070813_JPM_This year is different_Global economic research.pdf

8/22/2019 070813_JPM_This year is different_Global economic research.pdf

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Global Economic ResearchJ uly 2013

This ear is different

uChief Economist

1-212 834-5515

[email protected]

www.jpmorganmarkets.com/economics

J PMorgan Chase Bank NA

See the end pages of this presentation for analyst certification and important disclosures.


2/31

Main points

The global economy is in transition 1H growth remains subpar as drags from restrictive fiscal policy and weak EM corporates are constraints Growth expected to return to trend in 4Q. Fiscal drags to fade fast and credit drags to fade slowly. Fuel for lift also comes as monetary ease gains traction

.

Low global inflation both reflects and drives growth Sub-par growth combines with an unwinding of EM bottleneck pressures. We have also been lucky. Low inflation is hurting EM corporates and redistributing growth towards consumers.

The transition to stronger growth relies on consumer lift The consumer lifts on the back of lower inflation and rising G4 confidence.

Business sector hiring to moderate. Manufacturing sector gets leaner, setting up 4Q lift in production.

Europe is exiting recession now

Fed tapering will follow the economy and is not a threat to US performance

EM push and pull: vulnerable but levered to global industry cycle

inflation

2


3/31

The outlook: Forecasting a return to trend

Global GDP%q/ q, saarGlobal GDP

%q4/q4

2011 2012 1H13 2H13 2014

Global (3.0) 2.7 2.1 2.4 3.0 3.1

4.5

.

Global potential growthrate (3.0%)

. . . . . .

US (2.2) 2.0 1.7 1.9 2.3 2.7

Euro area (1.3) 0.7 -1.0 -0.4 0.8 1.5

Japan (0.5) 0.2 0.4 4.0 3.2 0.2

3.5

.

UK (1.5) 1.1 0.0 2.0 1.7 2.0

EM (5.4) 5.5 4.9 4.2 5.1 5.2

China (8.0) 8.8 7.9 6.9 7.8 7.6

2.5

.

EM Asia ex China (5.2) 4.1 5.2 3.7 4.9 5.0Latam (3.5) 3.4 2.6 2.4 2.8 3.6

Brazil (3.3) 1.4 1.4 2.4 1.7 3.3Note: Trend growth in parentheses

1.0

1.5

.

3

Source: J .P. Morgan, national statistics agencies2010 2011 2012 2013 2014Source: J.P. Morgan


4/31

Anatomy of a soft-patch: credit tightening and fear

Net %, abo ve zero indicat es t ight ening

Bank lending standards

G-3 capital goods shipments andglobal PMI employment

25

30

35

53

20

25

%3m, saar DI, sa

Shipments

10

15

Euro area 52

10

15

-10

-5

0

51

-

0

5

-25

-20

-15 US

49-15

-10Global all-industry PMI

employment

4

2011 2012 2013Source: IIF bank survey, FRB, ECB

2010 2011 2012 2013Source: J.P. Morgan


5/31

A recipe for disinflation: Sub-par growth, EMweakness and luck

2.08

%oya; bot h scal esConsumer prices

G-4 import and consumer prices, core

4.0

%oya

Consumer price inflation, global

Central bank target(upper bound)

1.2

1.4

1.6

1.8

0

4

2.5

3.0

3.5 JPM fcst

0.8

1.0

-8

-

02 03 04 05 06 07 08 09 10 11 12 13 14Source: National sources, J.P.Morgan

mpor ex-pe ro . ,12m lead

1.5

2.0

2010 2011 2012 2013

Model forecast

Source: J.P. Morgan

Global a rices

2.0

2.5

3.0%oya

Services (CPI)

40

60

80

%oya; fcst assumes sta ble p r ice l evel

0.0

0.5

1.0.

Goods (CPI)

Services (PCE)

-40

-20

0

20

5

- .

2011 2012 2013Source: BLSSource: BLS

2010 2011 2012 2013 2014Source: J.P. Morgan


6/31

The result: Lousy growth generates regional andsectoral rotation

%oya; bot h scales

Real GDP growth% oya

Global GDP and industrial production

83 US 6

9

72 3

GDP

61

Dev Mktexcl. US

0

IP

4

5

-1

0

EM

-6

-3

6

2010 2011 2012 2013Source: J.P. Morgan

92 97 02 07 12Source: J.P. Morgan


7/31

The result: Corporate margins are under pressure

%oya

Real business equipment spending

10

12

%oya

GDP deflator and unit labor cost, EM

Unit

15

18

Emerging

4

68

labor

cost

9

122

04 06 08 10 12 14Source: J.P. Morgan, BLS

e ator

GDP deflator and unit labor cost DM

3

6

3

%oya

GDP deflator

-3

0Developed

-3

0

Unit labor cost

7

04 06 08 10 12 14Source: J.P. Morgan

04 06 08 10 12 14Source: J.P. Morgan, BLS


8/31

The case for 2H lift: Consumer spending lifts

st d devs f r om hist average

Standardized G-4 consumer confidence

%3m, saar ; Fcst assumes const ant Br ent at $102 /b bl

Oil prices and real global retail sales

0.5

1.0

Japan

5

6

-20

-10

Oil (Brent)

-1.0

-0.5

.US

3

4

0

-2.0

-1.5

EMU1

210

-3.0

-2.5

-1

0

20

30

Retail sales (volume)

8

Source: ESRI, Eurostat, University of Michigan, EC, J.P.Morgan2010 2011 2012 2013

Source: Platt s, J.P. Morgan


9/31

The case for 2H lift: Business sentiment holds uplimiting employment slowdown

Index es, sa, bot h scales

Business sentiment Output per employee (productivityproxy)

US: Fed capex outlook

apan: euters an an6oya

150

4

10-10 0Developed

5-20

GER: IFO mfg exp.

-2

9

Source: Reuters, IFO, regional Federal Reserve banks Source: Nat ional s ources, J.P.Morgan


10/31

The case for 2H lift: Policy backdrop is moresupportive

Index

Financial conditionsBps

US Deficit decomposition

FY, % of GDP 2010 2011 2012 2013f 2014f

Deficit -9.0 -8.7 -7.0 -4.0 -3.4

5001030

Global HY spread(inverted)

- . - . - . - . - .

TARP and GSEs 0.8 0.2 -0.1 0.6 0.0

Structural deficit -7.1 -6.3 -4.6 -2.1 -0.9

Change in structural defici 0.6 -0.8 -1.7 -2.5 -1.2

Thrust (+) Drag (-)* 0.4 -0.6 -1.2 -1.8 -0.8

600960

% of ot ent ial GDPEuro area fiscal thrust

.

Source: CBO, J .P . Morgan

700890

-1.5

-0.5

0.5

900750

Global equities(local fx)

-3.5

-2.5

Euro area Germany Italy Spain

2012 2013 2014

10

Source: MSCI, J.P.MorganSource:J.P.Morgan


11/31

Releases show activity lift ing but surveys look soft

50.056

DI, sa; b ot h scales

Finished goodsinventories

JPM global PMI mfgJ.P.Morgan global aggregates

uarters are m m,saar s avg eve ; ont s are m m s eve

ar pr ay un

, mg . . . . . .

48.0

48.5

49.0

.

48

50

52

, . . . . . .

. . . . . .

eta saes . . . . . .uo saes . . . . . .

ap. r ers . . . - . . - .

owcas . . . . . .

47.546

2011 2012 2013

Source: J.P. Morgan

JPM lobal services PMI

.

model. Underlined values are our estimates based on available data and our judgment. Source: J .P.

Morgan, Markit, and national statistical agencies.

Global GDP nowcaster

52

53

56

58DI, sa

Employment

3.5

%m/m, saar

49

50

51

50

52

54

Activity

0.5

1.5

.

11

2011 2012 2013 2014Source: J.P. Morgan, Markit

Jan 11 Jul 11 Dec 11 Jun 12 Dec 12 Jun 13Source:J.P.Morgan


12/31

Europe is exiting recession now

DI, sa; 3Q f cst

Euro area composite PMI and GDP

q/q ,saar 5

10

15

%3m, saar

anu ac ur ng ou pu

Euro area

Japan

60

4

5

GDP

-20

-15

-10

-5 US

55

2

3 -25

Jan 12 Jul 12 Jan 13 Jul 13Source: J.P. Morgan

UK output PMIs

500

1

54

56

58

56

60

DI, sa, bo t h scales

Manufacturing

45-2

-1 PMI

48

50

52

44

48

52

Services

12

Source: J.P. Morgan, Markit, Eurostat2011 2012 2013 2014

Source: J.P. Morgan, Markit


13/31

EM vulnerabil ity is a main risk

1.10Rat io

Global mfg PMI orders to inventories

DM

%oya; bot h scales

Real GDP growth and employment

1.00

1.05

EM6

Employment

EM overnment bond ields

0.95

Jan 12 Apr 12 Aug 12 Dec 12 Apr 13Source: J.P. Morgan, Markit

2

5

6.0

6.5

7.0

7.5%, bot h scal es

GBI-EM (local currency)

EMBIG (external)

1

4

4.0

4.5

5.0

.

5.5

6.0

6.5

02

3 GDP

13

Jan 12 Apr 12 Aug 12 Dec 12 Apr 13 Aug 13Source: Bloomberg

03 05 07 09 11 13Source: J.P.Morgan; Includes bra, mex, chl, kor, twn, phl, hun, pol, rom, and rus.


14/31

China likely to grow close to 7%

12

58

60

DI, sa, w it h June fcst %q/ q, saar

GDP

PMI

China PMI and real GDP

35%oya

Total social financing

China total social financing andnominal growth

8

10

52

54

56

15

20

25

China retail sales breakdown

648

2009 2010 2011 2012 2013Source: NBS, Markit

5

03 05 07 09 11 13

Nominal GDP

Source: NBS

China 7-day Shibor

16

18

%oya, yt d

Total retail sales8

10

12

%

10

12

Catering2

4

6

14

2010 2011 2012 2013Source: NBS

an , ar , ay , un ,Source: Bloomberg


15/31

Give the Fed credit where credit is due

US 10yr real yield and inflationbreakeven %oya

Composition of US growth

3

4

Inflation breakeven10

12

Interest sensitive demand

2

6

8

1

0

2

4

Real exports ofgoods and services

-1

0

Real yield

-4

-2Gov't

expenditures

15

- - - -Source: J.P. Morgan Source: Bureau of Economic Analysis


16/31

Fear of early Fed exit is overdone

Fed Forecasts

2013 2014 2015 Long run

0.40

0.45%

Dec 2014 Fed Funds futures

Rea GDP %q4/q4 2.6 3.2 3.3 2.4

Unemployment rate (%eop) 7.4 6.9 6.3 5.6PCE inflation (%q4/q4) 1.5 1.8 1.9 2.0

Source: FRB

Note: Forecast is midpoint of the central tendency0.20

0.250.30

0.35

FOMC ro ected olic rate b end of

0.15

Jan 13 Mar 13 May 13 Jul 13Source: Bloomberg

Strong desire to begin tapering soonlabor markets show resilience financial

9 June mtg

March mtg

2015# o f par t i ci pant s

stability concerns

The message on forward guidance

0

3

Growth likely to disappoint fedforecasts, inflation to stay low

16

150Source: FRB, J.P.Morgan


17/31

US tax hikes bite less than expected, but savingsrebuild stil l likely

10%chg over 6mos, saar

Nominal income and consumption

7

8Percent , sa

US personal saving rate

2

4

6

PCE 4

5

6

-2

0

2010 2011 2012 2013Source: BEA

DPI 2

2010 2011 2012 2013Source: BEA

4

5%6m, saar

1.5

2.0

%-pt s, saar ; ad di t ion t o US PCE grow t h

1

2

0.0

0.5

1.0

17

2011 2012 2013 2014Source: BLS and J.P. Morgan

2010 2011 2012 2013 2014Source: BEA, FRB, J.P. Morgan


18/31

US outlook hinges on healthy corporates that hire

6

3

%oya, bot h scales

US private sector employment and GDP

Employment

22

24% of corpor at e value added

US corporate profit margin

0

2

4

-1

1

14

1618

20

ECI rivate com ensation

-2-3

90 95 00 05 10Source: BLS, BEA

US cor orate rofit rowth

10

70 75 80 85 90 95 00 05 10Source: BEA, FRB

4

5%oya, bot h scal es

40

60%oya

1

2

3

-40

-20

0

18

00 02 04 06 08 10 12 14Source: BLS

90 95 00 05 10Source: BEA


19/31

The US housing recovery rests on normalizinghousehold formation

2250Ch fr om year a go, '000s

Net new

1990 - 2012avg formation

Household formation and net newhousing supply

2.5

3.0

11

12%, nsa, bo t h scales

Rentalvacancy rate

Housing vacancy rates

750

1125

1500housingsupply

1.5

2.0

9

10

Homeownervacancy rate

0

05 06 07 08 09 10 11 12 13 14

Household formation

Source: Census Bureau

1.0800 02 04 06 08 10 12

Source: Census Bureau

Months' su l of existin homes and

42

44

78

79

Mn unit s, nsa, bot h scalesRenter-occupied orvacant and for rent

,

6

12

183

5

sa, 2-q t r mov avg %oyahouse prices

36

38

40

74

75

76 Owner-occupied orvacant and for sale

-18

-12

-607

9

11

Months' supply(inverted scale)

Case-Shiller nationalhouse price index

19

Source: Census

-90 95 00 05 10

Source: S&P/Case-Shiller, National Association of Realtors


20/31

ECB fails to address a regional demand shortfall

Net % of banks r epor t ing t ight er lending st andards

Euro area bank lending standards

%oya

Euro area unemployment andinflation

60

Corporates

3

4

12

Unemp rate

40

Householdmortgages

2

10

11

2019

-20

0

-1

0

7

8 HICP

20

03 05 07 09 11 13Source: ECB

03 05 07 09 11 13Source: Eurosta t


21/31

Japan decides deflation has done too muchdamage

3.01Q90 to 4Q93Core inf la t ion, %oya

Japan slack and inflation

250

US/J apan; Indexed 1980 =100

Capex

Domestic demand: US vs Japan

0.0

.

1Q00 to 3Q12

1Q94 to 4Q99

100

150

Consumption

-1.5

-6 -4 -2 0 2 4 6Outpu t gap, %Source: MIAC

Central bank balance sheet Ex ort market erformance

50

80 85 90 95 00 05 10Source: BEA, ESRI

40

50

55

65% of GDP; Fcst Mar 13 t hro ugh Dec14

BoJ 1.2

1.4Index

Germany

10

20

25

35

Fed

0.6

0.8

1.0 US

Japan

21

08 09 10 11 12 13 14Source:J.P.Morgan, FRB, BoJ

75 80 85 90 95 00 05 10Source: OECD


22/31

US energy sector lift remains a side show

% of nomi nal GDP

Oil and gas extractionBn $, sa, 3mma Bn 2005 $, sa, 3mma

Petroleum trade balance

2.5Value added, oil and

gas extraction

-8

-

-10

Nominal

1.5

.

Priv investment inO&G structures,

-10-20

1.0

equipment

-12-30

Real

0.0

0.5

-16

-14

-50

-40

22

77 82 87 92 97 02 07 12Source: BEA

89 94 99 04 09 14Source: BLS


23/31

Fiscal debate moves away from factors affectingnear-term growth

7

8% of GDP, f or f i scal y ear

Evolution of US federal deficit

% of GDP

Publicly-held debt to GDP

3

45

6

Latest

No cliff, nosequestration

(Dec 12)

200

Evolution of US federal debt

1

12 13 14 15 16 17 18 19 20 21 22Source: CBO, J.P. Morgan 150

CBO estimate,Dec 2012

79818385

% of GDP, f or f i scal y earNo cliff, no

sequestration(Dec 12)

100

6769717375

Latest

0

50

CBO estimate,latest

23

12 13 14 15 16 17 18 19 20 21 22Source: CBO, J.P. Morgan

00 10 20 30 40 50 60 70 80 90 00 10 20 30 40Source: CBO, J.P. Morgan


24/31

US participation rate looks cyclically depressed

32

34% of populat ion age 16 t o 2 4 enro l l ed in col l ege

College enrollment

66

67%, annual avera ge

Participation rate

28

30

64

65 Actual JPM

26

93 95 97 99 01 03 05 07 09 11 13Source: BLS

6300 02 04 06 08 10 12 14

Source: J.P. Morgan, BLS, CBO

- JOLTS hirin and se arations rates

76

77

91

92%, bot h scales

Female

,

2.5

3.0

4.0

4.5

% of t ot al employment , bot h scales

Hiring rate

74

75

89

90Male

1.0

1.5

2.0

2.5

3.0

3.5

Separations rate

24

03 05 07 09 11 13Source: BLS

01 03 05 07 09 11 13Source: BLS


25/31

The US demographic path is troubling

Growth in resident working agepopulation Mn

Net international migration

2.0

%

1.3

.

2008 projection

1.5

2008projection 1.1

1.0

0.9

2012 projection

0.0

.

Current (2012) projection

0.5

0.7

25

60 65 70 75 80 85 90 95 00 05 10 15 20Source: Census Bureau

01 03 05 07 09 11 13 15 17 19Source: Census Bureau


26/31

Japan: BoJ success is growth; achieving 2%inflation target would be a failure

0

5

200

250

% of GDP, bo t h scales

Debt

Japan government deficit and debt

expectations and financialconditions that generate-10

-5

100

150

Deficit

Large fiscal adjustments and

structural changes are coming

-1550

90 95 00 05 10Source: OECD

Ja an inflation swa s and JGB ields

With inflation below 2% theBoJ has room to provide1.0

1.5

1.0

1.2

1.4%, bot h scales

10yr JGB yield

ongoing support for neededchange

-0.5

0.0

0.5

0.4

0.6

0.8

10yr inflation swap

26

2011 2012 2013Source: J.P. Morgan


27/31

OMT fixes Euro area structural f law but there ismuch work to be done

Euro area required primary positionsRequired 2015 primary positions, % of GDP

Re uired rimar ositions130

1401Q00 = 100

ITA

FRA

uro area un t a or costs

Primary

position

2012

Maastricht vision,

debt at 60% of GDP

r>g by 200bp

OM T allows r=g,

debt still at 60%

of GDP

OM T allows r=g

and debt at 80%

of GDP

100

110

120 PRT

DEU

Institutional change and integration loses

France -2.0 3.4 1.6 0.6

Italy 2.2 5.8 3.3 2.3

90

99 01 03 05 07 09 11 13Source: Eurostat

momen um

Clash over timing of individual country structuralchange vs. institutional change at regional level

Spain -4.2 3.3 1.5 0.5

Ireland -4.2 5.4 3.0 2.0

Divide on burden sharing of legacy assets for banksand sovereigns

Disagreement on speed of move toward bankingunion, role of ECB and need for shared deposit

Portugal-2.3 5.3 2.9 1.9

Greece -0.7 8.7 5.4 4.4

r refers to average borrowing cost on sovereign debt, g refers to nominal GDP growth.

27

guarantee schemesSource: J .P. Morgan


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070813_JPM_This year is different_Global economic research.pdf