Flash Economics 17 January 2018 - 70 Patrick Artus Tel. (33 1) 58 55 15 00 patrick.artusnatixis.com PatrickArtus www.research.natixis.comOptimism for 2018: Remember 2007 All comments on the economic situation in OECD countries in 2018 are now very optimistic. But we should remember that in 2007, one year before the crisis, we also saw, like now: Major optimism among companies and households;Rapid growth in all demand items and in global trade;Synchronised growth in all regions;Rising asset prices (real estate, equities), with a monetary policy that did not react;In the United States, an increase in corporate debt leverage and share buybacks;An abnormal squeezing of risk premia.These similarities and the presence of identical financial imbalances should give grounds for concern about the current situation. Since the 2008 crisis household have, admittedly, deleveraged in OECD countries, but governments have increased their debt even more. So the current optimism does not signify that another crisis will not occur. Distribution of this report in the United States. See important disclosures at the end of this report. Flash Economics 2 Widespread optimism prevails in 2018 as in 2007 We will look at the OECD as a whole, defined for the sake of simplification as United States + United Kingdom + euro zone + Japan. In 2018, as in 2007 (i.e. one year before the Lehman bankruptcy), we are seeing: - Optimism on growth prospects among companies (Chart 1); - Optimism among households (Chart 2); - Quite robust growth (Chart 3). 35404550556035404550556002 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 1 OECD*: Composite PMI (index)Sources: Datastream, ISM, Markit, Natixis(*) United States, United Kingdom, euro zone and Japan969798991001011029697989910010110202 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 2 OECD*: Household confidence index (normal = 100)Sources: Datastream, OECD, Natixis(*) United States, United Kingdom, euro zone and Japan-6-4-2024-6-4-202402 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 3 OECD*: Real GDP (Y/Y as %)Sources: Datastream, BEA, ONS, CAO, Eurostat, Natixis(*) United States, United Kingdom, euro zone and JapanThe 2007 experience shows that major optimism does not signify that a recession and a crisis are not imminent. We will also show that, in addition to the optimism, many factors are similar today and in 2007. Many similarities between 2007 and today (1) Rapid growth in global trade and in all demand items Today, as in early 2007, global trade and exports are increasing rapidly (Chart 4A), and corporate investment (not housing investment) and consumption are growing rapidly (Charts 4B and C). Flash Economics 3 10012014016018020010012014016018020002 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 4A Global trade and exports (in volume terms, 2002:1 = 100)Global tradeOECD*: exportsSources: Datastream, BEA, ONS, CAO, Eurostat, Natixis(*) United States, United Kingdom, euro zone and Japan-25-20-15-10-50510-25-20-15-10-5051002 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 4B OECD*: Productive investment and household housing investment (in volume terms, Y/Y as %)Productive investmentHousehold housing investmentSources: Datastream, BEA, ONS, Eurostat, CAO, Natixis(*) United States, United Kingdom, euro zone and Japan-3-2-10123-3-2-1012302 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 4C OECD*: Household consumption (in volume terms, Y/Y as %)Sources: Datastream, BEA, ONS, CAO, Eurostat, Natixis(*) United States, United Kingdom, euro zone and Japan(2) Synchronised growth in all regions of the world Today, as in 2007, all regions of the world are growing synchronously (Charts 5A and B). -6-4-20246-6-4-2024602 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 5A Real GDP growth (Y/Y as %)United StatesEuro zoneUnited KingdomSources: Datastream, BEA, ONS, Eurostat, Natixis-10-5051015-10-505101502 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 5B Real GDP growth (Y/Y as %)ChinaEmerging countries as a whole excl. ChinaJapanSources: Datastream, NBS, CAO, Natixis(3) Rising asset prices without monetary policy reaction Today, as in 2007, share prices and real estate prices are rising (Charts 6A and B), and monetary policy is not doing much to prevent these asset prices from rising (Chart 7). Flash Economics 4 48121620242832507510012515017520022502 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 6A OECD*: Stock market index and PERStock market indices (2002:1 = 100, LHS)Current PER (RHS)Sources: Datastream, Natixis(*) United States, United Kingdom, euro zone and Japan10011012013014015016017010011012013014015016017002 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Chart 6B OECD*: Commercial and residential real estate prices (2002:1 = 100)House pricesCommercial real estate prices(*) United States + United Kingdom + euro zone + JapanSources: Datastream, Case-Shiller, Moodys, ECB, Halifax, ECB, Natixis-6-4-20246-6-4-202