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Goldman Sachs Global Investment Research 1
July 2016
The Goldman Sachs Group, Inc.
Goldman Sachs Research
The global economic outlook after Brexit
July 2016
Dirk SchumacherSenior European Economist
dirk.schumacher@gs.com+49(69)7532-1210Goldman Sachs AG
Investors should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
Goldman Sachs Global Investment Research 2
Brexit implications are now the main risk for the short-term outlook
Real GDP Growth
GS Revision GS Revision
2.5 1.6 2.2 1.5 2.4 2.4 1.9 -0.1 2.0 -0.14.7 -0.5 1.7 1.4 0.0 0.5 0.6 0.0 1.0 0.02.0 1.6 -0.8 -0.2 0.9 1.5 1.3 -0.2 1.2 -0.31.5 2.0 1.2 2.2 2.9 2.3 1.5 -0.5 0.2 -1.85.7 2.7 0.1 1.2 2.4 3.9 3.4 -0.2 2.6 -0.31.8 1.9 3.6 2.3 2.3 1.0 0.9 -0.2 2.1 -0.32.9 1.9 1.1 1.8 1.9 1.5 1.5 0.0 1.5 0.0
China 10.6 9.5 7.7 7.7 7.3 6.9 6.6 0.0 6.4 0.0Brazil 7.5 3.9 1.9 3.0 0.1 -3.8 -3.1 0.0 1.1 0.0Russia 4.5 4.0 3.5 1.3 0.7 -3.7 0.5 0.0 3.0 0.0
3.0 1.8 1.2 1.2 1.9 2.0 1.7 -0.1 1.7 -0.28.2 7.0 5.4 5.3 4.9 4.2 4.7 0.0 5.3 0.0
World 5.4 4.2 3.2 3.2 3.4 3.1 3.1 -0.1 3.4 -0.2
2016 (f) 2017 (f)
US
Developed MarketsEmerging Markets
Source: Goldman Sachs Global Investment Research.
JapanEuro AreaUKSwedenNorwaySwitzerland
Percent Change yoy 20152014201320122010 2011
Goldman Sachs Global Investment Research 3
Most studies suggests a significant adverse impact on UK growth
Brexit’s peak impact on GDP level
-7-6-5-4-3-2-1012
-7-6-5-4-3-2-1012
Optimistic Scenario
Pessimistic Scenario
% %
* Peak impact year is 2018 and ** is other.
Source: Haver, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 4
Trade channel is rather small
Exports to UK as a % of GDP
Euro area China US Japan0.00
0.50
1.00
1.50
2.00
2.50
3.00
0.00
0.50
1.00
1.50
2.00
2.50
3.00% %
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 5
Uncertainty and FCI changes to be the main transmission channels
Spillover SimulationsDom. FCI TWI FCI GDP Core CPI Policy Rate
(pp) (%) (pp) (%) (%)* (pp)US 0.12 1.28 0.22 -0.17 -0.04 -0.21Euro Area 0.41 0.18 0.43 -0.45 -0.04 -0.43Japan 0.37 5.25 0.78 -0.67 -0.14 -0.55UK 0.59 -6.01 -0.46 -2.51 0.01 -2.68EM -0.04DM -0.43World -0.20
* Average year-over-year inflation rate over the next 8 quarters.Source: Goldman Sachs Global Investment Research.
Changes in key macro variables
Goldman Sachs Global Investment Research 6
Impact to be felt most in Japan via FCI tightening
Impact on real GDP relative to base line
US Euro Area Japan-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4% %
Impact on core inflation relative to base line
US Euro Area Japan-0.16
-0.14
-0.12
-0.10
-0.08
-0.06
-0.04
-0.02
0.00
0.02
0.04
-0.16
-0.14
-0.12
-0.10
-0.08
-0.06
-0.04
-0.02
0.00
0.02
0.04% %
* Average year-over-year inflation rate.
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 7
Currency moves in uncertain times
Cumulative impact on trade-weighted G10 nominal exchangerate indices to one st. dev. “uncertainty shock”
-15
-10
-5
0
5
10
15
GBP NZD AUD CAD EUR USD SEK NOK CHF JPY
1-month3-months cumulative6-months cumulative
Change in TWI G10
(%)
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 8
Equities hit hard during the Brexit sell-off
-6
-4
-2
0
2
4
6
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
Gol
d (G
BP
inve
stor
)VI
XU
K 30
yG
erm
an 3
0yG
old
(EU
R in
vest
or)
US
30y
Spai
n 30
yJa
pan
30y
Gol
d (U
SD)
UK
10y
JPY/
USD
US
10y
Italy
30y
Ger
man
10y
Spai
n 10
yJa
pan
10y
Italy
10y
CHF
/USD
SX5E
201
7 di
vsEU
R/U
SDFT
SE 1
00VS
TOXX
S&P
500
SX5E
201
8 di
vsM
SCI E
M $
(EEM
)B
rent
VFTS
EN
ikke
i 225
SX5E
201
9 di
vsEu
ro S
toxx
50
GB
P/U
SDFT
SE 2
50SX
5E 2
024
divs
IBEX
FTSE
MIB
3-day Return since Thursday's close
# Standard Deviations (3-day terms, RHS)
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 9
A permanent lower oil price is good newsfor the Euro area – but it implies some global
re-balancing
Breakeven oil priceUS crude oil production
300
400
500
600
700
800
900
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
mil barrels
20
30
40
50
60
70
80
90
100
110
0 2,000 4,000 6,000 8,000 10,000 12,000Cumulative Peak Production (kbls/d)
Tradition
Heavy oilDeepwater
"Shale oil"
Ultradeepwater
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 10
We expect the oil price to stay around the current level
Oil price
0
20
40
60
80
100
120
140
160
0
20
40
60
80
100
120
140
160
2007 2009 2011 2013 2015 2017
USDUSD
USD BRENT Forwards
Source:Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 11
Low commodity prices and China re-balancingimply lower EM FX reserves
Official sector FX reserves
0
1000
2000
3000
4000
5000
6000
7000
8000
2000 2002 2004 2006 2008 2010 2012 2014
GCCLatamCEEMEAAsia ex ChinaChina
USDbillion
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 12
Our Global Leading Indicator is showing –prior to Brexit – rising momentum
GLI momentumGLI components
Baltic Dry Index
Belgian and Netherlands Manufacturing Survey
Consumer Confidence Aggregate
Global New Orders Less Inventories
Global PMIGS Australian and Canadian Dollar Trade
Weighted IndexJapan IP Inventory/Sales Ratio
Korean Exports
S&P GS Industrial Metals Index
US Initial Jobless Claims-1.0
-0.5
0.0
0.5
1.0
1.5
00 02 04 06 08 10 12 14 16
%, 3mma
Source: Goldman Sachs Global Investment Research
GLI
GLI
Goldman Sachs Global Investment Research 13
US: Financial conditions are rising again –postponing the next Fed hike
98
99
100
101
102
103
90 92 94 96 98 00 02 04 06 08 10 12 14 16
index
Source: Goldman Sachs Global Investment Research
FCI
Goldman Sachs Global Investment Research 14
US: Our Current Activity Indicator is easing again
-10-8-6-4-202468
10
98 01 04 07 10 13 16
%
Source: Goldman Sachs Global Investment Research
GDP
Current ActivityIndicator
Goldman Sachs Global Investment Research 15
US: The Fed risks missing out on its mandate
-2%
0%
2%
4%
6%
8%
10%
12%PCE: Chain Price Index (SA, 2009=100) % Change -Year to YearCivilian Unemployment Rate: 16 yr + (SA, %)
Fed NAIRU Estimate
Fed Fore-casts
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 16
China: CNY to disconnect from US
Trade-weighted exchange rates
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30Ja
n-14
Apr
-14
Jul-1
4
Oct
-14
Jan-
15
Apr
-15
Jul-1
5
Oct
-15
Jan-
16
Apr
-16
Jul-1
6
EM FX TWI
USD TWI
CNY TWI
Depreciation
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 17
China: Growth keeps trending down
0
2
4
6
8
10
12
14
16
06 07 08 09 10 11 12 13 14 15 16
%, yoy
GS CurrentActivityIndicator
Source: GoldmanSachs Global Investment Research
GS Current Activity Indicator
Goldman Sachs Global Investment Research 18
China: A bumpy deceleration
Different measures of Chinese growth
-30
-20
-10
0
10
20
4
6
8
10
12
11 12 13 14 15 16
Real GDP (left axis)
In-China imports (right axis)
GS China Metal Consumption (right axis)
%, yoy %, yoy
Source: Goldman Sachs Global Investment Research
4
7
10
13
4
7
10
13
12 13 14 15 16
GS total consumption tracker
Final consumption in GDP*
Source:Goldman Sachs Global Investment Research
Private consumption picking up
Goldman Sachs Global Investment Research 19
China: Breakdown of demand for different commodities points to re-balancing
2015 demand growth of different commodities
‐20 ‐10 0 10 20
SteelThermal Coal
Met CoalCementIron OreWheat*Cotton*CopperSugar*Diesel
NapthaCorn*
Nickel**Coffee*
Oil (total)AluminiumSoybean*Zinc***GasolineKerosene
OpEx com
mod
ities
CapEx commod
ities
*Estimated 2015 annual consumption growth (no monthly data) **calculated from apparent stainless steel demand***calculated from zinc galv. production
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 20
China: Short-term push through credit easing
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2012 2013 2014 2015 2016
-3
-2
-1
0
1
2
3
4
-3
-2
-1
0
1
2
3
4
Sequential credit growth stays at Q1 paceCredit growth decelerates to hit 13% target
Percentage points,
annualized
Percentage points,annualized
Estimated growth impact of credit impulse
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 21
China: The level of debt looks worrying
Indebtedness of different sectors
0
30
60
90
120
150
180
210
240
270
0
30
60
90
120
150
180
210
240
27020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
E
Corporate leverage
LGFV leverage(loan, bond)
Govt. Leverage
Household Leverage
% of GDP
% of GDP
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 22
Emerging Markets: Significant improvement of current accounts
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
EM avg current accountbalance (% GDP)4 qtr MA
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 23
Emerging Markets: Financial Conditions have eased again
99.4
99.6
99.8
100.0
100.2
100.4
100.6
100.8
101.0
101.2
101.4
2010 2011 2012 2013 2014 2015 2016
EM average financial conditions indexIndex
Financial conditions
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 24
Emerging Markets: Consumer confidence has stabilised
40
42
44
46
48
50
52
54
EM ConsumerConfidence
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 25
Euro area: A moderate, but broad based recovery
Source: Eurostat, Goldman Sachs Global Investment Research
-3.0
-2.0
-1.0
0.0
1.0
2.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
06 07 08 09 10 11 12 13 14 15 16 17
%qoq%yoy
Sequential quarterlyGDP (RHS)
Annual GDP (LHS)
GS F'casts
Goldman Sachs Global Investment Research 26
Euro area: Business sentiment remains consistent with solid growth during Q2 – our RETINA model
has also rebounded
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
10 11 12 13 14 15 16
%qoqComposite PMI-based indicator
Euro area CAI
Euro area actual real GDP
Source: Eurostat, Markit, Goldman Sachs Global Investment Research
Composite PMI and CAI RETINA
Source: Haver Analytics, Goldman Sachs Global Investment Research
-0.5-0.4-0.3-0.2-0.10.00.10.20.30.40.50.60.70.80.91.01.11.2
Mar-16 Apr-16 May-16 Jun-16
Q2 GDP,% qoq
50 % Confidence band25 % Confidence band10 % Confidence bandGS judgemental f'castMedian
Eurostat's first
estimate of Q2 GDP
As of last week
Goldman Sachs Global Investment Research 27
Euro area: Less headwind from fiscal consolidation next year
Source: Haver Analytics, Goldman Sachs Global Investment Research
-2.3
-1.8
-1.3
-0.8
-0.3
0.2
0.7
Germany France Italy Spain EMU4
ppt
2012 2013
2014 2015
2016 2017
2018
Fiscal drag
Goldman Sachs Global Investment Research 28
Euro area: Bank lending rates in Spain and Italy have come down significantly
2.0
3.0
4.0
5.0
6.0
7.0
07 08 09 10 11 12 13 14 15 16
GermanyFranceItalySpain
interest rates on business loans % up to € 1mil., of maturity 1-5 years
Source:Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 29
Euro area: Corporates still in deleveraging mood
-80-70-60-50-40-30-20-10
0102030405060
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
bn Euro
Net savings of Euro area non-financial corporates
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 30
Euro area: Profits growth is supporting investment spending
-18
-13
-8
-3
2
7
12
-12
-7
-2
3
8
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
%, yoy%, yoy
Operating surplus (lhs)
Fixed investment
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 31
Inflation to rise in H2:2016 as the oil price effect dissipates
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.06.0
7.0
8.0
9.0
10.0
11.0
12.0
98 00 02 04 06 08 10 12 14 16
Unemployment rate
Core inflation (reversescale)
% %, yoy
Source: Goldman Sachs Global Investment Research
Euro area inflation Euro area core inflation andunemployment rate
-1
0
1
2
3
4
5
06 07 08 09 10 11 12 13 14 15 16 17 18
yoy%
ECB's definition of price stability objective GS Forecast
Core inflati on
Headline inflation
Source: Haver, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 32
Euro area: ECB purchases continue steadily
0
200
400
600
800
1000
1200
17/1
0/20
1417
/11/
2014
17/1
2/20
1417
/01/
2015
17/0
2/20
1517
/03/
2015
17/0
4/20
1517
/05/
2015
17/0
6/20
1517
/07/
2015
17/0
8/20
1517
/09/
2015
17/1
0/20
1517
/11/
2015
17/1
2/20
1517
/01/
2016
17/0
2/20
1617
/03/
2016
17/0
4/20
1617
/05/
2016
CSPP PSPP
ABSPP CBPP3
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 33
Euro area: ECB’ CSPP – learning by doing
Breakdown of ECB purchases
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 34
ECB: Breakdown of Euro area corporate bond market
BeneluxAAA-AA 0-3 Years
Auto Mfg
France
A+3-5 Years Chemicals
Germany
A
5-7 Years
Non-Bank Finance
Italy
A-
7-10 Years
Food/Beverage
Spain
BBB+
10+ Years
REITS
OtherBBB
Telecom
BBB-
Transportation
Utilities
Other
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Country Rating Maturity Sector
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 35
ECB: Excess liquidity to rise to€1.4 trillion by the end of the year …
0
100
200
300
400
500
600
700
800
900
12 13 14 15 16
bn EUR
Excess reserves
Source: Goldman Sachs Global Investment Research, Bloomberg
Excess reserves ECB balance sheet
0
500
1000
1500
2000
2500
3000
3500
99 01 03 05 07 09 11 13 15
bn Euro
Total assets
LTROs
MROs
Source: Haver Analytics, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 36
… which is unevenly distributed
0
50
100
150
200
250
300
Germany France Italy Spain
Liquidity held at nationalcentral bank (Apr16)
Purchases under PSPP(Apr16)
bn EUR
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 37
Italian export weakness not a new phenomenon – neither is low productivity
growth
Exports
95
100
105
110
115
120
125
130
95 97 99 01 03 05 07 09 11 13 15
index
GermanyFranceItalySpain
Source: Haver Analytics
95
145
195
245
295
95 97 99 01 03 05 07 09 11 13 15
index
GermanyFranceItalySpain
Source: Haver Analytics
Output per hour worked
Goldman Sachs Global Investment Research 38
Disclaimer
I, Dirk Schumacher, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by considerations of thefirm’s business or client relationships.Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.Global product; distributing entities
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