2017 International Economic Outlook Everett Grant Research Economist Globalization & Monetary Policy Institute Federal Reserve Bank of Dallas October 2017 The views expressed are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System
Outline Overview of globalization Global outlook for real economic activity & inflation Risks to the outlook Monetary policy divergence Oil Europe: BREXIT, Italian banks, Greece, migrant problem China
Globalization Globalization - defining phenomenon of our era Comparable to industrial revolution, Reformation etc. Not new nineteenth century / pre WWI Trade versus technological change as drivers of change Interconnectedness Global value chains International financial markets Fragility versus robustness
Globalization of the U.S. economy Percent 35 30 25 20 15 10 5 Deglobalization during Great Depression and WWII Share of international trade in U.S. GDP Trade boom due to GATT & containerization Postwar recovery Onset of Globalization 2.0: information Chine joins WTO Dec. 11 th, 2001 Great Trade Collapse 0 1929 1939 1949 1959 1969 1979 1989 1999 2009
Percent 90 80 70 60 50 40 30 20 10 World Output Shares Nominal GDP based in USD, share of world total Advanced Emerging 0 1992 1997 2002 2007 2012 2017 2022
The world has changed! GDP based on PPP, share of world total Percent 65 60 55 50 45 40 35 Advanced Emerging 30 1992 1997 2002 2007 2012 2017 2022
U.S. & China World Output Shares Nominal GDP based in USD, share of world total Percent 35 30 25 20 15 10 5 U.S. China 0 1992 1997 2002 2007 2012 2017 2022
The world has really changed! GDP based on PPP, share of world total Percent 25 U.S. China 20 15 10 5 0 1992 1997 2002 2007 2012 2017 2022
Global economic growth Global growth upswing that began in mid-2016 continues Global growth expected at 3.6% in 2017, which is up from 3.2% in 2016 The current upswing is broader than others over the past decade Includes about 75% of the global economy when measured by GDP at PPP Accelerating growth in Europe, Japan, China and the U.S. Some emerging & commodity exporting countries continue to struggle Oil prices have remained low reflecting stronger than anticipated supply
Global real GDP growth over the past decade Percent 7 6 5 4 3 2 1 0-1 -2-3 -4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Real GDP growth picking up Percent, year/year 10 8 Consensus Forecasts (as of August 2017) 6 4 2 0 Emerging -2 World (ex. U.S.) -4 U.S. Advanced (ex. U.S.) -6 2004 2006 2008 2010 2012 2014 2016 2018
Global outlook has improved since mid-2016 60 Foreign-Advanced PMI 58 Emerging-Market PMI 56 54 52 50 48 '12 '13 '14 '15 '16 '17
30 20 10 0-10 -20 U.S. exports picking up with stronger global growth and a weaker USD Percent, 3MMA, year/year 40 Advanced (ex. U.S.) World (ex. U.S.) Emerging -30 2004 2006 2008 2010 2012 2014 2016
Global inflation outlook Inflation remains below target in most advanced economies Leaves policy rates near zero in most advanced nations Weak wage growth Effects of commodity price decline in recent months
CPI inflation dominated by swings in energy prices Percent, year/year 8 6 4 Emerging (ex. VN) World (ex. U.S.,VN) Advanced (ex. U.S.) U.S. 2 0-2 Consensus Forecasts (as of September 2017) -4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Deflation at the producer price level is ending Percent, year/year 15 12 9 6 3 0-3 -6 Emerging World (ex. U.S.) Advanced (ex. U.S.) U.S. -9 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
U.S. import price inflation back in positive territory after lower energy prices & strong dollar Percent, year/year 25 20 15 10 5 0-5 -10-15 -20 Nominal broad trade weighted USD (% YoY) Import price index (ex. Petroleum, % YoY)) Import price index (% YoY) -25 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
6 5 4 3 2 1 0 Central bank policy rates stuck at zero outside the U.S. Percent 7 Bank of England Federal Reserve ECB Bank of Japan -1 2007 2010 2013 2016
Central bank balance sheets: Still growing in euro area, Japan & U.K. Percent of GDP 100 90 80 70 60 50 40 30 20 10 Bank of Japan ECB Federal Reserve Bank of England 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
10-year government bond yields 6.0 5.0 4.0 remain near record lows Percent Japan Germany U.S. U.K. 3.0 2.0 1.0 0.0-1.0 2002 2004 2006 2008 2010 2012 2014 2016
Headwinds & tailwinds for U.S. economy Tailwinds Lower oil prices Headwinds Monetary policy normalization in the United States Liftoff from zero occurred at end 2015 How well prepared is the rest of the world for the end of the zero interest rate policy era? Europe How disruptive will BREXIT be? Unresolved issues in Greece Weak European banks & non-performing loans Potential for a slowdown in China Excess capacity Risks of potential stock market & real estate market bubbles
Euro area economic activity finally growing above its pre-crisis level GDP, Trillions of 2010 2.6 2.5 Euro Area GDP 2.4 2.3 2.2 2.1 Double dip recessions associated with Global Financial Crisis and euro zone Sovereign Debt Crisis 2 1999 2002 2005 2008 2011 2014 2017
Great Depressions Unemployment Rate Percent 30 25 20 15 Spain Greece Portugal Ireland U.S. 10 5 0 (U.S.) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
Impact of the BREXIT shock on U.K. growth and inflation in 2017 Percent 3.0 2.5 2.0 1.5 1.0 2017 GDP growth 2017 CPI Inflation Oct. 2017 IMF WEO: 1.7 percent GDP 2.6 percent CPI 0.5 0.0 Consensus forecast as of June 23 referendum Jan Feb Mar Apr May Jun Jul Aug Sep Oct 2016
China contributes a lot to global GDP growth Percentage Points 6 Contribution from China (PPP wgts) 5 World GDP Growth (PPP wgts) 4 3 2 1 0-1 1990 1995 2000 2005 2010 2015
Credit to the nonfinancial sector (Percent of GDP) Percent of GDP 280 260 240 220 200 180 160 140 120 U.S. China 100 2000 2005 2010 2015
235 215 195 175 155 135 115 95 Credit to the private nonfinancial sector (Percent of GDP) Percent of GDP U.S. China 75 2000 2005 2010 2015
16 14 12 10 8 6 4 2 Chinese industrial output growth has slowed dramatically Percent, year/year 18 0 1992 1997 2002 2007 2012 2017
Chinese price inflation: end of deflation at the producer level Percent, year/year 8 6 Percent, year/year PPI 24 Average house price in 100 cities 20 16 4 2 0-2 CPI CPI ex. food and energy -4 2010 2011 2012 2013 2014 2015 2016 2017 12 8 4 0-4 -8-12
Conclusions Outlook is for continued improved growth in 2017 U.S. likely to continue to be one of the stronger performers Signs of improvement in Europe, Japan, China & the U.S. Risks Monetary policies of major central banks diverging Fed: normalization began December 2015 Europe; BREXIT China slowdown Oil
IMF growth outlook October 2017 World output Advanced economies United States Euro area Japan UK Canada Emerging Market & Developing Economies China India Brazil Mexico Russia 2017 2018 Change from April 2017 forecast 2017 Change from April 2017 forecast 2018 3.6 3.7 0.1 0.1 2.2 2.0 0.2 0.0 1.8 2.3-0.1-0.2 2.1 1.9-0.1-0.2 1.5 0.7 0.3 0.1 1.7 1.5-0.3 0.0 3.0 2.1 1.1 0.1 4.6 4.9 0.1 0.1 6.8 6.5 0.2 0.3 6.7 7.4-0.5-0.3 0.7 1.5 0.5-0.2 2.1 1.9 0.4-0.1 1.8 1.6 0.4 0.2
IMF inflation outlook October 2017 World Advanced economies United States Euro area Japan UK Canada Emerging Market & Developing Economies China India Brazil Russia 2017 2018 Change from April 2017 forecast 2017 Change from April 2017 forecast 2018 3.2 3.2-0.3-0.1 1.5 1.9-0.4-0.1 1.8 2.3-0.6-0.3 1.1 1.6-0.3 0.1 0.1 0.6-0.7 0.0 2.8 2.6 0.1 0.0 1.6 1.9-0.5-0.3 4.5 4.2-0.3-0.1 2.3 2.4-0.2 0.1 4.5 4.8-0.4-0.3 3.6 4.0-0.8-0.5 4.0 4.0-0.4 0.0
Demographic changes Working age population (15-64) as share of total (world) 0.68 0.66 0.64 0.62 0.6 0.58 0.56 Country peaks Euro area: 1990 (0.68) Japan: 1992 (0.70) U.S.: 2008 (0.68) China: 2011 (0.74) 0.54 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Lower oil prices a favorable tailwind for most countries Dollars per barrel 140 120 95% WTI futures confidence interval 100 80 60 40 20 0 WTI spot price WTI futures (Oct 28) Brent spot price Brent futures (Oct 28) 2012 2013 2014 2015 2016 2017 2018
Impact of China slowdown on U.S. in 2000. Percent, deviation from baseline 0.2 0.0-0.2-0.4-0.6-0.8 10% - 90% confidence bounds China U.S. -1.0-1.2 0 1 2 3 4 5 6 7 8
and today Percent, deviation from baseline 0.2 0.0-0.2-0.4-0.6-0.8 10% - 90% confidence bounds China U.S. -1.0-1.2 0 1 2 3 4 5 6 7 8