frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Global Securities Research March 2014 Global Economic Outlook A world redefined Larry Hatheway Chief Economist Tel: +44 20 7568 4053 [email protected] This document has been prepared by UBS Limited March 2014 ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON SLIDE 23 0 frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Challenging the received wisdom Just a few short years ago… …becoming Financial crisis, de-leveraging American transformed Eurozone crisis European renewal Age of austerity Yep, an age of austerity BRICs Cracks in the façade Commodity super cycles Not living up to expectations Japan’s lost decades ‘Abenomics’ Currency wars Emerging currency vulnerability Occupy Wall Street Soaring profits, regressive taxes Global imbalances solved Return of global imbalances? 1 frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Global outlook frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Global economic forecast summary • Following a 2.5% expansion in 2013, global GDP growth is expected to pick up to 3.3% in 2014 and 3.4% in 2015, albeit still below trend. • Cyclical leadership has shifted to developed economies. The biggest change is in the Eurozone, where after a contraction of (0.4%) in 2013, we forecast recovery to 1.1% growth in 2014. • We forecast US GDP growth of 3.0% for 2014. Corporate confidence is critical. So, too, is the resumption of stronger jobs growth. • In China we forecast GDP growth of 7.8% this year, with diminished downside risk. But credit growth is too strong and China must rely onto exports to achieve its growth targets. • The Fed will reduce its asset purchases throughout 2014, with 'QE3' concluding by year end. For Treasuries, 'tapering' is less important than expectations about when the Fed will raise short rates (not before 2015, in our view) • Risks include the European politics, Eurozone bank de-leveraging, Fed uncertainty, 'the fragile 5', and geopolitical flare-ups—any of which could de-rail a still-sluggish global recovery. 3 Source: UBS frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Living history Level of real GDP, selected countries: Q1 2008 = 100 111 Real GDP Q108=100 106 101 96 91 86 81 76 Q111 Q110 Q211 Q311 Q411 Q112 Q113 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q210 Q310 Q410 Q212 Q312 Q412 Q213 Q313 US UK Germany France Italy Spain Greece 4 Source: OECD/IMF frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Better but not good World GDP growth and long-term average 5 Source: Haver, UBS frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Spot the divergence GDP growth rates in EM vs. DM 10% Real GDP growth (% y/y, mid-weighted) 8% 6% 4% 2% 0% -2% -4% -6% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 EM Developed 6 Source: Haver, CEIC, IMF, UBS estimates frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Inflation doesn’t start from here Global output gap as % of world GDP 7 Source: Haver, OECD Economic Outlook, UBS estimates frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Policy challenges frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt The other great de-leveraging? Central bank balance sheets as % GDP 9 Source: UBS Europe’s fiscalfrenchph [printed: March 23, adjustment2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL has INBOX\Reports\Nord beenics-SA-PF.ppt painful but impressive Cyclically-adjusted primary balances, % of potential GDP 10 5 0 -5 -10 2009 2013 [] 2009 [] 2013 -15 Greece Ireland Spain Portugal France Euro area Italy Germany US UK Japan Source: Haver, OECD Economic Outlook, UBS 10 frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Soak the middle class, spare the rich Number of times taxes were changes (or not) Personal income taxes Value added taxes Excise taxes Social security contributions Corporate income taxes Property taxes 0 5 10 15 20 25 30 35 40 Unchanged Lowered Raised 11 Source: IMF Fiscal Monitor, UBS estimates frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt A world transformed frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt “I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.” -Romano Prodi, EU Commission President, December 2001 Source: UBS frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt The silver lining to a very black cloud Unit labour costs (2000 = 100) 160 150 140 130 120 110 100 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 France Germany Greece Ireland Portugal Spain Italy 14 Source: Haver, Eurostat, UBS estimates frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt American renewal? Real effective exchange rates 130 Real effective exchange rate index, Jan 2000 = 100 125 120 115 110 105 100 95 90 85 80 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 US China 15 Source: Haver, BIS, UBS estimates frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt America’s energy advantage Domestic price of natural gas: January 2007 = 100 300 Index, 2007 = 100 250 200 150 100 50 0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 European natural gas prices US natural gas prices 16 Source: Haver, BIS, UBS estimates Oh, to be the 1% be to the Oh, US profit share profitshare inGDP US 10.0 11.0 12.0 13.0 14.0 6.0 7.0 8.0 9.0 Q1-47 Source: Haver, National Income and Product AccountsProduct and Haver, IncomeNational Source: Q1-50 Q1-53 frenchph [printed:frenchphMarch 23, 2011 Octo[saved: 11:48AM] Q1-56 Q1-59 Q1-62 Recession Q1-65 Q1-68 ber 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nord 20124,ber 4:46S:\EDITORIAL PM] Q1-71 , UBS UBS estimates , Q1-74 Q1-77 Q1-80 US corporate profits as %GDP as profits corporate US Q1-83 Q1-86 ics-SA-PF.ppt Q1-89 Q1-92 Q1-95 Q1-98 Q1-01 Q1-04 Q1-07 Q1-10 17 Q1-13 frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt From Ricardo to China: Comparative labor advantage Consumers Wholesaler Raw materials Manufacturer Shop Source: UBS/The Economic Impact of 3D printing, http://madameeureka.files.wordpress.com 18 A world transformed:frenchph [printed: March 23, 2011 11:48 AM] [saved: Octo ber Comparative4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt advantage based on capital Raw Printer/CAD materials input Consumers Source: UBS/The Economic Impact of 3D printing, http://madameeureka.files.wordpress.com 19 frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Emerging? Really? Total factor productivity growth 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Emerging economies Advanced economies 20 Source: The Conference Board, UBS frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Concluding remarks frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt A world re-defined • Sluggish, fragile and unbalanced recovery: 'American dependency' • Unprecedented policy challenges: Good luck Janet, Mario & Shinzo • De-leveraging: An 'emerging' theme? • Age of Plutocracy • Technology: Hope or fear? • Why the sun sets in the East and rises in the West 22 Source: UBS frenchph [printed: March 23, 2011 11:48 AM] [saved: October 4, 2012 4:46 PM] S:\EDITORIAL INBOX\Reports\Nordics-SA-PF.ppt Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.