Global Macroeconomic Scenario Update With an Outlook for EMEAma.moodys.com/rs/961-KCJ-308/images/2018-04-25-Global-Macroeconomic... · 4. Q&A. Agenda. 1. Global Model Overview. EMEA

Ryan Sweet • Director, Real Time EconomicsAnna Zabrodzka • Asst. Director, Economist

Global Macroeconomic Scenario Update With an Outlook for EMEA

April 25, 2018

Ryan Sweet

Ryan Sweet, a director of real-time economics. He is part of the U.S. macroeconomics team and among the most accurate high-frequency forecasters of the U.S. economy, according to MarketWatch and Bloomberg.

Anna Zabrodzka

Anna Zabrodzka is the key analyst for Germany and Poland responsible for macroeconomic baseline and scenario forecasting, narrative development, as well as contributing to the European regional forecasting services. She also provides commentary and research on the euro zone and Central and Eastern Europe for the Economy.com website.

Speakers

EMEA Outlook Webinar 3

1. Global Model Overview2. Scenario Highlights3. Outlook4. Q&A

Agenda

1 Global Model Overview


Linkages in the simultaneous global model allow for shock propagation and contagion effects, and ensure greater scenario consistency.

» Trade flows (exports reflect partner imports)

» Financial markets (stock prices and bond yields)

» Prices (exchange rates, terms of trade and global commodity prices)

» Investment (foreign direct investment and capital flows)

Recursive top-down linkages relate forecast output from the global model to satellite models.

Moody’s Analytics Global Macroeconomic Model


Moody’s Analytics Global Forecast CoverageApr 2018

Sources: Moody’s Analytics

Included in the Global Macroeconomic Model (64 countries)Additional forecasts (IFRS9) (25 countries)


With detailed quantitative and qualitative testing

Structural Forecast Model Methodology

Exchange rates

Investment

Wages & salaries

PopulationPrices

GDP

Monetary policy rate

Imports

Government

Exports

Global GDP

Unemployment rate

Consumption

Labor force

Potential GDP

Banking sector

Import prices

10-yr yield

Global prices

Employment

Specification choice» Theoretical reasoning versus statistical

propertiesIn-sample equation fit» R-squared, RMSE, information criteria» Fitted values and residualsForecasting performance» Back-testing: conditional and unconditional

evaluation» Benchmarking during important past episodesSensitivity to shocks» Forecasts across scenarios» Response to individual shocks


Variable Specification suggested by economic theory…Unemployment rate Okun's LawLabor Force Trend participation rate, demographics & cyclical factorsPrivate consumption expenditure Keynesian consumption function / Euler equationPublic consumption expenditure Baumol's disease w/austerity effectsFixed investment Accelerator model / Tobin's QInventory investment Adjustment to deviations of expenditures from target firm outputExports Foreign demand curve (foreign imports, real FX rate)Imports Imports reflect domestic demand + re-exporting demandLabor income (wages & salaries) Wage bargaining over revenue product of laborCentral bank target rate Policy forecast based on Taylor Rule10yr Gov bond yield Fisher Rule w/ soveign risk premiumMoney market rate, lending rate Term-structure of interest ratesReal-effective exchange rate Short-run interest rate parity & long-run purchasing power parityImport price deflator Exchange rate pass-throughConsumer price index Expectations augmented Phillip's curve based on firm price setting functionHouse price index Asset pricing error-correction frameworkStock price index Asset pricing error-correction frameworkGovernment interest payments Debt service equals the effective interest rate multiplied by debtGovernment total expenditure Expenditures equal sum of spending componentsGovernment total revenues Revenues equal the effective tax rate multiplied by incomeIndustrial production IP tracks the aggregate value added of goods-producing industriesRetail sales Retail sales reflect real consumer demand and consumer pricesDomestic credit (money supply) Liquidity demand depends on transactions value (GDP) and interest ratesCA balance (Identity) CA = net exports + net income + net transfersHousing activity (e.g. permits, starts) Housing market equilibrium adjustment equation

A Theoretically Motivated Structural Model


Testing Your Own AssumptionsMoody’s Analytics collaborative forecasting platform.

"What If" Scenario AnalysisQuickly produce answers with reliable scenario outcomes.

Evaluate assumptions across multiple geographies and applications.

Economic Forecasting

Run your own idiosyncratic scenarios based on our highly-regarded forecasts.

Obtain value from advanced features that provide full control over output.

Stress Testing Produce reasonable and supportable scenarios for stress testing and ECL standards.

Use auditable and repeatable features for compliance, i.e. CECL/IFRS9, CCAR/ICAAP.

Generate custom scenarios individually or with others in a multi-user environment, using process controls that provide complete governance.


Forecast Governance by Design

Forecast Governance

Transparency & Auditability

Effective Process Control

Roles & Responsibilities

Mastering of scenario data, with local versions for

testing edits

Flexible and fast data visualization for

review and evaluation

All equations, data, and edits visible with an annotated audit trail

Configurable access control to data and platform functions


Available Scenarios

Stronger Near-Term ReboundS1

S2 Mild Second Recession

S3 Deeper Second Recession

Protracted SlumpS4

Baseline / Most LikelyBL

Standard

Below Trend Long Term GrowthS5

Oil Price ShockS6Fed BaselineFB

Fed Adverse ScenarioFA

ECB-EBA BaselineEB

ECB-EBA AdverseES

Regulatory DrivenPRA-BoE BaselineUKB

Fed Severely AdverseFS

PRA-BoE SevereUKS

PRA-BoE IdiosyncraticUKI

Low Oil Price ShockS8

New Upside ScenarioS0

CF Consensus Forecast Scenario

2 Scenario Highlights


Consensus (“CF”) Scenario

» This scenario is designed to incorporate the central tendency of a range of baseline forecasts produced by various institutions.

» Moody’s Analytics creates consensus targets for GDP and CPI for each country for the first four years of the scenario, since that is the most typical duration in the surveyed results.

» Unemployment rate consensus targets were created where availability permits. Forecast sources include the International Monetary Fund, the World Bank, the USDA, central banks, and Focus Economics.

» Consensus targets for GDP, CPI, and the unemployment rate are run through the Moody’s Analytics global macroeconomic model to estimate the paths for all other variables.

Based on the review of a variety of surveys of baseline forecasts


Exceptionally Strong Growth ("S0") Scenario

» In the U.S., tax reform combined with the large gains in corporate earnings and the stock market since late 2016 leads to a greater than expected rise in business investment.

» The trade policies of the Trump administration do not trigger a trade war.

» The U.K. and the EU reach a mutually advantageous agreement on the U.K.’s departure from the EU, with the U.K. keeping unhindered access to the single market.

» In Europe, cooperation of new German and French governments leads to enhancement of euro zone institutional architecture, which supports the banking sector and decreases the risk premium in bond markets. Periphery countries use the economic momentum to push through further structural reforms.

Confluence of extremely favorable events around the world


90

95

100

105

110

115

18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3 22Q1 22Q3

BL CF S0 S1 S4

Scenarios – GDP PathsUnited KingdomReal GDP, index, 2018q1=100

95

100

105

110

115

18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3 22Q1 22Q3

BL CF S0 S1 S4

Euro ZoneReal GDP, index, 2018q1=100

95

100

105

110

115

120

18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3 22Q1 22Q3

BL CF S0 S1 S4

United StatesReal GDP, index, 2018q1=100

95100105110115120125130135140

18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3 22Q1 22Q3

BL CF S0 S1 S4

ChinaReal GDP, index, 2018q1=100

Sources: National central banks, Moody’s Analytics


Based on some recent conversations with banks around IFRS 9 for 2018-19, we expand our IFRS 9 Scenario from three economic forecasts (1 upside, 1 downside, baseline) to five scenarios (2 upside, 2 downside, baseline).

We have created an additional optimistic scenario (called S0) that is symmetric (but opposite) to our S4 forecast.

With this additional projection we can offer two different IFRS 9 scenario packages:

Two Options

IFRS 9 Scenario Forecasting

Option 1 (1 upside, 1 downside, baseline)

S3: Severity = 0.10, Weight = 30%

BL: Severity = 0.50, Weight = 40%


Option 2 (2 upside, 2 downside, baseline)



BL: Severity = 0.50, Weight = 40%


S0 (new upside scenario): Severity = 0.96, Weight = 7%


Scenario Calibration: Discrete Scenario ProbabilityGDP growth %, annualized avg, 10,000 simulations over a 5 yr period

Source: Moody’s Analytics

0

100

200

300

400

500

600

700

800

-2.6 -1.8 -1.0 -0.2 0.6 1.4 2.2 3.0 3.8 4.6 5.4

S0: 96%severity

S0: 7% Weight

S3: 10% downside severity

S3: 23% Weight

BL0.50 Severity40% Weight S1: 23% Weight

S1: 90%severity

S4: 4% downside severity

S4: 7% Weight


1500

1700

1900

2100

2300

2500

2700

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S4 S3 S1 S0 BL

Example: U.K. IFRS9 Scenario Forecasting

2

3

4

5

6

7

8

9

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S4 S3 S1S0 BL

Unemployment rate, %, SA

House price index, 2010=100, SAInflation, % change yr ago

Real GDP, Bil. 2015 GBP, SAAR

-2

-1

0

1

2

3

4

5

6

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S4 S3 S1 S0 BL

80

100

120

140

160

180

200

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S4 S3 S1S0 BL

Sources: BoE, ONS, Moody’s Analytics

3 Outlook


U.S.

U.K.

China

Brazil

Russia

ItalyJapan

SpainFrance

Canada

IndiaASEAN-5Germany

Australia

Expansion

SlowdownRecession

Recovery


The Global Economy Is Humming Along


Sources: Eurostat, Moody’s Analytics

Unemployment rate, %

2

4

6

8

10

12

14

Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

Euro zone (19 countries) Germany France Italy

Germany Is on a Roll


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Euro zone Germany France U.K. Italy Spain

2017 2018F

Real GDP, % change yr ago


Another Solid Year


Real GDP growth 2017-2019, baseline vs. trade war scenario


>-0.2

No data

-0.45 to -0.2<-0.45

Who Suffers Most in a Trade War


2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

16Q1 17Q1 18Q1F 19Q1F

Baseline U.S. stock market slump scenario

Global real GDP, % change yr ago


Financial Markets Feel Vulnerable


Q&AAdditional questions?

Send an email to [email protected] or contact:

Alex LowyRegional Account [email protected]

mailto:[email protected]


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Moody's Analytics operates independently of the credit ratings activities of Moody's Investors Service. We do not comment on credit ratings or potential rating changes, and no opinion or analysis you hear during this presentation can be assumed to reflect those of the ratings agency.

A Appendix


» Produces a joint forecast of over 10,000 global economic and financial time series, accounting for roughly 95% of global activity.

» Balances economic theory and empirical forecast performance.

» Allows users to determine the impact of both domestic and foreign economic and financial shocks.

– Scenarios can be constructed through exogenous shocks or endogenous adjustments.

» Is flexibly constructed, to allow for multiple use cases.

– Real GDP may be a model output (for forecasting), or a model input (for regulatory stress test scenario generation).

MA Global Macroeconomic Model

EMEA Outlook Webinar 30Sources: Federal Reserve, EBA, Moody’s Analytics

Comparing Stress Test ScenariosReal GDP, Start-to-trough, %

U.S. U.K. Euro zone

PRA 2018 -3.5 -4.7 -3.6

PRA 2017 -3.5 -4.7 -3.6

EBA 2018 -2.3 -5.6 -3.8

Fed CCAR Adverse -2.3 -3.7 -2.9

Fed CCAR Severely Adverse -7.5 -5.4 -4.6


1500160017001800190020002100220023002400

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S1 S0 BL

Example: U.K. PRA Scenarios

2

3

4

5

6

7

8

9

10

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S1 S0 BL

Unemployment rate, %, SA

House price index, 2010=100, SABoE official discount rate, %, NSA

Real GDP, Bil. 2015 GBP, SAAR

0

1

2

3

4

5

6

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S1 S0 BL

80

100

120

140

160

180

200

08 09 10 11 12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F

S1 S0 BL

Sources: BoE, ONS, Moody’s Analytics

economy.com

Tony HughesManaging [email protected]

Alex LowyRegional Account [email protected]

Michael VoganAssistant [email protected]

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Documents

Global Macroeconomic Scenario Update With an Outlook for EMEAma.moodys.com/rs/961-KCJ-308/images/2018-04-25-Global-Macroeconomic... · 4. Q&A. Agenda. 1. Global Model Overview. EMEA