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Global Economy Chartbook April 2014

Global Economy Chartbook April 2014. Charles Collyns Chief Economist & Managing Director Felix Huefner Deputy Director, Global Macroeconomic Analysis Saacha Mohammed Research Assistant. Table of Contents. Global Business Cycle Overview Economic Policy and Financial Conditions

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Global Economy Chartbook April 2014

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

  2. Table of Contents Global Business Cycle Overview Economic Policy and Financial Conditions G7 Business Investment─ Coming Out of the Doldrums? 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 3 Page 11 Page 16 Page 19 Page 26 Page 31 Page 35 Page 37

  3. Global Business Cycle Overview

  4. 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: Feb. 2014

  5. 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

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

  7. Exports and Retail Sales Have Faltered Merchandise Exports Retail Sales %3m/3m, saar %3m/3m, saar Sources: IIF, Datastream. Last Observation: Jan. 2014 Sources: IIF, Datastream, Bloomberg. Last Observation: Jan. 2014

  8. IIF Growth Forecasts Shaded Down Real GDP Growth Rate % q/q, saar % y/y, horizontal lines represent 2000-07 average Sources: IIF. Sources: IIF.

  9. Top 6 Risks for the Global Economy Sources: IIFGlobal Economic Monitor, April 2014

  10. The Ukraine Crisis Energy from Russia Real GDP Growth in 2013-14 % (both axes) % change Sources: Oxford Economics, IIF Sources: Oxford Economics, IIF

  11. Economic Policy and Financial Conditions

  12. Financial Conditions Ease in Mature Economies 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 Last Observation: Feb. 2014 Source: Bloomberg Last Observation: Apr. 7, 2014

  13. Smaller Fiscal Headwinds In 2014, Except For Japan • Change in Cyclically Adjusted Fiscal Balances • Emerging Economies • Mature Economies • % of potential GDP • % of potential GDP • Source: IMF Fiscal Monitor April 2014. • Source: IMF Fiscal Monitor April 2014.

  14. 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, IIF. • Last Observation: Apr. 1, 2014 • Source: IIF, IMF. • Last Observation: Jan. 2014

  15. Adjusting Monetary Policy in EMs─ Credibility Matters • Inflation and Official Interest Rates • Inflation and Credit Growth • Source: National Sources, IIF estimates. • Source: Bloomberg, National Sources, IIF; • Inflation is IIF’s 2014 forecast. • Updated: Apr. 3, 2014

  16. G7 Business Investment─ Coming Out of the Doldrums?

  17. Business Investment has Turned Down… • G7 Private Nonresidential Fixed Investment • Real Investment Rate vs. Real GDP Growth, 1970-2013* • Investment as a % of GDP • % of GDP, current prices • GDP Growth, y/y • Source: Datastream; • *Unweighted avg.; constant prices; Japan, Germany, France, Italy • Source: Eurostat, CANSIM, Datastream. • Last Observation: Q3 2013

  18. …But some Cyclical Pick-up is on the Cards • G7 Non-Financial Corporations’ Net Lending • Fixed Investment in Equipment & Machinery • % of GDP, GDP-weighted, 2q ma • Percent change, q/q, saar; 2q ma • Source: U.S. Flow of Funds, Eurostat, Datastream. • Last Observation: Q3 2013 • Source: Eurostat, Haver Analytics. • Last Observation: Q4 2013

  19. Capital Flows to Emerging Economies Under Pressure

  20. Capital Flows Have Been Volatile Recently • Net Inflows into EM Funds • Emerging Market External Bond Issuance* • $ billion • $ billion • Source: EPFR. • Last Observation: Feb. 2014 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. Last Observation: Mar. 2014

  21. Capital Inflows to EM Under Pressure • Exchange Rate Changes: Then and Now • Current Account Balances and Exchange Rate Changes • Sources: Bloomberg, IIF. • Last Updated: Apr. 8, 2014. • . • Sources: Bloomberg, IIF. • Current Account Balance is 2014 estimate. • Last Updated: Apr. 8, 2014.

  22. IIF’s New Capital Flows Tracker • Total Portfolio Equity Inflows to EMs • Total Portfolio Debt Inflows to EMs • $ billion • $ billion • Source: IIF, EPFR. • Last Observation: Q4 2013 • Source: IIF, EPFR. • Last Observation: Q4 2013

  23. New Tracker Suggests Some Resilience • Total Portfolio Equity Inflows to EMs • Total Portfolio Debt Inflows to EMs • $ billion • $ billion • Source: IIF. • Source: IIF.

  24. 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.

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

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

  27. 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.

  28. Household Deleveraging has Progressed • Household Saving Rate • U.S. Corporate Profits and Household Net Worth • % of GDP (both axes) • % of disposable income • Source: Bureau of Economic Analysis, IIF. • Last Observation: Q4 2013 • Source: Datastream. • Last Observation Q2 2013

  29. Labor Market Challenges Remain U.S. Labor Market • U.S. Unemployment Rate percent • % of labor force • *Mid-point of central tendency projections. • Source: Datastream. • Last Observation: Mar. 2014 • Source: Datastream. • Last Observation: Mar. 2014

  30. 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. • Last Updated: Apr. 8, 2014 • Source: Fed. • Last Updated: Apr. 8, 2014

  31. Euro Area: Still Work to Do

  32. Euro Area Recession has Ended… Manufacturing PMIs Real GDP Growth index, 50=breakeven % q/q, saar • Source: Bloomberg. • Last Observation: Mar. 2014 • Source: Datastream, IIF.

  33. Update (Kristina) …But Fragmentation Continues… Cross-Country Dispersion in Business Sentiment and Bank Lending Rates HICP Inflation Rates Stand. Dev., 3mma; DE, FR, IT, ES; all maturity and size Percentage change over a year ago • Source: ECB, European Commission. • Last Observation: Feb. 2014 • Source: Eurostat, National Sources. • Last Observation: Mar. 2014

  34. …And Disinflation Remains a Concern Euro Area Headline Inflation and Projections Policy Rate Expectations %, based on fed fund futures and EONIA forward rate Percentage change over a year ago • Source: Bloomberg. • Last Updated: Apr. 8, 2014 • Source: ECB, Datastream. • Last Observation: Mar. 2014

  35. Japan: Will Abenomics Work?

  36. Inflation and Inflation Expectations are Rising CPI Inflation Inflation Expectations % oya %, 1-month moving average Source: Bloomberg. Last Observation: Apr. 4, 2014 Source: Ministry of International Affairs & Communication. Last Observation: Feb. 2014

  37. 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. Last Observation: Feb. 2014 Source: OECD.

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

  39. Challenges for Emerging Economies

  40. A Broad – Based Slowdown • GDP Growth in Emerging Economies • GDP Growth in Emerging Economies • percent, y/y • percent, y/y • Source: IIF. • Source: IIF.

  41. 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.

  42. 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.

  43. 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.

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

  45. 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.

  46. 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.

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

  48. References • Global Economic Monitor, April 2014: http://www.iif.com/emr/resources+3433.php • Portfolio Flows Tracker, March 2014: http://www.iif.com/emr/resources+3414.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

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