Hot, bright and soft spots: Who will make or break global
growth? ICTF, Barcelona 12 May, 2014 Andrew Atkinson Economic
Research Department
Slide 2
2 Agenda 1 Growth, Fragility and Financing 2 Political hot
spots 3 Economic soft spots 4 Confidence bright spots
Slide 3
3 Below 3% GDP growth for the third year in a row: Who will
make or break global growth? Advanced economies seem to be back in
the game Source: IHS Global Insight, Euler Hermes World imports and
regional contributions, % Source: IHS Global Insight, Euler
Hermes
Slide 4
4 Six country risk upgrades at end Q1 2014 Sources: Euler
Hermes, 31 March 2014 Country Risk Committee. Netherlands from AA2
to AA1 Malta from AA2 to A1 Philippines from C3 to B2 Kenya from C3
to C2 Algeria from C3 to C2 Romania from C3 to B2 The economic
outlook improved in recent months and growth is expected to reach
+0.9% in 2014 and +1.3% in 2015. Business insolvencies should
stabilise in 2014, albeit at a record high level. Short-term
financing risk remains low as a result of contained fiscal deficits
and interest expenditures, a high current account surplus and
improving banking sector health. Since 2010, the country has been
relatively resilient and GDP growth should average +2.1% in
2014-15. Financing risk remains moderate in the next 6 to 12 months
but a number of vulnerabilities weigh on medium-term prospects
(public and external debt, weak banking sector, dependence on
tourism and on semiconductor exports). The economys resilience to
external shocks, the high levels of GDP growth during the past
decade, the robust external position, the substantial improvement
in public finances and the stronger business environment are
indicators for a much improved macro environment. Macro-economic
fundamentals have continued to improve (narrowed current account
and fiscal deficits, moderate public debt) though external debt is
still elevated (68% of GDP in 2013, on a declining trend). EH
forecasts growth of around +3% in 2014 and 2015, accompanied by
falling business insolvencies. Current account surpluses, buoyed by
large oil and gas revenues, enable FX accumulation. FX reserves of
around USD190 billion currently provide import cover of over 30
months and foreign debt obligations (and ratios) remain very low.
EH expects GDP growth of +4.5% and +4% in 2014 and 2015,
respectively, boosted by government spending (including large
infrastructure projects). Economic diversification away from
traditional sectors is actively promoted. The use of mobile
telephony has permitted an advance in the spread of banking and
other financial sector services. The medium and longer term
outlooks are favourable, reflecting the countrys status as a
regional hub and the prospects provided by energy resources.
Slide 5
5 While the FEDs tapering hit all EM, the impact differed...
Our Fragile 10 on diverging paths (Update) Fragile 10: Currency
depreciation at end- January (USD/LCU, %) Source: IHS Global
Insight, Euler Hermes Fragile 10: Evolution of foreign reserves
since May 2013 to end-January (USD bn) Source: IHS Global Insight,
Euler Hermes depending on perceptions of countries and
countervailing measures
Slide 6
6 One question: Who will finance the recovery? Lenders vs.
borrowers Lenders to translate their surpluses into FDIs Current
account (USD billions) FDI (USD, billions) Sources: IHS Global
Insight, Euler Hermes Asia GCC Germany USA Fragile 10 Southern
European countries Sources: IHS Global Insight, Euler Hermes
Slide 7
7 especially as uneven rebalancing continues Expected return of
portfolio inflows in the emerging markets Southern Europe is one of
the winners Inward portfolio flows, 12 months cumulated, EURbn but
investors will continue to differentiate between countries. Inward
equity flows, YTD, USDbn Inward portfolio flows, EM*, USDbn *30 big
EM countries in Emerging Europe, Latin America, Emerging Asia,
Africa and Middle East Sources: IIF, Euler Hermes Sources:
Bloomberg, Euler Hermes Sources: Eurostat, Euler Hermes
Slide 8
8 Agenda 1 Growth, Fragility and Financing 2 Political hot
spots 3 Economic soft spots 4 Confidence bright spots
Slide 9
9 Hot spot #1: Turkey, policy responsiveness likely to remain a
source of vulnerability Large current account deficits (8% of GDP
in 2013), mainly financed by short-term capital inflows, remain a
key concern Monetary policy, inflation and exchange rate Source:
Central Bank of Turkey, Euler Hermes After sharp policy response to
Fed tapering and despite political turmoil the TRY stabilised but
will weigh down on growth (3% in 2014) Source: Central Bank of
Turkey, Global Insight, Euler Hermes Current account balance and
financing of deficits (% of GDP)
Slide 10
10 Hot spot #2: Putinomics, tightrope walking Investor
confidence has dropped sharply Net capital inflows/outflows by the
Russian private sector (USD bn) Current account surplus continues
to narrow Current account balance (% of GDP) Sources: Central Bank
of Russia, Euler Hermes From crisis to conflict: Russia is likely
to be the most impacted Sources: Global Insight, Euler Hermes
forecasts Baseline scenario No further occupation of parts of
Ukraine by Russia and thus no full-blown sanctions on Russia (80%
probability) Impact on Russia: GDP: +0.7% Net capital outflows:
USD120bn 15% RUB depreciation against a USD+EUR basket FX reserves:
USD400bn Impact on the eurozone: Contained: -0.1pps of GDP growth
through reduced trade flows and slightly rising non-payment risk
Escalation scenario Russia intervenes in east and southeast
Ukraine. West imposes substantial economic sanctions (20%
probability) Impact on Russia: GDP: -2.5% Net capital outflows:
USD200bn 30% RUB depreciation against a USD+EUR basket FX reserves:
USD300bn Impact on the eurozone: Significant : -0.9pps of GDP
growth through reduced trade flows, reduced investment flows,
rising energy prices (USD130/b) Firms payment behaviour to
deteriorate strongly (EUR18bn of unpaid invoices at risk)
Slide 11
11 Bonus: Eurasia - at a crossroads Countries that have built
strong commercial and economic links with western Europe will
benefit from the eurozone recovery. In contrast, those that have
remained dependent on Russia will suffer from the current crisis
Sources: IHS Global Insight, Euler Hermes Trade with Russia vs
Western EuropeInvestment flows (inflows and outflows) with Russia
vs eurozone European Union Eurasian Economic Community European
Union Eurasian Economic Community
Slide 12
12 Our Weak 4 did weaken in Q1 2014 (Update) Russia Annexation
of Crimea increased geo- political tensions A loss of confidence
and continued market volatility led to capital outflows, a
depreciation of the RUB and a hike in the key monetary policy
interest rate, weighing on 2014 GDP growth Downside risks prevail
Ukraine Prospect of large IMF-led international funding programme
(approx. USD27bn) has reduced immediate risk of balance of payments
crisis and sovereign default But big challenges remain: (i)
recession in 2014; (ii) implementation of required reforms for IMF
support; (iii) resolution of domestic political tensions and
standoff with Russia Thailand Standoff between Thaksin regime and
opponents Elections failed to resolve the conflict, increasing
societys divide Despite history of economic growth during political
turmoil, the prolonged conflict weighs on 2014 growth prospects
Venezuela Unorthodox macro-economic policies have put the country
in a very difficult economic position (inflation >40%, lack of
FX & resulting difficulty in importing) Lack of even the most
basic goods and increasing crime send people out on the streets
(esp. middle class), resulting in partially violent
demonstrations
Slide 13
13 Agenda 1 Growth, Fragility and Financing 2 Political hot
spots 3 Economic soft spots 4 Confidence bright spots
Slide 14
14 Soft spot #1: Brazil suffers from bottlenecks and lack of
competitiveness Internal (inflation) and external (current account
deficit) macro-economic imbalances will take time to be tackled
Industrial production and retail sales (basis 100:01-2005) Source:
IBGE, Euler Hermes Economic activity to expand by 2.0% in 2014 and
2.5% in 2015, among the lowest growth rates in the region Inflation
rate and SELIC (%) Source: Central bank of Brazil, Euler
Hermes
Slide 15
15 Bonus: Latin America - It is all about attractiveness!
Source: Country Risk Level as of March 31, 2014, Euler Hermes
Regional growth will remain weak in 2014 (2.6%), before picking-up
moderately in 2015 (3.0%)still below pre-crisis rates The tax
burden remains one hurdle limiting growth Selected countries: Real
GDP growth forecasts 2014-15 and country risk level Brazil: 2.0%
2.5% Chile: 3.7% 4.0% Colombia: 4.3% 4.4% Peru: 5.6% 6.0%
Argentina: 1.7% 2.5% Venezuela: 0.0% 0.3% Mexico: 3.3% 3.9% Lower
tax burden Higher tax burden Better growth prospects Worse growth
prospects Tax rate for corporates (% of commercial profits, 2013)
Real growth (%, 2014) Source: WDI World Bank, Euler Hermes
Slide 16
16 Soft spot #2: India needs to build strong macro-financial
foundations Sources: IHS Global insight, Bloomberg, Euler Hermes
Impact of Rajanomics: Stabilising prices + reducing external
imbalances + improving confidence Monetary policy and
inflationCurrent account and exchange rateBusiness confidence
Sources: IHS Global insight, Euler HermesSources: Bloomberg, Euler
Hermes
Slide 17
17 Sectors share of GDP Sources: Nigeria National Bureau of
Statistics, World Bank, Euler Hermes Soft spot #3: South Africa and
Nigeria, who leads Sub-Saharan Africa? Nigerias GDP new
methodology: services now account for half of the countrys GDP.
South Africa remains more attractive for business and keeps its
regional leadership Nigeria released a new methodology to estimate
its GDP on April 6 th 2014. Nigeria old shows the former GDP
estimates and Nigeria new shows the new estimates given by the
government of Nigeria. Attractiveness and regional integration of
Nigeria and South Africa in 2012 Nigeria (based on new data for
GDP) South Africa Financial attractiveness Domestic credit to
private sector (% of GDP) 11.9%151.1% Credit depth of information
index (0=low to 6=high) 56 Business attractiveness GDP per capita
USD2 688.87 314.1 Rule of law, CPIA index (-2.5=low to +2.5=high)
-1.180.08 Regional integration Regional trade agreements 1 (ECOWAS)
3 (SACU / SADC / EC- South Africa) Ratio trade Africa /
World8.5%12.6% Sources: Nigeria National Bureau of Statistics,
World Bank, WTO, Chelem, Euler Hermes Revised GDP estimates 2013:
Nigeria USD510bn (vs USD292bn previously), South Africa
USD350bn
Slide 18
18 High competition with Japan and to a lesser extent the U.S.
but the euro is too strong and wages are increasingly dynamic Soft
spot #4: Europes core, chink in the armour? Germany (1)
Manufacturing hourly earnings indexReal effective exchange rate
Sources: Global Insight, Euler Hermes Input prices (wages, energy
costs) increase while deflationary pressures on prices prevail
Problem #1: Intra-zone Problem #2: Extra-zone PPI (Germany) vs CPI
(eurozone), y/y, % 57% of German exports go to the EU-27 o.w. 30%
go to France, Netherlands, Italy, Belgium and Spain.
Slide 19
19 Who-wants-to-be-a-millionaire question: Can France grow
without public spending? Short-term growth drivers could stall
(such as consumption), longer-term ones still subdued (including
investment) Frances Stability Pact: Wishful thinking? Source :
Ministry of Finance, Euler Hermes Soft spot #4: Europes core, chink
in the armour? France (2)
Slide 20
20 Agenda 1 Growth, Fragility and Financing 2 Political hot
spots 3 Economic soft spots 4 Confidence bright spots
Slide 21
21 Bright spot #1: The United States will improve in the
Spring? Severe winter weather damaged economic activity in Q1 but a
spring rebound is expected. Private consumption and investment
should boost GDP growth to 2.8% in 2014 Sources: IHS Global
Insight, Euler Hermes Selected advanced indicators for the USGDP
growth and contribution to GDP growth
Slide 22
22 Bright spot #2: China to unwind savings The power of saving
China 2.0: becoming lender and consumer FDI and consumer goods
imports Cheap labour costs and high productivity growth model
losing steam Wages an productivityDomestic saving rates Sources:
IHS Global Insight, Euler Hermes Sources: Bloomberg, Euler Hermes
Sources: Eurostat, Euler Hermes
Slide 23
23 Bonus: Japan - When it is just about confidence Mixed impact
of Abenomics: inflation is picking up, but no clear improvement in
wages Private confidence on diverging trends Sources: Bloomberg,
IHS Global Insight, Euler Hermes Sources: IHS Global Insight, Euler
Hermes Inflation and wagesBusiness and consumer confidence
Slide 24
24 Bright spot #3: GCC, the ultimate money-spinners? Sources:
IHS Global Insight, Euler Hermes Growth rates in GCC and in the
average of the Middle-East region FDIs from GCC countries to
selected economies (2012 stock, % of total FDI) High growth in GCC
countries, giving additional resources to sovereign wealth funds
investing in Europe, but also in other GCC countries and elsewhere
in the Middle East Sources: IHS Global Insight, Euler Hermes GCC
have important sovereign wealth funds Sovereign Wealth Funds
(USDbn)* *Based on published data, which may be incomplete Sources:
IHS Global Insight, Euler Hermes
Slide 25
25 Bright spot #4: How shiny is life after austerity in
southern eurozone? (1) Signs of pick up in exports due to
competitiveness gains Real exports, Q1 2008 = 100 Sources: IHS
Global Insight, Euler Hermes forecasts But long-lasting low
inflation due to painful adjustments is a high risk Inflation rate,
% Sources: Eurostat, Euler Hermes forecasts and credit to
non-financial corporations continues to contract Credit to NFC,
y/y, % Sources: ECB, Euler Hermes
Slide 26
26 Bonus: Renzimania - Will charm survive tough reforms? The
Renzi effect: accelerating business confidence and return of
portfolio flows Economic Sentiment vs. portfolio flows Source:
Eurostat, Euler Hermes Act 1: gain political support and give a
modest boost to growth Act 2: more still needs to be done to
support credit and ease fiscal pressure on firms Source: Euler
Hermes Estimated impact of Renzi reform package GDP growth (pps)
Fiscal deficit (% of GDP) +0.4+0.2 GDP growth: 2014: +0.4% 2015:
+0.9% Fiscal deficit: 2014: -3.1% 2015: -2.5%
Slide 27
27 N.B.: Domestic demand includes private consumption, total
investment and inventories Sources: IHS Global Insight, Euler
Hermes Consumer spending recovered rapidly as a result of the
improving labour market Total tax rate, % of commercial profits
Less fiscal burden for companies and still low interest rates will
support investment Sources: World Bank, Euler Hermes Real GDP and
components Further cuts in corporate tax (-1pps to 20% in April
2015 after a 2pps cut in April 2014, the lowest rate within the
G20). BoE to support banks that extend loans to exporting firms.
Increase in infrastructure spending (EUR3bn per year). EUR1.6bn for
financing in 11 strategic industries (auto, aerospace,
construction, housing). New shale gas field allowance and reduction
of the effective tax rate on shale gas production. Abolish stamp
duty (currently at a rate of 0.5%) on transfers of shares of UK
companies listed on growth markets in April 2014. Economic policies
to remain supportive Bright spot #4: and the UK (2)
Slide 28
Thank you for your attention! Economic Research Department
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