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September 30, 2015
Issue No: 15/21
Global Economics Weekly
Economics Research
A secular increase in the equity risk premium
Increasing consensus that ‘excess saving’ has contributed to
lower equilibrium interest rates
There is an increasing consensus that global ‘excess saving’ has
contributed to a reduction in equilibrium real interest rates, with the
‘secular stagnation’ thesis the most recent (and extreme) expression of this
view. While economists and policymakers dispute the extent and duration
of the decline, few now question that a decline has taken place or that
excess saving has played a causal role.
Global equity yields have risen significantly since 2000
A key implication of the excess saving account is a decline in yields of all
assets, including but not restricted to government bond yields. Yet, since
the turn of the century, the global economy has also been characterised by
a rise in the yields on quoted equity, a feature for which the standard
excess saving story cannot easily account. A separate explanation –
complementary to the excess saving narrative – is that there has been a
secular increase in the global ex ante equity risk premium (ERP), which has
simultaneously pushed risk-free yield curves lower and earnings yields on
risky equity higher.
Kevin Daly
+44(20)7774-5908 [email protected]
Goldman Sachs International
Noah Weisberger
(212) 357-6261 [email protected]
Goldman, Sachs & Co.
Aleksandar Timcenko
(212) 357-7628 [email protected]
Goldman, Sachs & Co.
Sharon Yin
(212) 855-0684 [email protected]
Goldman, Sachs & Co.
An increase in the global ERP has contributed to lower rates
Applying a sign restrictions approach to explore the relative importance of
‘excess savings’ and ‘risk premium’ shocks, we find that an increase in the
global propensity to save relative to the propensity to invest was the
predominant force affecting global real bond yields between the mid-1980s
and 2000 but that an increase in the global equity risk premium has
accounted for more of the decline in real bond yields since 2000.
Relative to bonds, the long-term returns implied by current
global equity valuations are high
In addition to aiding our understanding of the decline in equilibrium real
interest rates, this analysis has important forward-looking implications for
financial markets. While expected real returns on the government bonds of
developed economies are exceptionally low, the expected returns implied
by current global equity valuations remain relatively high.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification
and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
Global Investment Research
September 30, 2015
Global Economics Weekly
A secular increase in the equity risk premium
‘Excess saving’ has contributed to lower equilibrium interest rates
Earlier today, we published a Global Economics Paper in which we discussed the
implications of the divergence in global bond and equity yields that has taken place since
the turn of the century.1
There is a large body of opinion that excess saving – or, more precisely, an increase in the
global propensity to save relative to the propensity to invest – has lowered global
equilibrium real interest rates in the past 25 years.
Ben Bernanke (2005), former chairman of the US Federal Reserve, was the first to suggest
that an emerging-world ‘savings glut’ was responsible for the decline in real long-term
government bond yields witnessed in developed economies from the early 1990s onwards
(Exhibit 1 plots 10-year real, ex ante government bond yields for the US, Japan, UK and a
Euro area composite from 1975 onwards 2 ). Initially viewed as a largely benign
development, this savings glut is now considered by many to have played an instrumental
role in facilitating the credit boom that preceded the 2007/08 global financial crisis.
Exhibit 1: Long-term real bond yields have been falling since the mid-1980s
Real ex ante 10-year government bond yields (%)
7.0
US
6.0
Euro area
5.0
Japan
UK
4.0
3.0
2.0
1.0
0.0
-1.0
75
78
81
84
87
90
93
96
99
02
05
08
11
14
Source: Goldman Sachs Global Investment Research
In the years since the crisis, short- and long-term real interest rates have fallen further, and
the idea that excess saving has resulted in a secular decline in interest rates has become
more widespread. Former US Treasury Secretary Lawrence Summers (2014) has argued
that the global economy has entered a period of secular stagnation, in which too much
1
“A Secular Increase in the Equity Risk Premium”, Global Economics Paper No. 226, September 30, 2015.
2
We have directly-observed 10-year (constant maturity) inflation-linked government bond yields for the UK from
1986Q1, for the US from 1997Q2, for the Euro area from 2003Q1 and for Japan from 2004Q2. Given a longer
sample for the UK, which includes periods of significant volatility in bond yields and inflation, it is possible to
estimate a more robust relationship between real yields, nominal yields and inflation for this economy. We therefore
apply the estimated coefficients from this relationship to the nominal bond yields and inflation rates of other
economies, making an adjustment for the difference between UK RPI and CPI inflation. An additional advantage of
this approach is that it helps to ensure cross-country comparability.
Goldman Sachs Global Investment Research
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Global Economics Weekly
saving is chasing too few investment opportunities, driving the equilibrium real interest
rate below zero and curtailing the effectiveness of monetary policy in the process.
While there are differences between the savings glut and secular stagnation theses, a
common implication of both is that excess saving has resulted in a generalised decline in
yields across all assets, including but not restricted to real government bond yields
(sometimes referred to as real ‘risk-free’ rates). Yet, in the years before and since the
2007/08 crisis, the global economy has also been characterised by rising yields on quoted
equity, a feature for which the standard excess saving story cannot easily account (Exhibit
2 plots an estimate of the 10-year global real ex ante government bond yield and the
earnings yield on global equities – including advanced and emerging markets – adjusted
for changes in leverage from 1975 onwards3). We argue not that the excess saving story is
wrong but that, in failing to account for the rise in the earnings yield on quoted equity from
the early 2000s onwards, it is incomplete.
Exhibit 2: Bond and equity yields have diverged since the turn of the century
Global earnings yield and G4 real ex ante 10-year government bond yields (%)
13.0
11.0
Earnings Yield (E/V, Global)
Real 10yr Bond Yield (G4)
9.0
7.0
5.0
3.0
1.0
-1.0
75
78
81
84
87
90
93
96
99
02
05
08
11
14
Source: Goldman Sachs Global Investment Research
A separate explanation – which is complementary to the excess saving story – is that there
has been a secular increase in the global ex ante equity risk premium (ERP) since the turn
of the century, which has simultaneously pushed risk-free yield curves lower and earnings
yields on risky equities higher. 4
Global ERP has increased significantly since turn of century
The main purpose of our analysis is to document the behaviour of real government bond
yields and the earnings yields of quoted equities, and to assess what the behaviour of both
implies about the relative importance of ‘excess savings’ shocks (which would tend to push
both bond and equity yields lower) and ‘risk premium’ shocks (which would tend to push
bond and equity yields in opposite directions).
3
For a detailed discussion of the derivation of these series, please refer to Global Economics Paper.
4
The divergence between global equity and bond yields and what it implies for the global ERP was discussed in a
previous Global Paper (“The savings glut, the return on capital and the rise in risk aversion”, Daly and Broadbent,
Goldman Sachs Global Economics Paper No. 185, May 27, 2009) and in a speech by Broadbent (2014).
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Global Economics Weekly
To explore the relative importance of excess savings and risk premium shocks in driving
real government bond yields and the earnings yields of quoted equities, we use a sign
restrictions approach. Exhibit 3 – which plots our measures of the global earnings yield
against G4 real bond yields over time – provides a visual representation of this analysis in
its simplest form. An increase in the global propensity to save relative to the propensity to
invest will result in a simultaneous decline in both real bond yields and equity earnings
yields (i.e., a move in a south-westerly direction in Exhibit 3), while an increase in
perceived risk will result in a decline in real bond yields but a rise in equity earnings yields
(i.e., a move a south-easterly direction).
Exhibit 3: Equity and bond yields both fell between 1985 and 2000, but have moved in
opposite directions since 2000
Global earnings yield and real bond yields (1985Q1-2015Q3, actual & 8Q mav)
6
1985
Real bond
yield (%)
5
4
2000
3
2
1
2015
0
Equity earnings
yield (%)
-1
3
4
5
6
7
8
9
10
Source: Goldman Sachs Global Investment Research
We start our analysis in 1985.5 Between 1985 and 2000, global real bond yields and equity
earnings yields both fell (a south-westerly move), implying that an increase in the global
propensity to save relative to the propensity to invest was the predominant force affecting
both. However, from 2000 until 2015, bond yields have continued to fall but global equity
yields have risen (a south-easterly move), implying that risk premium shocks have
predominated.
To provide a more quantitative assessment of the underlying shocks, we employ a vector
autoregression with sign restrictions to decompose the observed changes in real bond
yields into savings shocks (where real bond yields positively co-move with equity yields)
and risk premium shocks (where real bond yields negatively co-move with equity yields).6
5
We choose 1985Q1 as the starting point because we are less confident of the reliability of our real bond yield
series during the 1970s and early 1980s, when inflation was exceptionally high and volatile.
6
Our methodology proceeds in three steps. First, we estimate a reduced-form Bayesian vector autoregression with
quarterly changes in our global real bond and equity yield series. Second, we draw a number of possible structural
models with respect to the sign restrictions we place on the impulse responses, and estimate a historical
decomposition of real bond and equity yields from each. Finally, we use the median of these historical
decompositions of real bond and equity yield movements. Our colleagues in the Asian economics team used a
similar approach to quantify supply- and demand-driven changes in oil prices (“The economic impact of the New Oil
Order on emerging Asia”, Asia Economics Analyst: 15/02).
Goldman Sachs Global Investment Research
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Global Economics Weekly
The resulting decomposition is presented in Exhibit 4. Between 1985Q1 and 2000Q1, global
real bond yields declined by 2.0pp and we find that virtually all of this decline was due to
savings shocks. However, between 2000Q1 and 2015Q3, when global real bond yields
declined by a further 3.0pp, we find that only 0.5pp of the decline was due to savings
shocks and 2.5pp was due to risk premium shocks. Our estimates imply that, if there had
only been savings shocks and no risk premium shocks over the period as a whole, G4 real
bond yields would have been 2.5pp higher than they currently are.
Exhibit 4: Most of the decline in bond yields since 2000 appears related to a rise in the risk
premium
A decomposition of global real bond yields into 'saving' and 'risk premium' shocks
1
0
-1
-2
-3
Saving Shocks
-4
Risk Premium Shocks
Real Bond Yield
-5
-6
85
88
91
94
97
00
03
06
09
12
15
Source: Goldman Sachs Global Investment Research
Of course, these estimates are dependent on our identification strategy and assume that
other factors which do not affect the propensity to save or invest or the equity risk
premium but which do affect bond and equity yields have held equal. Both sets of
assumptions are open to question. Nevertheless, at the very least, our estimates suggest
that a rise in the global ERP has been an important feature of the global economy since the
turn of the century that the standard excess saving story neglects.
Explaining the rise in the ERP
Our analysis till now has primarily been an exercise in accounting – we have not provided a
behavioural explanation for the rise in the global ERP since the turn of the century.
One explanation for the increase is that emerging market portfolio preferences have played
an important role in accounting for the rise in the global ERP and, specifically, that there is
some connection between higher saving rates in China and other large emerging markets
and higher levels of risk aversion.
On this view, the emergence of China and other large emerging economies had two
relevant effects on the global economy. Consistent with the excess savings hypothesis, the
increase in desired saving from large emerging economies contributed to lower yields on
government bonds and other fixed-income assets. In addition, there was an effective shift
in the global aversion to risk that reconciles the rise in yields on risky equity and the
decline in risk-free interest rates.
Goldman Sachs Global Investment Research
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Global Economics Weekly
This would help to explain the divergence between government bond yields and equity
yields since the early 2000s. But there is also independent evidence of these differing
portfolio preferences. In a detailed analysis of the net asset positions of China and India, for
example, economists Lane and Schmuckler (2006) show that the net investment positions
of both are essentially ‘short equity, long debt’. Particularly following the 1997 Asian crisis,
an increasing share of emerging economies’ savings were channelled into foreign
exchange reserves held in the shape of developed economy government bonds.
As to why emerging market investors display a bias in their portfolio allocation towards
government bonds and away from equity, we see two possibilities (which are not mutually
exclusive).
The first is that emerging market investors are genuinely more risk-averse than advanced
economy investors. This would not be surprising – in many models of consumer behaviour,
a higher propensity to save goes hand in hand with a higher level of risk aversion.
Blanchard and Giavazzi (2005) argue that the relatively high household saving rates of
emerging economies reflect a high level of individual risk, related to health costs,
retirement and the financing of education that are a result of low levels of social protection.
It is plausible that relatively high levels of income uncertainty also account for why those
savings have been invested in a relatively risk-averse manner.
A second potential explanation for the skew in emerging market portfolios towards fixed
income and away from equity is that it is the outcome of restricted investment opportunity
– resulting from segmentation in the market for global capital – rather than the outcome of
a portfolio preference for debt. Because much of the saving of emerging economies is
channelled through government entities, and because these entities are often restricted
from making large equity investments in developed economies, there is an effective
constraint on the savings of emerging economies being invested in overseas equity.
A separate factor that is also likely to have contributed to the dual rise in the global
propensity to save and the global ERP has been the impact of population ageing and
pensions’ regulation on saving behaviour in advanced economies. There has been an
increased focus on the long-term sustainability of private and public pension provision in
advanced economies since the turn of the century and a common response to these
concerns has been to alter the tax treatment of pensions to encourage increased saving for
retirement. At the same time, regulations affecting private pensions saving in advanced
economies have tended to skew the investment of those savings away from equity and
towards fixed income. Two examples of such regulations include the significantly more
favourable treatment of bonds vs. equities under (internationally-agreed) pension solvency
rules and the widespread practice of obliging workers to purchase an annuity upon
retirement.7
Exhibit 5 displays the direct holding of equities and bonds by European (Euro area and UK)
pension and insurance funds as a share of total assets.
Both explanations – the increasing importance of relatively risk-averse emerging market
investors and the impact of population ageing and pensions’ regulation on saving
behaviour in advanced economies – imply that, in effect, the marginal investor became
more risk-averse and the increase in the global propensity to save relative to the propensity
to invest went hand in hand with a rise in the ex ante global equity risk premium.
7
Under IAS19 (International Accounting Standard 19), a set of accounting rules concerning employee benefits set by
the International Accounting Standards Board that took effect in 2013, the assumed discount rate for future liabilities
and the assumed long-term expected return on assets held by company pension funds are both fixed to current
bond yields (government and other highly rated). In other words, the ERP is implicitly fixed by accounting rules to
zero, which means that, from a solvency perspective, investing in equities comes with costs – in terms of higher
volatility – but has no associated benefits for pension funds.
Goldman Sachs Global Investment Research
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Global Economics Weekly
Exhibit 5: European pension and insurance companies have switched from equities to
bonds
Pension and insurance funds direct holding of equities and bonds (% total assets)
40.0
35.0
30.0
25.0
20.0
Direct holdings in equities
15.0
Direct holdings in bonds
10.0
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
Source: Goldman Sachs Global Investment Research, ONS, Eurostat
A third potential explanation for the divergence between global bond and equity yields
(and the implied rise in the global ERP) since the turn of the century is that it reflects a
reduction in expected long-run global growth.8 Consensus long-run (10-year) real global
growth expectations are broadly unchanged from where they stood in 2000 – having risen
on the back of BRICs-related optimism, before falling back again (Exhibit 6). But long-run
expectations of growth in advanced economies have fallen from 2.6% to 1.9% over this
period and it may be that investors’ expectations of long-run real earnings growth have
fallen by more. If they have declined materially, this would have tended to push equity
yields higher (all else equal).
That said, the change in growth expectations would need to have been very large for this
to be the primary explanation for the rise in equity yields. In standard equity valuation
models, future earnings are discounted at the real risk-free rate. Given that real bond yields
have fallen by 3.0 percentage points since the turn of the century, this implies that the
expected long-run growth of earnings would have to have fallen by 3.0pp over this period
just to offset the effect of declining bond yields, and that expected growth would have had
to have fallen by a further 3.2pp (6.2pp in total) to have accounted for the rise in equity
yields that has actually taken place. These are large numbers and there is little evidence
from surveys that growth expectations have fallen to anything like this degree. Therefore,
while it seems likely that reduced growth expectations have played some role in the rise in
equity yields (particularly in recent years), we nevertheless place less weight on this
explanation relative to the previous two.
8
A change in the central expectation of long-run real growth should – in theory – have no effect on the ERP, because
it affects neither investors’ preferences nor the perceived degree of risk. In the standard Gordon relationship (ERP =
dy + Eg – rby), a reduction in expected growth (Eg) should be matched by a rise in the dividend yield (dy). However,
in measures of the ERP that assume that long-run real growth is either fixed or broadly stable, an increase in the
dividend yield will be (wrongly) interpreted as a rise in the ERP rather than a reduction in expected growth.
Goldman Sachs Global Investment Research
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Global Economics Weekly
Exhibit 6: Long-term real global growth expectations rose between 2001 and 2010, and are
now broadly unchanged from 2000 levels
Rolling Consensus forecasts for average global and G6 growth over the next 10 years
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Global
0.5
G6
0.0
98
01
04
07
10
13
16
Source: Consensus Economics, Goldman Sachs Global Investment Research
Financial market implications
In addition to aiding our understanding of the decline in equilibrium real interest rates, this
analysis has important forward-looking implications for financial markets. Although we
view the excess saving and rising risk premium accounts as largely complementary to each
other in economic terms, they have contrasting implications for financial markets. The
standard excess saving account suggests that a glut of savings has driven yields and
expected future real returns on all assets lower. By contrast, a higher global ERP implies
that, while the expected real returns on government bonds are low, the long-run real
returns implied by current global equity valuations remain relatively high.
The global ex ante ERP – the expected excess return that a diversified portfolio of global
equities provides over G4 real 10-year bond yields – is currently around 6½%, on our
estimates. Moreover, this assumes that valuations are held fixed at current levels. Were
real bond yields to rise and/or global equity yields to fall over time, this would imply a
larger long-run outperformance of real global equity returns over advanced-economy
government bonds.
These conclusions are consistent with the views of our Equity and Rates strategists:

Low bond yields due to reduced term premia: Our Rates strategists have argued
that 10-year US and German yields are low mainly because term premia are very
depressed, whereas expectations of long-term nominal neutral rates – while lower
than they were before the financial crisis – are still tracking at around 3.5-3.75% in
the US and 2.5%-2.75% in the Euro area.9 In their view, while part of the decline in
term premia at the long end of government bond yield curves is the result of
unconventional monetary policies (QE in particular) pursued by the Fed and
ongoing in the Euro area and Japan, concerns around deflation in major
developed countries have also contributed to its fall.
9
For a discussion of the evolution of government bond term premia, see “Depressed Euro area Term Premium
Behind the Wide Transatlantic Yield Gap”, Macro Rates Analyst, September 18, 2014.
Goldman Sachs Global Investment Research
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Global Economics Weekly
Our Rates strategists also find evidence of investors’ pessimism (another
manifestation of high risk aversion) in their empirical work. According to their
‘Sudoku’ model framework – in which they estimate ‘fair value’ levels for
government bond yields based on their historical relationship with macro
fundamentals – 10-year yields in major markets are trading around 50-75bp lower
than historical macro relationships would imply. Looking ahead, they expect longend rates to increase more than priced in the forwards, but they still expect yields
to remain below their macro ‘fair values’ for some time, as the term-premium
component will likely normalise slowly, as long as the ECB and BoJ continue to
remove duration from the market.

Significant outperformance of equities relative to government bonds over the
next year. Our Equity and Rates strategists’ global asset allocation is currently
overweight equities and underweight government bonds on a 12-month horizon,
based largely on the view that valuations are significantly more attractive for
equities than for government bonds.10 While equities appear more attractively
valued than government bonds in general, they find significant variation in
valuations across equity markets, with US equity valuations appearing more
stretched than Euro area, Japanese and UK equities. On a 12-month basis, our
strategists are overweight European and Japanese equities but underweight US
equities.
Kevin Daly
10
See GOAL: Global Opportunity Asset Locator, July 20, 2015 and GOAL Flash: “China & Commodity Commotion;
our views across the asset classes”, August 24, 2015.
Goldman Sachs Global Investment Research
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Global Economics Weekly
Global economic forecasts
Real GDP, %ch yoy
Consumer Prices, %ch yoy
2015
G3
USA
Euro area
Japan
Advanced Economies
Australia
Canada
France
Germany
Italy
New Zealand
Norway
Spain
Sweden
Switzerland
UK
Asia
China
Hong Kong
India
Indonesia
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
CEEMEA
Czech Republic
Hungary
Poland
Russia
South Africa
Turkey
Latin America
Argentina
Brazil
Chile
Mexico
Venezuela
Regional Aggregates
BRICS
G7
EU27
G20
Asia ex Japan
Central and Eastern Europe
Latin America
Emerging Markets
Advanced Economies
World
2016
2017
2018
2.5
1.6
0.6
2.4
1.8
0.8
2.2
1.7
0.8
2.0
1.6
0.9
2.0
1.6
1.2
1.6
0.6
2.3
1.3
3.1
3.3
0.8
2.7
2.0
2.1
1.7
1.9
1.5
2.4
1.4
2.5
3.5
1.2
3.0
3.2
2.0
2.0
1.4
1.3
2.2
2.0
2.2
2.9
1.7
2.8
3.0
1.6
2.4
1.2
1.2
2.5
1.9
2.1
2.5
1.6
2.6
6.8
2.6
7.5
4.9
4.9
5.6
2.2
2.4
1.6
2.8
6.4
2.8
7.9
5.2
4.6
6.3
2.5
3.3
3.0
2.9
6.1
2.8
7.0
5.7
5.0
6.3
2.8
3.2
2.8
3.2
5.8
2.7
7.1
6.4
5.2
6.5
3.0
3.1
2.8
3.6
3.9
2.8
3.6
-3.3
1.4
2.8
2.8
3.2
3.5
1.0
1.9
3.0
2.6
2.6
3.2
2.8
2.4
3.5
2.5
2.5
3.2
3.1
2.8
3.6
0.0
-2.6
2.2
2.3
-5.2
1.8
-0.4
3.1
3.5
0.2
4.1
1.6
3.8
3.9
2.1
4.5
2.3
3.7
4.0
2.8
5.3
1.9
2.0
3.3
6.1
3.6
-0.2
4.5
2.0
3.2
5.8
2.0
2.2
3.7
6.2
3.3
1.7
5.2
2.2
3.6
5.7
1.9
2.0
3.6
5.8
3.0
3.0
5.3
2.0
3.6
5.7
1.8
1.9
3.6
5.8
2.9
3.4
5.4
2.0
3.7
G3
USA
Euro area
Japan
Advanced Economies
Australia
Canada
France
Germany
Italy
New Zealand
Norway
Spain
Sweden
Switzerland
UK
Asia
China
Hong Kong
India
Indonesia
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
CEEMEA
Czech Republic
Hungary
Poland
Russia
South Africa
Turkey
Latin America
Argentina
Brazil
Chile
Mexico
Venezuela
Regional Aggregates
BRICS
G7
EU27
G20
Asia ex Japan
Central and Eastern Europe
Latin America
Emerging Markets
Advanced Economies
World
2015
2016
2017
2018
0.2
0.1
0.6
2.0
1.0
0.5
2.3
1.7
2.0
2.4
1.8
1.3
1.8
1.7
0.1
0.1
0.3
0.3
2.2
-0.4
0.1
-1.1
0.0
2.8
1.9
0.6
1.8
0.5
1.4
2.4
0.8
1.3
0.0
1.1
2.8
2.0
1.4
2.5
0.8
1.9
2.6
1.1
2.3
0.8
2.1
2.6
2.0
1.8
2.4
1.3
2.0
2.7
1.0
2.5
1.1
2.2
1.5
3.0
5.2
6.5
2.1
1.5
-0.2
0.8
-0.4
-0.6
2.2
3.0
5.8
6.2
3.1
2.3
1.8
2.0
1.4
1.7
2.0
3.1
6.0
6.1
3.3
3.1
2.3
2.2
1.1
3.2
2.1
3.0
6.0
6.1
3.4
3.0
2.2
2.0
1.0
3.4
0.6
0.2
-0.8
15.0
4.8
7.3
1.5
2.8
1.8
5.5
6.4
7.5
1.4
2.7
2.3
4.0
5.3
7.3
1.6
2.7
2.4
4.0
4.5
7.5
16.1
8.8
4.5
2.8
86.0
21.6
6.3
4.1
3.5
80.9
22.3
5.2
3.2
3.2
63.3
19.0
4.9
3.0
3.0
47.4
4.2
0.3
0.0
2.4
2.5
-0.3
13.3
5.7
0.3
2.9
3.8
1.5
1.1
2.9
3.3
1.9
11.5
5.5
1.5
3.4
3.5
2.1
1.8
3.1
3.4
2.2
9.2
4.8
2.1
3.4
3.6
2.1
1.9
3.1
3.4
2.2
7.3
4.6
2.0
3.3
Source: Goldman Sachs Global Investment Research
For a list of the members within groups, please refer to ERWIN.
For our latest Bond, Currency and GSDEER forecasts, please refer to the Goldman Sachs 360 website: (https://360.gs.com/gs/portal/research/econ/econmarkets/).
Goldman Sachs Global Investment Research
10
September 30, 2015
Global Economics Weekly
Global macro and markets charts
PMI-implied global growth
8
6
GLI momentum vs. global industrial production*
2
% qoq
annl
%mom
1
4
0
2
-1
0
-2
Global PMI ModelImplied Growth
-2
-4
Global Actual
Sequential Growth
-3
-6
-8
-4
03
04
05
06
07
08
09
10
11
12
13
14
15
See Global Economics Weekly 12/18 for methodology
Source: OECD, Goldman Sachs Global Investment Research
Expansion
Mar-15
0.03%
Apr-15
May-15
0.01%
Jan-15
06
07
08
10
110
Europe Risk
Slowdown
0.05%
0.10%
0.15%
0.20%
80
US Risks
75
Oct-13
Feb-14
Jun-14
Oct-14
Jan-15
See Global Economics Paper 214 for methodology
Source: OECD, Goldman Sachs Global Investment Research
See Global Economics Weekly 12/15 for methodology
Source: Goldman Sachs Global Investment Research
US equity risk premium
US equity credit premium
5
US ERP, calculated daily
5.7
May-15
Sep-15
%
4
US ERP, 200 Day Moving
Average
5.3
15
China Risk
Sept-15
GLI Growth
%
13
Index
85
-0.05%
6.1
12
90
-0.04%
6.5
11
Oct-14
Nov-14
-0.06%
0.00%
05
95
Jul-15
Dec-14
-0.03%
03
100
Jun-15
Aug-15
-0.01%
-0.02%
02
105
Feb-15
0.00%
01
China, Europe and US risk factors
0.04%
0.02%
00
* Includes OECD countries plus BRICs, Indonesia and South Africa
See Global Economics Paper 199 for methodology
Source: OECD, Goldman Sachs Global Investment Research
GLI ‘Swirlogram’
GLI Acceleration
GLI Momentum
Global Industrial Production*, 3mma
GS Forecast
3
4.5
2
4.1
1
3.7
Credit
relatively
expensive
1985-1998
average
4.9
0
3.3
2.9
-1
2.5
-2
2.1
1.7
04
05
06
07
08
09
10
11
12
See Global Economics Weekly 02/35 for methodology
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research
13
14
15
2 standard deviations
band
-3
82
85
88
91
94
97
00
03
06
09
12
15
See Global Economics Weekly 03/25 for methodology
Source: Goldman Sachs Global Investment Research
11
September 30, 2015
Global Economics Weekly
The world in a nutshell
THE GLOBAL ECONOMY
OUTLOOK
KEY ISSUES
UNITED STATES
We forecast real GDP growth of 2.5% in 2015 and 2.4% in
2016. On a sequential and annualised basis, we expect
growth to pick up to around 2.1% in 2015Q3 and 2.5% in
2015Q4.
The US remains the strongest anchor of the global
recovery. Positive impulses from investment should add
significantly to growth in 2015 and beyond.
JAPAN
We forecast real GDP growth of 0.6% in 2015 and 0.8% in
2016. On a sequential basis, we expect growth to be
between 1% and 2% for the rest of the year. Sequential
growth moved to negative territory in 2015Q1 for the first
time in three quarters. It was last negative in 2014, when
Japan had a technical recession following the
consumption tax hike.
The new BoJ leadership has led to a regime shift in
Japanese monetary policy, with much more aggressive,
Fed-style easing capabilities. While this potentially offers
a way out of more than a decade of deflation, reaching
the 2% inflation target remains a tall order.
EUROPE
For the Euro area as a whole, we forecast growth of 1.6%
in 2015 and 1.8% in 2016. The growth outlook at the
country level still shows divergent trajectories, with
growth below 1% in Italy, but notably above that threshold
in Germany, Denmark and Spain.
We expect Euro area growth to move higher alongside an
increase in consumer expenditure. Support from
monetary policy will also contribute to the recovery. Still,
the list of adjustments required in parts of the periphery
remains long.
NON-JAPAN ASIA
For Asia ex-Japan, we forecast growth of 6.1% in 2015 and
6.2% in 2016.
In China, we forecast real GDP growth of 6.8% in 2015 and
6.4% in 2016.
LATIN AMERICA
We forecast that real GDP growth in Latin America will be
-0.2% in 2015 and 1.7% in 2016. Against a more favourable
global backdrop, the divergence between those economies
with more challenging (Brazil) and more stable (Mexico)
policy outlooks is likely to increase.
In Brazil, we forecast real GDP growth of -2.6% in 2015
and -0.4% in 2016. For Mexico we expect 2.3% and 3.5%,
respectively. Over the summer, Brazil’s real sector data
worsened, credit and financial conditions tightened
further, the labour market deteriorated rapidly and
political/institutional risk rose.
CENTRAL &
EASTERN EUROPE,
MIDDLE EAST AND
AFRICA
We forecast growth across the region at 1.0% in 2015 and
3.0% in 2016.
The EM differentiation theme is again visible across the
region. We forecast solid growth in Poland and Turkey,
while growth in Russia and Ukraine are forecast to be
negative in 2015.
CENTRAL BANK WATCH
CURRENT SITUATION
NEXT
MEETINGS
EXPECTATION
UNITED STATES:
FOMC
The fed funds target range is 0-0.25%. The FOMC
held policy interest rates unchanged in September.
The statement indicated increased concern about
global and financial market developments. Fed
officials’ funds rate projections indicated a shift
toward one interest rate hike this year.
Oct. 28
Dec. 16
We still project a December ‘lift-off’ because we
expect decent job market news, stable to higher
wage and core price inflation, and an improvement
in financial conditions. But the risks around this
baseline are strongly tilted to the later side. October
is very unlikely for both substantive and logistical
reasons, while a significant miss on any of the lift-off
conditions (jobs, inflation, or financial conditions)
would probably push the move into 2016.
JAPAN: BoJ
Monetary Policy
Board
The overnight call rate is at 0%-0.1%. The BoJ
maintained its overall assessment of Japan’s
economy
at
“has
continued
to
recover
moderately,” but cut its export and production
assessments to “recently been more or less flat,
due mainly to the effect of the slowdown in
emerging economies” from “have been picking up,
albeit with some fluctuations,” as we expected.
Oct. 7
Oct. 30
We expect the BoJ to announce additional easing at
the October-end meeting, centred on an extension of
the current QQE program.
EURO AREA: ECB
Governing Council
The refi/depo rates are at 0.05%/-0.20%. The ECB
began an expanded asset purchase programme
that included sovereign debt on March 9, and
bonds with a negative yield as low as the deposit
rate (-20bp) will be purchased. Total purchases will
be made at a rate of €60bn per month. The
programme is “intended” to continue until at least
September 2016.
Oct. 22
Nov. 4
Policy rates on hold until 2017Q3. We expect the ECB
to implement its PSPP 'in full' until September 2017.
UK: BoE Monetary
Policy Committee
The BoE policy rate is currently at 0.5%.
Oct. 8
Nov. 5
We expect the BoE to keep the policy rate unchanged
until 2016Q2.
Goldman Sachs Global Investment Research
12
September 30, 2015
Global Economics Weekly
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13