The Next Recession: Asia

Mark Zandi, Chief EconomistSeptember 23, 2019

XXXXX, TitleKatrina Ell, EconomistSteve Cochrane, Chief APAC Economist

Moody's Analytics operates independently of the credit ratings activities of Moody's Investors Service. We do not comment on credit ratings or potential rating changes, and no opinion or

analysis you hear during this presentation can be assumed to reflect those of the ratings agency.

2

September, 2019 3

1. Sizing Up the Recession Threat2. Recession Triggers3. Road to Recession4. Policy Response5. How Severe a Downturn

Agenda

1 Sizing Up the Recession Threat

September, 2019 5

U.S.Turkey

UK

China

South Africa

BrazilRussia

Italy

Japan Spain

France

Canada

India

Indonesia

Germany

Israel

Chile

Saudi Arabia

Australia

Egypt

Expansion

SlowdownRecession

Recovery

MalaysiaSingapore

Thailand

Greece

Recession Risks Are Rising…

South Korea

Vietnam

Source: Moody’s Analytics

September, 2019 6

-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14

S. KoreaSingaporeIndonesia

Hong Kong*Japan

ThailandMalaysia*

ChinaTaiwan

Philippines*Vietnam

Aug-18

Aug-19

* Jul-19

Exports Faltering Across Much of Asia in 2019

Sources: National statistics agencies, Moody’s Analytics

Total exports, 3-mo MA, % change yr ago

2 Recession Triggers

September, 2019 8

What Could Go Wrong? Risk Matrix - China

Source: Moody’s Analytics

High

Likelihood

LowLow HighEconomic Severity of Shock

U.S.-China trade war

Corporate credit bubble burst

Destabilizing capital outflows

State-owned enterprises fuel inefficiencies

Housing market bubble

Hong Kong protests

Losing status as Asia’s manufacturing

hub

African swine flu

Environmental risks

Troubled transition to consumption-led

Local government debt

September, 2019 9September, 2019 9

Tax Hikes Derail Japan’s Growth

-4

-2

0

2

4

6

T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8

Nominal GDP - 1997 Private consumption - 1997Nominal GDP - 2014 Private consumption - 2014

Tax introduced at T

% change yr ago, T=qtr

Sources: Economic and Social Research Institute, Moody’s Analytics

September, 2019 10September, 2019 10

-80

-60

-40

-20

0

20

40

60

80

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Present conditionsExpectations

Moody’s Analytics business sentiment survey

Source: Moody’s Analytics

Trade War Undermines Business Sentiment

% diff between positive and negative responses

September, 2019 11

0

20

40

60

80

100

15 16 17 18 19

Global recession China recession

Recession Worries MountWorldwide Google search term, 100=peak popularity

Sources: Google Trends, Moody’s Analytics

3 Road to Recession

September, 2019 13

-4-3-2-1012345

75 80 85 90 95 00 05 10 15

Treasury Yield Curve Sends a WarningDifference between 10-yr Treasury yield and 3-mo EBY, %

Sources: Federal Reserve, Moody’s Analytics

Avg length of time between inversion and recession is 12 mo

September, 2019 14

-1

0

1

2

3

4

5

6

11 12 13 14 15 16 17 18 19

Japan South Korea Australia China

Asia’s Bond Yields Trend Lower10-yr government bond yield, %

Sources: FRED, Moody’s Analytics

4 Policy Response

September, 2019 16

0123456789

13 14 15 16 17 18 19

Australia Indonesia India South Korea Malaysia Philippines

Asia’s Central Banks Mostly Have Room to CutCentral bank policy rate, %

Sources: Various central banks, Moody’s Analytics

September, 2019 17

Fiscal Space (IMF) versus Debt/GDP

Source: Moody’s Analytics

-500

50100150200250300350400

0 50 100 150 200 250

Korea

Debt-to-GDP Ratio, 2018

Fisc

al S

pace

(IM

F)

Circle size = Real GDP, USD, 2018Q4

Japan

Singapore

India

VietnamLaos

MalaysiaChina

Hong Kong

Thailand

Myanmar

Taiwan

Cambodia

Indonesia

Philippines

5 How Severe a Downturn

September, 2019 19

AUS

AUT

BEL CANCZE

DNK

FIN

FRA

DEU

ISR

ITA

JPN

NLD

NZL

NOR

KOR

ESP

SWE CHE

GBRUSA

LUX

POL

PRT

GRCHUN

ARG BRACHL

CHN

IND IDN MYS

MEXRUS

SAU

ZAF

THA

TUR

HKG

SGP

-30-25-20-15-10

-505

10152025

0 20 40 60 80 100 120 140

Developed EconomiesEmerging Markets

Household Debt Adds Stress in China and KoreaHousehold debt-to-GDP ratio, % (x-axis), 5-yr change, ppts, (y-axis)

2018Q4

Sources: BIS, Moody’s Analytics https://stats.bis.org/statx/toc/CRE.html

APAC

September, 2019 20

HKG

SGP

VNM

TWNTHA MYSKOR

PHLCHNIDN

INDJPN

0

50

100

150

200

250

0 50 100 150 200 250

Y-axis=2018X-axis=2007

Vietnam is Latest Export-Dependent EconomyExports as % share of GDP, 2007 vs. 2018

Sources: National statistical agencies, Moody’s Analytics

September, 2019 21

404550556065707580

Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 15 Jul 19

Distant Geopolitical Risks Matter for APAC

Sources: EIA, Moody’s Analytics

West Texas Intermediate, $ per bbl

September, 2019 22

Q&A

Questions? Contact us at help@economy.com

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Contact Us: Economics & Business Analytics Offices

help@economy.com moodysanalytics.com

September, 2019 24

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September, 2019 25

No-Deal Brexit Would Be a Global Body BlowDifference in Real GDP in 2020Q4, No deal vs No Brexit

Source: Moody’s Analytics

Lower by less than 0.5 pptLower by 0.5 to 1 pptLower by more than 1 ppt

September, 2019 26

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

50 55 60 65 70 75 80 85 90 95 00 05 10 15

How a Vicious Cycle Takes Hold3-mo change in the unemployment rate, ppts

Sources: BLS, Moody’s Analytics

September, 2019 27

0.0

0.2

0.4

0.6

0.8

1.0

1.2

19Q3 19Q4 20Q1 20Q2 20Q3 20Q4 21Q1 21Q2 21Q3 21Q4

Assuming implied path of fed funds rate from futures

Monetary Easing Is Critical…Deviation in real GDP under Fed cut scenario and baseline, %

Source: Moody’s Analytics

September, 2019 28

-2

-1

0

1

2

3

08 09 10 11 12 13 14 15 16 17 18 19 20

Trump Spending Trump Tax CutSequester ObamacareBush taxes over $400k Payroll tax & UIRecovery Act Other PolicyCash for Clunkers Tax rebate checks

…As More Fiscal Stimulus Is Not Likely

Source: Moody’s Analytics

U.S. federal discretionary fiscal policy as a % of GDPSt

imul

usAu

ster

ity

September, 2019 29

0.0

0.2

0.4

0.6

0.8

1.0

62 67 72 77 82 87 92 97 02 07 12 17

UnadjustedAdjusted

…And Uncomfortably HighProbability of U.S. recession based on financial indicators 12-mo prior

Sources: Federal Reserve, Moody’s Analytics

67% in 2020Q2

42%

September, 2019 30

Title Here One Line Only, Title CaseGDP heat map

September, 2019 31September, 2019 31

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

08 09 10 11 12 13 14 15 16 17 18 19H1

Leveraged Firms Leverage UpLeveraged loans outstanding, $ bil

Sources: IMF, Moody’s Analytics

September, 2019 32

0

2

4

6

8

10

12

14

15 16 17 18 19

Europe Faces Another Existential MomentShare of European debt with negative interest rates, $ tril

Sources: Bloomberg, Barclays, Moody’s Analytics

September, 2019 33

-2 -1 0 1 2 3 4 5 6 7

China

Hong Kong

Singapore

India

Japan

South Korea

Malaysia

19Q1 19Q2 19Q3F

Mostly Softer Conditions Over 2019

Sources: National statistics agencies, Moody’s Analytics

Real GDP growth, % change yr ago

September, 2019 34

2.62.83.03.23.43.63.84.04.24.4

20-Aug-14 30-Jan-15 25-Dec-16 09-Oct-17 14-Aug-18 10-Jul-19

…China’s Not ImmuneChina 10-yr bond yield, %

Sources: Bloomberg, Moody’s Analytics