Global Economic Scenario - Swiss Life Asset Managers

Global Economic Scenario
February 2015
Revisions since last month (in brackets forecasts as per previous month)
GDP 2015
Swiss Life AM
GDP 2016
Swiss Life AM
(3.2%) 3.2% (3.0%) 2.5%
CPI 2015
CPI 2016
Swiss Life AM
Swiss Life AM
2.8% (n.a.)
0.3% (1.3%)
(1.3%) 2.9%
(2.3%) 2.2% (n.a.)
Euro Area
(1.0%) 1.1%
(1.3%) 1.6% (n.a.)
0.5% (1.0%)
(0.6%) 2.0%
(1.7%) 1.2% (n.a.)
(0.4%) 1.2%
(0.7%) 1.5% (n.a.)
(1.4%) 0.4%
(0.2%) 1.2% (n.a.)
2.4% (n.a.)
(1.3%) 2.2%
(2.0%) 1.8% (n.a.)
(1.5%) 1.9% (1.8%) 0.6%
(1.3%) 2.0% (n.a.)
Switzerland 0.9%
-1.1% (0.1%)
-0.2% (0.1%) -0.4% (0.5%) 0.5% (n.a.)
Source for Consensus Estimates: Consensus Economics Inc. London, 12 January 2015
USA – The growth engine is back for now
GDP Growth
Swiss Life Asset Managers
2015: 3.4%
2016: 2.5%
2015: 3.2%
2016: 2.8%
The strong decline of the oil price has led many experts to
identify the US economy as THE bright spot in the global
growth environment. Had growth dynamics in European
economies and the US started to diverge last year already,
some of the emerging markets which rely heavily on commodity exports have entered a pronounced slowdown if not
recession phase. Therefore, despite the fact that the US has
increasingly turned into an energy producer over past years,
the benefits from cheaper oil will be more clearly felt than
elsewhere and should support overall growth dynamics directly via strong consumption activity in the short and medium term. As a consequence, we upgraded our GDP forecast
for the current year pushing it further above its potential
rate. Against the backdrop of strengthening consumer demand, production will have to rise, investment plans should
get revised to the upside and hiring plans are bound to support the ongoing recovery of the labour market. The opposing trend of the growth rate and inflation complicates the
call for the timing of a first rate hike by the Federal Reserve.
The central bank has always stressed the importance of labour market indicators for their decision to take out steam.
Although most indicators continue to signal a tightening of
the labour market, wage growth dynamics have again disappointed with the latest publication for the month of December. There still is an above-normal amount of slack in the
form of underemployment, so that wage dynamics exhibit a
long lag to the business cycle. However, pressure certainly is
© Swiss Life Asset Management AG
Global Economic Scenario
building up according to business surveys but also consumer
confidence subcomponents on wage income expectations.
Some forecasters argue that the decline in energy prices will
also meaningfully dent jobs and income prospects for households. Yet, based on the fact that employment in the oil and
gas extraction industry makes up just 0.13% of total nonfarm
payrolls in the country, the positive effect of higher disposable income in the broad population should overcompensate
this potential drawback by far. It is much rather capital
spending plans in the energy sector which have the potential
to negatively impact GDP growth but should prove to be a
minor headwind after all.
Swiss Life Asset Managers
2015: 0.3%
2016: 2.9%
2015: 0.7%
2016: 2.2%
We have built modestly higher energy prices into our inflation
forecast for the rest of the year. Despite this, the past crash of
oil prices and its derivatives has already done so much damage
to inflation projections that the headline inflation rate will
move into negative territory with the reading for January and
will remain there until August of this year. Furthermore, the
appreciation of the USD depresses import prices and puts additional downward pressure on overall inflation. This forces us
to revise our whole year inflation projection to the downside
by a full percentage point from last month. The core measure
of inflation reached a level of 1.8% on average in 2014 and of
1.6% in December. Core services prices will continue to get support from the shelter as well as the medical care components.
In our own inflation path, the core reading will end the year
2015 at a level of 1.9%.
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Euro Area – Quantitative easing after all
Japan – Lifting our growth forecast
GDP Growth
Swiss Life Asset Managers
2015: 1.2%
2016: 1.5%
GDP Growth
Swiss Life Asset Managers
2015: 0.8%
2016: 1.2%
2015: 1.1%
2016: 1.6%
As expected, President Draghi announced a huge additional
asset purchase program to include bond purchases of Euro
Area governments and of European institutions. The ECB
will buy assets for 60 billion Euro each month, starting in
March 2015 until at least September 2016. Yet, the ECB left
the option open to continue the purchases beyond September 2016 until there is sustained adjustment in the path of
inflation towards the 2% inflation target. As stressed before,
we view the decision with a critical eye. As the US example has
shown, the impact of QE is overrated. Secondly, interventions of central banks make us drift farther away from free
capital markets and distort asset pricing further. Finally, the
cyclical momentum has improved anyway and the latest ECB
lending survey reveals increasing loan demand from the corporate side and further easing of banks’ lending conditions
even without QE. The most important channel is the impact
on confidence and expectations besides the potential impact
on the exchange rate. An impressive announcement has the
potential to boost investors’ and households’ inflation expectations which remain a major concern of the ECB. That in
turn lowers real interest rates making investment more attractive and should thus boost growth. Yet, it also harbours
the risk of taking the pressure from governments to undertake structural reforms and thus boost competitiveness further out. It remains to be seen how the outcome of the Greek
elections shapes the financial and political situation of the
country and the region as a whole.
Swiss Life Asset Managers
2015: 0.5%
2016: 2.0%
2015: 0.1%
2016: 1.2%
Cheap oil has pushed headline inflation into negative territory
in December, one month earlier than in the US. The corresponding decline in inflation expectations has added to deflation fears and left no room to manoeuvre for the ECB. Forward
looking, we have built in slightly higher energy prices and the
effects of a weakening Euro, however, still had to halve our inflation projection for this year. This is entirely due to the past
erosion of energy and food prices. According to the ECB’s lending suvrvey, loan growth in the Euro Area revives, so that central bank liquidity may reach the real economy.
© Swiss Life Asset Management AG
Global Economic Scenario
2015: 1.2%
2016: 1.5%
Three fresh reasons justify an upward revision to our growth
forecast for Japan: First, like elsewhere in the developed world,
falling energy prices mean a strong support for Japan’s economy. Cheaper energy imports provide a support to Japan’s
trade balance. The trade balance is also supposed to be positively impacted by rising overseas demand for Japanese consumer goods and machinery as lower energy prices mean that
Western households and businesses have more money to
spend on other goods and services. Foreign trade statistics for
December 2014 confirm this judgement. Should the oil price
stay at current levels throughout 2015, Japan’s trade balance is
likely to post a surplus. A second reason, why we are forced to
double the forecast for this year and also substantially lift the
numbers for 2016 is yet another fiscal spending program approved by Japan’s newly elected parliament. In sum, the latest
stimulus package amounts to the equivalent of around 0.5% of
Japan’s gross domestic product. The third reason for a more
constructive view on domestic economic dynamics stems from
the accelerating improvement on the labour market. November data show that for 100 job seekers, there are 112 vacancies
reported by firms. This is the highest ratio since May 1992.
Swiss Life Asset Managers
2015: 0.9%
2016: 0.4%
2015: 1.2%
2016: 1.2%
Falling energy prices provide the Bank of Japan with a good
excuse to give up the target of returning to annual inflation
rates of 2% in short time. Due to last year’s consumption tax
rate hike, inflation indeed stood above 2% by the end of last
year. Yet, we expect inflation to fall below 1% until April 2015
and to stay around 0.5% until mid-year 2016. Risk factors to
our forecast are the following: Hefty swings in the oil price
(which we expect to gradually rise in Dollar terms until end
of 2016), rising wages following to the labour market recovery and a further weakening of the Yen in case of additional
monetary easing by the central bank.
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UK – Step-up in fiscal consolidation
Switzerland – Scenarios after the SNB decision
GDP Growth
Swiss Life Asset Managers
2015: 2.3%
2016: 1.8%
GDP Growth
Swiss Life Asset Managers
2015: 0.9%
2016: 0.6%
2015: 2.6%
2016: 2.4%
The UK labour market continued to recover in the final
months 2014. Jobless claims have now fallen for 26 straight
months, the longest stretch since 1998. In annual terms, nominal aggregate wage growth exceeds 4%. Car sales and retail
sales suggest strong underlying dynamics in the domestic
economy. Apart from sound labour market conditions, consumers’ purchasing power is also supported by lower petrol
prices which bodes well for the short-term consumption outlook. Medium-term, falling oil prices cut both ways for the UK
economy. At current prices, offshore North Sea oil production
is not profitable putting pressure on the 160’000 jobs strong
industry, which has already asked for government support via
tax cuts. Yet, this is not the reason, why our own forecast falls
short of the consensus estimate for this year and also 2016: Rather, we believe that the uncertain outcome of the general election in May weighs on business sentiment meaning that investment decisions are held back for the time being. Decision makers are confronted with two major uncertainties: One being EU
membership and the country’s attractiveness for foreign investment, and the second one the composition of future austerity measures. Regardless of the outcome of the election, we
expect a step-up in fiscal consolidation in the second half of
2015 and more importantly in 2016.
Swiss Life Asset Managers
2015: 1.1%
2016: 2.2%
2015: 0.9%
2016: 1.8%
Despite economic growth clearly exceeding potential since
eight quarters and wage growth dynamics accelerating, annual inflation in the UK dropped from 1.9% to 0.5% between
June and December 2014. As elsewhere, the main culprit was
the falling oil price while price competition in the retail sector seems to have eased slightly. Assuming a stable or just
modestly higher oil price in the course of the next 24 months,
we think that annual inflation will start to grind higher by
April and exceed 2% again by the end of 2015.
2015: 1.9%
2016: 2.0%
It is too early to present a detailed revised forecast after the
surprise decision by the Swiss National Bank to abandon the
minimum exchange rate versus the Euro. As concerns GDP
growth, one first has to consider the exchange rate impact on
the growth components directly dependent on the external
value of the Swiss Franc. The focus here is on external trade
and the tourism industry. While exports will suffer from the
currency appreciation, imports become cheaper and may
therefore rise, causing further harm to overall growth. Furthermore, one has to consider the adverse currency effect on
business investments. However, the lower rate environment
is bound to positively support building investments. We have
simulated the effect on average GDP growth under three alternative scenarios for the EUR/CHF exchange rate: A first
scenario with the Euro recovering to 1.10 on average through
2015, a second one in which the Euro stays around parity and
finally an even more severe case in which the Euro drops to
0.90 Swiss Francs. In each scenario, we kept the exchange rate
stable throughout 2016 at its assumed average levels for
2015. Obviously, in none of the scenarios could we stick to
our initial forecast for yearly average growth of 1.5% in 2015.
Instead, the outcomes of the simulations vary from 0.3% to
1.0% growth in 2015 and from -0.2% to 0.8% in 2016. Falling
energy prices and signs of recovering lending activity in the
Euro Area bode well for a continued economic recovery
abroad. We thus base our revised growth forecast on the assumption of an average EUR/CHF exchange of around 1.05
for this and next year.
Swiss Life Asset Managers
2015: -1.1%
2016: -0.4%
2015: -0.2%
2016: 0.5%
A simulation for average consumer price inflation under the
above mentioned exchange rate assumptions results in
deeply deflationary scenarios. Outcomes of the simulations
vary from -1.9% to -0.9% average inflation in 2015. Further
out, the forecast is highly dependent on the assumptions for
the oil price and the Dollar which we expect to appreciate in
the light of looming monetary policy tightening in the US.
Released and approved by the Economics Department, Swiss Life Asset Management AG, Zurich
Swiss Life Asset Managers may have acted upon or used research recommendations before they have been published. The contents of this document are based upon
sources of information believed to be reliable but no guarantee is given as to their accuracy or completeness. This document may include forward-looking statements
which are based on our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results
could differ materially from those anticipated in the forward-looking statements. Should you have further questions, or wish to order our reports, send an e-mail
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Global Economic Scenario
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