Marco Soriano, CEO: "Expectations on Global Economics 2017-2018" --- P A R T 1

1. Is the fundamental structure of the world economy changing? 2. Why is productivity low, and savings keep rising? 3. Has globalization increased co-dependence and systemic risks? 4. Why is international monetary system neither preventing currency volatility nor fostering an efficient allocation of global capital? 5. Is the global economy in the middle of a “lost decade”? Key takeaway – The fundamental structure of the world economy is changing. While the contribution of services to global output is on the rise, investment and productivity remain stagnant, savings keep accumulating, and growth and inflation decline. Meanwhile, globalization has increased co-dependence: a rising number of countries can influence the world’s economic performance and its financial stability. Yet, the international monetary system is neither fostering an efficient allocation of global capital nor preventing currency volatility. As a result, the global economy is in the middle of a “lost decade”: emerging markets (EMs) struggle with slowing growth, a sizeable external debt, capital outflows and depreciating currencies. Europe’s economies suffer from stagnating growth, separatist politics, a heavy sovereign debt, unfavourable demographics, inflexible labor markets, a migrant crisis and religious divides. Until 2020, the price of oil will stay in the US Dollars (USD) 50-60 range. As the shortcut to recovery is an ‘unfair’ mix of orderly debt restructuring and mild inflation, monetary policy normalization will take longer than expected, buoying the financial markets. As a result, the financial system is reaching an unstable equilibrium. The global economy is weak, the markets are strong, but the trade-off between sustained growth and financial stability is likely to continue. While high volatility will favour traders, for fundamental investors returns are likely to be lower than in recent years. Article based on material prepared for the keynote speech of the “International Finance Conference: Currency markets. Global practices”, Ancona ITALY, November 2015. [1] With market capitalizations in the billions, the most popular social media – Facebook, Twitter, and WhatsApp – do not need heavy investments, because they create no content. Alibaba, a large retailer, has no inventory. In just six years, Airbnb became the globe’s largest accommodation provider (with 17 million users and an inventory larger than that of the Hilton) but owns no real estate. Uber, the largest taxi company, owns no vehicles. [2] In 2016, for the first time since 1950, the working-age population will decline in DMs – where by 2050 it will shrink by 5 percent – and in key EMs, such as China and Russia. At the same time, the share population over 65 will rise steeply. [3] The proportion of working-age individuals either employed or actively seeking work. [4] Between 1995 and 2012, the demand for foreign-exchange reserves rose steadily – from USD 1.3tn (5 percent of world GDP) to USD 10.7tn (15 percent). DMs hold less foreign exchange reserves than EMs. In 2015, DMs held USD3.97tn, compared with USD7.52tn for EMs. Brazil: USD 361.2bn (October 2015); Russia: USD 369.6bn (October 2015); India: USD 352.5bn (October 2015); China: USD 3,525.5bn (October 2015). Source: Trading Economics, 2015; IMF, 2015. [5] The world’s main CBs have expanded their balance sheets significantly: in the US, from USD 2.2tn (December 2008) to USD 4.5tn (October 2015); in the EZ, from USD 2.4tn (December 2008) to USD 2.9tn (October 2015); in Japan, from USD 1.0tn (December 2008) to USD 3.0tn (October 2015); in the UK, from USD 0.3tn (December 2008) to USD 1.1tn (October 2015); in Switzerland, USD 0.2tn (December 2014) to USD 0.6tn (October 2015); in Brazil, from USD 0.4tn (December, 2008) to USD 0.7tn (October 2015); in Russia, from USD 15.8bn (December 2008) to USD 22.9bn (October 2015); in India, from USD 0.1tn (December 2008) to USD 0.2tn (October 2015); in China, from USD 3.4tn (December 2008) to USD 5.1tn (October 2015). Source: Trading Economics, 2015.