The Next Recession: Asia Mark Zandi, Chief Economist September 23, 2019 XXXXX, Title Katrina Ell, Economist Steve Cochrane, Chief APAC Economist
The Next Recession: Asia
Mark Zandi, Chief EconomistSeptember 23, 2019
XXXXX, TitleKatrina Ell, EconomistSteve Cochrane, Chief APAC Economist
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2
September, 2019 3
1. Sizing Up the Recession Threat2. Recession Triggers3. Road to Recession4. Policy Response5. How Severe a Downturn
Agenda
1 Sizing Up the Recession Threat
September, 2019 5
U.S.Turkey
UK
China
South Africa
BrazilRussia
Italy
Japan Spain
France
Canada
India
Indonesia
Germany
Israel
Chile
Saudi Arabia
Australia
Egypt
Expansion
SlowdownRecession
Recovery
MalaysiaSingapore
Thailand
Greece
Recession Risks Are Rising…
South Korea
Vietnam
Source: Moody’s Analytics
September, 2019 6
-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14
S. KoreaSingaporeIndonesia
Hong Kong*Japan
ThailandMalaysia*
ChinaTaiwan
Philippines*Vietnam
Aug-18
Aug-19
* Jul-19
Exports Faltering Across Much of Asia in 2019
Sources: National statistics agencies, Moody’s Analytics
Total exports, 3-mo MA, % change yr ago
2 Recession Triggers
September, 2019 8
What Could Go Wrong? Risk Matrix - China
Source: Moody’s Analytics
High
Likelihood
LowLow HighEconomic Severity of Shock
U.S.-China trade war
Corporate credit bubble burst
Destabilizing capital outflows
State-owned enterprises fuel inefficiencies
Housing market bubble
Hong Kong protests
Losing status as Asia’s manufacturing
hub
African swine flu
Environmental risks
Troubled transition to consumption-led
Local government debt
September, 2019 9September, 2019 9
Tax Hikes Derail Japan’s Growth
-4
-2
0
2
4
6
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8
Nominal GDP - 1997 Private consumption - 1997Nominal GDP - 2014 Private consumption - 2014
Tax introduced at T
% change yr ago, T=qtr
Sources: Economic and Social Research Institute, Moody’s Analytics
September, 2019 10September, 2019 10
-80
-60
-40
-20
0
20
40
60
80
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Present conditionsExpectations
Moody’s Analytics business sentiment survey
Source: Moody’s Analytics
Trade War Undermines Business Sentiment
% diff between positive and negative responses
September, 2019 11
0
20
40
60
80
100
15 16 17 18 19
Global recession China recession
Recession Worries MountWorldwide Google search term, 100=peak popularity
Sources: Google Trends, Moody’s Analytics
3 Road to Recession
September, 2019 13
-4-3-2-1012345
75 80 85 90 95 00 05 10 15
Treasury Yield Curve Sends a WarningDifference between 10-yr Treasury yield and 3-mo EBY, %
Sources: Federal Reserve, Moody’s Analytics
Avg length of time between inversion and recession is 12 mo
September, 2019 14
-1
0
1
2
3
4
5
6
11 12 13 14 15 16 17 18 19
Japan South Korea Australia China
Asia’s Bond Yields Trend Lower10-yr government bond yield, %
Sources: FRED, Moody’s Analytics
4 Policy Response
September, 2019 16
0123456789
13 14 15 16 17 18 19
Australia Indonesia India South Korea Malaysia Philippines
Asia’s Central Banks Mostly Have Room to CutCentral bank policy rate, %
Sources: Various central banks, Moody’s Analytics
September, 2019 17
Fiscal Space (IMF) versus Debt/GDP
Source: Moody’s Analytics
-500
50100150200250300350400
0 50 100 150 200 250
Korea
Debt-to-GDP Ratio, 2018
Fisc
al S
pace
(IM
F)
Circle size = Real GDP, USD, 2018Q4
Japan
Singapore
India
VietnamLaos
MalaysiaChina
Hong Kong
Thailand
Myanmar
Taiwan
Cambodia
Indonesia
Philippines
5 How Severe a Downturn
September, 2019 19
AUS
AUT
BEL CANCZE
DNK
FIN
FRA
DEU
ISR
ITA
JPN
NLD
NZL
NOR
KOR
ESP
SWE CHE
GBRUSA
LUX
POL
PRT
GRCHUN
ARG BRACHL
CHN
IND IDN MYS
MEXRUS
SAU
ZAF
THA
TUR
HKG
SGP
-30-25-20-15-10
-505
10152025
0 20 40 60 80 100 120 140
Developed EconomiesEmerging Markets
Household Debt Adds Stress in China and KoreaHousehold debt-to-GDP ratio, % (x-axis), 5-yr change, ppts, (y-axis)
2018Q4
Sources: BIS, Moody’s Analytics https://stats.bis.org/statx/toc/CRE.html
APAC
September, 2019 20
HKG
SGP
VNM
TWNTHA MYSKOR
PHLCHNIDN
INDJPN
0
50
100
150
200
250
0 50 100 150 200 250
Y-axis=2018X-axis=2007
Vietnam is Latest Export-Dependent EconomyExports as % share of GDP, 2007 vs. 2018
Sources: National statistical agencies, Moody’s Analytics
September, 2019 21
404550556065707580
Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 15 Jul 19
Distant Geopolitical Risks Matter for APAC
Sources: EIA, Moody’s Analytics
West Texas Intermediate, $ per bbl
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September, 2019 24
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September, 2019 25
No-Deal Brexit Would Be a Global Body BlowDifference in Real GDP in 2020Q4, No deal vs No Brexit
Source: Moody’s Analytics
Lower by less than 0.5 pptLower by 0.5 to 1 pptLower by more than 1 ppt
September, 2019 26
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
50 55 60 65 70 75 80 85 90 95 00 05 10 15
How a Vicious Cycle Takes Hold3-mo change in the unemployment rate, ppts
Sources: BLS, Moody’s Analytics
September, 2019 27
0.0
0.2
0.4
0.6
0.8
1.0
1.2
19Q3 19Q4 20Q1 20Q2 20Q3 20Q4 21Q1 21Q2 21Q3 21Q4
Assuming implied path of fed funds rate from futures
Monetary Easing Is Critical…Deviation in real GDP under Fed cut scenario and baseline, %
Source: Moody’s Analytics
September, 2019 28
-2
-1
0
1
2
3
08 09 10 11 12 13 14 15 16 17 18 19 20
Trump Spending Trump Tax CutSequester ObamacareBush taxes over $400k Payroll tax & UIRecovery Act Other PolicyCash for Clunkers Tax rebate checks
…As More Fiscal Stimulus Is Not Likely
Source: Moody’s Analytics
U.S. federal discretionary fiscal policy as a % of GDPSt
imul
usAu
ster
ity
September, 2019 29
0.0
0.2
0.4
0.6
0.8
1.0
62 67 72 77 82 87 92 97 02 07 12 17
UnadjustedAdjusted
…And Uncomfortably HighProbability of U.S. recession based on financial indicators 12-mo prior
Sources: Federal Reserve, Moody’s Analytics
67% in 2020Q2
42%
September, 2019 30
Title Here One Line Only, Title CaseGDP heat map
September, 2019 31September, 2019 31
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
08 09 10 11 12 13 14 15 16 17 18 19H1
Leveraged Firms Leverage UpLeveraged loans outstanding, $ bil
Sources: IMF, Moody’s Analytics
September, 2019 32
0
2
4
6
8
10
12
14
15 16 17 18 19
Europe Faces Another Existential MomentShare of European debt with negative interest rates, $ tril
Sources: Bloomberg, Barclays, Moody’s Analytics
September, 2019 33
-2 -1 0 1 2 3 4 5 6 7
China
Hong Kong
Singapore
India
Japan
South Korea
Malaysia
19Q1 19Q2 19Q3F
Mostly Softer Conditions Over 2019
Sources: National statistics agencies, Moody’s Analytics
Real GDP growth, % change yr ago
September, 2019 34
2.62.83.03.23.43.63.84.04.24.4
20-Aug-14 30-Jan-15 25-Dec-16 09-Oct-17 14-Aug-18 10-Jul-19
…China’s Not ImmuneChina 10-yr bond yield, %
Sources: Bloomberg, Moody’s Analytics