Global Economic OutlookBilal Hasanjee, CFA®, MBA, MScFinance

October 28th, 2015

Disclaimer

NOTICE & DISCLAIMER: This publication has been prepared for informational purposesonly. Opinions, estimates and projections contained herein are my own and alsoextracted from third party sources and as of the date hereof and are subject to changewithout notice. The information and opinions contained herein have been compiled orarrived at from sources believed reliable, but no representation or warranty, express orimplied, is made as to their accuracy or completeness and neither the information northe forecast shall be taken as a representation for which the author or his employer incurany responsibility. The author does not accept any liability whatsoever for any lossarising from any use of this information. This publication is not, and is not intended to beconstructed as, an offer to sell or solicitation of any offer to buy any financial instrumentreferred to herein, nor shall this publication be construed as an opinion as to whether youshould enter into financial transaction or trading strategy involving any financialinstrument.

Global Economic Outlook

Global Economic Outlook

Three biggest macroeconomic developments of the past year have been:

Drop in commodity prices

Weakness in emerging market growth

Appreciation of the US dollar

Although the domestic US economy has been quite strong, the trickle-down effectsfrom the above 3 developments have contained US growth and inflation significantly

Even 7 years after the global economy emerged from its most severe recession sincethe Great Depression, a sustained and wide-spread global expansion still remainselusive

Downside risks to the global economy appear more real and pronounced than theywere just a few months ago

Global Economic Outlook

Although, near-term economic growth stilllooks stronger in advanced (G8) economies,but it looks weaker for emerging anddeveloping economies

The latter account for a major share of theworld’s growth and output

Countries enjoying the most robust recoveryin the developed world are: US and the UK –both facing a monetary tightening soon

Emerging and developing economies arefacing slower growth due to:

Commodity price declines

Haunting legacy of past credit expansion

Political turmoil

Source: The Economist

Global Economic Outlook

IMF projects growth in the world economy at 3.1%, compared with 3.4% in 2014 and0.2% lower than its estimate in the last quarter

Compared to last year, the recovery in advanced economies is expected at a slowerrate

EMEs and DEs are projected to slow for the fifth year in a row!

In an environment of declining commodity prices coupled with prospects of higherinterest rates in the US and UK are resulting in reduced capital flows to emergingmarkets and pressure on their currencies, and increasing financial market volatility

Thus, downside risks to the outlook have risen, particularly for emerging market anddeveloping economies

Global Economic Outlook

Slower economic recovery is attributable to:

Low productivity growth since the 2008 financial crisis

Crisis legacies in some advanced economies

High public and private debt, financial sector weakness, low investment

Demographic transitions, ongoing adjustment in many emerging markets following the post-crisiscredit and investment boom

Growth realignment in China from exports -> manufacturing -> investments model toconsumer-led growth —with important cross-border repercussions for raw-material andcommodities exporting countries

A downturn in commodity prices triggered by weaker demand as well as higher productioncapacity

Global Economic Outlook

Financial market volatility spiked inAugust:

Following the depreciation of theRenminbi

With an increase in global risk aversion

Weakening currencies for manyemerging markets,

Sharp correction in equity pricesworldwide

Temporary surges in volatility hadearlier been associated with eventssurrounding Greek debt negotiationsand the sharp stock market decline inChina and subsequent policy measuresby the Chinese authorities in June–July

Global Economic Outlook With the US interest rate increases expected from

December this year coupled with worsening of theglobal outlook, financial conditions for emergingmarkets have tightened since the spring

Dollar bond spreads and long-term local-currency bondyields have increased by 50 to 60 basis points onaverage, and stock prices are weaker, while exchangerates have depreciated or come under pressure

Commodity prices have weakened, particularly in recentweeks. After increasing in the spring from their Januarytrough, oil prices have declined sharply, reflectingresilient supply, the prospects of higher future outputfollowing the nuclear deal with the Iran, and weakerglobal demand

China, by far the biggest single contributor to the globaldemand of commodities, is showing signs of slowing

Its maturing economy needs less of the commodities—such as raw materials for infrastructure, or ready-madecomponents for manufacturing—that other emergingcountries rely on selling.

Other would-be powerhouses of the 2000s, such asBrazil and Russia, have been crippled by falling oil pricesand political stalemate.

Bloomberg Commodities

Index

US Dollar Index (USD

Performance Against a Basket of

Currencies)

Conclusion

Conclusion

Key drivers of global economic developments for the next 6 months:

Drop in commodity prices

Weakness in emerging market growth

Appreciation of the US dollar

US Growth

Euro Zone Problems

EMEs and DEs are projected to slow for the fifth year in a row!

4 Key risks to the Canadian Economy:

Correction in house prices

Sharp increase in long term interest rates

Stress emanating from China and EMEs

Financial Stress from Euro area

Conclusion

US productivity growth and consumer spending are key engines to the globaleconomic growth

US higher interest rate cycle is asynchronous to most of the developed economies(except UK) and may force them to move in tandem

China’s PBOC has plenty of fiscal and monetary flexibility to fight off any recessionarytail winds