Tim Condon_ING Bank Asia_annual economic briefing 2017

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The 2017 Global Economic Outlook: Political Uncertainty Remains Elevated

Tim Condon, Chief Economist, Asia, ING Wholesale Banking

Manila, 25-26 January 2017

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• Will global trade recover?

• Where is the US dollar going?

• What will the Fed do?

• Will US bond yields move permanently above 3%?

• Will the Eurozone succumb to an existential crisis?

• Will Trump start a trade war with China?

Big questions

2


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Will global trade recover?

Source: ING Bank,The Netherlands Bureal of Policy Analysis (CPB), World Bank, Bloomberg

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50

100

World Trade Volume and World Industrial Production(index with 2010 = 100, log scale)

Steady growth periods World Industrial Production World Trade Volume

Trade growth = 2.1%

IP growth = 2.6%

Trade growth = 7.5%

IP growth = 4.7%


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The end of globalization was a first shock. MAGA could be a second

• The post-WWII recovery of the advanced economies 1950s and 1960s, the emergence of the Asian tigers in the 1970s and 1980s, of the Tiger Cubs in the 1980s and 1990s and the integration of China in the 1990s and 2000s…

• …created opportunities for specialization and gains from trade, whose exploitation led to US de-industrialization and rapid trade growth

• The Asian Tigers were lucky to hit upon export-led growth to escape the middle income trap…

• … because US de-industrialization ran its course around 2010

• A big disruption could create new possibilities for specialization/gains from trade…

• …but until then countries will need to rely on domestic spending for growth Source: ING Bank, Bureau of Economic Analysis via FRED Economic Data, St. Louis Fed

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US: Manufacturing Employment(in relation to total employment, %)

Actual 1965-2009 Trend (-2.4% growth, R^2 = 0.99)


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Will the US dollar continue to rally?

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US Dollar Trade-Weighted Index(March 1973 = 100)

Shaded areas denote Republican presidencies.

5

Source: ING Bank, EMED data service


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Trump as Reagan?

• Trump’s proposes to cut marginal tax rates for all…

• …but the president only proposes

• Tax law changes must be passed by Congress

Source: CRFB

0%

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25%

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45%

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$0

Current Law

Trump's Tax Plan

$100k $200k $300k $500k $400k $5M $5.05M

6


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Or Trump as Hoover? S

oft

H

ard

Loose Even looser

Po

litic

al n

ati

on

alis

m

Fiscal policy

Trump as Hoover Trump Democrat

Trump as Reagan Trump-Lite

ING baseline: limited fiscal stimulus, limited

protectionism => USD neutral

Significant fiscal stimulus, limited protectionism =>

USD positive

More protectionism than fiscal stimulus => USD

negative

Significant fiscal stimulus but outweighed by

protectionism => USD negative

7


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ING’s view: a bit of both

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5%

6%

7%

0.75 0.85 0.96 1.00 1.04 1.09 1.13 1.18 1.24 1.34

# of Analyst forecasts for EUR/USD in 4Q17 (rhs)

Market implied probability (lhs)

1 std. dev. range

1.12 ING 4Q17 forecast

• ING expects EURUSD to depreciate to 1.02 in 1Q17 on Trump’s budget proposal and European political risks…

• …then rally as the reality of Trump-Lite sinks in…

• …and markets re-price for the end of the ECB’s QE policy and reduced Eurozone political risk.

• EURUSD to 1.12 by yearend, which is at the upper end of analyst forecasts.

Source: ING Bank, Bloomberg


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What will the Fed do?

9

Market expectations Around 2 hikes currently priced in

Inflation CPI to hit 2% in early 2017 but price pressures concentrated in shelter costs

Labour market Near full employment

0

1 2

3

Low neutral rate FOMC voter Bullard has said that Fed policy is 1 hike away from being growth-neutral

Fiscal policy could force the Fed to move more quickly than otherwise

Wages Slowly approaching pre-crisis levels

European politics Brexit or election-related shocks from Europe could adversely hit US financial conditions

Balance sheet If the Fed stops reinvesting proceeds of matured bond holdings, higher yields at the short end of the curve would reduce the need for hikes

Number of 2017 rate

hikes


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Why the Fed could hike again as early as March

10

0.16 0.42 0.56 1.02 1.18 1.50 1.79 2.15

Shading reflects number of hikes priced in the USD OIS curve (as of 11 Jan)

Feb.

March May June July Sept. Nov. Dec. FOMC meetings

ING US rate hike forecasts

2 hikes ING forecast

• The Fed’s three-hike signal looks ambitious against the

decline in the neutral rate…

• …but two hikes looks about right. Rising inflation and near-full

employment should give the Fed confidence to act…

• …and could encourage the Fed to frontload its hikes before

focussing on the balance sheet later in the year.

• We forecast a hike in March…

• …but a packed European political calendar poses risk.

Source: Bloomberg


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Will US bond yields move permanently above 3%?

Source: ING Bank, EMED data service

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10-Year US Treasury Constant Maturity Rate(percent)


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Trump-as-Reagan is responsible for the recent rise in yields…

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Implied 10yr Inflation Implied 10yr Real Rate

2% Real yields

1.0

1.5

2.0

2.5

3.0

Jan 16 Apr 16 Jul 16 Oct 16 Jan 17

0.5% Real yields

Source: ING Bank, Bloomberg


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…but 3% will be hard to breach in Trump-Lite

0.0

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4.0

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Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18

Standard deviation bands (from implied vols; max +/- 2 std dev)

Treasury Market Forward

US 10Y Yield (actual)

ING Illustrative Path

US 10-year yield (%)Q1

Trump

Jump-Start

Q2Reality

Check

Q3Bund

Tailwind

Q4Fed QE

Unwind

2.75% Trump reflationary drive could see a 1Q17 surge in yields

2.25% Summer lull & some Trump realism may trigger a correction

3%

• Treasury yields to push through 2.50% in 1Q17 as Trump presents his policy wish list…

• …then retrace as Congress curtails some of his plans.

• Yields to move higher in 4Q17 on stronger growth and Fed talk of shrinking its balance sheet

• => Rollercoaster ride in US Treasury yields to drive global financial markets in 2017

13


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Will the Eurozone succumb to an existential crisis?

14

15 Mar Netherlands General election

5-8 Dec Supreme Court Brexit hearing

2017

“Early January” Brexit appeal result due

March Article 50 expected to be triggered by UK

French Presidential elections

23 Apr Round 1

7 May Round 2

11 May BoE Inflation Report We expect a rate cut

Aug-Oct German Federal election (Date to be set)

Italian Elections? Not confirmed, but Interior Minister has raised possibility


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Politics could become a headwind to growth…

15

The economy is showing resilience…

• The Eurozone economy has been looking a bit

better recently, despite the Brexit vote and

Trump’s surprise victory

• PMIs, hiring intentions, price expectations and

new orders indicators all point upward

…but political uncertainty may become a

headwind

• The far-right may have been defeated in

Austria, but the aftermath of Italy’s ‘no’ vote is

uncertain

• Throw in elections in Germany, France and The

Netherlands, alongside noise surrounding Greek

debt relief, and we think Eurozone growth will

be slow slightly in 2017

1.6% 1.5% 2016 2017

ING’s Eurozone GDP growth forecasts

2017 dragged down by political uncertainty

Our ECB expectations

QE A 3-6 month extension of QE programme at current pace

Tapering Announced June 2017 earliest

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2006 2008 2010 2012 2014 2016

Composite PMI (lhs, 1Q lead)

Real GDP (YoY%, rhs)


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16

Economics matters…

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Change in Gross Domestic Demand since Jan 2008 (percentage points)

US

UK

Eurozone


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17

…and has given EZ voters grounds for wanting change

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Does Italy’s “No” vote signal an “Italexit”?

18

=> The road to leaving the Euro is a long one….

Step 1: Italy elects Eurosceptic party (e.g. Five Star Movement

The Italian Constitution explicitly prohibits any referendum meant to repeal laws that ratified international treaties.

Step 2: Amend rules via a new constitutional law

Step 3: Seek approval from Senate and House of Deputies. Could take a long time and deliberations could be fraught – relies on 5* having strong majority in both chambers

Step 4: If vote fails to reach two-third majority in each house, law will be put to a constitutional referendum

Step 5: Despite referendum, law could still be blocked/slowed down by Constitutional Court

Path clear to leave


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Nexit, Frexit? What do the polls say?

19

Key European election calendar:

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Parti

Socialiste

Front

National

Les

Republicans

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party

En

Marche!

Others

First round April 2017 France Presidential

election - latest poll (Jan 3)

0

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Renzi

PD

Beppe

Grillo

M5S

Silvio

Berlusconi

FI

Nichi

Vendola

SEL

Matteo

Salvini

Lega nord

Others

Scheduled February 2018 Italian election -

latest poll (Dec 21)

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Geert

Wilders

PVV

VVD PvdA SP CDA D66 CU GL Others

Netherlands Mar 2017 election latest poll -

projected seats (Dec 22)

Source: Ipsos Source: Ipsos

Source: Elabe

15 March 23 April 7 May June? 3Q17

Netherlands General election France Presidential election (Round 1) France Presidential election (Round 2) Italy? Elections possible later this year Germany Federal election


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A French EU referendum is not so simple

20

• Current polls suggest Fillon is comfortably

poised to win the French presidency

• If Le Pen wins she’s promised to call an EU vote.

Can she?

• To call a referendum on new laws or

constitutional change as Nexit would imply

requires majority support from Parliament. Le

Pen would most likely have to rely on the

support of other political parties

• => the only real possibility of a referendum

would be for the Prime Minister (likely not from

Le Pen’s party) to come under political

pressure to call one (e.g. Cameron in the 2015

UK election).

• Fewer than a third of French people think

France would be better off outside the EU (see

chart on next slide)

-10-505

101520253035

Poll Actual Poll Actual Poll Actual

Fillon Le Pen Remain / Leave Clinton / Trump

% Poll lead with 4-5 months to go

?

Fillon: Insurmountable lead?

Source: Ifop-Fiducial poll


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A Nexit looks even less likely

21

• Referendums in the Netherlands are advisory

and can cover only recently-adopted laws

• => there is no legal possibility of a Nexit vote

• A majority in both houses could change

legislation to allow an EU referendum…

• …but no main party supports one…

• …and surveys suggest most of the population is

in favour of staying in the EU/Euro

PVV, 35

VVD, 23

CDA, 15 D66, 14 GL

(Greens),

14 SP, 11

50Plus, 11

PvdA , 10

Other, 9

CU, 5 SGP, 3

Projected number of lower house seats (Total 150)

Source: Peil.nl poll, 8 Jan

• While Geert Wilders leads in the polls, several

parties are expected to get more than 10

seats…

• …and most have ruled out forming a coalition

with Wilders’ PVV party

• The ruling VVD party has not ruled out a

coalition…

• …but has suggested it would have to lead one

• The most likely outcome is a coalition of 4 or 5

centre-right and centre-left parties

0%

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30%

40%

50%

60%

70%

80%

UK IT PL HU FR DE BE NL

Total 'Agree'

Total 'Disagree'

“(Our country) could better face the future outside of the EU”

Source: Eurobarometer


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22

Will Trump start a trade war with China?

Wilbur Ross US Secretary of Commerce

• Investor and vocal critic of NAFTA • Argues tariffs benefit Mexico • China world’s biggest “trade cheater”

Robert Lighthizer US Trade Representative

Dan DiMicco Trade Advisor to Trump – former CEO of Nucor Steel

Peter Navarro Director of National Trade Council

• Lawyer who served under Reagan • Accused China of unfair trade

• Economist and strong China critic • Author of Death by China

• Author of Steeling America’s Future • Labelled China as destructive


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Trump’s vision: a US manufacturing renaissance

• The “China Shock” caused the loss of 1 million manufacturing jobs and 2.4 million total jobs between 1999 and 2011 a/

• Trump’s strategy for getting them back:

• First, eliminate push factors

• => Tax reform

• Second, work on pull factors

• => China’s currency

• a/ Autor, D., Dorn, D. and Hanson, G. “The China Shock: Learning

from Labor Market Adjustment to Large Changes in Trade,” NBER Working Paper 21906, January 2016.

Source: ING Bank, Bureau of Economic Analysis via FRED Economic Data, St. Louis Fed

23

0

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10000

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20000

25000

US: Manufacturing Employment(thousands)


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The RMB is going the wrong way

24

• Trump-adviser Anthony Scaramucci said “the new

administration does not want to have a trade war”

but the US’s huge bilateral trade deficit with China

argued for greater “symmetry” in the relation.

• Commerce Secretary-designate Wilbur Ross called

China “the most protectionist country” among major

nations: “They talk much more about free trade than

they actually practice. We would like to levelize that

playing field and bring the realities a bit closer to the

rhetoric. The No. 1 objective will be expanding our

exports.” Source: ING Bank, EMED data service

• CNY appreciation is the path of least resistance for

the world’s most important bilateral economic

relationship

• We forecast the RMB moving to 6.80 by yearend

(consensus 7.17)

• The downside for Chinese exporters is clear.

• The upside for the PBOC would be significantly

diminished CNY depreciation expectations and a

halt to FX reserve losses. Source: ING Bank, EMED data service

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China's Total and Bilateral US Trade Surplus(US$ billions)

Total US

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25

How Trump would wage a trade war

NAFTA Implementation Act 1993

• Power to return Mexico and Canada to MFN basis

• 6 months notice • Impose additional duties after

consulting Congress

Trade Expansion Act 1962 Section 232 (b)

• Impose Tariffs / quotas to offset national security impacts

Trading with the enemy Act 1917 (and International emergency economic powers act 1977)

• For use in times of war (not necessarily with the country being restricted)

• Unlimited powers to limit trade… • …seize / freeze assets of all kinds

Trade Act 1974 Section 122 • To address serious balance of

payments deficits • Through tariffs or quotas of up to

15% for 150 days… • …or both


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• Q: Will global trade recover? • A: No, world trade is destined to grow in line with world GDP

• Q: Where is the US dollar going? • A: Not far

• Q: What will the Fed do? • A: What people expect, 2 hikes this year

• Q: Will US bond yields move permanently above 3%? • A: Not this year, but fluctuations will be a main source of financial market volatility

• Q: Will the Eurozone succumb to an existential crisis? • A: Not this year, but the tensions behind break-up worries will get worse

• Q: Will Trump start a trade war with China? • A: No, the two sides will negotiate a deal to avoid a trade war

Our Bottom Line

26


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Our global forecasts

Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY

United States

GDP (% QoQ, ann) 0.8 1.4 3.5 2.0 1.6 3.0 2.7 3.4 3.6 2.8

CPI headline (% YoY) 1.1 1.1 1.1 1.7 1.3 2.3 2.3 2.6 2.7 2.5

Federal funds (%, eop, lower bound) 0.25 0.25 0.25 0.50 0.75 0.75 1.00 1.00

3-month interest rate (%, eop) 0.62 0.65 0.83 1.01 1.21 1.20 1.36 1.38

Eurozone

GDP (% QoQ, ann) 2.1 1.2 1.1 1.5 1.6 1.5 1.5 1.8 1.8 1.5

CPI headline (% YoY) 0.0 0.0 0.3 0.7 0.3 1.3 1.0 1.1 1.1 1.1

Refi minimum bid rate (%, eop) 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.00

3-month interest rate (%, eop) -0.22 -0.26 -0.30 -0.31 -0.31 -0.32 -0.32 -0.32

Japan

GDP (% QoQ, ann) 2.1 0.7 2.2 0.8 0.6 0.7 0.5 0.7 0.9 0.7

CPI headline (% YoY) 0.1 -0.4 -0.3 0.0 0.3 0.5 0.8 0.9

Excess reserve rate (%) -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10

3-month interest rate (%, eop) 0.09 0.06 0.04 0.02 0.05 0.05 0.05 0.05

China

GDP (% YoY) 6.7 6.7 6.7 6.6 6.7 6.6 6.5 6.4 6.4 6.5

CPI headline (% YoY) 2.1 2.1 1.7 1.8 1.9 2.0 2.0 2.0 2.0 2.0

PBOC 1yr deposit rate (% eop) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50

PBOC 1yr best lending rate (% eop) 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35

7-day repo rate (% eop) 2.9 2.7 2.6 2.8 2.8 2.8 2.8 2.8

2016F 2017F


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Business

Tim Condon_ING Bank Asia_annual economic briefing 2017