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Hot, bright and soft spots: Who will make or break global growth? ICTF, Barcelona 12 May, 2014 Andrew Atkinson Economic Research Department.

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Presentation on theme: "Hot, bright and soft spots: Who will make or break global growth? ICTF, Barcelona 12 May, 2014 Andrew Atkinson Economic Research Department."— Presentation transcript:

1 Hot, bright and soft spots: Who will make or break global growth? ICTF, Barcelona 12 May, 2014 Andrew Atkinson Economic Research Department

2 2 Agenda 1 Growth, Fragility and Financing 2 Political hot spots 3 Economic soft spots 4 Confidence bright spots

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

4 4 Six country risk upgrades at end Q 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 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 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 economy’s 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 country’s status as a regional hub and the prospects provided by energy resources.

5 5 While the FED’s 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

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

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

8 8 Agenda 1 Growth, Fragility and Financing 2 Political hot spots 3 Economic soft spots 4 Confidence bright spots

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)

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)

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

12 12 Our Weak 4 did weaken in Q (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 society’s 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

13 13 Agenda 1 Growth, Fragility and Financing 2 Political hot spots 3 Economic soft spots 4 Confidence bright spots

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: ) 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

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 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

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

17 17 Sector’s 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? Nigeria’s GDP new methodology: services now account for half of the country’s 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 “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 USD Rule of law, CPIA index (-2.5=low to +2.5=high) 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

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: Europe’s 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.

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) France’s Stability Pact: Wishful thinking? Source : Ministry of Finance, Euler Hermes Soft spot #4: Europe’s core, chink in the armour? France (2)

20 20 Agenda 1 Growth, Fragility and Financing 2 Political hot spots 3 Economic soft spots 4 Confidence bright spots

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

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

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

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

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, Q = 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

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) GDP growth: 2014: +0.4% 2015: +0.9% Fiscal deficit: 2014: -3.1% 2015: -2.5%

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 Economic policies to remain supportive Bright spot #4: … and the UK (2)

28 Thank you for your attention! Economic Research Department Euler Hermes Group 1 place des Saisons Paris La Défense Cedex France Phone research This material is published by Euler Hermes SA, a Company of Allianz, for information purposes only and should not be regarded as providing any specific advice. This publication and its contains are proprietary to Euler Hermes SA. Euler Hermes and Euler Hermes’ logo are trademarks or registered trademarks belonging to Euler Hermes Group, Worldwide Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by Euler Hermes and Euler Hermes makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the Euler Hermes Economics Department, as of this date and are subject to change without notice. The classification of this document is PUBLIC. Euler Hermes SA. Registered in Nanterre ( ).Euler Hermes SA is authorized and regulated by the Financial Markets Authority of France. © Copyright 2014 Euler Hermes. All rights reserved


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