Manuel Balmaseda Chief Economist
Foro Boca, Mexico CEMEX Building Award 2018
A Dimming Outlook
The key issues remain the same as a year ago, with one exception July 2018
Return to “dovishland”
-2-
Recession: when, what and where?
Return to Dovishland
Trade, playing with fire
Political Economy over Economic Policy
Growth slowdown in a noisy environment GDP growth 2019
Recession Source: CX-Economics, Consensus Forecast, Bloomberg
Stagnation
Mild Growth Srong Growth
Recession
Stagnation
Mild Growth Srong Growth
-4-
Growth slowdown in a noisy environment GDP growth 2020
?
Recession Source: CX-Economics, Consensus Forecast, Bloomberg
Stagnation
Mild Growth Srong Growth
-5-
The when, the what and the where
New York Fed recession probability model (12 month ahead)
100%
80%
60%
40%
20%
0% 60 65 70 75 80 85 90 95 00 05 10 15 20
-6-
The when, the what and the where
Eurozone: Activity and GDP
Where? • Negative surprises: • Germany in recession • EZ slowing significantly • Mexico, Brazil barely growing • US slowing but in line with projections
(% qoq sa) 2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4 -5 -6
-4
GDP CX-EZ Activity index CEPR Eurocoin ECONOMIC SENTIMENT INDICATOR 2008
2010
2012
2014
2016
-5 -6
2018
Source: Refinitiv Datastream, CX Economics
-7-
The when, the what and the where
Germany: Manufacturing and Services PMI Index
Where? • Negative surprises: • Germany in recession • EZ slowing significantly • Mexico, Brazil barely growing
65
• US slowing but in line with projections
50
What? • Manufacturing recession while services resilient
45
60 Services 55
Manufacturing Aug-19
Feb-19
Aug-18
Feb-18
Aug-17
Feb-17
Aug-16
40
-8-
The when, the what and the where
Where? • Negative surprises: • Germany in recession • EZ slowing significantly • Mexico, Brazil barely growing • US slowing but in line with projections What? • Manufacturing recession while services resilient • Wall St. vs. Main St.
Slowdown? For sure (already happening) Recession? Eventually, but no crisis -9-
Recession fears may be exaggerated US GDP (accumulated growth from through ) 60
Recessions 50
40
30
20
Expansions
10
0
Duration
53
58
63
68
73
78
83
88
93
98
03
08
13
(months)
39
24
106
36
58
12
92
120
73
124
Intensity
14
12
53
15
22
4
38
43
18
25
(%)
Source: NBER, BEA and CX.
18
Recession: when, what and where?
Return to Dovishland
Trade, playing with fire
Political Economy over Economic Policy
US at center stage, economics or politics
List of existing and potential tariffs on US imports • Trump following his “To Do” list. • Impact on global value-chains • US-China, beyond trade • Europe next after China
US exercising its power, to what end? As conflict spreads, the impact becomes more global Source: US Commerce Department and USTR
- 12 -
Trade war having a global impact
Global trade
Global trade by country: (X+M)/Y
(yoy)
(% GDP, 2017)
7 6 5 4
100
100
80
80
60
60
40
40
20
20
0
0
3 2 1 0
Source: CPB World Trade Monitor
Source: Datastream
US
Ch ina
Ita ly
UK
Fra nc e
Sp ain
are a Eu ro
abr.-19
abr.-18
abr.-17
abr.-16
abr.-15
abr.-14
abr.-13
abr.-12
-2
Ge rm an y Me xic o
-1
- 13 -
Slowing to “normal�, and beyond
Return to Dovishland
Trade, playing with fire
Political Economy over Economic Policy
Central Banks, the return to Dovishland Central Banks’ interest rates (yoy%)
6
• Lower expected rates everywhere
1Y ago forecast Current forecast
5
• Inflation disappoints, again … as growth uncertainty rise
4 3 2
• Market (and political) pressure
FED
1
ECB
• Focus on tail risk, insurance play
0
For how long?
Dec-21
Dec-20
Dec-19
Dec-18
Dec-17
Dec-16
Dec-15
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
-1
How far (low) can rates go?
• US: 2% growth, 2% inflation and 2% interest rates • EZ: 1% growth, 1.5% inflation and neg. rates
Source: Bloomberg, Banxico - 15 -
Central Banks stimulating demand by any means Transmission mechanism of monetary policy • The expectation and asset price channels, the more active currently in the US
Official interest rates
Money market interest rates
Expectations
• Stimulating demand via governments spending • Demand policies are just that, Demand Policies
Money, credit
Asset prices
Bank rates
Exchange rates
• Asset bubbles vs. Wealth effect • Currency war?
r*: the question is not how low it is but why is it that low and what the implications are - 16 -
What a difference a year makes Spreads in "recession" territory
US yield curve
14
14
12
12
10 yr Bond
10
8
6
6
4
4
2
2
0
0
-2
-2
4
4
2
2
0
0
-2 1985
1990
1995
2000
2005
2010
3.5
10
2 yr Bond 3 m T-bill
8
(%)
2015
-2
3.0
2.5
2.0
LATEST -3M -6M -1Y
1.5
1.0
0
5
10
15
20
25
30
- 17 -
Currency war in the making? Spreads in "recession" territory
Highest spread ever
14
14
10
12
12
8
10 yr Bond
10
10
2 yr Bond 3 m T-bill
8
US 10 yr rate
6
8
6
6
4
4
4
2
2
2
0
0
-2
-2
Germany 10 yr rate
0 -2 4
4
4
2
2
2
0
0
0
-2 1985
1990
1995
2000
2005
2010
2015
-2
-2
90
95
00
05
10
15
Source: Thomson Reuters Datastream - 18 -
Slowing to “normal�, and beyond
Return to Dovishland
Trade, playing with fire
Political Economy over Economic Policy
Other “stuff” to worry about Brexit
Autocratic leaderships
Financial Excesses: Stocks, Corporate Debt, Sovereign Debt…
Politics / Geopolitics
Brexit, still a ticking bomb
- 21 -
Brexit, still a ticking bomb
- 22 -
A Few Good Men…
- 23 -
Manuel Balmaseda Chief Economist
Foro Boca, Mexico CEMEX Building Award 2018
A Dimming Outlook