j.p.morgan chase s t r i c t l y p r i v a t e a n d c o n f i d e n t i a l mega trends in the...

J.P.Morgan Chase

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Mega Trends in the Global Mega Trends in the Global Economic SystemEconomic System

Prof. Jacob A. FrenkelProf. Jacob A. FrenkelChairman, JPMorgan Chase InternationalChairman, JPMorgan Chase International

Chairman of the Board of Trustees,Chairman of the Board of Trustees, Group of Thirty (G30)Group of Thirty (G30)

Hezeliya ConferenceHezeliya Conference

June 9, 2014June 9, 2014

6/5/20142

Global Economic TrendsGlobal Economic Trends

• Growth in the Global EconomyGrowth in the Global Economy

• International Trade International Trade

• Global Monetary Policies Global Monetary Policies

• The Euro-System: Turning the CornerThe Euro-System: Turning the Corner

• US and Euro Area Labor MarketsUS and Euro Area Labor Markets

• Long-Term Considerations:Long-Term Considerations:I. Demographic ChallengesI. Demographic ChallengesII. Fiscal ChallengesII. Fiscal Challenges

6/5/20143

• Global Growth ProjectionsGlobal Growth Projections

• The Rise of Developing CountriesThe Rise of Developing Countries

Economic GrowthEconomic Growth

4 J.P.Morgan Chase 6/5/2014

Global GDP GrowthGlobal GDP Growth

3.3

3.84.1

2.6

3.7

4.7

2.3

2.8

3.8

5.1

4.7

5.2 5.3

2.7

-0.4

5.2

3.9

3.23.0

3.63.9

#N/A

-1

0

1

2

3

4

5

6

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

(Percent change)

World Growth

Source: IMF, last update Apr 08 2014, WEO (2014 & 2015 Forecast)


Real GDP Growth, Select CountriesReal GDP Growth, Select Countries

-6

-4

-2

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(Annual % Change)

US, GDP Growth Euro Area, GDP Growth

Japan, GDP Growth China, GDP growth

India, GDP growth

China, 2015: 7.3%

Japan, 2015: 1.0%

Euro Area, 2015:2.0%

US, 2015: 2.9%

India, 2015: 6.4%

Source: IMF, last update Apr 8 2014, WEO (2014 & 2015 forecast); For US and Euro area, 2014 & 2015 are JPM forecast, last update May 30, 2014.


Global GDP SharesGlobal GDP Shares

United States

Japan, 5%EU-27

China

India, 6%

Latin America

Other Advanced Economies

Other Emerging Economies

2014 IMF Forecast

20%

18%

8%9%

14%

20%

United States

Japan

EU-27

China, 4%

India, 3%

Latin America Other

Advanced Economies

Other Emerging Economies

1990

25%

10%

28%

9%

12%

8%

Source: IMF, WEO Database, last update Apr 8 2014, WEO


Ease of Doing Business by RegionEase of Doing Business by Region

29.6

55.2

100.6

103.2

0 20 40 60 80 100 120

Developed Economies

Emerging Asia

Emerging Latin America

MENA

(2013, unweighted average across region, lower = easier to do business)

Source: World Bank, last update June 2013.

6/5/20148

• The Volume of World TradeThe Volume of World Trade

• China and the Trading SystemChina and the Trading System

• International ReservesInternational Reserves

Global Trade, Reserves and SavingsGlobal Trade, Reserves and Savings


World Trade VolumeWorld Trade Volume

4.5

6.7

8.98.0

7.0

4.8

5.9

3.1

9.610.1

7.1

10.1

4.95.5

11.9

0.1

4.0

5.9

10.9

7.6

9.3

7.9

2.8

-10.6

12.8

6.2

2.8 3.0

4.35.3

-12

-7

-2

3

8

13

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

(Percent change)

World trade volume

Source: IMF, av. Annual growth rates, last update Apr 08 2014, WEO (2014 & 2015 forecast).


ChinaChina’’s Role in Global Trade (bill. Usd)s Role in Global Trade (bill. Usd)

U.S.U.S.&&

EUEU

PeoplePeople’’ssRepublic ofRepublic of

ChinaChina

ExportsExports

ImportsImportsImportsImports

ExportsExports

AsiaAsia

$1,211

$1,171 $774

$419

Source: National Bureau of Statistics of China, 12-months through April 2014


European Union Exports by DestinationEuropean Union Exports by Destination

US, 56.6%

China, 5.2%

Asia ex China, 38.2%

2000

US, 40.9%

China, 21.3%


2014

Source: Customs General Administration, Last Observation: Mar 2014


U.S. Exports by DestinationU.S. Exports by Destination

EU, 43.3%

China, 22.5%


2014

EU, 48.1%

China, 7.6%


2000

Source: Eurostat, Last Observation: Feb 2014


Foreign Exchange Reserves (Bill. Usd)Foreign Exchange Reserves (Bill. Usd)

Source: Nat'l Statistical Institutes, Foreign-Exchange Reserves ex. Gold, Last Observation: April 2014; China (3/ 14)

$3,948

$1,217

$415 $422 $356

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

China Japan Russia Taiwan Korea

($B)

6/5/201414

• Global Policy RatesGlobal Policy Rates

• Central Bank Balance SheetsCentral Bank Balance Sheets

• Forward GuidanceForward Guidance

Global Monetary PoliciesGlobal Monetary Policies


Central Bank Policy Interest RateCentral Bank Policy Interest Rate

-1

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(%)

United Kingdom Japan Eurozone Canada United States

EUR

Canada

JapanUS

UK

Latest observation (%):6 Jun 2014

US 0.25UK 0.50Japan 0.10EUR 0.15Canada 1.00

Source: Bloomberg Market Data, Last observation: 6 Jun, 2014


Total Assets of Key Central Banks Total Assets of Key Central Banks (indexed levels)(indexed levels)

Source: Bloomberg; Last Observation: Fed: May 28, 2014; ECB: May 30, 2014; BoJ: May 31, 2014.

50

100

150

200

250

300

350

400

450

500

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14

(indexed, end of June 2007 = 100)

BoJ ECB Federal Reserve

Fed: 498

ECB: 182

BoJ: 254QE2

QE3

LTROs

LTROrepayments

PM Abe assumes office

Current Assets% of GDP

Fed 24.7% ECB 22.5% BoJ 51.6%

Current AssetsBillions of $

Total 9,814Of Which: Fed 4,323 ECB 2,996 BoJ 2,496


Composition of Federal Reserve AssetsComposition of Federal Reserve Assets

0

20

40

60

80

100

Jun 2007 Jun 2010 May 2014

(% of total assets)

Other

Treasuries

Treasuries

Treasuries

OtherOther

MBS

MBS

Agencies

Source: Federal Reserve, Bloomberg, Last Observation: May 28, 2014.


Composition of ECB Liquidity FacilitiesComposition of ECB Liquidity Facilities

0

20

40

60

80

100

Jun 2007 Mar 2012 May 2014

(% of total liquidity measures)

Long-termrefi

operations (LTROs), maturity btw 3mo and 36mo

Main refioperations, maturity of

1mo or less

Main refioperations

LTROsLTROs

Note: March 2012 follows two rounds of 36-month LTRO auctions that occurred December 21, 2011 and February 29, 2012.Source: ECB, Last Observation: May 30, 2014

6/5/201419

• GDP Growth: Gradual RecoveryGDP Growth: Gradual Recovery

• Structural Challenges:Structural Challenges:

-- Unemployment-- Unemployment

-- Productivity-- Productivity

• Declining Bond SpreadsDeclining Bond Spreads

The Euro-System: Turning the CornerThe Euro-System: Turning the Corner


Real GDP Growth, Euro area countriesReal GDP Growth, Euro area countries

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

2000 2002 2004 2006 2008 2010 2012 2014 2016

(Percent change)

Euro area

Germany

Italy

Spain

Greece

Italy, 2015: 1.5%

Germany, 2015: 2.3%

Spain, 2015: 2.0%

Euro area , 2015: 2.0%

Greece, 2015: 2.9%

2014 2015

1.2 2.02.3 2.30.3 1.51.2 2.00.6 2.9

GDP growth forecast

Source: IMF, last update Apr 8 2014, WEO (2014 & 2015 forecast); For Euro area, Germany, Italy, & Spain, JPM forecast, last update May 30, 2014.


Unemployment Rate: Euro Area CountriesUnemployment Rate: Euro Area Countries

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(% of Labor Force)

Germany Greece Euro areaSpain Italy

Spain: 25.1%

Italy: 12.6%

Greece: 27.4%

Euro area : 11.7%

Germany: 6.7%

Source: Eurostat, Last Observation: Germany (5/ 14); Italy, Spain, Euro area (4/ 14); Greece (3/ 14)


Relative Unit Labor Cost, Total EconomyRelative Unit Labor Cost, Total Economy

85

90

95

100

105

110

115

120

125

130

135

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(index, Q1 2001 = 100)

Greece Euro Area Germany

Italy Spain

Spain

Euro adoption

Italy

Euro Area

Germany

Greece

Source: OECD, Last observation: Q4 2013

Note: Relative unit labor cost is a weighted average of changes in unit labor costs (converted to USD terms) relative to trading partners, with weights derived from manufactured goods exports.

Last observation:Q4 2013

Euro Area 108.2Germany 91.6Italy 118.6Spain 102.3Greece 96.6


10yr Sovereign Bond Spreads10yr Sovereign Bond Spreads

Source: For 10yr yields, Reuters, Bloomberg, last update 05 Jun, 2014; for gross debt, IMF World Economic Outlook, last update 8 Oct 2013.

-50

0

50

100

150

200

250

300

350

400

450

500

550

600

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

(spread in basis points)

Italy 10yr sov spread to bunds Spain 10yr sov spread to bunds

Italy

Spain

Latest observation (bp)5 Jun 2014

Italy 153Spain 142

6/5/201424

• UnemploymentUnemployment

• Labor Force ParticipationLabor Force Participation

• Cyclical or Structural? Cyclical or Structural?

- the Role of Education- the Role of Education

- the Duration of Unemployment- the Duration of Unemployment

US and Euro Area Labor MarketsUS and Euro Area Labor Markets


Unemployment Rate: US and Euro AreaUnemployment Rate: US and Euro Area

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(%)

United States Euro area

United States: 6.3%

Euro area : 11.7%

Source: Eurostat and BLS; Last observation for Euro area April 2014, For US, May 2014


Labor Force Participation: US and Euro AreaLabor Force Participation: US and Euro Area

54

56

58

60

62

64

66

68

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(%)

United States Euro area

United States: 62.8%

Euro area : 57.0%

Source: Eurostat and BLS; Last observation for Euro area Q4 2013, For US, May 2014


US Unemployment: Actual and HypotheticalUS Unemployment: Actual and Hypothetical

3

4

5

6

7

8

9

10

11

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(%)

Actual Assuming 2006 participation rate (66.2%)

Alt: 11.0%

Actual: 6.3%

Source: Bureau of Labor Statistics, Last Observation: May 2014


U.S. Unemployment, by Level of EducationU.S. Unemployment, by Level of Education

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(Unemployment Rate in %)

No high school diplomaHigh school diplomaTotalSome collegeCollege degree or higher

No HS diploma: 9.1%

HS diploma: 6.5%

Total: 6.3%

Some college: 5.5%

College or higher: 3.2%



Euro Area Unemployment by Level of Euro Area Unemployment by Level of EducationEducation

4

6

8

10

12

14

16

18

20

22

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(%)

Tertiary: 7.4%

Upper secondary and post-secondary non-tertiary:

10.3%

Pre-primary, primary, and

lower secondary: 20.2%

Euro area total: 11.7%

Source: Eurostat, Last observation Q4 2013


U.S. Unemployment, by DurationU.S. Unemployment, by Duration

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(Share of total unemployed)

Less than 5wks

5 to 14wks

15 to 26wks

27 weeks or more

<5wks: 26.2%

5 to 14wks: 24.5%

15 to 26wks: 14.8%

27+wks: 34.6%



Euro Area Unemployment, by DurationEuro Area Unemployment, by Duration

Source: Eurostat, Last observation Q4 2013

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(%)

6 to 11 months1 to 5 months12 months or moreLess than 1 month

1 to 5 mo: 28.3%

<1 mo: 5.4%

12+ mo: 52.0%

6 to 11 mo:

14.1%

6/5/201432

• Demographic ChallengesDemographic Challenges

• Fiscal ChallengesFiscal Challenges

Long-Term ConsiderationsLong-Term Considerations


World Demographic ChallengeWorld Demographic Challenge

0

50

100

150

200

250

300

350

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age

Change in population, 2010-2030 (millions)

Source: UN Populations Division, last update 2010 Projected change in population 2010: 7001Mfrom 2010 - 2030: 1516M 2030: 8517M


Developing Countries Demographic Developing Countries Demographic ChallengeChallenge

0

50

100

150

200

250

300

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




Developed Countries Demographic Developed Countries Demographic ChallengeChallenge

- 30

- 20

- 10

0

10

20

30

40

50

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




U.S. Demographic ChallengeU.S. Demographic Challenge

- 2

0

2

4

6

8

10

12

14

16

18

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




Europe Demographic ChallengeEurope Demographic Challenge

- 25

- 20

- 15

- 10

- 5

0

5

10

15

20

25

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




Japan Demographic ChallengeJapan Demographic Challenge

- 8

- 6

- 4

- 2

0

2

4

6

8

10

12

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




China Demographic ChallengeChina Demographic Challenge

- 60

- 40

- 20

0

20

40

60

80

100

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




India Demographic ChallengeIndia Demographic Challenge

- 20

- 10

0

10

20

30

40

50

60

70

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




Africa Demographic ChallengeAfrica Demographic Challenge

0

20

40

60

80

100

120

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




Middle East Demographic ChallengeMiddle East Demographic Challenge

- 5

0

5

10

15

20

25

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+Age




Population and GDP by regionPopulation and GDP by regionNominal GDPNominal GDPPopulationPopulation

Middle East & North Africa0.4 bn

5%

OECD1.0

14%

EM Asia3.3 bn45%EM Latam

0.5 bn7%

Rest of World2.1 bn29%

Middle East & North Africa

5%

OECD54%

EM Asia21%

EM Latam7%

Rest of World13%

Source: For population, UN World Population Prospects, last update: Apr 14, 2014; for GDP, World Bank, last update Apr 8, 2014.

6/5/201444

US Demographic ChallengeUS Demographic Challenge

• Age of Medicare eligibility: 65Age of Medicare eligibility: 65

• Age of Social Security eligibility, reduced benefits: 62; full benefits: 67 (for those born after 1960)Age of Social Security eligibility, reduced benefits: 62; full benefits: 67 (for those born after 1960)

Age group share of total population:Age group share of total population:

Source: UN Population Division, 2010 revision.

8%

92%

1950

0-64

65+

13%

87%

2010

0-64

65+

21%

79%

2050

0-64

65+


Expenditures on healthcare and social Expenditures on healthcare and social security as a share of primary spendingsecurity as a share of primary spending

18

20

22

24

26

28

30

32

34

36

38

18

20

22

24

26

28

30

32

34

36

38

2000 2005 2010 2015 2020 2025 2030 2035

(% of primary expenditures)

Healthcare Social Security

Social Security

Healthcare

Source: Congressional Budget Office, last updated September, 2013


Composition of US Federal ExpendituresComposition of US Federal Expenditures

• Aging accounts for 2/3 of projected rise in expenditures on social security and healthcare (CBO) Aging accounts for 2/3 of projected rise in expenditures on social security and healthcare (CBO)

• Healthcare includes Medicare (17% of noninterest spending in 2012, 25% in 2035) and Medicaid, Healthcare includes Medicare (17% of noninterest spending in 2012, 25% in 2035) and Medicaid, CHIP, and exchange subsidies (combined for 8% of noninterest spending in 2012, 14% in 2035)CHIP, and exchange subsidies (combined for 8% of noninterest spending in 2012, 14% in 2035)

2012

Social Security:

23%

All other: 53%

Healthcare: 25%

2035

Healthcare: 39%

All other: 38%

Social Security:

24%

Source: Congressional Budget Office, 2012 Long-Term Budget Update, 5 June, 2012.

Share of government spending (ex interest payments):Share of government spending (ex interest payments):

6/5/201447


FEDERAL RESERVE’s Forward GuidanceFEDERAL RESERVE’s Forward Guidance“the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” January 29, 2014

“In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation…The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” April 30, 2014


Bank of England’s Forward GuidanceBank of England’s Forward Guidance“Looking beyond the immediate decision, the Committee discussed how to set policy to achieve the 2% inflation target, while supporting the recovery, once the 7% unemployment threshold had been reached. Despite the sharp fall in unemployment, the Committee judged that there remained scope to absorb spare capacity further before raising Bank Rate. When Bank Rate did begin to rise, it expected that the appropriate path, so as to eliminate slack over the next two or three years and keep inflation close to target, would be gradual.”-Minutes of the MPC meeting 5 and 6 February 2014, released February 19, 2014

“The LFS unemployment rate had fallen below the Committee’s 7% threshold in the data for the three months to February. The policy guidance the Committee had provided in August 2013 had therefore ceased to apply. The Committee reaffirmed the subsequent guidance set out in its February Inflation Report on how it would seek to achieve the inflation target over the policy horizon. A key feature of the guidance was that, given the likely persistence of headwinds weighing on the economy, when Bank Rate did begin to rise, it was expected to do so only gradually.”-Minutes of the MPC meeting 8 May 2014, released May 21, 2014


ECB’s and BoJ’s Forward GuidanceECB’s and BoJ’s Forward Guidance

ECB“Concerning our forward guidance, the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation. This expectation is further underpinned by our decisions today. Moreover, if req uired, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation.”-ECB President Mario Draghi, Introductory statement, June 5, 2014

--------------------

BOJ“Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.”-Statement of Monetary Policy, May 21, 2014


Perspectives on Global Spillovers from Perspectives on Global Spillovers from DM Central Bank PolicyDM Central Bank PolicyRBI Governor Raghuram Rajan, April 28, 2014:“More problematic, the disregard for spillovers could put the global economy on a dangerous path of unconventional monetary tit for tat. To ensure stable and sustainable economic growth, world leaders must re-examine the international rules of the monetary game, with advanced and emerging economies alike adopting more mutually beneficial monetary policies.”Central Bank of Brazil President Tombini, April 11, 2014:“I am a bit skeptical about the capacity of jurisdictions to effectively and fully coordinate policies…Brazil has a long history of riding global financial cycles…Of course we think there are spillovers from monetary policy in advanced economies. The world is a very financially integrated place. But we have learned how to ride this.”South African Reserve Bank Governor Marcus, February 3, 2014:“When the advanced economies were really at the depth of the crisis, it was the emerging markets that helped stabilize, that helped create some balance to the global outlook…The challenge here is if the advanced economies say OK, you are on your own, the scale of the emerging markets is such that it’s going to impact on this fragile recovery.”

j.p.morgan chase s t r i c t l y p r i v a t e a n d c o n f i d e n t i a l mega trends in the...

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