The world in 2017 and beyond

- Populists, protectionism and potential

Citi’s Treasury and Finance Conference

April 6th 2017

Singapore

Dr Simon Baptist

Chief Economist

The Economist Intelligence Unit

Global outlook

3 3

World economic growth to quicken from 2.2% in 2016 to 2.6% in 2017

Key global themes for 2017

Monetary policy

divergence Global economic growth Political realignment

• Cheap credit remains

key support for global

economy

• Central banks reaching

limit of capabilities in

Japan and Europe,

where rates will stay low

• We expect two more Fed

rate hikes in 2017 and

another two in 2018

• Capital flowing out of

EMs; China credit risk

• US will remain engine of

growth in the OECD

• Question mark over

Trump’s fiscal plans and

impact of strong dollar

• Euro zone weighed down

by political issues and

US policy changes

• Brazil and Russia return

to growth

• Possible sharp slowdown

in China coming

• Traditional parties being

challenged as the left-

right axis breaks down

• Strong impact of

megatrends such as

globalisation, technology,

demographics etc

• US to reduce its

international

commitments

• Rise of protectionism in

movement of people,

goods and capital (data?)

4 4

Indonesia, Philippines and Vietnam have elevated risk in Asia

Hotspots for financial risk

5 5

The anti-mainstream revolt will continue

Pressures of populism

What has happenedWhat we think will

happen

What should politicians do?

Traditional left and right parties

shifted to the technocratic middle

ground

Parties became increasingly

estranged from the electorate

Left-right divide became less

important, voters battle lines were

open vs closed

Many of these issues ignored by

mainstream parties, opening up

space for populists

Some mainstream parties

move onto populist

ground – even in

Germany and the Nordics

More ‘grand coalitions’

between the traditional

parties of left and right

Increase in nationalism in

developed countries

International migration to

become more difficult

Foreign investors to face

higher risks

Face head-on the uncomfortable

debates on racism, prejudice and

nationalism

Put national sovereignty back at the

heart of policymaking (this can still

allow international co-operation),

stop blaming outside forces for hard

decisions

Have the debate about what to do

about low productivity, poor

infrastructure, education and

technology

Make provisions for those who will

lose out

6 6

Global economic growth is expected to accelerate this year to 2.6%, but will

then slow down in 2018 and 2019

As good as it gets?

-1

0

1

2

3

4

5

6

7

8

2016 2017 2018Real GDP growth; % change, year on year.

As of March 2017. Source: The Economist Intelligence Unit.

• China’s economy will slow down

• US to drive OECD growth in 2017

• US business cycle will turn in 2019

• Japan, EU — ageing shrinking workforce,

tight immigration policy

7

India will be Asia's fastest-growing large economy over the next five years

Asia GDP growth

4.7 4.1 Average growth for

ASEAN

8

Average annual growth of the consumer class (2015-2025)

Growth of consuming class

Source: C-GIDD. Note: consuming class includes upper,

upper middle, middle, lower middle and lower class

9

Downward pressure on EM currencies, but growing demand for exports

Swings and roundabouts: LCU vs US$

10

Ready for reflation?

We forecast global inflation of 4.6% in 2017, the highest rate since 2011

Consumer price inflation

11 11

Events may diverge from our forecast in ways that affect global

business operations; the following scenarios represent the main risk

Major risks in 2017-18

Risk Scenarios Level of Risk Level Of Impact

China suffers a disorderly and prolonged economic slump High Very High

One or more countries withdraw from the euro zone Moderate Very High

Beset by external and internal pressures, the EU begins

to fracture

Moderate Very High

Currency depreciation and higher US interest rates lead to

an emerging-market corporate debt crisis

Moderate High

Rising threat of jihadi terrorism destabilises the global

economy

Moderate High

Clash of arms in East Asia Moderate High

US introduces a border-adjustment tax Low Very High

UK fails to reach agreement with the EU and reverts to

WTO rules

Moderate Low

A collapse in investment in the oil sector prompts a future

oil price shock

Very Low High

Very high risk = greater than 40% probability high = 31-40%; moderate = 21-30%; low = 11-20%; very low = 0-10%

Global commodity markets

13

Following the OPEC deal announcement—

• Members have met 90% of their pledged

production cuts in January and February

• Compliance of non-OPEC members with

production cuts remains uncertain

Brent: Prices rise (US$55-57/b) in Dec 2016

• Global prices will be higher in 2017, but

only weak upward pressure

• Rise in US crude oil production and an

unclear energy policy

• Weaker demand in China and the US to

affect prices in 2018-19

Output curbs will accelerate rebalancing in

1H17

OPEC likely to extend production deal by another six months

Supply overhang will cap the rise in oil prices in 2017

Oil prices – No big surprises expected

020

4060

80

2016

2017F

2018F

2019F

2020F

2021F

44

56

60

59.9

61.3

64

BRENT; US$/B

14

A sharp slowdown in China in 2018 will result in softer price growth

Commodity markets

‘Everything is negotiable’

The US economy in the age of Trump

16 16

Fiscal surge could help temporarily, but growth of 4% will be out of reach

Trumponomics: Transforming US economy?

• Productivity growth has halved in the US

since the 1990s

• Productivity has slowed in many rich

countries

• Slower labour force growth

• Surge in women entering the workforce in

the 1970s-1990s will not be repeated

• Investment has been slowing for some time

• More regulation, weaker returns

• Rapid growth would be inflationary

• Fed would lift rates to slow pace

17

• The US will experience a mild business-cycle recession in 2019

• Exporters to the US should be familiar with the impact of border-adjustment tax (BAT); high

probability it will not become law, but some degree of US tax reform should be assumed

• The Trump administration's apparent enthusiasm for protectionist tax reform may lead to the

potential flouting of World Trade Organisation (WTO) rules

Businesses must take precautions

How will Trump’s policies affect business?

• Businesses reliant on external financing should

prepare for stronger dollar and higher interest rates

• Exporters to US should attempt to measure impact

of discretionary import taxes, possibly as high as

35%; although likely to fall afoul of NAFTA and

WTO rules, will prove disruptive even if temporary

The biggest risk to the global economy posed by the new US administration is

to international trade

18

• The Trump administration will adopt protectionist

measures targeted at specific sectors and goods

within certain economies rather than a broad

increase in tariffs across the board

• Such a protectionist rhetoric (blanket tariff on

Chinese goods, branding China a currency

manipulator) will leave little room for co-

operation with China

A slight rise in protectionism will inhibit trade in 2017-21

Who’s afraid of Donald Trump?

• Mr Trump’s protectionist agenda

may lead to retaliatory actions

(tariffs targeting a narrow range of

US exports, greater scrutiny of US

firms) from other countries and

evolve into a trade war

• NAFTA is likely to be renegotiated;

prospects for major multilateral

trade deals like the TPP are limited

Foreign affairs

under Trump

America

first,

more

military

Is the US

a reliable

ally?

Worse

relations

with

China

US allies

uncomfor

table

China likes

less human rights, less US action in

Asia

China doesn’t like

Protectionism (in other countries!),

Taiwan and SCS stance, disregard for

established norms

Focus

away

from the

US

Embolde

ned, but

might not

get on

Asian US

allies

less

important

Politicians

under

pressure

look to

China

Iran in

the

freezer?

More

distant yet

unpredicta

ble force

Aid to

fall

Key regional/country profiles

21

US-China ties: China’s toolkit

• The fiscal deficit will widen in 4-5 years as China

seeks to prop up growth by raising spending

• Use of economic diplomacy to dampen tensions

stemming from regional territorial disputes, but only

with partial success

• Slowdown to affect trade, investment and credit

flows with Africa; domestic industrial restructuring

will hurt various Asian economies

• OBOR promises significant boost in Chinese

overseas direct investment in Central, South-east

and South Asia (might prove slow to implement);

agreement over RCEP appears a long way off

• The renminbi’s value will depreciate to an annual

average of Rmb7.44:US$1 in 2019, before a

rebound to average Rmb7.08:US$1 in 2021

China will have a larger influence on global standards and norms

China: Hard landing in 2018?

• Bar state-owned enterprises from doing

business with US firms

• Deny key components to supply chains

• Dump US financial instruments

• Drag feet on new agreements and

implementation of existing pacts—

copyright violations, IPR

• Media campaign against US firms

Rebalancing, but not

as the party intended!

22

0

2

4

6

8

10

2015 2016 2017F 2018F 2019F 2020F 2021F

India World Asia & Australasia

BJP

BJP allies

Congress Congress allies

Others

GDP growth will accelerate after the shock of demonetisation

India: All systems go?

• We estimate that real GDP growth slowed from

7.5% in 2015/16 to 6.5% in 2016/17 due to

demonetisation, but will recover and average

7.6% a year in 2017/18-2021/22

• Inflation to trend upwards averaging 5% a year

in 2017-21

• Political stability (NDA—BJP and its allies—will

return to office in 2019), but constrained by lack

of majority in the upper house

• Structural reforms to progress but controversial

land and labour reforms are unlikely to be

implemented before 2019

• Fluctuations in India’s urban housing market

tied to money and credit growth – not rising

household incomes

Composition of the upper house of parliament

Real GDP growth (%)

23

ASEAN outlook

Growth will remain buoyant in emerging South-east Asian economies

Vietnam

• Above 6% growth in 2017-21

• Deeper ties with India and the US;

South China Sea dispute

• Labour woes

Philippines

• Around 5.8% growth

in 2017-21

• Environmental crackdown

• Human rights concerns

Thailand

• New constitution; 2018 elections?

• Pivot towards China and Russia

• Corruption and conflict-based

distortions of interest

Indonesia

• Slow progress on reforms

• Focus on infrastructure and FDI

• China’s slowdown affects

local currency

Malaysia

• Budget deficit to widen

to 3.5% of GDP by 2021

• Pursuing HIC status under 11MP

• Threat of Islamic terrorism

24 24

World economic growth to quicken from 2.2% in 2016 to 2.6% in 2017

Key global themes for 2017

Monetary policy

divergence Global economic growth Political realignment

• Cheap credit remains

key support for global

economy

• Central banks reaching

limit of capabilities in

Japan and Europe,

where rates will stay low

• We expect two more Fed

rate hikes in 2017 and

another two in 2018

• Capital flowing out of

EMs; China credit risk

• US will remain engine of

growth in the OECD

• Question mark over

Trump’s fiscal plans and

impact of strong dollar

• Euro zone weighed down

by political issues and

US policy changes

• Brazil and Russia return

to growth

• Possible sharp slowdown

in China coming

• Traditional parties being

challenged as the left-

right axis breaks down

• Strong impact of

megatrends such as

globalisation, technology,

demographics etc

• US to reduce its

international

commitments

• Rise of protectionism in

movement of people,

goods and capital (data?)

Any questions?

Dr Simon Baptist

Chief Economist

Managing Director Asia

The Economist Intelligence Unit

simonbaptist@eiu.com

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