Transcript Singapore, Hong Kong Talks

Possible Tripwires for the Global
Economy: 2005-06
Robert F. Wescott, Ph.D.
ISEO Conference
Bergamo
4 July 2005
Energy, Deficits, and Dollar Worry
Financial Markets
Factors “Hurting” Investment Climate “A Lot”
80%
70%
60%
50%
40%
Energy Prices
Outsourcing
Budget
Deficits
Bad
Accounting Illegal
Immigration
Iraq
Falling
Dollar
Threat of
Terrorism
30%
20%
10%
0%
Source: UBS Index of Investor Optimism, May 2005
Possible Global Tripwires







Removal of policy support: greater than realized?
Oil prices: more slowing than expected?
Can U.S. consumers keep driving the world economy?
Widening shift from labor to capital in industrial
countries hurting growth?
Fracturing of international relations: Is Osama bin
Laden winning?
Shoehorning China into the world economy and
China’s international relations
George W. Bush: leadership challenges?
2005: Economic Policy Floodgates
Closing
2
US
2000-2004
2004-2005
1
Italy
Change in structural fiscal balance as a % of GDP
-5
-4
Easier Fiscal Policy
-3
-2
Tighter Monetary Policy
-1
UK
Japan
Euro
Area
0
China
France
Germany
Japan
0
Canada
-1
1
2
Tighter Fiscal Policy
Canada
Italy
UK
US
Germany
France
-2
Euro Area
-3
China
-4
% change in real six month LIBOR
Easier Monetary Policy
-5
Source: IMF WEO, Author’s calculations for China
Oil: A Growing Burden on
the World Economy
World Oil Expenditure as Percent of World GDP
8.0%
Global Recession
Trigger Level?
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
7
19
0
7
19
2
7
19
4
7
19
6
7
19
8
8
19
0
8
19
2
8
19
4
8
19
6
8
19
8
9
19
0
9
19
2
9
19
4
9
19
6
9
19
8
0
20
0
0
20
Source: EIA
2
0
20
4
$20 per Barrel Higher Oil Prices Will Lower
Economic Growth, Boost Inflation, and
Raise the Unemployment Rate
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
Real GDP
Growth
CPI Inflation
1st Year
Core CPI
Inflation
Unemployment
Rate
2nd Year
Source: Average of model results from Macroeconomic Advisers, Global Insight, and the International Monetary Fund
Out of Control?
The U.S. Trade Deficit
200
Japan
France
Germany
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
19
19
-100
82
0
80
Billions of US dollars
100
Italy
-200
-300
-400
-500
United States
-600
-700
Source: BEA, OECD
First Main Cause: American
Households Save Almost Nothing
Household Savings Rates
16.0
14.0
Germany
France
12.0
10.0
8.0
6.0
4.0
United States
2.0
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
19
87
0.0
Source: OECD
Second Main Cause:
U.S. Budget Deficits
U.S. Government Budget Deficit as a Percentage of GDP
3
2
1
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
0
-1
-2
-3
-4
-5
-6
-7
Source: BEA
Foreign Official Purchases of U.S. Debt
Have Declined for More than a Year
Net Foreign Purchases of U.S. Treasury Bonds and Notes
(6 mo. MA)
30,000
20,000
Foreign Private
15,000
10,000
5,000
0
Foreign Official
19
95
19 -0 1
95
19 -0 6
95
19 -1 1
96
19 0 4
96
19 -0 9
97
19 -0 2
97
19 -0 7
97
19 1 2
98
19 -0 5
98
19 -1 0
99
19 -0 3
99
20 0 8
00
20 -0 1
00
20 -0 6
00
20 -1 1
01
20 -0 4
01
20 0 9
02
20 -0 2
02
20 -0 7
02
20 -1 2
03
20 0 5
03
20 -1 0
04
20 -0 3
04
20 -0 8
05
-0
1
millions of dollars
25,000
-5,000
-10,000
Source: U.S. Treasury Department
U.S. Debt, Total and Total
Held by Private Sector
4,500,000
Total US Debt Held by
Public
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
Total US Debt Held by
Private Sector*
1,500,000
1,000,000
1985
Mar.
1986
Mar.
1987
Mar.
1988
Mar.
1989
Mar
1990
Mar
1991 1992
Mar
Mar
1993
Mar
1994
Mar
1995
Mar.
1996
Mar.
1997
Mar.
1998 1999
Mar. Mar
2000
Mar
2001
Mar
2002
Mar
2003
Mar
2004
Mar
Source: U.S. Treasury, Federal Reserve
Despite Strong U.S. Investment, 20-Year
Trend for Large Economies is Down
Average Investment Share of GDP
26
24
23
22
21
20
19
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
19
84
18
19
Percent of GDP
25
Source: IMF WEO
Historically, Rising Interest Rates
Add Financial Pressures
Monthly Fed Funds Rate
20
Continental
Illinois Bank
18
16
14
12
10
8
S&L Crisis
Franklin
National
Bank
Latin
American
Crisis
High Tech Bubble
???
6
4
2
0
Penn Central Railroad
Black
Monday
Mexican
Crisis
67 -69 -71 -73 -75 -77 -79 -81 -83 -85 -87 -89 -91 -93 -95 -97 -99 -01 -03 -05
n an an an an an an an an an an
n an an an an an an an an
Ja
J
J
J
J
J
J
J
J
J
J
Ja
J
J
J
J
J
J
J
J
Source: Federal Reserve
Financial Sectors to Watch Closely in
2005-06 as Interest Rates Rise
U.S. Housing
Sub-prime
Loans
Chinese Banking
Corporate
Governance Risks
AIG
Airlines
Autos
Falling U.S. Real Wages for
the First Time in a Decade
Real Avg Hourly Earnings, % Chg. YA
6%
4%
2%
19
71
19
72
19
73
19
75
19
76
19
78
19
79
19
80
19
82
19
83
19
85
19
86
19
88
19
89
19
90
19
92
19
93
19
95
19
96
19
97
19
99
20
00
20
02
20
03
20
05
0%
-2%
-4%
-6%
-8%
Source: Bureau of Labor Statistics
Profit Share Has Jumped
under President Bush
Profits as a share of GDP
20.0%
19.0%
Clinton raises
minimum wage
18.0%
GW Bush
inaugurated
17.0%
16.0%
15.0%
14.0%
13.0%
12.0%
11.0%
Reagan fires air
traffic controllers
19
70
-I
19
72
-I
19
74
-I
19
76
-I
19
78
-I
19
80
-I
19
82
-I
19
84
-I
19
86
-I
19
88
-I
19
90
-I
19
92
-I
19
94
-I
19
96
-I
19
98
-I
20
00
-I
20
02
-I
20
04
-I
10.0%
Source: BEA
The Bush Legacy: Consumer
Patterns Tilting Toward the Rich
How Spending Has Changed by Quintile in the Bush Administration
Bottom
2nd
3rd
4th
Top
Quintile Quintile Quintile Quintile Quintile
19972000
20002003
Recreation,
cultural events
+28.6%
+29.5%
-1.5%
-0.7%
+11.0%
Boats, recreational +85.5%
vehicles
-10.3%
+49.4%
+13.0%
-32.5%
Air travel, public
transportation
+35.9%
+25.3%
+22.9%
+9.5%
+5.3%
Recreation,
cultural events
-33.8%
-25.2%
-2.4%
+4.8%
-0.7%
Boats, recreational
vehicles
-55.8%
+14.6%
+16.2%
-2.3%
+49.6%
Air travel, public
transportation
-27.4%
-7.1%
-25.0%
-1.4%
-3.9%
Source: BLS, Consumer Expenditure Survey 2003
Returns to Capital Continue to
Increase Faster than Wages
Percent change 2004 Q1 to 2005 Q1
12%
10%
8%
6%
4%
2%
0%
Average Hourly
Earnings, NonSupervisory Workers
All Income
Dividends
Entrepreneurial Income
Source: BEA and BLS
Income Inequality Affecting
Consumer Spending?
Same-store Sales, April 2005 vs. April 2004
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Wal-Mart
Target
JC Penney's
Nordstrom
Neiman
Marcus
Abercrombie
& Fitch
American
Eagle
Source: International Council of Shopping Centers-UBS
Germany: A Decade without
Wage Growth
German Real Wage Growth
6%
5%
4%
3%
2%
1%
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
0%
-1%
-2%
Source: OECD, IMF WEO
German Wage Share Falling:
A Shift from Labor to Capital
German Wage Share of GDP
Down 5% points since re-unification
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
60%
59%
58%
57%
56%
55%
54%
53%
52%
51%
50%
Source: OECD
A Fracturing of International
Relations?
(Percent reporting favorable view of the United States)
Pre-9/11
(2000)
UK
83
After Fall
of Saddam
(2003)
70
Today
(2005)
France
62
43
43
Germany
78
45
41
Russia
37
36
52
Turkey
52
15
23
55
Source: Pew Research Center for the People and the Press, June 2005
Do You Support the U.S.-Led
War on Terror?
(Percent responding “yes”)
80
70
60
50
40
30
20
10
0
U.S.
U.K.
France
Germany
Canada
Spain
Pakistan
Turkey
Should Western Europe be more
independent from the U.S.?
(Percent saying “yes”)
80
70
60
50
40
30
20
10
0
U.S.
Spain
U.K.
Netherlands
Germany
France
Big
differences
between
U.S. and
most other
countries
Source: Pew Research Center
for Public and Press, June 22,
2005
China’s Trend Has Been Sharply Upward
(Share of world economy, PPP basis)
25
21.6
U.S.
21.9
20.9
percentage
20
15
China
13.2
10.6
10
8.4
7.5
Japan
8.3
5
5.3
Germany
6.9
4.9
4.3
2.9
3.5
3.3
Italy
0
1994
1999
2004
Source: IMF WEO
China’s Exports Are Increasing
as a Share of World Trade
1990
2003
5.2%
1.6%
12.4%
10.9%
6.9%
53.0%
5.2%
56.3%
Others
11.1%
9.3%
Others
4.8%
5.6%
5.9%
7.7%
1.7%
2.4%
Source: World Bank, World Development Indicators 2005
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
2004
Source: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund
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
60
40
20
19% of
world (1974)
<5% of
world (1950)
0
1950
1956
1962
1968
1974
China, 1980-2005
350
300
250
200
150
100
50
0
29% of
world (2005)
<4% of
world (1980)
1980
1986
1992
1998
2004
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
-2
7/ 2/ 0
19
1
-2
2
10 /01
/5
-6
/
1/ 01
7
3/ -9/0
22
-2 2
4/
6/ 02
3
7/ -6/0
29
-3 2
1
10 /02
/3
12 -6/0
/9
2
1/ -10
31
/0
-2 2
3/ /2/
24 03
5/ -25
30
/0
-6 3
8/ /1/
25 03
11 -26
/1 /03
416
/
2/ 03
68/
5/ 04
7/ 2- 4
30
/0
-8 4
10 / 1
/1 /0
1- 4
14
/
1/ 04
3
3/ -5/0
18
-2 5
5/ 0/ 0
23
5
-2
6/
05
4/
20
George Bush’s Political Capital
President Bush's Job Approval Rating
100
90
80
70
60
September 11
Attacks
Invasion of
Iraq
Capture of
Saddam
Hussein
Re-election
and
Inauguration
50
40
Source: Gallup
Among Presidents Early in Their
Second Terms, Bush is Quite
Unpopular
President
Positive
Negative Differential
Date
Johnson
66%
21%
+45%
24-29 June 1965
Eisenhower
64%
22%
+42%
6-11 June 1957
Truman
57%
26%
+31%
11-14 June 1949
Reagan
58%
32%
+26%
7-10 June 1985
Clinton
55%
35%
+20%
26-29 June 1997
Nixon
44%
45%
-1%
22-25 June 1973
GW Bush
47%
51%
-4%
16-19 June 2005
Source: Gallup Presidential Approval Ratings
Are U.S. Casualties in Iraq
Worth It?
Source: Washington Post, June 8, 2005
Americans Feel the Country is
“Losing Ground” on Most Issues
Losing Ground
Making Progress
Budget deficit
65%
6%
Social Security’s finances
63%
6%
Health care system
62%
9%
Medicare’s finances
56%
5%
Job availability
55%
15%
Illegal immigration
52%
11%
Quality of education
50%
20%
Illegal drugs
46%
16%
Political corruption
41%
10%
Environmental pollution
37%
21%
International Terrorism
31%
36%
Source: Pew Research Center, May 19, 2005