Download Opportunities and challenges for 2016

December 2015
G20/20 Vision
Opportunities and challenges for 2016
Table of contents
Introduction2
Activity4
1. Size of economy—GDP
4
2. GDP/Capita4
3. GDP growth
4
4. Industrial production
4
Prices
5. CPI inflation
6. House prices
7. Wage growth
5
5
5
5
Labour6
8. Unemployment rate
6
9. Youth unemployment
6
Financial markets
10. Equity market
11. Currency market
12. Official interest rates
13. Long term interest rates
7
7
7
7
8
Demographics9
14. Population growth
9
15. Life expectancy
9
Government10
16. Budget balance 10
17. Public debt
10
External11
18. Exports11
19. Current Account
11
20. Foreign exchange reserves
11
G20 Country details
12-31
Conclusion32
1
Introduction
In 1999, in the aftermath of the Asian Financial Crisis, the
group of the 20 largest countries in the world was formed.
The purpose of the group was to seek agreement on ways
to strengthen the global economy, reform international
financial institutions, improve financial regulation and
implement key economic reforms that are needed to raise
the potential growth rate of its members.
In the 16 years since its formation, the G20 has had to
deal with a number of colossal events including, but not
limited to, the technology boom and bust, major terror
attacks in the US, Bali, Madrid, London, and Paris, wars in
Iraq, Afghanistan and Syria, the global financial crisis, the
Greek debt crisis, and the European sovereign crisis.
As its Chair in 2014, Australia set an objective to lift G20
economic growth by an additional 2% over five years.
The G20:20 Report, now in its second year, analyses the
past trajectory and future challenges of the G20 through
the lens of 20 macroeconomic indicators with a view to
assessing how the G20 is tracking against the goal set
by Australia.
A number of interesting themes that relate to the ability of
the G20 to achieve its growth goals have emerged from
this years’ report:
Theme 1: Dealing with divergence.
Last year, almost 25% of the G20, on a GDP weighted
average basis, eased monetary policy. Just 7% of the G20
tightened monetary policy. Over the next 12 months, that
divergence is expected to widen with almost 40% of the
G20 expected to tighten policy while almost 45% are
expected to ease monetary policy.
remained broadly unchanged. With divergence comes
volatility in what may become an all-out currency war.
Currency risk management will become more important
over the next 12 months.
Theme 2: Less is the new normal
In the past 12 months, the G20 economies managed to
record growth of 2.3%. In the 12 months prior to that
G20 GDP growth was 2.5%. Slower growth has been
driven by weaker growth in China and by association
those economies reliant on commodities including
Australia, Brazil and Canada.
Inflation is also lower across the G20. In the last 12
months, 69% of the G20 economies by GDP weight had
an inflation rate of 1% or less. This compares with 30% in
the 12 months prior to that.
Slower economic growth and lower inflation means real
interest rates will be lower. For investors, this means
expected returns, which work off real interest rates as
their starting point, will also be lower. Achieving target
returns will be more difficult going forward. Investors will
either need to revise down their target returns to match
the lower expect return environment, chase returns by
taking on more risk, or be more dynamic in their asset
allocation—taking profits early and often.
One of the key investment implications of divergent
monetary policy is increased volatility. In terms of idea
generation this means directionality will be difficult
to determine. Relative value positions will become a
more important driver of return. In terms of portfolio
construction, nimble asset allocation underpinned by
clarity of investment process; having clear investment
review levels and knowing when to take a profit will
become even more important.
Theme 3: Peak reserves
The decision by the US Federal Reserve to raise interest
rates for the first time in nine years will have significant
ramifications for a world that has for so long relied on
a weaker US dollar. The tide is going out on emerging
market currencies and with it the benefits of low inflation
and low interest rates. G20 currencies have fallen
significantly against the US dollar in the last 12 months.
Rapidly declining emerging market currencies is putting
upward pressure on inflation, and on their central banks
to respond with higher interest rates. Many of these
central banks have responded by intervening in the market
to defend their currencies. This intervention is not without
cost. According to the IMF, foreign exchange reserves
globally peaked in the middle of last year and have been
declining ever since.
In recent years, currency volatility has been relatively
muted, as interest rates in most major economies have
China and the emerging G20 economies led the build-up
in reserves in the wake of the 1997 Asian Financial Crisis
2
to a peak of more than $8.2 trillion last year. Of this, 81%
sat in emerging G20 central banks. G20 reserves have
since declined to $7.7 trillion.
into financial assets. Upward pressure on US bond yields may
affect the operation of monetary policy and hamper
the ability of other countries such as Europe and Japan, to
exit unconventional monetary policy.
Slower economic growth out of China, still weak
commodity prices, a strong US dollar and higher US
interest rates and still weak global trade are all reasons to
suggest we have seen a peak, at least for now, in global
foreign exchange reserves.
Whilst setting a growth goal is admirable, it appears clear
that achieving it will be a challenge.
One of the implications of peak reserves would be less
demand for sovereign bonds from a key non-profit
maximising buyer. A large proportion of foreign exchange
reserves are invested in sovereign bonds, mainly US
Treasuries. The effect is equivalent to a quantitative
tightening because it means less liquidity being pumped
Tracey McNaughton
Executive Director
Head of Investment Strategy
Global Investment Solutions—Asset class attractiveness.
Unattractive
Overall
Neutral
USA
Australia
Equities
Attractive
Japan
Emerging
UK
Eurozone
Switzerland
Fixed Income
UK
High Yields
EMD local
Corporates
Currencies
NZD
Positive
EMD $
US
Switzerland
Australia
EMU
Japan
CAD
EUR
AUD
USD
CHF
GBP
JPY
Negative
As of October 31, 2015
Based on UBS Asset Management views with a 12-18 month time horizon.
3
Activity
1. Size of economy—GDP
Global GDP, the total value of all goods and services
manufactured and produced in one year, amounted to
approximately 77 trillion US dollars in 2014. G20 GDP
amounts to around 79% of global GDP.
The United States, Europe and China alone make up 56%
of G20 GDP. The remaining 44% of the group is made up
of 17 countries.
3. GDP growth
The latest annual growth rates for each of the economies
in the G20 when compared with their 10 year average
growth rate reveal some interesting trends. First, the
commodity countries of Australia and Canada have moved
from outperforming their 10 year average last year to
underperforming it this year. The emerging markets are
currently growing below their 10 year average growth
rate. This is particularly evident for Russia where economic
sanctions combined with a significantly lower oil price has
pushed the economy into a deep recession. Finally, the
remaining developed economies (the US, Germany, the
UK, the EU, France, Japan and Italy) are currently growing
at rates above their 10 year average. For France and Japan
this is a turnaround from last year.
Chart 1: G20 GDP (% share)
GDP Growth (yoy%)
Chart
3: GDP Growth (yoy %)
The G20 grew by 2.3% most recently, down from its
2.5% pace of the previous 12 months and lower than
its 10 year average pace of growth of 2.9%. Indeed, the
world economy recorded its slowest 3 year average pace
of growth in 2014 since 2002.
10.0
Australia
2%
US
24%
India
3%
6.0
4.0
Russia
3%
2.0
Brazil
3%
0.0
(2.0)
France
4%
China
14%
(4.0)
Source: Bloomberg, as at 30 September 2015
(USD, 2014)
Aust
US
Canada
Japan
Germany
France
UK
EU
Italy
S. Kor
Saudi Arabia
Argentina
Russia
Brazil
Turkey
Mexico
China
South Africa
Indonesia
India
Italy
Japan
EU
France
UK
US
Germany
Mexico
4. Industrial production
Brazil and Japan remain the weakest performers in terms
of industrial production. Industrial production grew by
8.5% most recently in Turkey, driven by the manufacturing
sub-sector and supported by growth in the European
Union economies. Industrial production growth in China
has declined from an average annual pace of 6.1%
last year to 5.9% currently. Industrial activity remains
lacklustre across most of the developed G20 economies
reflecting the decline in global trade. It has weakened in
the US where the strength in the dollar has undermined
its international competitiveness. Manufacturing activity is
struggling in emerging markets as reflected in the decline
in global trade.
Industrial production (latest, yoy %)
Chart 4: Industrial production (latest, yoy %)
2014
2013
0
10,000
20,000
30,000
Source: Bloomberg, as at 30 September 2015
40,000
50,000
60,000
70,000
Turkey
India
China
Indonesia
Australia
Germany
UK
France
Canada
South Korea
Mexico
Italy
Russia
Argentina
US
EU
South Africa
Japan
Brazil
(9)
(7)
(5)
(3)
(1)
Source: Bloomberg, as at 30 September 2015
4
Canada
Australia
South Africa
Brazil
Russia
Turkey
South Korea
Argentina
Source: Bloomberg, as at 30 September 2015
2. GDP/Capita
Comparing the gross domestic product of a country to
the number of inhabitants produces GDP per capita. GDP
per capita rose in most countries compared to last year.
The exceptions were Australia, Canada, Japan, Argentina,
Russia, and Turkey. These countries have either struggled
under the weight of significantly lower commodity prices,
or, as is the case with Japan, the translation effect from a
stronger US dollar has had a significant impact.
G20
GDP/Capita
(USD)
Chart
2: G20
GDP/Capita
Saudi Arabia
EU
18%
India
Japan
6%
Indonesia
(6.0)
Germany
5%
China
UK
4%
Latest
8.0
Canada
2%
Italy
3%
10yr avg
other
1
3
5
7
9
Prices
5. CPI inflation
As was the case last year, consumer prices are increasing
most significantly in Russia, Brazil and Turkey. These
emerging market economies are suffering from substantial
devaluations in their exchange rates which is putting
upward pressure on import prices. A large proportion
of imports into these countries is food which has a
disproportionately large weight in the CPI basket for many
emerging economies (on average a weight of 27%).
defaults, legal proceedings usually take five to seven years.
Investing in the Italian housing market is made even more
unattractive due to rental controls and other restrictions.
Real house price growth
Chart 6: Real house price growth (Index Jan 09 = 100)
160
150
140
130
Consumer prices have risen significantly in Russia since the
imposition of economic sanctions by the European Union
and the US.
120
110
100
90
09
The effect of lower oil prices is clearly evident among the
oil importing nations with headline inflation now below
1% in 68% of the G20 economies. This is up from 30%
of the G20 last year. Headline inflation is currently zero in
the US, Germany, France, and Japan. Deflation is already
evident in the EU and the UK. The US recorded one of
the most significant declines in inflation compared to last
year as the strength in the dollar added to the deflationary
effects of a lower oil price.
10
Aust
2
4
6
8
10
12
14
12
13
Indonesia
14
15
Brazil
Canada
11
Mexico
12
France
13
Russia
14
Korea
15
Italy
Source: Bloomberg, as at 30 September 2015
7. Wage growth
Not surprisingly, wage growth is greatest in the emerging
G20 economies where inflation is also the highest. This
includes Brazil, Russia and Mexico where wages are
growing in excess of 4% annually. Elsewhere, wage
growth remains subdued and is even in decline in
Australia, Germany, Italy, and the US.
Russia
Brazil
Turkey
Indonesia
South Africa
India
Mexico
Saudi Arabia
China
Australia
Canada
South Korea
Italy
Japan
US
Germany
France
UK
EU
0
10
Japan
CPI (latest,
Chart
5:yoy%)
CPI (latest, yoy %)
(2)
India
110
105
100
95
90
85
80
75
70
65
60
09
For emerging market economies, the issue is more one
of inflation, rather than deflation. Headline inflation has
increased over the last 12 months in Russia, Brazil and
Indonesia. Sharp depreciations in the local currencies has
put upward pressure on imported inflation.
11
US
16
Source: Bloomberg, as at 30 September 2015
6. House prices
Since the global financial crisis, real house prices have
increased by over 50% in India and Brazil with Canadian
house prices up almost 40% in real terms over the same
period. Brazilian house prices increased on average by
16% per year in real terms between 2009 and 2011 as
the domestic economy benefited from a strong currency
and low interest rates. More recently the pace of growth
has declined to an annual average of just 0.3%. Real
house prices have remained relatively stagnant in Japan,
Mexico, France and South Korea and have fallen in Russia
and in Italy. The mortgage market in Italy is small due to
the length and cost of the loan recovery process, making
Italian banks cautious to lend. From the time a borrower
Weak wage growth may in part be a result of a structural
shift in some economies away from manufacturing and
toward the lower paying services sector. This certainly may
be the case in Australia and the US where wage growth
has been surprisingly weak despite improving labour
markets. Another key driver may also be the shift toward
part-time and temporary work. The International Labour
Organisation recently highlighted the growing incidence
of workers without a permanent contract. The occurrence
was particularly evident in Indonesia, India, and China. Wage growth (latest, yoy%)
Chart 7: Wage growth (latest, yoy %)
China
Brazil
Russia
Mexico
UK
Argentina
Australia
Canada
US
EU
Germany
South Africa
France
Italy
Japan
South Korea
-2
0
2
4
6
8
10
12
Source: Bloomberg, as at 30 September 2015
5
Labour
8. Unemployment rate
Among the G20, the economy with the highest
unemployment rate continues to be South Africa, with an
unemployment rate little changed from last year at 25.5%.
The G20 economy with the lowest unemployment rate is
Japan, closely followed by South Korea.
The unemployment rate has fallen across most G20
economies compared to this time last year. The
exceptions are Brazil, Russia and Canada, all of whom
entered into a recession in 2015, and South Africa. The
unemployment rate has risen in Brazil to 7.6% currently
from 4.9% this time last year. In most G20 economies,
the current unemployment rate is below its 10 year
average. The exception to this is the commodity-driven
economies, Australia, Brazil and Canada, where the
current unemployment rate is above their 10 year average.
Relative to its 10 year average the unemployment rate has
fallen in the US, followed by Germany and Argentina. The
greatest amount of deterioration in the unemployment
rate relative to its 10 year average occurred in Italy.
Unemployment
Rate (latest, %)
Chart 8: Unemployment
rate (%)
Chart 9: Youth
unemployment
rate (%)
Youth
(15-24) unemployment
rate (%)
South Africa
Italy
Saudi Arabia
France
Indonesia
EU
Turkey
Argentina
Brazil
Russia
UK
Canada
Australia
India
US
Mexico
South Korea
Germany
Japan
2015
2014
0
Japan
South Korea
China
Mexico
US
Russia
UK
Saudi Arabia
Australia
Germany
Argentina
Canada
Indonesia
Brazil
India
EU
Turkey
France
Italy
South Africa
10
20
Source: Bloomberg, as at 30 September 2015
0
5
10
Source: Bloomberg, as at 30 September 2015
6
9. Youth unemployment
Youth unemployment remains elevated across the G20
although it does appear to have declined since last year.
The exceptions to this are South Africa, where the rate
is the highest among the G20 and growing at 51.5%
compared to 48.2% last year. Among the developed
economies, youth unemployment is exceptionally high
in Italy at 40.5%, just shy of its all-time high of 43.7%
reached in March 2014.
15
20
25
30
30
40
50
Financial markets
10. Equity market
The best performing equity markets over the past 12
months were China and Russia, with 29% and 16.4%
growth respectively, followed by India and Japan,
with 9.3% and 6.4% growth respectively. The worst
performing markets, down by more than 10%, were
Argentina, Indonesia, Brazil and Canada. Most developed
market G20 equity markets are still well below their
pre-GFC peak. This particularly applies to Italy, France
and Australia, each more than 20% below their peak. In
contrast, most emerging G20 equity markets are currently
well above their pre-GFC peak. This is most evident
for Argentina, South Africa, Indonesia and India, each
more than 30% above their pre-crisis peak. The US and
Germany are the only developed market G20 economies
to have their equity markets above their respective preGFC peak, up 25.8% and 19.7% respectively.
China
Russia
India
Japan
South Korea
Germany
Italy
South Africa
France
Turkey
US
Australia
Mexico
UK
Canada
Brazil
Indonesia
Argentina
(20)
(10)
0
10
20
Japan
Turkey
Argentina
Brazil
Mexico
Russia
South Africa
Indonesia
Canada
EU
France
Australia
India
Germany
Italy
South Korea
UK
US
China
Saudi Arabia
(40)
(20)
0
20
40
Source: Bloomberg, as at 30 September 2015
12. Official interest rates
Official interest rates are still highest among the emerging
G20 economies. Interest rates are above 10% in
Argentina, Brazil and Russia and above 7% in Indonesia,
India and Turkey. Interest rates are the lowest among the
developed G20 economies with the US, Europe, Japan,
the UK and Canada all having rates at or below 0.5%,
in total representing 49% of the G20. Monetary policy
has been eased in the past 12 months in China, India,
South Korea, Australia, Canada and Turkey. In contrast,
monetary policy has been tightened in Argentina, Brazil,
Russia and South Africa—all of whom are fighting
imported inflation from recent currency depreciations.
Chart 10: Equity market growth (latest, yoy %)
(30)
Chart 11: Currency markets (% deviation from 15yr
Real effective echange rate (% deviation from 10-year
average)
average)
30
Source: Bloomberg, as at 30 September 2015
11. Currency market
Most emerging market currencies have fallen significantly
in the past 12 months. Among the G20, the Brazilian
real is the worst performer, falling 30% in real effective
exchange rate terms over the past 12 months. The Russian
rouble has declined by 26% and the Mexican peso has
fallen 15%. The Mexican peso is the most liquid emerging
market currency which can be traded 24/7. Mexican
assets will therefore suffer in a risk-off environment even
if the country is fundamentally stronger than many other
emerging economies. The only G20 currencies that saw
appreciations were the US dollar (+13.4%), the Saudi
Arabian riyal (+13.0%) and the Chinese yuan.
Official
rates (latest,
%)
Chart interest
12: Official
interest
rates (%)
Argentina
Brazil
Russia
Indonesia
Turkey
India
South Africa
China
Mexico
Saudi Arabia
Australia
South Korea
UK
Canada
US
Japan
Italy
Germany
France
2015
2014
0
5
10
15
20
Source: Bloomberg, as at 30 September 2015
Relative to their 10 year average, the largest declines in the
real effective exchange rate have been for the Japanese
yen and the Turkish lira. The largest appreciations were in
the Saudi riyal (+37.0%) and the Chinese yuan (+31.2%).
7
13. Long term interest rates
Long term interest rates, as measured by the yield on 10
year government bonds, have generally moved lower over
the last 12 months among the G20. The exception to this
is Brazil, Russia, Indonesia, Turkey and South Africa. Long
term interest rates currently sit at 15.4% and 10.7% in
Brazil and Turkey respectively, posing a funding challenge
for the sizeable current account deficit each emerging
market faces.
In the past year, the European Central Bank’s Quantitative
Easing program has had a dampening effect on euroarea bond yields. In Germany, 10 year bond yields are
approaching the levels seen in Japan while yields in Italy
and France are below 10 year yields in the US and UK.
Chart Government
13: 10 yearbond
bond
yields
(%)
10-year
yield
(latest,
%)
Brazil
Russia
Turkey
Indonesia
South Africa
India
Mexico
China
Australia
South Korea
US
UK
Italy
Canada
France
Germany
Japan
2015
2014
(4)
1
Source: Bloomberg, as at 30 September 2015
8
6
11
16
Demographics
14. Population growth
There are currently around 7.3 billion people in the world,
growing at the rate of around 2 people every second.
Between 2010 and 2015 populations have grown in
every G20 economy with the single exception of Japan
where it declined by 0.12%. In the past year alone, the
population in Japan has shrunk by one million people.
The fastest growing population is Saudi Arabia, where
immigration levels are the highest in the G20 (see Chart
28). Immigrants make up 31.4% of the Saudi national
population. Among the advanced G20 economies,
Australia has one of the fastest population growth
rate at 1.4%.
Chart
14: Population
growth
(latest,%)
yoy %)
Population
growth (last
12 months,
Saudi Arabia
Italy
Russia
South Africa
Australia
Indonesia
India
Canada
Turkey
Mexico
Argentina
Brazil
US
UK
China
France
Germany
South Korea
Japan
15. Life expectancy
Population growth is slowing as the birth rate declines
but people are living longer thanks to new technology
and healthier lifestyles. The economy with one of the
biggest improvements in life expectancy among the
G20 is China. A child born in China in 1990 could
be expected to live to on average to the age of 68.
This compares with a child born in China in 2013
could expect to live on average 8 years longer to 76.
In Shanghai life expectancy is now 83—on par with
Switzerland.
While Japan tops the league tables for the highest
life expectancy, South Korea has the fastest ageing
population. South Korea’s population of 65+ has almost
tripled within one generation. At the other extreme is
the US, whose 65+ population has increased just 16%
compared to 1981 (see Chart 25).
-0.5
0
0.5
Source: Bloomberg, as at 30 September 2015
1
1.5
2
2.5
90
85
80
75
70
65
60
55
3 50
South Africa
India
Russia
Indonesia
Brazil
China
Turkey
Saudi Arabia
Argentina
Mexico
US
Germany
UK
South Korea
Canada
France
Australia
Italy
Japan
Chart
15: Longest
Longest
lifespanlifespan
(years)(years)
Source: Bloomberg, as at 30 September 2015
9
Government
16. Budget balance
Generally speaking, most G20 economies are currently
running a fiscal deficit. The exceptions are South Korea,
which is running a surplus of 1.6% of GDP, and Germany,
which is running a small 0.3% surplus. In the past 12
months, fiscal balances have generally deteriorated,
particularly in Brazil, Russia, and Saudi Arabia. The
deterioration in commodity prices has been particularly
harmful for government revenue in these economies. The
fiscal balance has improved for a number of economies
over the last 12 months, particularly for Canada, the UK
and Japan.
Compared to its 10 year average, the fiscal position for the
US has improved significantly, from a deficit of 4.9% to a
deficit of 2.4% currently. Germany and the UK have also
had, though less significant, improvements in their fiscal
positions compared to their 10 year average.
Fiscal Balance
(latest,
%GDP) (% GDP)
Chart
16: Fiscal
balance
South Korea
Germany
Saudi Arabia
Argentina
Turkey
Canada
China
Indonesia
Australia
US
Russia
Italy
Mexico
France
UK
India
Japan
Brazil
Chart
Public
debt
(% GDP)
Public17:
debt
(latest,
% GDP)
Japan
Italy
France
Canada
UK
Germany
US
Brazil
India
South Africa
Mexico
Argentina
Turkey
Australia
South Korea
Indonesia
China
Russia
Saudi Arabia
0
50
100
Source: Bloomberg, as at 30 September 2015
(10)
(8)
(6)
Source: Bloomberg, as at 30 September 2015
10
17. Public debt
Public debt levels have generally improved across the G20
over the past 12 months. This is particularly the case for
Saudi Arabia, Argentina, China and Germany. Public debt
levels have increased in the last 12 months as a share of
GDP in Canada, Japan, Russia and Mexico. Public debt as
a percentage of GDP now stands above the critical level of
90% in Japan, Italy, France and Canada. Saudi Arabia has
taken over from Russia as the least indebted G20 economy.
(4)
(2)
0
2
150
200
250
External
18. Exports
South Korea remains the most open economy in the
G20 with 50.6% of its GDP in exports. The least open
economy remains Brazil with just 11.5% of GDP in
exports. The structure of the G20 economies has changed
significantly over the past 10 years. The export sector has
become far more important for economies such as South
Korea, Germany, Mexico, and India. In the case of Mexico
this is a deliberate strategy given the number of Free Trade
Agreements it has signed in that time. For others, such
as Indonesia, China, Argentina, Canada and Russia, the
export sector has shrunk as a share of the economy.
Chart
Exports
Exports18:
(latest,
% GDP)(% GDP)
Chart
19:
Current
account
Current
Account
Balance
(%GDP)balance (% GDP)
Saudi Arabia
Germany
South Korea
Russia
China
Japan
Italy
France
India
Argentina
Mexico
US
Canada
South Africa
Indonesia
Brazil
Australia
UK
Turkey
(8)
South Korea
Saudi Arabia
Germany
Mexico
Canada
South Africa
Italy
France
Russia
UK
Turkey
Indonesia
India
China
Australia
Japan
Argentina
US
Brazil
(6)
(4)
(2)
0
2
4
6
8
10
12
Source: Bloomberg, as at 30 September 2015
100%
90%
3.5
USD, trillion (LHS)
3.0
As % GDP (RHS)
80%
70%
2.5
60%
2.0
50%
1.5
40%
30%
1.0
20%
France
Argentina
Germany
US
Italy
0%
Canada
10%
0.0
Australia
0.5
South Africa
Interestingly the trade fortunes of Japan and South Korea
have oscillated around each other. For much of the past
10 years, the current account surplus of Japan has been in
decline while the surplus in South Korea has been rising.
Most recently, the surplus in Japan has once again begun
to rise while the current account surplus in Korea has
levelled out.
4.0
Indonesia
The collapse in commodity prices has been responsible
for the deterioration in the current account position for
Saudi Arabia, Australia, Canada, Argentina and Brazil. The
strength in the US dollar, up 13.7% relative to its long
term average real effective exchange rate, has undermined
the international competitiveness of US exports resulting
in a deterioration in the current account deficit there to
2.4% of GDP from 2.1% of GDP last year.
Chart 20: Foreign
reserves
(USD)
Foreignexchange
exchange reserves
(latest)
UK
19. Current account
Turkey has the largest current account deficit in the G20
at 5.9% of GDP but this is closely followed by the UK
(5.1% GDP), Australia (4.7% GDP), and Brazil (4.2% GDP).
Turkey's current account deficit reached a peak of 9.7%
of GDP in 2011 and has since declined back to its average
level of the last 10 years. Despite the collapse in oil prices,
Russia’s current account surplus has improved over the last
12 months.
Turkey
60
Mexico
50
India
40
Russia
30
Brazil
20
South Korea
10
Saudi Arabia
0
Source: Bloomberg, as at 30 September 2015
China
2005
Japan
2015
20. Foreign exchange reserves
A defining feature of the world economy over the past 15
years was the unprecedented accumulation of foreignexchange reserves. Central banks, led by those in China
and the oil-producing states such as Russia and Saudi
Arabia, built up an enormous amount of other countries’
currencies. Mid-2014 proved to be the high-point. Since
then reserves have dropped by at least $500 billion. China,
whose reserves peaked at around $4 trillion in June 2014,
has burnt through $300 billion of its holdings to prop up
the yuan. Other emerging markets, notably Russia and
Saudi Arabia, have also tapped their reserves over the same
period for a combined $174 billion. As a share of GDP,
however, Saudi Arabia still has the highest reserves in the
G20. In an effort to support their currencies and ward off
inflation Brazil and Turkey have tapped into their reserves
for around $100 billion each over the past 12 months.
Source: Bloomberg, as at 30 September 2015
11
Argentina
Argentina ranks 19th out of the G20 in terms of its GDP.
Its share of world GDP is just 0.7%, down from a 1.0%
share this time last year. With a population of 41.5 million
people, its GDP per capita is just $13,017 US dollars, down
from $14,741 last year.
The Argentinian economy reportedly grew at a 2.3%
pace in the September quarter, well down on its 10 year
average of 4.7%. Inflation reportedly sits at 14.5%, a
rate second only to Russia among the G20. Argentina
is therefore facing stagflation. One of the biggest
drivers of growth is also one of the biggest issues for
the economy—public spending. The fiscal deficit has
increased significantly despite cheapening energy imports.
Argentina spent around 3.5% of GDP on energy-related
subsidies in 2014.
Under President Kirchner, the state has exercised greater
control over the economy, including the imposition of
heavy taxes on agricultural exports, which helped swell
the public coffers and pay for social programmes during
the global commodities boom. The Kirchner administration
currently owns around 80% of the media industry,
illustrating the lack of transparency and difficulty in
defining whether reports on the economy are valid or not.
The government has continued with expansionary policies,
despite running low on international reserves (currently
just around $28 billion). Some containment of capital
outflows has been achieved by rationing hard currency. As
a result, reserves have actually increased slightly over the
last 12 months.
The results of the October 25 Presidential election
whereby the conservative, business-friendly, opposition
candidate Mauricio Macri took a surprise lead, resulted
in a run-off election on 22 November. This was the first
ever run-off in Argentina, which adopted a two-round
presidential election system in 1973. The win for Macri,
was a disappointing outcome for Scioli, Kirchners handpicked successor.
Not only does Mr Macri want to reduce the state's role
in the economy, he is also keen to scrap the country's
currency controls, and make it much easier for Argentines
to change their local pesos into US dollars—a popular
move in a country where hiding dollars under the mattress
has traditionally been the preferred way of warding off
hard times.
12
Largest debt
default in history
However, such a policy would probably involve a peso
devaluation and would certainly require a substantial
increase in the central bank's currency reserves. The only
way of doing that in a hurry would be to issue new bonds
on the international money markets, which Argentina
cannot do while it remains an international pariah because
of previous defaults.
Challenges to growth
The main challenges to growth for Argentina remain
uncontrolled government spending, heavy taxes on
exports coupled with strict controls on imports and
disincentives for foreigners to invest. Recent changes to
tax laws have reduced the number of tax evaders, but the
proportion is still high at around 25%.
Economic growth has picked up on last year and a more
business friendly government would be a positive move
but issues around a lack of access to global credit markets
given the selective default in 2014 (its eighth), rising fiscal
indebtedness, excessive regulation, and an overvalued
currency limit the ability for this pace to be maintained.
Australia
Australia ranks 13th out of the G20 in terms of its GDP.
Its share of world GDP is 1.9%, down from 2.2% last
year. With a population of 23.1 million people, its GDP
per capita is $62,934 US dollars, down from $67,558 US
dollars last year.
Australia has outperformed for the past two decades:
GDP has grown twice as fast as its peers (averaging
3.25% since 1998), without a technical recession for 25
years. Per capita income has grown rapidly and is among
the highest in the world. The fiscal position compares
well to advanced economy peers with net debt only 15%
of GDP compared to 79% on average for G20 advanced
economies. And net migration has contributed to a rapidly
growing population, at 1.5% a year, among the highest
in the OECD.
However, the biggest mining construction boom in
150 years is now over. Australia’s economy has slowed
to a crawl and mining investment as a share of GDP is
expected to fall from over 7% to just over 2% by 2016/17.
Growth has been below trend for the past two years
which combined with poor productivity, low wages,
and falling profits means real net disposable income slid
1.2 p.p. in the biggest drop in standards of living since the
global financial crisis.
Chart 21: Minumum wage (PPP)
Australia
France
Saudi Arabia
Germany
Highest minimum
wage in the G20
rate there is less of a need for reserves and banks’ external
liability positions are either in domestic currency or hedged.
Lower oil prices have a mild positive effect on the trade
balance (net oil imports of 2% of GDP). LNG prices have
also declined as they are linked to the oil price with a
lag. Over the medium term as Australia becomes a larger
exporter of LNG (it is expected to overtake Qatar by 2018),
this effect will begin to dominate.
The Australian dollar has depreciated sharply against
the U.S. dollar. While this should help boost the
competitiveness of non-resource exports—and there
are signs that services exports are picking up—the real
exchange rate still looks high relative to the decline in the
terms of trade.
Australia has recently signed the Trans-Pacific Partnership
Agreement which will create a free-trade area covering
40% of the global economy. This deal follows the free
trade deal struck with China in June. Australia is also
preparing for a trade deal with the European Union.
Australia ranks as the EUs 21st largest trading partner while
the EU represents Australia’s 3rd largest trading partner
after China and Japan.
Canada
UK
Argentina
US
South Korea
Japan
Turkey
China
Brazil
Russia
Indonesia
India
Mexico
0
2
4
6
8
10
12
Source: OECD, 2015
Australia has run a current account deficit for much of
its history. Official reserves are relatively small at 4.5% of
GDP, but with a strong commitment to a floating exchange
Challenges to growth
Australia needs to transition from mining led growth
and position itself more competitively for an increasingly
wealthy, more services-oriented, Chinese market. Australia
is the most China-dependent economy in the world
with 36.1% of our exports destined for China (see Chart
26). Part of this adjustment requires economic reform
to encourage greater business investment. This includes
taxation reform. Compared with other nations, Australia’s
GST rate remains low too. The OECD average for valueadded taxes (or GST) is 19.5%. Countries with regressive
tax codes, like Sweden, have VAT’s as high as 25%. Raising
the GST rate to 15% from 10% currently would raise as
much as $40 billion in additional revenue each year. 13
Brazil
Brazil ranks 8th out of the G20 in terms of its GDP. Its
share of world GDP is 3.0%, down from a 3.6% share this
time last year. With a population of 201 million people, its
GDP per capita is just $11,672 US dollars, up slightly from
last year.
Most expensive
iPhone in the G20
Having recorded average annual growth of 4.5% during
the 2004-10 commodity-related boom, the Brazilian
economy is in a deep recession with GDP growing at
-2.6%. Inflation currently sits at 9.5%, well above the
4.5% target set by the central bank. Inflation is expected
to remain elevated due to the weakness of the currency,
the effects of high indexation (the minimum wage is
linked to nominal GDP) and other economic inefficiencies.
Challenges to growth
In the last 8 years, Brazil became middle class by its own
standards helped by the China-inspired commodity boom
and lower interest rates. The country is now seeing a
dramatic reversal of those fortunes and is now mired in
the middle-income trap. Anaemic investment in traditional
infrastructure has become an increasingly heavy drag on
productivity, contributing to waste and inefficiency in
existing production systems. Just 14% of roads are
paved and sewage from almost half of the population
goes untreated.
Brazil’s private sector borrowed heavily in recent years. As
a share of GDP, domestic credit to the private sector has
increased to 69.1% from 39.7% in 2006. Banks accounted
for most of this increase with an estimated 14% being
foreign currency denominated. So far in 2015, the real
has fallen by 31% against the US dollar making it the
worst performing EM currency. The sharp rise in external
indebtedness by Brazilian corporations is a potential threat
to growth given this weakness in the currency.
Whilst the weakness in the currency will help to boost
the international competitiveness of Brazilian exports, its
economy is relatively closed. Exports in Brazil represent
just 11.5% of GDP, the lowest among the G20.
Chart 22: Most expensive iPhones in the world (USD)
1,400
Brazil is caught in a vicious circle of policy tightening
and a negative spill-over from political scandal. This is
undermining real economic activity, investor confidence
and the currency pushing inflation higher as a result.
This is putting pressure on the central bank to lift official
interest rates, currently at 14.25%. Pressure is therefore
rising for the government to reverse course on its fiscal
objective and pursue fiscal stimulus. This would trigger
even more capital outflows and put greater pressure on
the currency and hence external borrowing costs.
Brazil suffers from a punitive tax system (where it takes
an average mid-sized firm 2,600 hours per year to comply
versus 334 hours in Mexico), high levels of bureaucracy
and an inflexible labour force.
1,200
The deterioration in Brazils public finances can only be
reversed through reform, particularly regarding social
security expenditure, which has been rising rapidly in
recent years due to its ageing population, overly generous
benefits, indexing rules and a low retirement age.
1,000
800
600
400
200
Source: Apple, 2015
14
Canada
US
Japan
Mexico
Australia
South Korea
China
Russia
UK
Germany
France
Italy
Turkey
Brazil
0
Canada
Canada ranks 12th out of the G20 in terms of its GDP. Its
share of world GDP is 2.3%, down from 2.9% this time last
year. With a population of 35.4 million people, its GDP per
capita is $50,471 US dollars, down slightly from last year.
The Canadian economy is currently in a recession with
growth of just 0.9%. This is down from 2.6% growth last
year and is well down on its 10 year average of 1.9%. The
Bank of Canada (BoC) has cut interest rates twice this year
leaving them at a record low of 0.5% currently.
International trade is important for the Canadian economy
with exports representing 31.6% of GDP. The US is by far
its largest trading partner, accounting for around 70% of
exports and 60% of imports. Canada is the fourth-largest
crude oil exporter in the world and is also one of the
world’s largest suppliers of agriculture products, especially
wheat and other grains. The economy should benefit by
being a part of the Trans-Pacific Partnership (TPP) currently
being negotiated with 11 other countries.
Canada’s government is in a strong fiscal position despite
the poor growth record recently. Canada’s budget deficit
as a proportion of GDP is low by international standards.
Cheapest iPhone
in the G20
Challenges to growth
As a result of record low interest rates, Canadian
households have been taking on greater amounts of debt,
much of it housing-related. House prices are now 34%
pricier than their long term average when compared to
disposable income. Consumer debt is a record 165% of
disposable income.
Despite the binge, Canadians have remained relatively
sober. Only about 5% of Canadian mortgages are
subprime, compared with nearly a quarter in the US before
the crisis. This self-restraint is encouraged by the limited
competition evident in the banking sector. Just twelve
banks hold 95% of the assets. Competition among them is
not cut-throat and margins are therefore profitable.
A Federal election was held on October 19th with the
Liberal Party winning under leader Justin Trudeau, son
of the former Prime Minister Pierre E. Trudeau. Canada
is counting on an ongoing recovery in the US and a
devalued currency to boost its exports contribution to
growth. The new Prime Minister has promised to run
budget deficits for at least three years to finance $C60
billion in infrastructure spending.
15
China
China ranks 3rd out of the G20 in terms of its GDP. While
its share of world GDP is 13.3%, down from 14.9% last
year, in recent years it has been responsible for 45% of
global growth. With a population of 1,361 million people,
its GDP per capita is just $7,614 US dollars, up from
$6,791 US dollars last year.
China's economic boom of the past 30 years means it now
accounts for 11% of world GDP and around 10% of world
trade. In terms of resources, it now accounts for 11% of
world oil demand and 40–70% of demand for other key
commodities. Its financial system, as measured by broad
money supply, is now larger than the U.S.'s. Between
1978 (the year before Beijing began to reform and open
up its economy) and 2014, agriculture as a share of the
economy has fallen from 30% to less than 7%, while the
services sector has doubled to around 50%. As recently
as 2000, just 4% of Chinese households were considered
middleclass. Today that share has soared to around 70%.
Chart 23: Major foreign holders of U.S. treasury
securities in 2015 (USD bn)
China, Mainland
Japan
Oil Exporters
Brazil
United Kingdom
India
Mexico
Korea
Turkey
Germany
Russia
Canada
France
Australia
Italy
Chinese households still have very little leverage. Likewise,
federal debt in China remains low. The issue is local
government and corporate debt which has risen sharply
and the recent property slowdown has been particularly
painful for local government financing.
Challenges to growth
The ability to transition the economy from the world’s
largest producer to the world’s largest consumer without a
miss-step will be challenging. Along with the potential for
policy mistakes, the Chinese authorities face an impossible
trinity—an independent monetary policy combined with
a fixed exchange rate and an open capital account. The
difficulties this trinity pose to the economy were on display
in August and September 2015.
China has kept its currency off world markets and
restricted buying and selling. That walled off China from
boom-and-bust capital flows and kept its goods cheap.
Now it has reason to loosen the grip on the renminbi,
which means “the people’s currency,” and is better
known by the name for its biggest unit, called yuan.
To fuel a slowing economy and back rising political
ambitions, China is promoting the use of the yuan
throughout the world.
0
200
400
600
800
1,000
1,200
1,400
Source: Federal Reserve; US Department of the Treasury
As at June 2015
While the manufacturing sector has certainly diminished
in size, the government is making big efforts to move
Chinas manufacturing capabilities to the next level.
Policies such as “Made in China 2025” announced
in May 2015 promote advanced industries such as IT,
robotics, aerospace, railways and electric vehicles. The
“One Belt, One Road” plan announced in late 2013 and
highlighted in China’s fifth plenum also aims to not only
boost trade but will also provide a new source of demand
for commodities such as copper and iron ore. The plan
involves the investment of an estimated $US1 trillion of
government money to construct a transport system that
stretches from Beijing to northern Europe.
16
Largest foreign holder
of US Treasuries in
the world
A key step in this process is the inclusion of the yuan
in the basket of reserve currencies the IMF holds for
central banks known as Special Drawing Rights (SDRs).
Effective October 1, 2016, the yuan will have a weighting
of 10.92% in the basket, behind the USD and euro at
41.75% and 30.95% respectively.
The yuan’s advance into global markets demonstrates
President Xi Jinping’s ambition to challenge the hegemony
of the US dollar. A more widely used currency would raise
China’s influence in setting prices of commodities from oil
to iron ore and give individuals and companies in China
more choice with their savings. But as the yuan makes
the long march to internationalisation, China will be
vulnerable to swings in the currency and money flows that
could aggravate its economic slowdown.
France
France ranks 7th out of the G20 in terms of its GDP. Its
share of world GDP is 3.6%, down from 4.4% last year.
With a population of 65.8 million people, its GDP per
capita is $42,997 US dollars, up slightly from last year.
The economic performance of France has improved over
the last 12 months. The economy is currently growing at
1.1%, up from 0.2% last year and ahead of its 10 year
average of 0.9%. GDP per head is significantly higher in
the US, however, despite the fact that output per hour
worked in France is on par with the US. The difference is
due to the underutilisation of labour in France. France has
one of the lowest employment rates in the EU, and also
has one of the shortest working hours in the developed
world behind Sweden and Norway.
The trend rate of GDP growth is set to remain below
1.5% per year as growth in the working age population
stagnates and the political will against immigration
remains. France had one of the lowest population growth
rates in the G20 over the last 12 months (see Chart 14).
France’s future growth performance therefore hinges on
raising the level of productivity in the economy. There
is reason to be optimistic in this regard. Productivity
in France’s manufacturing sector has been supported
by relatively high levels of spending on research and
development. At 2.3% of GDP, spending on R&D is the
fourth highest in the OECD.
The most taxed
country in the G20
Challenges to growth
France remains burden by the world’s highest level of
payroll tax, which at 43% is far higher than in any other
country. Historically, the French have tolerated high
taxes as the price of decent public services and a proper
universal safety-net.
The strain is beginning to show, however. François
Hollande was forced to drop the unpopular 75% supertax
on those earning above €1m after accusations it was antibusiness. The decision to drop the tax is a personal blow
for Hollande and only one of a number of government
U-turns since he was elected, fuelling criticism that he is
indecisive and lacking authority.
Pressure is now on the government to undertake fiscal
austerity not through yet higher taxes but rather by
cutting government spending.
With exports and imports of goods and services together
representing 59% of GDP in 2014, France is a very open
economy for its size. Yet despite this, the push toward free
trade agreements and globalisation has not been as fully
embraced as other G20 economies.
17
Germany
Germany ranks 5th out of the G20 in terms of its GDP. Its
share of world GDP is 4.9%, down from 5.9% last year.
With a population of 80.5 million people, its GDP per
capita is $47,858 US dollars, up from $45,153 US dollars
last year.
18
Source: CIA, 2014
South Africa
India
Saudi Arabia
Mexico
Indonesia
Brazil
Turkey
Argentina
US
China
Russia
Australia
UK
South Korea
Challenges to growth
One of the clear challenges facing the German economy
is its ageing demographic. Germany has the oldest
population in the G20 (median age of 46.5 years) with
50
45
40
35
30
25
20
15
10
5
0
France
While income and social-security taxes are high, corporate
taxes have fallen.
Median24:
ageMedian
(years) age (years)
Chart
Italy
Foreign direct investment flows have increased
considerably and the favourable economic situation
attracted the highest number of skilled migrants since
1995. In addition, helped by higher wages, consumers are
increasing their spending, which is quite exceptional given
the country’s traditionally very high savings rate and low
consumption dynamics.
Equally, a severe global economic downturn (caused by a
weakening Chinese economy for example) would hit the
export dependent German economy very hard. Germany
is one of the most open economies in the G20 with
almost half of its GDP tied to exports (see Chart 18). China
is Germany’s 4th largest export market with around a
third of German exports to China in autos. Canada
As a result, Germany’s ability to refinance its debt on
international capital markets has never been better. Bond
yields in Germany hit an all-time low in 2015 of just 0.18%
and have averaged 0.5% so far in 2015 compared with an
average of 1.2% in 2014.
The perception that the last decade’s reforms may have
exacerbated inequality has induced a clear change in
reform policies. This has become evident in the policy
projects of the grand coalition which came to power
in 2013. Reforms since then have tended to move the
country into the opposite direction of the Hartz reforms.
While the Hartz reforms tried to liberalize labour markets,
new substantive regulations, such as the general statutory
minimum wage, are being introduced.
Japan
The country’s fiscal performance indicates that the past
years of reforms have started to pay off. Since 2012,
the public sector has had a balanced budget and the
government debt-to-GDP ratio has been reduced. This
fiscal performance is the consequence of the employment
boom, a relatively disciplined management of
expenditures and very favourable interest rates.
one of the slowest population growth rates (see Chart
14). While the pension reforms of the past prepared the
pension system for the coming substantial aging of the
population, recent reforms (e.g., lowering the pension
age for workers with a long employment history and
additional pensions for mothers) have increased pension
benefits as well as increased sustainability risks.
Germany
The German economy is currently growing at 1.6%,
slightly better than the 1.2% recorded last year and
up on its 1.4% 10 year average. Germany’s economic
structure is characterized by a healthy mix of service and
industrial sectors. A decade of reforms has increased
Germany’s competitiveness. Employment rates have
risen continuously, structural unemployment rates are
down, and productivity gains have been strong. Stability
during the euro crisis has made it a popular investment
destination.
Highest median
age in the G20
India
India ranks 10th out of the G20 in terms of its GDP. Its
share of world GDP is 2.7%, up from 2.6% this time last
year. With a population of 1,233 million people, its GDP per
capita is just $1,676 US dollars, up slightly from last year.
India’s GDP is currently growing by 5.3%, about in line
with last years’ growth but well down on its 7.3% 10 year
average. A pick-up in industries, such as clothing, furniture
and cars suggests that India’s bounce-back from a rocky
period in 2013 is being led largely by consumer spending.
India cannot evade the global challenges, however. A
more persistent drag to growth from weak exports is now
likely. India is hurt far less than other emerging markets by
what is happening in China. Manufacturing supply chains
tie Singapore, South Korea and Taiwan to the Chinese
economy; India exports little there, by comparison. Just
4.6% of its exports are destined for China comared with
26% for South Korea and 19% for Brazil (see chart 26)
Inflation has been relatively stable in India at 4.4%, well
below the RBI’s near-term target of 6% and roughly inline with its medium-term goal of 4%. And downward
pressure on prices is more welcome in inflation-prone
India than in most places. The weight of food in the Indian
CPI basket is the highest in the world at 45% compared to
14% and 32% for South Korea and China respectively.
While India and China urbanised at about the same rate in
the 1950s–1970s, India did not keep pace with China in the
1990s and 2000s. While China is today more than 50%
urban, India is barely one-third urbanized. This therefore
leaves plenty of potential growth remaining for India.
India is a long way from having the sort of muscle to add
much to global growth. Its population of 1.25 billion is
similar in size to China’s and is much younger (the median
age is 26.7 compared to 36.8 in China, see chart 24). But
it is also much poorer. At current prices and exchange
rates, India’s economy is worth around $2 trillion, whereas
China’s is worth more than $10 trillion.
Largest youth
market in the world
Challenges to growth
India is not immune to all emerging-market afflictions,
however. Exports have been shrinking for eight months.
Falling factory-gate prices across Asia have placed
additional pressure on firms in heavy industry that are
already struggling to service their debts. Imports of cheap
steel from China have more than doubled in the past year.
India’s economy also suffers from a few locally incubated
ailments. Its public sector banks, which account for 70%
of outstanding loans, are weighed down with bad debts
accumulated in an investment boom in 2008–12. Credit
growth is feeble.
Recently the government of Narendra Modi, who won
an election last year on a pledge to reform the economy,
has backtracked on such things as compulsory land
aquisitions. Union strikes hope to force a similar backdown on proposals to tidy up India’s Byzantine labour
laws and to make it slightly easier for smallish firms to
lay off workers. A bill to establish a nationwide goodsand-services tax, to replace a myriad of federal, state and
city taxes, is stuck between parliament’s two houses.
Even modest changes, such as the privatisation of some
airports, have been put on ice.
Mr Modi controls parliament’s lower house, but his
legislative plans have been thwarted because his party and
its allies are a minority in the upper chamber. Oil exporters, such as Nigeria, Russia and Venezuela,
have been hurt by the collapse in crude prices. But India
imports 70–80% of the oil it uses so benefits greatly from
cheap energy. India’s current-account deficit has narrowed
to 1.3% of GDP, from a peak of 5.1% in December 2012.
19
Indonesia
Indonesia ranks 16th out of the G20 in terms of its GDP.
Its share of world GDP is 1.1%, down from 1.2% last year.
With a population of 247.4 million people, its GDP per
capita is just $3,592 US dollars, up slightly from last year.
World's largest
archipealgic state
The Indonesian economy grew by 4.7% most recently,
slightly down from its performance last year and under
its 10 year average of 5.7%. Indonesia's economy is
struggling against a backdrop of weaker external demand
for commodities, delayed infrastructure spending and
tight monetary policy. The government has introduced
several stimulus packages, but real GDP expansion is still
expected to remain sedate in 2016.
place. They neither fundamentally change Indonesia’s
investment climate nor signal to investors that Jokowi
is preparing for bigger reforms. Indonesia’s negativeinvestment list, which details the sectors that are barred to
foreign capital, remains sizeable. Hiring foreigners is still a
burdensome process: one rule requires businesses to hire
ten Indonesians for every foreign worker.
Indonesia’s current account deficit requires foreign capital
flows to finance it. As with other emerging market
economies with large current account deficits, securing
the funds has required a cheaper currency. A slight
improvement in the current account deficit over last year
owes much to generally weaker domestic demand rather
than a pickup in exports.
Challenges to growth
Decentralisation—meaning a huge devolution of power
from the national government to the regional level—may
have held the country together in the early 2000s, but
today it impedes infrastructure development and hinders
policy co-ordination. Poor communication from the
president compounds these problems.
The president, Joko Widodo, lacks the political authority
to pursue ambitious structural reforms. Subsidies for petrol
and diesel have been cut dramatically by the government in
an effort to narrow the current-account and fiscal deficits;
local fuel prices now, in effect, track movements in global
oil costs. The administration may also move to dismantle
some of the barriers imposed on foreign investment, but
controls introduced in 2014 over the export of mineral ores
are unlikely to be completely liberalised.
The pull of protectionism has characterized the presidency
of Joko Widodo, who came to power in October 2014 as
the country’s second freely elected leader. A rising tide of
economic nationalism is threatening to undo the formula
that for many years brought much-needed investment
to the world’s fourth-most-populous nation and its 250
million people. Indonesia has resisted the temptation to panic in the face
of a plunging currency and rising bond yields. It has, for
instance, maintained fiscal discipline—aided by a law that
caps the budget deficit at 3%.
Markets nonetheless seem unconvinced. The rupiah has
fallen by 12% against the dollar since peaking in May
2014. Economic growth is at its slowest since 2009.
Nobody doubts the new deregulatory measures are better
than nothing, but they are hardly game-changing.
For the most part, Jokowi’s measures remove regulations
that should never have been implemented in the first
20
Italy
Italy ranks 9th out of the G20 in terms of its GDP. Its share
of world GDP is 2.8%, down from 2.9% last year. With
a population of 59.7 million people, its GDP per capita is
$35,919 US dollars, down slightly from last year.
The most recent reading on GDP has the economy
growing at 0.7% which doesn’t seem very strong but is
up from -0.5% last year and is well ahead of its meagre
-0.5% average pace of the last 10 years. Incredibly, the
Italian economy has spent more of the last 10 years
shrinking than growing.
Fiscal austerity has exacerbated the downturn, and
household incomes have shrunk, while unemployment—
particularly among the young—remains very high. The
failure rate among small and medium-sized enterprises
has skyrocketed. Only the export-oriented sectors of
the economy did somewhat better than average. The
new government is now more focused on formulating
economic policies that foster economic growth and
competitiveness.
The difficult economic situation has worsened one of
the problematic features of the Italian labour market: the
polarization between protected sectors and those that are
largely unprotected and precarious. While older workers
in the public sector and in large firms of the private
sector enjoy sufficient and, in some cases, even excessive
protection, young people and in general those working
for small private-sector firms are much less protected.
The current Italian government under Matteo Renzi’s
leadership is trying to re-invigorate economic growth as it
seeks to convince European institutions to shift away from
fiscal austerity toward more growth-oriented policies.
First country in
the world to build
a motorway
Challenges to growth
The Italian tax system continues to be stressed by the
need to sustain the combined burden of high public
expenditures and payment of interests on the very high
public debt accumulated over the past decades. It is also
defined by its inability to significantly reduce the very high
levels of tax evasion or the size of the black economy.
As a result, levels of fiscal pressure have increased over
the years. Italy has the second highest level of public
debt to GDP in the G20, behind Japan (see chart 17).
Although, like Japan, the private sector has relatively high
levels of savings and low levels of indebtedness. There
is very limited exposure of Italian government bonds to
foreign investors (around 34%).
Families with children have very limited exemptions. Labour
and business are also heavily taxed, which results in fewer
new businesses and job opportunities. Italian tax policy
provides nearly zero incentives and no compelling reason
to declare revenues but instead encourages tax evasion.
Should the measures introduced by the Renzi cabinet
be sustained, they might go some way toward a much
needed correction in the fiscal system.
The government has identified a number of significant
reform projects. For example, introduced income
allowances for lower incomes, reduced taxes for
businesses, and introduced a new ambitious labour
law reform aimed at stimulating the economy and
making the hiring of youth easier. The scheduled labour
market reforms, which will also introduce a general
unemployment insurance, are ambitious and could lift
Italy’s labour market policy to meet average EU levels.
21
Japan
Japan ranks 4th out of the G20 in terms of its GDP. Its
share of world GDP is 5.9%, down from 8.4% last year.
With a population of 127.2 million people, its GDP per
capita is $36,175 US dollars, down from $46,855 US
dollars last year.
The Japanese economy is currently growing at 0.8%, up
from -1.4% last year and just ahead of its 10 year average
of 0.6%. A strong devaluation of the yen in response to
the monetary easing played a considerable role. Corporate
profits and share prices have risen significantly.
After years of short-lived cabinets (2007 to 2012), the
2012 lower house parliamentary elections led to a stable
coalition of the Liberal Democratic Party (LDP) and Komeito
(NK). The coalition under Prime Minister Shinzo Abe has
also benefited from a majority in both chambers giving it a
strong basis to pursue its ambitious economic agenda.
During its first year in office, the government began
implementing some of its major policy proposals,
particularly in the field of economic policy. It initiated a
major stimulus program ('three arrows'), which included
aggressive monetary easing and additional deficitspending, pursued in conjunction with the Bank of Japan,
and structural reform.
More work needs to be done on the structural reform
front, the 'third arrow'. This includes a sweeping reduction
of agricultural protections (which is also a prerequisite for
major new trade agreements), a more liberal labour-market
regime (in part to make layoffs easier), an effective support
of well-educated women (which despite new measures
still seems to lack the firm support of the establishment),
a much more liberal immigration policy, and social policy
reform that better focus on combating hardship.
Challenges to growth
Ageing demographics and fiscal sustainability are the two
major challenges facing the Japanese economy.
Japan's over-65s currently make up 24% of the
population, something which is forecast to rise to 30%
by 2025 and to almost 40% by 2060. Japan also has
one of the lowest fertility rates in the world at just 1.4.
The so-called 'celibacy syndrome' among the youth is
contributing to the demographic challenge facing Japan.
22
World's largest
LNG importer
While the unemployment rate remains low at the headline
level the problem for Japan, as in many other countries, is
a significant deterioration in the quality of jobs. Retiring
well-paid baby boomers have, more often than not, been
replaced by part-timers, contractors and other lower-wage
workers. The incidence of non-regular employment has
risen strongly; while only 16% of jobs were non-regular in
1985, this ratio had risen to a record 37% in 2014 (70%
of which are occupied by females).
With the rising incidence of part-time and contract work,
one-sixth of Japan’s population, including one-fifth
of pensioners, lives in relative poverty. Consequently,
consumption has remained flat.
Paradoxically, one of Japan’s strengths accentuates these
demographic problems. Japanese healthcare is remarkably
cheap (10.1% of GDP, just over half as much as the United
States) and achieving spectacular results: the average
Japanese can hope to live almost 83 years, longer than in
any other country (see chart 15).
Japan has one of the lowest overall tax-revenue levels
among OECD nations. Only around 30% of Japanese firms
pay corporate tax, with the rest exempted due to poor
performance. Raising the remarkably low consumption tax
has been seen as one key to addressing this problem. The
government raised the consumption tax rate from 5% to
8% in April 2014, and plans to raise it further to 10% in
April 2017.
It is no surprise, therefore, that public indebtedness in
Japan, amounting to 230% of GDP, is the highest in the
world (see chart 17). Japanese governments have been torn
between seeking to give the economy new momentum
and consolidating the country’s battered public finances.
This is likely to worsen as the Japanese population shrinks,
the pension and healthcare costs of retirees inevitably
grows, and the working-age population declines.
South Korea
South Korea ranks 14th out of the G20 in terms of its
GDP. Its share of world GDP is 1.8%, unchanged from last
year. With a population of 50.2 million people, its GDP per
capita is $28,095 US dollars, up from $25,987 US dollars
last year.
South Korea is currently growing at 2.6%, down from its
3.3% pace recorded last year and under its 10 year 3.7%
average pace. The economy has lost some momentum
in the face of the global downturn in trade since 2012,
sluggish domestic demand, increasing household
indebtedness and a decline in job growth.
In February 2014 the government unveiled a Three Year
Plan for Economic Innovation with an ambitious '474' vision,
targeting—a 4% GDP growth rate, 70% employment rate
and a per capita income of $40,000. The government has
announced a $40 billion stimulus package and put pressure
on the Bank of Korea to adjust its monetary stance in
harmony with the pro-growth fiscal policy.
The Bank of Korea eased monetary policy by a
cumulative 175 bps between July 2012 and June 2015
to a record low of 1.5%. Along with housing market
deregulation measures, the impact on mortgage loans
was stark as lending accelerated and household loans
surged by KRW 10.1 trillion (USD 1 billion) in April 2015,
the highest monthly increase ever recorded. Expectations
for a further rate cut have risen due to the weaknesses in
export figures over the last several months. With lower
interest rates, the upward trajectory of household debt
may accelerate.
Fastest ageing
population in G20
Challenges to growth
Economically, South Korea faces major uncertainties
with respect to its heavy reliance on exports in the
face of weaker global trade. South Korea has the most
open economy among the G20 with more than 50% of
GDP export-oriented (see chart 18). The economy faces
rising competitive threats: from Japan via its policy of
quantitative easing putting downward pressure on the yen
relative to the won; from China via its move up the valueadded chain; and from Mexico via cheaper wages.
South Korea also has a rapidly ageing population (due to
low fertility rates and high life expectancy), an immature
retirement income system, and a low retirement age on
average (most workers retire at the age of 53). While the
government fiscal position remains healthy with a surplus
the highest in the G20 (see chart 16), this situation can
hinder the potential growth rate of the economy and put
upward pressure on poverty rates.
Chart 25: Fastest ageing within one generation
(share of pop aged 65+ in 2011 vs 1981)
3.50
3.00
2.50
2.00
In an effort to rein in household debt growth and allay
financial risks, the government in July announced policy
measures that encourage borrowers to take out fixed-rate
and long-term loans over floating-rate and short-term
loans. The government also tightened the screening of
borrowers' repayment abilities.
1.50
1.00
0.50
US
Russia
France
Argentina
India
Germany
Australia
Canada
Italy
Turkey
China
Indonesia
Brazil
Mexico
Japan
0.00
South Korea
Currently, South Korea’s household debt-to-disposable
income is greater than 160% and exceeds the OECD
average of 135% by a wide margin. Mortgage debt
accounts for approximately half of household debt in
Korea and policymakers face the difficult challenge of
slowing the surge in mortgage lending while avoiding a
sharp decline in home prices as approximately 70% of
household wealth is concentrated in the real estate sector.
Source: World Bank
23
Mexico
Mexico ranks 15th out of the G20 in terms of its GDP. Its
share of world GDP is 1.6%, down from 1.8% last year.
With a population of 122.3 million people, its GDP per
capita is $10,488 US dollars, up slightly from last year.
The Mexican economy grew by 2.2% most recently, in
line with last year and just shy of its 10 year average. The
general quality of macroeconomic management in Mexico
has been good though structural growth is constrained
by years of underinvestment in infrastructure, deficiencies
in education outputs, low research and development
spending, and low levels of lending by the banking sector.
On the positive side, a strengthening of the policy
environment since the 1994–95 crisis has reversed the
excessive external indebtedness and so created a more
stable macroeconomic climate. Geographical advantages
also provide much scope for developing infrastructure links
and becoming a logistical hub between the US and the
rest of the Americas as well as a key manufacturing sector.
In 2012, Mexico enacted a new labour-reform bill
intended to increase market flexibility and reduce hiring
costs. Although eventually watered down with regard to
union transparency, supporters of the law claim that it has
the potential to increase productivity, boost employment,
and improve competitiveness. The new law allows
employers to offer workers part-time work, hourly wages
and gives them the freedom to engage in outsourcing.
Chart
26:
Sharetoof
exports
Share of
exports
China
(%) to China (%)
40
2007
35
2013
30
25
20
15
10
5
UK
Source: DFAT
Trade is an important sector for the economy. Mexico is
an export economy tied to the North American market.
24
Mexico
Italy
Turkey
France
India
Canada
Russia
Germany
US
Argentina
Indonesia
South Africa
Saudi Arabia
Brazil
Japan
Australia
South Korea
0
Highest level of export
dependence on one
market in the G20
Exports represent 32.7% of GDP in Mexico, most of
which (88%) are manufactured exports. Exports have
risen as a share of GDP from 12.5% in 1993, just before
the implementation of NAFTA. However, despite Mexico’s
extensive network of Free Trade Agreements (FTAs)—it
has the highest number of FTAs in the G20 providing
access to over 70% of global GDP—80% of export sales
were to a single market (the US) in 2014.
Increased investment in logistics and more proactive
government policies to help producers move up the value
chain and develop links with Asia and Europe as well as
Latin America should see greater export diversification in
come years.
Oil revenues make up around 30% of total government
revenue. The fiscal surplus from oil is now being squeezed
by falling world prices, rising Mexican oil consumption and
(slowly) falling oil production.
Challenges to growth
Fiscal slippage is a concern in the light of rising stock of
debt. The deficit has been steadily increasing since the
GFC and currently sits at 3.6% of GDP. The government
will continue to attempt to bring more of the informal
economy into the tax base. Around 58% of the labour
force are employed 'off the books'. Efforts will also focus
on further reducing red tape and strengthening the
capabilities of the revenue collection authority, as well as
reducing the government’s budgetary dependency on oil
revenue. There is a current commitment to raising capital
spending, particularly on infrastructure.
Dollar-denominated debt is also a source of concern for
Mexico. Mexican corporates took advantage of extremely
loose monetary conditions in the US to borrow money
at record low Libor rates. Most corporates have dollar
revenues to offset this risk but the impact could be
significant for unhedged companies.
Russia
Russia ranks 11th out of the G20 in terms of its GDP. Its
share of world GDP is 2.4%, down from 2.9% last year.
With a population of 143.7 million people, its GDP per
capita is $12,948 US dollars, down from $14,591 US
dollars last year.
For the first time since 2009—the low point of the global
economic slowdown—Russia is in recession. Its economy
contracted 4.6% most recently, though Moscow’s $360
billion in cash reserves will cushion the immediate blow.
The contraction was driven by sharp falls in household
and business spending. Falling oil prices and rapid capital
flight led to a steep devaluation in the ruble in November–
December 2014. Not-with-standing the devaluation, the
ruble-denominated oil price is still down 20% yoy.
The fall in the ruble is putting upward pressure on
inflation (now at 15.7% up from 8% last year, well above
the 4% target set by the Russian Central Bank) and
resulting in a decline in real incomes.
The fall in oil prices has led to a sharp external adjustment.
Export and import volumes have fallen significantly while
the income deficit has shrunk as domestic earnings and
corporate profits have been squeezed while foreign
earnings receive a positive translation effect. Overall, the
current-account surplus has increased slightly to 5.0% of
GDP from 1.3% last year.
Lower oil prices are deeply troubling for Moscow, which
relies on oil and gas sales for nearly 50% of its revenues.
In 1999, oil and gas accounted for less than half of
Russia’s export proceeds; today they account for 68%.
Moscow has grown so reliant on energy sales that for
each dollar the price of oil drops, Russia loses about US $2
billion in potential sales.
Russia’s annexation of Crimea and its confrontation with
the West over Ukraine have left Russia’s relations with
the West at their lowest ebb in a quarter of a century and
resulted in economic sanctions on Russia and retaliatory
trade restrictions on the EU imposed in mid-2014. Whilst
these sanctions are reviewed every 6 months, they are
expected to remain in place until at least mid-2016,
impairing growth prospects.
Challenges to growth
For years, the Kremlin has supported and protected large
state-owned companies at the expense of small and
Largest diamond
producer in the world
medium-sized enterprises (SMEs). But those smaller firms
are the foundation of any strong and well-diversified
economy. SMEs spur innovation and respond effectively to
changing times, technologies, and consumer tastes. In the
EU, SMEs contribute an average of 40% to their respective
countries’ GDP; in Russia, SMEs contribute just 15%.
Between 2008 and 2012, Russia’s private sector lost
300,000 jobs while the state added 1.1 million workers to
its payroll. Rather than diversifying, Moscow is doubling
down on its state-centred approach to economic
development.
Russians aren’t nearly as productive as they could be. For
each hour worked, the average Russian worker contributes
$25.90 to Russia’s GDP. The average Greek worker adds
$36.20 per hour of work. The average for U.S. workers is
$67.40. Endemic corruption costs the Russian economy
between $300 and $500 billion each year, or roughly the
cost of three Greek bailout packages combined.
It’s no surprise then that well-educated Russians are
leaving their country in droves. Between 2012 and 2013,
more than 300,000 people left Russia in search of greener
economic pastures, and experts believe that number has
risen since Moscow’s annexation of Crimea last year. Chart 27: Top diamond producers in the World
(Carats, million)
South Africa
8.1
Angola
9.4
Nambia
1.7
Sierra Leone
0.6
Russia
37.9
Zimbabwe
10.4
Canada
10.6
Australia
11.7
Congo
15.7
Botswana
23.2
Source: Kimberley Process, 2014
25
Saudi Arabia
Saudi Arabia ranks 18th out of the G20 in terms of its
GDP. Its share of world GDP is 1.0%, unchanged from last
year. With a population of 30 million people, its GDP per
capita is just $24,875 US dollars, in line with last year.
26
30
25
20
15
10
5
Source: United Nations, 2013
Indonesia
India
China
Brazil
Japan
Mexico
Turkey
South Korea
Argentina
South Africa
Italy
Russia
France
0
Germany
Much of the Saudi government expenses, such as wages,
are in riyals, but most of its income comes from oil which
is priced in US dollars. As such, a devaluation against the
USD could provide short term relief for budget pressures
and improve the balance of payments. A devaluation
however would not provide investors with confidence and
my lead to an increase in capital flight.
35
US
It is, however, considering cutbacks to investment
spending. It is said to be reviewing plans for new
infrastructure and may delay or scale back some projects.
Chart 28: Immigration as % national population
UK
The kingdoms wealth gives it the capacity to absorb
the fiscal shock of lower oil prices. In the past year it
has burned through over $80 billion of foreign reserves,
leaving it still with $650 billion remaining (equivalent to
88% of GDP, see chart 20). Public debt, which was around
100% of GDP in 1999 is now around 2%. The region is
therefore not expected to raise taxes or relax fuel subsidies.
The Saudis are essentially betting that their FX reserves
are large enough to allow the kingdom to ride out the
self-inflicted pain from persistently low crude prices on
the way to bankrupting the US shale industry. But the
battle for market share comes at a cost, especially when
ultra-easy monetary policy in the US has served to keep
capital markets open to heavily indebted drillers, allowing
otherwise insolvent producers to remain in business longer
than they otherwise would.
Canada
As the price of oil has collapsed, so has government
revenues. The result is a budget deficit that is expected
to exceed 20% of GDP this year (after running a surplus
of 12% just three years ago) and the first Saudi currentaccount deficit in more than a decade. This is putting
downward pressure on Saudi’s sizeable foreign exchange
reserves. The decline in reserves to fund the fiscal
deficit has been tempered somewhat by the issuance of
sovereign debt for the first time since 2007.
But Saudi Arabia is a difficult place to do business—
restrictions on foreign ownership, tough labour regulations
and cumbersome bureaucracy with regulations that are
unpredictably enforced—and faces rivals in the form of
the United Arab Emirates. Not surprisingly, after more
than 40 years of development plans aiming to diversify the
economy, oil is still by far the main engine of growth.
Australia
Saudi nationals and citizens of Gulf Cooperation Council
countries pay no income taxes, but net worth is subject to
a 2.5% religious tax. Foreigners (31% of the population,
see Chart 28) pay income taxes, and non-Saudi companies
pay a 20% corporate tax. Tax revenue equals 3.7% of
domestic income, and public spending amounts to 35.7%
of domestic output.
Challenges to growth
The government is encouraging the diversification of the
economy away from oil with efforts focussing on tourism,
power generation, telecommunications, natural gas
exploration, plastics and petrochemicals. Manufacturing is
just 10% of GDP. The government is investing more than
$70 billion in building up to six new 'economic cities' with
modern infrastructure and business-friendly regulations.
Saudi Arabia
The Saudi Arabian economy grew by 3.8% most recently,
up from 2.4% last year but down on its 10 year average of
3.8%. The oil sector makes up 45% of GDP; 90% of fiscal
revenues; and about 85% of export revenue.
Highest immigration
in G20
South Africa
South Africa ranks 20th out of the G20 in terms of its GDP.
Its share of world GDP is 0.4%, down from 0.5% last year.
With a population of 53 million people, its GDP per capita
is just $6,600 US dollars, unchanged from last year.
Economic growth in South Africa remains subdued
growing at just 1.2% in the most recent period, down
from 1.6% last year and the 2.8% average over the last 10
years. South Africa’s current account and fiscal deficits are
elevated and the unemployment rate is among the highest
in the world. About 1 in 4 South Africans is out of work;
among the youth that ratio is 1 in 2.
The current environment of low oil prices and falling
inflation actually provides an opportunity for South Africa
to address some of these challenges. Lower oil prices
are helping to reduce inflation, now down to 4.6%
compared to its 10 year average of 6.2%, and the
current account deficit, now at 3.1% compared to a
10 year average of 5.1%.
Mining is regarded as the bedrock of the South African
economy responsible for 60% of exports. South Africa has
fallen in the rankings of gold producers from number one in
the world to number eight currently (see chart 27). Labour
unrest has contributed to a decline in production levels.
Chart 29: Gini Coefficient—measure of income
Gini Coefficient
- measure
of income inequality
inequality
(where
0=perfect
equality; 100= perfect
(where 0=perfect equality; 100= perfect inequality)
inequality)
70
65
60
55
50
45
40
35
30
25
Source: World Bank
Challenges to growth
Job creation is South Africa’s most pressing challenge.
South Africa has a high unemployment rate of 25%,
compared to an average of 6.5% for the G20 countries
Australia
Germany
Sth Korea
India
France
Canada
Italy
Indonesia
UK
China
Japan
Turkey
US
Russia
Argentina
Brazil
Mexico
Sth Africa
20
The most unequal
society in the G20
(see Chart 8). One third of South Africa’s labour force is
either out of work or not looking for a job, a challenge
that has arisen because of the low rate of job creation.
Employment opportunities shrank in agriculture, mining
and manufacturing, traditionally labour intensive sectors
that employ unskilled workers. Together, these three
industries now account for 19% of total employment,
down from about 30% in 2000, while the services sector
now accounts for 72% of total employment. New laws
that discourage the hiring of temporary workers have
added to unemployment.
While a black middle class has grown up in the past 20
years, the average white household still earns about six
times the average black household, and inequality within
the African population has increased. This inequality is
also reflected in access to education. The public schools
system is ranked among the world’s worst, leaving millions
of youths without marketable skills.
Improving electricity availability is of paramount
importance. The government’s failure to add power
plants as it connected millions of black households to
the electrical grid led to rolling blackouts that have hit
manufacturing hard. The government is making efforts to
strengthen the financial position of Eskom and improve its
efficiency. Greater private sector participation in the sector
and in infrastructure development could also help.
The government of President Jacob Zuma is lurching from
one crisis to the next. The economy is hamstrung by a
shortage of electricity, a hangover from decades of underinvestment in new generation capacity. Prices of gold and
platinum—vital exports—have plunged. The government
increased personal income taxes to avoid having the
country’s credit rating cut to junk.
Mounting discontent is manifest in violent street protests
and strikes. While the ANC shows no signs of losing
power nationally—it won 62% of the vote in last year’s
elections—party support is slipping in the cities amid
charges of corruption and incompetence.
27
Turkey
Turkey ranks 17th out of the G20 in terms of its GDP. Its
share of world GDP is 1.0%, down from 1.2% last year.
With a population of 76.7 million people, its GDP per
capita is just $10,424 US dollars, up slightly from last year.
Turkey took over the G-20 presidency for 2015.
The Turkish economy is currently growing at 3.8%, up
on the 1.8% pace of last year but just below its 10 year
average pace of 4.1%. The unemployment rate remains
high, currently 9.8%, as does inflation at 8.0%, well
above the central bank target of 5%.
The country’s slowdown since 2012 has been partly due
to the ongoing global financial crisis, and partly to Turkish
policymakers’ desire to slow the economy in order to
bring the current account deficit under control. Moreover,
regional Turkish export markets such as Syria and Iraq,
which had boomed in the past, were themselves suffering
from setbacks due to political instability and war.
The government has stalled on pushing through reforms.
Social welfare is very generous and the labour market is
very inflexible.
Looking ahead, it seems that Turkey must settle for
a period of modest growth as higher global interest
rates constrict external financing and lower economic
momentum among its trading partners. This, combined
with growing geopolitical tensions, will cause a fall in
demand for Turkey’s exports (currently representing
28% of GDP).
28
Second largest oil
pipeline in the world
Challenges to growth
Turkey’s most significant economic problems relate
to its external imbalance. The current account deficit
currently sits at 5.9% of GDP, the highest among the
G20. With Turkey’s 10 year bond yield sitting at 10.7%
currently, financing this deficit is expensive. The countries
vulnerability to volatile financial market conditions is
heightened by the fact that it has limited foreign exchange
reserves, just 13% of GDP (see Chart 20).
Foreign investors are growing increasingly concerned
about the apparent rise in authoritarianism exhibited
by the incumbent government. Since the government
crackdown on mass protests in 2013, indicators of
democratic freedom such as rule of law, freedom of
speech, judicial independence, and media freedom have
come into question. This is reflected in corruption indices.
Freedom House downgraded Turkey from 'partly free' to
'not free' in 2014.
Rising political risk make Turkey, a member of the 'fragile
five' (along with India, Indonesia, Brazil and South
Africa) even more vulnerable to volatile, external market
conditions. In anticipation of a rate rise in the US, the
Turkish lira fell to a record low against the US dollar this
year and is down 20% year-to-date.
UK
The United Kingdom ranks 6th out of the G20 in terms of
its GDP. Its share of world GDP is 3.8%, up from 3.5% last
year. With a population of 63.9 million people, its GDP per
capita is $46,039 US dollars, up from $39,472 US dollars
last year.
The UK economy is growing at a 2.3% pace currently,
down from 2.9% last year. This compares favourably to its
long run average of 1.4%. Currently the growth picture
for the UK is holding up well. Fiscal austerity has worked
to cut the budget from a deficit of over 7.5% in 2013 to a
deficit of 4.6% currently.
British PM David Cameron promised an in/out referendum
on the UK’s membership of the EU before the end of 2017
after winning the general election in May 2015. Cameron
will support the 'stay' campaign but only if he can loosen
the UK’s ties with Brussels, cut red tape and secure
an opt-out of the EUs core goal of 'ever-closer' union.
Most polls have support for staying in the union at 44%
compared with 39% backing the level campaign.
After labour-market flexibility was increased through
deregulation and the lowering of secondary-wage costs,
the unemployment rate fell significantly from 8.3% at
the end of 2012 to 5.4% currently. The UK labour
market continues to attract substantial numbers of
economic migrants.
Chart 30: Gasoline price per litre in selected
countries—September 2015 (USD)
UK
Italy
Turkey
France
Germany
Argentina
South Korea
Japan
China
India
Brazil
Australia
Canada
South Africa
Mexico
Indonesia
US
Russia
Saudi Arabia
Highest petrol
prices in the G20
Challenges to growth
The biggest uncertainty hanging over the institutional and
economic make-up of the UK is its relationship with the
EU. The UK is a highly trade dependent economy (exports
represent 28.4% of GDP) hence why the issue of EU
membership is so important to the economic outlook for
the economy.
Those for Brexit argue it requires Britain to apply rules it
has no say in making—and to pay for the privilege. Those
against argue that the EU takes almost half of British
exports whereas Britain takes less than 10% of the EUs.
Moreover, Britain in search of greater freedom to form
free trade agreements with other countries would lose the
bargaining clout of being part of the worlds’ largest single
market. For example, Britain would be excluded from
the Transatlantic Trade and Investment Partnership (TTIP)
currently being negotiated between EU and the US.
One of the biggest economic issues facing the UK is
the level of productivity. Between the early 1990s up to
2008 the economic performance of the UK improved
relative to many of its regional peers (notably France and
Germany). This improvement was driven in large part by
a rise in labour utilisation. Since then, however, levels of
labour productivity have lagged behind those of the US,
Germany and France. Key to this is improving the quality
of infrastructure for land transport (the UK has the second
most crowded road network in the G20) and relaxing its
strict planning regulations.
The fiscal deficit remains large by G20 standards (see
Chart 16). In 2010 Prime Minister Cameron initiated a five
year austerity program aiming to reduce the deficit from
11% to 1% by 2015. The growth drag from fiscal austerity
is expected to ease in 2016.
0
0.5
1
1.5
2
Source: www.globalpetrolprices.com
29
US
The United States ranks 1st out of the G20 in terms of its
GDP. Its share of world GDP is 22.4%, down from 23.6%
last year. With a population of 317.3 million people, its
GDP per capita is $54,898 US dollars, up from $52,947 US
dollars last year.
The US economy grew by 2.0% most recently, down from
2.9% last year but up on its 10 year average of 1.5%. The
Federal Reserve has held interest rates at historically low
levels and, at least until September 2014, reinforced the
effect with large-scale bond purchases. The balance sheet
of the Fed has swelled as a result from less than $1 trillion
US dollars to $4.5 trillion currently.
The unemployment rate has fallen from a peak of 10% in
December 2009 to just 5.0% currently. The decline reflects
the flexibility of the labour market. The US has one of the
least regulated and least unionized labour markets in the
OECD, with less than 7% of private-sector workers and
40% of public-sector workers holding union membership.
However, many discouraged workers have left the labour
force, the proportion of low-paid and part-time jobs is
rising, and incomes have been stagnant for a decade.
While exports are a relatively small part of the US
economy, just 13% of GDP, the Trans Pacific Partnership
being negotiated mostly with Asia and the Transatlantic
Trade and Investment Partnership (TTIP) with Europe are
significant given these are the first multi-lateral free trade
agreement the US has negotiated in 20 years.
Largest oil producer
in the world
Challenges to growth
Like the UK, the US has been undergoing fiscal austerity
to reign in its budget deficit. Currently, the fiscal deficit
sits at 2.4% of GDP, down from over 10% in 2009.
Longer term structural challenges pose an ongoing
threat to the deficit, however. Not least of which are
deteriorating infrastructure and rapidly rising medical and
pension costs associated with an ageing society.
The U.S. tax system does not produce enough revenue to
reduce the deficit, tax policy is highly responsive to special
interests (resulting in extreme complexity and differing
treatment of different categories of income) and the
redistributive effect of the tax system is very low.
The long-term debt picture has serious implications for
monetary stability, and reduces business confidence. U.S.
treasury bonds have not regained their AAA rating from
the Standard & Poor’s rating agency, although the bond
market has not shared the agency’s alarm.
Addressing this will require cooperation between the
President and Congress. The 113th Congress (2013–2014)
narrowly avoided being the least productive Congress in
the modern era according to the Pew Research Centre.
Oil production in selected countries 2004
Chart
31: Oil
production
selected
countries 2004
and 2014
(in 1,000
barrels in
per
day)
and 2014 (in 1,000 barrels per day)
United States
Saudi Arabia
Russia
Canada
China
Mexico
Brazil
2014
India
Indonesia
2004
UK
Argentina
Australia
Italy
0
Source: BP
30
5,000
10,000
15,000
In short, U.S. budget policy provides too little current
stimulus to promote robust growth; seriously fails to
balance revenues and spending over a 10 to 20 year
period; and yet underfunds most government services—
from infrastructure and border security to aged care,
environmental regulation and R&D. European Union
The European Union ranks 2nd out of the G20 in terms
of its GDP. Its share of world GDP is 17.2%, down from
17.9% last year. With a population of 332.9 million
people, its GDP per capita is $40,260 US dollars, up from
$38,300 US dollars last year.
Top trading partner
for 80 countries
Broadly speaking the European Union is recovering better
than expected from the financial crisis. This is particularly
the case for Spain and Portugal where economic growth is
the fastest. Manufacturing activity is improving helped by
the weak euro and bank lending is rising. Lower oil prices,
while putting downward pressure on headline inflation, is
providing a stimulus to consumers.
ECB already provides lending of last resort facilities and
access to central bank liquidity; additional features the
banking union will provide include common regulatory
supervision, a common resolution mechanism and a crossborder deposit guarantee system.
Fiscal imbalances in the EU have largely been corrected
through prolonged austerity. Labour market conditions
have improved and the unemployment rate has fallen
from a peak of 11% to 9.3%, its lowest level in almost
6 years. However, inflexible labour markets means the
unemployment rate still remains too high at more than
twice that of the US.
Politics remains the major uncertainty for the EU but the
short history of the euro tells us that the exit threshold for
a single member is very high—Greece faced three weeks
of forced bank closures and the Greek Government had to
make a U-turn on its reform stance after acknowledging
what was at stake; Cyprus faced a significant bail-in of
depositors’ wealth and still chose to stay in the euro.
Italy, Portugal and Spain accelerated labour and product
market reforms in the wake of the financial crisis by
cutting complex and costly regulatory processes,
improving legal institutions, and promoting training, selfemployment and entrepreneurship, and eased hiring and
firing restrictions.
One of the most obvious weaknesses of the union that
was revealed by the financial crisis is the EU’s extensive
reliance on banking-sector financing. About 80% of
financing in Europe comes from the banking sector, with
the rest coming from capital markets. By contrast in
the US, capital markets are much more developed and
account for around 70% of lending. Both equity and debt
markets in Europe are under-developed relative to the US.
Challenges to growth
It was said by the founding father of the EU, Jean Monnet
that “Europe will be forged in crisis, and will be the sum
of the solutions adopted for those crises.” The crisis’s the
EU has gone through in past seven years have provided
the motivation and incentive to further evolve the EU.
Many of the challenges that the EU currently face are
as a direct result of the single currency union being an
unfinished project. The most pressing challenges in the
short-term are to complete the banking union, fast-track
reform of the labour and product market, and move
towards a capital markets union.
The decision to create a banking union in 2012 was a
watershed moment for the union as it served to ease any
immediate doubts about the future of the euro area. The
31
Conclusion
Seven years on from the Global Financial Crisis and a lot of progress has been
made by the G20 economies in moving toward a more sustainable growth
path. G20 GDP growth has increased from a low of -3.0% in March 2009 to
2.3% currently. The unemployment rate has declined from a peak of 8.0%
in December 2009 to 6.5% currently. And equity markets have recovered on
average by 135% for emerging G20 economies and by 75% on average for
developed G20 economies from their crisis-lows.
A number of challenges remain, however, some of which are structural in nature.
The G20 economies are hamstrung by deteriorating demographics; inadequate
and inefficient infrastructure due to years of under-investment; and a depletion
in political capital resulting in populist, myopic-policy making, hampering
structural reform efforts.
Equally challenging, particularly for emerging G20 economies, global trade is
heading for its worst year since 2009. Whilst there is some question as to what
role structural factors are playing in this decline, there is little disagreement that
the majority can be explained by weaker global GDP growth. Weaker trade will
challenge the growth outlooks for emerging economies, particularly as their
domestic demand weakens as a result of tightening in financial conditions.
While significant deleveraging has taken place among some households and
governments, corporate sector debt has become more of an issue. The increase
in corporate debt of nonfinancial firms has been particularly acute among
major emerging economies where it has risen from about $4 trillion in 2004 to
well over $18 trillion in 2014. The biggest increases have been seen in China,
Turkey, Brazil and India. This makes emerging market economies even more
vulnerable to rising interest rates and or an increase in global risk aversion.
In our view, Australia’s goal of lifting G20 growth by 2% by 2019 will be a
difficult one to achieve. At the very least, however, it is serving to focus effort
and attention on the key issues and challenges that need to be addressed.
32
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