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

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.


spastic_colon Mon, 11/13/2017 - 10:53 Permalink

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.

Decoherence Mon, 11/13/2017 - 11:12 Permalink

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.     

taketheredpill Mon, 11/13/2017 - 11:04 Permalink

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??Sure.

TheSilentMajority Mon, 11/13/2017 - 11:14 Permalink

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%.

bornlastnight Mon, 11/13/2017 - 11:33 Permalink

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.

knotjammin2 Mon, 11/13/2017 - 11:50 Permalink

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?

joego1 Mon, 11/13/2017 - 12:18 Permalink

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.