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The world in 2017 and beyond
- Populists, protectionism and potential
Citi’s Treasury and Finance Conference
April 6th 2017
Singapore
Dr Simon Baptist
Chief Economist
The Economist Intelligence Unit
Global outlook
3 3
World economic growth to quicken from 2.2% in 2016 to 2.6% in 2017
Key global themes for 2017
Monetary policy
divergence Global economic growth Political realignment
• Cheap credit remains
key support for global
economy
• Central banks reaching
limit of capabilities in
Japan and Europe,
where rates will stay low
• We expect two more Fed
rate hikes in 2017 and
another two in 2018
• Capital flowing out of
EMs; China credit risk
• US will remain engine of
growth in the OECD
• Question mark over
Trump’s fiscal plans and
impact of strong dollar
• Euro zone weighed down
by political issues and
US policy changes
• Brazil and Russia return
to growth
• Possible sharp slowdown
in China coming
• Traditional parties being
challenged as the left-
right axis breaks down
• Strong impact of
megatrends such as
globalisation, technology,
demographics etc
• US to reduce its
international
commitments
• Rise of protectionism in
movement of people,
goods and capital (data?)
4 4
Indonesia, Philippines and Vietnam have elevated risk in Asia
Hotspots for financial risk
5 5
The anti-mainstream revolt will continue
Pressures of populism
What has happenedWhat we think will
happen
What should politicians do?
Traditional left and right parties
shifted to the technocratic middle
ground
Parties became increasingly
estranged from the electorate
Left-right divide became less
important, voters battle lines were
open vs closed
Many of these issues ignored by
mainstream parties, opening up
space for populists
Some mainstream parties
move onto populist
ground – even in
Germany and the Nordics
More ‘grand coalitions’
between the traditional
parties of left and right
Increase in nationalism in
developed countries
International migration to
become more difficult
Foreign investors to face
higher risks
Face head-on the uncomfortable
debates on racism, prejudice and
nationalism
Put national sovereignty back at the
heart of policymaking (this can still
allow international co-operation),
stop blaming outside forces for hard
decisions
Have the debate about what to do
about low productivity, poor
infrastructure, education and
technology
Make provisions for those who will
lose out
6 6
Global economic growth is expected to accelerate this year to 2.6%, but will
then slow down in 2018 and 2019
As good as it gets?
-1
0
1
2
3
4
5
6
7
8
2016 2017 2018Real GDP growth; % change, year on year.
As of March 2017. Source: The Economist Intelligence Unit.
• China’s economy will slow down
• US to drive OECD growth in 2017
• US business cycle will turn in 2019
• Japan, EU — ageing shrinking workforce,
tight immigration policy
7
India will be Asia's fastest-growing large economy over the next five years
Asia GDP growth
4.7 4.1 Average growth for
ASEAN
8
Average annual growth of the consumer class (2015-2025)
Growth of consuming class
Source: C-GIDD. Note: consuming class includes upper,
upper middle, middle, lower middle and lower class
9
Downward pressure on EM currencies, but growing demand for exports
Swings and roundabouts: LCU vs US$
10
Ready for reflation?
We forecast global inflation of 4.6% in 2017, the highest rate since 2011
Consumer price inflation
11 11
Events may diverge from our forecast in ways that affect global
business operations; the following scenarios represent the main risk
Major risks in 2017-18
Risk Scenarios Level of Risk Level Of Impact
China suffers a disorderly and prolonged economic slump High Very High
One or more countries withdraw from the euro zone Moderate Very High
Beset by external and internal pressures, the EU begins
to fracture
Moderate Very High
Currency depreciation and higher US interest rates lead to
an emerging-market corporate debt crisis
Moderate High
Rising threat of jihadi terrorism destabilises the global
economy
Moderate High
Clash of arms in East Asia Moderate High
US introduces a border-adjustment tax Low Very High
UK fails to reach agreement with the EU and reverts to
WTO rules
Moderate Low
A collapse in investment in the oil sector prompts a future
oil price shock
Very Low High
Very high risk = greater than 40% probability high = 31-40%; moderate = 21-30%; low = 11-20%; very low = 0-10%
Global commodity markets
13
Following the OPEC deal announcement—
• Members have met 90% of their pledged
production cuts in January and February
• Compliance of non-OPEC members with
production cuts remains uncertain
Brent: Prices rise (US$55-57/b) in Dec 2016
• Global prices will be higher in 2017, but
only weak upward pressure
• Rise in US crude oil production and an
unclear energy policy
• Weaker demand in China and the US to
affect prices in 2018-19
Output curbs will accelerate rebalancing in
1H17
OPEC likely to extend production deal by another six months
Supply overhang will cap the rise in oil prices in 2017
Oil prices – No big surprises expected
020
4060
80
2016
2017F
2018F
2019F
2020F
2021F
44
56
60
59.9
61.3
64
BRENT; US$/B
14
A sharp slowdown in China in 2018 will result in softer price growth
Commodity markets
‘Everything is negotiable’
The US economy in the age of Trump
16 16
Fiscal surge could help temporarily, but growth of 4% will be out of reach
Trumponomics: Transforming US economy?
• Productivity growth has halved in the US
since the 1990s
• Productivity has slowed in many rich
countries
• Slower labour force growth
• Surge in women entering the workforce in
the 1970s-1990s will not be repeated
• Investment has been slowing for some time
• More regulation, weaker returns
• Rapid growth would be inflationary
• Fed would lift rates to slow pace
17
• The US will experience a mild business-cycle recession in 2019
• Exporters to the US should be familiar with the impact of border-adjustment tax (BAT); high
probability it will not become law, but some degree of US tax reform should be assumed
• The Trump administration's apparent enthusiasm for protectionist tax reform may lead to the
potential flouting of World Trade Organisation (WTO) rules
Businesses must take precautions
How will Trump’s policies affect business?
• Businesses reliant on external financing should
prepare for stronger dollar and higher interest rates
• Exporters to US should attempt to measure impact
of discretionary import taxes, possibly as high as
35%; although likely to fall afoul of NAFTA and
WTO rules, will prove disruptive even if temporary
The biggest risk to the global economy posed by the new US administration is
to international trade
18
• The Trump administration will adopt protectionist
measures targeted at specific sectors and goods
within certain economies rather than a broad
increase in tariffs across the board
• Such a protectionist rhetoric (blanket tariff on
Chinese goods, branding China a currency
manipulator) will leave little room for co-
operation with China
A slight rise in protectionism will inhibit trade in 2017-21
Who’s afraid of Donald Trump?
• Mr Trump’s protectionist agenda
may lead to retaliatory actions
(tariffs targeting a narrow range of
US exports, greater scrutiny of US
firms) from other countries and
evolve into a trade war
• NAFTA is likely to be renegotiated;
prospects for major multilateral
trade deals like the TPP are limited
Foreign affairs
under Trump
America
first,
more
military
Is the US
a reliable
ally?
Worse
relations
with
China
US allies
uncomfor
table
China likes
less human rights, less US action in
Asia
China doesn’t like
Protectionism (in other countries!),
Taiwan and SCS stance, disregard for
established norms
Focus
away
from the
US
Embolde
ned, but
might not
get on
Asian US
allies
less
important
Politicians
under
pressure
look to
China
Iran in
the
freezer?
More
distant yet
unpredicta
ble force
Aid to
fall
Key regional/country profiles
21
US-China ties: China’s toolkit
• The fiscal deficit will widen in 4-5 years as China
seeks to prop up growth by raising spending
• Use of economic diplomacy to dampen tensions
stemming from regional territorial disputes, but only
with partial success
• Slowdown to affect trade, investment and credit
flows with Africa; domestic industrial restructuring
will hurt various Asian economies
• OBOR promises significant boost in Chinese
overseas direct investment in Central, South-east
and South Asia (might prove slow to implement);
agreement over RCEP appears a long way off
• The renminbi’s value will depreciate to an annual
average of Rmb7.44:US$1 in 2019, before a
rebound to average Rmb7.08:US$1 in 2021
China will have a larger influence on global standards and norms
China: Hard landing in 2018?
• Bar state-owned enterprises from doing
business with US firms
• Deny key components to supply chains
• Dump US financial instruments
• Drag feet on new agreements and
implementation of existing pacts—
copyright violations, IPR
• Media campaign against US firms
Rebalancing, but not
as the party intended!
22
0
2
4
6
8
10
2015 2016 2017F 2018F 2019F 2020F 2021F
India World Asia & Australasia
BJP
BJP allies
Congress Congress allies
Others
GDP growth will accelerate after the shock of demonetisation
India: All systems go?
• We estimate that real GDP growth slowed from
7.5% in 2015/16 to 6.5% in 2016/17 due to
demonetisation, but will recover and average
7.6% a year in 2017/18-2021/22
• Inflation to trend upwards averaging 5% a year
in 2017-21
• Political stability (NDA—BJP and its allies—will
return to office in 2019), but constrained by lack
of majority in the upper house
• Structural reforms to progress but controversial
land and labour reforms are unlikely to be
implemented before 2019
• Fluctuations in India’s urban housing market
tied to money and credit growth – not rising
household incomes
Composition of the upper house of parliament
Real GDP growth (%)
23
ASEAN outlook
Growth will remain buoyant in emerging South-east Asian economies
Vietnam
• Above 6% growth in 2017-21
• Deeper ties with India and the US;
South China Sea dispute
• Labour woes
Philippines
• Around 5.8% growth
in 2017-21
• Environmental crackdown
• Human rights concerns
Thailand
• New constitution; 2018 elections?
• Pivot towards China and Russia
• Corruption and conflict-based
distortions of interest
Indonesia
• Slow progress on reforms
• Focus on infrastructure and FDI
• China’s slowdown affects
local currency
Malaysia
• Budget deficit to widen
to 3.5% of GDP by 2021
• Pursuing HIC status under 11MP
• Threat of Islamic terrorism
24 24
World economic growth to quicken from 2.2% in 2016 to 2.6% in 2017
Key global themes for 2017
Monetary policy
divergence Global economic growth Political realignment
• Cheap credit remains
key support for global
economy
• Central banks reaching
limit of capabilities in
Japan and Europe,
where rates will stay low
• We expect two more Fed
rate hikes in 2017 and
another two in 2018
• Capital flowing out of
EMs; China credit risk
• US will remain engine of
growth in the OECD
• Question mark over
Trump’s fiscal plans and
impact of strong dollar
• Euro zone weighed down
by political issues and
US policy changes
• Brazil and Russia return
to growth
• Possible sharp slowdown
in China coming
• Traditional parties being
challenged as the left-
right axis breaks down
• Strong impact of
megatrends such as
globalisation, technology,
demographics etc
• US to reduce its
international
commitments
• Rise of protectionism in
movement of people,
goods and capital (data?)
Any questions?
Dr Simon Baptist
Chief Economist
Managing Director Asia
The Economist Intelligence Unit
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