Last week, UBS released its Global Economic Outlook forecast for 2018-2019, which coming in at over 220 pages and with more than 270 charts, is rather “difficult to summarize” as UBS’ chief economist Arend Kapteyn snarkily notes. Still, as Kapteyn helpfully summarizes, the 3 charts below capture some of the main themes from the report, the first of which is a doozy and crushes the Trump “economic recovery” narrative .
Message 1: The 2017 global growth acceleration was largely (70%) a commodity bounce. This applies even to the US which was 20% of the global growth improvement but, as the 1st chart below shows, it was entirely energy investment. Once you strip that out ‘underlying’ growth is only 1% or so (ex inventories) – the slowest since 2010 – and a significant amount of rotation now needs to take place from energy to non-energy investment just to sustain the current growth pace. The surveys suggest that is possible but the surveys have also consistently overstated growth so far. As Kapteyn adds, due to “skepticism about that rotation is why we are about 20bp below consensus for US growth next year.” It also means that contrary to conventional wisdom, the US consumer has not only not turned the corner, but continues to retrench and with the personal savings rate plunging to 10 years lows, there is little hope that personal consumption expenditures will be a significant driver of US growth for the foreseeable future.
More details from UBS:
In Figure 5 we show what we think the contributions to US headline growth have been from the energy sector (structures and equipment investment combined). This is depicted as the grey area. The blue line is headline growth (ex-inventories) and the red line is headline growth minus the energy sector investment contribution, which we call ‘underlying growth ex-energy’. Taken at face value, the chart suggests underlying US growth has been slowing dramatically, from about 2.6% in 2015 to only around 1% in 2017. We do not quite interpret it that way, and view it more as a story of stability and ‘adding-up constraints’. The economy can only produce so much, and when one sector is strong (energy), it absorbs labour disproportionately, while other sectors pull back. Furthermore, when investment is weak the consumer accelerates. US growth post-crisis has hovered around a 2% average and nothing in our recession probability models suggests that there is anything ominous going on. But the point of Figure 5 is to show that as energy investment runs out of steam, other sectors will need to accelerate
significantly to maintain the current pace of growth.
