global outlook - institutional dialogue · global outlook paul domjan (ceo), 4cast-rge 18 october...

Global outlook

Paul Domjan (CEO), 4CAST-RGE18 October 2016

Source: Roubini Global Economics

Muddle-through “new abnormal”

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Base Case - 55% Upside Case - 5% Adverse Case - 40%

Modest Divergent, Muddle-Through New Abnormal

Growth Acceleration, Deleveraging Delayed (&

Unnecessary)

Negative Feedback Loop & Outflows

Scenario

• Output gaps closegradually.

• EMs grow below pre-crisis pace with slow reforms.

• Slow hikes in U.S. and most EMs., EZ continues to ease.

• Demography, poor reform pace stunt potentialgrowth globally.

• Political risks dampen investment

• Inflation modest.

• Above-potential growth in most DMs, spurred by pro-business and pro-labor policies, investment, productivity and wage growth reverse hysteresis.

• EM reforms support sustainable growth, including China.

• Inflation moderate as central banks exit ZIRP.

• Tighter financial conditions increase risk of slowdown/recession.

• European turmoil post-Brexit, and/or

• Sharp China slowdown, and/or

• EM outflows cause weakness, downgrades, selected defaults, capital controls.

• Deflation risks.

GDP 2016 (PPP)

3.2% 4.0% or higher 2% or lower

Source: Roubini Global Economics.

3

Likely expansionary fiscal measures and multiplier

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Red denotes a change from our original analysis in February 2016. Fiscal Multipliers are estimated by RGE using our global econometric model.

Will Won't Fiscal multiplier

Japan X 1.17

U.S. X 0.95

Spain X 0.76

Norway X 0.69

Canada X 0.6

Indonesia X 0.59

UK X 0.57

France X 0.56

Italy X 0.51

Germany X 0.44

Sweden X 0.41

Turkey X 0.41

Switzerland X 0.32

S. Korea X 0.32

China X 0.18


US Politics & Economics

5

The Senate is a near to a toss-up


Source: FiveThirtyEight

6

Can he do that? Imagining a Trump presidency


Trumps’ Promises

Can he do that?

Withdraw from NAFTA

Yes. Entering / exiting trade agreements are generally powers of the president

Change U.S. FX policy

Yes. FX policy is the responsibility of the executive branch, exercised through the Treasury Department. The president can order the Treasury to undertake FX intervention.

Take the U.S. into war

Yes, but only because Congress has granted that power to the president. Constitutionally, Congress has this power but historically have delegated to the president

“Tear up” the Iran nuclear deal?

Sort of. Trump could pull the U.S. out of the agreement, but could not require other parties to the deal to pull out. He could also reinstate U.S. sanctions.

Ban Muslim immigration

Sort of. Presidents may suspend entry of people/groups that “would be detrimental to the interests” of the US. However, a ban on Muslims would likely be challenged on a number of constitutional grounds (e.g. 1st amendment bans religious discrimination)


7

Can he do that? Imagining a Trump presidency


Trumps’ Promises

Can he do that?

Order a nuclear strike

Yes - The president has sole authority to order a nuclear strike.

Build a border wall

Maybe. If Congress authorizes the expense of a wall, Trump can build it. If Congress declines, Trump could use part of the security budget, but that might be challenged in the courts.

Force China to change trade / FX policies

No, but just as in the case of getting Mexico to pay for a border wall, Trump has suggested restrictions on trade as a tool to force China to act.

Overturn Dodd-Frank

No. However, the executive powers of the President include supervision of most federal regulatory agencies, which are charged with enforcing provisions of the Dodd-Frank Act.

Change fiscal policy

No, not in a direct way. Presidents propose budgets, but Congress writes the actual budget and passes it. The president can veto the budget and suggest changes, but it is still up to Congress to determine tax and spending levels.


In the U.S., consumers are the whole story…


30%

31%

32%

33%

34%

35%

36%

66%

67%

68%

69%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Consumers' share of GDP (left axis) Everything else (right axis)

Source: Roubini Global Economics, Haver

…but consumer spending has recently outpaced job gains


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

90

140

190

240

290

340

2012 2013 2014 2015 2016

Average Monthly Job Gain (Left Axis) Consumer Spending Growth (Right Axis)

This gap is a worry



Canada

15%

20%

25%

30%

35%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Government Consumption % of GDP

Canada U.S. Germany UK

11

Government consumption expenditure on the rise


Trudeau Government'sFiscal Stimulus So Far


12

House prices have surged above trend


50

70

90

110

130

150

170

190

210

2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2014 2015 2016

Teranet Housing Price Index Trend



China

14

Consumption still the main driver of Chinese growth


-2

0

2

4

6

8

10

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16

Contributions to change in real GDP (%, YTD, NSA)

Final Consumption Gross Fixed Capital Net Exports GDP growth y/y)


15

CNY is now weakening against its basket


600

650

700

750

800

8500

20

40

60

80

100

120

140

Mar2013

Jun2013

Sep2013

Dec2013

Mar2014

Jun2014

Sep2014

Dec2014

Mar2015

Jun2015

Sep2015

Dec2015

Mar2016

Jun2016

CFETS (end 2014=100) RMB Exchange Rate: United States (Yuan/100 US$; right axis) CNY/EUR (right axis)

Source: Roubini Global Economics, Haver Analytics

16

Yuan depreciation no longer damaging financial markets?


2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

3.7%

6.2

6.3

6.4

6.5

6.6

6.7

6.8

Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016 Apr-2016 Jul-2016

CNY/USD (4-wk avg, left axis) Baa/Treasury Yield Spread (4-wk avg, right axis)

This decoupling of risk away

from CNY reflects reduced

concern about China’s near-

term macro performance



Brexit

So far not as bad as feared, but too early to tell


35

40

45

50

55

60

65

70

Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16

Purchasing Managers Index (>50 = expansion)

Manufacturing PMI Services PMI Construction PMI

Referendum

Source: Source: IHS Markit/CIPS

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

2013 2014 2015 2016 2017 2018 2019 2020

GDP Growth (% y/y)

RGE forecast (13 Jun 2016) RGE forecast (19 Sept 2016) Historic

Growth still likely to suffer, at least in the short term


Pre-Brexit forecast

Post-Brexit forecast

Source: Roubini Global Economics,

UK now expected to loosen fiscal policy


-£50

£0

£50

£100

£150

£200

Full year PSNB (bns) March 2016 Budget 2016 Autumn Budget (expected)

But Public-Sector Net Borrowing (PSNB) should remain on a downward

(albeit flatter) trajectory

Fiscal policy options• Infrastructure spending• VAT & corporate tax cuts• Housing market reform

Source: Roubini Global Economics, OBR


Europe

Our 10-year Europe scenarios (introduced July 2015)


More integratedLess integrated

More flexible / diverse

Less flexible / diverse

Nation StatesDisunity & rigidities, nation states

regain sovereignty through EU exits, possibly in a disorderly

fashion.

‘Germanification’More integration but less flexibility.

Led by Germany, EU members forced into current account &

budget surpluses.

Transfer UnionEurope integrates & becomes more

flexible internally. Nation states lose significance in favour of cross-

border blocs.

Customs UnionCountries regain some national

sovereignty in the context of the single market / free trade

agreements.


Events over the last 12 months…


Talk of debt relief for Greece

Catalan independence

Renzi’s reformsSlow progress on EZ

deposit insurance

Single EZ Treasury discussions

Turkey pact & post-coup crackdown

Portugal’s “Anti” government

Nearby wars

Brexit voteMore fiscal flexibility

Capital Markets Union progress

Flexibility in bank bail-in rules

Unorthodox ECB policy

Suspension of Schengen

No Spanish government

Bail-in dogma

Greek bailout conditions

Rise of populism

Migrant crisis

Increased terrorism

…have shifted the odds (in the “wrong” direction)


Nation StatesDisunity & rigidities, nation states

regain sovereignty through EU exits, possibly in a disorderly

fashion.

‘Germanification’More integration but less flexibility.

Led by Germany, EU members forced into current account &

budget surpluses.

Transfer UnionEurope integrates & becomes more

flexible internally. Nation states lose significance in favour of cross-

border blocs.

Customs UnionCountries regain some national

sovereignty in the context of the single market / free trade

agreements.

15%

10%

45%

40%

20%

10%

--30%

30%


The next 12 months contains numerous risk events


Date Event

Oct 2 2016 Austria: Repeat of presidential elections

Oct 2 2016 Hungary: Referendum on refugee quotas

Nov 8 2016 U.S: Presidential election

Nov 20 2016 Italy: Constitutional referendum (could trigger general election)

Dec 2016 Spain: Possible elections if a govt can’t be formed

April/May 2017 France: Presidential election

June 2017 France: Parliamentary election

Sept 2017 Germany: Federal election



Equity Market Implications

27

Real GDP growth forecasts


RGE forecast

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2016 2017 2018 2019 2020 2021 2022 2023

RGDP y/y %

France Germany Great Britain (UK) Italy

Japan Spain Switzerland United States

28

FX forecasts (e.o.p)


0

20

40

60

80

100

120

140

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

EUR/GBP EUR/USD EUR/CHF GBP/USD USD/JPY (right axis)

RGE forecast

27 21

13 15 169 10

21

0

20

40

60

80

100Cyclically Adjusted Price to Earnings (Shiller PE)

Current CAPE

Equity valuations historically except in U.S., Switzerland


Historic range

75th percentile

Median

25th percentile

Source: Research Affiliates, Roubini Global Economics

30

The long view: secular stagnation


10

100

1,000

10,000

100,000Dow

Dow

20 years

20 years

"only" 14 years (Dow) ...

WW1

Oil Shock 1

Credit Crunch 1

'42 ~ '65 Reflation epoch(19% annualised)

Stagnation Epoch

'82 ~ '98 Free-Market epoch(15% annualised)

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Back-up slides

U.S. jobs data weakens the case for a fed hike


1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Unemployment rate (left axis) Average Hourly Earnings (right axis)

Stall in unemployment rate’s downward trend means a stall

in wage gains


34

After a strong start to the year, credit growth easing


-10,000

0

10,000

20,000

30,000

40,000

50,000Three-month moving average (million CNY)

RMB Bank Loans FX Bank Loans Corporate Bonds


Fiscal space does exist in the Eurozone to help cushion risk


Four components of ‘Fiscal Space’ France Germany Italy Spain

Primary Balance >

Debt stabilizing primary balance

2016

2017

2018

Real Growth > Real Interest Rate

2016

2017

2018

Contingent Liabilities (Structural) NPV (2015-50)

Contingent Liabilities (Banking Sector)

FISCAL SPACE


Have space

Limited space

Low/No space

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013-Q1

2013-Q3

2014-Q1

2014-Q3

2015-Q1

2015-Q3

2016-Q1

2016-Q3

2017-Q1

2017-Q3

2018-Q1

2018-Q3

2019-Q1

2019-Q3

GDP Growth (%)

Q/Q (RHS) Q/Q BoE Forecast AUG 2016 (RHS)

Y/Y Y/Y BoE Forecast AUG 2016

UK recession risk highest around turn of the year


Source: BoE, 4CAST-RGE

Sentiment / confidence more important than institutional

arrangements in the short term

Unemployment falling where reforms implemented

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Source: Roubini Global Economics, Statistical Office of the European Communities

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan-2000 Dec-2001 Nov-2003 Oct-2005 Sep-2007 Aug-2009 Jul-2011 Jun-2013 May-2015

Harmonized unemployment rate (SA, %)

EZ France Germany Italy Spain UK

France is the exception



0.0

5.0

10.0

15.0

20.0

25.0

30.0

Mar-2000 Jan-2002 Nov-2003 Sep-2005 Jul-2007 May-2009 Mar-2011 Jan-2013 Nov-2014

Metropolitan France: unemployment rate (%) by age group

Total 15-24 25-49 50+

Will it be enough to produce a Le Pen Presidency?


Source: Roubini Global Economics, TNS Sofre, BVA, Odoxa - latest available polls (April – September 2016)

Polls suggest Marine Le Pen will (easily) make

it to the 2nd round…

11%

12%

15%

25%

29%

François Hollande

Jean-Luc Mélenchon

Emmanuel Macron

Alain Juppé*

Marine Le Pen

…but (so far) head-to-heads suggest she

would struggle to win

Hollande47%

Sarkozy58%

Macron61%

Juppe68%

Le Pen53%

Le Pen42%

Le Pen39%

Le Pen32%

…unless she’s running against the

sitting President!

*Le Pen still comes first with Sarkozy instead

of Juppe as the Republicain candidate

German economy has performed well



0

1

2

3

4

5

6

7

8

9

10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

German unemployment rates (%) by age

Total Under 25 55+

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

German unemployment rates (%) by region

Total West Germany East Germany

Germany - Putting AFD support into perspective



0

5

10

15

20

25

30

35

40

45

50

Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016

Opinion polls since 2013 Federal election (6-poll rolling average, %)

CDU/CSU Social Democratic Party The Left

Green Party Free Democratic Party Alternative for Germany

Despite a drop in support

the two main parties are still

dominant nationally

Germany - Putting AFD support into perspective


Source: Roubini Global Economics, INSA/YouGov

While the AFD (currently) appears to have

little chance of being part of the next

government.

CDU/CSU

CDU/CSU

SDP

SDP

Left

Left

Green

Green

FDP

FDP

AFD

AFD

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Election 2013

Poll 5 Sept 2016

Renzi attempting to increase Executive stability


New Electoral Law for the Chamber of Deputies (lower house)

Constitutional Referendum to Reform the Senate (upper house)

Introduces proportional representation through a list system in 100 constituencies.

Reduces size & limits the Senate’s legislative power (currently has equal power as the lower house).

The list with the most support nationally (provided it is above 40%) receives 340/630 seats (54%), ensuring a majority.

Members no longer elected; to be selected by regions from councilors & local mayors.

If no list achieves 40%, there will be a run-off between the two most popular lists.

The Senate will no longer have the ability to pass votes of (no) confidence in the government.

If the Senate reforms are not approved, the new electoral law will be repealed.

Step 1: Passed in 2015 Step 2: Oct/Nov 2016

For example, Italy’s constitutional referendum…


Renzi loses & resigns

A caretaker / technocratic government passes budget & calls elections (under the old

rules)

Renzi loses & remains

But lacks credibility & is ineffective. Would probably

be forced to call early elections (under the old rules)

Renzi wins

Calls elections under new electoral rules (probably H1

2017) to try & secure his mandate for reform

Regardless of the referendum outcome, Italy will hold elections at some point in the next 20 months, potentially as early as Q1 2017…

…and subsequent elections


1. Partito Democratico (PD) + allies win

Continue with reform plan (pace depends on margin of victory and which electoral rules)

3. Five Star Movement win and don’t moderate

Pursue radical objectives of their movement including a potential EUR referendum

2. Five Star Movement win but moderate

Implement some minor reforms (e.g. basic income) but avoid any major upheavals

Increases odds EU survives

Increases odds of EU break-up

‘German-ification’

Transfer Union

Customs Union

Nation States

EZ rigidity – Government budget balances



-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primary surplus (ex interest) as % of potential GDP

EA 19 France Germany Italy Spain

47

Housing stock tends and prices tend to move in sync


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Teranet Housing Price Index Y/Y % Housing Stock Y/Y %


60

80

100

120

140

160

180

2010 2011 2012 2013 2014 2015 2016

Eurozone CAPE (Jan 2010 = 100, 4m rolling average)

Healthcare

Consumer discretionary

Financials

Industrials

Telecoms

Energy

Utilities

Materials

Eurozone sectoral CAPE – Flat or rolling over


Source: Barclays, Roubini Global Economics

60

80

100

120

140

160

180

2010 2011 2012 2013 2014 2015 2016

Eurozone CAPE (Jan 2010 = 100, 4m rolling average)

Information technology

Consumer staple

Eurozone sectoral CAPE – Expanding


Source: Barclays, Roubini Global Economics

50

Sequential trend easing in H2 2016


0

5

10

15

20

25

-25

-20

-15

-10

-5

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Retail sales (QSAA, left axis) Retail sales (y/y, right axis)


51

Chinese liquidity surge has breathed life into property


-30

-20

-10

0

10

20

30

40

50

60

70

80

Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16

Three-month moving average (%, y/y)

Volume of Property Sold Value of buildings sold

Investment in residential construction Prices


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global outlook - institutional dialogue · global outlook paul domjan (ceo), 4cast-rge 18 october...

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