Global Economic Outlook

Global Economic Outlook Mark A. Wynne Vice President & Associate Director of Research Director, Globalization & Monetary Policy Institute Federal Reserve Bank of Dallas Presentation to Vistas Conference November 4, 2016 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 Two secular trends reshaping the world Recent developments and changes in the outlook for real economic activity Recent developments and changes in the outlook for inflation Monetary policy developments around the world Risks to the outlook Europe: Greece, BREXIT, China Oil Monetary policy divergence

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

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

And we ain t done yet 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

Global GDP growth over the past decade Percent 7 6 5 4 3 2 1 0-1 -2-3 -4 2004 2007 2010 2013 2016

Percent 6.0 5.5 5.0 4.5 4.0 3.5 3.0 A disappointing recovery Global growth outcomes and IMF forecasts 2.5 2010 2011 2012 2013 2014 2015 2016 2017

Global economic policy uncertainty 300 250 200 150 Asian & Russian Financial Crisis 9/11 Invasion Of Iraq Global Financial Crisis Eurozone Crises, U.S. Fiscal Battles, China Leadership Transition Immigration Crisis, China Economy Fears Brexit 100 50 0 1997 2000 2003 2006 2009 2012 2015

10 8 6 4 2 Real GDP growth expected to pick up Percent, year/year 0 Emerging -2 World (ex. U.S.) Consensus Forecasts -4 U.S. (as of October 2016) -6 Advanced (ex. U.S.) 2004 2007 2010 2013 2016

CPI inflation dominated by swings in energy prices Percent, year/year 8 6 4 Emerging World (ex. U.S.) Advanced (ex. U.S.) U.S. 2 0-2 Consensus Forecasts (as of October 2016) -4 2004 2007 2010 2013 2016

12 9 6 3 0-3 -6 Deflation at the producer price level is ending Percent, year/year 15 Emerging World (ex. U.S.) Advanced (ex. U.S.) U.S. -9 2004 2007 2010 2013 2016

U.S. import price inflation in negative territory due to lower energy prices & strong dollar Percent, year/year 25 20 15 10 5 0-5 -10-15 -20 Nominal broad TWVD Import price index (ex. food and fuels) Import price index (ex. petroleum) Import price index -25 2004 2007 2010 2013 2016

30 20 10 0-10 -20 Strong dollar and weak global growth weigh on U.S. exports Percent, 3MMA, year/year 40 Advanced (ex. U.S.) World (ex. U.S.) Emerging -30 2004 2007 2010 2013 2016

Central bank policy rates stuck at zero outside the U.S. Percent 7 6 5 4 Bank of England Federal Reserve ECB Bank of Japan 3 2 At its policy meeting at the end of January 2016 the BoJ adopted a negative interest rate of -0.10 percent on reserves 1 0-1 2007 2010 2013 2016

80 70 60 50 40 30 20 10 Central bank balance sheets: Still growing in euro area & Japan Percent of GDP 90 Bank of Japan Federal Reserve ECB Bank of England 0 2007 2010 2013 2016

10-year government bond yields remain near record lows Percent 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 2012 2013 2014 2015 2016 Japan Germany U.S. U.K.

Headwinds, tailwinds and CAT Tailwinds Lower oil prices Fall in oil prices to boost global growth by about ½ percentage point in 2015 & 2016 (IMF) Headwinds Europe Unresolved issues in Greece How disruptive would BREXIT be? Slowdown in China Economy seems to be slowing faster than expected, prompting policy action; bursting of stock market bubble Clear air turbulence? 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 ZIRP era?

140 Lower oil prices a favorable tailwind for most countries Dollars per barrel 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

Euro area economic activity only recently got back to its pre-crisis level GDP, Trillions of 2010 2.5 2.4 Euro Area GDP 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

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 IMF WEO: 1.1 percent GDP 2.5 percent CPI 0.5 0.0 Consensus forecast as of June 23 referendum Jan Feb Mar Apr May Jun Jul Aug Sep Oct 2016

What worries European voters? Percent 80 70 60 Economic Situation Immigration Unemployment Terrorism 50 40 30 20 10 0 2010 2011 2012 2013 2014 2015

5 4 3 2 1 0 China s contributes a lot to global GDP growth Percentage Points 6 Contribution from China World GDP Growth -1 1990 1995 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 1998 2004 2010 2016

Chinese price inflation: persistent deflation at the producer level Percent, year/year 8 6 Percent, year/year 16 PPI Average house price in 100 cities 12 4 8 2 4 0 0-2 CPI CPI ex. food and energy -4 2010 2011 2012 2013 2014 2015 2016-4 -8

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

Credit to the private nonfinancial sector (Percent of GDP) Percent of GDP 235 215 195 175 155 135 115 95 U.S. China 75 2000 2005 2010 2015

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

IMF growth outlook October 2016 2015 2016(f) 2017(f) Change from April 2016 forecast 2016 Change from April 2016 forecast 2017 World output Advanced economies United States Euro area Japan UK Canada Emerging Market & Developing Economies China India Brazil Russia 3.2 3.1 3.4-0.1-0.1 2.1 1.6 1.8-0.3-0.2 2.6 1.6 2.2-0.8-0.3 2.0 1.7 1.5 0.2-0.1 0.5 0.5 0.6 0.0 0.7 2.2 1.8 1.1-0.1-1.1 1.1 1.2 1.9-0.3 0.0 4.0 4.2 4.6 0.1 0.0 6.9 6.6 6.2 0.1 0.0 7.6 7.6 7.6 0.1 0.1-3.8-3.3 0.5 0.5 0.5-3.7-0.8 1.1 1.0 0.3

IMF growth outlook October 2016 2015 2016(f) 2017(f) Change from April 2016 forecast 2016 Change from April 2016 forecast 2017 World output Advanced economies United States Euro area Japan UK Canada Emerging Market & Developing Economies China India Brazil Russia 3.2 3.1 3.4-0.1-0.1 2.1 1.6 1.8-0.3-0.2 2.6 1.6 2.2-0.8-0.3 2.0 1.7 1.5 0.2-0.1 0.5 0.5 0.6 0.0 0.7 2.2 1.8 1.1-0.1-1.1 1.1 1.2 1.9-0.3 0.0 4.0 4.2 4.6 0.1 0.0 6.9 6.6 6.2 0.1 0.0 7.6 7.6 7.6 0.1 0.1-3.8-3.3 0.5 0.5 0.5-3.7-0.8 1.1 1.0 0.3

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. (emphasis added)

Conclusions Modal outlook is for continued growth through 2016 & 2017, with a modest acceleration in 2017 U.S. likely to continue to be one of the stronger performers Signs of improvement in Europe, Japan Monetary policies of major central banks diverging Fed: normalization began December 2015 ECB, BoJ, PBOC: easing Risks: Europe: BREXIT China slowdown Oil