Transcript Housing Module

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)
30%
25%
20%
15%
10%
5%
20
00
Q
1
20
00
Q
3
20
01
Q
1
20
01
Q
3
20
02
Q
1
20
02
Q
3
20
03
Q
1
20
03
Q
3
20
04
Q
1
20
04
Q
3
20
05
Q
1
20
05
Q
3
0%
Sources: Federal Reserve, IMF COFER database
Oil: A Continuing Burden on
the World Economy
7%
Global Slowdown
Trigger Level?
6%
5%
4%
3%
2%
1%
Source: EIA, IMF WEO
20
06
20
02
19
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
0%
What’s Hurting Investment Climate
“A Lot”?
54%
53%
52%
Source: UBS Index of Investor Optimism, Nov. 27, 2006
36%
26%
Housing Prices Rising Worldwide
Percent Change, 1997-2005
S. Africa
Ireland
Spain
Britain
Australia
Netherlands
U.S.
Italy
N. Zealand
Belgium
Denmark
France
Canada
Sweden
Switzerland
Germany
Japan
Hong Kong
-50%
Source: The Economist
0%
50%
100%
150%
200%
250%
Housing’s Disproportionate
Contribution to U.S. Job Growth
81.3%
29.6%
20.6%
5.3%
Share of Total
Employment, 2005
Source: BLS
2004
2005
2001- 2005
Mortgage Equity Withdrawal Can Almost
Entirely Explain the Decline in U.S. Saving
12%
Mortgage Equity Withdrawal
Household Savings Rate
10%
8%
6%
4%
2%
0%
Source: Federal Reserve, BEA, Office of Thrift Supervision, ISI
.Q
1
20
06
.Q
1
20
04
.Q
1
20
02
.Q
1
20
00
.Q
1
19
98
.Q
1
19
96
.Q
1
19
94
.Q
1
19
92
.Q
1
19
90
.Q
1
19
88
.Q
1
19
86
.Q
1
19
84
.Q
1
82
19
19
80
.Q
1
-2%
Housing’s Contribution to U.S. GDP
Growth, 2001-05
Channel
Growth, ‘01-’05
Effect on
GDP
Contribution to
GDP Growth
Residential
Investment
$343 billion
100%
$343 billion
Housing Wealth
$4,286 billion
7%
$300 billion
Cash Out From
Refinancing
$1,219 billion
100%
$1,219 billion
Total housing contribution to GDP growth:
$1,862 billion
Total U.S. GDP growth:
$2,918 billion
Housing share of GDP growth (percent):
64%
U.S. Housing Downturns Tend to be Deep
Decline in Housing Starts, Last Five Housing Market Downturns
1973-75
1978-80
1981-82
1984
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
Source: Census Bureau
Average Decline: 51.2%
1986-91
U.S. Housing Bubble Already Burst!
NAHB/Wells Fargo Housing Market Index, 2002-2006
75
70
65
60
55
50
45
40
2002.02
2002.10
2003.06
Source: National Association of Home Builders
2004.02
2004.10
2005.06
2006.02
8 Ways Global Economy Will Change
in 2007 and Beyond








1.
2.
3.
4.
5.
6.
7.
8.
Centers of activity will shift
Consumer landscape will change
Energy and environmental problems will grow
Emerging markets will have both inflationary and
deflationary effects
Battleground for talent will heat up
Emerging markets will have faster productivity growth
and appreciating currencies
Investors beware: diversification will keep falling
Disequilibrium pressures will correct
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)
China’s Trend Has Been
Sharply Upward
Share of World Economy, PPP Basis
30
percentage
25
20
15
10
5
Source: IMF
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
0
GDP, % of World Total, PPP Basis
U.K., 1820-1870
U.S., 1860-1913
10
25
8
20
6
15
4
10
2
5
0
0
1820
1845
1870
1860
Japan, 1950-1974
15
8
12
6
9
4
6
2
3
0
0
1956
1962
1913
China, 1980-2005
10
1950
1882
1968
1974
1980
1986
1992
1998
Sources: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund
2004
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.
Vehicles Registered per Capita
Vehicle
Registration
0.01
(1 in 100)
0.05
(1 in 20)
0.1
(1 in 10)
0.2
(1 in 5)
Country/Year
Per Capita Income
China, 1997
Korea, 1973
Korea, 1988
Taiwan, 1981
Mexico, 1974
Korea, 1991
Taiwan, 1987
Mexico, 1981
Japan, 1971
Korea, 1995
$3,695
$3,465
$8,934
$6,628
$7,639
$10,973
$9,992
$10,030
$11,400
$13,864
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
4. For Goods that China Buys…
China’s Share of World Imports of Metal Ores & Concentrates
70%
Copper
Iron
Aluminum
60%
50%
40%
30%
20%
10%
0%
1996
1997
Source: UN ComTrade
1998
1999
2000
2001
2002
2003
2004
2005
…Prices Go Up
Average US Market Spot Prices, Indexed to 1996 Prices
1.6
Copper
Iron
Aluminum
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
1996
1997
1998
Source: United States Geological Survey
1999
2000
2001
2002
2003
2004
2005
But for Goods that China Sells…
10,000
9,000
8,000
China’s exports have
increased 3X in 5 years
Billion Yuan
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
…Prices Are Held Down
155
U.S. Core CPI, Index 1990 = 100
145
135
125
U.S. Import Nonenergy Import Price
Index 1990 = 100
115
105
95
1991
1993
1995
1997
1999
2001
2003
2005
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)
Talent
Percent of population ages 25-64 with a B.A. degree or above
30%
25%
20%
15%
10%
5%
D
A
Source: Florida and Tinagli, “Europe in the Creative Age,” Feb. 2004
.S
.
U
en
m
ar
k
us
Po tria
rt
ug
al
Ita
Fr ly
an
c
Ire e
la
n
G d
re
e
B ce
el
gi
u
Sw m
ed
Fi en
nl
G and
er
m
an
y
Sp
ai
n
N
et
U
he .K
rla .
nd
s
0%
6. Key Attractions of Emerging Markets:
Rapid Productivity Growth & Appreciating Currencies
45
Polish Zloty, real
effective exchange
rate, % change from
1995
40
35
30
25
20
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.
15
10
5
0
1995
Source: IMF
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
7. Global Markets Move as One!
Tighter Linkages Between Equity Markets
0.9
Average Correlation Between US & Emerging Market Equity Indices
0.7
0.5
0.3
0.1
-0.1
-0.3
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source: Global Financial Data. Equity market indices for Argentina, Brazil, China, India, Mexico, South Africa, South Korea, Taiwan,
Turkey, Venezuela, and the United States.
8. Risk: Can Disequilibrium Continue?
Current Account Balance as a Percent of GDP
8
6
China Produces
4
2
0
-2
-4
The US Consumes
-6
-8
1980
1983
Source: IMF WEO
1986
1989
1992
1995
1998
2001
2004
2007