the global economic outlook presented to: icas fall symposium 2003 washington, d.c. october 14, 2003...

The Global Economic Outlook

Presented to:ICAS Fall Symposium 2003

Washington, D.C.October 14, 2003

Presented by:Sara Johnson

Managing Director,Global Macroeconomics Group

Copyright © 2003 Global Insight, Inc.

Copyright © 2003 Global Insight, Inc. 2

World Overview and Issues

• The world economy’s performance in this cycle—marked by subpar, stop-and-go growth—has been disappointing.

• The U.S. rebound is lifting the rest of the world, but the pace of recovery will be uneven across regions.

• World real GDP growth will pick up from 2.3% this year to 3.3% in 2004. Global output will remain below potential.

• Weak domestic demand, inflexible policies, and currency appreciation are holding back Western Europe and Japan.

• Asia’s expansion, disrupted by SARS, is regaining strength, led by growth in the technology sector.


Sluggish Growth in the World Economy

0

1

2

3

4

5

1986 1989 1992 1995 1998 2001 2004 2007

(Percent change, real GDP)

The world economy is in recession when real GDP growth is below 2%.


OECD Leading Indicators Are Rising

90

100

110

120

130

140

1996 1997 1998 1999 2000 2001 2002 2003

U.S. European Union Japan

(Trend-restored composite index)


Industrial Commodity Prices Are Recovering

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2000 2001 2002 2003

0.95

1.00

1.05

1.10

1.15

1.20

1.25

Global Insight Manufacturing Cost Index CRB Industrial Index

(Index, 2002:1=1.0) (Index, 2002:1=1.0)

Includes energy


Fiscal and Monetary Policies Will Boost Growth

Fiscal Balance

(Percentage of GDP, 2003)

Net Cumulative Cut in Policy Rates Since January 2001

(Basis points)

United States -4.0 550

Eurozone -2.5 275

Japan -6.8 25

United Kingdom -2.7 250

Canada 0.5 275

Australia -1.0 150

Switzerland -2.2 325


Emerging Markets Achieve the Fastest Growth

-2-10123456

NAFTA OtherAmericas

WesternEurope

EmergingEurope

Japan Other Asia

2001 2002 2003 2004 2005



The U.S. Expansion Broadens

• The U.S. economy has been expanding since late 2001, but not rapidly enough to create jobs—until this September.

• Consumer spending has steadily risen, supported by tax cuts, low interest rates, and the stock market rally.

• Housing markets have peaked but remain strong.

• Business fixed investment stabilized in mid-2002 and has begun a phased recovery, led by information technologies.

• With the inventory-to-sales ratio at a record low, businesses will need to step up production in the months ahead.

• Exports are starting to rebound in response to the dollar’s depreciation, neutralizing the impact of rising imports.

• Federal fiscal stimulus outweighs the adverse effects of state and local government budget cuts and tax increases.


The U.S. Expansion Is Strengthening

(Percent change, annual rate) (Percent)

-2

0

2

4

6

8

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

2

3

4

5

6

7

Real GDP Growth Unemployment Rate


Employment Is Finally Beginning to Recover

-3

-2

-1

0

1

2

3

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

The U.S. lost 2.8 million jobs from February 2001 to August 2003.

(Percent change, annual rate)


Federal Reserve Policy Will Be Accommodating: Key Interest Rates

(Percent)

0

2

4

6

8

10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Federal Funds 10-Year Treasury Yield Mortgage Rate


Government Budgets Are Back in Deficit

-500

-400

-300

-200

-100

0

100

200

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Federal State & Local

(Billions of dollars, fiscal years)


Real Consumer Spending and Confidence

0

1

2

3

4

5

6

7

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

75

80

85

90

95

100

105

110

Real Consumption Growth Consumer Sentiment

(Annual percent change) (Michigan Index, 1967=100)


Monetary Policy Has Stabilized Home-Building

(Housing starts, millions of units)

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Single-Family Multi-Family


An Uneven Recovery in Business Investment

-20

-10

0

10

20

30

40

Structures Computers Software Communic.Equipment

OtherEquipment

2001 2002 2003 2004 2005

(Percent change, 1996 dollars)


Real U.S. Exports and Imports Reflect the Business Cycle and Exchange Rates

(Year-over-year percent change)

-12

-8

-4

0

4

8

12

16

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Real Exports Real Imports


The Widening U.S. Current Account Deficit

(Billions of dollars) (Percent of GDP)

-800

-600

-400

-200

0

200

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

-8

-6

-4

-2

0

2

Current Account Deficit Deficit as % of GDP


The U.S. Dollar Is Still Overvalued

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1976 1980 1984 1988 1992 1996 2000 2004

Industrial Countries Developing Countries

(Real Trade-Weighted Dollar Index, 1996=1.0)


Canada’s Economy Depends on U.S. Trade

• Consumer spending, home-building, and public investment are leading Canada’s expansion.

• Exports have declined in 2003, however, in response to currency appreciation, Toronto’s outbreak of SARS, and beef and lumber trade restrictions.

• The Canadian dollar has appreciated in response to a trade surplus and attractive interest rates spreads. Yet, it remains below its PPP value of 81 U.S. cents.

• Favorable financing terms and pent-up demand have lifted home-building to unsustainable rates. Housing starts will fall in 2004 and 2005.

• Energy and infrastructure projects will support growth in nonresidential construction.


Canada’s Real GDP Growth Begins to Lag

-2-1

012

34

56

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Canada United States

(Percent change, 1997 dollars)


Mexico: Stability Under NAFTA

• Mexico has achieved remarkable macroeconomic stability under NAFTA. Cautious monetary policies have lowered inflation to from 35% in the mid-1990s to 4% today.

• Mexico’s sluggish recovery is led by consumer spending and government-funded construction. Manufacturing remains weak, awaiting a rebound in exports.

• Capital inflows and an overvalued peso have hurt competitiveness against emerging markets, notably China.

• President Fox’s reforms are stalled by Congressional opposition, discouraging needed private investments.

• Construction of subsidized housing and infrastructure (water, power transmission, roads) remain priorities.


Mexico’s Real GDP Growth Disappoints

-2

0

2

4

6

8

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Mexico United States



South America Recovers But Risks Are High

• Argentina’s economy is turning around as exports respond to a 65% peso depreciation. But full recovery will take a decade and risks remain high under another Peronist government.

• Brazil faces conflicting challenges—revive growth, subdue inflation, meet debt payments, and improve social conditions. High interest rates are undermining the domestic economy.

• In Venezuela, recovery from a deep recession will not arrive until President Chavez leaves office, perhaps in 2004.

• Chile’s economy will accelerate sharply in 2004 as a free trade agreement with the U.S. takes effect and exports strengthen.

• Peru’s strong economic growth is threatened by social unrest.


Real GDP Growth in South America

-12

-9

-6

-3

0

3

6

Brazil Argentina Venezuela Colombia Chile

2001 2002 2003 2004 2005

(Percent change)


A Delayed Upturn in Western Europe

• Europe’s recovery is lagging. Unemployment is near 9% and confidence remains depressed. A strong euro, uncompetitive labor costs, and cautious policies have undermined growth.

• Once inflation falls below 2%, the European Central Bank is expected cut its key rate from 2.0% to 1.5% by early 2004.

• Tax cuts will provide additional stimuli under a more flexible application of the Stability and Growth Pact.

• An aging population, inflexible labor markets, costly pension systems, and anti-immigrant sentiments will limit long-term economic growth to 2.0-2.5%.

• Enlargement of the European Union will divert investment to accession countries, but could become an impetus to reforms.


Eurozone Confidence Remains Weak

(Balance of respondents giving positive and negative replies)

-25

-20

-15

-10

-5

0

5

10

1995 1996 1997 1998 1999 2000 2001 2002 2003

Consumer Business


Real GDP Growth Rates in European Countries

0

1

2

3

4

France Germany Italy Spain U.K.

2001 2002 2003 2004 2005

(Percent change)


Slow Progress in Japan

• The economy’s acceleration in 2003 reflects broad gains in real exports, consumer spending, and business investment.

• Japan’s economy suffers from several long-term problems: asset deflation, bad bank loans, rising government debt, ineffective monetary policies, and structural inefficiencies.

• A more expansionary monetary policy has emerged, easing the pain of restructuring in the banking and industrial sectors.

• The Bank of Japan will intervene in currency markets to keep the yen from appreciating beyond 110 per dollar.

• Deflation is expected to end in 2005.

• Japan’s long-term real GDP growth trend is only 1.8%; the country’s population will peak in 2007.


Japan’s Economy Has Limited Growth Potential

-1

0

1

2

3

4

5

6

7

1987 1990 1993 1996 1999 2002 2005 2008



Other Asia/Pacific: A Bright Spot

• Asia’s rapid growth is led by a boom in exports and high-tech industries. Monetary and fiscal policies are accommodating.

• The SARS outbreak briefly curtailed travel and retail trade, with Hong Kong, Singapore, Taiwan, and China most affected.

• In South Korea, consumer spending and home-building have retrenched after the borrowing binge of recent years.

• China’s strong expansion is driven by foreign direct investment, exports, and public infrastructure spending.

• WTO accession is forcing China to reform its inefficient state enterprises and banking system, raising unemployment.

• China, Hong Kong, and Malaysia will benefit from dollar’s depreciation. By 2006, China will be forced to revalue.


Real GDP Growth in Asian/Pacific Economies

-4

-2

0

2

4

6

8

China South Korea India Australia Taiwan

2001 2002 2003 2004 2005

(Percent change)


South Korea’s Real Economic Growth by Sector

2001 2002 2003 2004 2005

Real GDP 3.2 6.3 2.8 6.1 6.3

Private Consumption 4.7 6.8 -1.3 5.8 6.8

Government Consumption 1.2 3.0 5.0 2.3 0.9

Total Fixed Investment -2.1 4.9 5.0 7.6 7.8

Exports 0.6 14.8 9.0 5.6 4.4

Imports -3.1 16.4 8.1 9.6 6.0

(Percent change)


Real GDP Growth in Other Asian Economies

-4

-2

0

2

4

6

Hong Kong Indonesia Singapore Malaysia Philippines

2001 2002 2003 2004 2005

(Percent change)


The Rise of China

1980 2002

Nominal GDP ($ billions) 302 1,237

Real GDP (% of U.S. level) 3.5% 13.5%

Avg. Real GDP Growth in Previous 10 Years 5.4% 9.3%

Population (millions) 981 1,285

Per Capita GDP ($) 307 963

Trade’s Share in GDP 15% 55%

Current Account Surplus ($ billions) 1 35

Agriculture’s Share in GDP 30% 15%

Urbanization 20% 32%


Greater China’s Expanding Role in World Trade

0

2

4

6

8

10

12

14

1980 1990 1995 2000 2005

China* Hong Kong* Taiwan* Intra-Regional

* Export totals from China, Hong Kong and Taiwan exclude trade with each other. Source: Global Insight World Industry Service

(Percent share of world manufacturing exports)


Other Emerging Markets Are Growing

0

1

2

3

4

5

6

7

Eastern Europe Former SovietUnion

Middle East Africa

2001 2002 2003 2004 2005



Emerging Europe Is Attracting Investment

• Despite weak export markets, economic growth is picking up in Central Europe, Russia, and the Ukraine.

• Eastern European countries are attracting foreign investment in anticipation of accession to the European Union.

• Falling trade barriers, low costs, and privatization will spark industrial development in Romania, Bulgaria, and Croatia.

• Azerbaijan, Kazakhstan, and Turkmenistan will achieve high growth rates as a result of oil and gas development.

• Russia, the Ukraine, and Kazakhstan are introducing market reforms, but corruption and weak financial systems will impede non-energy investment.


Middle East and Africa Face Several Obstacles

• The Iraq war, the Israeli-Arab conflict, and fears of terrorism have undermined tourism and investment.

• Near-term strength in oil export revenues will support public spending in the Middle East and North Africa.

• Iraq’s long-term economic outlook is bright but risky; the country is rich in natural resources.

Oil production—potential to reach 5 mmbd

Agriculture—fertile land, water from Tigris & Euphrates

Tourism—Shiite holy cities of Najaf and Karbala

• Capital flight, the AIDS epidemic, and political instability hinder growth in Sub-Saharan Africa.


A Unique Global Business Cycle

• The past recession was triggered by an investment bubble that led to excess capacity and reduced returns on capital.

• The manufacturing recession was deep and global.

• Deflation became a greater concern than inflation.

• Expansionary fiscal and monetary policies cushioned the downturn. Consumers kept spending and housing markets boomed.

• A succession of shocks impeded recovery—terrorist attacks, corporate governance scandals, the Iraq war, SARS.

• Investment will recover as excess capacity is cleared and profitability improves. This process will lead to sustainable economic growth in 2004 and beyond.


Thank you!

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the global economic outlook presented to: icas fall symposium 2003 washington, d.c. october 14, 2003...

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