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The Global Economic Outlook Jay H. Bryson, Managing Director and Global Economist November 17, 2015 Real GDP Forecast U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change 10% 10% GDP - CAGR: Q3 @ 1.5% 8% GDP - Yr/Yr Percent Change: Q3 @ 2.0% 6% 6% Forecast 4% Our forecast looks for real GDP growth to remain generally solid in coming quarters 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% -8% -8% -10% 2000 -10% 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 8% 2 2012 2014 2016 Real Final Sales Real Final Sales to Domestic Purchasers Bars = CAGR 8% Line = Yr/Yr Percent Change 8% 6% 6% Forecast 4% Growth in domestic spending clearly has strengthened 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% -8% Real Fin Sales to Dom. Purch. - CAGR: Q3 @ 2.9% -8% Real Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q3 @ 2.8% -10% 2000 -10% 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 3 2012 2014 2016 Government Purchases Forecast Real Government Purchases Bars = CAGR Line = Yr/Yr Percent Change 12% 12% 9% 9% 6% 6% Forecast The headwinds on growth from government spending have largely dissipated 3% 3% 0% 0% -3% -3% -6% -6% -9% -9% Government Purchases-CAGR: Q3 @ 1.7% Government Purchases-Yr/Yr: Q3 @ 0.7% -12% 2000 -12% 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 4 2012 2014 2016 Business Fixed Investment Forecast Real Business Fixed Investment Bars = CAGR Line = Yr/Yr Percent Change 30% 30% 20% 20% 10% Business fixed investment spending should continue to grow at a solid pace, as it usually does at this point in the cycle Forecast 0% 10% 0% -10% -10% -20% -20% -30% -30% Non-Res Fixed Invest - CAGR: Q3 @ 2.1% Non-Res Fixed Invest - Yr/Yr Percent Change: Q3 @ 2.1% -40% 2000 -40% 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 5 2012 2014 2016 Real PCE Forecast Real Personal Consumption Expenditures Bars = CAGR 8% Line = Yr/Yr Percent Change 8% 6% 6% Forecast 4% Growth in consumer spending has ramped up in recent quarters 2% 2% 0% 0% -2% -2% -4% -4% -6% -8% 2000 -6% PCE - CAGR: Q3 @ 3.2% PCE - Yr/Yr Percent Change: Q3 @ 3.2% -8% 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 4% 6 2012 2014 2016 Real Net Exports Net Exports Percentage Point Contibution to Real GDP 3.0 3.0 Net Exports: Q3 @ 0.0 Pct. Points Net exports likely will exert a modest drag on growth going forward 2.0 2.0 1.0 1.0 Forecast 0.0 0.0 -1.0 -1.0 -2.0 2000 -2.0 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 7 2012 2014 2016 Eurozone GDP Eurozone Real GDP Bars = Compound Annual Rate Line = Yr/Yr % Change 8% 8% Compound Annual Growth: Q2 @ 1.4% Year-over-Year Percent Change: Q2 @ 1.5% 4% The economic recovery in the Eurozone should continue Forecast 0% 0% -4% -4% -8% -8% -12% 2002 -12% 2004 2006 2008 2010 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 4% 8 2012 2014 2016 Eurozone CPI Eurozone Consumer Price Inflation Year-over-Year Percent Change 5% 5% Core CPI: Oct @ 1.0% CPI: Oct @ 0.0% The rate of CPI inflation in the euro area is well below the ECB’s target 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% 1997 -1% 1999 2001 2003 2005 2007 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 9 2009 2011 2013 2015 ECB Balance Sheet ECB Balance Sheet €3.5 €3.5 ECB Balance Sheet: Oct @ €2.63T The ECB likely will bolster its QE program in the near future €3.0 €3.0 €2.5 €2.5 €2.0 €2.0 €1.5 €1.5 €1.0 €1.0 €0.5 €0.5 €0.0 €0.0 99 00 01 02 03 04 05 06 Source: Bloomberg LP and Wells Fargo Securities, LLC Economics 10 07 08 09 10 11 12 13 14 15 Thousands Trillions of Euros China Real GDP Chinese Real GDP Forecast Year-over-Year Percent Change 14% We forecast that growth in China will slow further, but that the economy will not completely implode 14% 12% 12% 10% 10% Forecast 8% 8% 6% 6% 4% 4% 2% 2% Year-over-Year Percent Change: Q3 @ 6.9% 0% 2000 0% 2002 2004 2006 2008 Source: Bloomberg LP and Wells Fargo Securities, LLC Economics 11 2010 2012 2014 2016 Contributions to Chinese Growth Contributions to Chinese Real GDP Growth Chinese authorities hope to rebalance growth toward more consumer spending 16% 16% 12% 12% 8% 8% 4% 4% 0% 0% -4% -4% Net Exports: 2014 @ 0.1% Gross Capital Investment: 2014 @ 3.4% Final Consumption Expenditures: 2014 @ 3.8% GDP Growth: 2014 @ 7.3% -8% -8% -12% -12% 00 01 02 03 04 05 Source: CEIC and Wells Fargo Securities, LLC Economics 12 06 07 08 09 10 11 12 13 14 China Household Assets Financial Assets of Chinese Households Trillions of Yuan 80 70 60 Equities play a limited role in the allocation of Chinese financial wealth 80 Other: 2013 @ 6.6T Yuan Currency: 2013 @ 4.9T Yuan Bonds: 2013 @ 0.9T Yuan Stocks: 2013 @ 6.4T Yuan Insurance: 2013 @ 9.0T Yuan Bank Deposits: 2013 @ 47.8T Yuan 70 60 50 50 40 40 30 30 20 20 10 10 0 0 04 05 06 07 Source: CEIC and Wells Fargo Securities, LLC Economics 13 08 09 10 11 12 13 Financial Markets Size of Financial Markets Trillions of USD, 2013 $80 $80 Bank Assets $70 Debt Securities $70 Equity Securities The Chinese economy is largely bank financed $60 $60 $50 $50 $40 $40 $30 $30 $20 $20 $10 $10 $0 $0 United States Euro Area United Kingdom Source: CEIC, IMF and Wells Fargo Securities, LLC Economics 14 Emerging Asia Japan China China Exchange Rate Chinese Exchange Rate CNY per USD (Inverted Axis) Chinese authorities are allowing the renminbi to depreciate slowly 6.00 6.00 6.50 6.50 7.00 7.00 7.50 7.50 8.00 8.00 CNY per USD: Oct @ 6.32 8.50 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 15 8.50 China FX Reserves Chinese Foreign Exchange Reserves Trillions of USD $4.5 $4.5 Foreign Exchange Reserves: Oct @ $3.5 Trillion China has a huge warchest of foreign exchange reserves $4.0 $4.0 $3.5 $3.5 $3.0 $3.0 $2.5 $2.5 $2.0 $2.0 $1.5 $1.5 $1.0 $1.0 $0.5 $0.5 $0.0 1996 $0.0 1998 2000 2002 2004 Source: Bloomberg LP and Wells Fargo Securities, LLC Economics 16 2006 2008 2010 2012 2014 Debt Outstanding U.S. vs. China Debt Outstanding by Sector Percent of GDP 250% If there is a leverage issue in the Chinese economy it resides in the non-financial corporate sector Central Government Non-Financial Corporate Household 200% 200% 150% 150% 100% 100% 50% 50% 0% 0% 09 10 11 12 13 United States Source: CEIC, BIS and Wells Fargo Securities, LLC Economics 250% 17 14 09 10 11 12 China 13 14 Trade with China Asian Exports to China Percent of Total Asian Exports 16% 16% Exports to China: 2014 @ 13.2% China has become a more important trading partner for many Asian economies over the past few decades 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 90 92 94 96 98 00 02 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 18 04 06 08 10 12 14 Value Added Value Added Attributable to Foreign FDD Percent of Total Value Added, 2011 15% 15% China United States 12% Some, but not all, Asian economies have limited economic exposure to China 12% 9% 9% 6% 6% 3% 3% 0% Hong Kong Taiwan Malaysia Korea Singapore Australia Japan Source: Organisation for Economic Cooperation and Development and Wells Fargo Securities, LLC Economics 19 India 0% Global Value-Added Global Value-Added Embodied in FDD Percent of Global GDP 4% 4% United States China The United States has about twice as much “pull” on the global economy than China 3% 3% 2% 2% 1% 1% 0% 0% 1995 2000 2005 2011 Source: Organisation for Economic Cooperation and Development and Wells Fargo Securities, LLC Economics 20 Brazil GDP Brazilian Real GDP Year-over-Year Percent Change, NSA 10% 10% 8% 8% 6% 6% Forecast The Brazilian economy is in the middle of a deep recession 4% 4% 2% 2% 0% 0% -2% -2% Real GDP: Q2 @ -2.6% -4% 2000 -4% 2002 2004 2006 2008 2010 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 21 2012 2014 2016 Brazil Exchange Rate Brazilian Exchange Rate BRL per USD (Inverted Axis) 1.0 1.0 BRL per USD: Oct @ 3.86 The Brazilian currency has weakened sharply over the past year or two 1.5 1.5 2.0 2.0 2.5 2.5 3.0 3.0 3.5 3.5 4.0 4.0 4.5 4.5 99 01 03 05 07 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 22 09 11 13 15 Brazil CPI Brazilian Consumer Price Index Year-over-Year Percent Change 18% 18% CPI: Oct @ 9.9% Exchange rate depreciation is helping to push up the inflation rate 15% 15% 12% 12% 9% 9% 6% 6% 3% 3% 0% 1998 0% 2000 2002 2004 2006 2008 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 23 2010 2012 2014 Brazil Policy Rate Brazilian Policy Rate Percent The Brazilian central bank has tightened monetary policy to keep inflation expectations in check 21% 21% 18% 18% 15% 15% 12% 12% 9% 9% Selic Rate: Oct @ 14.25% 6% 6% 05 06 07 08 09 10 Source: Bloomberg LP and Wells Fargo Securities, LLC Economics 24 11 12 13 14 15 Mexico GDP Real GDP Growth Year-over-Year Percent Change 9% 9% Forecast Solid real GDP growth in the United States is helping to support economic growth in Mexico 6% 6% 3% 3% 0% 0% -3% -3% -6% -6% Mexico: Q2 @ 2.2% United States: Q3 @ 2.0% -9% -9% 00 02 04 06 08 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 25 10 12 14 16 Global Industrial Production Global Economic Indicators Year-over-Year Percent Change It would take a sharp downturn in the rest of the world to have a meaningful effect on U.S. economic growth 15% 15% 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% Global Industrial Production: Q3 @ 1.7% U.S. GDP: Q3 @ 2.0% -15% -15% 92 94 96 98 00 02 04 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 26 06 08 10 12 14 Value Added Value-Added Embodied in Foreign FDD Percent of Total Value-Added 30% 30% 2011 27.3% 25% 25% 21.5% 21.9% 20% 20% 17.6% The United States derives only 10 percent of its value added from final spending in the rest of the world 15% 15% 12.6% 10% 9.7% 10% 5% 5% 0% 0% U.S. Japan China United Kingdom Canada Germany Source: Organisation for Economic Cooperation and Development and Wells Fargo Securities, LLC Economics 27 U.S. Unemployment Rate Unemployment Rates Seasonally Adjusted 18% 18% Unemployment Rate: Oct @ 5.0% U-6 Unemployment Rate: Oct @ 9.8% 16% There is less slack in the labor market today 16% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 94 96 98 00 02 04 06 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 28 08 10 12 14 PCE Inflation PCE Deflator vs. Core PCE Deflator Year-over-Year Percent Change 5% The drop in oil prices should cause the overall rate of inflation to recede, but “core” inflation likely will remain steady 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% PCE Deflator: Sep @ 0.2% "Core" PCE Deflator: Sep @ 1.3% -2% -2% 92 94 96 98 00 02 04 06 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 29 08 10 12 14 Import Prices U.S. Inflation Indicators Year-over-Year Percent Change CPI inflation is not highly correlated with changes in prices of imports from China 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% Nonfuel Import Prices: Sep @ -3.1% Import Prices from China: Sep @ -1.3% Core CPI: Sep @ 1.9% -6% -8% 03 05 07 09 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 30 11 -6% -8% 13 15 U.S. Interest Rates 10-Yr Treasury and Federal Funds Target Rate Percent 10% 10% 10-Year Treasury Yield: Oct @ 2.07% 9% The Fed likely will begin to raise the fed funds rate later this year 9% Fed Funds Target: Oct @ 0.25% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% 90 92 94 96 98 00 02 Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 31 04 06 08 10 12 14 World GDP Growth Real GDP Growth by Region Year-over-Year Percent Change 10% 10% IMF Projections 8% The IMF does not believe that the developing world will return to pre-crisis growth rates 8% 6% 6% 4% 4% 2% 2% 0% 0% World: 2014 @ 3.4% -2% -2% Advanced Economies: 2014 @ 1.8% Developing Economies: 2014 @ 4.6% -4% -4% 80 84 88 92 Source: IMF and Wells Fargo Securities, LLC Economics 32 96 00 04 08 12 16 20 International Economic Forecast Wells Fargo International Economic Forecast (Year-over-Year Percent C hange) GDP We project that global GDP growth will strengthen a bit during the next two years CPI 2015 2016 2017 2015 2016 2017 Global (PPP Weights) Global (Market Exchange Rates) 3.0% 2.9% 3.2% 3.1% 3.4% 3.3% 3.3% n/a 3.4% n/a 3.6% n/a Advanced Economies 1 United States Eurozone United Kingdom Japan Korea Canada 2.1% 2.4% 1.5% 2.4% 0.6% 2.5% 1.2% 2.3% 2.5% 2.0% 2.2% 0.9% 3.0% 2.0% 2.4% 2.4% 2.2% 2.1% 1.4% 3.3% 2.3% 0.2% 0.1% 0.0% 0.1% 0.8% 0.7% 1.2% 1.5% 1.8% 1.1% 1.3% 0.8% 1.8% 1.8% 1.9% 2.2% 1.6% 1.9% 1.1% 2.0% 1.9% Developing Economies 1 China India2 Mexico Brazil Russia 3.9% 6.9% 7.3% 2.3% -2.3% -3.7% 4.0% 6.3% 7.3% 2.3% -1.0% 0.0% 4.4% 6.1% 7.8% 2.8% 1.6% 2.3% 6.1% 1.5% 5.3% 2.7% 8.9% 15.5% 5.3% 1.4% 5.1% 3.1% 8.0% 7.3% 5.3% 1.8% 5.5% 3.0% 7.2% 6.0% Forecast as of: November 11, 2015 1 Aggregated Using PPP Weights 2 Forecasts Refer to Fiscal Year Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 33 Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Economists Diane Schumaker-Krieg ………………… …[email protected] Global Head of Research & Economics Azhar Iqbal, Econometrician………………… ……………[email protected] …… Tim Quinlan, Economist …………………… ……………. [email protected] Eric J. Viloria, Currency Strategist Chief Economist Sarah House, Economist John E. Silvia … ...................... … [email protected] . …………… ………… Michael A. Brown, Economist ……………… … Michael T. Wolf, Economist Senior Economists [email protected] ………………… … [email protected] [email protected] . [email protected] Economic Analysts Mark Vitner, Senior Economist……………....………. . [email protected] Erik Nelson, Economic Analyst Jay H. Bryson, Global Economist …………………....…… …[email protected] Sam Bullard, Senior Economist [email protected] Nick Bennenbroek, Currency Strategist ……[email protected] Alex Moehring, Economic Analyst [email protected] Misa Batcheller, Economic Analyst [email protected] Michael Pugliese, Economic Analyst [email protected] Administrative Assistants Eugenio J. Alemán, Senior Economist… …………[email protected] Anika R. Khan, Senior Economist … [email protected] Donna LaFleur, Executive Assistant. . 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