30 January 2017

Global
Fixed Income Research
Global Strategy

Global Cycle Notes

Research Analysts
James Sweeney
212 538 4648
james.sweeney@credit-suisse.com Too Much Optimism, Too Soon
Wenzhe Zhao
212 325 1798 We expect solid global industrial production growth overall in 2017, but the near-
wenzhe.zhao@credit-suisse.com term outlook is somewhat troubled. Investor expectations on short-term growth
Jeremy Schwartz and prospects for US stimulus appear to be overly optimistic, in our view.
212 538 6419
jeremy.schwartz@credit-suisse.com Certainly, recent data and surveys have been solid. We see the current
Sarah Smith strength in global growth as mostly attributable to an ongoing rebound from the
212 325 1022
sarah.smith@credit-suisse.com commodity-centric slump of 2015. Already high PMIs also appear to have
Veronika Roharova received a boost from new policy expectations for the US.
44 20 7888 2403
veronika.roharova@credit-suisse.com However, surveys can overreact to political developments. And significant US
tax reform is unlikely to pass soon. Meanwhile, new uncertainties could create
turbulence. For example, the USs proposed destination-based cash flow tax
with border adjustments (DBCFTBA) might lead firms to take a cautious
approach with regard to investment in the near term.
Disappointment on stimulus and growth might disrupt the current strong risk
appetite in financial markets (Figure 1). If investors begin to price in a
DBCFTBA, a period of chaos might negatively impact corporate investment
spending for a while.
Our basic forecast, which does not assume DBCFTBA, is however for a
modest wobble lower in global growth and PMIs in the months ahead, followed
by a rebound in the second half of the year.

Figure 1: Global Risk Appetite Has Been Rising

Source: Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, LEGAL ENTITY
DISCLOSURE AND ANALYST CERTIFICATIONS.
 30 January 2017

Too much optimism, too soon

The worlds tradeable goods sector is growing at a brisk pace following 12 months of a
steady acceleration that started in the pits of a combined credit/China/commodities funk.
We estimate that global industrial production momentum (3m/3m annualized growth) will
be near 5% in February, a level of growth last reached only briefly in late 2013. Surveys
corroborate this forecast, with US, Chinese, and European Manufacturing New Orders
PMIs near multi-year highs (Figure 2). Similarly, weve seen survey-based evidence of
strong growth from consumer and small business confidence.

Figure 2: Jump In US ISM Manufacturing New Orders

ISM Manufacturing New Orders and Global IP Momentum

Source: Credit Suisse, ISM

Markets are in line with the upbeat growth news. Our global risk appetite index has been
trending higher for months and is well above average. Our credit risk appetite index is
even higher, reaching levels we associate with euphoria (Figure 3). The post-US election
increase in yields was also directionally consistent with rising growth. And equity cyclical-
to-defensives ratios have also increased.
It all raises the important question of whether there is too much optimism too soon after
the US election.

Figure 3: Global and Credit Risk Appetite Near Recent Highs

Source: Credit Suisse

Global Cycle Notes 2

 30 January 2017

Our recent discussions with investors indicate most think strong growth will persist. They
point to US stimulus, a rebounding global energy and mining sector, and a general US
investment boom due to positivity on a range of new government policies, including
regulatory cutbacks.
We agree with some of this and expect a solid year for global growth, with industrial
production growing close to the long-term trend at 3.1% (see dotted line in Figure 4) and
global GDP bouncing back from last years lackluster performance.

Figure 4: Global IP Momentum Above Trend

Global IP Momentum with Trend Line (3.1%)

Source: Credit Suisse estimates

However, sequencing is important, and a decent year in global growth does not exclude our
expectations for a near-term slowdown from high levels. Such a wobble down would likely
be accompanied by falling PMIs and a pickup in risk aversion evident in market prices.
If investors are extrapolating future performance from recent strength, and wishfully thinking
about stimulus, they might be prone to an abrupt change in expectations on the emergence
of even mildly disappointing data. Pessimistic projections may return focus to downside risks
including those related to China where private capital outflows have been heavy or
Europe where political risks or policy moves could easily bring back a state of agitation.
But in a year of diverse and complex changes to the markets underlying expectations, we are
getting ahead of ourselves in discussing these specifics. Our base view is for ordinary mean
reversion in the economic data, which will disappoint investors and potentially undermine risk
appetite for a while. We now turn to the empirical basis for a near-term let-down.

Let Down and Hanging Around

We approach IP forecasting three ways, and because there is no one model which has
been shown to be constantly reliable on the global cycle, we show the details and potential
inconsistencies in the underlying data.
First, we look at short-term drivers of the data, including the tendency toward mean-
reversion. Second, we look at various measures of inventories in order to ascertain whether
additional headwinds or tailwinds should be part of the outlook. Third, we look at the
underlying growth of the parts of global aggregate demand which correspond to industrial
production. Those tend to be goods consumption and the majority of investment categories.
The modest slowdown we are forecasting is based on mean-reversion and skepticism
regarding the idea that Trumps policies will lead to an instantaneous jump in investment
or consumer spending. Recent industrial production growth has been above trend, but we
do not think demand growth has accelerated sufficiently to support ongoing IP growth near
the current 5% annualized pace.
Global Cycle Notes 3
 30 January 2017

Statistical mean-reversion is a banal justification for a forecast, but it is commonly a

successful one. For example, since 1980, when ISM New Orders is above 60, it has fallen
over the next 3 months 81% of the time. And it is lower 12 months later 87% of the time.
Month-over-month increases in global IP over the past year show clear steady
acceleration. In our view, markets are expecting a continuation of the recent high growth
rate, or even a further acceleration. Part of the basis for this optimism is the strong PMIs
themselves, including the New Orders data. But New Orders PMIs have been somewhat
overrated as forecasters of IP. Regression-based estimates are often flattered by the
inclusion of recessions and upside outliers. In the middle of the range for PMIs, the values
are not very correlated with IP growth.
A risk to our current view is that production stays high relative to demand for a while,
extending the 12-month acceleration that has occurred and leading to an inventory
accumulation.
Another risk would be if demand picked up sharply now due to an acceleration in consumer
spending or a miniboom in business investment. We expect ongoing improvements in
developed market investment, but not sharp increases. The 2015 global investment slump
was concentrated in the mining and energy sector, so one upside risk is that this sector
bounces back vigorously. However, oil prices are down more than 50% from the mid-2014
level, and prices for many metals are sharply lower too. There is optimism that US
regulatory rollbacks will help the sector, but the impact is not easily quantifiable. In our view,
the change in the policy environment will be positive for investment in this sector over time,
but we do not expect an immediate explosion in activity.
While real goods consumption in the US and Europe has been very solid recently, we do
not expect a sharp acceleration. We wrote a US note showing that consumer confidence is
not a reliable indicator for a surge in spending. In fact, the recent details of consumer data
have shown strength in auto sales with some sluggishness elsewhere.
We have surveyed various inventory measures and do not detect a significant decline that
is likely to give production a major tailwind in the near term. Several measures of US
inventories have fallen lately, but on a global level demand has been sluggish and so there
is no evidence for an inventory based need for a surge of production.
In addition to the potential for modest growth disappointments in the months ahead, there
is also potential for disappointments on US stimulus. Tax legislation looks unlikely soon
we now expect a bill to pass early next year. Meanwhile, US infrastructure spending is
unlikely to be a major driver of global IP in the event that a plan emerges and passes.
One reason for the delay in tax reform is that some in Congress are pushing for
complicated changes to the corporate tax system. Some of these changes present
significant short-term risks to markets and to growth, even if they have a benign effect in
the longer term.
The Trump administration might embrace Paul Ryans corporate tax plan, with its switch to
a destination-based cash flow tax with border adjustment (DBCFTBA). This could cause
short-term chaos in markets and have many important and IP-relevant side effects. For
example, under the plan, firms would be allowed to fully expense their investments at
once, a large benefit that could prompt some firms to delay investments until the new
regime takes effect. Speculation regarding the reform may also drive dollar strength and
commodity price volatility. The plan has significant benefits, but the transition to such a
system would be turbulent, to say the least.
In theory, if this tax plan is adopted, a massive appreciation of the dollar would boost the
purchasing power of US importers just enough to balance the increased costs from
adjustments on imported goods and offset the competitiveness gain to exporters from the
subsidies.

Global Cycle Notes 4

 30 January 2017

Investors are rightly skeptical of an orderly dollar adjustment that perfectly counters the
effects of this system. In our view, the PPP-based fair value of the dollar would adjust
higher by 25% given a 20% DBCFTBA. The dollar will tend over time to trade toward this
higher level, but the volatility in exchange rates will be elevated as capital flows adjust.
A critical variable will be the behavior of fixed exchange rate economies. For example, if
the Chinese were to devalue their exchange rate by 25% in response to a 20% US
DBCFTBA, it would mean that the price of goods imported from China on the shelves of
US retailers would be unlikely to move much. This might catalyze floating exchange rates
toward a similar move. Of course, theory and practice point to frequent overshooting in
large foreign exchange moves, so even an overshoot of the 25% appreciation is possible.
Interestingly, a Chinese devaluation would suit US importers who fear that their margins
will erode and the prices of the goods they sell will rise. These fears might prove
unfounded if a sufficient dollar appreciation expanded their purchasing power. And the US
administration would be able to tout the border tax that Chinese exporters and others are
paying. Thus a very public protectionist policy would be accomplished in a way that would
provoke exchange rate adjustments, but not necessarily retaliatory tariffs.
The effects of this tax change to the US system would vary heavily across firms, sectors, and
economies depending on each entitys net trade position with the United States, the
responsiveness of customer demand to taxes, the precise path of exchange rates, the
stickiness of tradeable goods prices, interest rates, and the growth rates of volume trade itself.
And financial markets would have to deal with the impact of the larger dollar move on entities
which are structurally short dollars, as well as the impact on financial and real asset prices in
the US and abroad from the permanent shift higher in the dollar. Although current opposition is
strongest among firms that are net importers (especially in the refining and retail sectors), one
could imagine the financial sector being the epicenter of earnings volatility.
Short-term volatility and transition path costs are the main economic problems with this plan.
And it is easy to imagine a variety of ways that this could negatively impact the output for global
industrial production growth in the immediate future (as firms delay investments).
But recent rhetoric toward significant tariffs on US imports raises a more pernicious threat to
the medium and long-term IP outlook that of escalating global protectionism. In our view, the
DBCFTBA might look protectionist, but it would likely reduce the likelihood of tit for tat tariffs.
Perhaps faux protectionism in this form is the best hope to prevent a trade war.

Conclusions
The USs proposed DBCFTBA is not a major driver of our short-term IP outlook, which is
based on the idea of mean reversion amid excessive optimism about near-term
investment. But this and other sources of policy uncertainty might lead firms to take a
cautious approach with regard to investment in the short run.
Last year, PMIs in the UK fell sharply following the Brexit vote. Now they have risen
sharply following the US election. Surveys may be prone to overreact to political
developments, and real economic change might take longer to unfold. In our view, the
current underlying strength in global growth is mostly due to a 12 month rebound that
began when the commodity investment slump was at its worst point early last year.
Investors are now in danger of extrapolating from recent growth while also overestimating
the likelihood of immediate US stimulus. Disappointment on both things might lead risk
appetite lower. And if the market begins to price in a DBCFTBA, a period of turbulence will
likely negatively impact investment spending for a while.
We expect global IP growth to dip between January and the middle of 2017, but the year
as a whole looks likely to deliver solid growth. Great policy risks mean we should not be
too precise on our outlook for later this year. But for now, we remain upbeat, even while
expecting a wobble lower in the months ahead.
Global Cycle Notes 5
 30 January 2017

Global Goods Demand

Global goods final demand growth moderated in Q31, led by a broad-based retreat in
household consumption and weakness in business investment in the US, euro area and
Japan. Based on estimates from the US and Europe, there has not been a clear
reacceleration in Q4.
The modest slowdown was largely anticipated given the high base of Q2 consumption
growth, the soft patch in US labor income, and the deceleration in Chinese housing
construction.
In other words, the factors responsible for lifting the global goods sector out of its longest
growth slump since the 2008 crisis have taken a breath.

Figure 5: Global x-China Goods Demand, IP and world trade volume

Source: Credit Suisse, Thomson Reuters Datastream

Despite the moderation in demand, industrial output has continued its expansion,
supported by strong sentiment among producers and a rebuilding of inventory. The
positive sentiment driven by steady final sales contrasts sharply with the pessimism of
late 2015 and is expected to continue for the medium term.
The expansion in final demand remains in an infant stage. The components of goods
demand that were most heavily punished by the growth slump the household and
corporate sectors in EM and energy sector in the US remain depressed relative to their
normal rates of expansion. However, these sectors should be buoyed by policy stimulus
and more stable commodity prices. Figure 6 compares the severity of the growth slump of
2014-2015 with the long-term average before the 2008 financial crisis and the timid period
of 2011-13.
Fundamentals in other parts of world should also remain supportive. US December auto
sales were robust and consumer sentiment rose further. The strength in confidence could
be offset by tightening financial conditions due to a recent spike in treasury yields, but the
expanding labor market should provide for healthy income and spending growth in the
medium-term. Similar dynamics also support the household sector in Japan and the euro
area. Investment growth in the Euro area has additionally become more likely given steady
profitability, high capacity utilization, and rising demand for housing construction.

1 Our global goods demand indicator is based on a sample of economies for which we can get comparable real goods demand
and investment data. Although our sample is partial, our aggregate demand measure normally moves with global industrial
production and trade data, and in periods when demand and production diverge we can often presume that a global inventory
dislocation has occurred. Due to the notorious unreliability and inconsistency within Chinas investment data, we often exclude
Chinese investment from our inventory measures and compare only x-China global IP and goods demand.

Global Cycle Notes 6

 30 January 2017

We expect China to grow slowly by its own standard, but the impact on global growth is
likely to be mitigated by rebounds elsewhere.

Figure 6: Goods demand growth during historical episodes (annualized)

DM goods DM EM x-China goods EM x-China EM x-China
Periods Global consumption investment DM total consumption Investment total
1980-2008 2.6% 2.6% 2.8% 2.6% 5.5% 6.2% 5.8%
'11-'13 1.9% 1.2% 2.9% 1.9% 3.9% 2.5% 3.4%
'14-current 1.2% 2.6% 1.7% 2.2% -1.0% -2.5% -1.6%
Source: Credit Suisse, Thomson Reuters Datastream

Figure 7: G3+ GDP Inventory Change and Global Inventory Change Proxy

Source: Credit Suisse, Thomson Reuters Datastream

Figure 8: G3+ Goods Consumption Figure 9: G3+ Investment

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Global Cycle Notes 7

 30 January 2017

Leading Indicators
The latest jump in ISM Manufacturing New Orders suggests the modest expansion in the
global industrial sector should continue in the short term. Such an expectation is also
consistent with recent manufacturing surveys.

Figure 10: Global IP momentum and ISM New Orders

Source: Credit Suisse

In December,

US manufacturing PMI New Orders moderated from its one-year high, but remains
elevated, suggesting the recovery in manufacturing from the deep mining slump
continues.

Chinese manufacturing PMI New Orders reached its 30-month high, and has diverged
from hard growth data. The improved manufacturing profitability may have lifted
producers' sentiment but the recovery remains largely unbalanced.

EA manufacturing PMI New Orders rose to the highest level since the recovery from
the European debt crisis demonstrating the resilience of European manufacturers to
the past year's political shocks.

Japanese manufacturing PMI New Orders increased for the sixth consecutive month
amid falling inventory levels and improving business conditions.

Figure 11: PMI Manufacturing New Orders

Source: Credit Suisse

Global Cycle Notes 8

 30 January 2017

Country Sections
US
US industrial production momentum has fallen back into negative territory after reaching a
peak of 3.0% in August. However, the key driver of the slowdown is normalization in
utilities production after unseasonably warm summer weather. As this effect fades, we
expect momentum to gradually pick up steam in the months ahead, driven by a steady
increase in manufacturing and continued rebound in mining production. Markit PMI New
Orders and regional manufacturing surveys have risen sharply in the recent months,
suggesting some upside risk for growth momentum in the near term.
The beginning of the Trump presidency adds considerable uncertainty to the medium-term
outlook for IP growth. The early days of the administration have been chaotic, and much will
come down to the interplay between Trump and congressional Republicans. On the one
hand, stimulus (in the form of tax cuts or infrastructure) could boost manufacturing, and the
energy sector could eventually benefit from a more lax regulatory environment. However, on
the other hand, a stronger dollar, higher interest rates, and the possibility of more restrictive
trade could be a significant shock to US investment. Overall, we have largely maintained our
growth views, but are prepared to adjust as policy details become clearer.
For now, US demand growth appears solid, but unremarkable. Consumption slipped a bit
in Q4 and labor income growth has dropped below its recent trend of 4.4%. However, high
frequency indicators give some cause for optimism in the near term. Consumer confidence
measures have been surging since the election and unit auto sales numbers shot up to a
new cycle high in December at 18.3m SAAR.
The outlook for investment is improving as headwinds dissipate but the underlying
growth trends remain lackluster. Equipment investment returned to positive growth in Q4
after four consecutive quarters of contraction but is unlikely to move much higher, in our
view. Core capital goods shipments have improved in recent months, but YoY growth
remains steeply negative. Bank C&I loans have now been stagnant for several months.
Inventories are likely to be a headwind to production growth going forward. GDP measures
of inventory accumulation accelerated in H2 2016 after five quarters of slowdown and,
despite some improvement, real inventory stocks remain elevated relative to sales. We
dont expect this to lead to a sharp destocking, but in the near term this suggests that
businesses may be content to let production growth run a bit slower than demand.

Global Cycle Notes 9

 30 January 2017

Figure 13: Utilities have been a key contributor to

Figure 12: US momentum peaked in August the momentum slowdown
(3m/3m % annualized growth of US industrial production) % contribution to US IP momentum

Source: Credit Suisse, Markit, Federal Reserve Source: Credit Suisse, Federal Reserve

Figure 14: Consumer optimism has increased since

the election Figure 15: Equipment investment has picked up

Source: Credit Suisse, U. of Mich, Conference Board Source: Credit Suisse, Census Bureau

Figure 16: Business loans have been stagnant Figure 17: Inventory levels remain elevated
Commercial Bank C&I Loans Ratio of business inventories to sales

Source: Credit Suisse, Federal Reserve Source: Credit Suisse, Census Bureau

Global Cycle Notes 10

 30 January 2017

China
Chinese industrial production growth has had a mixed performance recently, with
momentum wobbling around a low underlying rate. The outlook has improved for
manufacturing investment but worsened for housing and durable goods consumption.
Capex decisions among Chinese manufactures often respond with a delay to changes in
profit margins, which are a proxy for returns on productive capital. Aggregate profit
margins have improved since late 2015, brightening the prospects for capex growth
(Figure 18). Manufacturing investment has shown early signs of recovery, after reaching
the lowest level in many years. This sector makes up 30%-40% of fixed asset investment
so an end to the decline would be good news for overall growth.
Despite currently heightened corporate sentiment, capex may not accelerate as much as
profit margins suggest. A large proportion of the profit gain comes from producers of raw
materials, whose costs and revenues move with the housing market.
Policy makers have gradually turned to a tightening stance on the housing market since
September. Policy measures such as higher administrative barriers for home purchasing
and tighter standards for mortgage lending have been introduced. House prices have
responded in tier-1 cities, but are still rising rapidly elsewhere (Figure 20). More forceful
measures are likely to be introduced to combat the leveraged demand and signs of an
asset bubble.
On the other hand, policy makers are wary of excessive tightening. A cooling property
market should cap home construction activities and consumer goods spending. The pace
of property construction remains relatively slow (Figure 21), and the deceleration in
October auto shipments and retail sales will likely persist as the positive wealth effect
begins to abate (Figure 22). Recent turmoil in the debt market has exposed China's
financial vulnerability as the economy continues to rely heavily on debt to generate growth.
The government's ability to ease monetary conditions is severely constrained by its
desire for a stable currency. Chinas conflicting policy goals are further challenged by
the external environment: higher global interest rates, a strong dollar, and geopolitical
tension with the US.

Figure 18: Manufacturing capex and profit margins Figure 19: China IP momentum and Markit PMI

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Global Cycle Notes 11

 30 January 2017

Figure 20: Average new home prices, index Figure 21: House starts and completions

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Figure 22: Automobile shipment and production Figure 23: China and US 10yr bond yields

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Euro Area
The new US administration has brought increased uncertainty to international relations,
trade and security, but is unlikely to have a material impact on euro area industrial
production in the short term. On the other hand, the lingering uncertainty related to Brexit
and other political risks is capping the upside risks of the steady, albeit uninspiring,
regional outlook. Goods consumption and investment should end the year on a strong
note as consumer and business confidence improved markedly in Q4. IP momentum has
started to normalize, falling down to 3.6% in November after reaching a peak in the
previous month. Given its elevated level, IP momentum should continue to decelerate in
the first half of this year, although the pace of this decline should be limited by the low
level of inventories (Figure 29).
Key business indicators recovered after decelerating in the summer months on the back of
Brexit fears and weak export demand, especially from Asia. Manufacturing PMI New
Orders rose to its highest level since early 2011 at the turn of the year, driven by increases

Global Cycle Notes 12

 30 January 2017

in both new orders and export orders. In contrast, German Ifo expectations fell by over two
points in January after climbing to the highest level since early 2014 in Q4. While Ifo still
remains high in level terms and its decrease is consistent with normalization in IP
momentum (Figure 28), a deterioration in the survey contrasts with improvements in all
other measures of economic activity in the euro area. We will stay focused on further data
releases to confirm whether the fall in expectations is persistent, and whether it is
supported by other surveys.
With business indicators improving in Q4, capex growth should accelerate (Figure 26).
The continued pressure on the manufacturing sectors capacity utilization rate should
support investment in the coming quarters (Figure 27). Backlogs of work grew to a five-
and-a-half year high in December and remained elevated in January, highlighting the fact
that capacity is being strained by the recent rise in demand. Additionally, low financing
rates and energy prices allow corporates to strengthen their cash position, opening the
door for stronger investment as global growth further normalizes. Credit growth and bank
lending softened in Q3 despite easy credit conditions, but credit growth for the private
sector rebounded and recorded a solid expansion in Q4.
While easier credit conditions are unlikely to provide a significant boost to growth,
economic activity is likely to strengthen on the back of stronger investment and better
export growth prospects, in our view. Global IP and GDP growth have picked up, a recent
significant drag on euro area export growth Russia has faded, and the weak euro
allows exporters to see a modest increase in their market share. Some business surveys
are already pointing to a modest improvement in the outlook for exports.
The trend-like fall in the unemployment rate continued in Q4, reaching 9.8% in November
and December, the lowest level since 2009 (Figure 25). After the Brexit vote, consumer
confidence came off its highs and households goods consumption slowed. But as
consumer confidence rebounded toward the end of the year and PMI employment growth
reached post-crisis highs, goods consumption should pick up pace in the near term
(Figure 24). Although the positive impact of lower oil prices on real personal income
fading, there is still sizeable pent-up demand for big-ticket items. Moreover, fiscal policy is
turning slightly more supportive as we approach the Dutch, French and German elections
next year.

Figure 24: Goods consumption growth is robust Figure 25: U-rate continues to fall at a steady pace
Real retail sales (incl. cars) 12.2
119

117 11.7

115
11.2

113
10.7
111

10.2
109

107 9.7
10 11 12 13 14 15 16 Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Global Cycle Notes 13

 30 January 2017

Figure 26: Capex is set to rebound Figure 27:and the capacity utilization rate is rising
65 15%
86
60 10% 84 Long-term avg
(1987-2007)
55 82
5%
50 80
0%
45 78
-5%
40 76
EA Manufacturing PMI -10%
35 New Orders 74
Machinery & Equipment
30 -15% 72
investment qoq% ann
(2qma, rhs)
25 -20% 70
98 00 02 04 06 08 10 12 14 16 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Figure 28: Leading indicators are consistent with

normalization in IP momentum Figure 29: Inventories should support IP in Q4
15% 3 3 0.6
IP 3m/3m% ann. (lhs)
PMI - NO, 1m lead (stdzed, rhs) 2.5 2 0.4
10% Ifo exp., 2m lead (stdzed, rhs) 2
1 0.2
1.5
5% 1 0 0.0

0.5 -1 -0.2
0% 0
-2 -0.4
-0.5 Change in Manufacturing
-3 PMI: inventories -0.6
-5% -1
-4 Contributions of changes -0.8
-1.5
in inventories to GDP
-10% -2 -5 growth (q/q%, 2qma, rhs) -1.0
10 11 12 13 14 15 16 17 18 06 08 10 12 14 16
Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Japan
After declining modestly since 2014, industrial production resumed an upward trend in the
middle of 2016. This rise is supported by rising domestic demand, declining inventories,
and abating external headwinds. IP momentum should peak around 9.4% in January, the
top of its post-2008 range.
Household consumption has been recovering steadily since its early-2016 low, as
evidenced by improving retail and car sales. Consumer confidence has also risen and
labor market conditions have continued to improve. Employment is steadily rising, driven
by strong labor demand. With the new job offers-to-applicant ratio at an extremely high
level, wage growth should remain positive going forward. At the same time, negative
consumer price inflation and temporary cash rebates included in the forthcoming stimulus
package should support consumption spending.
Business investment remained flat for most of 2016, but has improved a bit in recent
months. The currency weakness since November could provide a short-term boost to
manufacturers profits and support capex. Meanwhile, business confidence has improved,
as PMIs reached a one-year high and the Tankan business conditions index also ticked
up. However, until the fiscal stimulus (focused on infrastructure investment) hits the
economy, private investment should stay at the trend rate seen since 2010.

Global Cycle Notes 14

 30 January 2017

Figure 30: Goods consumption is recovering Figure 31: Vehicle Sales are trending upwards

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Figure 32: The unemployment rate keeps falling Figure 33: Labor earnings should stay positive

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Figure 34: Machinery orders have edged higher Figure 35: IP momentum and surveys

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Global Cycle Notes 15

 30 January 2017

Emerging Markets
Emerging market (ex-China) IP momentum has been improving since January 2016
(trough of -5.0%) with an increase in commodities demand, a recovery in oil prices, and
robust household demand in developed markets.
IP momentum is likely to peak in early 2017, but growth should improve marginally for
the entire year, with most countries contributing to the expansion. Pent-up domestic
demand is most likely to support the Latam economies of Argentina and Brazil and the
Asian exporters of the Philippines, Indonesia and Thailand. Credit conditions are also
likely to improve.
Meanwhile, combative US trade policy may bring negative surprises to countries that rely
heavily on the US market. Geopolitical uncertainty is especially high for Mexico, where we
expect a modest slowdown in economic growth for 2017.

Figure 36: Metal exporters' IP and global steel output Figure 37: PMI and IP momentum
25% EM ex-China IP momentum
EM ex-China PMI New Orders 59
20%
57
15%
55

10%
53

5%
51

0% 49

-5% 47

-10% 45
05 06 07 08 09 10 11 12 13 14 15 16 17
Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Global Cycle Notes 16

 30 January 2017

Forecast Table
Figure 38: Global IP latest data and forecasts
Global Americas Asia Europe
m/m 3m/3m ann. y/y m/m y/y m/m y/y m/m y/y
Jan-16 0.8% 0.0% 1.3% 0.5% -2.0% 0.4% 2.8% 1.5% 2.4%
Feb-16 -0.4% 0.4% 0.8% -0.4% -2.2% -0.2% 2.5% -0.5% 1.1%
Mar-16 0.2% 1.5% 1.1% -0.6% -2.4% 1.0% 4.0% -0.5% 0.0%
Apr-16 0.5% 1.5% 1.5% 0.1% -2.0% 0.3% 3.5% 1.0% 1.9%
May-16 -0.3% 1.6% 1.4% -0.4% -2.1% 0.2% 3.8% -0.9% 0.8%
Jun-16 0.7% 2.0% 1.6% 0.7% -1.3% 1.0% 3.9% 0.1% 0.5%
Jul-16 -0.1% 2.1% 1.3% 0.4% -1.3% -0.2% 3.7% -0.4% 0.0%
Aug-16 0.7% 3.3% 2.0% -0.3% -1.7% 0.8% 4.5% 1.6% 1.5%
Sep-16 0.0% 3.0% 1.8% 0.1% -1.1% 0.4% 4.3% -0.9% 0.3%
Oct-16 0.3% 3.8% 1.8% -0.3% -1.1% 0.3% 4.0% 0.7% 0.9%
Nov-16 0.7% 3.3% 2.9% -0.3% -0.8% 0.9% 5.2% 1.4% 2.8%
Dec-16 0.2% 4.2% 3.3% 0.8% 0.3% 0.3% 5.2% -0.3% 2.9%
Jan-17 0.4% 4.8% 2.9% 0.1% -0.1% 0.7% 5.5% 0.2% 1.5%
Feb-17 0.4% 4.9% 3.7% 0.2% 0.5% 0.6% 6.3% 0.2% 2.2%
Mar-17 0.0% 4.3% 3.5% 0.1% 1.2% 0.1% 5.3% 0.0% 2.7%
Apr-17 0.1% 3.1% 3.1% 0.2% 1.3% 0.0% 5.1% 0.0% 1.6%
May-17 0.2% 2.2% 3.7% 0.2% 1.9% 0.4% 5.3% 0.0% 2.6%
Jun-17 0.2% 1.9% 3.2% 0.1% 1.3% 0.4% 4.6% 0.1% 2.5%
Source: Credit Suisse

Global Cycle Notes 17

 GLOBAL FIXED INCOME AND ECONOMIC RESEARCH
James Sweeney, Managing Director Dr. Neal Soss, Managing Director
Head of Fixed Income and Economic Research Vice Chairman, Fixed Income Research
+1 212 538 4648 1 212 325 3335
james.sweeney@credit-suisse.com neal.soss@credit-suisse.com

US / GLOBAL ECONOMICS AND STRATEGY

James Sweeney
Chief Economist Xiao Cui Zoltan Pozsar Jeremy Schwartz Sarah Smith Wenzhe Zhao
+1 212 538 4648 +1 212 538 2511 +1 212 538 3779 +1 212 538 6419 +1 212 325-1022 +1 212 325 1798
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Praveen Korapaty
Head of Interest Rate Strategy Jonathan Cohn William Marshall
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EUROPEAN ECONOMICS AND STRATEGY

Neville Hill
Head of European Economics & Strategy Anais Boussie Peter Foley Sonali Punhani Veronika Roharova Giovanni Zanni
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David Sneddon
Head of Technical Analysis Christopher Hine
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William Porter
Head of European Credit Chiraag Somaia
+44 20 7888 1207 +44 20 7888 2776
william.porter@credit-suisse.com chiraag.somaia@credit-suisse.com

GLOBAL FX / EM ECONOMICS AND STRATEGY

Shahab Jalinoos
Head of Global FX Strategy Honglin Jiang Trang Thuy Le Alvise Marino Bhaveer Shah
212 325 5412 44 20 7888 1501 +852 2101 7426 212 325 5911 44 20 7883 1449
shahab.jalinoos@credit-suisse.com honglin.jiang@credit-suisse.com trangthuy.le@credit-suisse.com alvise.marino@credit-suisse.com bhaveer.shah@credit-suisse.com
Kasper Bartholdy
Head of Global EM Strategy Ashish Agrawal Daniel Chodos Nimrod Mevorach Martin Yu
+44 20 7883 4907 +65 6212 3405 +1 212 325 7708 +44 20 7888 1257 +65 6212 3448
kasper.bartholdy@credit-suisse.com ashish.agrawal@credit-suisse.com daniel.chodos@credit-suisse.com nimrod.mevorach@credit-suisse.com martin.yu@credit-suisse.com
Berna Bayazitoglu
Head of EEMEA Economics Alexey Pogorelov Carlos Teixeira
+44 20 7883 3431 +44 20 7883 0396 +27 11 012 8054
berna.bayazitoglu@credit-suisse.com alexey.pogorelov@credit-suisse.com carlos.teixeira@credit-suisse.com
Alonso Cervera Juan Lorenzo Maldonado
Head of Latin America Economics +1 212 325 4245 Casey Reckman Alberto Rojas
+52 55 5283 3845 juanlorenzo.maldonado@credit- +1 212 325 5570 +52 55 5283 8975
alonso.cervera@credit-suisse.com suisse.com casey.reckman@credit-suisse.com alberto.rojas@credit-suisse.com
Nilson Teixeira
Head of Brazil Economics Paulo Coutinho Iana Ferrao Leonardo Fonseca Lucas Vilela
+55 11 3701 6288 +55 11 3701-6353 +55 11 3701 6345 +55 11 3701 6348 +55 11 3701-6352
nilson.teixeira@credit-suisse.com paulo.coutinho@credit-suisse.com iana.ferrao@credit-suisse.com leonardo.fonseca@credit-suisse.com lucas.vilela @credit-suisse.com

ASIA PACIFIC DIVISION

Ray Farris, Managing Director
Head of Fixed Income Research and Economics, Asia Pacific Division
+65 6212 3412
ray.farris@credit-suisse.com
EMERGING ASIA ECONOMICS
Dr. Santitarn Sathirathai Vincent Chan
Head of Emerging Asia Economics Head of China Macro Deepali Bhargava Weishen Deng Christiaan Tuntono Michael Wan
+65 6212 5675 +852 2101 6568 +65 6212 5699 +852 2101 7162 +852 2101 7409 +65 6212 3418
santitarn.sathirathai@credit-suisse.com vincent.chan@credit-suisse.com deepali.bhargava@credit-suisse.com weishen.deng@credit-suisse.com christiaan.tuntono@credit-suisse.com michael.wan@credit-suisse.com

JAPAN ECONOMICS
Hiromichi Shirakawa
Head of Japan Economics Takashi Shiono
+81 3 4550 7117 +81 3 4550 7189
hiromichi.shirakawa@credit-suisse.com takashi.shiono@credit-suisse.com
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