Global Discussion: 10 Challenges

Global Discussion 10 Challenges Kathleen Stephansen December 14, 2018

*The views I will express are my own as an independent economist and do not necessarily reflect the positions of the Boston Consulting Group.

Global Growth: Beyond the 2016-2017 Pick-up Global growth remains steady following the healthy acceleration in 2016-2017. But headwinds to the current growth path are emerging, shifting the balance of risks to the downside: - In developed markets, growth will converge to potential, which is lower than pre-Great Recession.

- In emerging markets (EM) growth remains solid in Asia but subpar in other countries, particularly for those facing fiscal consolidation.

Global GDP (y/y % change) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 12 012 012 012 013 013 013 013 014 014 014 014 015 015 015 015 016 016 016 016 017 017 017 017 20 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 World: GDP at 2010 Prices & Exchange Rates (SA, Bil.2010.US$) Emerging Markets: GDP at 2010 Prices & Exchange Rates (SA, Bil.2010.US$) Advanced Economies: GDP at 2010 Prices & Exchange Rates (SA, Bil.2010.US$)

Source: Haver Analytics

Challenge # 1: Less synchronized Growth  The cyclical expansion has peaked in many developed markets (UK, Euro area) as export growth decelerates.  The US cycle has benefitted from the fiscal stimulus, but should weaken when the fiscal impact fades.  Some countries continue to emerge from recession (Brazil).  Higher energy prices (from the low of $31 a barrel in January 2016) have affected the terms-of-trade and growth prospects oil importers and exporters.

Global Manufacturing PMIs 57.0 56.0 55.0 54.0 53.0 52.0 51.0 50.0 49.0 48.0 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 14 014 014 014 015 015 015 015 016 016 016 016 017 017 017 017 018 018 018 018 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: Haver Analytics

Global PMI

Emerging Market PMI

Developed Markets PMI

Challenge # 2: Weaker Global Trade Growth ďƒź World trade volume growth has decelerated sharply, driven by a deceleration in export orders, which remain below trend and is approaching the weakest point seen in 2012, during the euro area crisis. ďƒź The WTO reports that indices for auto production and sales, electronic components and ag raw materials have moved from trend to below trend. ďƒź World trade growth below 4% y/y diminishes the positive second-round effects that strengthen global growth.

World Trade Volume (SA, 2010=100) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0

Source: Haver Analytics; WTO

Challenge # 3: The Fading 2016-2017 Investment Cycle Investment growth in developed markets is likely to weaken in reaction to rising trade tensions, the fading of the US fiscal stimulus and political uncertainty Gross Capital Formation

OECD Total: Real Gross Fixed Capital Formation (SA, Y/Y % Change) 6

5

14.0

9.0

4

4.0 3

2

1

0

Source: Haver Analytics

-1.021 1 20

3 12 0 2

1 13 0 2

3 13 0 2

1 14 0 2

3 14 0 2

1 15 0 2

3 15 0 2

1 16 0 2

3 16 0 2

1 17 0 2

3 17 0 2

-6.0 Euro Area: Gross capital formation (y/y % change) US: Non residential fixed investment (y/y % change)

1 18 0 2

Challenge # 4: Tepid Wage Growth Annual average real wage growth in the G-20 countries, 2006-2017

Challenge # 5: Loss Of Risk Appetite & Vol Returns Stock Price Index: Standard & Poor's 100 (Close, Jan-2-76=100) 1350.00

FTSE Global All-Cap US$ Stock Price Index(Index) 640.00 620.00

1300.00

600.00

1250.00

580.00 1200.00

560.00

1150.00

540.00

1100.00 02 18 05 21 09 27 12 30 16 01 19 05 23 08 24 11 27 15 31 16 04 01 801 802 802 803 803 804 804 805 806 806 807 807 808 808 809 809 810 810 811 812 8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

520.00 01 17 02 20 08 26 11 27 15 31 18 04 20 07 23 10 26 12 30 15 03 01 801 802 802 803 803 804 804 805 805 806 807 807 808 808 809 809 810 810 811 812 8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

United States: CBOE Volatility Index [VIX] (Index) 38.00 33.00 28.00 23.00 18.00 13.00

20 16 20 010 16 5 20 022 16 4 20 041 16 4 20 060 16 3 20 072 16 5 20 091 16 3 20 110 16 2 20 122 17 2 20 021 17 0 20 040 17 3 20 052 17 3 20 071 17 2 20 083 17 1 20 102 17 0 20 121 18 1 20 013 18 0 20 032 18 1 20 051 18 0 20 062 18 9 20 082 18 0 20 100 18 9 11 28

8.00

Source: Haver Analytics

Safe Haven Assets And The USD

10-Year Treasury Note Yield at Constant Maturity (Avg, % p.a.) Nominal Broad Trade-Weighted Exchange Value of the US$ (Jan-97=100) 129 3.35 3.25 3.15 3.05 2.95 2.85 2.75 2.65 2.55 2.45

Source: Haver Analytics

127 125 123 121 119 117 115

Challenge # 6: FX Debt of EM Non-Bank Borrowers EM FX debt levels have improved relative to 1999, thanks largely to EM Asia ex-China, where FX debt has declined from 30% of GDP in 1998 to 18% in Q2 2018. But debt levels have risen elsewhere.

In other EM regions, however, FX debt levels are close to or higher than seen in the EM crises of the late 1990/early 2000s. The FX debt rose dramatically in Africa/Middle East –driven by Saudi Arabia.

Sources: IIF; BIS; 95Q1-99Q4 figures are estimated using BIS debt and banking statistics; only includes USD, EUR and JPY debt

FX Debt of EM Non-Bank Borrowers Both China and EM Europe FX debt level ratios have declined but remain well above their late-1990/early 2000s levels. LatAm has also seen a sharp rise in the FX debt level ratios since 2014 though the speed of accumulation has recently moderated.

Sources: IIF; BIS; 95Q1-99Q4 figures are estimated using BIS debt and banking statistics; only includes USD, EUR and JPY debt

Challenge # 7: EM Record Debt Redemption According to the IIF, over $4 trillion of EM bonds and syndicated loans will mature by the end of 2020, of which 1/3 represent FX redemptions. USDrefinancing needs are high for Chile, Colombia, Egypt, Nigeria, Mexico, South Africa and Turkey.

Capital flows (both equities and fixed income) to EM have weakened already, having turned negative in Q2 2018

Challenge # 8: Structural Changes Fiscal policies have done little to address the longer-run structural changes largely facing advanced economies also large EM economies: •

Demographics, such as the as aging of the population and immigration, limit labor input growth.

•

New technologies will affect business models (e.g., asset-light), finance (Fintech) and the type and supply/demand of future jobs.

•

A potential shift in value chains may slow down global growth which has already become less synchronized. The more uncertain geopolitical outlook for emerging markets, China, and Brexit reinforces this dynamic.

Challenge # 9: (Geo-)Political Risks  US: • Trade policies: Switching from multilateralism to unilateralism • Domestic politics (December 21 deadline for government’s budget) • 2019 Congress  US-China trade tensions and competition for dominance: • Tariffs and isolationism • Competition for 5G • Competition for AI (Kai-Fu Lee’s book AI Superpowers: China, Silicon Valley and the New World Order, argues that China will win the knowledge economy race, partly because of the massive store of data.)  Energy competition and the future direction of oil prices  Europe: • BREXIT uncertainty • German politics • France and the new social contract • Euro area 2019 parliamentary elections  Russia and Ukraine  Brazil  Mexico

Challenge # 10: The Spread of Populism

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