THE OUTL K FOR THE NORTH AMERICAN ECONOMY...EULER HERMES: GLOBAL LEADER IN TRADE CREDIT INSURANCE 2 Credit Insurance: Protection against bankruptcy and slow payment losses Safer sales

THE OUTL K FOR THE NORTH AMERICAN ECONOMYFebruary 11th, 2020

Dan NorthChief Economist, Euler Hermes North America

NORTH AMERICAN POWER CREDIT ORGANIZATION, CREDIT CONFERENCEPALM SPRINGS, CA

EULER HERMES: GLOBAL LEADERIN TRADE CREDIT INSURANCE

2

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Looking Ahead in 2020

agn

AGENDA

3


01 THE GLOBAL OUTLOOK

02 THE CANADIAN OUTLOOK

03 THE US OUTLOOK

04 TRADE AND TARIFFS

05 CONCLUSIONS


THE GLOBAL OUTLOOK

01

5

World GDP growth 2.7 3.3 3.1 2.5 2.4

United States 1.6 2.4 2.9 2.3 1.6

Latin America -1.1 1.0 1.0 0.0 1.1Brazil -3.3 1.3 1.3 1.1 2.0

United Kingdom 1.9 1.8 1.4 1.2 1.0

Eurozone members 1.7 2.7 1.9 1.2 1.0Germany 2.1 2.8 1.5 0.6 0.6France 1.0 2.4 1.7 1.2 1.2Italy 1.4 1.8 0.7 0.1 0.4Spain 3.0 2.9 2.4 2.0 1.6

Russia 0.3 1.6 2.3 1.1 1.3Turkey 3.2 7.5 2.8 0.1 2.3

Asia 5.0 5.3 4.9 4.4 4.4China 6.7 6.9 6.6 6.2 5.9Japan 0.6 1.9 0.8 0.8 0.9India 8.1 7.1 6.8 5.2 6.0

Middle East 4.9 1.2 1.1 0.5 2.1Saudi Arabia 1.7 -0.7 2.4 0.4 1.2

Africa 1.2 3.2 2.7 1.9 1.8South Africa 0.6 1.4 0.8 0.3 0.0

2016 2017 2018 2019 2020

Global growth to weaken again during thecoming quarters. Some quarters of zero ornegative growth possible, in the US, the UK,Japan, South Korea, Russia and Asianexport hubs.

Sources: IHS, Euler Hermes, Allianz Research

GDP, Gross Domestic Product is our broadest measure of economic health. It’s a $ valueof everything produced by the economy, historically grows ~ 3.3% annually.

Recession (two quarters of contraction) or borderline ones (one quarter of contraction) in France, Italy, Germany, the UK, South Korea, Singapore, Hong Kong, Turkey, Brazil, Mexico, Argentina and South Africa.


GLOBAL GROWTH FORECAST

1.8

can


THE CANADIAN OUTLOOK

02sum

7

THE CANADA SUMMARYLooking Ahead in 2020

Sources: IHS, StatCan, Allianz Research

• Weak consumption• Lack of investment• Manufacturing contraction• BoC too tight, inverted yield curve• Slowing US and global economies• Rising insolvencies

• Hot job market• Low inflation and interest rates• Leading Indicators rebounding• BoC on hold• Housing stabilized• Fiscal stimulus

The NegativesThe Positives

• GDP forecast only 1.7% for both 2019 and 2020.• Downside risks, but things can improve.

gdp

8

THE ECONOMY AND CONSUMERSARE SLOWING


Sources: IHS, StatCan, Allianz Research

-1%

0%

1%

2%

3%

4%

5%

2014 2015 2016 2017 2018 2019

GDP and Consumption, y/y

Cons1.4%

GDP1.7%

lbr

9

LABOR MARKET STRONG, NEAR RECORD LOWUNEMPLOYMENT BUT JOB GAINS SLOWING


Sources: IHS, StatCan, Allianz Research hsn

5%

6%

7%

8%

9%

-100-80-60-40-20

020406080

100120

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Canadian Labor Market, Jobs Created (000s) and the Unemployment Rate

unemployment rate ( R) near record low 5.4%

jobs created (L):H1 247.5kH2 72.8k

10

HOUSING: GOV’T MEASURES (TAXES, MORTGAGERULES)TO COOL MARKET WORKED, NOW REBOUNDING


Sources: IHS, StatCan, CREA, Allianz Research

Home prices, Y/YUnit sales, annualized

rates, 000’sHousing starts, 3 mo ave,

annualized rates, 000’s

mfr

-10%

0%

10%

20%

30%

CanadaTorontoVancouver

26%

-5%

29%

4%

14%

1%

bubbles

400

425

450

475

500

525

550

160

180

200

220

240problem?

MANUFACTURING IN CONTRACTIONLooking Ahead in 2020

leadSources: IHS, StatCan, Allianz Research

1.3

1.4

1.5

1.6

2014 2015 2016 2017 2018 2019

Manufacturing Inventory/Sales Ratio

highest since the recession

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2014 2015 2016 2017 2018 2019

Manufacturing, y/y

New orders -1%Sales -0.1%

12

LEADING INDICATORS, BUSINESSCONFIDENCE POSITIVE, SLIDING


Sources: IHS, StatCan, Boc, CFIB, Ivey, Allianz Research

40

45

50

55

60

65

70

75

2011 2013 2015 2017 2019

CFIB >50 stronger in next yearPMI >50 expansion

CFIB Business Barometer, and Ivey PMI

-8

-6

-4

-2

0

2

4

6

8

-60

-40

-20

0

20

40

60 BoC Business Outlook Survey

overall (R)

future sales outlook (l)

boc

13

BUT HOW LONG CAN THE BOC HOLDOUT IN A WORLD OF COMPETITIVE EASING?


-1%

0%

1%

2%

3%

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

US 1.63%

Eur -0.5%

Jpn -0.1%

Aus 0.75%

Can 1.75%

Central Bank Rates

(Note: negative rates don't work)

Sources: Central banks, Haver, Allianz Research us


THE U.S. OUTLOOK

03sum

15low

US SUMMARY; SOME STRONGINDICATORS NOW, BUT FUTURE WORRIES


The near-term outlook is pretty good...• Low interest rates and inflation• Small business confidence• Services strong• Easy financial conditions• Housing market recovering• Consumer confidence high• Income, consumption positive• Strong labor market• Fed cutting rates• GDP forecast positive at 1.6% for 2020

• Consumer worried about future• Income slowing• Fiscal and monetary policy• Labor market slowing• Consumer delinquencies on rise• Manufacturing, transportation in contraction• Corporate profits weak• Several indicators flashing warnings• Bankruptcies rising• Trade war, divided govt, global weakness• GDP forecast only 1.6% for 2020

... but the long-term outlook suggests slowdown

16nfb

GOOD BUSINESS CONDITIONS WITHLOW INTEREST RATES AND INFLATION


Sources: IHS Global Insight, BLS, Allianz Research

-3%

0%

3%

6%

9%

12%

15%

1969 1979 1989 1999 2009 2019

Consumer Price Index

CPI core

Inflation

0%

5%

10%

15%

20%

1969 1979 1989 1999 2009 2019

Fed Funds

30 yrmortgage

10-yr

Interest Rates

prime

17gdp

SMALL BUSINESS STILL OPTIMISTICLooking Ahead in 2020

-10

0

10

20

30

40

80

90

100

110

1999 2004 2009 2014 2019

National Federation of Independent Business,Small Business Optimism Survey

overall optimism (L) remains historically high

election

% saying now is a good time to

expand (R) historically high

Sources: IHS Global Insight, National Federation of Independent Business, Allianz Research

18

-3%

-2%

-1%

0%

1%

2%

3%

4%

2005 2008 2011 2014 2017 2020

GDP Growth


GDP, LEAD BY SERVICES, HASBEEN POSITIVE (BUT SLIDING).

fin

2.9%

2.3%

1.6%

45

50

55

60

65

70

2015 2016 2017 2018 2019 2020

ISM Services (85% of the economy)<50 means contraction

neworders

services

19Sources: IHS Global Insight. FRED, Fed, NBER, Allianz Research

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1990 1994 1998 2002 2006 2010 2014 2018

Net % of Banks Increasing Spreadson Large C&I Loans

Kansas City Fed Financial Stress Index

St. Louis Fed Financial Stress Index

hsn


FINANCIAL CONDITIONS ARE EASY

20mbaSources: IHS Global Insight. BEA, NAR, NAHB, Allianz Research

40

45

50

55

60

65

70

75

80

85

90

2017 2018 2019

TotalPresent SalesExpected SalesTraffic

National Association of Homebuilders Index


HOUSING MARKET RECOVERING

5,000

5,200

5,400

5,600

550

575

600

625

650

675

700

725

750

2017 2018 2019

New & Existing Home Sales3mo ave Seasonally Adjusted Annualized Rates

Existing sales (R)

6% y/y

New sales(L) 21% y/y

1,100

1,200

1,300

1,400

1,500

2017 2018 2019

Housing Starts and Permits3mo ave Seasonally Adjusted Annualized Rates

Permits;11% y/y

Starts;22% yy

21confSources: MBA, Allianz Research


HOUSING MARKET RECOVERING

22Sources: IHS Global Insight. Conference Board, Allianz Research pce


CONSUMERS 70% OF THE ECONOMY,BUT NERVOUS ABOUT THE FUTURE

20

40

60

80

100

120

140

160

180

2010 2012 2014 2016 2018 2020

Conference Board Consumer Confidence (down 4/5 months)

present situation

future expectations

175

103

132

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-100

-75

-50

-25

0

25

50

75

100

1970 1980 1990 2000 2010 2020

Consumer Confidence survey:future expectations - present situation

shaded areas are recessions -72

23Sources: IHS Global Insight. BEA, BLS, Allianz Research grwt


THE TOTAL SPENDING HAS BEEN HELDDOWN BY WEAK INCOME, WAGE GROWTH

1%

2%

3%

4%

5%

2016 2017 2018 2019

Real Personal Consumption Expenditures & Disposable Personal Income, y/y % growth rate

long-term ave

tax cut (fiscal stimulus) wearing off,slowing after tax income

consumption

(this will reverse next mo.)

1.8%

2.4%

3.0%

3.6%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2015 2016 2017 2018 2019 2020

Job and Wage Growth, y/y

jobs (L)

wages ( R)

24 indcsSources: IHS Global Insight, BLS, NBER, Allianz Research


AND THAT SLOWING JOBCREATION IS WORRISOME

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

3.5%

4.0%

4.5%

5.0%

2015 2016 2017 2018 2019 2020

Job Openings Rate and Job Growth y/y

job openingsrate (L)

job growth y/y (R)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-6%

-4%

-2%

0%

2%

4%

6%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Job Growth y/y

latest, 1.4%

25Sources: IHS Global Insight, BLS, NBER, Bloomberg, SF Fed, Allianz Research dbt


ESPECIALLY SINCE OTHER LABOR MARKET INDICATORS ALSO SUGGEST A SLOWDOWN

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

-30%

-20%

-10%

0%

10%

20%

30%

1990 1992 1994 1996 1999 2001 2003 2005 2008 2010 2012 2014 2017 2019

Temporary Job Growth, y/y

26Sources: IHS Global Insight, NBER, BEA, Federal Reserve, Allianz Researchmfr


CONSUMER ALSO UNDER A DEBT BURDEN, CREDIT CARD RATES AVE. 17%. DELINQUENCIES RISING.

0.0%

0.5%

1.0%

2003 2005 2007 2009 2011 2013 2015 2017 2019

$ Delinquent (>90 days) Debt as a% of Disposable Personal Income (DPI)

STUDENTCARDAUTO

$163b

$15b

$15b

$62b

$73b

$61b

0

0 .0 2

0 .0 4

0 .0 6

0 .0 8

0 .1

0 .1 2

0 .1 4

0 .1 6

0 .1 8

0 .2

1.5%

2.0%

2.5%

3.0%

3.5%

1959 1969 1979 1989 1999 2009 2019

Non-mortgage interest payments / personal outlays


MANUFACTURING IN CONTRACTION,BUT SMALL SIGNS OF REBOUND

Sources: IHS Global Insight. Census, ISM, Allianz Researchtrns

-5%

0%

5%

10%

2014 2015 2016 2017 2018 2019

Real Business Investment

-0.1% y/y

down 3 straight quarters

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

35

40

45

50

55

60

65

2015 2016 2017 2018 2019 2020

Manufacturing Industrial Production (y/y) andISM Manufacturing Index (<50 is contraction)

mfg industrial production (R)

-1.3% y/y

ISM (L) <505/6 months

temp. rebound?

28Sources: IHS Global Insight. Cass Systems, Association of American Railroads, city ports, Allianz Research yld


TRANSPORTATION INDICATORSLEAD ECONOMY, TURNING DOWN

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2009 2011 2013 2015 2017 2019

Rail FreightCarloadsRail FreightIntermodal Traffic

Railroad Traffic, y/y

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-15%

-10%

-5%

0%

5%

10%

15%

2009 2011 2013 2014 2016 2018 2019

Cass Indexes, Trucking Freight

shipments -8%

rates (L) -3%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2014 2015 2016 2017 2018 2019

Container Shipments12 months y/y%, (Long Beach, LA, NY)

YIELD CURVE, LEADING INDICATORDRIVEN BY FED POLICY

29Source: IHS, Federal Reserve, BEA, Euler Hermes dly


-300

-200

-100

0

100

200

300

400

500

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%19

69

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

Yield spread:10yr-3 mo Treasuries (bps)

Real GDP Growth,Y/Y % Change

The Treasury Yield Curve vs. GDP

average lead about 3-5 qs

30source: IHS, Federal Reserve, Euler Hermes, Allianz Research 5/7


CURVE INVERTED, OR WENT NEGATIVE, BUT NOT IN ISOLATION

-60

-40

-20

0

20

40

60

80

100

120

140

1/18 3/18 5/18 6/18 8/18 10/18 11/18 1/19 2/19 4/19 6/19 7/19 9/19 10/19 12/19 2/20

Treasury Yield Curve, 10 yr - 3mo, bps

September '18: unemployment drops from 3.9% to 3.7%;

blistering ISM; hawkishPowell

Jan 3rd, 15 bps, then wages steady,ISM drops sharply, Powell softens

Fed: done for the year(weak economy)

tradetalksstop

4 hikes in 2018 to slowhot economy and inflation

new tariffs

Fed cuts but not enough

trade fearsease

phase 1 not enough

coronavirus

31sp

Sources: IHS Global Insight., Fed, NBER, Allianz Research

00.10.20.30.40.50.60.70.80.91

-100

-50

0

50

100

6/00 8/00 11/00 2/01

2001 recession

00.10.20.30.40.50.60.70.80.91

-50-25

0255075

100125

4/89 6/89 9/89 12/89 3/90 6/90

1990 - 1991 recession

00.10.20.30.40.50.60.70.80.91

-250-200-150-100

-500

50100150

10/78 1/79 4/79 7/79 10/79 1/80

1980 recession

00.10.20.30.40.50.60.70.80.91

-250-200-150-100

-500

50100150

3/73 4/73 6/73 7/73 9/73


00.10.20.30.40.50.60.70.80.91

-100

-50

0

50

100

10/68 2/69 7/69 11/69


00.10.20.30.40.50.60.70.80.91

-100

0

100

200

11/05 7/06 4/07 12/07

2007-2009 recession

00.10.20.30.40.50.60.70.80.91

-500-400-300-200-100

0100200

8/80 10/80 12/80 3/81 5/81 7/81



IN 5 OF PAST 7 RECESSIONS, CURVEWENT POSITIVE BEFORE RECESSION

32

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

52

54

56

58

60

Apr-59 Jun-59 Aug-59 Oct-59 Dec-59 Feb-60 Apr-60

1960

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

115

120

125

130

135

140

Jul-80 Sep-80 Nov-80 Jan-81 Mar-81 May-81 Jul-81

1981

warning

warning

warning

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

14

15

16

17

Dec-47 Feb-48 Apr-48 Jun-48 Aug-48 Oct-48

1949

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

23

24

25

26

27


1953

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

42

44

46

48

50

Aug-56 Oct-56 Dec-56 Feb-57 Apr-57 Jun-57 Aug-57

1957

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

90

95

100

105

Dec-68 Feb-69 Apr-69 Jun-69 Aug-69 Oct-69 Dec-69

1970

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

95

100

105

110

115

120

Nov-72 Jan-73 Mar-73 May-73 Jul-73 Sep-73 Nov-73

1974

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

90

95

100

105

110

115

120

Jan-79 Mar-79 May-79 Jul-79 Sep-79 Nov-79 Jan-80

1980

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

1,100

1,200

1,300

1,400

1,500

Mar-00 May-00 Jul-00 Sep-00 Nov-00 Jan-01 Mar-01

2001

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

325330335340345350355360365


1990

0 %

2 %

4 %

6 %

8 %

1 0%

1 2%

1 4%

1 6%

1 8%

2 0%

1,350

1,400

1,450

1,500

1,550

Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07

2008

earnSources: IHS Global Insight. BEA, NBER, S&P, Allianz Research

warning

warning

warning


THE STOCK MARKET ONLY GAVE A WARNING IN 3 OF 11 PAST RECESSIONS

33

-15%

-10%

-5%

0%

5%

10%

15%

20%

2011 2013 2015 2017 2019

pre-tax

after tax

Corporate Profits Before and After Taxes, y/y%

tax cut, fiscal stimulus,wearing off2019 stock market returns

not from the economy……it was all PE expansion

lead


EARNINGS, PROFITS WEAK

34brpt


MORE EVIDENCE OF A COMING SLOWDOWN

Sources: IHS Global Insight. Conference Board, Allianz Research

-4%

-3%

-2%

-1%

0%

1%

2%

-20%

-15%

-10%

-5%

0%

5%

10%

2007 2009 2011 2013 2015 2017 2019

m/m (R) down 4 of past 5 months

Index of Leading Economic Indicatorsy/y (L) lowest

since recession

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

20

40

60

80

100

120

1959 1969 1979 1989 1999 2009 2019

Index of Leading Indicators

35trd


Sources: IHS Global Insight, US Courts, Allianz Research

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

U.S. Business Bankruptcy Filings, y/y % change

recession ends

9 yrs of falling bruptcies coming to an end

recession

BUSINESS BANKRUPTCIESON THE RISE


TRADE AND TARIFFS

04

37


Sources: . Allianz Research phs

• 20% on Canadian softwood. Prices soar.

• 20% on washing machines, going to 50% after 1.2mil units. Prices rise 15%.

• 30% on solar panels resulting in $2.5b cancelled contracts, 10ks job losses.

• 25% on steel and 10% on aluminium. Steel rose 36% (now down on weak demand)

• 10%-25% tariffs on $7.5B of EU goods

• 100% on $2.4B French goods in February.

TARIFFS SUMMARY

Even after phase 1, most tariffs still in place

38

PHASE 1 TRADE DEAL: IT’S NOTQUITE A “NOTHING-BURGER”


• China agrees to buy an additional $200bn of imports from the US over 2 years. This could be unrealistic as it represents about a 50% increase over 2017 and 2018 levels.

• China pledges to not use coercion, forced technology transfer, or IP theft. But China has said this before and there have been no changes to Chinese law.

• China lowers barriers for US companies going into some Chinese markets.

• US removes 15% tariffs on $160bn of Chinese imports… that were never there in the first place. • US reduces tariffs on the last tranche $120bn from 15% to 7.5%.

• BUT, US keeps in place 25% tariffs on the first $250bn of imports (just under half). • AND, China keeps in place its 5%-25% tariffs on $110bn of US goods.• So the trade “feud” is not over.• Still costing something like 0.3%-0.5% of GDP per year.

cncl


CONCLUSIONS

05

40

US SUMMARY; SOME STRONGINDICATORS NOW, BUT FUTURE WORRIES


The near-term outlook is pretty good... ... but the long-term outlook suggests slowdown• Low interest rates and inflation• Small business confidence• Services strong• Easy financial conditions• Housing market recovering• Consumer confidence high• Income, consumption positive• Strong labor market• Fed cutting rates• GDP forecast positive at 1.6% for 2020

• Consumer worried about future• Income slowing• Fiscal and monetary policy• Labor market slowing• Consumer delinquencies on rise• Manufacturing, transportation in contraction• Corporate profits weak• Several indicators flashing warnings• Bankruptcies rising• Trade war, divided govt, global weakness• GDP forecast only 1.6% for 2020

41

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Documents

THE OUTL K FOR THE NORTH AMERICAN ECONOMY...EULER HERMES: GLOBAL LEADER IN TRADE CREDIT INSURANCE 2 Credit Insurance: Protection against bankruptcy and slow payment losses Safer sales