ecb fx the global economic outlook after brexit [read … · goldman sachs global investment...

Goldman Sachs Global Investment Research 1

July 2016

The Goldman Sachs Group, Inc.

Goldman Sachs Research

The global economic outlook after Brexit

July 2016

Dirk SchumacherSenior European Economist

[email protected]+49(69)7532-1210Goldman Sachs AG

Investors should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.


Brexit implications are now the main risk for the short-term outlook

Real GDP Growth

GS Revision GS Revision

2.5 1.6 2.2 1.5 2.4 2.4 1.9 -0.1 2.0 -0.14.7 -0.5 1.7 1.4 0.0 0.5 0.6 0.0 1.0 0.02.0 1.6 -0.8 -0.2 0.9 1.5 1.3 -0.2 1.2 -0.31.5 2.0 1.2 2.2 2.9 2.3 1.5 -0.5 0.2 -1.85.7 2.7 0.1 1.2 2.4 3.9 3.4 -0.2 2.6 -0.31.8 1.9 3.6 2.3 2.3 1.0 0.9 -0.2 2.1 -0.32.9 1.9 1.1 1.8 1.9 1.5 1.5 0.0 1.5 0.0

China 10.6 9.5 7.7 7.7 7.3 6.9 6.6 0.0 6.4 0.0Brazil 7.5 3.9 1.9 3.0 0.1 -3.8 -3.1 0.0 1.1 0.0Russia 4.5 4.0 3.5 1.3 0.7 -3.7 0.5 0.0 3.0 0.0

3.0 1.8 1.2 1.2 1.9 2.0 1.7 -0.1 1.7 -0.28.2 7.0 5.4 5.3 4.9 4.2 4.7 0.0 5.3 0.0

World 5.4 4.2 3.2 3.2 3.4 3.1 3.1 -0.1 3.4 -0.2

2016 (f) 2017 (f)

US

Developed MarketsEmerging Markets

Source: Goldman Sachs Global Investment Research.

JapanEuro AreaUKSwedenNorwaySwitzerland

Percent Change yoy 20152014201320122010 2011


Most studies suggests a significant adverse impact on UK growth

Brexit’s peak impact on GDP level

-7-6-5-4-3-2-1012

-7-6-5-4-3-2-1012

Optimistic Scenario

Pessimistic Scenario

% %

* Peak impact year is 2018 and ** is other.

Source: Haver, Goldman Sachs Global Investment Research


Trade channel is rather small

Exports to UK as a % of GDP

Euro area China US Japan0.00

0.50

1.00

1.50

2.00

2.50

3.00

0.00

0.50

1.00

1.50

2.00

2.50

3.00% %

Source: Haver Analytics, Goldman Sachs Global Investment Research


Uncertainty and FCI changes to be the main transmission channels

Spillover SimulationsDom. FCI TWI FCI GDP Core CPI Policy Rate

(pp) (%) (pp) (%) (%)* (pp)US 0.12 1.28 0.22 -0.17 -0.04 -0.21Euro Area 0.41 0.18 0.43 -0.45 -0.04 -0.43Japan 0.37 5.25 0.78 -0.67 -0.14 -0.55UK 0.59 -6.01 -0.46 -2.51 0.01 -2.68EM -0.04DM -0.43World -0.20

* Average year-over-year inflation rate over the next 8 quarters.Source: Goldman Sachs Global Investment Research.

Changes in key macro variables


Impact to be felt most in Japan via FCI tightening

Impact on real GDP relative to base line

US Euro Area Japan-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4% %

Impact on core inflation relative to base line

US Euro Area Japan-0.16

-0.14

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

-0.16

-0.14

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04% %

* Average year-over-year inflation rate.



Currency moves in uncertain times

Cumulative impact on trade-weighted G10 nominal exchangerate indices to one st. dev. “uncertainty shock”

-15

-10

-5

0

5

10

15

GBP NZD AUD CAD EUR USD SEK NOK CHF JPY

1-month3-months cumulative6-months cumulative

Change in TWI G10

(%)



Equities hit hard during the Brexit sell-off

-6

-4

-2

0

2

4

6

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

Gol

d (G

BP

inve

stor

)VI

XU

K 30

yG

erm

an 3

0yG

old

(EU

R in

vest

or)

US

30y

Spai

n 30

yJa

pan

30y

Gol

d (U

SD)

UK

10y

JPY/

USD

US

10y

Italy

30y

Ger

man

10y

Spai

n 10

yJa

pan

10y

Italy

10y

CHF

/USD

SX5E

201

7 di

vsEU

R/U

SDFT

SE 1

00VS

TOXX

S&P

500

SX5E

201

8 di

vsM

SCI E

M $

(EEM

)B

rent

VFTS

EN

ikke

i 225

SX5E

201

9 di

vsEu

ro S

toxx

50

GB

P/U

SDFT

SE 2

50SX

5E 2

024

divs

IBEX

FTSE

MIB

3-day Return since Thursday's close

# Standard Deviations (3-day terms, RHS)



A permanent lower oil price is good newsfor the Euro area – but it implies some global

re-balancing

Breakeven oil priceUS crude oil production

300

400

500

600

700

800

900

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

mil barrels

20

30

40

50

60

70

80

90

100

110

0 2,000 4,000 6,000 8,000 10,000 12,000Cumulative Peak Production (kbls/d)

Tradition

Heavy oilDeepwater

"Shale oil"

Ultradeepwater



We expect the oil price to stay around the current level

Oil price

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

2007 2009 2011 2013 2015 2017

USDUSD

USD BRENT Forwards

Source:Goldman Sachs Global Investment Research


Low commodity prices and China re-balancingimply lower EM FX reserves

Official sector FX reserves

0

1000

2000

3000

4000

5000

6000

7000

8000

2000 2002 2004 2006 2008 2010 2012 2014

GCCLatamCEEMEAAsia ex ChinaChina

USDbillion



Our Global Leading Indicator is showing –prior to Brexit – rising momentum

GLI momentumGLI components

Baltic Dry Index

Belgian and Netherlands Manufacturing Survey

Consumer Confidence Aggregate

Global New Orders Less Inventories

Global PMIGS Australian and Canadian Dollar Trade

Weighted IndexJapan IP Inventory/Sales Ratio

Korean Exports

S&P GS Industrial Metals Index

US Initial Jobless Claims-1.0

-0.5

0.0

0.5

1.0

1.5

00 02 04 06 08 10 12 14 16

%, 3mma

Source: Goldman Sachs Global Investment Research

GLI

GLI


US: Financial conditions are rising again –postponing the next Fed hike

98

99

100

101

102

103

90 92 94 96 98 00 02 04 06 08 10 12 14 16

index


FCI


US: Our Current Activity Indicator is easing again

-10-8-6-4-202468

10

98 01 04 07 10 13 16

%


GDP

Current ActivityIndicator


US: The Fed risks missing out on its mandate

-2%

0%

2%

4%

6%

8%

10%

12%PCE: Chain Price Index (SA, 2009=100) % Change -Year to YearCivilian Unemployment Rate: 16 yr + (SA, %)

Fed NAIRU Estimate

Fed Fore-casts



China: CNY to disconnect from US

Trade-weighted exchange rates

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30Ja

n-14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

EM FX TWI

USD TWI

CNY TWI

Depreciation



China: Growth keeps trending down

0

2

4

6

8

10

12

14

16

06 07 08 09 10 11 12 13 14 15 16

%, yoy

GS CurrentActivityIndicator

Source: GoldmanSachs Global Investment Research

GS Current Activity Indicator


China: A bumpy deceleration

Different measures of Chinese growth

-30

-20

-10

0

10

20

4

6

8

10

12

11 12 13 14 15 16

Real GDP (left axis)

In-China imports (right axis)

GS China Metal Consumption (right axis)

%, yoy %, yoy


4

7

10

13

4

7

10

13

12 13 14 15 16

GS total consumption tracker

Final consumption in GDP*


Private consumption picking up


China: Breakdown of demand for different commodities points to re-balancing

2015 demand growth of different commodities

‐20 ‐10 0 10 20

SteelThermal Coal

Met CoalCementIron OreWheat*Cotton*CopperSugar*Diesel

NapthaCorn*

Nickel**Coffee*

Oil (total)AluminiumSoybean*Zinc***GasolineKerosene

OpEx com

mod

ities

CapEx commod

ities

*Estimated 2015 annual consumption growth (no monthly data) **calculated from apparent stainless steel demand***calculated from zinc galv. production



China: Short-term push through credit easing

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2012 2013 2014 2015 2016

-3

-2

-1

0

1

2

3

4

-3

-2

-1

0

1

2

3

4

Sequential credit growth stays at Q1 paceCredit growth decelerates to hit 13% target

Percentage points,

annualized

Percentage points,annualized

Estimated growth impact of credit impulse



China: The level of debt looks worrying

Indebtedness of different sectors

0

30

60

90

120

150

180

210

240

270

0

30

60

90

120

150

180

210

240

27020

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

Corporate leverage

LGFV leverage(loan, bond)

Govt. Leverage

Household Leverage

% of GDP

% of GDP



Emerging Markets: Significant improvement of current accounts

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

EM avg current accountbalance (% GDP)4 qtr MA



Emerging Markets: Financial Conditions have eased again

99.4

99.6

99.8

100.0

100.2

100.4

100.6

100.8

101.0

101.2

101.4

2010 2011 2012 2013 2014 2015 2016

EM average financial conditions indexIndex

Financial conditions



Emerging Markets: Consumer confidence has stabilised

40

42

44

46

48

50

52

54

EM ConsumerConfidence



Euro area: A moderate, but broad based recovery

Source: Eurostat, Goldman Sachs Global Investment Research

-3.0

-2.0

-1.0

0.0

1.0

2.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

06 07 08 09 10 11 12 13 14 15 16 17

%qoq%yoy

Sequential quarterlyGDP (RHS)

Annual GDP (LHS)

GS F'casts


Euro area: Business sentiment remains consistent with solid growth during Q2 – our RETINA model

has also rebounded

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

10 11 12 13 14 15 16

%qoqComposite PMI-based indicator

Euro area CAI

Euro area actual real GDP

Source: Eurostat, Markit, Goldman Sachs Global Investment Research

Composite PMI and CAI RETINA


-0.5-0.4-0.3-0.2-0.10.00.10.20.30.40.50.60.70.80.91.01.11.2

Mar-16 Apr-16 May-16 Jun-16

Q2 GDP,% qoq

50 % Confidence band25 % Confidence band10 % Confidence bandGS judgemental f'castMedian

Eurostat's first

estimate of Q2 GDP

As of last week


Euro area: Less headwind from fiscal consolidation next year


-2.3

-1.8

-1.3

-0.8

-0.3

0.2

0.7

Germany France Italy Spain EMU4

ppt

2012 2013

2014 2015

2016 2017

2018

Fiscal drag


Euro area: Bank lending rates in Spain and Italy have come down significantly

2.0

3.0

4.0

5.0

6.0

7.0

07 08 09 10 11 12 13 14 15 16

GermanyFranceItalySpain

interest rates on business loans % up to € 1mil., of maturity 1-5 years



Euro area: Corporates still in deleveraging mood

-80-70-60-50-40-30-20-10

0102030405060

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

bn Euro

Net savings of Euro area non-financial corporates



Euro area: Profits growth is supporting investment spending

-18

-13

-8

-3

2

7

12

-12

-7

-2

3

8

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

%, yoy%, yoy

Operating surplus (lhs)

Fixed investment



Inflation to rise in H2:2016 as the oil price effect dissipates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.06.0

7.0

8.0

9.0

10.0

11.0

12.0

98 00 02 04 06 08 10 12 14 16

Unemployment rate

Core inflation (reversescale)

% %, yoy


Euro area inflation Euro area core inflation andunemployment rate

-1

0

1

2

3

4

5

06 07 08 09 10 11 12 13 14 15 16 17 18

yoy%

ECB's definition of price stability objective GS Forecast

Core inflati on

Headline inflation

Source: Haver, Goldman Sachs Global Investment Research


Euro area: ECB purchases continue steadily

0

200

400

600

800

1000

1200

17/1

0/20

1417

/11/

2014

17/1

2/20

1417

/01/

2015

17/0

2/20

1517

/03/

2015

17/0

4/20

1517

/05/

2015

17/0

6/20

1517

/07/

2015

17/0

8/20

1517

/09/

2015

17/1

0/20

1517

/11/

2015

17/1

2/20

1517

/01/

2016

17/0

2/20

1617

/03/

2016

17/0

4/20

1617

/05/

2016

CSPP PSPP

ABSPP CBPP3



Euro area: ECB’ CSPP – learning by doing

Breakdown of ECB purchases



ECB: Breakdown of Euro area corporate bond market

BeneluxAAA-AA 0-3 Years

Auto Mfg

France

A+3-5 Years Chemicals

Germany

A

5-7 Years

Non-Bank Finance

Italy

A-

7-10 Years

Food/Beverage

Spain

BBB+

10+ Years

REITS

OtherBBB

Telecom

BBB-

Transportation

Utilities

Other

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Country Rating Maturity Sector



ECB: Excess liquidity to rise to€1.4 trillion by the end of the year …

0

100

200

300

400

500

600

700

800

900

12 13 14 15 16

bn EUR

Excess reserves

Source: Goldman Sachs Global Investment Research, Bloomberg

Excess reserves ECB balance sheet

0

500

1000

1500

2000

2500

3000

3500

99 01 03 05 07 09 11 13 15

bn Euro

Total assets

LTROs

MROs



… which is unevenly distributed

0

50

100

150

200

250

300

Germany France Italy Spain

Liquidity held at nationalcentral bank (Apr16)

Purchases under PSPP(Apr16)

bn EUR



Italian export weakness not a new phenomenon – neither is low productivity

growth

Exports

95

100

105

110

115

120

125

130

95 97 99 01 03 05 07 09 11 13 15

index


Source: Haver Analytics

95

145

195

245

295

95 97 99 01 03 05 07 09 11 13 15

index


Source: Haver Analytics

Output per hour worked


Disclaimer

I, Dirk Schumacher, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by considerations of thefirm’s business or client relationships.Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.Global product; distributing entities

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