Global Economic Trends and OutlookPBEC Malaysian Business Roundtable            Sean Maher            PBEC Consultant Econ...
Capital Flowed from EM to US via Reserves, and Portfolio/FDI Flowed Back          EM FX Reserves peaking at current $9trn ...
US Energy Balance Undergoing Radical Shift on Booming Shale Gas/Oil OutputLNG Exports to Asia by 2016, US Coal Exports Sur...
GEM Hit by Credit Slowdown in 2012, ASEAN Performance Resilient      Boosted by Domestic Consumption Bias, Lower Funding C...
Asian Demographic Decline Key Economic ThemeLow Pension Coverage, Weak Funding and Excessive Retirement Length (21 years f...
China Faces Medium Term Deleveraging and Shrinking Workforce        Excess Capacity Implies Asset Write-offs/Defaults – In...
Enormous Rebalancing Challenge To Boost Consumer/SMEs     Bank LTD ratio at 70% Forced Interest Rate Spread Widening – RMB...
China Productivity Growth Slowing to Sub 8% in 2012 From Over 10% in 2010          ‘Extensive’ Growth Model of Rising Labo...
Even With Reforms, China Trend Growth Unlikely to Exceed 7%          Total Credit Growth Picks Up in Q3, But Banks Constra...
US Structural Economic Challenges Require Political Rather Than Fed Action        Healthcare at 20% of GDP by 2020, Entitl...
US Deleveraging Proceeds in Orderly Fashion    Aggregate Debt Down to 330% of GDP From 360% - Private Sector Borrowing Dow...
Will US Republicans Jump Off the ‘Fiscal Cliff’?Delay to Mid 2013 or Fiscal ‘Bungee Jump’ i.e. All Tax Breaks Expire –Some...
Respite From Solvency Crisis – Spanish Bailout and Banking Union Key Tests    ECB Intervention Buys Time for Fiscal Union ...
India Trapped in Stagflation – State Banks Face Rapid NPL Rise                          Corporate Capex 11% of GDP from 17...
‘Washboard’ Post-Crisis Recovery Continuing – 3% Trend Global Growth             Only in Germany and Canada Has Real GDP E...
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PBEC Macro Presentation - Kuala Lumpur Conference -Oct 2012

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PBEC Macro Presentation - Kuala Lumpur Conference -Oct 2012

  1. 1. Global Economic Trends and OutlookPBEC Malaysian Business Roundtable Sean Maher PBEC Consultant Economist Mandarin Oriental, Kuala Lumpur October 16th, 2012
  2. 2. Capital Flowed from EM to US via Reserves, and Portfolio/FDI Flowed Back EM FX Reserves peaking at current $9trn - Set to Reverse on Demographics, Terms of Trade • Shortage of Safe Assets/Collateral To Absorb Reserve Flows • China ($3.2trn in reserves) trade surplus from almost 11% to sub 3% of GDP since 2007 • Russia ($0.5trn) forecast to see current account deficit by 2015 • Less FX Sterilisation a withdrawal of liquidity across GEM – key driver of Chinese M2 US External Balance Sustained by EM FX Reserve Growth Slumps in 2012 Reserve Flows into Treasuries 25 30% 25% 20 Capital Flows 20% 15% 15 10% 5%% GDP 0% 10 -5% -10% 5 -15% -20% 0 -25% -30% -5 Foreign Holdings of US Treasury Securities Net International Investment Position of the US 2011 % y/y 2012 YTD % y/y PBEC Malaysian Roundtable - Oct 16, 2012 2
  3. 3. US Energy Balance Undergoing Radical Shift on Booming Shale Gas/Oil OutputLNG Exports to Asia by 2016, US Coal Exports Surge as Power Plants Switch to NG • Fuel Efficiency Driving Strong US Auto Demand – Consumer Less Sensitive to $4 Gasoline • Coal Exports up 24% y/y in H1 – Set to Exceed 1981 Record – Exacerbating China Demand Slowdown • US Thermal Coal Prices Down 60% Since 2008 Peak, NG Down 80% US Net Oil Imports Down 40% Since 2006 Gasoline Less of a Consumption Drag 15000 3400 15 4.50 Imports, Balance (ths bl/d, 4wk avg) 14000 3100 13 4.00 Exports (ths bl/d, 4wk avg) 13000 2800 11 US Energy 3.50 12000 2500 9 11000 2200 3.00 7 10000 1900 2.50 5 9000 1600 2.00 3 8000 1300 1 1.50 7000 1000 Henry Hub Gulf Coast Natural Gas Spot Price ($/MMBTU) (lhs) Balance (lhs) Imports (lhs) Exports (rhs) US Average Retail Gasoline Price ($/gallon) (rhs) PBEC Malaysian Roundtable - Oct 16, 2012 3
  4. 4. GEM Hit by Credit Slowdown in 2012, ASEAN Performance Resilient Boosted by Domestic Consumption Bias, Lower Funding Costs and Fiscal Expansion Indonesia/Philippines Least Leveraged China Credit to GDP Surge Double Levels 200% 150% Triggering Prior EM Crises 60 100%275 60 100% 50% 0% 23225 50 0% -50%175 40 Asian Macro 31 Government Debt 2012 (% GDP) Private Sector Credit (% GDP) 30 Net External Assets (% GDP) rhs 17125 26 30 10 Fiscal Policy Expansionary Across Asia 12 10% 75 20 15 5% 0% 25 10 -5% -10% Total Credit to GDP % 3-yr Growth in Credit to GDP % (rhs) 2012 Fiscal Balance (% GDP) 2012 Current Account (% GDP) PBEC Malaysian Roundtable - Oct 16, 2012 4
  5. 5. Asian Demographic Decline Key Economic ThemeLow Pension Coverage, Weak Funding and Excessive Retirement Length (21 years for men, 26 for women) Old Age Dependency Surging Across Asia Old-Age Dependency Ratio• Today, 3.5 workers pay the pension benefits of 60 every Chinese retiree; by 2035, that ratio will fall 50 toward 2:1 unless the retirement age rises 40 30 substantially; the pension funding gap versus 20 implied future liabilities is likely to reach over 10 40% of GDP by late decade. 0• By 2020 China will have the same demographic Asian Demographics profile as Korea now, but a fraction of Korean GDP (and even lower pension assets) per capita. Average pensioner in Beijing receives $360 a 2010 2025 2035 month, half of the average working wage in the city, on official figures retirement age sub 60 in Asian Pension Coverage Low Relative to Income SOEs 1.2• Need to rapidly expand pension systems across 1.0 Asia to cope with demographic decline will support domestic institutional inflows. 0.8 Japan Canada Singapore, Malaysia and HK pension fund systems Germany Australia advanced – Thailand faces biggest Emerging 0.6 Romania HK Italy France Asian demographic challenge after China Chile Brazil Singapore 0.4• Malaysia’s EPF already allocates a significant Malaysia Korea Thailand portion of AUM to local equities (and the KLSE has 0.2 China Philippines Indonesia Turkey shown the lowest volatility in the region over the Vietnam India 0.0 past 5 years and the highest risk-adjusted returns 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 alongside Thailand, Indonesia and the Philippines). National Income per Capita (2010 USD) PBEC Malaysian Roundtable - Oct 16, 2012 5
  6. 6. China Faces Medium Term Deleveraging and Shrinking Workforce Excess Capacity Implies Asset Write-offs/Defaults – Industrial Utilization Rate Down to 60%Peak in China Workforce Means Emerging Asia Can Raise Minimum Wages, Boost Domestic Consumption • Excess capacity in auto manufacture 6m units end 2011, likely to reach 9-11m by 2016 • China has lost 2% of US import market share to Mexico since 2008 - Mexican factory wages in 2011 only 28% higher than Chinese compared to 4.5x higher in 2001 – has to move up value chain • While weak productivity growth/investment remains a constraint across the smaller Asian economies, real wages can be expected to increase at maybe a third to a half of Chinese rates over the next few years. Asian Productivity as % of US Rising Slowly China Investment Levels Extreme 80% 90 80 70% 70 60% China 60 % GDP 50 50% 40 40% 30 30% 20 10 20% 0 10% 2000 2011 Consumption Investment PBEC Malaysian Roundtable - Oct 16, 2012 6
  7. 7. Enormous Rebalancing Challenge To Boost Consumer/SMEs Bank LTD ratio at 70% Forced Interest Rate Spread Widening – RMB Deposits Under Intense PressureInvestment/GDP Ratio at Almost 50% Destabilising - Rebalancing Implies Huge Wealth Transfer from SOEs/State • China transition to consumer driven Investment as % of GDP Unprecedented economy necessary to drive flagging 50% productivity but a zero sum game – 45% implies huge wealth transfer from 40% % GDP state/SOEs including banks 35% • Sustained bounce in real estate activity 30% is unlikely to occur until H2 2013 when excess inventories are eroded – material 25% price gains will attract further restrictions 20% • Impact via industrial commodity China Rebalancing markets will undermine terms of trade for other big EMs such as Brazil – China will slow more than expected but China 2002-11 Japan 1966-75 Korea 1988-98 also attract more capital as returns and Singapore 1978-88 Thailand 1989-99 transparency improve • Investment/GDP 49.5% in 2011 from 41.7% in 2007 - can’t increase bank Consumption Growth Needs to Exceed GDP Growth by 3- credit or investment to GDP ratios 5% to Rebalance without further inflation/NPL negative Target Required Consumption Growth Premium over GDP Growth feedback. Consumption • Capital and credit use must become Share of GDP in 2021 5% GDP y/y 7% GDP y/y 9% GDP y/y more efficient. PBoC facing less constraint from FX sterilization - interest 45% rate/financial market liberalization finally 3.1 3.0 2.8 practical - positive real funding rate 50% would restrict corruption 4.1 4.0 3.9 opportunities/reallocate capital 55% 5.1 5.0 4.9 PBEC Malaysian Roundtable - Oct 16, 2012 7
  8. 8. China Productivity Growth Slowing to Sub 8% in 2012 From Over 10% in 2010 ‘Extensive’ Growth Model of Rising Labour and Capital Inputs Now Exhausted Capital spending accounted for 54% of China’s GDP growth in 2011 ASEAN Productivity Weak, China Slowing• HK listed Chinese companies have issued a record number of profit warnings during 12 2012, surpassing the peak reached during the 10 height of the 2008-2009 crisis 8• In the three years post-crisis, total credit 6 expanded by 22.7% a year, generating nominal 4 GDP growth of 14.1% on average – i.e. productivity of capital slumped – a new 2 stimulus that restored that trend would be self- 0 Asian Productivity defeating, and probably impossible given deteriorating credit dynamics• Reform implies rapid de-regulation of financial and state enterprise sectors to 2000-10 CAGR in GDP PPP per hour worked improve capital allocation (bank NIM squeeze a start) alongside investment in social, education China GDP Drivers (% Growth) and health care support systems• Rationalisation/consolidation of current off- 1997-2002 2003-7 2008-11 2012-17 balance sheet SOE and provincial debt and closing the funding cost divergence between the Capital 3.5 4.3 3.9 2.5 - 3 SME sector and SOEs. If reform doesn’t Labour (Quality accelerate in 2013/14, growth rates will slide 1.6 1.3 1 0 - 0.5 Adjusted) to sub 5% by mid-decade. TFP 2.5 6.6 4.8 2.5 - 3 GDP 7.6 12.1 11.5 6 - 7.5 TFP as % of GDP 33 54 51 35 - 40 Growth PBEC Malaysian Roundtable - Oct 16, 2012 8
  9. 9. Even With Reforms, China Trend Growth Unlikely to Exceed 7% Total Credit Growth Picks Up in Q3, But Banks Constrained by Weak Deposit Growth • RMB1.3trn of bonds in Jan-Aug, up 90% y/y – 80% of new issuance was via the interbank market • TSF has been higher than in 2011 in July/Aug – reflecting infrastructure project funding • Deleveraging/inventory destocking cyclical drag on growth • Reverse repos reflect policy ‘normalisation’ by PBoC, but interbank liquidity shortage structural Credit Growth 90% of GDP in 2008-10 Credit Trend Reaccelerating 50000 45% 100% 18000 45000 40% 16000 80% China Credit % of Monthly Credit Growth 40000 35% 14000 35000 30% 60% 12000RMB bn 30000 RMB 100m 25% 25000 40% 10000 20% 20000 8000 15% 20% 15000 6000 10000 10% 0% 5% 4000 5000 -20% 0 0% 2000 -40% 0 Mar-11 Mar-12 Nov-11 Jul-11 Sep-11 Dec-11 Jul-12 Feb-11 Jun-11 Feb-12 Jun-12 Jan-11 Oct-11 Jan-12 May-11 May-12 Apr-11 Apr-12 Aug-11 Aug-12 Total Social Financing (lhs) RMB Lending New Bank Acceptance Nominal GDP (lhs) Corporate Bond New Trust Loans New Entrusted Loans New Foreign Currency Loans Total Social Financing to Nominal GDP Ratio (rhs) Stocks of Non-financial Enterprises TSF Monthly Growth 3mma PBEC Malaysian Roundtable - Oct 16, 2012 9
  10. 10. US Structural Economic Challenges Require Political Rather Than Fed Action Healthcare at 20% of GDP by 2020, Entitlement Spending Driving 70% of Deficit Growth Lower Fiscal Deficit Allows Greater Investment and Trend Growth • Collapsing Wage Share of GDP Key Driver of 2003-8 Credit Boom to Sustain Living Standards • Low US Savings Means Capital Has To be Imported to Grow Investment i.e. bigger CA Deficit US Gross Savings Barely Cover Depreciation Wage Share of US GDP Has Slumped to 44% 54% 12% 20% 52% 10% 15% US Structural Themes 50% 8% 10%% GDP 48% 6% 5% 46% 4% 0% 44% 2% -5% Wage and Salary Disbursements (% GDP 12mma) (lhs) Net Saving (% GDP) Gross Saving (% GDP) Corporate Profits After Tax (% GDP 12mma) (rhs) Depreciation (% GDP) PBEC Malaysian Roundtable - Oct 16, 2012 10
  11. 11. US Deleveraging Proceeds in Orderly Fashion Aggregate Debt Down to 330% of GDP From 360% - Private Sector Borrowing Down by $4trn Foreclosures at 5yr Low, Inventories Down Almost 30% y/y in September• Since end 2007, US household total financial obligations down from 19% of disposable income to 15.8%• Construction subtracted 3.4% from GDP 2006-11 as housing starts slumped 75%, now bottoming.• Household financial obligation ratio tumbles from record high of 19% in 2008 to 15yr low of 16%• 15yr fixed mortgage at record low of 2.7% US Housing Construction Bottoming as Household Debt Down By 14% of GDP From Foreclosure Trend Improves Peak, Aggregate by 30% 1,500 40 300% 100% 1,300 35 95% 250% 30 1,100 90% 25 US Debt 85% 900 200% 20 80% 700 15 150% 75% 500 10 70% 100% 300 5 65% 100 0 50% 60% Foreclosure Filings (000) Nonfinancial business New Housing Permits Consolidated governments Financial business Wells Fargo - NAHB Index (rhs) Households and nonprofit organizations (line, rhs) PBEC Malaysian Roundtable - Oct 16, 2012 11
  12. 12. Will US Republicans Jump Off the ‘Fiscal Cliff’?Delay to Mid 2013 or Fiscal ‘Bungee Jump’ i.e. All Tax Breaks Expire –Some Reinstated via Tax Cuts in January Consumer Balance Sheets Recovering 14000 660% 13000• 16.4trn debt ceiling limit hit in Q4 – repeat of mid 12000 620% 2011 political brinkmanship/rating downgrade? If 11000 580% no offsetting action, $600bn in tax and spending 10000 changes – uncertainty already reducing corporate 9000 540% investment - taxes would go up for 2013 by 8000 500% average of almost $3,500 per household if all 7000 tax breaks actually expire as scheduled and are 6000 460% not partially reinstated in Q1. 5000 420%• Tax rate on dividends for individual investors, will US ‘Fiscal Cliff’ revert back to the ordinary income tax rate. At the margin, for investors earning more than $85k if Household Real Estate Equity (bn USD) (lhs) single ($142k married joint income) that rate will Net Worth (% Disposable Income) (rhs) be close to 35% - high yielding stocks vulnerable to precautionary selling in Q4 US Real Income Growth Leads Employment 8%• A typical middle class household (income up to 6% $64k) would see taxes go up by about $2k. Households in the top 1% – with income of over 4% $506k upward would see an average increase of 2% more than $120k 0%• M2 and commercial lending growth still -2% healthy, but losing momentum since Q1 - student -4% loans are the only part of consumer credit that has -6% expanded post-2008. As % of consumer credit, student loans are up from 4% to 18% today. Total Nonfarm Employment (% y/y 3m lead) Real Personal Consumption Expenditures (% y/y 3mma) Real Disposable Personal Income (% y/y 3mma) PBEC Malaysian Roundtable - Oct 16, 2012 12
  13. 13. Respite From Solvency Crisis – Spanish Bailout and Banking Union Key Tests ECB Intervention Buys Time for Fiscal Union – But Bond Buying Conditional Ahead of German Elections Peripheral Net External Balances a Risk• Eurozone 6mth real narrow money growth 350% at highest since February 2010• 3mth Euribor interbank funding rate down 250% from 150bps in November 2011 to 15bps 150%• Bank funding spread over non-financial 50% IG issuers down from 115 to minus 10bps• Capital starting to flow back to the -50% periphery post ECB effort to stem -150% convertibility risk - eases funding pressures on peripheral banks, reflected in borrowing Eurozone from the ECB down €38bn in September Government Debt 2012 (% GDP) Private Sector Credit (% GDP)• Spanish bank bad loan level at almost Net External Assets (% GDP) 10%, but real estate correction only half As are Persistent Twin Deficits… complete - Italy’s debt/GDP 120% (€1.9trn) 10% but financial sector has assets in excess of 6% €8.4trn, mortgage/GDP ratio under 20% 2% –Italy more like Japan than Spain -2% -6%• Italian/Spanish banks overleveraged – -10% Loan to Deposit ratio 180% in Italy, 135% in Spain versus 70% in Asia/US. Modest recession (0.5%) in 2012, flat to similar in 2013. 2012 C/A (% GDP) 2012 Government Budget Balance (% GDP) PBEC Malaysian Roundtable - Oct 16, 2012 13
  14. 14. India Trapped in Stagflation – State Banks Face Rapid NPL Rise Corporate Capex 11% of GDP from 17% in 2008 – RBI Easing Constrained by Fiscal Deficit • Industrial Output Set to Grow Just 2% this FY – Chronic Supply Side Inflation Bottlenecks • State banks (75% of total lending) Risk 15% Peak NPLs – Restructured Debt Over 6% of Loans • Power Distributors in Crisis - $35bn Debt Bailout – But No Pricing/Payment Enforcement Reform Industrial Output Growth Remains Capital Goods Output Trend Reflects Weak Weak, and Inflation Persistent Private Investment 62 10% 20% 60% 9% 8% 15% 45% IIP Components (% y/y) 59Manufacturing PMI 7% 10% 30% 6% India % y/y 5% 56 5% 15% 4% 3% 0% 0% 53 2% 1% -5% -15% 0% 50 -1% -10% -30% Manufacturing PMI (lhs) Capital Goods (3mma) (rhs) WPI Growth (rhs) Basic Goods (3mma) Industrial Production Growth (3mma) (rhs) Intermediate Goods (3mma) PBEC Malaysian Roundtable - Oct 16, 2012 14
  15. 15. ‘Washboard’ Post-Crisis Recovery Continuing – 3% Trend Global Growth Only in Germany and Canada Has Real GDP Exceeded 2007 levels ‘Austrian’ Debt Solution Incompatible With Democracy – Sustained Financial Repression/Inflation Instead• Trade growth just 2.5% this year, compared to 5% in 2011 and almost 14% in 2011 - one percentage Orders/Inventory Ratios Bottoming point drop in GEM equivalent to a 1.7 point fall in US and China in US growth- Brazil, India and China have slowed 2 simultaneously YTD, largely structural• Exports have accounted for almost 50% of US growth during this recovery, compared with an 1.75 average of 12% in recoveries since 1970 – now slowing, but construction/autos positive• Global Outlook Taiwanese exports grew by over 10% y/y in 1.5 September led by electronics, Korea down 1.8% after 6.2% fall in August – low base effect flatters, but no free-fall 1.25• Japan’s Tankan survey showed big Japanese manufacturers more pessimistic, for the 1 September quarter, core machinery orders weak in August (China/Eurozone impact)• Overall, new orders versus inventory ratios suggest 0.75 momentum is levelling out as worst of EM slowdown over – but no ‘V’ shaped rebound• China can’t delay RRR cuts much longer - 0.5 reverse repos ineffective in supressing Shibor• ASEAN challenge to boost productivity via higher investment and thus real wages to drive PMI New Orders/Inventory Ratio US domestic consumption PMI New Orders/Inventory Ratio China PBEC Malaysian Roundtable - Oct 16, 2012 15
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