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Global Economic Growth Prospects: 2007 and Beyond

Global Economic Growth Prospects: 2007 and Beyond. Robert F. Wescott, Ph.D. Keybridge Research LLC Washington, DC. 4 Forces Shaping World Economy in 2006-07. 1. Tighter monetary and fiscal policies: 2. Still high energy prices: 3. Strong global productivity: 4. Trade opening: .

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Global Economic Growth Prospects: 2007 and Beyond

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  1. Global Economic Growth Prospects: 2007 and Beyond Robert F. Wescott, Ph.D. Keybridge Research LLC Washington, DC

  2. 4 Forces Shaping World Economy in 2006-07 1. Tighter monetary and fiscal policies: 2. Still high energy prices: 3. Strong global productivity: 4. Trade opening:

  3. Global Liquidity Now Slowing U.S. monetary base plus world foreign exchange holdings (percent change, year on year) Sources: Federal Reserve, IMF COFER database

  4. Oil: A Growing Burden on the World Economy Global Slowdown Trigger Level? Source: EIA, IMF WEO

  5. 2006-07 Economic Prospects • Global growth downshifts from 5% to 3.5 or 4% – adjustment to higher interest rates, high energy prices – consensus view of 5% too high as real incomes slow • Growth convergence: E.U. and Japan up to 2.5%, • E.U.: profits spur investment, consumption recovers, pent up demand • Japan: land prices rebound, credit increases, provide lift • U.S. down—2.0% as housing slows • China, India still strong, 7-8% • Other Asia, Latin America, Eastern Europe—decent growth (4-5%)

  6. 2006-07 Financial Prospects • Global interest rates: have already peaked at 5.25% (U.S.) • Global equities: have liked “Goldilocks” worldview, but likely to suffer if U.S. really slows to 2% GDP growth • Currencies: $ depreciates. Euro, yen, and RMB appreciate. • U.S. equities: at risk, particularly housing, lumber, autos, mortgage lenders (especially sub-prime lenders) • EU equities: profits should help sustain equity rallies • Eastern Europe equities: generally favorable

  7. Housing Prices Rising Worldwide Percent Change, 1997-2005 Source: The Economist

  8. Housing’s Disproportionate Contribution to U.S. Job Growth Source: BLS

  9. Mortgage Equity Withdrawal Can Almost Entirely Explain the Decline in U.S. Saving Source: Federal Reserve, BEA, Office of Thrift Supervision, ISI

  10. Housing’s Contribution to U.S. GDP Growth, 2001-05

  11. U.S. Housing Downturns Tend to be Deep Decline in Housing Starts, Last Five Housing Market Downturns Average Decline: 51.2% Source: Census Bureau

  12. U.S. Housing Slowdown Has Already Started NAHB/Wells Fargo Housing Market Index, 2002-2006 Source: National Association of Home Builders

  13. 8 Observations About the Changing Global Economy • 1. Centers of activity will shift • 2. Consumer landscape will change • 3. Energy and environmental problems will grow • 4. Emerging markets will have both inflationary and deflationary effects • 5. Battleground for talent will heat up • 6. Key secret of emerging markets: productivity and appreciating currencies • 7. But investors beware: diversification is falling • 8. Risks to consider

  14. 1. Centers of economic activity will shift profoundly – globally and regionally • Today Asia (excluding Japan) represents 13% of world GDP; the E.U. represents 30%. • In 2025 Asia and the E.U. will each be 20%-22% of the world economy. • The U.S. will remain the world’s largest economy. • Regional shifts: toward regional capital cities (Kansei, Kanto)

  15. China’s Trend Has Been Sharply Upward Source: IMF

  16. GDP, % of World Total, PPP Basis U.K., 1820-1870 U.S., 1860-1913 Japan, 1950-1974 China, 1980-2005 Sources: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund

  17. “Asian Tiger” Five Phase Growth Cycle Average Per Capita Income Growth %

  18. China: Fitting the “Asian Tiger” Growth Profile Average Annual Growth in Per Capita Income

  19. 2. The consumer landscape will expand significantly • $5,000 in income is a threshold above which spending can go to discretionary items (like Italian silk scarves) • Spending power in emerging markets will jump from $4 trillion today to $10 trillion in 2025. • Already Poland has more people with a Danish income level than Denmark. • Soon China will have more people with a German income level than Germany.

  20. Vehicles Registered per Capita

  21. The “Sweet Spot” for Car Ownership is between $4,000 & $9,000 Per Capita Income Average of Japan, Taiwan, Korea, Thailand, China, and Mexico $21,000 $19,200 Per Capita Income-US$ PPP Basis $18,000 Korea (2002) Taiwan $15,000 (2001) Japan $12,400 (1976) $12,000 China Mexico (1997) $9,100 (2000) Korea $9,000 Korea Korea (1973) $6,700 (1995) (1991) India Korea Japan $6,000 Taiwan (2002) $4,900 (1991) (1971) (1987) China $3,400 Taiwan Thailand (2002) $3,000 (1987) (1996) Korea Thailand (1981) (1996) 0 1 0.01 0.02 0.05 0.1 0.2 0.3 Vehicle Registration per Capita

  22. 3. Demand for natural resources will grow; put strain on the environment • Oil demand projected to grow 50% in the next 20 years • But China cannot use oil as U.S. and Europe do • Growing demands for steel, aluminum, copper, minerals, water • Pressing need for alternate fuels, new transportation technology

  23. Steel Production, Millions of tons U.S., 1860-1913 Japan, 1950-1974 19% of world (1974) 36% of world (1900) <5% of world (1950) <10% of world (1843) China, 1980-2005 29% of world (2005) <4% of world (1980) Sources: International Iron and Steel Institute, Japan Iron and Steel Federation, Barraclough: Steelmaking, Hogan: The Economic History of the Iron and Steel Industry in the U.S, Hudson & Sadler: The International Steel Industry

  24. World CO2 Emissions Are Rising and Asia is the Biggest Polluter Source: Energy Information Agency, U.S. Department of Energy

  25. 4. For Goods that China Buys… China’s Share of World Imports of Metal Ores & Concentrates Source: UN ComTrade

  26. …Prices Go Up Average US Market Spot Prices, Indexed to 1996 Prices Source: United States Geological Survey

  27. But for Goods that China Sells… China’s exports have increased 3X in 5 years

  28. …Prices Are Held Down U.S. Core CPI, Index 1990 = 100 U.S. Import Non-energy Import Price Index 1990 = 100

  29. 5. Battleground for talent will shift • Shift from production to knowledge-intensive industries (science, technology, culture, arts, entertainment) • In U.S., 5% of jobs were in these industries in 1900, but 40% today are. • In Italy, 13% are today, but this will increase. • 33 million university-educated young professionals in developing countries today (more than twice the number in advanced countries)

  30. Talent Percent of population ages 25-64 with a B.A. degree or above Source: Florida and Tinagli, “Europe in the Creative Age,” Feb. 2004

  31. 6. Key Attractions of Emerging Markets:Rapid Productivity Growth & Appreciating Currencies Polish Zloty, real effective exchange rate, 1995 = 0 While Poland’s productivity has increased 4.2% a year, the Zloty has appreciated by roughly 3% per year against the currencies of all its trading partners. Source: IMF

  32. 7. Together We Rise, Together We Fall!Tighter Linkages Between Equity Markets Average Correlation Between US & Emerging Market Equity Indices Source: Global Financial Data. Equity market indices for Argentina, Brazil, China, India, Mexico, South Africa, South Korea, Taiwan, Turkey, Venezuela, and the United States.

  33. 8. Risk: Can Disequilibrium Continue? Current Account Balance as a Percent of GDP China Produces The US Consumes Source: IMF WEO

  34. Problems from China’s over saving • Inefficient use of capital (zero returns) • Stirs protectionist backlash from trading partners Impediments to Shift to Domestic Demand • Confucian work ethic (Japan and Korea, etc. maintained 30% saving rates for 30-40 years) • One child policy (“1-2-4” problem, dependency ratio up starting in 2010) • Weak Social Security system • Banking system weak, may not be able to support consumerism

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