U.S. Consumer
$500
Economic Outlook: A get out of jail free card for 2016
SEC REVIEW
PAY $100
June 2016
Healthcare
$550
Constance L. Hunter Chief Economist, KPMG @constancehunter constancehunter@kpmg.com
Negative Rates
#Rateslowforlongtime UK Curve
U.S. Curve 3.00
3.00
2.00
2.00
1.00
1.00
0.00
0.00
JPY Curve
EU Curve 1.00
1.50 1.00
0.50
0.50 0.00
0.00
-0.50
-0.50
Today
1YR
Source: Bloomberg © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2
EU credit expanded in response to negative rates European Union: Loans to Households % Change - Year to Year SA, Bil.Euros
European Union: Money Supply Growth From Year Ago, SA, %
12.5
12.5
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5 06
07
08
09
10
11
12
13
14
15
16
Source: KPMG Economics /European Central Bank /Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3
The global economy is seeing some recovery
Source: KPMG Economics, Haver Analytics, Markit Economics; Countries in Green have PMI Data above 50 and Countries in Red have PMI Data below 50; Combined PMI (Services + Manufacturing) for all countries with available data. Manufacturing data only: Australia, Canada, Czech Republic, Denmark, Austria, Greece, Netherlands, Hungary, Indonesia, Israel, Korea, Malaysia, New Zealand, Poland, Switzerland, Taiwan, Turkey, Vietnam © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
IMF GDP forecasts near long term average World: Gross Domestic Product, Constant Prices Ann % Chng
6
6
4
4
2
2
0
0
-2
-2 80
85
90
95
00
05
10
15
20
Source: KPMG Economics /International Monetary Fund /Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
Unintended consequences? • Erosion of Bank Profitability • Pressures on Non-Bank Financial Institutions • Anomalies in the Valuation of Returns and Payment Streams • Effects on Money Market Funds • Excessive Risk Taking • Increased Savings (reduce consumption) © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6
Erosion of Bank Profitability • Lower Net Interest Margins for those banks that leave excess deposits at the central bank • Reduced profit on standard maturity transformation of funding short-term and lending longer term • Potential Eventual losses on government bond positions
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7
Pressures on Non-Bank Financial Institutions • Inability of Insurance companies to meet obligations • Inability of pensions to meet obligations • Volatility in riskier assets
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
Debt increased significantly with low interest rates Breakdown of Total Debt/GDP
Japan France Canada Italy UK U.S. China Australia Germany Brazil 0
100
Gen Gov Debt/GDP HH Debt/GDP
200
300
400
500
Nonfin Corp Debt/GDP
Source: KPMG Economics, BIS © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9
China Debt U.S. & China Debt Breakdown 2008 vs 2015 300 250
2015
2008
200 150 100 50 0 Total Gen Gov Debt/GDP 2008
Nonfin Corp
HH
Banks
U.S.
Total Gen Gov Debt/GDP 2015
Nonfin Corp
HH
Banks
China
Source: KPMG Economics, BIS © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10
#ChinaMeetsGravity China's Growing Corporate Debt
170
25.0%
160
20.0%
150
15.0%
140 130
10.0%
120
5.0%
110
0.0%
100 90
Y/Y % change
Apr-15
Nov-14
Jun-14
Jan-14
Aug-13
Mar-13
Oct-12
May-12
Dec-11
Jul-11
Feb-11
Sep-10
Apr-10
Nov-09
Jun-09
Jan-09
Aug-08
Mar-08
-5.0%
Non-Financial Corporate Debt/GDP (Left)
Source: KPMG Economics, BIS © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
11
Leverage amongst oil companies ran amok Annual Debt Issuance 500 450 400 350 300 250 200 150 100 50 0
$U.S. billions Source: KPMG Economics, BIS © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
12
Increased savings? “People need to invest more today to achieve their desired annual retirement income in the future. For example, a 35-yearold looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.” Larry Fink, Blackrock
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13
Savings rates naturally fluctuate Denmark: Gross Savings Rate SA, %
20
20
16
16
12
12 8
8
4
4
0
00
05
10
15
0
Source: KPMG Economics /Danmarks Statistik/Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
Globally there wil be fewer workers to retirees
3.0
Source: KPMG Economics, Haver Analytics, UN Population Statistics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
15
Raising the retirement age to 74 helps UK Working Age Population (15-74) & (15-64)
U.S. Working Age Population (15-74) & (15-64) 76
80
71
70
66 60
61 56 1980
1990
2000
2010
2020
2030
50 1980
1990
2000
2010
2020
2030
Japan Working Age Population (15-74) & (15-64)
Europe Working Age Population (15-74) & (15-64) 85
80
75
70
65 60 50 1980
55 1990
2000
2010
2020
2030
45 1980
1990
2000
2010
2020
2030
Source: KPMG Economics, Haver analytics, UN Population Statistics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
16
Retirement age stagnant despite demographics Change in Retirement Age
4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00%
US
Japan
Germany
UK
Brazil
France
Canada
Italy
Source: KPMG Economics, UN Population Statistics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
17
Fiscal Contribution to growth in Japan, EU and U.S. Fiscal Contributions to GDP (percentage points) 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 2009
2010
2011
Japan
2012 Euro Area
2013
2014
2015
U.S.
Source: KPMG Economics, Haver Analytics, CAO, Eurostat, BEA © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
18
Japan is the weakest of the large economies Japan Euro Area U.S. China 64
64
60
60
56
56
52
52
48
48
44
44 12
13
14
15
16
Sources: KPMG Economics /NK/MKT, MARKIT, CXN/MKT /Haver
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
19
Services stil driving growth Manufacturing SA, 50+ = Increasing
Services SA, 50+ = Increasing
60
60
55
55
50
50
45
45
40
40
35
35
30
30 07
08
09
10
11
12
13
14
15
16
Source: KPMG Economics /Institute for Supply Management /Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
20
Consumers are stil the engine of U.S. growth Real consumer spending, percent change at annual rates 5.0 Actual Forecast
4.0 3.0
Expansion Average 2.25%
2.0 1.0 0.0 2010
2011
2012
2013
2014
2015
2016
Source: KPMG Economics/Bureau of Economic Analysis/Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21
Growth in new firms adds an engine for U.S. growth Births as % of Average Number of Establishments SA,% (LHS)
Private Sector Establishment Births SA, Thous (RHS)
3.8
240
3.6
230
3.4 220 3.2 210 3.0 2.8
200
2.6
190
95
00
05
10
15
Source: KPMG Economics /Bureau of Labor Statistics /Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
22
Software investment sees slight pickup Software as a % of Total Investment
20
20
16
16
12
12 8
8
4
4
0
85
90
95
00
05
10
15
0
Source: KPMG Economics /Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
23
U.S. GDP scenarios show resilience in the economy U.S. GDP with Forecast and Alternate Scenario 5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0%
-1.0%
-1.0%
-2.0%
-2.0%
Real GDP
Forecast
Alternate
Source: KPMG Economics, Macroeconomic Advisers, Haver Analytics © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
24
Concluding Thoughts • #RatesLowForLongTime • Demographics are Destiny • Tectonic Plate Shifts in Global Supply and Demand • “Flation” dynamics impacted by demographics and debt • Technology and improved matching markets present opportunities
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
25
Thank you
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