UBS Makes A Striking Discovery: Ex-Energy, US GDP Growth Is The Slowest Since 2010

Tyler Durden's picture

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.

Message 2: The one (developed market) country that no one thinks can generate inflation (Japan) is likely to create more inflation than any other developed market.

"Japan is cyclically 2 years ahead of most other countries and it has a textbook Phillips curve with higher Phillips curve wage and price coefficients than all the other countries we looked at. The labour market is already extraordinarily tight."

If unemployment goes to 2.5% by end-2018 UBS sees (BoJ) core inflation going up towards 1.5% (70bp above consensus) and Yield Curve Control starting to get tweakend (10y  JGB to drift higher.

Message 3 : The Fed is going to $4 trillion in US Treasuries by 2025 even absent a recession, $1.5 trillion more than they hold today. The is because the Fed will hit a trough determined by the 'floor system' for monetary policy coupled with some other balance sheet changes, of around $ 3 ¼ trillion by mid-2020 and currency in circulation growth then starts to drive the dynamics of the balance sheet. If they still want to roll off the MBS book they need to buy UST. That is part of the reason that the aggregate size of the G3 central balance sheet by 2025 will still be roughly as large as where it was late last year. And that's with some fairly aggressive assumptions about BoJ balance sheet roll-off. So good for term premium.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thought Processor's picture



Now subtract all QE and see what you get...............

Stuck on Zero's picture

Also subtract the true inflation rate - not the government BS number.

Creative_Destruct's picture

The self-delusional GDP, inflation rate, and other economic flim-flams continue....

There is NO WAY interest rates can rise significantly without throwing the irresponsibly hyper-indebted world into a depression.

Therefore...  nagonna happen.

MOAR QE likely in the not-so-distant-future.

ejmoosa's picture

And the expenditures on Obamacare too!

Everybodys All American's picture

Take into account the fake gdp generated by Obamacare forced spending and the Marxist princicpals employed under that con man the past eight years prior to Trump.

FreeShitter's picture

Thanks captain obvious.

spastic_colon's picture

wonder how much these "experts" get paid to keep the low inflation story alive?? cant make anyone think rates are going too high but gotta keep pushing the perfect recovery narrative.

Peacefulwarrior's picture

 So whats the play in a slow motion deflationary collapse, where demand is now waning even when banks have been loosening lending standards? Soon pensions will need access to cheap money too. Whatta $hit storm this will be when the windows blow open on this house of cards...

Jtrillian's picture

If you are shocked then  YOU AREN'T PAYING ATTENTION!

Decoherence's picture

And the energy sector / oil supply was fueled by massive credit expansion for loans to energy companies who can't ever repay them.  All of the cheap oil has been used.  The use of oil will require ever expanding debt to extract.  Once this round of sour, cheap oil is used up and reserves are gone, oil companies have nothing to back their loans with.  If this is all we have left to keep us afloat, let's just put a fork in it now.     

LawsofPhysics's picture

Eating your seed corn is never a smart idea...

csmith's picture

Real GDP is higher than counted because inflation metrics are bogus. The hedonic adjustments are nowhere near great enough.

SurlysonofaBitch's picture

You got the math backwards.

Solio's picture

Low growth, high inflation to keep the illusion alive.

FreeShitter's picture

same as voting for your favorite puppet.......

onthedeschutes's picture

You can expect more and more "striking discoveries" between now and the December FED meeting.  

taketheredpill's picture

Japan has same Unemployment Rate bias as US.  Labor Force Participation collapsed in 2000 and has only recovered sligthly since then.  So Unemployment Rate can go to Zero but it doen't imply a healthy labor market.

Inflation in Japan has been falling since when?  And it's going to surprise on the upside??


Consuelo's picture



Sealed EGR smog JPY/ECB/Fed-UST system recycling loop makes certain that inflation stays tame.

LawsofPhysics's picture

Wait a minute!!!  Who is buying all that bullshit MBS paper?!?!?!?!

"Full Faith and Credit" has to wonder who that greater fool is.

Catahoula's picture

Only a fool would believe the shit UBS puts out. Consume your propaganda with a grain of salt  

Peacefulwarrior's picture

This parallels another analysis I read showing loan demand shrinking simulataneously along with core inflation numbers even while banks have been loosening. If there wasn't such distorted Alice in Wonderland accomodation procedures involved, one would think the economy is heading into a sinkhole?

aliens is here's picture

One article says GDP went up then another one says the opposite. I can't follow any of these economic reports anymore too confusing.

Consuelo's picture



Because keeping you confused (distracted, disillusioned, entertained, etc.), is the name of the game.  

TheSilentMajority's picture

Wow they are smarties at UBS!!

If UBS adds the real inflation rate to the “growth” rate they may actually find that real GDP “growth” is between ((negative)) -9% to -12%.

vesna's picture

In 2009 UBS had few capital injections because of 50 billion MBS. UBS was the acronym for Universal BullShit.

JackMeOff's picture

And another card is being pulled away in the house of economic cards.  This time its different people...

bornlastnight's picture

Looks like UBS was casting a stunning success story reflecting Obama's dictatorship in figure 5.  Shame on me if I thought UBS was cooking the books and feeding the unwashed masses pablum.

ludwigvmises's picture

Didn't Trump say achieving 4% organic growth was going to be easy?

shortonoil's picture

It is, if you are a mushroom, and kept in the dark and fed hosrse shit.

knotjammin2's picture

Once you strip that out 'underlying' growth is only 1% or so (ex inventories) - the slowest since 2010! 


So what was it in 2010 if you strip those out?

batalyst's picture

More from the 'Evidence Lab' ? What a load of shite...

joego1's picture

Many sites including Chris Martenson have been watching this for years. It's no surprise it finally shows up in the numbers. If it costs more to get it out of the ground than it's worth then we have a big problem. Just a few missiles aimed in the middle east at the right locations could have us above 100 bbl oil overnight.