Transcript Global Economic and Financial Prospects: 2006 and Beyond

Global Economic and
Financial Prospects and
Risks: 2006
Robert F. Wescott, Ph.D.
Rome
5 December 2005
6 Forces Shaping World Economy in 2006
1.
2.
3.
4.
5.
6.
Reversal of policy stimulus: negative
Still high energy prices: negative
Faster global productivity: positive
Tax/business policies: mixed
Trade openness: neutral
Demographics: mixed
Economic Policy Floodgates Closing
2
US
2000-2004
Italy
2004-2005
Change in structural fiscal balance as a % of GDP
-5
-4
-3
-2
Tighter Monetary Policy
-1
Easier Fiscal Policy
UK
China
France
1
Euro
Area0
Japan
Germany
Japan
0
1
Canada
2
Tighter Fiscal Policy
-1
Canada
Italy
Germany
France
UK
-2
Euro Area
-3
China
US
-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%
7.0%
6.0%
Global Recession
Trigger Level?
5.0%
4.0%
3.0%
2.0%
1.0%
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
0.0%
Source: EIA, IMF WEO
6 Forces Shaping World Economy in 2006
1.
2.
3.
4.
5.
6.
Reversal of policy stimulus: negative
Still high energy prices: negative
Faster global productivity: positive
Tax/business policies: mixed
Trade openness: neutral
Demographics: mixed
Perceived Global Investment Risks
60
1998
2005
40
Percent rating the region “low risk”
20
minus percent rating it “high risk”
0
-20
-40
-60
-80
Canada United
States
Japan Western China
Europe
Source: UBS Index of Investor Optimism, August 2005
Eastern
Europe
Other
Latin Russia
Asia America
Africa
Middle
East
The dollar-euro in 2006
Shaped by long-run, medium-run, and
short-run factors
Long run: competitiveness, productivity
(good for $)
Medium run: current account
imbalances (very bad for $)
Short run: interest rate differentials,
growth differentials (shifting to euro)
Risks to Ponder
U.S. soft patch?
Energy prices lead to negative industry effects?
Housing bubble bursts?
Wrong policies in Europe?
Interest rates
Loss of jobs to China
Disequilibrium proves unsustainable?
Hypothesis: U.S. consumes, China produces
Weakened President Bush?
The Oil Price Pass-Through to Inflation
is Falling
Percent change in CPI and core CPI divided by percent change in
RAC of oil (during periods of 30%+ increases in oil prices)
0.1
0.09
0.08
CPI
Core
CPI
Core
CPI CPI
0.07
CPI
CPI
0.06
0.05
Core
CPI
Core
CPI
0.04
0.03
0.02
0.01
0
1970s
1980s
Source: Bureau of Labor Statistics and Energy Information Agency
1990s
2000s
Why Isn’t the Dow at 12,800?
(Because of Energy Prices)
Change in DJIA when Corporate Profits are up 30% or More (Y/Y)
40
36.0
36.0
31.1
27.7
30
21.9
Average:
21.5%
20
10
6.1
0.8
0
-3.3
-10
-20
1950s-1990s
Source: Bureau of Economic Analysis, Yahoo! Finance
Average:
-4.5%
-15.1
2000s
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
-75
Source: The Economist
0
75
150
225
300
Are Rising Interest Rates Killing the
U.S. Refinancing Boom?
10-Year U.S. Treasury Yield and Mortgage Refinancing Index
6000
10-year treasury yield
10-year treasury yield (left)
4.6
5000
4.2
4000
3.8
3000
3.4
2000
Mortgage Refinancing Index (right)
1/
2/
2/ 200
6
3/ /20 4
12 0
4/ /20 4
16 0
5/ /20 4
21 0
6/ /20 4
25 0
7/ /20 4
30 0
/ 4
9/ 200
3
10 /20 4
11 /8/2 04
/1 0
12 2/2 04
/1 00
7
1/ /20 4
21 0
2/ /20 4
25 0
/ 5
4/ 200
1/ 5
5/ 200
6
6/ /20 5
10 0
7/ /20 5
15 0
8/ /20 5
19 0
9/ /20 5
10 23/ 05
/2 20
8 0
12 /20 5
/2 05
/2
00
5
3
Sources: Federal Reserve, Mortgage Bankers Association
1000
Mortgage Refinancing Index
5
Greenspan’s Medicine Would Help Europe
(Real short-term interest rates)
Fed funds / ECB policy rate deflated by “core” CPI inflation
7
6
5
EU real
interest rate
4
3
2
US real
interest rate
1
I1
99
0
I1
99
I1 1
99
2
I1
99
3
I1
99
4
I1
99
I1 5
99
6
I1
99
7
I1
99
8
I1
99
I2 9
00
0
I2
00
1
I2
00
2
I2
00
I2 3
00
4
I2
00
5
0
-1
-2
Sources: Federal Reserve, Bureau of Labor Statistics, European Central Bank, European Commission
China’s Trend Has Been Sharply Upward
Share of World Economy, PPP Basis
30
20
15
10
5
Source: IMF WEO
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
19
percentage
25
High Tech Manufactures: Asia Rising,
Europe Declining
Share of World Production of High-Tech Goods
35%
30%
1980
1990
2001
25%
20%
15%
10%
5%
0%
US
Germany
France
U.K.
Italy
Japan
Source: National Science Foundation, “Science and Engineering Indicators 2004”
China
South
Korea
India
Percentage of 18-24 Year Olds in
Science and Engineering Programs
Source: National Science Foundation, Science and Engineering Indicators 2002
in
a
Ch
Ita
ly
.S
.
U
y
er
m
an
G
n
Ja
pa
e
Fr
an
c
or
ea
S.
K
U
.K
.
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Can Disequilibrium Continue? (China
produces, the U.S. consumes?)
Current Account Balance (percent of GDP)
8
6
4
2
-4
-6
-8
Source: IMF WEO
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
-2
19
82
19
80
0
Historically, Rising Interest Rates Add
Financial Pressures
Monthly Fed Funds Rate
20
Continental
Illinois Bank
18
16
14
12
Franklin
National
Bank
10
8
S&L Crisis
High Tech Bubble
Latin
American
Crisis
???
6
4
2
0
Penn Central Railroad
Black
Monday
Mexican
Crisis
6 7 -6 9 -7 1 -7 3 -7 5 -7 7 -7 9 -8 1 -8 3 -8 5 -8 7 -8 9 -9 1 -9 3 -9 5 -9 7 -9 9 -0 1 -0 3 -0 5
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja
Source: Federal Reserve
Bush’s Falling Political Capital
President Bush's Job Approval Rating
100
90
80
70
September 11
Attacks
Invasion of
Iraq
Capture of
Saddam
Hussein
Re-election and
Inauguration
60
50
40
30
3
3
4
2
2
4
4
5
1
2
1
1
2
2
2
3
3
5
5
3
4
05
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
0
2
1
1
9
6
8
4
5
6
6
2
2
4
1
0
5
6
0
6
6
4
/
/
/
/2
2
2
1
1
7
3
6
2
3
53-2
-2
-2
-3
-1
-2
-2
- 2 24- 6 25-8
411/
6/
2/
5/
1/
28
0/
0/
/9
/
20
19
22
29
18
23
1
1
1
0
0
1
1
/
/
/
/
2
/
/
/
/
/
/
3
3
3
4
7
3
7
1
3
8
3
5
11
11
10
1/
5/
7/
Source: Gallup