Transcript Robert F. Wescott

Robert F. Wescott, Ph.D.
Global Economic Growth Prospects: 2007 and Beyond
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:
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 Growing 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%
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%,


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

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%)
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
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
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1
19
98
.Q
1
19
96
.Q
1
19
94
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1
19
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.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
$343.4 billion
100%
$343.4 billion
Housing
Wealth
$4,285.9 billion
7%
$300.0 billion
100%
$1,219.0 billion
Cash Out From
$1.219.0 billion
Refinancing
Total housing contribution to GDP growth:
$1,862.4 billion
Total U.S. GDP growth:
$2,918.3 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
75
U.S. Housing Slowdown Has Already
Started
NAHB/Wells Fargo Housing Market Index, 2002-2006
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 Observations About the Changing
Global Economy

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



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
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
“Asian Tiger” Five Phase
Growth Cycle
Average Per Capita Income Growth %
PreTakeoff
Maximum
Consolidatio Slow-down
Takeoff (5 (10 yrs)
burst (10
n (10 yrs)
(10 yrs)
yrs)
yrs)
Japan
1945-49
2.0%
195059
6.5%
1960-69
9.4%
1970-79
3.9%
1980-89
3.1%
Taiwan
1955-59
2.5%
196069
6.4%
1970-79
8.1%
1980-89
6.6%
1990-99
4.5%
Korea
1970-74
6.3%
197584
5.8%
1985-94
7.2%
1995-2003
4.5%
----
Thailan
d
1970-74
3.6%
197584
4.5%
1985-94
7.4%
1995-2003
1.7%
----
China
1975-79
1980-
1990-99
2000-
----
China: Fitting the “Asian
Tiger” Growth Profile
Average Annual Growth in Per Capita Income
10
Pre-Take-Off
Take-Off
Maximum Burst
Consolidation
8.6
9
7.9
Asian Tiger
Average
8
8
6.7
7
percentage
Slowdown
China
5.8
6
5.0?
5
4
4.1
3.6
4.2
3.8
3
2
1
0
Note: Asian Tigers = Average of Japan, Taiw an, Korea and Thailand. Data adjusted for differences in cost of living
and exchange rates.
2. The consumer landscape will
expand significantly

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
$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
Registrati
on
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
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
$15,000
$12,400
$12,000
$9,000
$6,000
China
(1997)
Korea
(1973)
India
(2002) $4,900
$3,400
$3,000
China
(2002)
Korea
(1981)
0
Mexico
(2000)
Korea
(1995)
Japan
(1971)
$9,100
$6,700
Korea
(1991)
Taiwan
(1987)
Thailand
(1996)
Korea
(2002)
Taiwan
(2001)
Japan
(1976)
Korea
(1991)
Taiwan
(1987)
Thailand
(1996)
1
0.01
0.02
0.05
0.1
Vehicle Registration per Capita
0.2
0.3
3. Demand for natural
resources will grow; put strain
on the environment
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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
Steel Production, Millions of tons
U.S., 1860-1913
Japan, 1950-1974
40
35
36% of
30
world (1900)
25
20
<10% of
15
world (1843)
10
5
0
1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910
140
120
100
80
19% of
world (1974)
<5% of
world (1950)
60
40
20
0
1950
1956
China, 1980-2005
350
300
250
200
150
100
50
0
29% of
world (2005)
<4% of
world (1980)
1980
1986
1992
1998
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
2004
1962
1968
1974
World CO2 Emissions Are Rising
and Asia is the Biggest Polluter
World Carbon Dioxide Emissions by Region
30,000
million metric tons
25,000
Asia
20,000
15,000
Africa
Middle East
CIS/E. Europe
10,000
Western Europe
Latin America
5,000
North America
Source: Energy Information Agency, U.S. Department of Energy
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
4. For Goods that China Buys…
1.6
China’s Share of World Imports of Metal Ores & Concentrates
Copper
Iron
Aluminium
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
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
155
145
135
125
115
105
95
1991
1993
Source: United States Geological Survey
1995
1997
1999
2001
2003
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
45
40
U.S. Core CPI, Index 1990 = 100
35
30
25
20
U.S. Import Nonenergy Import Price
Index 1990 = 100
15
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
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
0.9
Polish Zloty, real
effective exchange
rate, 1995 = 0
0.7
0.5
0.3
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.
0.1
-0.1
-0.3
1989
Source: IMF
1991
1993
1995
1997
1999
2001
2003
2005
7. Together We Rise, Together We Fall!
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
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