Five macro themes for 2018 Chief Analyst Jakob Ekholdt Christensen +45 45 12 85 30 jakc@danskebank.dk Chief Analyst Allan von Mehren +45 45 12 80 55 alvo@danskebank.dk Senior Analyst Mikael Olai Milhøj +45 45 12 76 07 milh@danskebank.dk Analyst Aila Mihr +45 45 12 85 35 amih@danskebnak.dk 3 January 2018 Investment Research www.danskebank.com/ci Important disclosures and certifications are contained from page 23 of this report.
Five macro themes for 2018 1. Robust global recovery continues 2. Inflation to stay subdued 3. The (long) road to monetary policy normalisation 4. Political risks to remain in check 5. China the main downside risk to global growth 1
1. Robust global recovery continues
Global growth to continue in 2018 but acceleration is behind us Real income is slowing albeit from high levels but business optimism points to investment recovery Global growth to remain above potential in 2018 but set to lose some momentum The US to pick up speed, China and the UK to slow 2017 2018 2019 % y/y D anske B ank D anske B ank D anske B ank Global 3.6 3.6 3.5 Developed markets 2.1 2.0 1.8 USA 2.2 2.4 2.1 Euro area 2.3 2.0 1.8 Japan 1.6 1.3 0.8 UK 1.5 1.3 1.2 Note: the grey area is Danske Bank forecast Source (all charts): Macrobond Financial, Danske Bank Emerging Markets of which 4.6 4.7 4.7 China 6.8 6.3 6.2 3
How can the recovery continue for so long? Although the recovery has been ongoing for many years, it has been weaker than normal in the US A missing link so far has been private investment, which has room to grow Source (both charts): Congressional Budget Office, Macrobond Financial 4
2. Inflation to stay subdued
Inflation is set to stay muted Output gaps are closing and labour markets continue tightening but wage growth remains subdued partly due to lower inflation expectations so underlying inflation is set to stay muted Low inflation expectations Low actual inflation Low wage growth demands Sources (all charts): Eurostat, BLS, BEA, Macrobond Financial, Danske Bank 6
Wage growth still the missing link to higher euro area core inflation Euro area unemployment dragged down by the low German unemployment rate but despite the tight German labour market and continued growth above potential still no clear upward trend in German wages in sight Sources (all charts): Eurostat, EC, Destatis, ECB, Macrobond Financial, Danske Bank 7
Super core inflation increasingly in focus as ECB looks for exit arguments Super core inflation* in the euro area has indicated an upward trend since 2017 supporting ECB s hope of rising underlying inflation pressures due to closing output gap Source: ECB, Eurostat, Macrobond Financial, Danske Bank Source: ECB, Eurostat, Macrobond Financial, Danske Bank *For more details on our super core inflation measure see also ECB inflation gap persists in 2019, 4 December 2017 8
Higher oil price will have a positive impact on US and euro area inflation in 2018, but effect will be fleeting Base case oil price scenario If oil price moves higher Source (all charts): Macrobond Financial, Danske Bank 9
Benign inflation outlook as US and euro area core inflation to increase only gradually Headline inflation to move higher due to energy prices But underlying inflation pressures to remain subdued in 2018 Source: Eurostat, BEA, Macrobond Financial, Danske Bank Source: Eurostat, BEA, Macrobond Financial, Danske Bank 10
3. The (long) road to monetary policy normalisation
Gradual monetary policy normalisation: global liquidity likely to remain significant for a considerable period of time Very gradual hiking cycle Central banks are buying less this year Source: Federal Reserve, ECB, Danske Bank Source: Federal Reserve, Bank of Japan, ECB, Danske Bank 12
ECB: the extraordinary to become normal Gradual hiking cycle starting in Q2 19, but policy rate unlikely to rise above 1.5% New normal involves large balance sheet even if the economic situation normalises Source: ECB, Macrobond Financial, Danske Bank Source: ECB, Macrobond Financial, Danske Bank For more details on the ECB s exit strategy from extraordinary monetary policy measures, see The Euro-Scandi exit and what it implies for markets, 30 November 2017 13
Four out of six dovish executive board members will end their term by 2019 - opening the door for a more hawkish ECB? Lautenschläger (hawkish) Jan 2022 Cœuré (dovish-neutral) Dec 2019 Constâncio (dovish) May 2018 Praet (dovish) May 2019 Draghi (dovish) Oct 2019 Mersch (hawkish-neutral) Dec 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: ECB, Danske Bank 14
Natural rate of interest key to understand central banks Are the natural rates increasing? Fed currently thinks real natural rate is 0.75% in the long term monetary policy close to neutral Source: SF Fed, Macrobond Financial, Danske Bank Source: SF Fed, Federal Reserve, Macrobond Financial, Danske Bank 15
4. Political risks to remain in check
Political risks, but with limited economic impact May: Brexit means Brexit MENA power struggles US midterm elections in November: lame duck Trump turning hardcore protectionist? Italian general election in March: who will head the next Italian government? Kim Jong Un: North Korea is now a nuclear force 17
Political risks again looming in Italy - parliamentary elections to take place in H1 18 with strong showing of M5S expected Political uncertainty has dropped markedly Still many unresolved issues in Italy Centre-left government Centre-right government Five Star (M5S) government No structural reforms But high uncertainty about future Italian government, as no clear majority in sight + Lingering banking sector weaknesses + Risk High public debt & weak growth outlook + Risk of possible euro exit under M5S Italy could become a market concern again (not out base case) Source (all charts): Macrobond Financial, Danske Bank 18
Risk of escalation of US-North Korea crisis We continue to view a war on the Korean peninsula as a low probability but high impact risk. The probability is low, in our view, as losses would be too significant on both sides for any of the parties to want to start a military conflict. It seems increasingly likely that the US will have to accept that North Korea is a nuclear power. The latest missile test by North Korea on 28 November suggests that it is now capable of reaching all of the US with an Intercontinental Ballistic Missile (ICBM). However, when moving so close to the brink, a human error cannot be ruled out. This could for example be a missile landing on Japanese soil by mistake, setting off a dangerous spiral of retaliation. Source: Colourbox.com If a military conflict materialises it would pose a big risk to the global economy, as it would set off significant uncertainty and geopolitical tensions between the US on the one side and China and Russia on the other. Equity markets would sell off sharply and bond yields would come down. 19
5. China the main downside risk to global growth
China the main downside risk to global growth As China drives 30% of global growth, a sharper slowdown than we expect would be felt across the global economy. A number of factors point to downside risks over the coming quarters: 1. Credit tightening: Our credit impulse measure points to a sharp slowdown on the back of the credit tightening taking place over the past year. Credit impulse points to downside risk for Chinese manufacturing 2. Renewed reform push by China s leadership after the Congress may entail some short-term pain as deleveraging of SOEs and a further crackdown on shadow finance could hurt investment growth. New measures were announced again on 17 November, see China takes more steps to fight financial risks, 20 November 2017. Lower commodity price momentum points to weakening PMI 3. Anti-pollution measures are likely to reduce production more than usual over the winter months. Source (all charts): Macrobond Financial, Markit, Bloomberg, Danske Bank 21
Credit tightening and anti-pollution measures to kick in Downside risks to the housing market Crackdown on shadow banking kicking in Anti-pollution curbs on steel production over the winter may have bigger than expected spill-over to manufacturing PMI Wealth Management Products have been key financing source for infrastructure and property investments What Wealth Management Products have financed 49% 24% 13% 14% Infrastructure Construction Property Others Source (all charts): Moody s, Bloomberg, Macrobond Financial, Danske Bank 22
Disclosures This research report has been prepared by Danske Bank A/S ( Danske Bank ). The authors of this research report are Jakob Ekholdt Christensen (Chief Analyst), Allan von Mehren (Chief Analyst), Mikael Olai Milhøj (Senior Analyst) and Aila Mihr (Analyst). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. Danske Bank s research reports are prepared in accordance with the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from, and do not report to, other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates None. Date of first publication See the front page of this research report for the date of first publication. 23
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