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Global Economy Chartbook March 2014

Global Economy Chartbook March 2014. Charles Collyns Chief Economist & Managing Director Felix Huefner Deputy Director, Global Macroeconomic Analysis Saacha Mohammed Research Assistant. Key Messages.

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Global Economy Chartbook March 2014

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  1. Global Economy ChartbookMarch 2014 Charles Collyns Chief Economist & Managing Director Felix Huefner Deputy Director, Global Macroeconomic Analysis Saacha Mohammed Research Assistant

  2. Key Messages • 2014 is expected to see a global acceleration, led by mature economies, although the recent data flow has been mixed. • A bumpy Fed exit and contagion to emerging markets are key downside risks. • The U.S. economy is poised to gather pace as the fiscal drag fades. • Euro Area growth has been positive since 2013Q2, but the recovery is slow and still damped by financial strains. • The Japanese economy picked up pace in 2013, propelled by aggressive policy stimulus, but will slow in 2014 as fiscal policy tightens. Greater reform momentum is crucial. • China is seeking to maintain growth, while advancing reforms to rebalance its economy. • Capital flows to EMs have been volatile, and market access will remain under stress for countries with policy gaps. • In addition to cyclical weakness and a tightening of external financial conditions, EM economies need to deal with structural challenges to lift longer-term growth.

  3. Table of Contents Global Business Cycle Overview Economic Policy and Financial Conditions Capital Flows to Emerging Economies Under Pressure U.S.: Achieving a Smooth Exit from Policy Stimulus Euro Area: Still Work to Do Japan: Will Abenomics Work? Challenges for Emerging Economies Page 4 Page 12 Page 16 Page 22 Page 27 Page 31 Page 35

  4. Global Business Cycle Overview

  5. Signs of a Pick-up in the Global Economy Real GDP Growth Rate Consumer Prices % q/q, saar % oya Sources: IIF, Datastream Last Observation: Q4 2013 Sources: IIF, Datastream Last Observation: Jan. 2014

  6. Stronger Growth in MEs, But EM Performance Has Been Mixed Mature Economies: Real GDP Growth Rate Emerging Economies: Real GDP Growth Rate % q/q, saar % q/q, saar Sources: IIF, Datastream Last Observation: Q4 2013 Sources: IIF, Datastream Last Observation: Q4 2013

  7. Business Confidence Has Softened Manufacturing PMI Industrial Production % change, 3m/3m saar index, breakeven=50 Sources: IIF, Datastream Last Observation: Dec. 2013 Sources: Datastream, Markit Economics, Bloomberg Last Observation: Feb. 2014

  8. Exports and Retail Sales Have Picked Up Merchandise Exports Retail Sales %3m/3m, saar %3m/3m, saar Sources: IIF, Datastream Last Observation: Dec. 2013 Sources: IIF, Datastream, Bloomberg Last Observation: Dec. 2013

  9. Top 6 Risks for the Global Economy Sources: IIF Global Economic Monitor, February 2014

  10. Emerging Market Risk Scenarios EM Risk Premia Shock: Long-Term Government Bond Yields A Spike in EM Risk Premia: Impact on GDP %; GDP-weighted EM aggregate % change from baseline GDP level by the end of 2015 Sources: Oxford Economics, IIF Sources: Oxford Economics, IIF

  11. Global Risk Aversion Scenario U.S. Stock Market Scenarios: S&P 500 Global Risk Shock (EM Risk Premia and Global Stock Market Decline): Impact on GDP index % change from baseline GDP level by the end of 2015 Sources: Oxford Economics, IIF Sources: Oxford Economics, IIF

  12. Economic Policy and Financial Conditions

  13. Financial Conditions Remain Easy Global Equity Markets Goldman Sachs Financial Conditions Index* Index, Jan 2010 = 100 Index, value greater than 100 implies tightening Source: Goldman Sachs,*Weighted sum of short-term bond yield, a long term corporate yield, the exchange rate and a stock market variable Source: Bloomberg

  14. Smaller Fiscal Headwinds In 2014, Except For Japan Change in Cyclically Adjusted Fiscal Balances Mature Economies Emerging Economies % of potential GDP % of potential GDP Source: IMF Fiscal Monitor October 2013, IIF Source: IMF Fiscal Monitor October 2013

  15. Monetary Policy Remains Easy in ME, But is Tightening in EM Trends in Official Policy Rates Bank Lending to Private Sector %, GDP-weighted average (both scales) % oya Source: Datastream, Bloomberg Source: IIF, IMF

  16. Capital Flows to Emerging Economies Under Pressure

  17. Capital Flows Have Been Volatile Recently Net Inflows into EM Funds Emerging Market External Bond Issuance* $ billion $ billion Source: EPFR Source: Thomson Financial; IIF calculations. * Includes bonds issued in an external market, for the 30 major EM countries covered in the IIF's Capital Flows to EM report.

  18. Capital Inflows to EM Under Pressure Exchange Rate Changes: Then and Now Current Account Balances and Exchange Rate Changes Sources: Bloomberg, IIF. Current Account Balance is 2014 estimate. Sources: Bloomberg, IIF. .

  19. IIF Capital Flow Trackers Show Resilience • Portfolio Debt Inflows to EMs • Portfolio Equity Inflows to EMs • $ billion, IIF group of 30 economies • $ billion, IIF group of 30 economies Sources: IIF, EPFR, National Sources. Sources: IIF, EPFR, National Sources.

  20. Capital Flows Outlook Likely to be Choppy Emerging Market Capital Inflows Emerging Market Private Capital Inflows, Net $ billion, quarterly data $ billion % of GDP Forecast Source: IIF Capital Flows Report January 2014 Source: IIF Capital Flows Report January 2014

  21. Drivers For EM Capital Flows Financial Globalization and Deepening (2002-2012) GDP Growth Differential EM/Mature Economies percentage points total financial assets in % of GDP (foreign assets + foreign liabilities) / GDP Source: IIF Source: IIF Capital Flows Report October 2013

  22. U.S.: Achieving a Smooth Exit From Policy Stimulus

  23. U.S. Fiscal Consolidation Underway U.S. Federal Budget Balance U.S. Public Debt percent of GDP percent of GDP Source: Congressional Budget Office Source: Congressional Budget Office

  24. Housing Sector Turned Around, Balance Sheets Improved Housing Starts and Prices U.S. Corporate Profits and Household Net Worth % of GDP(both axes) millions of homes index, Jan 2000=100 Source: Datastream Source: Datastream

  25. Labor Market Challenges Remain U.S. Labor Market U.S. Unemployment Rate percent % of labor force • Extrapolation *Mid-point of central tendency projections Source: Datastream Source: Datastream

  26. Fed Tapering is Underway Fed Funds Target Rate during Fed Tightening Cycles Fed Holdings of Securities $ trillion %, t in months *Market expectations estimated from fed funds future and Eurodollar contracts Sources: Bloomberg, CME Group, IIF Source: Fed

  27. Euro Area: Still Work to Do

  28. Euro Area Recession has Ended… Manufacturing PMIs Real GDP Growth index, 50=breakeven % q/q, saar Source: Bloomberg Source: Datastream, IIF

  29. …But Fragmentation Continues… Cross-Country Dispersion in Business Sentiment and Bank Lending Rates Youth Unemployment % of youth labor force Stand. Dev., 3mma; DE, FR, IT, ES; all maturity and size Source: Datastream, IIF Source: ECB, European Commission

  30. …And Disinflation Remains A Concern Euro Area Headline Inflation and Projections HICP Inflation Rates Percentage change over a year ago Percentage change over a year ago Source: ECB, Datastream Source: Eurostat, National Sources

  31. Japan: Will Abenomics Work?

  32. Inflation and Inflation Expectations are Rising CPI Inflation Inflation Expectations % oya %, 1-month moving average Source: Bloomberg Source: Ministry of International Affairs & Communication

  33. Labor Reforms Key for Abenomics Success Base Wage Growth Remains Weak Gender Gap in Prime-Age Labor Force Participation (Male – Female) percent, 2012 percent, oya Source: Ministry of Health, Labor and Welfare Source: OECD

  34. Fiscal and Structural Challenges Remain Net Government Debt in Advanced Economies Potential Growth % of GDP % y/y Source: IMF Source: BoJ, IIF

  35. Challenges for Emerging Economies

  36. Chart on GDP growth per EM region from 2000 A Broad – Based Slowdown GDP Growth in Emerging Economies GDP Growth in Emerging Economies percent, y/y percent, y/y Source: IIF Source: IIF

  37. EM Challenge 1 – Rising Debt Credit Intensity of Growth Change in Non-Financial Private Sector Debt Ratio of private credit to GDP (%) percentage points, difference between 2007Q1 and 2013Q1 Source: BIS, IMF, IIF Source: BIS, IMF, IIF

  38. EM Challenge 2 – Aging Populations BRICS: Age Old Dependency Emerging Markets: Growth in Population Aged 15-64 ratio of people aged 65+ over population aged 15-64 Percent, average annual growth Source: UN, IIF Source: UN

  39. Challenge 3 – Fading Drivers of Growth Investment to GDP Ratio Investment Efficiency Investment to GDP ratio divided by GDP growth rate Difference between 2012 and 2007 level Source: IIF Source: IIF

  40. Challenge 4 – Domestic and External Imbalances General Government Overall Balance Trends in Current Account Balance percent of GDP percent of GDP Source: IMF Source: IIF

  41. IIF EM Bank Lending Survey: Tighter Conditions EM Lending Conditions by Category Overall EM Bank Lending Conditions Diffusion index (below 50=easing, above 50=tightening) Diffusion index (below 50=easing, above 50=tightening) Source: IIF Emerging Market Bank Lending Conditions Survey Source: IIF Emerging Market Bank Lending Conditions Survey

  42. China: Looking for a Soft Landing Short-term Indicators Credit, Investment and GDP Growth • diffusion index (50=neutral) %, oya • %, oya Sources: Datastream, IIF. Sources: Datastream, IIF.

  43. China: Rebalancing Challenges share of GDP share of GDP Source: Datastream, IIF Source: Datastream, IIF

  44. References • Global Economic Monitor, February 2014: http://www.iif.com/emr/resources+3351.php • Emerging Markets Bank Lending Conditions Survey- 2013Q4, January 2014: http://www.iif.com/emr/resources+3333.php • Capital Flows to Emerging Market Economies, January 2014: http://www.iif.com/emr/capflows201401.php • Japan: Abenomics Faces A Tougher Second Year, January 2014: http://www.iif.com/emr/resources+3291.php • Structural Challenges to Emerging Market Growth, October 2013: http://www.iif.com/emr/resources+3080.php • China: Tale of Three Bears, September 2013: http://www.iif.com/emr/resources+3055.php

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