The Global Macro Outlook：Divergences become chasms

Please refer to page 83 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 7-9. Online access to our global macro forecasts is available on request 2) The ongoing weakness in commodities/energy prices has led to some further cuts in 2016-17 forecast real GDP growth for resource-rich economies, South Africa in particular 3) The same factor supports consumers. This month, our China growth forecasts have been revised up modestly 4) Emphasizing economic strength, we expect the US Fed to begin a succession of Fed Funds increases Analyst(s) Macquarie Capital Securities (Japan) Limited Peter Eadon-Clarke +81 3 3512 7850 peter.eadon-clarke@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 Securities Limited Larry Hu PhD +852 3922 3778 larry.hu@macquarie.com Jerry Peng +852 3922 3548 jerry.peng@macquarie.com Macquarie Capital Securities (Malaysia) Sdn. Bhd. PK Basu +603 2059 8993 pk.basu@macquarie.com Macquarie Capital Securities India (Pvt) Ltd Tanvee Gupta Jain +91 22 6720 4355 tanvee.guptajain@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 14 December 2015 The Global Macro Outlook Divergences become chasms Whilst weak resource prices are battering many countries, consumers benefit. We have beneath consensus 2016 real GDP growth forecasts for Canada, South Africa and Australia, but this month modestly revise up our 2016-17 growth forecasts for China (to 6.7% and 6.5%, from 6.5% and 6.0%, respectively). Please see pages 9-11 for the latest insights from Colin Hamilton and the Macquarie global commodities team. There has been another round of significant forecast cuts this month. Supported by large falls in energy prices, service sector-PMIs remain buoyant in advanced economies (85% of employment in two-thirds of the world). Broad money and credit growth are now growing moderately in advanced economies. US: PMI Indices; an unusual divergence Source: Bloomberg, Macquarie Research, December 2015 Our 2015, 2016 and 2017 global real GDP growth forecasts are 2.6%, 2.8% and 2.8% respectively, implying a continuation of our “the long grinding cycle” forecast of 2.5% to 3.0% pa global growth. We expect neither global lift-off, nor global slump. There are two core forecasts underpinning our outlook: 1) We believe the US is on track for a gradual trajectory of Fed Funds rate increases. Our base case calls for this to begin on 16 December 2015, with the Fed emphasizing economic strength. We are forecasting the Fed Funds rate increasing 25bp each quarter until autumn 2017. Nonetheless, US real GDP growth is forecast to remain above 2% in both 2016 and 2017. 2) We believe the Chinese authorities have the desire & ability to maintain control of the RMB, which we forecast will depreciate only another 2-3% versus the US$ through end-2016 RMB6.60/US$. We expect the RMB to appreciate modestly in 2017. The US$ in 2016: After a period of broad US$ strength in 2015, we believe 2016 will see individual currencies at different times pass their lows versus the US$. Whilst relative monetary policy stances will remain important, resulting capital flows now have to exceed mounting current account surpluses in Japan and the Euro-zone (partially reflecting the falls in oil and other resource prices). On our forecasts the Yen bottoms first (1Q 2016), and then the Euro (2Q 2016). 30354045505560652000200120022003200420052006200720082009201020112012201320142015Index: above 50=expansionManufacturingNon manufacturing Macquarie Research The Global Macro Outlook 14 December 2015 2 The Global Macro Outlook Our 2015, 2016 and 2017 global real GDP growth forecasts are 2.6%, 2.8% and 2.8% respectively, implying a continuation of our “the long grinding cycle” forecast of 2.5% to 3.0% p.a. global growth. Investors should remain cautious, but we believe that it is not a time for fear. Trend growth rates: we believe the pace of the current expansion should continue to prove to be structurally lower than in previous cycles as high leverage levels, demographic factors, low productivity growth and sub-optimal global policy making are likely to remain as headwinds in the years ahead. 1) “The long grinding cycle continues” is discussed from page 25 2) “Sub-optimal global policy making” is discussed from page 37 Cyclical downside risks to “the long