GLOBAL ECONOMIC OUTLOOK 2017

Bucking the Trend – Overcoming Uncertainty, Shocks

and Disruptions with Qualitative Growth
December 2016

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 The Conference Board’s Global Economic Outlook 2017
Trend, Shocks and Disruption

Available for download on:

https://www.conference-board.org/economic-outlook2017

2 © 2016 The Conference Board, Inc. | www.conferenceboard.org

 Trend, shocks and disruptions that will determine the world
economy’s future (1)

 Trend:
 Ongoing stagnant growth (2.5 percent for
2016 and 2.8 percent in 2017) - well below Trend
the 3.5+ percent growth of past decade
 Supply side constraints (slowing labor force
growth and weak productivity) vs. secular
Shock
stagnation (lack of demand)
 Shocks and uncertainties:
 Geo-political and economic challenges
(Brexit, US elections, immigration, Disruption
terrorism, China, Brazil) weigh unusually
heavily on the global economic outlook
 Business is taking a wait-and-see attitude
towards investment

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 Trend, shocks and disruptions that will determine the world
economy’s future (2)

 Disruptions:
 Monetary and fiscal policy stances and Trend
their impact on debt – how sustainable?
 Transformation in energy demand and
supply – how large?
Shock
 A shift in the long-term elasticity of global
trade and growth – how big?
 Digital transformation provides the upside
for innovation, productivity and growth – Disruption
but when will the effects emerge?

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 Growth projections for 2016 weakened – modest recovery in 2017
will be mainly driven by energy-producing emerging economies
Real GDP growth, %

Note: GDP growth for select countries with significant ICT production and trade are revised upward to reflect ICT price declines
*Europe includes European Union -28 as well as Switzerland, Iceland and Norway.
**Other mature economies are Australia, Canada, Israel, Hong Kong, South Korea, New Zealand, Singapore, and Taiwan.
***Russia, Central Asia, and Southeast Europe include projections for Russia, Kazakhstan, Turkmenistan, Uzbekistan, Belarus, and Turkey.
Source: The Conference Board Global Economic Outlook 2017.

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 What risks to watch out for in 2017?

 Estimates of fiscal stimulus effects in US probably small in first

instance – but monetary policy environment likely to tighten
 The U.S. economy is tightening – rising wages, increased inflation,
higher interest rates – potentially bringing recession risk forward
(especially as consumers have become less tolerant to high prices)
 Muddled Brexit negotiations and multiple elections expose fragility of
Europe’s economic space and need for reform of European institutions
 China’s role globally, and in AP region in particular, is unpredictable
depending on a range of external and internal factors
 Capital flows out of emerging markets complicate financial stability
and create downside to growth prospects
 Markets have not factored in downside risks from negative shock to
globalization – especially on trade and immigration

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 Base scenario projects moderate improvement in
emerging markets in 2017, but downside risks loom large
 Growth in emerging markets may improve slightly to 3.7 percent in 2017, up from
3.2 percent in 2016, mostly depending on energy and commodity prices.
 Lower private-sector investment continues to drag on overall economy.
 Regional growth performance and policies continue to diverge:
Emerging Asia
– Growth remains relatively stable driven by consumption – especially supported by India
– China’s “long soft fall” continues – battle between state “re-forms” and market reforms
– Fiscal and monetary policies remain accommodative, but threat from global tightening
– Slow global trade and financial market volatility increase downside risks
Latin America
– Fiscal consolidations and monetary tightening likely
– Cyclical factors provide some lift to growth, but only modestly.
Turkey and Russia
– Currency devaluation and inflationary pressures will keep central banks on hold;
– Stabilizing energy prices and political situation help improve growth prospects.
 The rebalancing from (tangible) capital accumulation to skills and innovation will
sustain catch-up with mature countries but more slowly than before
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 China’s current macro picture – growth stabilized in 2016, but is
it sustainable?

 Topline Story – Temporary Stabilization

— Growth stabilized in 2016, but the stabilization is highly dependent on pro-growth
monetary policies
— The policy priority in the near-term has swung from pro-growth to risk-containment
— A resumption of decelerating growth is expected to ensue in early/mid-2017

 Fundamentals Remain Weak

— Investment – Growth came primarily from SOE investment in infrastructure; private
sector investment remains very subdued
— Consumption – resilient, pushed by strong “momentums”, but under pressure as
income growth slows
— Exports – Exports continue to weaken. RMB devaluation is unlikely to provide a
boost given weak external demand

 Risks Continue to Mount

— Pro-growth policies are increasingly ineffective and costly
— The housing market is entering a down-cycle; households have been leveraging-up
on real estate
— Debt growth continues to significantly outpace GDP growth

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 Main constraints for emerging markets to sustain growth are
medium-term and structural
GDP growth, %
India
2017-2021
Mexico
2022-2026
China
Brazil

Other Developing Asian Economies

Sub-Saharan Africa
Middle East & North Africa
Latin America
Russia, Central Asia and Southeast Europe

All emerging and developing economies

All Mature Economies
World

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Note: GDP growth for select countries with significant ICT production and trade are revised upward to reflect ICT price declines
***Russia, Central Asia, and Southeast Europe include projections for Russia, Kazakhstan, Turkmenistan, Uzbekistan, Belarus and Turkey.
Source: The Conference Board Global Economic Outlook 2017

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 Advanced economies show rapid declines in working-age
population growth – demographic dividends in emerging markets
gradually waning

* "Natural" refers to growth in population excluding migration

Source: United Nations Population Division

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 Productivity growth will recover somewhat but not enough to
offset other supply-side constraints

Trend growth in output (GDP) per worker, 1970-2026, in %

Note: Trend growth rates are obtained using HP filter, assuming a l=100.
Source: The Conference Total Economy Database & The Conference Board Global Economic Outlook 2017 (November 2016 )

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 While global growth will slow in the next decade, qualitative
growth factors play a larger role

Global Economy
Real GDP growth, %

Qualitative
growth
factors

Quantitative
growth
factors

Notes: Growth rates are presented as log changes

Source: The Conference Board Global Economic Outlook 2017

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 Nearly 1/3rd of growth in Southeast Asia is to come from
qualitative factors

Sources of output growth

Qualitative Quantitative

Optimize the use of

available labor
Labor Labor
supply Quality Quantity

Harness the Capital Capital

benefits from digital Quality Quantity
transformation

Total Factor
Innovation and Productivity a measure of efficiency with which quantitative and
efficiency qualitative factors are being used in the production
process
Note: * Contributions, which are expressed in log term, may not add up to GDP growth, as the latter is in % changes.
Source: The Conference Board Global Economic Outlook 2017.

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 Skill improvement and the movement to digital are key to
Malaysia’s future growth performance

Sources of output growth

Qualitative Quantitative

Optimize the use of

available labor
Labor Labor
supply Quality Quantity

Harness the Capital Capital

benefits from digital Quality Quantity
transformation

Total Factor
Innovation and Productivity a measure of efficiency with which quantitative and
efficiency qualitative factors are being used in the production
process
Note: * Contributions, which are expressed in log term, may not add up to GDP growth, as the latter is in % changes.
Source: The Conference Board Global Economic Outlook 2017.

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 Malaysia’s growth performance more strongly driven by
New Digital Economy than officially measured
Malaysia GDP growth, adjusted and unadjusted for decline prices in Information and
Communication Technology (annual y-o-y % growth

Note: for adjustment see Erumban and de Vries, Global Growth Projections for The Conference Board
Global Economic Outlook 2017, November
Source: The Conference Board Global Economic Outlook, 2017

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 Global trade growth has dropped off to historically low
levels – below industrial production and GDP growth
World Merchandise Trade Volume and Industrial Production (3-mth average y-o-y % growth)
and Real Global GDP Growth (annual y-o-y % growth

Source: CPB World Trade Monitor, August 2016; The Conference Board Total Economy Database, May 2016

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 Possible causes of the global trade slowdown

 Cyclical factors:
 Global Trade Collapse (2009), the Eurozone Crisis (2012) and the
Emerging Markets slowdown (since 2013)
 Fall in energy and commodity prices – but this isn’t just a commodity cycle
 Structural effects reducing the elasticity of trade on GDP:
 Long term stagnation in mature economies reduces demand permanently
and holds back investment
 Catch-up potential from largest emerging markets has receded, especially
in manufacturing – and in particular China
 Change towards final demand for services involves more domestic
production
 Increased trade in information and data services isn’t well measured
 Defragmentation in the global value chain
 Rising protectionism and failing trade negotiations fueled by political
backlash on globalization
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 The 1990s was a special period, and trade elasticities may
have turned back to the normal “pre-1985” period

Long-term trade elasticity with respect to GDP

Outlier?
-Fall of Berlin Wall and
opening up of Eastern
Europe
-Re-integration of China in
the world economy
-Great expansion in GVCs
(international fragmentation
of production)

Source: Cristina Constantinescu, Aaditya Mattoo, and Michele Ruta, The Global Trade Slowdown: Cyclical or
Structural?, IMF Working Paper WP/15/6

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 Creating value through qualitative rather than quantitative
growth

1. Overcome the pressures from weak labor supply and talent

shortages
– Aging, participation, immigration, education and training
2. Harness the benefits and digital transformation
– Shift to digital services, price declines in digital economy, and investments in
knowledge-based assets
3. Drive productivity growth through innovation and efficiency
– Revenue growth potential, cost management, global trade, financial and
investment climate
4. Take advantage of remaining catch-up potential in low-income
emerging markets
– Rapid growth potential for economies at less than half of mature economies’
level of incomes, rising middle classes

19 © 2016 The Conference Board, Inc. | www.conferenceboard.org

 The Conference Board’s Global Economic Outlook 2017
Trend, Shocks and Disruption

Available for download on:

https://www.conference-board.org/economic-outlook2017

20 © 2016 The Conference Board, Inc. | www.conferenceboard.org

 Note: GDP growth for select countries with significant ICT production and trade are revised upward to reflect ICT price declines
*Europe includes European Union -28 as well as Switzerland, Iceland and Norway.
**Other mature economies are Australia, Canada, Israel, Hong Kong, South Korea, New Zealand, Singapore, and Taiwan.
***Russia, Central Asia, and Southeast Europe include projections for Russia, Kazakhstan, Turkmenistan, Uzbekistan, Belarus, and Turkey.
Source: The Conference Board Global Economic Outlook 2017.

21 © 2016 The Conference Board, Inc. | www.conferenceboard.org

 United States growth increasingly kept in check by supply
constraints rather than slow demand

 GDP increased at a 3.2% rate in Q3, but details are less positive
 Consumer spending remains a bright spot, but investment picture
little changed despite better productivity in Q3
 Labor market conditions tighter with accelerating wages
 Actual and expected inflation are modest but rising and the Fed is
getting closer to its stated goals
 The outlook for economic growth and corporate profits in the coming
years is quite gloomy. The main reason is that the economy is held
back by supply constraints
 A new administration might provide some upside on fiscal policy, but
kept in check by offsetting forces in an already tightening economy
 Overall, the US is expected to remain close to an average growth
rate of 2.0 percent from 2017-2021

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 Markets may be ahead of themselves on Trump victory
 Immediate market and business response:
 No Brexit scenario
 Markets may be overly bullish?
 Watch the narrative develop and appointments by the incoming administration
 The policy dossiers in the first 100 days:
 Corporate taxes – perhaps also income taxes
 Infrastructure
 Regulations esp. red tape
 Immigration, esp. deport undocumented
 Health care: repeal of exchange subsidies and Medicaid expansion
 Beyond 100 days:
 Trade: TPP and TTIP almost certainly dead, but new approach to trade
agreements/negotiations might need to evolve – risk of rhetoric backfiring
 Immigration: border security (“the wall”); visa regulations unclear & which
occupations and countries will be affected
 Health care: insurers and businesses will seek clarity about new regulatory scheme
 Other regulations, especially finance and energy/climate

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 Brexit and Europe – a complex stranglehold

 Economic data point to resilient UK post-Brexit economy so far:

 Q3 GDP growth higher than expected (+0.5% q-o-q, +2.3% y-o-y)
 Low unemployment (4.9%)
 Sterling remains weak despite greater volatility around US$
 High (imported) inflation first major crack in the outlook
 Leading Economic Index suggests some weakening of business cycle
 Domestic vs. global: Ryanair cuts expansion plans in the UK while Nissan
extends investment on assumption of amicable agreement with EU
 Political-economic challenges suggest there is more to loose than gain:
 Start of Brexit negotiations by March 2017, although recent rulings could
extend negotiation process
 A higher level of uncertainty might be permanent and have more important
medium-term effects on UK growth
 EU isn’t forthcoming in negotiating a win-win deal, but the biggest casualty
at the end of the day could be the EU itself
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