Transcript Real GDP Growth – U.S.

The Global Economic Outlook
Presented to:
ICAS Fall Symposium 2003
Washington, D.C.
October 14, 2003
Presented by:
Sara Johnson
Managing Director,
Global Macroeconomics Group
Copyright © 2003 Global Insight, Inc.
World Overview and Issues
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The world economy’s performance in this cycle—marked by
subpar, stop-and-go growth—has been disappointing.
The U.S. rebound is lifting the rest of the world, but the
pace of recovery will be uneven across regions.
World real GDP growth will pick up from 2.3% this year to
3.3% in 2004. Global output will remain below potential.
Weak domestic demand, inflexible policies, and currency
appreciation are holding back Western Europe and Japan.
Asia’s expansion, disrupted by SARS, is regaining strength,
led by growth in the technology sector.
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Sluggish Growth in the World Economy
The world economy is in recession when
real GDP growth is below 2%.
5
(Percent change, real GDP)
4
3
2
1
0
1986
1989
1992
1995
1998
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2001
2004
2007
3
OECD Leading Indicators Are Rising
(Trend-restored composite index)
140
130
120
110
100
90
1996
1997
1998
1999
U.S.
2000
2001
European Union
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2002
2003
Japan
4
Industrial Commodity Prices Are Recovering
2.0
(Index, 2002:1=1.0)
(Index, 2002:1=1.0)
1.25
1.8
1.20
1.6
1.15
1.4
1.10
1.2
1.05
Includes energy
1.0
1.00
0.8
0.95
2000
2001
2002
Global Insight Manufacturing Cost Index
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2003
CRB Industrial Index
5
Fiscal and Monetary Policies Will Boost Growth
Net Cumulative Cut in Policy
Fiscal Balance
Rates Since January 2001
(Percentage of GDP, 2003)
(Basis points)
United States
-4.0
550
Eurozone
-2.5
275
Japan
-6.8
25
United Kingdom
-2.7
250
0.5
275
Australia
-1.0
150
Switzerland
-2.2
325
Canada
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Emerging Markets Achieve the Fastest Growth
6
5
4
3
2
1
0
-1
-2
(Percent change, real GDP)
NAFTA
Other
Americas
2001
Western
Europe
2002
Emerging
Europe
2003
2004
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Japan
Other Asia
2005
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The U.S. Expansion Broadens
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The U.S. economy has been expanding since late 2001, but
not rapidly enough to create jobs—until this September.
Consumer spending has steadily risen, supported by tax
cuts, low interest rates, and the stock market rally.
Housing markets have peaked but remain strong.
Business fixed investment stabilized in mid-2002 and has
begun a phased recovery, led by information technologies.
With the inventory-to-sales ratio at a record low, businesses
will need to step up production in the months ahead.
Exports are starting to rebound in response to the dollar’s
depreciation, neutralizing the impact of rising imports.
Federal fiscal stimulus outweighs the adverse effects of
state and local government budget cuts and tax increases.
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The U.S. Expansion Is Strengthening
8
(Percent change, annual rate)
(Percent)
7
6
6
4
5
2
4
0
3
-2
2
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Real GDP Growth
Unemployment Rate
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Employment Is Finally Beginning to Recover
The U.S. lost 2.8 million jobs from February 2001 to August 2003.
3
(Percent change, annual rate)
2
1
0
-1
-2
-3
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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Federal Reserve Policy Will Be Accommodating:
Key Interest Rates
10
(Percent)
8
6
4
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Federal Funds
10-Year Treasury Yield
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Mortgage Rate
11
Government Budgets Are Back in Deficit
300
200
100
0
-100
-200
-300
-400
-500
(Billions of dollars, fiscal years)
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Federal
State & Local
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Real Consumer Spending and Confidence
7
(Annual percent change)
(Michigan Index, 1967=100)
110
6
105
5
100
4
95
3
90
2
85
1
80
0
75
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Real Consumption Growth
Consumer Sentiment
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Monetary Policy Has Stabilized Home-Building
(Housing starts, millions of units)
2.4
2.0
1.6
1.2
0.8
0.4
0.0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Single-Family
Multi-Family
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An Uneven Recovery in Business Investment
40
(Percent change, 1996 dollars)
30
20
10
0
-10
-20
Structures
Computers
2001
2002
Software
2003
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Communic.
Equipment
2004
Other
Equipment
2005
15
Real U.S. Exports and Imports Reflect the
Business Cycle and Exchange Rates
16
(Year-over-year percent change)
12
8
4
0
-4
-8
-12
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Real Exports
Real Imports
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The Widening U.S. Current Account Deficit
200
(Billions of dollars)
(Percent of GDP)
2
0
0
-200
-2
-400
-4
-600
-6
-800
-8
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Current Account Deficit
Deficit as % of GDP
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The U.S. Dollar Is Still Overvalued
1.5
(Real Trade-Weighted Dollar Index, 1996=1.0)
1.4
1.3
1.2
1.1
1.0
0.9
0.8
1976
1980
1984
1988
1992
Industrial Countries
1996
2000
2004
Developing Countries
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Canada’s Economy Depends on U.S. Trade
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Consumer spending, home-building, and public
investment are leading Canada’s expansion.
Exports have declined in 2003, however, in response to
currency appreciation, Toronto’s outbreak of SARS, and
beef and lumber trade restrictions.
The Canadian dollar has appreciated in response to a
trade surplus and attractive interest rates spreads. Yet,
it remains below its PPP value of 81 U.S. cents.
Favorable financing terms and pent-up demand have
lifted home-building to unsustainable rates. Housing
starts will fall in 2004 and 2005.
Energy and infrastructure projects will support growth in
nonresidential construction.
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Canada’s Real GDP Growth Begins to Lag
(Percent change, 1997 dollars)
6
5
4
3
2
1
0
-1
-2
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Canada
United States
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Mexico: Stability Under NAFTA
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Mexico has achieved remarkable macroeconomic stability
under NAFTA. Cautious monetary policies have lowered
inflation to from 35% in the mid-1990s to 4% today.
Mexico’s sluggish recovery is led by consumer spending
and government-funded construction. Manufacturing
remains weak, awaiting a rebound in exports.
Capital inflows and an overvalued peso have hurt
competitiveness against emerging markets, notably China.
President Fox’s reforms are stalled by Congressional
opposition, discouraging needed private investments.
Construction of subsidized housing and infrastructure
(water, power transmission, roads) remain priorities.
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Mexico’s Real GDP Growth Disappoints
8
(Percent change, real GDP)
6
4
2
0
-2
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Mexico
United States
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South America Recovers But Risks Are High
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Argentina’s economy is turning around as exports respond to
a 65% peso depreciation. But full recovery will take a decade
and risks remain high under another Peronist government.
Brazil faces conflicting challenges—revive growth, subdue
inflation, meet debt payments, and improve social conditions.
High interest rates are undermining the domestic economy.
In Venezuela, recovery from a deep recession will not arrive
until President Chavez leaves office, perhaps in 2004.
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Chile’s economy will accelerate sharply in 2004 as a free trade
agreement with the U.S. takes effect and exports strengthen.
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Peru’s strong economic growth is threatened by social unrest.
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Real GDP Growth in South America
6
(Percent change)
3
0
-3
-6
-9
-12
Brazil
Argentina
2001
Venezuela
2002
2003
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Colombia
2004
Chile
2005
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A Delayed Upturn in Western Europe
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Europe’s recovery is lagging. Unemployment is near 9% and
confidence remains depressed. A strong euro, uncompetitive
labor costs, and cautious policies have undermined growth.
Once inflation falls below 2%, the European Central Bank is
expected cut its key rate from 2.0% to 1.5% by early 2004.
Tax cuts will provide additional stimuli under a more flexible
application of the Stability and Growth Pact.
An aging population, inflexible labor markets, costly pension
systems, and anti-immigrant sentiments will limit long-term
economic growth to 2.0-2.5%.
Enlargement of the European Union will divert investment to
accession countries, but could become an impetus to reforms.
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Eurozone Confidence Remains Weak
(Balance of respondents giving positive and negative replies)
10
5
0
-5
-10
-15
-20
-25
1995 1996 1997 1998 1999 2000 2001 2002 2003
Consumer
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Business
26
Real GDP Growth Rates in European Countries
(Percent change)
4
3
2
1
0
France
Germany
2001
Italy
2002
2003
Spain
2004
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U.K.
2005
27
Slow Progress in Japan
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The economy’s acceleration in 2003 reflects broad gains in real
exports, consumer spending, and business investment.
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Japan’s economy suffers from several long-term problems:
asset deflation, bad bank loans, rising government debt,
ineffective monetary policies, and structural inefficiencies.
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A more expansionary monetary policy has emerged, easing the
pain of restructuring in the banking and industrial sectors.
The Bank of Japan will intervene in currency markets to keep
the yen from appreciating beyond 110 per dollar.
Deflation is expected to end in 2005.
Japan’s long-term real GDP growth trend is only 1.8%; the
country’s population will peak in 2007.
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Japan’s Economy Has Limited Growth Potential
(Percent change, real GDP)
7
6
5
4
3
2
1
0
-1
1987
1990
1993
1996
1999
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2002
2005
2008
29
Other Asia/Pacific: A Bright Spot
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Asia’s rapid growth is led by a boom in exports and high-tech
industries. Monetary and fiscal policies are accommodating.
The SARS outbreak briefly curtailed travel and retail trade,
with Hong Kong, Singapore, Taiwan, and China most affected.
In South Korea, consumer spending and home-building have
retrenched after the borrowing binge of recent years.
China’s strong expansion is driven by foreign direct
investment, exports, and public infrastructure spending.
WTO accession is forcing China to reform its inefficient state
enterprises and banking system, raising unemployment.
China, Hong Kong, and Malaysia will benefit from dollar’s
depreciation. By 2006, China will be forced to revalue.
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Real GDP Growth in Asian/Pacific Economies
(Percent change)
8
6
4
2
0
-2
-4
China
South Korea
2001
2002
India
2003
Australia
2004
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Taiwan
2005
31
South Korea’s Real Economic Growth by Sector
(Percent change)
2001
2002
2003
2004
2005
Real GDP
3.2
6.3
2.8
6.1
6.3
Private Consumption
4.7
6.8
-1.3
5.8
6.8
Government Consumption
1.2
3.0
5.0
2.3
0.9
-2.1
4.9
5.0
7.6
7.8
Exports
0.6
14.8
9.0
5.6
4.4
Imports
-3.1
16.4
8.1
9.6
6.0
Total Fixed Investment
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Real GDP Growth in Other Asian Economies
(Percent change)
6
4
2
0
-2
-4
Hong Kong
Indonesia
2001
Singapore
2002
2003
Malaysia
2004
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Philippines
2005
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The Rise of China
1980
2002
302
1,237
Real GDP (% of U.S. level)
3.5%
13.5%
Avg. Real GDP Growth in Previous 10 Years
5.4%
9.3%
Population (millions)
981
1,285
Per Capita GDP ($)
307
963
Trade’s Share in GDP
15%
55%
1
35
Agriculture’s Share in GDP
30%
15%
Urbanization
20%
32%
Nominal GDP ($ billions)
Current Account Surplus ($ billions)
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Greater China’s Expanding Role in World Trade
(Percent share of world manufacturing exports)
14
12
10
8
6
4
2
0
1980
1990
China*
1995
Hong Kong*
Taiwan*
2000
2005
Intra-Regional
* Export totals from China, Hong Kong and Taiwan exclude trade with each other.
Source: Global Insight World Industry Service
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Other Emerging Markets Are Growing
(Percent change, real GDP)
7
6
5
4
3
2
1
0
Eastern Europe
Former Soviet
Union
2001
2002
Middle East
2003
2004
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Africa
2005
36
Emerging Europe Is Attracting Investment
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Despite weak export markets, economic growth is picking up
in Central Europe, Russia, and the Ukraine.
Eastern European countries are attracting foreign investment
in anticipation of accession to the European Union.
Falling trade barriers, low costs, and privatization will spark
industrial development in Romania, Bulgaria, and Croatia.
Azerbaijan, Kazakhstan, and Turkmenistan will achieve high
growth rates as a result of oil and gas development.
Russia, the Ukraine, and Kazakhstan are introducing market
reforms, but corruption and weak financial systems will
impede non-energy investment.
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Middle East and Africa Face Several Obstacles
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The Iraq war, the Israeli-Arab conflict, and fears of terrorism
have undermined tourism and investment.
Near-term strength in oil export revenues will support public
spending in the Middle East and North Africa.
Iraq’s long-term economic outlook is bright but risky; the
country is rich in natural resources.
 Oil production—potential to reach 5 mmbd
 Agriculture—fertile land, water from Tigris & Euphrates
 Tourism—Shiite holy cities of Najaf and Karbala
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Capital flight, the AIDS epidemic, and political instability
hinder growth in Sub-Saharan Africa.
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A Unique Global Business Cycle
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The past recession was triggered by an investment bubble
that led to excess capacity and reduced returns on capital.
The manufacturing recession was deep and global.
Deflation became a greater concern than inflation.
Expansionary fiscal and monetary policies cushioned the
downturn. Consumers kept spending and housing markets
boomed.
A succession of shocks impeded recovery—terrorist
attacks, corporate governance scandals, the Iraq war, SARS.
Investment will recover as excess capacity is cleared and
profitability improves. This process will lead to sustainable
economic growth in 2004 and beyond.
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