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ECONOMICSNovember2017ImportantNotice:ThecircumstancesinwhichthispublicationhasbeenproducedaresuchthatitisnotappropriatetocharacteriseitasindependentinvestmentresearchasreferredtoinMiFIDandthatitshouldbetreatedasamarketingcommunicationevenifitcontainsaresearchrecommendation.Thispublicationisalsonotsubjecttoanyprohibitionondealingaheadofthedisseminationofinvestmentresearch.However,SGisrequiredtohavepoliciestomanagetheconflictswhichmayariseintheproductionofitsresearch,includingpreventingdealingaheadofinvestmentresearch.Semi-annualExtractfromareportGlobalEconomicOutlookSurfingtheglobalexpansion©iStockGrowthmomentumstillsurprisingontheupsideBusinessinvestmentrecoveryhasalongwaytogoTheglobaltraderecoveryhaslegsWageconundruminpartinflation-relatedPleaseseeimportantdisclaimeranddisclosuresattheendofthedocumentThisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookPageleftblankintentionallyNovember20172Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookTABLEOFCONTENTSSummarySurfingtheglobalexpansion.......................................................................................................................................5SGvsconsensusAbovegrowthconsensusoneuroarea,Australia,Taiwan,...belowonChina,US,UKandLatam...................6SGswanchartDownsideriskprobabilitiesmostlydowngraded,butstillinthemajority.............................................................11SGgrowthandinflationoutlook.....................................................................................................................................................14SGunemploymentandcurrentaccountoutlook............................................................................................................................15SGmonetarypolicyoutlook–Keyrates.........................................................................................................................................16SGlong-termgovernmentbondyieldoutlook(10Y).......................................................................................................................17SGFXoutlook...............................................................................................................................................................................18AnchorTheme#1Growthmomentumstillsurprisingontheupside...........................................................................................19AnchorTheme#2Businessinvestmentrecoveryhasalongwaystilltogo.................................................................................23AnchorTheme#3Theglobaltraderecoveryhaslegs................................................................................................................27AnchorTheme#4Wageconundruminpartinflation-related......................................................................................................30Box1USTaxcutandreformFiscalpolicytakescentrestagein2018......................................................................................33Box2China’s19thPartyCongressEconomicreformswithChinesecharacteristics...................................................................35Box3EuroareaDeepeningEUintegration:thetimeisripe.......................................................................................................37Box4India-BankingSectorNPLState-ownedbankrecapitalisation–muchadoforatrifle....................................................40Box5SouthKoreaResidentialinvestmentfacesashortageofland..........................................................................................41Documentcompletedon24November2017.November20173Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookPageleftblankintentionallyNovember20174Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSUMMARYSURFINGTHEGLOBALEXPANSIONStrongglobalGDPgrowthtolastwellinto2019.AsfarasGDPgrowthisconcerned,theglobaleconomyisarguablyinthebestshapeinaboutadecade.Thisistrueinabsolutegrowthterms:ourforecastspredictworldGDPgrowthof3.7%inboth2017and2018,upfrom3.3%in2016,andbroadlyinlinewiththeforecastsofinternationalorganisationssuchasOECDandIMF.ButthegoodshapeoftheglobaleconomyisalsoreflectedinthehighdegreeofsynchronisationofgrowthwiththeOECD,forexample,predictingpositivegrowthratesineveryoneofthe45individualeconomiesitcoversforthefirsttimesince2007.Inthissense,atleastasfarasoutputandemploymentgrowthisconcerned,itisaGoldilocksscenario,withnosignofoverheatinginanyoftheeconomieswecover.Absentaseverenegativeexogenousshock,itishardtoseeatriggertoderailtheexpansionbefore2019.Thatsaid,inflationintheadvancedeconomies,albeitnotablystrongerthanin2015or2016,continuestofallshortofcentralbanks’targets,andposesacomplexdilemmaformonetarypolicy.Thereasonsfortheabsenceofmorepronouncedpricepressuresarenotfullyunderstood,butsomeofthefactorsinplayaresurelytechnicalinnovationwhichisintensifyingcompetitioninmanyareas,lowinflationexpectationsafterthelongandslowrecoveryfromtheGreatRecession,andarguablymostimportantly,theabsenceofupwardpressureonwagesinmostoftheadvancedeconomies,whichmaywellberelatedtotheeffectsofglobalisation,technologicalchangeandthedeclineinunionisation,tonamebutafew.Inadditiontotheupbeatgrowthoutlook,wepresentthreefurtheranchorthemes:Businessinvestmentsettoaccelerate.FollowingtheGreatRecession,businessinvestmentintheadvancedeconomiesfailedtorecovertotheextentitnormallydoesaftereconomicdownturns.Andintheeuroarea,businessinvestmentsufferedafurthersetbackduringthesovereigndebtcrisisin2012/13.Hence,inaggregate,theshareofbusinessinvestmentinnominalGDPintheadvancedeconomiesremainsbelowlong-runaverages.However,webelievethattherearegoodreasonstobelievethattheupswinginbusinessinvestmentwillstrengthenfurthergoinginto2018andarguablybeyond.Globaltradegrowthtobesustained.OncethereboundfromtheglobaltradeslumpinducedbytheGreatFinancialCrisis(GFC)wascompleteinlate2010,worldtradeenteredaphaseofunusuallydepressedgrowth.Infact,duringthefiveyears2012-2016,globaltradeexpandedataslowerratethanworldGDP,whichishistoricallyunusual.However,2017haswitnessedastrongrecoveryinglobaltradegrowthwhichisnowonceagainexceedingthatofglobalGDP.Foravarietyofreasons,weexpecttradetosustainthisstrongermomentum.Wageconundrumtofade.Acrossmanyadvancedeconomies,shrinkinglabourmarketslack,reflectedindecliningunemploymentrates,hasnotbeenaccompaniedbyacceleratingwages,oratleastnottotheextentthatthehistoricalrelationshipwouldsuggest.Thishasbeenakeyissueforvariouscentralbankswhichasaresultoflowwagegrowtharefindingitexceedinglydifficulttoreachtheirinflationtargets.Webelieveanimportantpartofthiswageconundrumisrootedinthefactthatinflationhasbeensolow.Asaresult,realwagegrowthin2015/16wasinfactrathersolid.However,despitefallingshortofcentralbanktargets,inflationacrossdevelopedeconomieshasincreasednoticeably,from0.3%in2015to1.7%in2017,meaningthatrealwagegrowthhasdeclinedsharply.Weexpectwagestoreacttoinflation,albeitwiththeusuallags.Klaus.Baader@sgcib.comNovember20175Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGVSCONSENSUSABOVEGROWTHCONSENSUSONEUROAREA,AUSTRALIA,TAIWAN,...BELOWONCHINA,US,UKANDLATAMTheSGToolkitsprovideadetailedoutlookforeachoftheeconomieswecover(lookingatgrowth,inflation,monetaryandfiscalpolicy,corporateprofits,bondyields,FX,externalbalances,politicsandrisks)inachart-packformat.TheSGToolkitscanbefoundonourwebsiteandbyclickingonthecountryinquestionontheSGEconomicGrowthHeatmap,whichgivesasnapshotofchanginggrowthpatternsfrom1999tothepresent.Pleasenote,weupdatetheToolkitsonaregularbasis,thuskeepingourforecastscontinuouslyuptodate.Hominginonwherewedifferfromconsensus,wehighlightsixkeycallsbelow.Evolutionof2017GDPgrowthconsensusforecastsEvolutionof2018GDPgrowthconsensusforecasts3.56.93.56.63.06.83.06.42.56.72.52.06.62.06.21.56.51.51.06.41.060.56.30.5WorldEuroareaUSWorldEuroareaUSJapanUKChina(rhs)JapanUKChina(rhs)0.06.20.05.8Jan16Jul16Jan17Jul17Jan17Apr17Jul17Oct17Source:ConsensusEconomics,SGCrossAssetResearch/Economics#1RemainingbelowconsensusonUSgrowth,maintainingrecessioncallWeforecastUSGDPgrowthof2.2%in2018,belowthecurrentconsensusof2.5%.Still,thisissubstantially-byaroundhalfapercentagepoint-aboveourestimateofpotentialgrowth,andwillfurtherreducetheunemploymentrate.Moreimportantly,wemaintainourcallthattheUSexpansion,alreadythethird-longestinhistory,andbyspring2018thesecond-longest,willrunoutofsteamsometimein2H19or1H20.AmongthevariousindicatorswetracktoattempttodatetheUSeconomiccycle,profitmarginsarekey.Asseeninthechartbelow,thesearewellpasttheirhighpointandarenowenteringthematurephaseofthecycle.However,wenotethatthisindicatorhasbroadlymovedsidewaysoverthepastyearorso.Thiscouldwellbepartofthenaturalvolatilityofmargins,butitmayalsosuggestalonger-livedexpansion.Moreover,corporatetaxcutswillhelpprolongthecycle,andthesenowlookfairlylikelytobeenacted;shouldthesefailtomaterialise,theeconomycouldslowmoresubstantiallyalreadyin2H18.OurforecastisalsobelowconsensusonUSinflation.USprofitmarginsholdthekeytothecycleUnemploymentratealreadybelowNAIRU17%ProfitMarginNon-Financial,BeforeTax1610151481312611RecessionCurrentCycle104Post1975Avg9Post1954AvgPost1949Avg28197019801990200020100102030405060708090100%ofcyclecompletion(0=trough)UnemploymentRateNAIRUSource:BEA,Haveranalytics,SGCrossAssetResearch/EconomicsNovember20176Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlook#2China’s2017growthrecoverymerelyapauseinstructuralslowdownGDPgrowthinChinain2017hassubstantiallysurprisedontheupside,andbrokethelong-rundecelerationtrend.However,webelievetheslowingtrendremainsfirmlyinplace,andthatthebettergrowthin2017wasprimarilytheresultofreflationarymeasuresthatallowedcreditgrowthtostrengthenthrough2015/16.However,giventhealready-highleverageinthenon-financialcorporatesector,policymakersarecognisantthisisnotasustainablecourseforpolicy.Indeed,policymakershaveonceagainintroducedtighteningmeasures,forexampleinthehousingsector.Thesehavenowbeguntoslowhousingsales,andhousinginvestmentwillfollow.Indeed,creditgrowthhasbeenslowingand,withtheusuallagofaroundthreequarters,GDPgrowthwillslowaswell.Theslightdecelerationin3QGDPwasalmostcertainlythebeginningofthisrenewedslowdown.Allinall,our2018forecastis0.2ppbelowconsensus.Near-termgrowthinChinawillalsobeslowedbytheshiftawayfrompursuingpurelyquantitativegrowthtargetstofocussingonthequalityofgrowth.Specifically,thismeanslarge-scaletemporaryfactoryshutdownsinheavilypollutingsectorsoverthewintermonthssoastoreduceairpollution,especiallyintheindustrialnorth-east.ChinacreditleadsnominalGDPHousingreactingtoprudentialtightening20Realestatesalesvolume(3mma-over-3mma,%)6040quarterly,%yoygrowthsatrendno.ofcitieswith351550tighteningmeasures,rhs30104025205301502010-5105TotalcreditNominalGDP(lagging3q)0-1002003200520072009201120132015201720102011201220132014201520162017Source:CEIC,PBoC,NBS,SGCrossAssetResearch/Economics#3NotableupwardrevisionstoeuroareaprospectsDespitehavingrevisedupour2017GDPforecastby0.4ppto2.2%intheSeptemberGEO,euroareagrowthmomentumhascontinuedtosurpriseontheupside,andwenowexpect2.3%.Theconsensushasmirroredthistrend,andweareonlyfractionally(by0.1pp)above.Moreimportantly,wenowseemoredurablegrowthmomentumandhaveraisedour2018forecastby0.4ppto2.1%,aheadofconsensusof1.9%.Theimprovementineuroareagrowthprospectsisbroadlybasedacrossthelargemembereconomies,withourforecastsforGermanyandFrancerevisedupby0.4ppand0.3pprespectivelyfor2018.For2018thismeansweareaboveconsensusby0.3%forFrance.Intheeuroarea,thepositiveoutlookisbasedonsolidlabourmarkettrends,aslightpick-upinnominalandrealwagegrowthsupportingprivateconsumption,highcorporateprofitmargins,animprovedinvestmentoutlookforbothresidentialandequipmentinvestment,allsupportedbylessfiscaltightening–andsomelimitedlooseninginGermany.November20177Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookEuroarea:enduringrecoveryintheEuroarea:netprofitathighestlevelsinceconstructionsector(investment,%ofGDP)1999(NFC,%ofGVA)2867.0%Grosssavings(netprofits)26GFCF412.5%6.5%Cashflow(RHS)2426.0%11.5%2205.5%20-2Residential10.5%18-45.0%Non-residentialTotalconstruction(RHS)16-64.5%9.5%14-8200020022004200620082010201220142016000102030405060708091011121314151617Source:Datastream,Eurostat,SGCrossAssetResearch/EconomicsSource:Datastream,Eurostat,SGCrossAssetResearch/Economics#4WellbelowconsensusonUKgrowthasBrexituncertaintiesintensifyThanksinparttothesteepdepreciationofthepound,theUKeconomyhastodatemaintainedafairlysolidgrowthrate.ButmoreimportanttomaintainingsolidgrowthhasbeenthewillingnessofUKhouseholdstoreducetheirsavingsrateasrealdisposableincomeslumped,owingtoslowerearningsgrowthandthejumpinconsumerpriceinflation.Butreducingthesavingsrateisafiniteprocess,andwebelievethelowpointmaywellalreadybepast.ThelackofprogressintheBrexitnegotiationsisalsolikelytohurtbusinessandconsumersentiment.Risinginputcostsareasqueezeonprofitmargins.Our2018GDPforecastisafull0.6ppbelowconsensus.Hence,wealsobelievetheBoE’srecentratehikewillprovetobeaone-off.UKconsumptionfundedbylowersavingsUKbusinessinvestmentgrowthinretreat14%6%13%12%4%8%10%2%3%8%0%-2%6%-2%-7%4%Savingsrate-4%BIqoq-12%RealGDPyoyBIyoy2%-6%-17%0%-8%-22%200120042007201020132016200120042007201020132016Source:SGCrossAssetResearch/Economics#5GrowthinLatamstrengthening,butmaybebylessthanconsensusBarMexico,whereweexpectbroadlysteadygrowth,allLatameconomieswecoverareexpectedtoclockupfastergrowthin2018thanin2017.However,ourforecastsfallshortofconsensuspredictions.Specifically,therecoveryfromrecessionin2016inBrazillookssettocontinue,butour2018forecastis0.5ppbelowtheconsensus.Despitethestabilisationofsomekeycommodityprices(e.g.ironoreandoil),wedoubtthiswilltriggermuchadditionalinvestment.Moreover,politicaluncertainty–especiallyaheadofBrazil’sgeneralelectionsinOctober–islikelytoweighonsentimentandinvestmentalreadyvulnerableduetothesignificantfiscalstressandrisingpublicdebt.Nevertheless,strongerconsumptionandexportdemandshouldencouragesomebouncebackinprivateinvestment.ElectionsarealsoscheduledinMexicoandColombia.Despitethecontinuedgrowthinexportsandprivateconsumption,Mexico’seconomywillfailtoacceleratein2018giventheelectionuncertainties,NAFTAdiscussionsandthelaggedeffectoftightenedfinancialconditions.Broadlyspeaking,whileimprovedcommoditypricesandlowerinflationhavestrengthenedthenear-termgrowthNovember20178Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookprospectsinLatamex-Mexico,investmentaccelerationwillremainmodestamidchallengingpolitical/fiscalsituation.ModestgrowthaccelerationinsightBrazilfacessignificantfiscalconstraint%chgRealGDP8%ofGDPFiscalBalance128SGforecast4SGforecast400-4-4-8-8-12-12200020042008201220162020200020042008201220162020ArgentinaBrazilChileArgentinaBrazilChileColombiaMexicoColombiaMexicoSource:Nationalsources,Datastream,SGCrossAssetResearch/Economics#6AboveconsensusonAustraliaOur2018outlookforAustraliangrowthat3.3%-upfrom2.4%thisyear-is0.5ppaboveconsensus.Thisreflectscontinuedexpansionofcommodityexports,butdomesticdemandwillalsobesupportedbystrongernon-resourceinvestment.Partofthisisalargepipelineofinfrastructureinvestmentprojectsthatwillsupportpublicandprivateinvestment.Moreover,thedragfromdecliningmininginvestmentisnowlargelygone.Consumerexpendituregrowthshouldgraduallystrengthenasstrongemploymentgrowthgivesrisetoaccelerationinwages.Australianon-miningcapexsettoriseAustraliamovingtomorebalancedgrowthPrivatesectorcapitalexpenditure(AUDm)8.025000Contributiontogrowth6.0200004.0150002.0100000.0-2.05000-4.002001200420072010201320162019f2022fMar90Jul93Nov96Mar00Jul03Nov06Mar10Jul13Nov16FinalDomDemNettradeMiningManufacturingOtherindustriesInventories&Stat.DisGDPSource:ABS,Datastream,CEIC,SGCrossAssetResearch/EconomicsNovember20179Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGgrowthoutlookvsconsensusSGConsensusEUCommissionIMFGrowthForecasts2017P*2018P*201720182017201820172018World(MktFXweights)3.93.13.73.1------------World(PPPweights)3.73.63.73.6--------3.63.7US2.22.12.22.22.22.52.22.32.22.3Euroarea2.32.22.11.72.21.92.22.12.11.9Germany(nsa)2.31.92.01.6------------France1.81.82.01.71.71.71.61.71.61.8Italy1.61.51.51.21.51.21.51.31.51.1Spain3.03.02.42.43.12.53.12.53.12.5Slovakia3.43.23.73.63.33.63.33.83.33.7UK1.51.50.80.81.51.41.51.31.71.5Switzerland0.70.71.61.60.91.80.91.81.01.3China6.86.86.26.26.86.46.2--6.86.5Japan1.51.51.31.21.61.31.61.21.50.7Australia2.42.53.33.32.32.82.42.82.22.9SouthKorea3.22.82.82.43.12.92.82.83.03.0Taiwan2.62.22.52.32.42.3----2.01.9India*6.47.17.46.96.87.5----6.77.4Indonesia5.15.15.35.45.15.3----5.25.3Brazil0.70.51.91.70.72.4----0.71.5Mexico2.12.12.02.12.12.32.12.22.11.9Chile1.51.52.62.51.53.0----1.42.5Colombia1.71.52.62.71.82.5----1.72.8Argentina2.52.02.92.62.93.2----2.52.5Russia1.61.51.61.31.71.81.0--1.81.6Hungary3.73.73.53.53.73.33.73.63.23.4Poland4.34.03.83.94.03.54.23.83.83.3CzechRepublic4.54.33.63.24.23.24.33.03.52.6Colours:Darkred-0.4bpawayfromconsensus,lightredbetween-0.4and-0.2awayfromconsensus;lightbluebetween0.2and0.4awayfromconsensus,darkblue+0.4awayfromconsensus.Source:SGCrossAssetResearch/Economics,Consensus=November2017,IMF=October2017,EuropeanCommission=November2017,P*=SeptemberInterimGEO.SGinflationoutlookvsconsensusSGConsensusEUCommissionIMFInflationForecasts2017P*2018P*201720182017201820172018World(MktFXweights)1.92.62.02.5------------World(PPPweights)3.33.33.33.2--------3.13.3US2.12.11.61.52.12.12.02.12.12.1Euroarea1.51.51.41.11.51.31.51.41.51.4Germany1.71.71.51.21.71.61.71.51.61.5France1.21.11.50.81.01.21.11.21.21.3Italy1.41.31.21.11.31.11.41.21.41.2Spain2.01.91.41.11.91.32.01.42.01.5Slovakia1.31.12.11.91.31.91.31.71.21.4UK2.72.72.72.72.72.62.72.62.62.6Switzerland0.50.40.60.60.50.70.50.20.50.6China1.61.72.32.31.62.1----1.82.4Japan0.40.40.91.00.40.70.40.80.40.5Australia1.92.01.92.12.02.22.02.02.02.2SouthKorea2.12.11.81.82.02.02.02.01.91.9Taiwan0.50.71.31.10.71.2----1.01.4India*3.34.54.23.63.44.7----3.84.9Indonesia3.93.93.73.73.93.7----4.03.9Brazil3.53.43.93.83.14.1----3.74.0Mexico5.95.93.93.86.23.85.33.85.93.8Chile2.12.42.52.92.12.7----2.32.7Colombia4.34.23.33.24.03.4----4.33.3Argentina----23.316.7----26.917.8Russia3.64.13.23.73.34.1----4.23.9Hungary2.52.62.83.02.42.82.32.62.53.2Poland1.91.92.52.51.92.11.92.11.92.3CzechRepublic2.42.32.22.22.42.22.42.12.31.8Colours:Darkred-0.4bpawayfromconsensus,lightredbetween-0.4and-0.2awayfromconsensus;lightbluebetween0.2and0.4awayfromconsensus,darkblue+0.4awayfromconsensus.Source:SGCrossAssetResearch/Economics,Consensus=November2017,IMF=October2017,EuropeanCommission=November2017,P*=SeptemberInterimGEO.November201710Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGSWANCHARTDOWNSIDERISKPROBABILITIESMOSTLYDOWNGRADED,BUTSTILLINTHEMAJORITYSGSwanchartshowspolicyuncertaintyisstillthehighestriskSource:SGCrossAssetResearch/EconomicsOurSwanChartisanattempttoquantifyup-anddown-sideriskstotheeconomicoutlookwhichwecanindentify.Wealsotrytoattachprobabilitiestotheriskeventmaterialising–asmuchasthisispossible.InthissenseitisentirelydifferentfromNicolasTaleb’sdefinitionofBlackSwans,whichcannotbeanticipated,muchlesshaveaprobabilityascribedtothem.Onthewhole,theprobabilitiesofthedownsideriskshaveeasedoverthepastthreemonths,buttheyremainmorenumerousthantheupsiderisks.Ontheupside,theprobabilitiesareunchangedbutwehaveaddedthepossibilityofaUSinfrastructureprogram.TheriskofwarontheKoreanpeninsulahasseeminglyreceded,withaclearde-escalationofaggressive,hostilerhetoriconbothsides,andaquitelongpauseinmissileandnucleartestsbyNorthKorea.Hence,wehavereducedtheprobabilityto1%from2%.Butitisinourviewariskworthnotingbecauseitsconsequenceswouldbeseverefortheglobaleconomy.Thedifficultywiththisriskscenarioisthatitcanmaterialiseinmanyforms,dependingonthescaleanddurationofanymilitaryconflict.Evenexcludingtheuseofnuclearweapons,ascenarioinvolvingsubstantialuseofconventionalweaponsandinflictingsubstantialdamagetonorthernpartsofSouthKorea–wheremuchofitstechindustryislocated–wouldhavesevereconsequencesfortheglobaleconomy.GivenSouthKorea’spre-eminentpositionintheproductionofmemorysemiconductors,D-RAM,LCDstonamebutafew,globalproductionofgoodsthatrelyonthesecomponentscouldbehamperedseverely.Indeed,aglobalrecessionwouldbewellwithintherealmofpossibilities.Inthissense,thisistheriskwiththegreatestpotentialimpactonglobalgrowthoveraone-yearorsohorizon.Theriskofaseriousintensificationofprotectionismresultinginatit-for-tattradewarremainsinplay.Evidently,theUnitedStateswouldbeatthecentreofthis,giventheanti-traderhetoricofthecurrentUSadministration,notmerelyvis-à-visChinaandothersurpluseconomiesinAsia,butalsoGermany,CanadaandMexicotonameafew.Ourjudgmentisthatalthoughfurtherexpansionofimportrestrictionsand/ortariffsisquitelikely–thishasbeenatrendforsomeyearsnow–theriskofanall-outtradewarisslimatperhaps10%.HighlyintegratedsupplychainsandtheinabilitytoresorttoimportsubstitutionbecauseofahighdegreeofNovember201711Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookspecialisation,forexampleinthehigh-techsector,makessuchascenarioverycostlyforallprotagonists.ThefacttherehasnotbeenaseriousescalationoftradeconflictsafterayearunderthenewUSadministration,despiteattimesfierylanguage,suggeststhisriskisquitelowaswell.TheriskofaEuropeanpoliticaluncertaintyshockhasnotdisappeared,butithasrecededoverthecourseoftheyear.TheelectionoutcomesintheNetherlands,France,Austria,andalsoGermanyhavepreventedpopulist,anti-EUpartiescomingtopower,sothatuncertaintyhasreceded.Thatsaid,theinconclusiveoutcomeoftheGermanfederalelections,whichatthetimeofwritingisstillhinderingtheformationofacoalitiongovernment,hasinjectedsomeuncertaintyintothedirectionofGermany’sEUpolicies.Onbalance,wehavereducedthisrisktoa10%probability(from25%),giventhatelectionswillbeheldinItalyin2018andtherearedownsideriskstoboththeEUandtheUKintheBrexitnegotiations.Itisdifficulttomakeanyplausibleestimateastohowmuchgrowthwouldsufferinthisriskscenario,butevenifgrowthweretobereducedby1ppintheEU(whichseemslargetous),givenitsweightintheglobaleconomytheimpactwouldbetotrim0.1-0.2ppoffglobalGDPgrowth.AChinahardlandingremainsarisk,albeitonethatwebelieveisstableat15%.OurdefinitionofahardlandingisareductionofGDPgrowthby2ppormoreoverthecourseofoneyear,whichwouldleavegrowthattheendof2018atlessthan5%yoy.SpecificallyinChina’scase,theriskcomesfromexcessivelyrapiddeleveraginginthefinancialsector,excessivelyrapidtighteningoflocalgovernmentfiscalpolicyandexcessivelyrapidcoolinginthehousingmarket.Notethattheseareallcloselylinkedtoeconomicpolicymaking.GivenChina’sweightintheglobaleconomyofaround20%,thiswouldimplyadownsideshocktoglobalgrowthof0.4ppormore.Asharpfinancialmarketrepricingisclearlyariskgivencontinuedhighvaluationsinequity,governmentbondandcreditmarkets,andexceptionallylowvolatility.Thiswouldcomeatatimewhencentralbanksareeitherreducingtheirstimulus,ledbytheUSFederalReserve,butalsopursuedbytheBankofEngland,and,weexpect,bytheBankofKoreainduecourse,orareslowingtherateofeasing,asinthecaseoftheECB.Giventhewiderangeofscenariosthatwouldcountasaseveremarketcorrection,itisparticularlydifficulttoattachareasonableimpactonglobalgrowthtosuchascenario,butareductionofglobalgrowthofatleast0.5ppwouldbereasonable.Asourbasecaseassumestaxcutswilltakeplace,thefailuretoimplementsometaxcutsintheUnitedStatesrepresentsanotherdownsiderisktoouroutlook.Butweconsiderthisriskhasnowroughlyhalvedcomparedtothreemonthsago,andwenowputitat20%.Still,thedirectdownwardimpactonUSgrowthcouldbeeasily0.5pp,oralittlelessthan0.1pponglobalgrowth.WealsonotethiscouldtriggerasubstantialcorrectioninUSstockmarkets,amplifyingthedirecteffect.Therearealsoclearupsideriskstotheoutlook,asthepastyearortwohaveshown.Oneisgreaterfiscalaccommodationthanwecurrentlyexpect(mainlyintheUS,Germany,Japan),withthisbeingsufficientlywidespreadtohaveanimpactatthegloballevel.Givenhighpublicsectordebtinmanyoftheadvancedeconomies,wedonotratethisriskasbeingahighprobabilityone,especiallyasgrowthinmostoftheadvancedeconomiesisrunningaheadofpotential.Aboosttoglobalgrowthof0.5ppwouldseemanupperbound.November201712Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookOneofouranchorthemesisapick-upinbusinessinvestmentafteralongperiodofsubduedgrowth.Still,givenitsrelativelyhighhistoricalvolatility,rapidlytighteninglabourmarkets,elevatedbusinesssentimentandstill-lowinterestrates,weretaintheriskofanupsidesurpriseoncapitalexpenditure.However,at10%itisnotalargeupsiderisk.Theimmediategrowthimpactwouldbequitelimited,asbusinessinvestmenttypicallyaccountsfor10-15%ofGDPinadvancedeconomies–meaningthatanyupsidesurprisewouldhavetobelargetosignificantlyraiseGDPgrowth.However,overthemediumtermstrongerbusinessinvestmentwouldraisepotentialgrowthandmakethecurrentexpansionmoresustainable.OnenewupsideriskweidentifyistheimplementationofaninfrastructureinvestmentprogramintheUS.Thisisunlikelytomaterialisein2018,inourview,butitremainsamongthepolicyproposalsoftheTrumpadministration,andcouldaddbothamedium-andlonger-termstimulustoUSgrowth.FasttrackreforminEuroperemainsahope,butwesetalowprobabilityonthisatjust5%.Ourbaselinediscountsenoughreformsintheeuroareatooffsetdemographicsheadwindsoverthecomingdecade.However,thereformswillcomeonlyslowlyandthereisscopefordisappointmentgiventhepoliticalrisksofanti-establishmentpartieswinningamajorityinaeuroareamemberstate.November201713Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGGROWTHANDINFLATIONOUTLOOKPotentialRealGDPCPIgrowth20162017f2018f2019f2020f2021f2022fperannum20162017f2018f2019f2020f2021f2022fWorld(MktFXweights)3.63.93.73.12.93.63.51.51.92.02.12.02.32.2World(PPPweights)3.33.73.73.33.13.73.72.83.33.33.13.03.13.0Developedcountries(PPP)1.72.22.11.41.01.91.80.81.71.61.71.92.01.8Emergingcountries(PPP)4.54.74.84.64.64.84.94.34.44.54.13.73.83.8NorthAmericaUS1.52.22.21.10.62.42.01.71.32.11.61.82.32.61.9EuropeEuroarea1.82.32.11.40.61.21.51.20.21.51.41.41.41.41.5Germany(nsa)1.92.32.01.31.01.61.51.2Germany1.92.52.01.30.71.61.50.41.71.51.51.41.41.5France1.12.22.01.40.61.01.31.20.31.21.51.31.51.41.4Italy1.11.61.50.80.30.61.10.70.01.41.21.41.21.31.3Spain3.33.02.41.80.81.21.51.1-0.32.01.41.31.31.41.4Slovakia3.33.43.73.32.12.02.42.5-0.51.32.12.42.32.42.9UK1.81.50.80.60.91.01.11.60.72.72.71.91.51.41.4Switzerland1.40.71.60.90.41.71.91.9-0.40.50.60.90.40.50.7AsiaChina6.76.86.25.45.25.55.35.52.01.62.32.01.42.02.2Japan1.01.51.31.20.81.21.31.0-0.10.40.91.62.62.12.0Australia2.52.43.33.02.12.62.92.81.31.91.92.21.92.02.4SouthKorea2.83.22.82.52.32.72.52.61.02.11.81.71.71.81.9Taiwan1.52.62.51.30.32.43.22.51.40.51.31.00.71.01.2India*7.96.47.47.37.77.78.07.55.03.34.24.34.14.24.1Indonesia5.05.15.35.35.65.96.05.63.53.93.74.04.13.93.9LatinAmericaBrazil-3.60.71.92.11.22.22.31.08.73.53.94.14.14.24.2Mexico2.02.12.01.10.52.12.32.52.85.93.93.43.43.53.5Chile1.61.52.62.62.02.62.72.53.82.12.53.23.03.13.0Colombia2.01.72.62.62.02.83.03.07.54.33.33.23.13.13.1Argentina-2.22.52.92.82.33.13.22.0-------Russia&EasternEuropeRussia-0.21.61.61.41.51.51.61.56.63.63.24.03.93.94.1Poland2.74.33.83.33.03.33.53.1-0.61.92.52.82.52.52.5CzechRepublic2.54.53.62.51.92.12.52.20.72.42.21.70.70.61.4Hungary1.93.73.52.82.52.93.03.00.52.52.82.92.83.03.0*InIndia,thenumbersareaveragedoverthefiscalyear,endinginMarch.Source:SGCrossAssetResearch/EconomicsAnnualaverageRealGDP-2018AnnualaverageCPIheadline-201884.57463.5352.54231.52110.500USItalyUKUSItalyIndiaChinaChileSpainBrazilJapanBrazilIndiaChileChinaSpainPolandTaiwanMexicoFranceRussiaMexicoRussiaPolandFranceTaiwanSlovakiaHungaryAustraliaHungarySlovakiaAustraliaGermanyIndonesiaEuroareaGermanyIndonesiaEuroareaSouthKoreaSwitzerlandSouthKoreaNetherlandsCzechRepublicCzechRepublicSources:IMF,SGCrossAssetResearch/EconomicsNovember201714Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGUNEMPLOYMENTANDCURRENTACCOUNTOUTLOOKUnemploymentrateNAIRUCurrentaccount201620172018f2019f2020f2021f2022f201620172018f2019f2020f2021f2022fNorthAmericaUS4.94.43.93.84.24.14.04.7-2.5-2.6-2.8-2.9-3.0-3.2-3.2EuropeEuroarea10.09.28.48.18.08.07.98.53.33.03.02.92.62.62.6Germany6.15.75.25.04.95.05.06.68.27.77.97.36.76.66.4France10.19.69.49.19.29.18.78.0-0.9-1.2-0.8-0.6-0.3-0.4-0.1Italy11.711.210.49.89.99.99.89.52.72.62.01.71.51.11.1Spain19.717.214.814.414.614.614.514.01.90.90.90.90.80.80.8Slovakia9.57.26.36.67.07.78.09.1-1.5-1.5-1.8-2.0-2.5-1.5-2.3UK4.94.44.75.55.86.36.74.0-5.9-3.7-2.8-2.2-2.3-2.5-2.6Switzerland3.33.23.23.13.43.73.53.29.87.96.46.05.55.15.3AsiaChina--------1.71.82.22.01.50.90.6Japan3.12.92.72.62.52.52.63.03.84.03.22.01.81.82.4Australia5.75.65.24.95.15.04.85.0-2.6-1.1-0.8-0.6-1.0-1.0-0.8SouthKorea3.73.83.83.93.83.73.63.87.07.06.56.05.55.05.0Taiwan3.93.83.94.55.44.43.94.013.612.712.011.59.010.012.0India*---------1.3-1.1-1.0-1.3-1.5-1.6-1.7Indonesia5.75.65.65.55.55.45.35.8-1.8-1.8-2.0-1.8-1.7-1.5-1.5LatinAmericaBrazil11.312.812.211.411.010.18.98.0-1.3-0.6-0.9-1.2-1.3-1.6-1.9Mexico3.93.53.84.45.14.74.13.6-2.2-1.9-1.8-1.8-1.7-2.0-2.0Chile6.56.76.56.16.16.05.96.0-1.4-2.2-2.0-2.0-1.9-2.1-2.2Colombia9.29.39.18.78.88.78.49.0-4.3-3.9-3.7-3.5-3.3-3.3-3.4Argentina6.68.89.39.08.48.47.59.0-2.6-2.6-2.6-3.0-3.0-2.7-3.0Russia&EasternEuropeRussia5.55.34.74.64.54.34.35.02.12.72.72.52.11.71.5Poland5.54.84.64.24.04.04.07.8-2.0-2.5-3.0-3.5-3.5-4.0-4.0CzechRepublic3.93.02.62.52.62.93.24.71.11.21.01.41.81.61.3Hungary4.44.04.05.24.94.74.74.75.53.42.72.52.42.82.8*InIndia,thenumbersareaveragedoverthefiscalyear,endinginMarch.Source:SGCrossAssetResearch/EconomicsAnnualaverageUnemployment-2018AnnualaverageCurrentAccount-201816141412121081068462402-20-4ItalyUKUSItalyUSSpainBrazilFranceChileJapanJapanChinaSpainFranceBrazilIndiaMexicoChileRussiaPolandTaiwanMexicoTaiwanRussiaSlovakiaAustraliaHungaryGermanyHungaryAustraliaSlovakiaIndonesiaEuroareaIndonesiaGermanyEuroareaNetherlandsSouthKoreaSwitzerlandNetherlandsSwitzerlandSouthKoreaCzechRepublicCzechRepublicSources:IMF,SGCrossAssetResearch/EconomicsNovember201715Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGMONETARYPOLICYOUTLOOK–KEYRATESNovMarJunSepDecNeutralrate201720182019202020212022212018201820182018NorthAmericaUS1.131.631.631.882.132.51.061.752.131.501.942.49EuropeEuroarea0.000.000.000.000.001.50.000.000.050.020.241.00UK0.500.500.500.500.502.50.290.500.200.050.050.05Switzerland-0.75-0.75-0.75-0.50-0.502.0-0.74-0.65-0.17-0.23-0.020.33AsiaChina2.452.452.452.252.003.02.42.32.01.41.82.4Japan-0.05-0.10-0.10-0.10-0.101.0-0.1-0.1-0.1-0.10.00.1Australia1.501.501.501.752.003.81.51.62.41.81.82.8SouthKorea1.251.751.751.751.752.01.31.71.81.41.42.0Taiwan1.381.381.381.381.382.51.41.41.31.01.01.4India6.005.755.755.755.755.36.15.85.65.55.65.8Indonesia4.254.254.254.504.504.8-4.44.54.54.34.3LatinAmericaBrazil7.507.007.007.007.2510.010.07.07.67.88.18.4Mexico7.007.257.257.257.005.56.87.26.14.64.85.4Chile2.502.502.502.753.254.02.72.73.72.73.54.0Colombia5.004.504.504.504.505.56.04.54.53.63.84.3Argentina28.7526.7524.7522.7520.7516.0-24.316.612.111.010.4EasternEuropeRussia8.257.757.507.257.005.09.07.56.86.56.36.0Poland1.501.501.501.752.003.01.51.62.32.02.02.0CzechRepublic0.500.751.001.251.503.50.21.01.50.71.52.8Hungary0.900.900.900.900.901.30.90.91.11.72.02.0Source:SGCrossAssetResearch/EconomicsandRates&FXStrategyShort-termSGviewLong-termSGviewForecastratechangebyend2018(inbp)Forecastratechangebyend2022(inbp)1503001002005010000-50-100-100-200-150-300UKUSUKUSChinaIndiaBrazilJapanChileIndiaChinaJapanBrazilChileRussiaTaiwanMexicoPolandRussiaMexicoTaiwanPolandColombiaEuroareaHungaryIndonesiaAustraliaColombiaIndonesiaEuroareaHungaryAustraliaSwitzerlandSouthKoreaSouthKoreaSwitzerlandCzechRepublicCzechRepublicSource:SGCrossAssetResearch/EconomicsandRates&FXStrategyNovember201716Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGLONG-TERMGVTBONDYIELDOUTLOOK(10Y)NovMarJunSepDecNeutralrate201720182019202020212022212018201820182018NorthAmericaUS2.362.552.602.802.703.72.32.72.52.53.53.8EuropeEuroarea(Bund)0.340.550.750.850.852.50.40.70.91.22.22.6UK1.251.401.501.601.504.01.11.51.71.92.83.1Switzerland-0.17-0.050.150.250.252.5-0.20.10.40.91.51.6AsiaChina3.963.953.903.853.804.03.53.93.73.33.63.8Japan0.030.000.000.000.101.50.00.00.20.61.52.0Australia2.552.703.003.203.255.02.63.03.33.24.04.3SouthKorea2.552.702.702.652.603.02.22.72.62.32.52.9Taiwan1.001.051.051.021.002.81.11.01.00.81.01.5India6.907.107.207.307.257.06.77.27.27.17.17.1Indonesia6.596.857.007.207.407.47.07.07.57.47.27.1LatinAmericaBrazil10.2011.0011.5011.7512.0011.210.611.412.212.412.412.6Mexico7.257.507.607.707.557.07.27.67.06.36.66.9Chile4.504.504.554.654.604.44.24.64.53.84.64.8Colombia6.666.907.007.207.107.26.67.06.96.26.66.9EasternEuropeRussia7.657.357.207.056.906.07.66.96.36.26.36.1Poland3.443.553.753.803.754.43.63.73.84.04.04.0CzechRepublic1.912.152.152.152.205.01.11.81.71.32.22.6Hungary2.222.001.951.901.903.23.11.92.12.53.03.0Source:SGCrossAssetResearch/EconomicsandRates&FXStrategyShort-termSGviewLong-termSGviewForecastyieldchangebyend2018(inbp)Forecastyieldchangebyend2022(inbp)200250150200150100100505000-50-50-100-100UKUSUKUSChinaJapanChileIndiaBrazilIndiaChinaChileBrazilJapanRussiaTaiwanMexicoPolandRussiaMexicoPolandTaiwanHungaryColombiaGermanyAustraliaIndonesiaIndonesiaColombiaHungaryAustraliaEuroareaSouthKoreaSwitzerlandSouthKoreaSwitzerlandCzechRepublicCzechRepublicSource:SGCrossAssetResearch/EconomicsandRates&FXStrategyNovember201717Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSGFXOUTLOOKNovMarJunSepDecNeutralrate201720182019202020212022212018201820182018NorthAmericaEURUSD1.171.211.231.251.271.331.131.231.311.351.331.33EuropeEURGBP0.890.920.940.960.980.750.880.940.991.011.001.00GBPUSD1.321.321.311.301.301.701.291.311.321.331.331.33EURCHF1.171.191.201.211.211.301.101.201.221.231.241.26AsiaUSDCNY6.636.636.656.676.707.006.786.666.716.776.566.47USDJPY113114116116114110112113121118122121AUDUSD0.760.790.810.830.850.780.770.810.830.810.800.79USDKRW109611301135114011501050113611361161118811681130USDTWD30.030.430.731.031.229.0030.630.732.333.031.530.1USDINR64.965.065.565.565.768.7565.165.366.066.566.967.4USDIDR135291350013600136501370013500133611359613700137461377113800LatinAmericaUSDBRL3.263.353.403.503.453.403.243.413.493.563.633.70USDMXN18.9718.0019.0019.5019.7519.3019.219.020.120.219.919.5USDCLP637640645650660660657647653640634634USDCOP301431503120313031502900297431263116308730873087EasternEuropeUSDRUB59.460.261.461.862.965.059.062.163.364.965.966.9EURPLN4.234.224.224.204.184.104.234.214.154.104.104.10EURCZK25.5525.425.125.024.724.6026.525.224.723.922.521.7EURHUF312.95310.0310.0312.0314.0310309.0311.5310.0310.0310.0310.0Source:SGCrossAssetResearch/EconomicsandRates&FXStrategyShort-termSGviewLong-termSGviewForecastspotchangebyend2018(in%)Forecastspotchangebyend2022(in%)142012151010865402-50-10-2-4-15-6-20EURCZKGBPUSDEURPLNEURHUFUSDJPYUSDCNYUSDINRUSDIDREURCHFUSDCLPUSDTWDUSDMXNUSDCOPUSDKRWUSDBRLUSDRUBEURUSDEURGBPAUDUSDEURCZKEURPLNUSDCNYEURHUFUSDCLPUSDTWDGBPUSDUSDIDRUSDCOPUSDMXNUSDKRWUSDINRAUDUSDUSDJPYEURCHFEURGBPUSDRUBUSDBRLEURUSDSource:SGCrossAssetResearch/EconomicsandRates&FXStrategyNovember201718Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookANCHORTHEME#1GROWTHMOMENTUMSTILLSURPRISINGONTHEUPSIDEOurhypothesisonglobalgrowthintheJuneGEOthatgrowthwaslikelytoplateauatitsstrongestratesince2007through2017and2018stillstands.However,theheightoftheplateaucontinuestogrow.Our2017and2018globalGDPgrowthforecastsareonceagainslightlyhigher,byjust0.1ppeachcomparedtotheSeptemberGEO,butby0.3ppfor2017fromwhatlookedlikelymid-year.Thebrightergrowthoutlookisanear-globalphenomenon,withimprovedprospectsparticularlypronouncedintheeuroareain2018andinseveralAsianeconomiessuchasSouthKoreaandTaiwan.OurGDPforecastforIndia(FY2018,i.e.toendof1Q18)isupby0.5pp,butthismarksareboundfromanevenlargercutintheFY2017forecast.TheUSforecastsarebasicallystable,savefora0.1pplifttothisyear.GrowthprospectshavealsoimprovedinEasternEuropeandBrazil.Inshort,thecurrentexpansionisnotonlyprovingmoredynamicthanexpected,butisalsohighlysynchronizedaroundtheglobe;indeed,asmentionedabove,theOECDpredictspositivegrowthratesineveryoneofthe45individualeconomiesitcoversforthefirsttimesince2007.Moreover,weexpect2018GDPgrowthtobeabovepotentialinnearlyalladvancedeconomiesexcepttheUK,whereweexpectgrowthtobesharplybelowpotential,andTaiwan,whereitshouldmatch(seechart).Advancedeconomiesnearlyallgrowingabovepotential4.54.03.53.02.52.01.51.00.50.0USEAGEFRITSPUKJPAUSKTWCZ2017ForecastRealGDP2018ForecastRealGDPgrowthPotentialgrowthSource:SGCrossAssetResearch/EconomicsThemerefactthatweexpectsteadyglobalgrowthin2018comparedwith2017isnoteworthy,giventhatweexpectthesecond-largestsingleeconomy,China,toslowquitemarkedlyfrom6.8%to6.2%.Thistooistestamenttothesolidgrowthmomentumintherestoftheworld.Thatsaid,inequalitycontinuestorise,whichinturnrisksunderminingthebroad-basedpopularsupportforpoliciesthatarelikelytofosterlong-termgrowth.Populistchoicessuchasanti-immigrationandanti-tradepoliciescontinuetoenjoysupport.Subduedwagegrowthinmanyadvancedeconomiesisalmostcertaintoplayaroleaswell.However,aswedetaillater,webelievewagegrowthmaygraduallydevelopgreatermomentumoverthecomingyear.November201719Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookInflationbetter,butnotgoodenoughinadvancedeconomiesInflationintheadvancedeconomieshasrecoveredsubstantiallyfromitslowin2015(0.3%),butinnearlyallofthemitremainsbelowthecentralbanks’targets(seechart).Again,theonlyexceptionistheUKwhere,owingtothesteepdepreciationofthecurrency,inflationhassurgedtowellabovetarget.Thecombinationofabove-potentialgrowthanddecliningunemploymentbutweakinflationposesadilemmaforthesecentralbanks,giventhatpracticallyallhavepricestabilitymandatesandpursuenumericaltargets.Inourview,thedilemmawillpersistforsometime.Indeed,notleastbecauseofenergy-priceeffects,headlineinflationratesin2018arelikelytoeasebackfromtheir2017levels.Asaconsequence,normalisationofthecurrentexceedinglyaccommodativepolicysettingswillproceedatapacethatatleastinahistoricalperspectivewillbeglacial.Butinflationtocontinuefallingshortofcentralbanks’targets,exceptintheUK3.02.52.01.51.00.50.0USEAGEFRITSPUKJPAUSK2017Forecastinflation2018ForecastinflationPotentialinflationSource:SGCrossAssetResearch/EconomicsMonetarypolicieswillremainaccommodativeatleastthrough2018TheUSFedisleadingthegradualwind-downofextrememonetarystimulusamongthedevelopedeconomies’centralbanks.AlthoughmarketscontinuetobescepticalaboutwhethertheFedwillbeableandwillingtotightenpolicyatthepaceitpredicts,weareintheFed’scamp,atleastasfaraspolicytotheendoftheyearandthrough2018isconcerned.Certainly,comparedtohistory,theexpectedpaceof75bpperyearisexceedinglyslow,andthatdespitethefactthatunemploymentisalreadybelowtherateestimatedtobeconsistentwithfullemployment.Itcanalsobearguedthattodate,USmonetarypolicyhasnotbeentightenedatallasregardstheFedfundsrate.Whilewewouldnotarguethatitisnecessarilythebestwaytolookatmonetarypolicy,calculatingarealpolicyratesimplyusingtheannualrateofheadlineCPIasthedeflatorindicatesthatinflationhasrisenfarmorequicklythanthepolicyratesincetheFedstartedhikingratesbackinDecember2015.Hence,therealpolicyratehasinfactdeclined,andbyquiteamargin:fromzeroin2Q15toalowof-1.7%in1Q17,beforerisingto-0.8%currently.BasedonourFedfundsandCPIforecasts,itwillnotturnpositiveuntil3Q18(seechartbelow).Asregardsthenon-conventionalpartofpolicy,movestotightenonlyjustbeganinOctoberwhentheFedbegantograduallyshrinkitsbalancesheet.November201720Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookGivenourcallthattheUSeconomicexpansionislikelytogivewaytoamildrecessionsometimein2H19or1H20,wepredictapeaktargetfortheFedfundsrateof2.00-2.25%beforepolicyratesarecutagainto1.25-1.50%.USFedfundsrate(%)USFedfundsrate–nominaland“real”(%)3.02.52.02.51.52.01.00.51.50.01.0-0.5SGforecast-1.00.5RatepathimpliedbymarketNominal-1.5FOMCmedianprojectionReal0.0-2.02015201620172018201920202021Mar15Sep15Mar16Sep16Mar17Sep17Mar18Sep18Source:Bloomberg,SGCrossAssetResearch/EconomicsSource:HaverAnalytics,SGCrossAssetResearch/EconomicsTheECB,incontrast,continuestoeasepolicybycontinuingitsQuantitativeEasing(QE)atleastuntilSeptember2018,albeitatasubstantiallyslowerrateof€30bnpermonthstartingfromJanuary2018,comparedtoatopspeedof€80bnatonestage.ThereisalegitimatedebateaboutwhetherinQEitistheflowofassetpurchasesthatmattersorthestockofassetsonthecentralbank’sbalancesheet;weleantowardsthelatter.QEisanalternativewaytoeasemonetarypolicywheninterestratescannotbeused–forexamplebecausetheyhavehitthelowerbound–throughincreasingthemoneysupplydirectly.Lookedatinthisway,itisthestockthatmatters.OurviewonECBpolicybeyondSeptember2018isthatassetpurchaseswillbeextendedbecauseinflationislikelytostillberunningbelowthe2%target.Buttherateislikelytobeslowedtojust€15bnpermonth,andonlytotheendoftheyear.Afirstratehikeisnotforeseenuntilaroundthemiddleof2019,consistentwiththeECB’sassurancesthatratehikeswillonlyoccur“wellpast”theendofassetpurchases.TheBoJforitspartwillinourviewcontinuetoexpanditsbalancesheetatwhateverpaceisnecessarytomaintainitsgoalofkeepingthe10-yeargovernmentbondyield(JGB)atzero–inotherwords,thequantityofassetpurchasesbytheBoJhasbeenmadeendogenousbecauseofitspricetarget.ThereasonfortheextraordinarypaceofeasinginJapanissimplythatafteryearsofmilddeflationanda‘deflationarymindset’amongJapan’sfirmsandconsumers,achievingthe2%inflationtargetremainsextremelychallenging.AsfortheBankofEngland,giventhebackgroundoflowunemployment,andasharpincreaseininflationtoabovetarget,ithasdecidedtofollowtheFedandraisedtheBankrateby25bpto0.5%.However,itwaswidelyseenasa“dovishhike”,giventhattheBoEdeclaredthatitforeseesjustthreefurther25bphikesoverthenextthreeyears(!).AswebelievethataseriousnegativeBrexitshockisabouttohittheUKeconomy,wedonotexpectanyfurtherrateincreasesfromtheBoE.Inshort,wedonotexpectanimminentglobalwaveofmonetarypolicytightening.Somecentralbanksarelikelytoshifttowardsalessexpansionarystance,suchastheBankofCanadaandtheCzechNationalBank–bothofwhichhavebeguntheprocessalready.WealsoexpecttheBankofKoreatomakesomeupwardadjustmentinthenearfuture.ButbyNovember201721Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlook2H18,centralbankpolicytighteningislikelytobecomemorewidespread,withthecentralbanksofAustralia,Poland,andChilefallingintoline.By2019,withtheUSeconomyinadownturn,somelimitedreversalofthetighteningislikely.Centralbankpolicyrates3.0FedBoEECB2.5BoKRBA2.01.51.00.50.02015201620172018201920202021Source:SGCrossAssetResearch/EconomicsNovember201722Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookANCHORTHEME#2BUSINESSINVESTMENTRECOVERYHASALONGWAYSTILLTOGOThereisawidespreadperceptionthatbusinessinvestmentinadvancedeconomieshasbeenatypicallyslowtorecoverfollowingtheGreatRecession,notwithstandingrecordlowinterestrates.AboxinarecentECBBulletinexaminedthisquestion,usingasampleofnineadvancedeconomies.ByconstructinganaggregateratioofnominalbusinessinvestmenttonominalGDP,theanalysisrevealedanumberofinterestingfeatures.One,notonlydidtheGreatRecessionstronglyhitbusinessinvestment,therelativedecline–vis-à-vistotalGDP–wasalsoparticularlypronounced.Theratiodeclinedfromitslong-runaverageof12%tonearly10.5%,considerablybelowtheprevioustworecessionarylows.Two,althoughtherecoverywasinitiallycomparabletopreviousrecoveries,thesubsequentsecondrecessionintheeuroareain2011/12,triggeredbythesovereigndebtcrisis,broughttherecoverytoatemporaryhalt.Three,thedataeffectivelyshowthattherecoveryfollowingtheGreatRecessionwasquitesluggish.InlargepartthiscanbeattributedtotheSource:ECB,SGCrossAssetResearch/EconomicsAttheindividualcountryleveltherearesubstantialdifferencesofdegreetowhichnon-residentialinvestmentdeclined(seechart).BoththeUSandJapanexperiencedsteepdownturnsin2009,anditwasonlyin2013thattheyreturnedtotheirlong-runaverage.Bycomparison,thedownturnintheeuroareawasmild,but,asmentioned,theonsetofthesovereigndebtcrisiscausedaseconddownturn.Asaresult,ittookuntil2016forinvestmenttoreturntoitslong-runratio.Inotherwords,investmentintheeuroareafellshortofitslong-runshareformorethansixyears.November201723Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookInvestment-to-GDPratioinadvancedeconomies*1.00.50.0-0.5-1.0-1.5-2.02007201020132016EuroAreaUSJapanSource:Nationalsources,SGCrossAssetResearch/Economics*Thedefinitionofinvestmentinthischartdiffersslightlyfromtheaggregatechartabove.Thelegacyofunder-investmentThecrucialtake-awayfromthisanalysisisthattheadvancedeconomiesasagrouphavebeeninaphaseofunder-investmentsince2008,soclosetoadecade.Atleastsincethelate1980s,thisisunprecedented.Itisonereasontoexpectacontinuationoftherecently-begunupswing,becauseduringthisperiodthecapitalstockwillhavebothagedsignificantlyanddepreciated.Givenrapidtechnologicalchangeandafastpaceofinnovation,thismaywellmattermorethaninthepast.Onemeasuretoexaminetowhatextentunderinvestmenthasledtoashortageofproductivecapitaliscapacityutilisation.However,thisistypicallyonlyavailableforindustryand/ormanufacturing,soisquitenarrowinscope.Theevidencefromkeyeconomiesismixed.IntheeuroareaandJapan,capacityutilisationratesarewellaboveaverage,buttheyarequitedepressedintheUnitedStates.So,whilethereisevidencethatinvestmenthasnotkeptpacewithgrowthinproductioninthetwoformereconomies,hencesuggestingthatinvestmentoughttopickup,thisisnotthecaseintheUS–thatisasfarasmanufacturingisconcerned.Capacityutilisationinmanufacturing(deviationfromlong-runaverageinstandarddeviations)2.51.50.5-0.5-1.5-2.5-3.5-4.51985198719901993199519982001200320062009201120142017EuroAreaUSJapanSource:OECD,SGCrossAssetResearch/EconomicsNovember201724Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookSentimentisakeyingredientBusinessinvestmentdecisionsaredrivenbyacomplexsetoffactors.Butthereisgeneralconsensusthatdemandexpectations,uncertaintyandfinancialconditionsplayakeyrole.ItishardlysurprisingthatthebiggestglobalrecessionsincetheGreatDepressionhadalastingimpactonuncertainty,givenitsexceptionalandunexpectedseverity.Anditmayalsohaveledtoaheightenedawarenessofdownsiderisksandhenceheightenedcautionforaprolongedperiod.Moreover,therecoverywasrelativelyslowandperceivedtobeso,weighingondemandexpectations.Althoughtherearenoreliabledirectmeasuresofdemandexpectationsorthelevelofuncertaintyamongfirms,overallbusinesssentimentisareasonableproxy–theproverbial‘animalspirits’.Acrosskeyeconomies,businesssentimentispracticallyatall-timehighs,suggestingthatbusinessconditionsareseenasexcellentandthatuncertaintyhasceasedtodepresssentimentandinvestmentplans.USA:Smallbusinessoptimism(index)Euroarea:Sentiment(deviationfromJapan:Tankansurvey,businessavg.,standarddeviations)conditions(diffusionindex)30210520110010095-10-190-20-285-30-3-40801999200220052008201120142017-50Manufact.-4Non-ManufactNFIB:SmallBusinessOptimism1999200220052008201120142017-60LongrunaverageBusinessclimateEconsentimentMar00Mar03Mar06Mar09Mar12Mar15Source:SGCrossAssetResearch/EconomicsAslabourbecomesscarce,highercapitalinvestmentbecomesmoreattractiveUnemploymentrateshavedeclinedstronglysincetheGreatRecession,andhavenowreachedlevelsnotseeninaboutadecade,andinJapan’scaseintwo.IntheUSandinJapanunemploymentratesarenowatlevelsbelowthosebelievedtobeequivalenttofullemployment,althoughestimatesofNAIRU(non-acceleratinginflationrateofunemployment)areuncertain.Aslabourbecomesscarce,expandingproductionwillhavetorelyincreasinglyongrowthinthecapitalstock.Clearly,thisargumentapplieslesstotheeuroareawheretheunemploymentrateremainsatquiteanelevatedlevel,butinJapanitisbecomingapressingissueascompaniesfeelanacuteshortageofworkers.Morebroadly,associetiesageandbaby-boomersretire,participationrateswilldecline,makingtighterlabourmarketsamedium-andlong-termissue.USA:Unemploymentrate(%)Euroarea:Unemploymentrate(%)Japan:Unemploymentrate(%)13106.09125.5115.084.57104.0693.5583.0472.5362.019901993199620002003200620102013201619992001200420062009201120142016Jan90Jan95Jan00Jan05Jan10Jan15Source:BLS,Eurostat,JapanStatisticalBureau,SGCrossAssetResearch/EconomicsNovember201725Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookTheupswingisstillinitsearlystageAcrossawiderangeofeconomies,businessinvestmentgrowthhasalreadystrengthened(seechart).Inourbasecasewedonotpredictamajorfurtheracceleration,butratheracontinuationofsolidgrowthratesthatexceedoverallGDPgrowthandhencewillleadtoafurtherincreaseintheinvestment-to-GDPratio.Buttherisksmaywellbeskewedtotheupside.Businessinvestmentishighlycyclicalandexhibitslargefluctuations.Moreover,publicsectoractivitymayprovideadditionalsupport.Duringyearsoffiscalausterity,publicinvestmenthasbeenparedback,asistypical,butthelackofpublicinvestmentininfrastructurehasbecomeatopicofpublicdebateinmanyeconomies.Withpublicsectordeficitsinmostadvancedeconomiesbacktosustainablelevels,thereisroomforadditionalinvestment,andasmuchofpublicsectorworktendstobecarriedoutbytheprivatesector,itislikelytotriggeradditionalinvestmentbytheprivatesector.AkeyrisktotheglobaloutlookforinvestmentisChina,giventhehighshareithasinGDP,andpolicymakers’concernoverrisingdebtlevels.Andwedoindeedexpectinvestmenttoslowthere.Buttheslowdownislikelytobeconcentratedinresidentialinvestmentratherthaninthenon-residentialpartwhichweexpecttoslowmodestly.Andthereisapotentialupside:althoughitsscoperemainsdifficulttojudge,China’sgrandproject,theOneBeltOneRoadinitiative,hasthepotentialtotriggerincreasedinvestmentininfrastructureacrossAsia,AfricaandEurope,whichwouldgiverisetoinvestmentinmachineryandequipmenttoconstruct.Non-residentialinvestmentprospects(real,%change)1020162017f2018f86420-2-4-6USEAGEFRITSPJPAUSKUKSource:SGCrossAssetResearch/EconomicsNovember201726Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookANCHORTHEME#3THEGLOBALTRADERECOVERYHASLEGSUnusuallyslowtradegrowthduringthepost-crisisperiodFormostofthepast25years,globaltradehasexpandedmuchfasterthanglobalGDP(seechart),interruptedonlyin2001whenglobalGDPdeceleratednotablyandglobaltrademoreorlessstagnated.WhentheGreatFinancialCrisishitin2008/09andfinancialmarketsfrozeandhencetradefinancebecamedifficulttoobtain,internationaltradecollapsed:in2009,tradevolumesfell13%,whileglobalGDPgrowthwas,accordingtotheIMF-0.1%.Oncefinancialmarketsreturnedtosomesemblanceofnormalityandtradefinancere-started,internationaltradereboundedstrongly.However,oncethereboundwascompleteinlate-2010,worldtradeenteredaphaseofunusuallydepressedgrowth.Infact,duringthefiveyears2012-2016,globaltradeexpandedataslowerratethanworldGDP,breakingthetypicalhistoricalpattern.2017haswitnessedanotableincreaseintradegrowth,andforthefirsttimesince2006–exceptingthereboundin2010/11–globaltradeisoncoursetobeatGDPgrowth.GlobalGDPandinternationaltradegrowth(%yoy)15105-5-10-151992199419961998200020022004200620082010201220142016WorldGDPgrowth,%yoyWorldTradegrowth,%yoySource:IMF,CPB,SGCrossAssetResearch/Economics*Noteastructuralbreakinthetradeseriesin2000Anexplanationfortheslowpaceofinternationaltradecannotbefoundinaregionaldecomposition.Through2012/13itwasduetoalackofimportdemandinadvancedeconomies,whereasimportsintoemergingeconomiesgrewatarobustrate.Butin2014importsintoemergingeconomiesslowed,declinedoutrightin2015andeffectivelystagnatedin2016.Meanwhile,afternogrowthinadvancedeconomies’importsin2012and2013,asustained,albeitmoderate,recoverysetinfrom2014(seechartbelow).Amorelikelyexplanationisthatthetradeweaknesswasrelatedtothecompositionofgrowth.Throughtheyearsofextrememonetaryaccommodation,growthwasdriveninlargepartbyprivateconsumptionandbyconstructioninvestment.Neitherofthesetendstobeparticularlyforeigntrade-intensive,notleastasprivateconsumptionincludesalotofserviceswhichmuchofthetimearenottradable.Ifwearerightthatbusinessinvestmentgrowthwillsustainitsrecentupturn,thiswouldalsosustainstrongergrowthininternationaltrade,becausecapitalgoodsaremoreheavilytradedinternationallythangoodsthatfeedprivateconsumption.Indeed,theupturnininternationaltradeobservedin2017maynotbemerelycoincidentalwithmoredynamicinvestmentactivity.November201727Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookWorldtrade(volume,%yoy)25WorldTradeImports,Advancedecon.20Imports,Emergingecon.151050-5-10-15-20Jan05Jan07Jan09Jan11Jan13Jan15Jan17Source:CPB,SGCrossAssetResearch/EconomicsTechnologysectorisaboostfortradeThetechnologysectorismarkedbyahighdegreeofspecialisationatthecomponentlevel,andhencecomplexsupplychainsthatveryofteninvolvecross-bordermovementsofgoods.ThisisparticularlyimportantforAsia,wheremuchoftheproductionoftechnology-relatedgoodsislocated.Infact,especiallyinEastAsia(China,Taiwan,SouthKoreaandTaiwan),tradeinelectricalmachinery(i.e.electronics)dominatestheoveralltradedynamics(seechart),andhasbeenthemaindriverofAsia’sunusualunderperformanceofglobaltradegrowthin2016anditspowerfulrevivalin2017.ExportsofelectricalandelectronicproductsarealsohighlyimportantforotherAsiannationssuchasSingapore,Malaysia,TaiwanandthePhilippineswheretheyaccountformorethan30%oftotalgoodsexports.Althoughwearenotexpertsintechnologycycles,itishardtoseeaseriousslowdowninthissector,giventheever-increasinguseofelectronicsineverydayproductssuchasautomobiles,robotics,andwiththedevelopmentoftheInternetofThingswhichisintroducingamultitudeofhigh-techdevicesandcomponentsintohouseholdsgoods.Meanwhiletheever-expandinguseofmobiledevicesdemandsever-greatermemorycapacity.Inshort,theoutlookforproducersofallthingsrelatedtoelectronicgadgetry,notjustinAsia,looksbright,andthiswillsupportsolidratesofgrowthininternationaltrade.Thatsaid,itisprobablyunrealistictoexpectrecentloftygrowthratestobefullysustained–itishardtobelievethatSouthKorea’sexportsofsuchgoodscancontinuetogrowat36%yoyastheydidin3Q17.Butthenotionthattherecoveryinglobaltradethatoccurredin2017ismerelyaflashinthepanisinourviewlikelytoprovefalse.Ofcourse,protectionismisathreat,butgiventhehighdegreeofspecialisationandtechnicalknow-howinthesector–whichmakesimportsubstitutiondifficultintheshorterrun–inourviewreducestheprobabilityoftradeimpedimentsbeingimposedonsuchgoods.November201728Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookEastAsiarealexportgrowth(%yoy)*Realexportsofelectricalmachinery(%yoy)2045ChinaJapanTaiwanKorea1535102551505-5%yoy-10-5ofwhich:electricalmachinery-15-1520112012201320142015201620172011201220132014201520162017Source:Nationalsources,SGCrossAssetResearch/Economics*EastAsiaisChina,Japan,Taiwan,SouthKorea,November201729Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookANCHORTHEME#4WAGECONUNDRUMINPARTINFLATION-RELATEDDespitedisappearinglabourmarketslack,wagegrowthremainsdormantFromtheUSAtoEuropetoAustralia,economistsandcentralbankershavebeenscratchingtheirheadsoverthelackofwageaccelerationevenasunemploymentratesdecline.Standardeconomictheorypostulatesthatasunemploymentdeclinesandlabourbecomesmorescarce,wagegrowthincreases–thisisthestandardPhillipscurve.Butthisinverserelationshipbetweentheunemploymentrateandwagegrowthappearstohavebrokendown.Thishasledtotheratherunusualsituationthatcentralbankersarenowcallingforstrongerwagegains–quiteareversalfromthepre-GFCperiodwhencentralbankerswereusuallyarguingforwagerestraintsoastocontaininflation.Thechartsbelowillustratetheevidenceforvariouseconomies.IntheUStherelationshipbetweentheunemploymentrateandwages(usingtheemploymentcostindex)hashistoricallybeenreasonablyclose,butsincetheGreatRecessionthetwovariableshavepartedways.Althoughtheunemploymentrate(U-3)hasdeclinedsharply,wagegrowthhashardlyrisen.Wealsopresentanalternativemeasureofunemploymentwhichincludesthosewhoareworkingpart-timeforeconomicreasons,i.e.thosewhowouldliketoworkadditionalhours(U-6).Theresultisthesame–thehistoricalrelationshiphasbrokendown,andthetrendsinthetwomeasuresofunemploymenthaveinanycasebeenverysimilar.UnemploymentandwagesintheUSAUnderutilisationandwagesintheUSA34.06.54.544.03.58.553.510.563.03.0712.52.52.5814.52.092.016.51.510198819921996199920032007201020141.5199419982002200620102014Unemploymentrate(%,inverted)U6rate(rhsinverted)Nominalwage(%yoy)Nominalwage(%yoy)Source:BLS,SGCrossAssetResearch/EconomicsIntheeuroarea,therelationshipbetweenunemploymentandwagegrowthisconsiderablylessclose–notethatweareusingcompensationperemployeehere,whichexplainsthespikedownwardattheheightofthecrisis.Whatbecomesapparentisthatwagegrowthwasveryslowtodeclinedespiteunemploymentsurging–aclassicexampleofwagerigidity.Bythesametoken,asunemploymentstartedtodecline,wagescontinuedtoslow.Onlymostrecentlyhavetherebeententativesignsofrisingwagegrowth,thoughtherateofgrowthremainslow.AsinthecaseoftheUS,takingintoaccountpart-timeworkerswhowouldliketoworkmorehoursdoesnotchangethepicture.November201730Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookUnemploymentandwagesintheeuroareaUnderutilisationandwagesintheeuroarea713.53.03.082.02.015.591.0101.017.5110.00.019.512-1.0-1.020082010201320152001200420062009201120142016Nominalwage(%yoy)Nominalwage(%yoy)UErate(rhs,inverted)Under-utilisationrate(rhsinverted)Source:Eurostat,SGCrossAssetResearch/EconomicsInJapan,therelationshipbetweentheunemploymentrateandwagegrowthhas,somewhatsurprisingly,heldratherwell,atleastdirectionally.However,overtime,foranygivenleveloftheunemploymentrate,therateofwagegrowthhasdeclined.Itisalsoworthnotingthatthemeasureofwagegrowthwhichwepresentlooksreasonablyhealthy,incontrasttothewidespreadperceptionofwagestagnation.Itisworthwhilenotingthatthereisquitealargedifferenceinpayperemployeeandperhour,reflectingdecliningperemployeeworkinghours.Nevertheless,afterabriefperiodlatein2016andearly2017whenrealandnominalwagegrowthwasaround1.5%yoy,mostrecentlywagegrowthhasweakenedagaindespitefurtherdeclinesintheunemploymentrate.Hence,thestabilityofthePhillipscureinJapanisfarfromclear.UnemploymentandwagesinJapanNominalandrealwagegrowthinJapan2.52.51.53.01.50.53.5-0.50.54.0-1.54.5-0.5-2.55.0-1.5-3.55.5200120032005200720092011201320152017-2.5Nominalwageperemployeeperhour(%yoy)200120032005200720092011201320152017Nominalwageperemployee(%yoy)Nominalwageperemployeeperhour(%yoy)Unemploymentrate(rhs,inv.)Realwageperemployeeperhour(%yoy)Source:BLS,SGCrossAssetResearch/EconomicsBeyondthethreelargestadvancedeconomies,thewagepuzzlehasalsoemergedinAustralia,withtheunemploymentrateandwagegrowthdivergingsharply.TheReserveBankofAustraliaforaperioddiscussedwhetherthehighandstubbornrateofunderemployment,i.e.workerswhoarepart-timebutwouldliketoworkadditionalhours,mayexplainthedivergence.Asthechartbelowindicates,thesumoftheunemploymentandtheunderemploymentrate,alsoknownastheunderutilisationrate,matchesthewagegrowthtrendratherwell.However,whileempiricallyattractive,measuresoflabourmarketslackthatjustaddtheunemploymentandunderemploymentratesignoretwofundamentaldifferencesbetweenthetwo.One,anunemployedpersonseekingafull-timejoboffersfarmoreworkinghoursthanapart-timeworkerseekingadditionalhours–infact,onaverageatleasttwiceasmuch.Two,whileitisrequiredforanunemployedpersontoactivelyseekworkinordertobecountedasunemployed,nosuchrequirementexiststobecountedasunderemployed.Someestimatessuggestthatonlyaroundhalfofthereportedunderemployedactivelyseekadditionalhours.Hence,theunderutilisationratedoesnotappeartobehelpfulinexplainingthewageconundrum–aswealsoencounteredintheUScase.November201731Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookUnemploymentandwagesinAustraliaUnderutilisationandwagesinAustralia4.54.04.5104.04.54.0113.55.03.5123.05.53.02.56.0132.52.06.5142.01.57.01.51519992001200320052007200920112013201520171999200220052008201120142017Wages,%yoy(LHS)UErate,%(inverted)Wages(%yoy,lhs)Underutilisationrate(%,inv.)Source:ABS,SGCrossAssetResearch/EconomicsWhatcountsisrealwagegrowthThesubduedpaceofwagegrowthinvariousadvancedeconomiesdespitesteepdeclinesinunemploymentratesremainsaconfoundingphenomenon.Variousfactorsarelikelyinplay,suchastechnologicalchangecausingagreatersenseofjobinsecurity,aswellasglobalisation.Thelong-termdeclineinunionisationalsolikelyplaysarole.Allthesewouldcontributetoalossofnegotiatingpowerofemployees.Theseareallworthyexplanationsthatwarrantongoingstudy.However,anotherfactormayhavebeenatworkaswell,andcouldpointtomoremarkedwageaccelerationinthenearfuture:inflation.Thesteepdropinheadlineratesofinflationin2015and2016meantthatdespitelownominalwagegrowth,inflation-adjustedwagegrowthwassolid:intheUSitaveraged1.6%and1.4%,respectively,whichisquitehighinhistoricalcontext,andespeciallygivenlowlabourproductivitygrowth.Intheeuroarea,too,realwagegrowthinthesetwoyearsaveraged1.0%and1.2%,respectively,andinAustraliatheaverage0.7%annualgrowthratewasrightinlinewiththelong-runaverage.Butwiththenear-normalisationofinflationin2017,realwagegrowthhasdeclinedmarkedly.Ifupwardwagepressuresweretofollowtheincreaseininflation,itwouldcertainlynotbethefirsttime.Thatwagesfollowinflationwithalagissurelyoneofthemorewidely-acceptedpropositionsineconomics.Itisalsoworthnotingthatsubduedwagegrowthinadvancedeconomiesisnotauniversaltruth.Despitesubduedinflation,lowunemploymentrateshavesentwagegrowthskywards,withgainsof3.8-4%inPolandand6.5-6.8%intheCzechRepublic.NominalandrealwagegrowthNominalandrealwagegrowthNominalandrealwagegrowthUnitedStatesEuroareaAustralia4.53.03.04.02.54.02.02.03.51.52.01.03.01.00.02.50.50.00.02.0-1.0-0.51.5-1.0-2.0-2.02005200720092011201320152017198819921996199920032007201020142001200420062009201120142016Nominalwage(%yoy)Nominalwage(%yoy)nominal,%yoy(LHS)Realwage(deflatedbyCPI,%yoy)Realwage(%yoy)realwages(CPIdeflated)Source:BLS,Eurostat,ABS,SGCrossAssetResearch/EconomicsNovember201732Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookBox1USTaxcutandreformFiscalpolicytakescentrestagein2018Trump’selectionraisedstronghopesforfiscalpolicy,Taxarbitragedoesplayasignificantrole,butbusinessesalsowhichwasbuiltonfivethemes:Taxcuts/reform,seektobuildproductionfacilitiesnearresourcesandalignderegulation,Obamacarerepeal,infrastructurespendingwithdemand.Taxcutsalonearenotsufficienttomeritandtraderenegotiations.ThemostprominentforUSGDPinvestment.growthintheshortandmediumtermoutlookistaxcuts.InfavourofthetaxcutforcorporationsistheglobalInlate2017,orthetimeofthiswriting,twodifferenttaxcompetitiveracetoattractinvestments.ThechartbelowisacutpackagesareworkingtheirwaythroughCongress.Incomparisonofglobalstatutoryrates–thetopthatappliestoearly2018,wefullyexpecttheHouseandSenatetoeachadditionaldollaroftaxableincomeinthehighesttaxreachacompromiseontheirlegislationfortaxcuts.Taxbracket.IntheUS,thefederaltaxrateis35%,andontothatcutsareessentialforextendingUSgrowthastheisa4.1%stateandlocalrate.Twoitemsareapparenthere.expansionages.Yet,weseelimitedupsidebeyondtheFirst,theUShasthehigheststatutorytaxrateamongthe2.0-2.5%pacefortheUSeconomy.G20.Second,manyothercountrieshavecuttheirtaxratesinrecentyears,whiletheUSratehasbarelychanged.Taxreformisaimedatcorporations.Householdshaveabarbellbenefit,withwealthyandlower-incomepeopleIneffect,theUShasnotkeptupwithfallingcorporatetaxbenefiting,whilethemiddleclasshaslimitedbenefits.ratesglobally.ThisisanargumentthattheUStaxsystemisuncompetitive.Taxreformstillhasseveralhurdlestojumpbeforeimplementation.ThereisastillareasonableriskthatreformCorporatetaxrates–Statutorycorporateincometaxratefailsalongthelinesofthehealthcare/Obamacarerepealand45%replacelegislationthatfailedin2017.Ourexpectationsfor40successfulpassageofthetaxlegislationisbuiltonthesimple35realitythattheRepublicanpartyviewspassageoftaxreform3025asessentialtoits2018electionstrategies.Thatshared20concernwithinthepartycanforceagreementsonkeypieces200315ofthelegislation.201210Taxcutproposalsfavourcorporationsandthewealthy.5Therearemanyreasonswhytaxcutsforthewealthyand0USUKcorporationsarereasonableforpromotinggrowth,buttheItalyJapanFranceBrazilIndiaMexicoCanadaChinaRussiaTurkeyviewishighlydebatableand,evenifaccurate,extremelyArgentinaGermanyAustraliaIndonesiadifficulttoselltoamajorityofvoters.WearenottakinganySouthAfricaSouthKoreaSaudiArabiaSource:USCongressionalBudgetOfficestrongpositiononthemerits,butwebelievetaxcutscansupportgrowth,atleasttoextendthecurrentbusinessOfcourse,statutorytaxratesarenotthesameasexpansion.WiththeUSexpansionlikelytobreakrecordsforaveragetaxrates.TheUSCongressionalBudgetOfficelength(thecurrentexpansionwouldbethelongestbyspringpublishesveryusefulglobaltaxrates,measureddifferently,2019),sustaininggrowthmaybeincreasinglydifficult.Ourandeachoffersadifferentinsightintotaxstrategy.ThebasecasefortheUSeconomyisamildrecessioninlatestatutoryratemaybethemoremeaningfulforincome2019,aftertherecordhasbeenachieved.accountingandshiftingincomeintolower-taxcounties.Whyfocusoncorporations?PresidentTrumpstronglyinsistsAveragetaxratesmaybemoremeaningfulforlong-termthatthetaxrateforUScompaniesbecutto20%fromtheinvestmentinaparticularcountry.current35%.ExpectationsarehighwithintheadministrationAveragecorporatetaxratesamongtheG20countriesarethatcuttingUScorporatetaxrateswillencourageinvestmentshowninthechartbelow.Inthismeasure,theUShadtheintheUSanddiscourageoff-shoring.Iftrue,thenetthirdhighestaveragetaxrate(at29%).Again,totheextentinvestmentintheUSwouldenhanceemploymentandUSthatcorporatetaxesmatter,thecomparisonsuggestsaeconomicactivity.Onthesurface,thisistoughtodispute.greateradvantagetoinvestingabroad.TheUSaverageTheissuesthatariseincludethecurrentlowunemploymentcorporatetaxrateisdownfromits2004levels,butstillveryrate,nowat4.1%,andevenifmoreresourceswerehighrelativetootherG20countries.available,theroleoftaxratesongrowthisfarfromcertain.November201733Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookAveragecorporatetaxratesinG20countries1.CorporatetaxrevenueinUSeconomy.TheUS40governmentcollectsjust1.6%(ofUSGDP)from%35corporations.Thatratehasaveraged1.8%inthepast2530yearsand2.0%inthepast50years.Evenasasmallpartof25USGDP,itstillhasbeenshrinkinginrecentyears.Thismay20betheresultoftaxavoidanceandoff-shoring,butatthe152004sametime,itisdifficulttoseeacutaddingsubstantiallyto102012GDP.Manyestimatescurrentlybeingconsideredanticipatea5jumpinbusinessinvestmentasaresultofacorporatetax0cut.AtaxratechangehasadirectinfluenceontheUSUKnumeratorofthismeasureandindirectlyinfluencesGDPItalyIndiaJapanBrazilRussiaChinaMexicoFranceTurkeyCanadagrowth,thedenominator,implyingpotentialsignificantArgentinaIndonesiaAustraliaGermanySouthAfricaSouthKoreachangesonthetopandbottom,resultinginmodestSource:USCongressionalBudgetOfficemovements.Thereisalastmeasureofinternationalcorporatetaxrates2.Limitedresourcesforgrowth.Theunemploymentratethatalsoneedstobeconsidered.Thisistheeffectiveiscurrentlyat4.1%andpopulationgrowthis0.4%.Taxcutscorporatetaxrateonthemarginalcorporateinvestment.ThisintheReaganeraarecitedasinspirationforwhatcouldratemightbethetaximplicationforamarginalfacility.Again,happenwithataxcuttoday.InthefirsttwoyearsofthetheUStaxrate,fourthamongtheG20,impliesataxReaganpresidency(1981-82),theUSunemploymentratedisadvantage.Italyisastandoutonthischart,whichtheaveraged8.7%andprimeworking-agepopulation(25-54CBOexplainsasanefforttosupportequityfinancingvsdebtyears)growthwas2.25%.WecurrentlyestimateUSpotentialfinancing,resultinginasubsidy.Itisnoteworthythatinmostgrowthat1.7%.Realgrowthaboveour2.0-2.5%isnotcountriesinallthecorporatetaxcomparisonsisadecliningsupportedbypopulationgrowthregardlessofthetaxrate.ratesincethefinancialcrisis(althoughnotall),andratesthatarelargelybelowtheUSrate.Tosomeextent,thismight3.Crowdingout.Non-financialUSdebtoutstandingisexplaintheemphasisonthecorporatetaxrate.currently250%ofGDP.Thathasbeenstablesincethecrisis,withfederalgovernmentleveragerisingwhileprivatesectorEffectivecorporatetaxrateamongG20countriesleveragefell.Taxcutsshouldentailgreatergovernment30%deficitsandleverage.Lookingahead,consumer,business20andgovernmentleverageislikelytogrow.Lowratesmaynotposeaproblemimmediately,buttheyweighonmedium-term10benefits.0-1020034.Temporarytaxcuts.Thebenefitsbecomeless2012compellingifonlyloweredtemporarily.Thisiswhy-20Republicanplanscallforpermanentcorporaterates,while-30theyshowawillingnesstosunsetindividualtaxcuts.JapanBrazilIndiaChinaItalyMexicoFranceCanadaTurkeyRussiaArgentinaGermanyIndonesiaAustraliaUSgovernmentrevenuebysource(as%ofGDP)UnitedStatesSouthAfricaSaudiArabiaSouthKoreaIndividualIncomeTaxesUnitedKingdomCorporateTaxesSource:USCongressionalBudgetOfficePayrollandsocialcontributionsTaxes%ofGDPOtherTaxRevenues10ButdoescuttingratespromoteUSgrowth?98Thisquestionishardtoanswer,althoughintheshortto76mediumterm,allelsebeingequal,webelieveloweringthe5taxratecanaddgrowthtotheUS.Taxpolicycanalso4reduceincentivestoinvestorrecogniseprofitsoverseas.In3suchcircumstances,afocusandthoroughunderstandingof21globaltaxsystemsareimportant.196019701980199020002010ThereareafewconcernswehaveforraisinggrowthviaSource:USCongressionalBudgetOfficecorporatetaxratecuts:stephen.gallagher@sgcib.comNovember201734Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookthBox2China’s19PartyCongressEconomicreformswithChinesecharacteristicsThe19thCongressoftheCommunistPartyofChinaPolicymakersarealsodeterminedtoseethroughfinancial(CPC)witnessedahighlysuccessfulpowerconsolidationdeleveraging.byPresidentXiJinpingandconfirmedthenewleadership’scommitmenttoauniquestate-directedIV.Projectingdiplomaticinfluenceisanimportantobjectivedevelopmentmodel–bothinlinewithourexpectations.ofeconomicpolicies.PresidentXi’svisionofa“ChinaWethinkthatthereformplanshouldhelpreduceDream”isnotjustaboutthesizeoftheeconomyortheleveldownsideriskstoagraduallyslowinggrowthtrendoverofincomepercapita.ItisaboutChinabecomingathemediumterm.responsiblesuperpowerineverywayandprojectingthatThenextmajoreventistheappointmentsofseveralkeygovernmentpositionsnextMarch,inparticular,theviceimage.Thisleadershipdeemsthateconomicpoliciesshouldpremiers,theministeroffinanceandthecentralbankservethishigherpurpose.Thetoweringstatusgiventothegovernor.However,thepolicyfocusespost-congressareBeltandRoadInitiativesayseverythingaboutthisview.alreadyquiteclear:thebattlesagainstairpollution,housinginflationandfinancialleverage.Slowergrowth,butlessdownsideriskXi’seconomicphilosophyGiventhereformdirectionconfirmedatthePartyCongressandourunderstandingofvariousreformprojectsasdetailedThe32,000wordspeechdeliveredbyPresidentXionthefirstinourthematicreport“19thPartyCongress:Coursedayofthecongresslaidouthistheoreticalframeworkforconfirmation”,themaineconomicimplicationoverthegoverningChina–“XiJinpingThoughtonSocialismwithmediumtermis,inourview,thateconomicgrowthislikelytoChineseCharacteristicsforaNewEra”.Thisisnowwrittenslowmorethanwhattheconsensusexpectsatthemoment,intotheconstitutionoftheCPC.Thisframeworkwillguideallbuttheriskofaneconomicorfinancialcrisisislikelytobepolicyduringhissecondfive-yeartermandbeyond.reduced.Theeconomicviewsandbeliefsreflectedbythistheoryare-Slowereconomicgrowthintherangeof5-6.5%verywellinlinewithourpre-congressanalysis,whichwelikebetween2018and2022.Weexpecttheleadershiptostarttosummariseasfourprinciples.toleratinggrowthofunder6.5%asearlyas2018.SlowerI.ThePartyleadseverything,includingtheeconomy.economicgrowthwouldbemostlyafunctionofslowerChinesepolicymakersareasconfidentaseverthattheinvestmentgrowthonthebackofslowercreditgrowth,asCPC’sleadership,ratherthanthewesternmodelofaliberalwellasacceleratedproductioncutstoreducepollutionanddemocracy,isthekeytoChina’slong-termsuccess.Thisexcesscapacity.However,toosharpaslowdownwouldnotprinciplepointstothecontinuedstronginfluenceofthestatebeacceptable,andthecontrolandinfluencethatthepartyoverthecorporatesectorandthefinancialmarket.Notably,retainsoverthecorporateandfinancialsystemmighttheproposedreformofstate-ownedenterprises(SOEs)aimscontinuetoshieldtheChineseeconomyfromadevastatingtomaketheSOEsectorbiggerandmoreresponsivetotheeconomiccrisis.party’sdirectives,andthepursuitofinnovationwillbeguidedbytop-downindustrialpolicies,ratherthaneconomic-Investmentfocusestoshift,anddeflationpressuretobeliberalisation.contained.Despiteslowerinvestmentgrowth,theshiftofarisingshareofinvestmentsinhigh-value-addedindustriesII.Stabilityisbiggerthangrowth.Withoutmentioninghasbegunandcouldaccelerate,supportedbyindustrialnumericgrowthtargetsatthecongress,theChinesepolicies,notably“MadeinChina2025”.ThecapacityleadershipsentastrongsignalthatitismorethaneverreductionprogrammecouldmeaningfullyrestrictChina’sdeterminedtoaddressChinesepeople’sprincipalsocialsupplyofanumberofindustrialmaterials,thusoffsettingtheconcerns,evenatthecostofsomewhatlowergrowth.Thesedeflationarypressurecomingfromthepotentialslowdowninconcernsincludepollution,incomedisparityandhighChina’saggregateinvestmentdemand.housinginflation.-Consumption’ssharetokeeprisingsteadily.TheIII.Riskmanagementisessential.Theauthoritiesaregovernmentwilllikelycontinuetoincreasesocialtransferspayingmuchmoreattentiontorisksandhavesingledoutandbeefupthehealthcareandpensionsystems,whichfourareas:rampantfinancialleverage,therealestatebubble,shouldallowhouseholdstolowertheirhighsavingrates.highleverageamongSOEs,andlocalgovernmentdebt.ForEquallyimportanttoextendingthehealthyconsumptionthesakeofsocialandbankingstability,theproposedplanoftrendiseconomicandsocialstability,underpinnedbySOEdeleveragingdoesnotinvolvepainfuldebtrestructuring,politicalstability.butrathercapitalraisingandindustrialconsolidation.November201735Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookEconomicrebalancingtocontinuebetweenOctoberandnextMarchviaharshproductioncuts.GDPbyexpenditure,%oftotalImplementationiswellunderway.Weexpectthiscampaign55ConsumptiontolowerIPgrowthbyasmuchas0.6-0.8pp,butproducerInvestmentpriceinflation–especiallythatofupstreamindustries–would50bewellsupported.45-Dampeninghousinginflation:Policymakershaveintroducedlayersandlayersofprudentialmeasuresinan40increasingnumberofcitiessincemid-2016.Whilebothhousinginflationandsaleshavebeguntocool,thereisno35signofanychangeinpolicydirectionyet.Theslowdownthat30hasoccurredinhousingsalesalreadypointsanotable8085909500051015decelerationinresidentialinvestmentnextyear.Source:NBS,CEIC,SGCrossAssetResearch/Economics-Financialdeleveraging:Theprojectispoisedtopickup-Medium-termcorporatedebtrisktobemitigatedbutnotthepacesoon,astheFinancialStabilityandDevelopmenteliminated.Whileweareconcernedaboutthelong-termCommittee(FSDC)–thehigh-profilebodyinchargeofthiseffectivenessoftheproposedSOEreforminboostingproject–concludeditsfirstgatheringonlytwoweeksafterproductivitygrowth,wehavetoagreethattheplancanthePartyCongress.TheexpectationoftighterregulationsreduceSOEs’leverageandimprovetheirprofitabilityinthehasalreadydrivenupbondyieldsonshore.Wethinkthatthiscomingyears.projectwillleadtohigherfinancialvolatility,tightercreditconditionsandslowergrowth,butPBoC’sdeftlyliquidity-Exchangeratestobecomemoreflexiblebutlesspronetomanagementwillbethekeytopreventingasystemicshock.devaluationwiththehelpofcapitalcontrols.AflexibleyuanwillbeonlyachievedundertheconditionsofabalancedFinancialdeleveragingtoslowbanks’growthcapitalaccount.Besideshopingforaweakdollar,the35Banks'balancesheet,%yoy80Chinesegovernmentwilltrytomaintainsteadyprogressin3070therelaxationofportfolioinflowsandrestricting/rationing60corporateoutflows.Thesuccessincapitalcontrolswill25significantlyreducetheriskofamajorRMBdevaluation,also5020positiveforthestabilityofglobalfinancialsystem.401530Asforthelongrun,ifonebelievesthatthemarketinmost10casescandoabetterjobofallocatingresources,theoutlookTotalassets20islessupbeat.WeagreethattheChineseeconomycould5Loans&govtbonds10makegooduseofmoremarketforces,buttotherulingMarketsecurities&otherinvestments(rhs)00CommunistParty,avoidingpoliticalandsocialinstabilityis08091011121314151617probablymorevaluablethanhigherpotentialgrowthbasedSource:PBoC,CEIC,SGCrossAssetResearch/Economicsonclassicalwesterneconomictheories.Near-termfocuses:pollution,housingandleverageAtthemoment,Chinesepolicymakerslookdeterminedtopursuegrowth-negativestructuraladjustments.ThetruetestAstheleadershipteamofthecommunistpartyissetup,theoftheirresolvewillcomewheneconomicgrowthdropsnextpoliticaleventtowatchistheappointmentsofkeygovernmentpositions.Themosthigh-profilepositionsbelow6.5%(probablyin2018).Wearenotcertainwhetherconcerningeconomicpoliciesarethevicepremiertheirchoicethenwillbetoscalebackreformsandrekindleoverseeingthefinancialsystem,thecentralbankgovernorcreditstimulus,butthesignalsfromthePartyCongressseemandtheministeroffinance.Wearehopefulacompetenttosuggestasmallerchanceofsucharelapse.teamwillbeappointed.TheformalannouncementwillbemadeattheNationalPeople’sCongressnextMarch.wei.yao@sgcib.comNevertheless,nomatterwhowillbetaskedtorunthereform,thepolicydirectionisalreadyquiteclearandreformmomentumhasbeenbuildingsincethebeginningof2017onanumberofprojects,notablythebattlesagainstpollution,housinginflationandfinancialleverage.SeniorofficialsatthePartyCongressreiteratedthattheprioritywouldbegiventothesethreeprojectsandpledgedcontinuousefforts.-Reducingairpollution:AdetailedplanwasannouncedinAugusttosignificantlyreduceairpollutioninNorthernChinaNovember201736Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookBox3EuroareaDeepeningEUintegration:thetimeisripeThe2018politicalandeconomicbackdropoffersaclearOnmigration,areformoftheDublinsystem(theCommonwindowofopportunityfordeeperEUintegration.AfewEuropeanAsylumSystem)isduein1H2018,whichaimsforhurdlesremainormayemergealongtheway(i.e.commonandharmonisedasylumpolicyrules.Germancoalitiontalks,Italianelections),butEUleadersAnotherkeypoliticaldevelopmentwillbethedecisionontheappeareagerforsomeprogressbeforeBrexitdueincompositionofthenextEUParliamentdueattheJune2018March2019andtheEUParliamentelectionsmid-2018.Council.Aproposaltoreplacethe73BritishMEPswithalistInourview,furtherdefence(andtoalesserextentofpan-Europeancandidatesatthe2019EUelectionisonthepolitical)integrationisonthecards.Thecompletionoftable(proposedbyFranceandbackedbyItaly).ThiswouldtheBankingUnioncouldbeapprovedbymid-2018andabethefirstinstanceofEU-widerepresentationandwouldmovetowardsaEuropeanMonetaryFundisinthemarkanotherimportantsteptowardsdeeperpoliticalpipeline.Conversely,whilethedebateonaeuroareaintegration.budgethasalreadybeenlaunched,anybreakthroughonCompletingtheBankingunion:ObjectiveJune2018thistopicisunlikelyanytimesoon.The6NovemberEurogroupmeetingmadeclearthattheEUAnyprogressoneconomicissueswillbedrivenbytwoleaders’objectiveistohaveapoliticaldecisiononthekeyprinciples:1)risksharingcomeswithriskreductioncompletionoftheBankingUnioninJune2018.Delayis(i.e.conditionality),and2)thedoctrineofbail-infirst,possibleasthisagendamayclashwiththeongoingGermanbail-outaslastresortwillprevailandbeextended.coalitionnegotiationsandtheupcomingItalianelections,butthepoliticalimpetusisencouraging.KeyeventsTheSingleSupervisoryMechanismandtheSingleResolutionYearDateEventMechanismoftheEuropeanBankingUnionarealready2017operational.ThemissingpillaristheEuropeanDeposit6-DecEuropeanCommissionreportonEUintegrationInsuranceScheme(EDIS),whichwouldcomplementthe15-DecEuroSummitnationaldepositschemes.Depositsupto€100,000are2018guaranteedinallmemberstates;however,thenational22/23MarEuropeanCouncilschememayprovetoosmall.May(latest)ItaliangeneralelectionsJuneEndofECBVice-PresidentConstanciotermInmid-October,theCommission(EC)proposedavery28/29-JunEuropeanCouncilgradualintroductionoftheEDIS,withalimitedreinsurancephase(inwhichanationalschemecouldborrowfundsfrom2019theEDISbutwouldneedtorepayatalaterstage)followed29-MarUKtoleavetheEUbycoinsurance(commondepositscheme).JuneEuropeanParliamentelectionsEndofECBexecutiveboardmemberPraettermAnothermissinglinkistheabilitytodirectlyrecapitaliseEndofECPresidentJunckerfirsttermtroubledbanks.WhiletheEurogrouprecentlyproposedAugustEndofEUPresidentTusksecondtermusinganESMcreditlineasafiscalbackstopfortheSingleNovemberEndofECBPresidentDraghitermResolutionScheme,theESMdirectrecapitalisationremainsSource:SGCrossAssetResearchonlyasolutionoflastresort.Risksharingcomeswithriskreduction.EstablishingtheAdditionalpoliticalintegrationonthecardsEDISandallowingdirectrecapitalisationshouldprovideaFurtherprogressonthepoliticalbuthighlysymbolicareasoffurtherseparationofthefeedbackloopbetweenthebankingdefence,securityandmigrationislikelyin2018:sectorandthesovereign.However,aslongastheriskstakenontheassetside(securitiespurchased,loansapprovalOndefenceandsecurity,theEUleadersintendtolaunchprocessandalsoNPLs)arenotfullyharmonised,acommonamulti-countryagreement(PESCO),whichaimsto“enhancedepositinsurancewouldcreaterisksofmoralhazardandcoordinationandcollaborationintheareasofinvestment,wouldmarktoobigasteptowardsrisk-sharing.capabilitydevelopmentandoperationalreadiness”.OtherprojectsareinthepipelinesuchassettingupaEuropeanThelatterisclearlythemostcontentiousissueblockingthedefencefundorreinforcingthesinglemarketfordefence.completionoftheBankingUnion.Indeed,limitingrisksharingwillrequireputtingacapontheshareofbanks’exposuretotheirlocalsovereign,whichfacesclearoppositionfromItalyNovember201737Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookandSpaininparticular.However,amiddlegroundmaybeHowever,thisresistancemaybeovercomeiftheissueisfoundinwhichthesovereigndebtexposurelimitremainsaddressedbyawiderEU-projectcoveringrisk-sharingandreasonable,non-riskadjustedandimplementedincrementallygreaterfiscalintegration.(possiblytenyears).Sovereignspreadstobunds(inbp)MFIholdingsofnationalgovernmentbonds,%GDP(1Q17)40025%30020%20015%10010%5%1994-20002001-072008-142015-17LatestFranceItalySpainPortugal0%BDFRITESNLBGOEFNIRGRPTLXSXSJLNLVCPSource:SGCrossAssetResearchSource:SGCrossAssetResearchCapitalMarketUnion:TruesinglemarketforcapitalTheCapitalMarketUnionisanotheralreadywell-advancedEuropeanMonetaryFund:vagueproposalssofarflagshipEUproject,whichaimstobuildatruesinglecapitalTheEuropeanMonetaryFund–anideapushedbyGermanymarketbyboostingdirectmarketfinancing,forSMEsin–seemstohavegotsometraction.Thedetailsoftheparticular.Withastartingdateplannedfor2019,theproposalsarevaguebuttheEMFwouldentailbuildingfromobjectiveistounlockinvestment,increasecompetitiontheESMandaddinggreaterflexibility.Assuch,itmaynot(includingcross-border)andalsoreducetheheavyreliancerequireTreatychangesandcouldbeupandrunningquickly.onbank-financingoftherealeconomy.TheEurogrouprecentlydiscussedgettingtheESMadditionalWhiletheCommissionandtheParliamenthavebeenworkingmonitoringcapabilities(inconjunctionwiththeEC),replacingonthisproject,wenotealackofenthusiasmfromEUtheIMFforthenextprogrammes.Oneofthemainleaders.Nevertheless,thereisalsolimitedopposition,thusconsequenceswouldbetoasserttheindependenceoftheprogressin2018maybeonthecards,withalaunchin2019.EU(withrespecttotheIMFinparticular)andhenceenhanceitstruepoliticalexistence.Commoncorporatetaxbase:harmonisationoftaxrulesBail-inrulesappliedtopublicsector.Ontopofthat,Thecommoncorporatetaxbase(CCTB)isalongstandingGermanyinparticularappearsinfavourofaddinganinitiative,whichwasfirstpresentedin2011andthenre-automaticgovernmentdebtmaturityextensionforanylaunchedin2015,thataimstoharmonisethetaxationrulescountryrequiringESMassistance(bail-inrule,reinforcingtheunderwhichEUcompaniesoperate.SinceBrexit,thisprojectno-bail-outclause-seenextsectionformoredetails).haslostoneofitsfiercestopponents.However,discussionsonashockabsorbingmechanism(e.g.Thoughafewofthelatterremain(e.g.Ireland),lastJulyusingtheESM/EMFasacounter-cyclicaltool)arestillatanGermanyandFrancesaidtheywoulddraftajointproposalearlystage(seeeuroarebudgetsection).Assuch,thisbyyear-endinordertoexpediteit.Wenotethattherecentremainsafarcryfromafirststeptowardsfiscalunion.“ParadisePapers”couldcreateanotherincentivefortheCCTB.Debtrestructuring:reassertingthenobail-outclauseEuroareabudget:noshort-termbreakthroughInordertoensurethenobail-outprincipleandtopreventfiscaltransfers,severalGermanpoliticianshaverecentlyDespitethepotentialprogressontheaspectsmentionedcalledfortheadoptionofnationalsovereigninsolvencylawsabove,theeuroareaisnotyetontheroadtofull-fledgefiscalorevenanEU-widesovereigndebtrestructuringmechanism.union.Indeed,giventhefierceoppositioninGermany(andothercountries),evenFrenchPresidentMacronhasbeenRisksharingcomeswithriskreduction.Mirroringthewaryofcallingfordeeperfiscalintegration–thoughhedidsoregulationadoptedinthebankingsector,anybail-outwouldasacandidate–andhasrepeatedlysaidheisnotinfavour(potentiallyonly)comeafterabail-inbyprivateinvestors.Thisofmutualisationofexistingdebt.wouldreassertthenobail-outclause,whichisenshrinedintheTreaty,butwasunderminedduringthecrisis.ThemainHowever,adebateattheEUlevelhasalreadystarted,withoppositiontothisproposalislikelytocomefromthemosttheNovemberEurogroupdiscussingnewfiscalinstruments.indebtedcountriesasthismayleadtobondmarketre-Theseincludeaseparateeuroareabudget,anewcategorypricingofrisks.withintheEUbudgetoraninsurance-likefundwhichwouldNovember201738Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlooksupplementcountries'fiscalstabilisers(eitherintermsofKeyEUprojectsandtimelineinvestmentorunemploymentbenefits).Proposals/NewideasCurrentstatusMainobstaclesTimetableTheseideaswillbediscussedatthe15DecemberEuropeanPoliticalmeasuresCommonDefencepolicyOngoingdiscussionsatEUCouncil2018Council,butcommongroundwillonlybereachedovertheExternalbordersOngoingdiscussionsatEUCouncil2018CompositionofEUParliamentTransnationallistJun-18longterm.Indeed,toourmind,aeuroareabudgetandShort-termeconomicmeasuresEurobondswillbeamongthelaststepsinthecompletionofCommoncorporatetaxbaseDiscussionsongoingsince2011UKandIrelandopposingit2018-19CompletingtheBankingUnionThirdpillardiscussionsongoingRisksharingvs.sovereignexposurelimitJune2018theEMU.Giventhelegalandpoliticalchallenges(e.g.CapitalMarketUnionOngoingdiscussionsatParliament2019potentialTreatychanges)andtheintricacyofthisproposal,EuropeanMonetaryFundVagueproposalssofar2018SovereignDebtRestructuringEarlystageofdiscussions?wedonotseeanyradicalbreakthroughanytimesoon.MechanismLong-termpoliticalandeconomicmeasuresABuyEuropeanActEarlystageofdiscussionsPro-tradecountriestoopposeradicalproposals?OneideafacingmuchlessresistanceisthecreationofaEuroareaFinanceMinisterEarlystageofdiscussionsFinlandsaidtoopposeit?commonfinanceministerunderthecontroloftheEuropeanDemocraticdeficitMayrequireTreatychanges;conditionalitywill2025atEuroareabudgetEarlystageofdiscussionsbeappliedtheearliestparliament(oronlyoftheMEPsfromeuroMemberStates)–Eurobondsthoughthetimetablehasnotbeendefinedyet.Source:SGCrossAssetResearchBrexit:notatthetopofthelistWhileBrexitisoneveryinvestor’smind,itisclearlynotatthetopofthelistofprioritiesforEUleaders.Indeed,giventheheavyreformagendaatthenationallevel(inFranceforinstance)andattheEUlevel,EUgovernmentswillhavelimitedpoliticalcapital,whichtheywillusetoaddressinternalissuesormorepressingEuropeanones.MostnegotiationsaretakingplaceattheEUCommissionlevel,withthefinaldecisionstakenattheEUlevelunanimously.Toourmind,theEUleaderswillonlybeinvolvedifthenegotiationscometoaheadandneedapoliticaldecisiontomoveontothenextphase.Thatsaid,weexpecttohavesomepositivenewsfromthenewroundoftalks,whichresumedon9-10November.AdealonthefirstphaseoftheArticle50negotiations(EUcitizens’rightsintheUK,theIrishborderandthedivorcebill)seemswithinreachbytheendofthismonth’sroundoftalks(thoughthedivorcebillmayprovetricky).Moreover,aninformalagreementonatransitionalperiodmaybeonthecards.ThiswouldpavethewayforthestartofthenegotiationsonthefuturerelationshipbetweentheUKandtheEU(i.e.tradetalks).However,asthedealhastoberatifiedbyall27remainingEUcountries,theaimistohaveitdoneatthelatestbytheautumnof2018.Ninetotenmonthsisanincrediblyshortperiodoftimetohammeroutanagreementonsuchacomplexrangeofissues,whichmakescleartheabsolutenecessityofatransitionaldealduringwhichthedetailsofthenewtradingrelationshipcanbehammeredout.WecontinuetoseeaHardBrexitasthemostlikelyscenario,giventhatthetwomajorpartiesareinfavourofimmigrationcontrol,whichwouldautomaticallyendaccesstotheSingleMarket.yvan.mamalet@sgcib.comNovember201739Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookBox4India-BankingSectorNPLState-ownedbankrecapitalisation–muchadoforatrifleRecently,thegovernmentofIndiaannouncedamajorWhilethegeneralconsensusisthatthismovewouldresultinpackagetorecapitalisestate-ownedbanksstrugglinghigherlevelofintermediationbythebanks,wewouldbegtowithahighlevelofgrossnon-performingloans(GNPLs)andataclearriskoffailingtoadheretoBaselIIInorms.differinouropinion.CreditgrowthinIndiaremainsweaknotThebanks,whichcurrentlyaccountforabout65%ofbecauseofthebanks’inabilitytolend,butbecauseoflowbankingsectorassets,alsoaccountfornearly90%ofdemandforcreditonaccountofweakeconomicactivityandNPLs.Theproposedscheme,amountingtoINR2.11tnstressedbalancesheetoftheborrowers.CredittoMSMEs(~$32.4bn)wouldconstituteamixtureofbudgetarysupport,capitalraisingandtheissuingofrecapitalisation(Micro,Small&MediumEnterprises)hascontractedin20ofbonds(accountingforINR1.35tnornearly64%ofthethelast21months.Bankshavenotlenttothem,notbecausetotalpackage)bythegovernment.Therecapitalisationtheyareconstrainedbutbecausetheydonotwanttolend.bondswouldallowthegovernmenttopumpinanOntheother,whilecredittotheindustryhasbeengrowingatequivalentamountofcapitalintothebankswithouthavinganyimpactonthefiscaldeficit.Expertsandthelowsingledigitsformanymonthsnow,bankcredittomarkethavewelcomedthemove.individualshasbeengrowingatarapidpace.Infact,duringWhilewebelievethisisagoodmove,alotmoreneedstothefirsteightmonthsofthisyear,whilebankcreditonbedonetochecktheaccumulationoffurtherbadloansaveragegrewby4.9%yoy,bankcreditex-personalloansgoingforward.Withoutthat,theproblemwillcontinuetocropupperiodically,haltingIndia’sgrowthstoryinitsgrewbyamere2.3%yoyduringthesameperiod.tracks.ThemostimportantissuetoaddressisensuringHighlevelofGNPLhasresultedinweakermonetarypolicythatstate-ownedbanksbecomeprofessionallymanagedandareabletotakelendingdecisionsonacommercialtransmission.Therecapitalisationmovewouldenablethebasiswithoutbeinginfluencedbyextraneousfactors,bankstolowertheirlendingratesastheircostofcapitalpoliticalorotherwise.Thegovernmentshouldalsowouldcomedown.ItwouldalsoimprovetheCAR(Capitalsteadfastlymovetowardmergingstate-runbanksandallowingtheweakonestodie.ItisalsoimportantfortheAdequacyRatio)ofthebanksandallowforasharppick-upgovernmenttoeschewpopulistmeasuresthatputinlendingwheninvestmentcyclepicksup.Butthatwouldadditionalstressonstate-runbanks.happenwhenIndiaismeaningfullyabletotackletheGNPLsproblem.Sofar,theresolutionprocesshasbeenmuchWhenthecurrentgovernmentinIndiacametopower,slowerthanexpected.WebelievethatGNPLresolutionwillbankingsectorGNPLwas3.8%ofoutstandingloantotakeanothertwoyears.around10%now-despitethegovernmentusingitsbudgettorecapitalisetheSOBstothetuneofINR570bnduringthisWhilewesupporttherecapitalisationmove,wethinktheperiod.AtaroundINR8.5tn,itisroughlyequivalentto6%ofgovernmentshouldaimreformingthedynamicsoftheSOBsIndia’sGDP.toensurethatcyclicalburstsofburgeoningNPLsdonottaketheeconomyhostage.FreeingSOBsfrompoliticalinfluenceThemostimportantpartofthepackageistheplantoandensuringbankboardsaremoreprofessionalremainsrecapitalisetheSOBsusingrecapitalisationbonds.Theessential.Thegovernmentshouldalsoaimatbringingdownbanks,whicharestillflushwithlow-costdepositsthathaveitsownershipinSOBstolessthan51%.Increasingthefloodedintothesystempostdemonetisation,willusethesenumberofprivateshareholderscouldeventuallyforceSOBstobuyrecapitalisationbondsissuedbythegovernment.Intoactinamuchmoreprofessionalmannerandtakelendingturn,thegovernmentwillusethemoneytorecapitalisethedecisionspurelyonacommercialbasis.banksbybuyingfreshsharesissuedbythebanks.Thebeautyofthiswholeplanisthatmoneymovesfromonepartofthebalancesheettoanother.Intheprocess,thebankskunal.kundu@sgcib.combecomewellcapitalizedandthegovernmentseeminglyachievesthisobjectivewithoutincurringadditionalfiscaldeficit.Sincemostofthebankshaveapoorprovisioncoverageratioalongwithnointernalaccrualsforcapital,mostofthecapitalinfusionwouldgotowardsfixingthebalancesheet.November201740Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookBox5SouthKoreaResidentialinvestmentfacesashortageoflandThecurrenthousingmarket‘boom’showsverylittletighteningofmortgage-relatedregulationsandthechangeintermsofpricesbuthasbeenaccompaniedbyintroductionofaceilingonnewhomepriceswillclearlyberelativelystrongresidentialconstructionactivitiesandnegativeforresidentialinvestment.householdcreditgrowthcomparedwiththepreviousHousingsitesandresidentialbuildingpermits(%yoy)boomin2005-08.Wenowexpectaslowdownin90residentialinvestmentinthenearfuture,partiallydueto80theshortageofland.Thegovernmenthaseffectively7060stoppedthedesignationofnewhousingsitessince2012,50whichwillweighonresidentialconstructionactivity.40ThecurrentconditionsinKorea’shousingmarketaremuch30differentfromtheboomwesawin2005-08.Firstly,weare2010watchingmuchmoremutedchangesinpricescompared0withthepreviousboom.Housepriceindexroseby32.7%1992199419961998200020022004200620082010201220142016fromthe2005troughtothe2008peak,whileithasrisenonlyDesignationofhousingsite(sqkm)Completionofhousingsite(sqkm)by7.9%sofarsincethe2013trough.Secondly,residentialResidentialbuildingpermits(tensofthousand)Source:MinistryofLand,InfrastructureandTransport,SGCrossAssetinvestmentactivityismuchstrongernowthantheperiodResearch/Economicsbetween2005and2008.TheaverageannualgrowthofTheshortageoflandfornewhousingprojectsisalsooneofresidentialinvestmentbetween2005and2008was-1.9%,themainreasonswhyweexpectahousingconstructionwhileaveragegrowthsince2013is18.4%.Thirdly,slowdown.Thegovernmentcontrolsthelandsupplyfornewapparentlyhouseholdcreditgrowthin2005-08andin2013-housingthroughthedesignationofspecificlandforhousing2017wasequallystrong,whichactuallyshowsthatthepacesites(i.e.,thedevelopmentofnewtowns).Ithaseffectivelyofhouseholddebtincreasesismuchstrongernowwhenyoustoppedthedesignationofnewhousingsitessince2012toconsiderpricemovements.Thiscanalsobeexplainedbythesupportthehousingmarketbylimitingsupply.However,strongtransactionvolumeinthecurrentperiodandtheactiveresidentialconstructionhasbeenstrongonthebackofresidentialconstructionthatisusuallyfinancedby‘collectiveexistingdesignatedhousingsitescompletedduring2004-13.loans’tohouseholds.GiventhatittakesseveralyearsfromthedesignationofnewHousingprices,householdcreditandresidentialinvestment(%yoy)housingsitestothebeginningofthebuildingprocess,theslowdownofresidentialbuildingpermitsandhousing1550constructionordersfrom2016wasnatural.Theslowdownof1240residentialinvestmentactivitywillsoonfollow.930620Weaknessinresidentialconstructionislikelytopersistfora310fewyearsasthegovernmenthasnotannouncedanynew00plansforthedevelopmentofnewtowns.Whilepeopleworry-3-10abouthousingmarketweakness,wesuspectthathousing-6-20priceswilleventuallybesupportedbythedeclineinsupply.-9-301Q051Q071Q091Q111Q131Q151Q17HousingpriceHouseholdcreditsuktae.oh@sgcib.comResidentialinvestment(RHS)Source:KoreaAppraisalBoard,TheBankofKorea,SGCrossAssetResearch/EconomicsWenowexpectaslowdownofresidentialinvestmentinthenearfuture,whichisthemainreasonwhyweexpectamilddeclineinGDPgrowthin2018.TheMoonadministration’svarioushousingmarketstabilisationmeasuressuchastheNovember201741Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) GlobalEconomicOutlookPageleftblankintentionallyNovember201742Thisdocument,publishedon24-Nov-2017at4:16PMCET,isbeingprovidedfortheexclusiveuseofKIYOKOKATAHIRA(SGCIB) 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