Transcript NFPA Presentation

The Economic and Financial Outlook:
Surviving Imbalances
David Wyss
Chief Economist
212-438-4952
[email protected]
World Bank
Washington
April 26, 2005
The Recovery Is Finally
Accelerating
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•
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•
•
•
•
•
•
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After two years of sluggish expansion
Jobs are finally materializing
Up to now, the recovery has run on two legs – consumer and
government spending
Now equipment spending is rising
And nonresidential construction is starting to recover
Higher interest rates will slow housing and consumer spending
Tax cuts are over, and the saving rate is already low
Federal deficits will come down slowly
But higher oil prices could stall the expansion
And world economic stagnation continues to widen the trade gap
2
Inflation Remains Mild
(Percent change in CPI)
3
2
1
0
-1
US
Canada
Japan
France
3
Germ.
Italy
UK
Unemployment Rates Are High
(Percentage of labor force, 2003)
10
8
6
4
2
0
US
Canada
Japan
France
Unemployment rate
4
Germ.
Italy
UK
Long-term (26-week)
The Fed Is Moving Toward Neutral
(Percent)
8
6
4
2
0
1993
1995
1997
1999
2001
Federal Funds Rate
2003
2005
2007
10-Year Treasury Bond Yield
5
Second-Term Policies
• Emphasis in second term will shift to controlling deficit
– The current deficit is manageable (3% of GDP)
– But few prospects for controlling it
• Creating an “Ownership Society”
• Social security reform is getting most attention
– We have promised more than we have money to pay
– Benefit cuts or tax increases
– Partial privatization will be main Administration proposal
• Tax reform rather than tax cuts
– Changes should be revenue neutral
– More consumption-based taxation
– Encourage saving
• Cut deficit in half by fiscal 2008
– Requires tough control of government spending
– Could be derailed by international events
7
The Future Looks Bleak
(Government debt as % of GDP)
400
718
350
287
300
239
250
200
221
160
150
150
100
235
108
101
65
42
50
66
66
68
98
0
US
Japan
UK
2005
2025
8
France
Germany
2050
Where the Money Goes
(Federal spending, percent of GDP, CBO estimates)
35
30
Interest
25
Other
20
Defense
15
Health care
10
Social security
5
0
2004
2050
2025
9
The Trade Gap Yawns Wider
(Percent of GDP)
16%
14%
12%
10%
8%
1993
1995
1997
1999
2001
Exports
2003
2005
2007
Imports
10
Taking the Dollar Down
(Real trade-weighted dollar)
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
1993
1995
1997
1999
2001
Industrial
2003
2005
2007
Developing
11
World Growth Is Slowing
(Real GDP, % change)
8
6
4
2
0
-2
US
2002
Europe
Japan
2003
2004
12
Other
Asia
2005
Latin
America
2006
US Deficit Balances Other Surpluses
(Trade balance as percent of GDP, 2004)
6
4
2
Japan
2.8
0
-2
-4
-6
-8
US
Canada
Eurozone
13
UK
Japan
Asia ex
Japan
US Borrows From Abroad to Offset
Weak Savings
(Percent of GDP)
22%
20%
18%
16%
14%
12%
10%
1970
1975
1980
Gross saving
1985
1990
1995
Private saving
14
2000
2005
Private investment
European Investment Lags US and UK
15
European Productivity Growth Trails
(Output per hour, percent change)
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
1992
1994
1996
Eurozone
1998
UK
16
2000
2002
Japan
2004
US
Average
Bottom Line: The Economy
Recovers, But Slowly
• Consumers are spending near max
• Businesses will not take over the lead yet
• But strong stimulus from fiscal policy
• Interest rates rise gradually next year
• Housing prices and starts slow
• Weak recovery for stock market
• Risk of recession remains if:
– Further terror attacks damage confidence
– War disrupts oil supplies
– World deflation sucks the US into slower growth
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Risks to the Economy
(Real GDP, percent change year ago)
6%
4%
2%
0%
-2%
2000
2001
Baseline
2002
2003
2004
Recession
2005
2006
Optimism
18
2007
2008
Stagnation
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