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GLOBAL MACRO LANDSCAPE

First Quarter 2020

Tailwinds Turn to Headwinds

Darren Williams Director—Global Economic Research

Guy Bruten Chief Economist―Asia Pacific ex China

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Global Macro Outlook |

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1

Global Macro Outlook | 2

That Was The Year That Was: What We Said A Year Ago

As of December 31, 2019Source: AB

Growth in all major economies is expected to slow this year We should see this primarily as a “normalization” back towards growth rates

more consistent with the (weak) secular backdrop A crystallization of one or more event risks could easily tip the balance

towards outright recession Structural pressure for higher inflation is building, but weaker growth and

lower oil prices represent significant headwinds to higher inflation in 2019 -

Gradual withdrawal of monetary accommodation in DM to continue

The outlook for bond yields is less certain: valuations remain stretched but our conviction level in higher yields is lower than it was


Through December 31, 2019*Shaded areas show periods during which global economic growth was running at 3% or higher.Source: Haver Analytics

Welcome To The Age Of Uncertainty

3

It’s All About Uncertainty & Trade

World Trade VolumeGlobal Economic Policy Uncertainty*

(15)

(10)

(5)

0

5

10

15

20

90 94 98 02 06 10 14 18

Period Averages

YoY

% C

hg.

(2)

(1)

0

1

2

3

4

00 02 04 06 08 10 12 14 16 18

Sta

ndar

d D

evia

tions

2.5%

6.8%


*Change in real GDP growth between Q3 2017 and Q3 2019, percentage points.†Eports plus imports of goods & services as a share of GDP (2018). AB estimateAs of December 31, 2019Source: Haver Analytics and AB

But Domestic Demand Prevents A Deeper DownturnTrade-Sensitive Economies Hurt The Most

4

Trade Openness & The Growth Slowdown

(2.1)

(1.8)

(1.5)

(1.2)

(0.9)

(0.6)

(0.3)

0.0

20 30 40 50 60 70 80 90 100

Cha

nge

in R

eal G

DP

Gro

wth

*

Trade Openness†, %

US

Japan

Euro

China

KoreaCanada

UK

Sweden

Australia

Mexico

German Manufacturing Output & Consumption

(6)

(4)

(2)

0

2

4

6

12 13 14 15 16 17 18 19Yo

Y %

Chg

.

Consumer Spending

Manufacturing Output


As of December 31, 2019Source: Haver Analytics and Markit

Manufacturing Remains Fragile

5

Should We Be More Optimistic On Growth? Yes, With Caveats

World Trade VolumeGlobal Real GDP Growth & Manufacturing PMI Proxy

96

100

104

108

112

116

120

124

12 13 14 15 16 17 18 19Ja

n 20

12 =

100

; 3-M

th M

ovin

g A

ve.

2.0

2.5

3.0

3.5

4.0

4.5

5.0

10 11 12 13 14 15 16 17 18 19

YoY

%. C

hg.

Actual

Proxy


Should We Be More Optimistic On Growth? Yes, With CaveatsGrowing Disconnect Between Asset Prices & Fundamentals

As of December 31, 2019Source: Haver Analytics

S&P 500/US Nominal GDP

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

1950 1960 1970 1980 1990 2000 2010

Sta

ndar

d D

evia

tions



And The Secular Backdrop Remains Challenging

7

Should We Be More Optimistic On Growth? Yes, With Caveats

Negative supply shock from demographics

Debt overhang

Weak productivity growth

Rising populism

Geopolitical conflict



Secular Trends Move Into Reverse

8

The Secular Backdrop: Tailwinds Turn to Headwinds

Looking Backwards Looking Forwards

Demographics Positive Supply Shock Negative Supply Shock

Monetary Regime Narrow focus on CPI inflation; no role for money, credit or asset prices

Policy regime favours higher inflation; unconventional monetary/fiscal policies

(helicopter money; MMT)

Government Policy Strongly favoured capital over labour Pendulum swings back towardslabour (populism)

Geopolitics Mutually beneficial, enhanced global economic cooperation

Heightened geopolitical conflict, especially between China and

the West

Impact Strong growth, low inflation, rising debt

Weak growth, low interest rates, higher inflation


*Advanced Economies. United Nations medium-variant projections.As of December 31, 2019Source: Haver Analytics

Running Out of Workers

9

Past The Demographic Sweet Spot

Working-Age Population

300

400

500

600

700

800

900

1,000

1,100

1950 1970 1990 2010 2030 2050

Milli

ons Advanced

Economies

China

Projections

Working-Age Population Growth: AE* + ChinaAnnual Average Growth Rates

0.9% 0.9%

0.0%

(0.3)%

(0.6)%(0.5)%

(0.8)%

1990s 2000s 2010s 2020s 2030s 2040s 2050s


Narrow CPI Focus Has Left The World Saddled With Debt

10

The Triumph & Failure Of Inflation Targeting

*Percentage change between 1997 and 2007. Weighted average of the US, euro area and the UK.†Government, households and non-financial companies. As of December 31, 2019Source: Haver Analytics and IMF Global Debt Database

US & European Money, Credit & Asset Prices: 1997 to 2007*

96%

119%

25%

75%

91%

Money Credit CPI Equities Housing

World Total Non-Financial Sector Debt†

75

100

125

150

175

200

225

250

50 60 70 80 90 00 10P

erce

nt o

f GD

P


1Labour income as a percentage of national income.As of December 31, 2019Source: Haver Analytics

Time For The Pendulum To Swing Back?

11

Capital Wins The Battle Over Labour

Labour Share*: G7 Change in Labour Share*: 1980 to 2017Percentage Points

55

56

57

58

59

60

61

62

63

64

65

66

60 70 80 90 00 10

Per

cent

(15.2)%(13.5)%

(12.5)%(11.4)%

(10.7)%(9.6)%(9.5)%

(7.7)%(7.3)%

(6.2)%(5.8)%

(4.3)%(3.3)%

(1.9)%

JapanAustraliaSpainN'landsItalyAverageEuroFranceGermanySwedenUSNorwayCanadaUK


A Mutually Beneficial Coincidence Of WantsEnhanced Global Economic Cooperation

12

*Fouquin and Hugot (CEPII 2016) 1830 to 1959; World Bank data from 1960.Through December 31, 2019Source: Haver Analytic and Our World In Data

World Merchandise Exports to GDP* Advanced Economy Imports From China

0

4

8

12

16

20

24

28

1830 1860 1890 1920 1950 1980 2010

Per

cent

of G

DP

2

4

6

8

10

12

14

16

18

90 94 98 02 06 10 14 18P

erce

nt o

f Tot

al Im

ports



Three Channels; Common ConsequencesPopulism: Here To Stay

13

Redistribution

Increased taxation of companies/ high-income earners

Higher minimum wages/labour market regulation/universal basic income

Return to collective bargaining

Price controls

Institutional Erosion

Erosion of monetary policy independence—fiscal dominance

Greater recourse to fiscal policy, including unconventional policies

Regulation & the rule of law?

Re-nationalisation of key industries

Raising the Drawbridge

Increased trade protection

Restrictions on capital flows, FDI

More restrictions on immigration/ cross-border flows of labour

Withdrawal from supranational relationships

Lower GrowthHigher Inflation

Greater Macro VolatilityHigher Inflation

Lower Profit ShareHigher Inflation


*Dominic Cummings, Senior Advisor to Boris Johnson (December 13, 2019).Source: AB

14

Seeing The World As It Is Not How You’d Like It To Be

“After the shock of the referendum, MPs and journalists should have taken a deep breath and had a lot of self-reflection on why they misunderstood what was going on in the country. But instead a lot of people just doubled down on their own ideas and “messed” it up even more.”*



The Economic and Cultural Dimension Of Populism

“The liberal idea has become obsolete. It has come into conflict with the interests of the overwhelming majority of the population.” (Vladimir Putin)

15

CONSERVATIVE/POPULISTThe Little People (Rural)

LocalismNationalism

Traditional values

ECONOMIC RIGHTSmall State

Low taxationDeregulationIndividualism

ECONOMIC LEFTLarge State

RedistributionRegulation

Collectivism

LIBERAL/PROGRESSIVE

Entrenched Elites (Urban)Multiculturalism

GlobalismProgressive values


As of December 31, 2019Source: YouGov

Are The Tories The New Party Of The Working-Class?

16

Redrawing The British Electoral Map

UK Vote Share Among Lower Working Class and People Not In Work

29%

41%

47%

37%

44%

34%

6% 5%8%

2015 Election 2017 Election 2019 Election

Conservative Labour Lib Dem


Year 0-1820 average and 1950-1973 average are from Maddison Project Database. 2018 and 2050 are OECD estimates.As of December 31, 2019Source: Haver Analytics, Maddison Project Database and OECD

17

Redrawing The Global Geopolitical Map

China26%

India 25%

Other 31%

West 18%

Share of World GDP0-1820 Ave.

5%4%

38%54%

23%

9%

29%

39%

25%

19%

26%

30%

Share of World GDP2018

Share of World GDP2050?

Share of World GDP1950-73 Ave.


The dots show how the centre-point for global economic activity has moved through time given the relative size of the world’s largest economies. This is a simplified version of an idea introduced by Danny Quah in The Global Economy’s Shifting Centre Of Gravity, January 2011. Source: Google Maps, Maddison Project Database, OECD and AB estimates

Back To The Future

18

The Global Economy’s Shifting Centre Of Gravity

19501973 1870

1913

2000 1500Year 0

1000

1820

2020

2050X

All Time



Secular Trends Move Into Reverse—at a Global Inflexion Point

19

The Secular Backdrop: Tailwinds Turn to Headwinds

Looking Backwards Looking Forwards

Demographics Positive Supply Shock Negative Supply Shock

Monetary Regime Narrow focus on CPI inflation; no role for money, credit or asset prices

Policy regime favours higher inflation; unconventional monetary/fiscal policies

(helicopter money; MMT)

Government Policy Strongly favoured capital over labour Pendulum swings back towardslabour (populism)

Geopolitics Mutually beneficial, enhanced global economic cooperation

Heightened geopolitical conflict, especially between China and

the West

Impact Strong growth, low inflation, rising debt

Weak growth, low interest rates, higher inflation


Can Policy Save The Day?

20


In Europe And Japan

21

Monetary Policy Reaches the End Of the Road

As of December 31, 2019Source: Bloomberg and Jorda-Schularick-Taylor Macrohistory Database.

Policy Interest RatesGlobal Nominal Short-Term Interest Rate By Decade

0

2

4

6

8

10

12

1870 1890 1910 1930 1950 1970 1990 2010

Per

cent

(0.8)%

(0.8)%

(0.5)%

(0.1)%

0.0%

0.8%

0.8%

1.0%

1.5%

1.6%

1.8%

Switz.

Denmark

Euro Area

Japan

Sweden

Australia

UK

NZ

Norway

US

Canada


*Zombie company defined as a company that has been in existence for more than 10 years with earnings before interest and tax below interest payments for three or more consecutive years. Simple average of Australia, Belgium, Canada, Switzerland, Germany, Denmark, Spain, France, the UK, Italy, Japan, the Netherlands, Sweden and the US.†IMF estimates.As of December 31, 2019Source: BIS and IMF

The Law Of Unintended Consequences

22


Frontier Countries In Or With High Risk of Debt Distress†

PercentZombie Firms On The Rise*Percent

0

2

4

6

8

10

12

14

86 90 94 98 02 06 10 1405

101520253035404550

10 11 12 13 14 15 16 17 18


Debt Trap (Or Turning Japanese)

23


*Government, households and non-financial companies.Through December 31, 2019 Source: Bloomberg, Haver Analytics and IMF Global Debt Database

10-Year Government Bond YieldsWorld Total Non-Financial Sector Debt*

(2)

0

2

4

6

8

10

90 94 98 02 06 10 14 18P

erce

nt

Germany

US

Japan

75

100

125

150

175

200

225

250

50 60 70 80 90 00 10

US

D T

rillio

n


*Seven-year rolling average.As of December 31, 2019Source: “Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311-2018” Paul Schmelzing (Bank of England Working Paper January 2020).

Mean Reversion . . . Think Again

24

The ‘Suprasecular’ Decline In Long-Term Interest Rates

Global Real Long-Term Rate Since The 14th Century*Global Nominal Long-Term Rate Since The 14th Century*

0

2

4

6

8

10

12

14

16

14th 15th 16th 17th 18th 19th 20th 21st

Per

cent

(15)

(10)

(5)

0

5

10

15

20

14th 15th 16th 17th 18th 19th 20th 21stP

erce

nt


As of December 31, 2019Source: Haver Analytics and Jorda-Schularick-Taylor Macrohistory Database

Central Banks Have Created A Lot Of Fiscal Space

25

Passing The Baton To Fiscal Policy

G7 Government Debt Servicing CostsG7 Gross Government Debt

0

20

40

60

80

100

120

140

1900 1920 1940 1960 1980 2000

Per

cent

of G

DP

1.5

2.0

2.5

3.0

3.5

4.0

4.5

91 95 99 03 07 11 15 19P

erce

nt o

f GD

P


*Change in cyclically adjusted primary budget balance. A positive number indicates an expansionary fiscal policy. As of December 31, 2019Source: European Commission and Haver Analytics

But Nobody’s Willing To Use It

26

Providing The Architecture For Large-Scale Fiscal Stimulus

Fiscal Impulse*: 2014 to 2019EPercent of GDP

Central Bank Government Debt HoldingsPercent of GDP

(3.0)%(2.2)%(1.9)%

0.5%0.7%0.8%0.9%1.1%1.4%1.5%

2.4%5.1%

UKAustralia

JapanGermany

FranceCanada

EuroSpain

ItalyG20US

China

10%18% 20%

89%

Fed ECB BOE BOJ


*Change in cyclically adjusted primary budget balance, adjusted for one-off measures. A positive number indicates an expansionary fiscal policy.†AB forecast for 2020.As of December 31, 2019Source: European Commission and Haver Analytics

But It’s A Nice To Have Rather Than A Gamechanger . . . For Now

27

Governments Are Finally Getting The Message

Fiscal Impulse: Advanced Economies Plus China*†

Percent of GDPEuropean Fiscal Impulse: 2020 National Budget Plans*Percent of GDP

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

00 02 04 06 08 10 12 14 16 18 20F(0.3)%

0.1%0.1%

0.2%0.3%0.3%

0.4%0.4%0.4%

0.8%0.9%

1.3%

IrelandFranceSpain

FinlandItaly

AustriaBelgiumPortugal

EuroGermany

N'landsGreece


Tailwinds Turn To Headwinds: Soft Growth; Low Interest Rates

Growth to remain subdued, particularly relative to the pre-crisis trend» Populist and geopolitical headwinds here to stay» Monetary policy (in)effectiveness» Fiscal policy moving in the right direction, but not yet a gamechanger

Risks skewed to the downside; a global recession is still more likely than a synchronized upswing

Structural factors continue to point to higher inflation; cyclical backdrop less supportive but tight labour markets a risk (growth/inflation trade-off)

Central banks on hold for now; risks still skewed towards further easing

Bond yields to move in a relatively narrow range—some upside possible in the US, less so in Europe or Japan

Another rangebound year for the US dollar



Biography

Source: AB

29

Darren WilliamsDirector—Global Economic Research

Darren Williams oversees the Global Economic Research Group for Fixed Income. He is also responsible for economic analysis, interest-rate forecasting and bond market strategy for Western Europe. Williams has covered the major economies of Western Europe for almost 30 years, and has written extensively on the European Economic and Monetary Union and the monetary policy decision-making process of Europe’s central banks. This experience proved invaluable when it came to guiding AB and its clients through the European sovereign-debt crisis in 2010. Williams joined the firm in 2003 from Citigroup, where his main focus was on providing thematic research to equity investors. Prior to that, he helped establish global economics coverage at Donaldson, Lufkin & Jenrette. Earlier in his career, Williams held senior positions at UBS, where he was responsible for pan-European coverage and coordinating a team of economists based in Europe, and Merrill Lynch, where he was responsible for economic analysis and bond market strategy for France, Italy and Spain. He holds a BSc in banking and finance from Loughborough University (UK). Location: London

Guy Bruten joined AllianceBernstein (AB) in 2004 and is a member of the firm’s Global Economic Research team. In that role, he provides macro research coverage for a number of countries in the Asia Pacific region, and is also responsible for conducting thematic research—looking at the impact, for example, of demographic change, the commodity price supercycle and the global surge in populist politics on the outlook for economies and asset prices. Prior to joining AB, Bruten worked in economics and market strategy roles for Macquarie Bank’s Funds Management Group and for SBC Warburg. He started his career in the early 1990s at the Commonwealth Department of the Treasury in Canberra. Bruten holds a BEc from the University of Adelaide and a MEc from the Australian National University. Location: Melbourne

Guy Bruten

Chief Economist—Asia Pacific ex China


A Word About Risk

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A short strategy may not always be able to close out a short position on favorable terms. Short sales involve the risk of loss by subsequently buying a security at a higher price than the price at which it sold the security short. The amount of such loss is theoretically unlimited (since it is limited only by the increase in value of the security sold short). In contrast, the risk of loss from a long position is limited to the investment in the long position, since its value cannot fall below zero. Short selling is a form of leverage. To mitigate leverage risk, a strategy will always hold liquid assets (including its long positions) at least equal to its short position exposure, marked to market daily.

Important Risk Information Related to Investing in Emerging Markets and Foreign Currencies

Investing in emerging-market debt poses risks, including those generally associated with fixed-income investments. Fixed-income securities may lose value due to market fluctuations or changes in interest rates. Longer-maturity bonds are more vulnerable to rising interest rates. A bond issuer’s credit rating may be lowered due to deteriorating financial condition; this may result in losses and potentially default, or failure to meet payment obligations. The default probability is higher in bonds with lower, noninvestment-grade ratings (commonly known as “junk bonds”).

There are other potential risks when investing in emerging-market debt. Non-US securities may be more volatile because of the associated political, regulatory, market and economic uncertainties; these risks can be magnified in emerging-market securities. Emerging-market bonds may also be exposed to fluctuating currency values. If a bond’s currency weakens against the US dollar, this can negatively affect its value when translated back into US-dollar terms.

30

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