The Global Macro Outlook：The view from the commodity pits

Please refer to page 77 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. GLOBAL Key forecasts, changes this month 1) Tables for real GDP growth, CPI, interest rates, currencies and commodity prices are on pages 9-11. Online access to our global macro forecasts is available on request. 2) Our US real GDP growth forecasts for 2017 and 2018 (4Q on 4Q) have been reduced to 2.0% and 1.8% respectively (previously 2.2% and 1.9% respectively) 3) Our 2018 South Africa real GDP growth forecast has been reduced to 1.3% (2.0%) reflecting renewed political and policy risks 4) Our Thailand real GDP growth (2018 to 3.2% from 3.5%), CPI and policy rate forecasts have been clipped reflecting both the maturing global cycle and manufacturing sector structural weaknesses Analyst(s) Macquarie Capital Securities (Japan) Limited Peter Eadon-Clarke +81 3 3512 7850 peter.eadon-clarke@macquarie.com Nara Song +81 3 3512 7878 nara.song@macquarie.com Macquarie Capital Markets Canada Ltd. David Doyle, CFA +1 416 848 3663 david.doyle@macquarie.com Macquarie Securities (Australia) Limited James McIntyre, CFA +61 2 8232 8930 james.mcintyre@macquarie.com Macquarie Capital Limited Larry Hu, PhD +852 3922 3778 larry.hu@macquarie.com Macquarie Equities South Africa (Pty) Ltd Elna Moolman +27 11 583 2570 elna.moolman@macquarie.com Macquarie Capital (Europe) Limited Matthew Turner +44 20 3037 4340 matt.turner@macquarie.com Colin Hamilton +44 20 3037 4061 colin.hamilton@macquarie.com 18 April 2017 The Global Macro Outlook The view from the commodity pits We expect global industrial production momentum to fade over the next few months, before rolling over during the summer. In the case of steel, chart below, output growth slowed from 8.1% YoY globally in January to 7.8% in February at 1.65bn tonnes annualised, Colin Hamilton and the Macquarie commodities team are forecasting 1.6% YoY growth for 2017, and -0.3% for 2018. The key to this is Chinese construction activity, where we expect some signs of weakening (but not collapse) to emerge during the coming months, and an adjustment in Chinese inventories (Fig.1 and Fig.15). Please see pages 2-5 and 11-14 for more from the commodity team. For China, we expect 1Q17 to be the peak of PPI inflation, earning growth and nominal GDP growth—please see pages 16-17. Global steel output: Absolute YoY gains remain strong Note: in February, China was +8.3% YoY, ex-China +7.3% YoY. Please note the greater breadth of the 2016 recovery versus the 2013-14 recovery. Source: worldsteel, Macquarie Research, April 2017 The tailwind from the global recovery has provided a policy window (2H 2016, 1H 2017) for countries to tackle their major issues: 1) The US Fed has been reloading its monetary policy weapon 2) The PBOC has begun to deleverage part of the financial system 3) In the Eurozone, recapitalisation of banks is proceeding very slowly 4) In Japan, labour market flexibility reform is not even on the agenda Global real GDP growth is forecast to remain in ‘the long grinding cycle’ of 2.5-3.0% pa, Fig 17. Our 2016, 2017 and 2018 global real GDP growth forecasts are 2.7%, 2.9% and 2.7%, respectively. Short-term business-cycle judgements are more likely to succeed with a deep awareness of more medium- and longer-term issues. In global macroeconomics, there are a considerable number of the latter. We examine 24 of them from page 28; topical issues investigated in our Macq-ro insights reports. -150-100-50050100150Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Mt annualisedYoY change in crude steel outputWorld ex-ChinaChina Macquarie Research The Global Macro Outlook 18 April 2017 2 The view from the commodity pits As detailed in the 11 April 2017 Commodities Comment: Steel slides in Asia as restock fades, the growth in Chinese steel output over the last year has partially gone into inventories, Fig.1 and Fig.15 on page 5. This suggests the need for caution on the cycle’s longevity. Colin Hamilton and the Macquarie commodities team are forecasting major price declines for some leading commodities through 2017 end, e.g. hard coking coal -37% and iron ore -33%, Fig 2. Fig 1 Chinese steel output growth has partially gone into increased inventories Fig 2 2H 2017 versus 1H 2017 forecast price Source: NBS, China Customs, Macquarie Research, April 2017 Source: LME, MB, CRU, TSI, Macquarie Research, April 2017 Higher prices over the last twelve months are attracting back latent supply capacity in many markets, Fig 3 and Fig 4. This is slowing inventory adjustments. Fig 3 Proportion of supply losing money Fig 4 Supply growth, 2016 & 2017E Source: IAI, CRU, ICSG, ILZSG, Wood Mackenzie, Macquarie Research, April 2017 As a consequence, commodity producers are in a sweet spot, generating strong free cash flow as capital expenditure deferrals continue, Fig 5 and Fig 6. How long this is likely to persist is best judged, we bel