global economic and financial prospects and risks: 2006 robert f. wescott, ph.d. rome 5 december...
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Global Economic and Financial Prospects and Risks: 2006
Robert F. Wescott, Ph.D.Rome5 December 2005
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6 Forces Shaping World Economy in 2006
1. Reversal of policy stimulus: negative2. Still high energy prices: negative3. Faster global productivity: positive4. Tax/business policies: mixed5. Trade openness: neutral6. Demographics: mixed
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Economic Policy Floodgates Closing
-5
-4
-3
-2
-1
0
1
2
-5 -4 -3 -2 -1 0 1 2
2000-2004
2004-2005
US
Canada
Germany
US
Italy
Euro AreaGermanyFrance
UK
Euro Area
FranceItaly
JapanUK
Japan
Canada
Tighter Fiscal PolicyEasier Fiscal Policy
% change in real six month LIBOR
Change in structural f iscal balance as a % of GDP
China
China
Tighter Monetary Policy
Easier Monetary Policy
Source: IMF WEO, Author’s calculations for China
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Oil: A Growing Burden on the World Economy
World Oil Expenditure as Percent of World GDP
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%Global Recession
Trigger Level?
Source: EIA, IMF WEO
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6 Forces Shaping World Economy in 2006
1. Reversal of policy stimulus: negative2. Still high energy prices: negative3. Faster global productivity: positive4. Tax/business policies: mixed5. Trade openness: neutral6. Demographics: mixed
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Perceived Global Investment Risks
-80
-60
-40
-20
0
20
40
60
Canada UnitedStates
Japan WesternEurope
China EasternEurope
OtherAsia
LatinAmerica
Russia Africa MiddleEast
1998 2005
Source: UBS Index of Investor Optimism, August 2005
Percent rating the region “low risk”
minus percent rating it “high risk”
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The dollar-euro in 2006
Shaped by long-run, medium-run, and short-run factorsLong run: competitiveness, productivity (good for $)Medium run: current account imbalances (very bad for $)Short run: interest rate differentials, growth differentials (shifting to euro)
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Risks to PonderU.S. soft patch?
Energy prices lead to negative industry effects?Housing bubble bursts?
Wrong policies in Europe?Interest ratesLoss of jobs to China
Disequilibrium proves unsustainable?Hypothesis: U.S. consumes, China producesWeakened President Bush?
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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
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
1970s 2000s1990s1980s
CPI
Core CPI
CPICPI
CPI
Core CPI
Core CPI
Core CPI
Source: Bureau of Labor Statistics and Energy Information Agency
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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)
21.9
-3.3
0.8
31.1
-15.1
6.1
27.7
36.036.0
-20
-10
0
10
20
30
40
2000s1950s-1990s
Average:-4.5%
Average: 21.5%
Source: Bureau of Economic Analysis, Yahoo! Finance
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Housing Prices Rising Worldwide
-75 0 75 150 225 300
Hong KongJapan
GermanySwitzerland
SwedenCanadaFrance
DenmarkBelgium
N. ZealandItalyU.S.
NetherlandsAustralia
BritainSpain
IrelandS. Africa
Percent Change, 1997-2005
Source: The Economist
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Are Rising Interest Rates Killing the U.S. Refinancing Boom?
10-Year U.S. Treasury Yield and Mortgage Refinancing Index
3
3.4
3.8
4.2
4.6
5
1/2/
2004
2/6/
2004
3/12
/200
4
4/16
/200
4
5/21
/200
4
6/25
/200
4
7/30
/200
4
9/3/
2004
10/8
/200
4
11/1
2/20
04
12/1
7/20
04
1/21
/200
5
2/25
/200
5
4/1/
2005
5/6/
2005
6/10
/200
5
7/15
/200
5
8/19
/200
5
9/23
/200
5
10/2
8/20
05
12/2
/200
5
10
-ye
ar
tre
as
ury
yie
ld
1000
2000
3000
4000
5000
6000 Mo
rtga
ge
Re
fina
nc
ing
Ind
ex
10-year treasury yield (left)
Mortgage Refinancing Index (right)
Sources: Federal Reserve, Mortgage Bankers Association
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Greenspan’s Medicine Would Help Europe(Real short-term interest rates)
-2
-1
0
1
2
3
4
5
6
7
I 1
990
I 1
991
I 1
992
I 1
993
I 1
994
I 1
995
I 1
996
I 1
997
I 1
998
I 1
999
I 2
000
I 200
1
I 200
2
I 200
3
I 200
4
I 200
5
Fed funds / ECB policy rate deflated by “core” CPI inflation
US real interest rate
EU real interest rate
Sources: Federal Reserve, Bureau of Labor Statistics, European Central Bank, European Commission
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China’s Trend Has Been Sharply UpwardShare of World Economy, PPP Basis
0
5
10
15
20
25
30
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
pe
rce
nta
ge
Source: IMF WEO
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High Tech Manufactures: Asia Rising, Europe Declining
Source: National Science Foundation, “Science and Engineering Indicators 2004”
Share of World Production of High-Tech Goods
0%
5%
10%
15%
20%
25%
30%
35%
US Germany France U.K. Italy Japan China SouthKorea
India
1980 1990 2001
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Percentage of 18-24 Year Olds in Science and Engineering Programs
0%
1%
2%
3%
4%
5%
6%
7%8%
9%
10%
U.K.
S. Kor
ea
France
Japa
n
German
yU.S
.Ita
lyChin
a
Source: National Science Foundation, Science and Engineering Indicators 2002
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Can Disequilibrium Continue? (China produces, the U.S. consumes?)
Current Account Balance (percent of GDP)
-8
-6
-4
-2
0
2
4
6
8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: IMF WEO
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Historically, Rising Interest Rates Add Financial Pressures
Monthly Fed Funds Rate
0
2
4
6
8
10
12
14
16
18
20
???
Black Monday
Continental Illinois Bank
Franklin National Bank
S&L Crisis
Penn Central Railroad
Latin American Crisis
High Tech Bubble
Mexican Crisis
Source: Federal Reserve
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Bush’s Falling Political CapitalPresident Bush's Job Approval Rating
30
40
50
60
70
80
90
100
11/2
8/20
05
5/23
-26/
05
3/18
-20/
05
1/3-
5/05
10/1
1-14
/04
7/30
- 8/
1/04
5/2-
4/04
2/6-
8/04
11/1
4-16
/03
8/25
-26/
03
5/30
- 6/
1/03
3/24
-25/
03
1/31
- 2/
2/03
12/9
-10/
02
10/3
-6/0
2
7/29
-31/
02
6/3-
6/02
3/22
-24/
02
1/7-
9/02
10/5
-6/0
1
7/19
-22/
01
4/20
-22/
01
September 11 Attacks
Invasion of Iraq Capture of
Saddam Hussein
Re-election and Inauguration
Source: Gallup