still the future, and as they integrate more rapidly into the global economy, trade growth could rebound strongly.
Global growth by region Real GDP 6 Y/Y, % change 4 2 0-2 NAFTA Other Americas Western Europe Emerging Europe Mideast- N. Africa Sub- Saharan Africa Japan Other Asia- Pacific 2015 2016 2017 2018 2019 23
Bottom line Brexit will not derail global growth, but will condemn it to another year of sluggish growth the sixth since 2011. After the UK vote to leave the European Union, the IHS Markit forecast of global real GDP growth was revised down from 2.5% to 2.4% in 2016 and from 3.1% to 2.7% in 2017. The Asia-Pacific region will continue to grow at the fastest rate. Emerging markets growth will rebound, but will not regain the peak growth rates of the 2000s. The US economy is fundamentally strong; consumer spending and homebuilding will drive growth. A reversal of globalization is neither new nor inevitable. Risks abound, including financial-market turbulence, China s rising debt and excess capacity, conflicts in the Middle East and Africa, high Eurozone debt burdens, stagnation in developed countries, the fallout from Brexit, and the outcome of the US election.
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