global economy outlook*: the backdrop for semiconductors
TRANSCRIPT
Duncan MeldrumBusiness of Cleans April 1, 2019 1
Global Economy Outlook*: The Backdrop for Semiconductors
Business of CleansApril 1, 2019
Duncan MeldrumChief Economist, Hilltop Economics, LLC
*A global outlook based on Consensus Economics, Inc. CONSENSUS FORECASTS®
Duncan MeldrumBusiness of Cleans April 1, 2019 2
Outline
• Review last year’s economic forecast
• Forecast with key themes:
– Slower growth
– Higher uncertainty
– Rising risk of recession
• Recession Risk Dashboard
Duncan MeldrumBusiness of Cleans April 1, 2019 3
Summary Overview: 2018
• In the accelerating phase of the economic cycle YES– Healthy consumer YES– Investment upsurge driving the global economy stronger YES– Slightly higher inflation, diverging interest rates YES– Currency unsettled YES– Potential for much higher economic policy uncertainty: trade,
geopolitics the current wild cards YES
• Healthy backdrop for semiconductor industry:– Demand for semiconductors grows above trend YES– Wafer Fab Equipment investment strong Peaked 18M5– Risks: excess capacity expansion, supply chain imbalances
(wafers?) and final demand uncertainty (5G, AI, mobile and computing devices)
2018 OUTCOME
Duncan MeldrumBusiness of Cleans April 1, 2019 4
Summary Overview: 2019-2020
• In the mature phase of the business cycle with decelerating growth and a rising risk of recession– Investment moderating despite need
– Healthy but more cautious consumer
– Low inflation, diverging interest rates, currency unsettled
– Higher economic policy uncertainty: • Domestic fiscal and monetary policy (China, US, EU, Japan)
• Trade
• Geopolitics
• Less-healthy backdrop for semiconductor industry
SPCC 2019 Forecast
Duncan MeldrumBusiness of Cleans April 1, 2019 55
Consensus: Growth Weakens to Trend in 2019-20
MARCH 2019
-2
-1
0
1
2
3
4
5
07 08 09 10 11 12 13 14 15 16 17 18 19 20
World* Real GDP Growth
2018: 3.0% 2019: 2.7% 2020: 2.7%
% C
ha
ng
e
*World: 85 major economies,
Data: World Bank, Hilltop Economics,
Consensus Forecasts, Mar19
Duncan MeldrumBusiness of Cleans April 1, 2019 66
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48
50
02 04 06 08 10 12 14 16 18
Actual Real GDP
Potential
TR
2010 U
S$
24 Major Developed Economies
Src: Hilltop Economics, World Bank, IMF
Estimating the Global Output GapA closed gap is the limiting factor to long-term growth
Output “Gaps”
Duncan MeldrumBusiness of Cleans April 1, 2019 77
Global Output Gap Disappeared in 2018In 2018, Real GDP finally pushed above potential
95
96
97
98
99
100
101
102
103
104
105
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Re
al G
DP
as
a P
erc
en
t of P
ote
ntia
l Ou
tpu
t
24 Major Developed Economies
Src: Hilltop Economics, World Bank, IMF
Output “Gaps”
Duncan MeldrumBusiness of Cleans April 1, 2019 88
A Weaker Investment Forecast(Investment SHOULD be picking up – as it did in 04-07)
-8
-6
-4
-2
0
2
4
6
8
95
96
97
98
99
100
101
102
103
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105
02 04 06 08 10 12 14 16 18 20
%C
H V
S Y
R A
GO
Real G
DP
as a
Perc
en
t of P
ote
ntia
l GD
P
~25% of GDP
Duncan MeldrumBusiness of Cleans April 1, 2019 9
Investment Growth: Needed to Drive Cycle Higher But Forecast to Slow
• Revenue growth OK– Real GDP growth (volume) now at 2.7%
– Some inflation (price) on average from ~1% - 2%
– “Revenue” now ~4 ½ %
• Output gaps closed, need capital to grow
• Profitability still positive
• Risk aversion is the problem again – Forecasts on a downward trajectory
– Economic policy uncertainty volatile and high on a global level
– Interest rates reflecting the uncertainty
Duncan MeldrumBusiness of Cleans April 1, 2019 10
Many Reasons for the Return of Risk Aversion
• Economic Policy Uncertainty– Trade wars (shifting international institutional arrangement)– US (post-stimulus fiscal policy, post-govt shutdown, monetary
policy, immigration)– Europe (Brexit, Italy, France, EU-wide e.g. immigration)– China stimulus impact, international situations– Japan tax increases
• Financial markets– Concern with policy– Concern about profits– Concern about the strong dollar and rising US interest rates– Concern about debt– Which explains the weaker real investment forecast & the rising
probability of an economic downturn (recession), not just slower growth
Duncan MeldrumBusiness of Cleans April 1, 2019 11
Recession Watch Dashboard:Cautious (Yellow)
Output momentum (Real GDP, Investment, Ind. Production)
Employment momentum (Unemployment rates)
Consumer confidence measures (US & majors)
Equities (recovered & but still a bit volatile)
Profits & Small Business Earnings (strong, but off peak)
Oil Prices & Inflation (pressure eased)
Global Economic Policy Uncertainty (Very high)
Global Consensus Forecast (weaker trend 11 mo.)
U.S. Yield Curve (close to inverting)
Interest Differentials (US vs EU rising)Recession watch: leading indicators that may help identify turning
points that precede a downturn in the next 18 to 24 months
Duncan MeldrumBusiness of Cleans April 1, 2019 12
Global Consumer Outlook Healthy
• Unemployment rates are low
• Wages are stable to rising
• Inflation is low
• Oil prices are not a big problem
• Consumer debt is under control
• Confidence is high, but off the peaks or 2018
Duncan MeldrumBusiness of Cleans April 1, 2019 13
-2
-1
0
1
2
3
4
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6
07 08 09 10 11 12 13 14 15 16 17 18 19 20
Pe
rce
nt
Ch
an
ge
97-07: 2.9% TLGR
World: 45 Key Countries; Src: World Bank, National Sources,
Hilltop Economics, Consensus Forecasts March 2019
World* Real Consumption
2018 +2.8%
2019 +2.6%
2020 +2.5%
~60% of GDP
Duncan MeldrumBusiness of Cleans April 1, 2019 1414
Jobs Markets Support Consumption
2
3
4
5
6
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8
9
10
11
12
00 02 04 06 08 10 12 14 16 18
EU
Japan
US - Headline Rate
Unemployment Rates
Perc
en
t o
f L
ab
or
Fo
rece
Sources: US NBER Recession Shading, US BLS,
OECD, "Main Economic Indicators - complete database",
Main Economic Indicators (database), http://dx.doi.org/10.1787/data-00052-en
Mar 26, 19
% Unemp. 2018 2019 2020
Japan 2.4 2.4 2.4
So. Korea 3.8 3.9 3.9
Taiwan 3.7 3.7 3.8
Germany 5.2 4.9 4.8
Eurozone 8.2 7.8 7.6
UK 4.1 4.1 4.2
US 3.9 3.7 3.7
Duncan MeldrumBusiness of Cleans April 1, 2019 15
CPI Inflation Weakens in 2019 Despite tightness in labor markets and closed output gaps
CPI % Change 2016 2017 2018 2019 2020
China 2.0 1.6 2.1 2.1 2.1
Japan (0.1) 0.5 1.0 0.7 1.0
South Korea 1.0 1.9 1.5 1.3 1.6
Taiwan 1.4 0.6 1.4 0.8 1.1
Germany 0.5 1.8 1.8 1.5 1.6
France 0.2 1.0 1.9 1.3 1.5
Italy (0.1) 1.2 1.2 0.9 1.2
UK 0.7 2.7 2.6 2.2 2.2
US 1.3 2.1 2.4 1.8 2.2
Hilltop Economics, Based on Consensus Forecasts, March 192018 actual vs. forecast: China: -0.2, Germany: +0.1, US & Japan no error
Duncan MeldrumBusiness of Cleans April 1, 2019 1616
Oil Prices
0
20
40
60
80
100
120
140
98 00 02 04 06 08 10 12 14 16 18 20 22
$/B
BL
- B
ren
t O
il P
ric
e
Source: NBER - Recession dating, EIA,
St Louis Federal Reserv e Economic Database
Fcst: Hilltop Economics from Consensus Forecasts Mar 19
Duncan MeldrumBusiness of Cleans April 1, 2019 1717
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110
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
USA (to March 2019)
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105
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CHINA (to December 18)
OECD, "Main Economic Indicators - complete database", http://dx.doi.org/10.1787/data-00052-en (Accessed on 3/27/19)Copyright, 2016, OECD. Reprinted with permission.
97.0
97.5
98.0
98.5
99.0
99.5
100.0
100.5
101.0
101.5
102.0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
EUROZONE
GREAT BRITAIN
OECD, "Main Economic Indicators - complete database", http://dx.doi.org/10.1787/data-00052-en (Accessed on 3/27/19)Copyright, 2016, OECD. Reprinted with permission.
97.0
97.5
98.0
98.5
99.0
99.5
100.0
100.5
101.0
101.5
102.0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
JAPAN (to February 2019)
OECD, "Main Economic Indicators - complete database", http://dx.doi.org/10.1787/data-00052-en (Accessed on 3/27/19)Copyright, 2016, OECD. Reprinted with permission.
Consumer Confidence Indexes Are HighBut off the 2018 peaks, with the exception of China
Peak
Duncan MeldrumBusiness of Cleans April 1, 2019 1818
400
800
1,200
1,600
2,000
2,400
2,800
3,200
98 00 02 04 06 08 10 12 14 16 18
S&
P 5
00
In
de
x
Shaded areas indicate recessions
Equity Prices Well Above December Lows as of End-
March, but Volatility Unsettling
18
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
II III IV I II III IV I II
2017 2018 2019
Duncan MeldrumBusiness of Cleans April 1, 2019 1919
Consensus: Profits Grow in Line with Revenue At Least Through 2020
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90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Before Tax Profit (ZCPROFIT/GDP)
After Tax Profit (ZCPAT/GDP)
Pe
rce
nt
of
GD
P (
"M
arg
in")
Src: U.S. Bureau of Economic Analysis,
Hilltop Economics forecast based on Consensus Mar 19
Duncan MeldrumBusiness of Cleans April 1, 2019 2020
Small Business Optimism: Dropped Sharply in Q1Earnings Still High, But Off the Peaks
20
Src: NFIB, January 2019 release of Nov – Dec Survey data
Duncan MeldrumBusiness of Cleans April 1, 2019 2121
0
40
80
120
160
200
240
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320
98 00 02 04 06 08 10 12 14 16 18 20
Global Economic Policy Uncertainty
Source: Scott Baker, Nicholas Bloom and Stev en J. Dav is
at www.PolicyUncertainty.com. Through February 2019
Ind
ex,
1997-2
015 M
ean
=100.0
Financial Crisis >
Uncertainty Peaked at Crisis Levels in January 2019
Uncertainty over future economic policy skyrocketed back to levels high enough- in the grey zone on the graph- to dampen investment by the middle of 2018.
Duncan MeldrumBusiness of Cleans April 1, 2019 2222
0
100
200
300
400
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
US
Europe
Ind
ex
Source: Scott Baker, Nicholas Bloom and Steven J. Davis
at www.PolicyUncertainty.com. Through Feb 19
Financial Crisis >
Economic Policy Uncertainty: U.S. & Europe
0
50
100
150
200
250
300
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Ind
ex
Source: Scott Baker, Nicholas Bloom and Steven J. Davis
at www.PolicyUncertainty.com. Through Feb 19
Financial Crisis >
Economic Policy Uncertainty: Japan
0
200
400
600
800
1,000
1,200
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
jpolunc_gbr
UK Economic Policy Uncertainty
Source: Scott Baker, Nicholas Bloom and Steven J. Davis
at www.PolicyUncertainty.com. Through Jan 19
<-
Lo
w U
ncert
ain
ty H
igh
->
0
200
400
600
800
1,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
jpolunc_kor
Economic Policy Uncertainty: China
Ind
ex
Source: Scott Baker, Nicholas Bloom and Steven J. Davis
at www.PolicyUncertainty.com. Through Feb 19
Uncertainty UP Everywhere Except U.S.
Duncan MeldrumBusiness of Cleans April 1, 2019 2323
Global Real GDP Forecasts for 2019 Lowered –Eleven Months in a Row
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
3.1
3.2
3.3
2018 2019 2020
%C
H V
S Y
R A
GO
Jan 17-Mar 19 Forecasts
Duncan MeldrumBusiness of Cleans April 1, 2019 2424
Yield Curve on Verge of Signaling RecessionUncertainty & fear of recession driving U.S. longer-term rates lower;
Consensus (the arrows) too optimistic as of the end of March
-1
0
1
2
3
4
5
6
2004 2006 2008 2010 2012 2014 2016 2018 2020
Fed Funds Rate (Policy)
3 Month T-Bill
10 Year T-Bond
Shaded area indicates recession
Pe
rce
nt
Duncan MeldrumBusiness of Cleans April 1, 2019 2525
U.S. Yield Curve Foreshadows RecessionSeven (eight?) inversions, seven recessions in the past 50 years
-4
-3
-2
-1
0
1
2
3
4
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
YIELD CURVE DAILY:
10 YR Minus 1 YR Treasuries
Pe
rce
nt
Shaded areas indicate recessions
Duncan MeldrumBusiness of Cleans April 1, 2019 2626
Different International Interest Rate TrendsA risk to financial flows, currencies, and a contributor to uncertainty
-1
0
1
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3
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7
00 02 04 06 08 10 12 14 16 18 20
3 Month LIBOR - US$
3 Month LIBOR - Euro
3 Month LIBOR - Japanese Yen
Perc
en
t
Duncan MeldrumBusiness of Cleans April 1, 2019 27
Summary: 2019-20• The world economy has moved into a decelerating phase
of the business cycle.
• Consensus expects slightly below-trend growth in key output measures (investment, consumption) that drive semiconductor demand.
• Recession risks rising from economic policy uncertainty (globally).
• Growth Rates: Annual % Change 2017 2018 2019 2020
World Real GDP 3.1 3.0 2.7 2.7
Investment 4.7 4.1 3.0 3.2
Consumption 3.1 2.8 2.6 2.5
SEMI MSI 10.0 7.9 (1.5) 2.9
SPCC 2019 Forecast
Duncan MeldrumBusiness of Cleans April 1, 2019 2828
Duncan MeldrumChief Economist
Hilltop Economics, [email protected]
610.709.7951
Duncan MeldrumBusiness of Cleans April 1, 2019 2929
Industrial Production Moderating
-30
-20
-10
0
10
20
07 08 09 10 11 12 13 14 15 16 17 18 19 20
US
China
Japan
Germany
Perc
en
t C
han
ge V
S Y
R A
go
Output Momentum
Duncan MeldrumBusiness of Cleans April 1, 2019 3030
Industrial Production Moderating
-30
-20
-10
0
10
20
07 08 09 10 11 12 13 14 15 16 17 18 19 20
US
China
Japan
Germany
Perc
en
t C
han
ge V
S Y
R A
go
Output Momentum
Duncan MeldrumBusiness of Cleans April 1, 2019 31
Economy RisksOne positive, many negative
• Forecasters under-anticipate business investment and consumer spending: actual data is better than the expectation
• Global trade protectionism • Differential global monetary policy
– Interest rates (U.S. tightens as others still easing/loose)– Currency & financial asset turmoil– U.S. yield curve flattening
• China post 19th Party Congress (geopolitical, debt, property market bubble, etc.)
• Political extremism (US & EU)• Geopolitical
– N. Korea, Middle East– Global terrorism
• Oil
Risks from 2018 SPCC presentation