REOPENING THE WORLD: BEWARE OF FALSE STARTS - Global and Asia-Pacific Economic Outlook - PARIMA
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REOPENING THE WORLD: BEWARE OF FALSE STARTS Ludovic Subran, Chief Economist Françoise Huang, Senior Economist Global and Asia-Pacific Economic Outlook © Ekaterina Pokrovsky - stock.adobe.com as of April 2020 © Copyright Allianz
COVID-19: AN UNPRECEDENTED SHOCK
Services PMIs Monthly car sales, annual change, ‘000 Current traffic congestion
vs. 2019 average value
65 17/04 18/04 19/04 20/04 21/04 22/04 23/04
1000 0%
60 500 -10%
55 0 -20%
-500 -30%
50
-1000 -40%
45
-1500 -50%
40
-2000 -60%
China
35 US - Services PMI -70%
-2500 US
China - Services PMI
Europe -80%
30 -3000
EZ - Services PMI (EU+EFTA+UK)
-90%
25 -3500 Jakarta Bangkok Tokyo Mu mbai Beijing
10 11 12 13 14 15 16 17 18 19 16 17 18 19 20
Sources: Markit, Euler Hermes, Allianz Research Sources: National Sources, Euler Hermes, Allianz Research Sources: TomTom, Euler Hermes, Allianz Research
© Copyright Allianz 2INITIAL RESPONSE: POLICYMAKERS’ BAZOOKA
Central Bank balance sheets (% of GDP) Fiscal policy: stimulus vs. State guarantees (% GDP)
ECB (lhs) BoE (lhs) PBoC (lhs) FED (lhs)
35%
70
30%
60
25%
50
20%
40
15%
30 10%
20 5%
0%
10
Eurozone
China*
Germa ny
UK
Japan
USA
Spain
Italy
Fra nce
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Fiscal stimulus (tax relief, spending) State guarantees
* Total expected, and liquidity injections instead of State guarantees (the latter-
Sources: Official sources, Euler Hermes, Allianz Research one not being straightforward to estimate given the structure of the economy).
Sources: Official sources, Euler Hermes, Allianz Research
© Copyright Allianz 3LIQUIDITY SHOCK: FOCUSING ON COMPANIES’
NEEDS, LARGE AND SMALL
Supportive measures for SMEs, distribution by type
Sources: World Bank, Euler Hermes, Allianz Research
© Copyright AllianzTHE GREAT LOCKDOWN: TWICE AS BAD AS
THE 2009 GLOBAL FINANCIAL CRISIS
Global real global GDP growth, q/q annualized Real global GDP growth, annual, %
2017 2018 2019 2020 2021
45%
World GDP growth 3.3 3.1 2.5 -3.3 5.6
35%
United States 2.4 2.9 2.3 -2.7 3.3
25% Latin America 1.0 1.0 0.1 -4.1 3.7
Brazil 1.3 1.3 1.1 -5.0 5.5
15% United Kingdom 1.8 1.3 1.4 -8.2 8.7
Eurozone members 2.7 1.9 1.2 -9.3 9.3
5%
Germany 2.8 1.5 0.6 -8.9 8.7
France 2.4 1.7 1.3 -8.9 9.6
-5%
Italy 1.7 0.7 0.3 -11.4 11.0
Spain 2.9 2.4 2.0 -11.0 10.0
-15% U-shape scenario
Russia 1.6 2.3 1.3 -2.5 5.2
-25% Global Financial Crisis Turkey 7.5 2.8 0.9 -3.3 7.6
(Q4 2007-Q3 2009)
Asia-Pacific 5.2 4.7 4.3 -0.6 6.5
-35% China 6.9 6.7 6.1 1.8 8.5
Q1 19 Q3 19 Q1 20 Q3 20 Q1 21 Q3 21 Japan 2.2 0.3 0.7 -5.7 2.2
Sources: Euler Hermes, Allianz Research India 7.3 6.2 5.0 1.1 7.5
Middle East 1.2 1.1 0.6 -4.5 2.4
We expect the supply and demand shocks, especially through confinement Saudi Arabia -0.7 2.4 0.2 -2.0 2.0
measures, to push the global economy into recession in H1 2020 Africa 3.1 2.7 1.9 -1.6 3.6
(4x the trough seen during the global financial crisis). South Africa 1.4 0.8 0.3 -5.3 4.5
We expect a U-shape recovery thereafter, supported by stimulus measures. Sources: Euler Hermes, Allianz Research
* Weights in glob al GDP at market price, 2019
© Copyright Allianz NB: fiscal year for India 5GLOBAL TRADE: USD3.5TN LOSS IN 2020 AND
PROTECTIONISM RELOADED
Global Trade growth in volume and value (%, y/y) Protectionism will be a key feature of the life after Covid-19
15% Volume Price Value 15.0%
10.0% Shorter supply chains likely to be in focus
10% 9.5%
in the coming year
3.3% 3.9% 10.0%
5% 3.0% 2.4%
2.7% 5.6% 1.4%
1.9% 4.0%
0%
-5%
-2.0%
-1.8% Rules on foreign investment
-15.0%
likely to get tighter
-10%
-10.8%
-15%
-20% Nationalization are considered where
-25%
-20.0%
necessary (air transport, banks…)
13 14 15 16 17 18 19e 20f 21f
Sources: IHS Markit, Euler Hermes, Allianz Research Sources: Euler Hermes, Allianz Research
We expect two quarters of recession in trade in goods and services UNCTAD predicts a drop in global FDI flows by up to -40% over 2020-2021.
(Q1 and Q2) which will bring the annual figure to -15% in 2020. In In addition, several FTAs (incl. with the UK) are likely to be delayed.
value terms, plummeting commodity prices and a stronger USD will
weigh on prices.
© Copyright Allianz 6DESPITE UNPRECEDENTED SUPPORT, INSOLVENCIES
ARE SET TO INCREASE BY +20% IN 2020
Share of SME & MidCaps at risk (close to zombies), % of total 2020 re-forecasts for annual business insolvencies –
selected key countries and region
Sources: Euler Hermes Sources: National statistics, Euler Hermes, Allianz Research
We find that more than 13,000 SMEs & MidCaps (7% of total) Final figures still depend on
in the six biggest Eurozone countries are at risk of going bust (i) the timing and magnitude of other policy measures yet to announced and
after persistent low profitability and turnover growth. We find that more (ii) the potential closures of business courts (which would create lags and delays
than EUR500 bn of turnover (or 4% of Eurozone GDP) could be at risk. in official registrations of liquidations and restructuring procedures).
© Copyright Allianz 7SECTOR RATINGS: HEATMAP OF DOWNGRADES (Q1’20)
Change of sector risk in a given country (the color of the s Deterioration Regional risk level: Low Medium Sensitive High
This heatmap shows arrow gives the final risk level):
r Improvement
Transportation
Manufacturers
Construction
Automotive
Automative
Electronics
Household
Equipment
Equipment
Chemicals
IT Services
Computer
Machinery
Transport
Agrifood
suppliers
Telecom
Pharma
Energy
Textile
Metals
Retail
Paper
North sUS sUS sUS
Am erica
qSingapore qMalaysia sTaiw an sKorea sMalaysia sPhilippines sChina sVietnam sKorea sKorea
qVietnam sHong-Kong sPhilippines sKorea qIndonesia sSingapore sPhilippines
qChina sSingapore sTaiw an sSingapore
ASIA qPhilipines sVietnam sVietnam
qVietnam qChina qJapan
qSingapore
qThailand
qLuxembourg sIreland sBelgium qNetherlands qIreland qIreland sBelgium qGermany sIreland sIreland sIreland sDenmark qBelgium qBelgium
qIreland sItaly sSw eden sIreland qSpain qPortugal sFinland qIreland qItaly sNetherlands sIreland qIreland qGermany
qItaly qBelgium sItaly sIreland qPortugal qSpain sPortugal qBelgium qPortugal qIreland
Western qLuxembourg sLuxembourg sLuxembour qLuxembourg qUK qPortugal
Europe sNetherlands sNorw ay qUK qUK
sUK sPortugal
sSw eden
qUK
sCzech Rep qEstonia qRussia sCzech Rep qEstonia sLithuania qRussia sCzech Rep sHungary sBulgaria
sEstonia sEstonia sRomania sCzech Rep
Central & sLithuania sHungary
Eastern sRomania sLithuania
Europe
sSlovakia sPoland
qPoland sRomania
qTurkey sSlovakia
Africa & sQatar qIsrael sMorocco
Middle East qSouth Africa
sChile sCosta Rica sMexico qEcuador qCosta Rica qPanama sChile
qChile sChile sCosta Rica sPeru
Latin
sGuatemala
Am erica
sMexico
qColombia
© Copyright Allianz 8HAPHAZARD OPENING: CARING, TESTING AND
MONITORING CAPACITIES WILL BE ESSENTIAL
Deconfinement analytical framework
Economic
Hong Kong
vulnerability to
Deconfinement Impacts on the
Initial conditions confinement
India
strategy economy (grow th New Zealand
South Africa U.S.
momentum,
current account, Philippines U.K. China
Vietnam
1. Readiness, from a health 1. Length and timeline of 1. Shape of the recovery: U- fiscal balance, oil
sector and virus spread deconfinement shape, L-shape, jump function price sensitivity, Indonesia Australia
perspective. This includes the (S-shaped) employment Brazil
2. Geographic segmentation Italy
virus spread momentum, (intra/interregional mobility) 2. Time to reach pre-crisis protection, Russia
medical capacity, testing tourism Singapore Japan Germany
3. Restrictions on movements activity level and/or pre-crisis
capacity, the use of technology contribution to France
(borders, trade, gatherings and pace of growth
tracing early on. employment,
demographic segmentation) 3. Workforce impact: informal Norway
2. Economic vulnerability to unemployment increase, labor employment)
4. Sector segmentation: which
prolonged confinement: GDP shortages in specific sectors
shops open, industries restart,
and employment structure
schools open 4. Inflation impact, especially in
(services, industry…), growth Taiwan
5. Health response: health specific sectors
momentum, % of tourism in
GDP, reliance on foreign labor, protocols in the private and 5. “Paused” sectors vs. Health readiness to de-confine
density of population in cities, public sector, testing strategy structurally damaged ones (proprietary effective R0, testing data,
political pressure, informality (insolvencies) w inter/flu season in coming tw o months)
Early birds Borderline Still battling Most vulnerable
Sources: Various, Euler Hermes, Allianz Research
Sources: Various, Euler Hermes, Allianz Research
To understand exit strategies and their risks, we group countries over two dimensions 4 clusters:
that analyze their initial conditions and then break down deconfinement strategies and early birds (blue), gradual de-confinement, first mover disadvantage;
impacts. borderline (green) could start de-confining but risk of renewed outbreaks;
still battling (pink), should keep confinement in place for the moment;
most vulnerable (orange), high risk of policy mistake.
© Copyright Allianz 9WHAT IT TAKES TO GET
BACK TO BUSINESS AS USUAL
Fresh virus outbreak –
back to stage 1
Stage 2: Gradual
Stage 4:
opening of national
• Expand healthcare capacity
economies
• Bans on large events & border Habemus vaccine!
(treatment, testing, monitoring) restrictions to be eased as
• Fiscal / monetary safety nets pandemics around the globe
to reduce downside risks & • Mass testing, tracking & end • Global rollout allows for return
cushion economic blow isolation of new cases • Ongoing fiscal & monetary to normalcy without border
• Ongoing targeted confinement policy support aimed at restrictions, testing & bans on
measures incl. border providing tailwind to rebound large events
restrictions & event bans • Policy support can be
• Policy to focus on boosting gradually withdrawn
economic recovery prospects
Stage 1: Full Stage 3: Global
lockdowns to economy getting
'flatten the curve' back on track
You are here!
Sources: OECD, Euler Hermes, Allianz Research
© Copyright Allianz 10UNITED STATES: DELINQUENCIES TO SURGE
Contribution to US GDP growth (%, y/y) US Delinquency rate of industrial and commercial loans
6,00
(% of total)
Consumption Non residential investment
7 7
Residential Investment Inventories Delinquency rate Forecast
Government spending Net exports
4,00
GDP 6 6
5 5
2,00
4 4
0,00
16 17 18 19 20 21
3 3
-2,00
2 2
1 1
-4,00
0 0
90 93 96 99 02 05 08 11 14 17 20
-6,00
US GDP should decline by -30% q/q annualized in Q2 2020. We estimate the delinquency rate with the unemployment rate (size of the shock),
We expect the US GDP to decline by -2.7% y/y in 2020 and the credit gap to GDP (fragility factor) and public expenditures (as % of GDP,
rebound at 3.3% y/y in 2021 economic policy reaction factor). In 2020, this delinquency rate could reach a
record high since the 1990s.
© Copyright AllianzEUROPEAN CORPORATES: EXPECT DECREASING
TURNOVERS AND DETERIORATING MARGINS
Eurozone PMIs Turnover growth (y/y), manufacturing sector Input and selling prices, Manufacturing PMI
2.00 World inventory to new orders
Eurozone
1.80
1.60
1.40
1.20
1.00
0.80
0.60
07 08 09 10 11 12 13 14 15 16 17 18 19
Sources: Refinitiv, Allianz Research Sources: Eurostat, Euler Hermes, Allianz Research Sources: Eurostat, Euler Hermes, Allianz Research
The Eurozone is facing an unprecedented In the context of the COVID-19 crisis, we estimate Companies are facing an strong increase in their
economic setback in terms of size and speed, that turnovers of Eurozone companies could fall inventory to new orders ratio, which can announce
with the contraction in GDP driven above all by more than -30% y/y at the peak of the crisis in Q2. further downside pressures on selling prices
by the services sector.
© Copyright Allianz 12EUROPEAN JOBS: UP TO ONE THIRD AT RISK
Employment at risk and cost for public finances Duration of temporary unemployment benefits Unemployment rates, %
20
14.0 2019 2020
Temporary Unemployment Duration - Months
Cost of 18
Compensation (incl. 12.0
Kurzarbeit from 16
employer social Full time-jobs at
65% to 84% of 10.0
contributions, EUR bn) risk in Million 14
wages depending
at risk
on the country 8.0 12
10
6.0
Germany 34 12 8
4.0
France 43 11 6
2.0 4
Italy 29 9
Spain 18 8 0.0 2
Germa ny
UK
Switzerland
Hungary
Portugal
Sweden
Denmark
Estonia
Australia
Spain
Iceland
Austria
Italy
Fra nce
Belgium
0
UK 37 13
Germa ny
USA
UK
CEE
Japan
China
Brazil
Spain
Italy
Fra nce
Turkey
Belgium 8 2
Sources: Eurostat, Euler Hermes, Allianz Research Sources: Euler Hermes, Allianz Research Sources: Euler Hermes, Allianz Research
A lockdown is estimated to shut down up to 40% of GDP Despite job protection of varying generosity in place, we expect a marked rise in unemployment.
and put up to 30% of jobs at risk given the temporary pause After all the very gradual economic reopening will put companies under pressure to reduce
of economic activity. We estimate 40 million people to be fixed costs, notably in those sectors that will see a relatively slower restart.
in need for partial unemployment benefits in the four biggest We estimate the Eurozone unemployment rate to rise by +2pp to 9.5% in 2020.
Eurozone countries alone.
© Copyright Allianz 13CHINA ACTIVITY STILL c.15% BELOW USUAL LEVELS
Daily average coal consumption at major Traffic congestion index (across 100 Property transaction volume (across 30
power generation groups, base 100 cities), base 100 cities), base 100
120 140
In red, % change compared to 2016-2019
160 In red, % change compared to
average
110 2016-2019 average
120
140
100
100 -11% 120
-14% -12%
-17% -15%
90 -20%
-23%
80 -28% -27%
100
-14% -24% -28%
80
80
60
70
60 -51% -49% -58%
-58%
60 40 -63%
40 -70%
-71%
-76%
50 20 -84%
20
-94%
-85% -99%
40
0 0
-21 -14 -7 0 7 14 21 28 35 42 49 56 63 70 77 84 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th
week week week week week week week week week week week week week week week week week week week week week week week week
2015 2016 2017 after after
LNY LNY
2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
Source: Wind, Allianz Research Source: Wind, Allianz Research Source: Wind, Allianz Research
With the COVID-19 epidemic now mostly under control in China, authorities’ focus has turned towards resuming business activity in the country.
High frequency indicators suggest that the economy is gradually coming back on track, and is now probably c.15% below its usual levels at this time
after the Lunar New Year. We expect resumption to be close to complete on the production side by the end of June.
On the consumption side, it could take longer for confidence and households behaviours to come back to normal.
© Copyright Allianz 14CHINA GROWTH IN 2020 REVISED DOWN TO +1.8%
GDP growth (%y/y) GDP growth (%) & breakdown of contributions (pp)
Private Consumption
20 Forecasts 11
Government Consumption
Gross Capital Formation
15 9 Net exports 8.5
GDP %y/y
10 7
5 5
1.8
0 3
China GDP grow th % y/y - latest forecasts
-5 1
China GDP grow th % y/y - December 2019 forecasts
-10 -1
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E
Source: National statistics, Euler Hermes, Allianz Research Source: National statistics, Euler Hermes, Allianz Research
Activity data at the beginning of the year declined to record lows. After the slump of Q1, we expect a gradual recovery thereafter,
GDP growth declined by -6.8% y/y in Q1, and we expect economic particularly visible in H2. This should be possible thanks to some
activity to fully resume around June 2020. catch-up from pent-up production and policy support.
We expect 2020 GDP growth at +1.8%.
© Copyright Allianz 15CHINA POLICY MIX: FURTHER EASING TO COME
Size of fiscal stimulus package (% of GDP) Interest rates (%) Housing affordability (cost as % of income)
Policy rate 300% 2018 2017
7 10
6.5 Average lending rate
9 Average mortgage rate
6 250% Less
Average interbank rate
8 affordable
5 7 200%
6
4
3.3 150%
5
3
2.4 4
100%
2 3
2 50%
1
1
0%
0 0
09 10 11 12 13 14 15 16 17 18 19 20
Shanghai Beijing Shenzhen Guangzhou
2018 2019 2020E
Source: Euler Hermes, Allianz Research Source: PBOC, Euler Hermes, Allianz Research Source: Bloomberg, Euler Hermes, Allianz Research
Fiscal easing is likely to increase in 2020. On the monetary side, the People’s Bank of China Authorities still seem reluctant to use the housing
We now expect fiscal support amounting to 6.5% (PBOC) should continue easing. Over 2020, we sector as a cyclical stabiliser, as they may be more
of GDP, up from 2.7% forecast before the expect cuts in the policy rate worth 40bp in total, and concerned with housing affordability.
COVID-19 outbreak. the Reserve Requirement Ratios for large banks Credit conditions may be loosened only marginally.
to be lowered by 150bp overall.
© Copyright Allianz 16ASIA-PACIFIC: GDP GROWTH IN 2020 REVISED DOWN
TO -0.6%
Real GDP growth (%) Real GDP growth (%y/y)
U-shape scenario Protracted crisis scenario
2018 2019 12%
2020 2021 2020 2021 Forecasts
10%
Asia-Pacific 4.8 4.3 -0.6 6.5 -9.8 -0.1
8%
Australia 2.7 1.8 -5.0 3.5 -13.6 -4.8
China 6.7 6.1 1.8 8.5 -6.6 1.8 6%
Hong Kong 2.9 -1.2 -4.7 4.5 -16.0 -4.4 4%
India 6.2 5.0 1.1 7.5 -12.8 2.2 2%
Indonesia 5.2 5.0 0.9 6.7 -7.1 0.3 0%
Japan 0.3 0.7 -5.7 2.2 -15.9 -5.1
-2%
Malaysia 4.7 4.3 -3.2 6.2 -14.3 -2.4
-4%
New Zealand 3.2 2.2 -5.2 3.0 -13.9 -5.4
Philippines 6.2 5.9 -2.6 7.7 -11.3 -0.5 -6%
Singapore 3.5 0.7 -4.1 4.9 -15.4 -3.5 -8%
10 11 12 13 14 15 16 17 18 19 20 21
South Korea 2.7 2.0 -2.5 4.5 -11.1 -2.1
Taiw an 2.7 2.7 -2.0 4.7 -11.0 -1.2
Thailand 4.1 2.4 -4.1 6.6 -15.3 -1.8 Japan China India APAC 4 Tigers ASEAN
Vietnam 7.1 7.0 3.1 6.7 -0.9 2.5
Source: National Statistics, Euler Hermes, Allianz Research Source: National Statistics, Euler Hermes, Allianz Research
We have revised down GDP growth for the Asia-Pacific region from +4.2% All the major economies in Asia-Pacific will experience a technical
prior to the global pandemic to -0.6% in 2020 (after 4.3% in 2019). recession in H1. A partial recovery should follow in H2 for most.
© Copyright AllianzASIA-PACIFIC: EXTERNAL AND DOMESTIC SHOCKS
Exports to top 3 global economies (as % of GDP, 2019) Private consumption and employment at risk
120 80
100
75
100 Philippines
Private consumption as % of GDP
70
Hong Kong
80 Vietnam
65
New Zealand
60 60
Malaysia
41 Australia Japan India
37 55
40 31 Indonesia
50 Taiwan
21 Thailand
15 14 South Korea
20 9 8 8 45
7 5 5 4
0 40
China
a
m
na
n
ia
nd
an
Th a
s
a
Ph and
35
e
sia
ng
Singapore
di
ne
pa
re
ew rali
or
na
ys
iw
hi
la
Ko
ne
In
Ko
ap
pi
Ja
al
a
st
ai
C
et
Ta
al
do
ilip
Ze
ng
g
Au
Vi
h
30
on
M
In
ut
Si
H
So
0 20 40 60 80 100
N
to China to US to Eurozone Share of informal employment in total employment (%)
Sources: Various sources, Euler Hermes, Allianz Research Sources: Various sources, Euler Hermes, Allianz Research
The external channel of COVID-19 economic impact hits as trading The domestic channel of COVID-19 economic impact hits as lockdown is
partners are under lockdown measures. The Four Asian Tigers and put in place locally. Economies with a larger share of fragile jobs will
some ASEAN economies are most exposed. experience a bigger hit to private consumption. Furthermore, the expected
decline in remittances could weigh further on household income.
© Copyright AllianzASIA-PACIFIC: POLICIES AIMING TO CUSHION
THE ECONOMIC BLOW OF COVID-19
Monetary policy leeway Fiscal policy leeway Change in fiscal balance (pp)
Inflation Inflation Monetary Fiscal Public
Inflation Policy Fiscal (+) Fiscal tightening
2020 latest policy 2019 balance debt
Target rate leeway
YTD month leeway % of GDP % of GDP
-1.0
Australia 2%-3% 2.2% 2.2% 0.25% Australia -0.7% 42%
China 3.0% 4.9% 4.3% 3.85% China -6.1% 55%
India 4.0% 6.7% 6.6% 4.40% Hong Kong 0.6% 0% -6.0
Indonesia 3.5% +/-1% 2.9% 3.0% 4.50% India -7.5% 69%
Indonesia -1.9% 30%
Japan 2.0% 0.5% 0.5% -0.10% -11.0
Japan -3.0% 246%
Malaysia* - 0.9% 1.3% 2.25%
Malaysia -3.0% 56%
New Zealand 1%-3% 2.5% 2.5% 0.25%
New Zealand 0.1% 29% -16.0
Philippines 3% +/-1% 2.7% 2.6% 2.75% Philippines -1.1% 39% (-) Fiscal easing
South Korea 2.0% 1.2% 1.1% 0.75% Singapore 4.3% 114%
-21.0
Taiwan* - 0.6% -0.2% 1.13% South Korea 0.7% 41%
India
Japan
Ma laysia
China
Thailand
Vietnam
N. Zealand
Philippines
APAC 14
Singapore
Australia
H.K.
S. Korea
Taiwan
Indonesia
Thailand 2.5% +/-1.5% 0.4% 0.7% 0.75% Taiwan -1.3% 33%
Vietnam* - 4.9% 5.4% 5.00% Thailand -0.2% 42%
* no explicit inflation targeting framework Vietnam -4.4% 54%
Light red when policy rate < latest inflation, green otherwise Light red if < -3% if > 50% 2020E
Source: National Statistics, Euler Hermes, Allianz Research Source: National Statistics, Euler Hermes, Allianz Research Source: National Statistics, Euler Hermes, Allianz Research
Most central banks in Asia-Pacific have been All major economies in Asia-Pacific have announced Fiscal easing in 2020 is particularly large in Japan,
aggressively cutting policy rates, with some now fiscal stimulus, with measures such as cash Singapore, Australia, Malaysia, Thailand, and New
pursuing unconventional easing measures. transfers, tax deferrals, wage and unemployment Zealand.
Inflationary and FX pressures need to be watched. subsidies, etc.
© Copyright Allianz 19ASIA-PACIFIC: CURRENCY AND EXTERNAL
FINANCING RISKS
Exchange rates of selected Emerging Markets (YTD Gross external financing requirement of selected
change vs. USD, end-April 2020) Emerging Markets (% of FX reserves)
-12% 250% 433%
-9.8% -9.5% 223% 216%
2020 Jan-Feb loss/gain in value
-10%
-7.1% -6.7%
2020 Mar-Apr loss/gain in value 200%
-8% -6.6%
-6.1%
-5.5%
-6% -4.8%
150%
-4% 118%
-1.6% 96%
-2% 100%
-0.4%
62%
0%
50% 40% 37% 34%
0.1% 0.5% 0.5% 25%
2% 19%
1.7%
4% 0%
Malaysia
China
South Korea
Philippines
Vietnam
Australia
Japan
Taiwan
New Zealand
Singapore
India
Indonesia
Hong Kong
Thailand
Malaysia
China
Vietnam
Japan
Philippines
Taiwan
Singapore
India
Indonesia
Thailand
Hong Kong
Sources: IHS Markit, Euler Hermes, Allianz Research Sources: IHS Markit, Euler Hermes, Allianz Research
In a risk-off environment, emerging market currencies tend to depreciate and foreign investors pull out capital.
This is a threat for economies with high external financing requirements; Indonesia, Malaysia and India are currently particularly at risk.
© Copyright AllianzWHAT COULD GO WRONG? SEVEN POSSIBLE SINS
Risks to the banking and
A second (more severe)
Long-lasting uncertainty and real estate sector, as a side
outbreak of the virus, which effect of a violent surge in
would keep the global low confidence delaying
investment and boosting high-risk lending and non-
economy below pre-crisis payment cash-strained
levels. until the end of 2021 precautionary savings.
companies
Policy mistakes – insufficient
support from central banks – Unaddressed rising Shorter supply chains
and the lack of adequate inequalities resulting in driving protectionist
fiscal burden-sharing in the higher social discontent and measures across the world
Eurozone to trigger a political tensions, notably in and feeding into structurally
relapse and a sovereign Emerging Markets. lower corporate margins.
debt crisis.
Excess moral hazard
creating a collective risk of
more inflation (if central
banks go overboard with
monetization), debt
restructuring and increased
taxes.
© Copyright AllianzWHAT COULD GO WRONG? PROTRACTED CRISIS (1/2)
U Shape Scenario Protracted Crisis
Peak in May. Exit by September. Containment lasts three months in 12-18 months sanitary crisis with possible reinfection. Borders stay closed
Covid19 assumptions
Europe and US. Border closure lifted by end of year. and intermittent domestic confinement prevail.
Technical recession in H1 in most of Europe and Asia. Recovery is L-Shaped recovery with debt monetization, systemic equity/credit/ liquidity
Scenario in a nutshell U-shaped and inflationary. Unprecedented policy mix to mitigate issues and direct actions by policy makers disrupt market roles for years to
shock and help protect the web. come. Hard to restart engines
2020 2021
Macroeconomics Unit Maximum drawdown
U Shape Scenario Protracted crisis U Shape Scenario Protracted crisis
qoq annualized
2 months confinement &
very progressive
Real GDP deconfinement. Not back
to pre-crisis levels before
mid-2021.
Global % -3.3 -25 to -35 -7.0 5.6 0.1
EMU % -9.3 -20.0 9.2 -2.5
US % -2.7 -6.0 3.3 -0.1
China % 1.8 -6.6 8.5 1.8
Inflation
EMU % 0.1 -0.6 1.6 0.2
US % 1.2 -2.5 2.5 -0.4
Unemployment rate
EMU % 9.5 11.0 8.0 11.5
US % 9.4 12.0 13.3 17.0
Other Indicators
Global trade (volume) % -15.0 -30.0 10.0 -10
Global automotive % -15.0 -40 / -45
(volume of sales) 10.0 -5 / -10
© Copyright
Global Allianz
business insolvencies % 20 35 / 40 2.0 20 / 25 22WHAT COULD GO WRONG? PROTRACTED CRISIS (2/2)
2020 2021
MIN
U Shape U Shape Protracted
year-end figures (MIN to be considered as intra-2020 limit) Latest Value Unit Protracted crisis (maximum
Scenario Scenario crisis
drawdown)
Eurozone
Sovereign Rates
10y yield “risk-free” sovereign (Bunds) -0.3 % -0.5 -0.9 -1.1 -0.3 -0.6
10y Swap Rate 0.0 % 0.0 -0.4 -0.6 0.3 -0.3
20y Swap Rate 0.2 % 0.3 -0.2 -0.3 0.7 0.0
10y yield other sovereign (Italy) 1.7 % 1.7 2.7 3.9 1.4 1.7
Italy - Germany spread (10y) 197 bps 220 360 500 170 230
10y yield other sovereign (France) 0.2 % 0.4 1.0 0.1 0.1 0.5
France - Germany spread (10y) 48 bps 90 190 120 40 110
10y yield other sovereign (Spain) 0.8 % 0.6 1.2 1.9 0.4 1.0
Spain - Germany spread (10y) 115 bps 110 210 300 70 160
Corporate Credit Spreads
Investment grade credit spreads 224 bps 180 230 300 150 190
High yield credit spreads 695 bps 750 850 1650 600 700
Equities
MSCI EMU: total return p.a. (Reference point 31.12.2019) -23 % -22 -39 -55 10 -10
Expected Recovery from last traded value % 7 -15 -38 18 -24
United States
Sovereign Rates
10y yield “risk-free” sovereign (Treasuries) 0.8 % 1.0 0.5 0.0 1.4 0.9
10y US - 10y Bund Rate Difference 108 bps 150 140 110 170 160
Corporate Credit Spreads
Investment grade credit spreads 283 bps 230 280 450 180 220
High yield credit spreads 881 bps 800 900 1650 650 750
Equities
MSCI USA: total return p.a. in USD (Reference point 31.12.2019 ) -12 % -20 -35 -50 15 -3
Expected Recovery from last traded value % -1 -20 -38 13 -22
Emerging Markets
Sovereign Rates
Hard Currency Yield (USD) 7.2 % 5.5 7.0 8.0 5.1 5.7
Hard Currency Spread (USD) 647 bps 450 650 800 370 480
Equities
MSCI EM: total return p.a. in USD (Reference point 31.12.2019) -19 % -24 -42 -60 20 -8
© Copyright Allianz Expected Recovery from last traded value % -3 -26 -49 17 -32 23MEDIUM TERM: CRISIS LEGACY
Strong state, redux De-globalization/-sinification Social risk
The role of the state vis-à-vis markets The close interlinkages between Inequality trifecta (income, wealth and
has been strengthened: states has been put into question opportunities) exacerbated by health,
• Expect more assertive and • Expect states to reduce their housing, and digital differences
interventionist governments foreign reliance on “strategic” • Expect social unrest
• Expect more basic needs and goods (from drugs to batteries) • Expect surge in demand for more
goods – from (green) infrastructure • Expect companies to shorten their (income) protection and security
to health – provided by the state supply chains
Identity politics 2.0 Risk aversion/awareness Increase in productivity/digital
Authoritarian vs democratic state: Trust in financial market stability & The way we work has been changed
Who can better fight a pandemic? functioning has been challenged • Expect more flexible team
• Expect checks and balances to be • Expect investors to shift to more structures and remote working,
put to the test, and politicization of defensive strategies pushing up productivity by around
economic carnage • Expect more demand for risk cover 5% (according to several studies)
• Expect rivalries (US/China/Europe) • Expect less business trips
© Copyright Allianz 19-May-20 24THANK YOU Ludovic Subran, Chief Economist Françoise Huang, Senior Economist Global and Asia-Pacific Economic Outlook © Ekaterina Pokrovsky - stock.adobe.com as of April 2020 © Copyright Allianz
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