Constance hunter

U.S. Consumer

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Economic Outlook: A get out of jail free card for 2016

SEC REVIEW

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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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