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Global Economic Shifts in 2007 and Beyond

Global Economic Shifts in 2007 and Beyond. Robert F. Wescott, Ph.D. Pioneer Investments Colloquia Prague 29 November 2006. A Major Geopolitical Shift. Global Liquidity Now Slowing U.S. monetary base plus world foreign exchange holdings (percent change, year on year).

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Global Economic Shifts in 2007 and Beyond

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  1. Global Economic Shifts in 2007 and Beyond Robert F. Wescott, Ph.D. Pioneer Investments Colloquia Prague 29 November 2006

  2. A Major Geopolitical Shift

  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 Continuing Burden on the World Economy Global Slowdown Trigger Level? Source: EIA, IMF WEO

  5. What’s Hurting Investment Climate “A Lot”? 54% 53% 52% 36% 26% Source: UBS Index of Investor Optimism, Nov. 27, 2006

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

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

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

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

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

  11. U.S. Housing Bubble Already Burst! NAHB/Wells Fargo Housing Market Index, 2002-2006 Source: National Association of Home Builders

  12. 8 Ways Global Economy Will Change in 2007 and Beyond • 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. Emerging markets will have faster productivity growth and appreciating currencies • 7. Investors beware: diversification will keep falling • 8. Disequilibrium pressures will correct

  13. 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)

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

  15. 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

  16. 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.

  17. Vehicles Registered per Capita

  18. 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 and coal as U.S. and Europe do • Growing demands for steel, aluminum, copper, minerals, water • Pressing need for alternate fuels, new transportation technology

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

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

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

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

  23. 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)

  24. 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

  25. 6. Key Attractions of Emerging Markets:Rapid Productivity Growth & Appreciating Currencies Polish Zloty, real effective exchange rate, % change from 1995 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

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

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

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