Global Economy: Stagnation or Recovery?

1. Economia Globale: quasi-Stagnazione o Ripresa? 24 Novembre 2015 Emilio Rossi EconPartners Oxford Economics erossi@oxfordeconomics.com emilio.rossi@econpartners.it

2. AE recovering after 2008 crisis, EM slowing • Improvement in US and EU compensates for EMs slowdown in 2015-2016 • Long-term global outlook affected by weak economic fundamentals • Deleveraging, low commodity prices, reduced capital inflows and weak EM currencies increase downside risks for EMs and global outlook • World GDP growth in 2015 @2.5%; down from 2.9% expected at start of year

3. Economic forecasts – constant downward revisions

4. Will growth continue to disappoint in the next 10 years? • AE better but yet low growth, EM now slowing • Crisis legacy or • Structural reduction of long-term growth ? • Most analysts (including Oxford Economics) consider “Secular Stagnation” overly pessimistic… • …but recognize the high likelihood of a global slowdown in long-term growth (OECD, Policy challenges for the next 50 years) • Risk of bubbles - policies may be excessively expansionary if trying to achieve targets not recognizing low potential output growth • L. Summers: “It may be impossible for an economy to achieve simultaneously full employment, satisfactory growth and financial stability simply through the operation of conventional monetary policy”

5. Weak fundamentals help explain low growth R. Gordon: • Slowing technical progress - leading to lower TFP for a sustained period - and scarce investment demand despite low real interest rates • Impact of technical changes in previous industrial revolutions (running water, electricity, combustion engine, telephone…) much greater than current changes • Ageing (and expensive health technology) leads to higher savings

6. Share of World GDP – Technology/Productivity are keys Advanced Emerging Source: Giovannini - A. Maddison, 2001, Groningen University data

7. Weak fundamentals help explain low growth L. Summers: • excess savings  no attainable real interest rate that brings the economy to full employment • CBs pushed to zero real interest rates, can’t activate adequate demand • Other factors • Income inequality • Trade lesser growth engine • High debt levels and need for deleveraging (weighing on demand) Total Debt, % GDP

8. Five forces shaping the global economy • 1. Oil shock triggered by US shale, Saudi policy and slower demand growth • Boosted net oil importers (EZ, JP) • Undermined oil exporters (Russia, OPEC) • Impact on US more neutral: positive for consumers, lower shale oil&gas investment • Factors affecting price outlook • potential supply increase • little demand pressure • shale oil&gas “flexible” production • Political upheavals of last decade had little impact on prices • Price weakness likely to continue for several years

9. Five forces shaping the global economy • 2. Prospect of rising US interest rates • Pushed up dollar, deteriorated China competitiveness • Triggered sharp reversal in capital flows for emerging markets • What happens when the Fed does actually raise rates? • 3. Quantitative easing in Eurozone and Japan • Currency devaluations, shifts in market shares • Eased deflation worries • Will the ECB and BoJ do more?

10. Five forces shaping the global economy • 4. Slump in world trade growth • Trade slowing overall as well as containers • Trade/GDP multiplier halved • How much of this is structural and how much cyclical? • 5. China slowdown • Meant the end of the commodity price super-cycle • Hit regional trade hard with knock-on effects to rest of the world • How severe will it get?

11. China - Rebalancing started, but it will take time

12. Growth bearable for Beijing but bad for imports

13. Emerging markets boom clearly over • High debt and commodity dependence are drags on EM growth • Private sector debt ratio in emerging Asia higher than in G7, private debt in EM (ex-China) up 20% since 2007 • Risk of a deleveraging cycle in highly indebted countries, especially in case of external shocks

14. India - a relatively bright spot • Indian economy – from euphoria to cautious optimism • slow progress on reforms, stagnant private investment and weakness in rural consumption indicators • Low oil prices, supportive macro policy, including 125bp easing by RBI, push overall growth to 7.2% in 2015 and 7.4% in 2016

15. Brazil -- Deteriorating outlook • Stubbornly high inflation eroding consumers' purchasing power and confidence • Tightened credit markets, increasing household indebtedness and deterioration in the labor market… • ...on top, political corruption scandal. Outlook for GDP to fall 3.1% in 2015 and decline another 2.0% 2016.

16. Russia -- Trouble in the ruble • Recession deepened in Q2. GDP expected to fall 4.0% in 2015 and another 0.8% in 2016. Sharp retrenchment in consumer spending and investment. • Triple hit from sanctions, ruble and oil. Outlook has worsened: ruble under renewed pressure with oil prices slump • Less space for monetary policy with inflation rampant (especially in the context of Fed liftoff)

17. Japan - BoJ holds fire on more QE; fiscal boost likely • Back into recession, but BoJ maintained QE in October at ¥80trn a year • Emphasized inflation ex energy rising & expects 2% inflation target met in late 2016 • Negligible growth is likely through H2 as positive domestic demand >< faltering exports • Supplementary spending worth around 1% of GDP is likely in coming weeks, boosting growth from 0.6% in 2015 to 1.5% in 2016

18. US – overall positive, with conflicting signals

19. Oxford Economics baseline forecast Updated as of November 20, 2015

20. Summary • Currently favorable global context - weak oil and commodities prices, overall expansionary monetary and fiscal policies • Nonetheless, world growth only 2.5% in 2015, 2.7% for 2016 • Weak for a recovery period, low growth rates for a prolonged period • Unfavorable fundamentals • low productivity growth, ageing population, savings glut, low corporate investment, high debt levels, world trade loosing steam as growth engine • Risks to world growth – adverse reaction to FED rate hike, slowdown in China • hit other emerging markets • Eurozone so far relatively resilient to the shock • In a low growth environment, fiscal policies become more difficult to balance • need to reduce taxes and invest on R&D, Technology, Infrastructure, Education