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GLOBAL 1 Oxford Economic
Forecasting
VANESSA ROSSI, OXFORD ECONOMICS
THE GLOBAL ECONOMY IN 2007
GLOBAL 2 Oxford Economic
Forecasting
A Robust Global Economy
• The global economy has continued to forge ahead in spite of various obstacles being put in its way
• This summer saw a slowdown in US growth to under 3% while oil and commodity prices remain high – but global growth in 2006 will be above 2005
• This is partly due to the long awaited recovery in Europe, with growth above 2.5%
• But it also reflects strength in big developing countries, mostly China and India where growth is in the 9-11% range this year
GLOBAL 3 Oxford Economic
Forecasting
0
1
2
3
4
5
6
1996 1998 2000 2002 2004 2006 2008
0
1
2
3
4
5
6
Source: OEF
World: GDP growth% year
PPP exchange rates
ForecastMarket exchange rates
% year
GLOBAL 4 Oxford Economic
Forecasting
0
10
20
30
40
50
60
70
80
90
1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
0
10
20
30
40
50
60
70
80
90
Source: OEF
$/barrel $/barrel
Real(1995 US prices)
Nominal
Oil price
F'cast
GLOBAL 5 Oxford Economic
Forecasting
1978 1982 1986 1990 1994 1998 2002 200682
84
86
88
90
92
94
96
98
82
84
86
88
90
92
94
96
98
World
Oil market tight
ESTIMATED CAPACITY UTILIZATION RATE %
GLOBAL 6 Oxford Economic
Forecasting
Risks to 2007
• Oil markets will continue to be tight and volatile – and even if crude prices fall, governments look set to the gap with taxes
• But oil no longer has a powerful impact on world growth – on its own it will not cause a recession
• Other concerns are the US and China – can growth keep going?
• And the financial market “wild card” may return – linked to global liquidity and Japan
GLOBAL 7 Oxford Economic
Forecasting
GLOBAL 8 Oxford Economic
Forecasting
10
20
30
40
50
60
70
2002 2003 2004 2005 2006
1.2
1.3
1.4
1.5
1.6
1.7
1.8
Source: Haver Analytics
TRY/US$ (rhs)
Turkey: TRY & interest ratesTRY/US$%
Overnight borrowing rate(lhs)
GLOBAL 9 Oxford Economic
Forecasting
GLOBAL 10 Oxford Economic
Forecasting
US downside scenario
The slowdown underway in the US is certainly one concern for the global economy
A modest downside scenario for the US might be: A 10% fall in house prices over the next year A further fall in residential investment that takes
spending to 20% below its peak, rather than 15% AND in addition Flat rather than falling oil prices, plus a pick up in
wage inflation might constrain the Fed from cutting short rates
GLOBAL 11 Oxford Economic
Forecasting
280
300
320
340
360
380
400
420
440
460
2003 2004 2005 2006 2007 2008 2009
280
300
320
340
360
380
400
420
440
460
Source: OEF
Nominal US house price index1980Q1 = 1001980Q1 = 100
Base forecast
Predicted
GLOBAL 12 Oxford Economic
Forecasting
GLOBAL 13 Oxford Economic
Forecasting
GLOBAL 14 Oxford Economic
Forecasting
GDP growth Inflation Interest rates GDP growth Inflation Interest rates2007 2.6 2.7 5.4 1.7 3.4 5.52008 3.2 1.9 4.7 2.1 2.9 4.8
Impact of a fall in US house prices
United States
Central forecast Scenario
GLOBAL 15 Oxford Economic
Forecasting
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
US & Italy GDP, annual % change% year
Source: SACE-OEF
US - scenario
Italy - scenario
% year
US - baseline
Italy - baseline
Forecast
GLOBAL 16 Oxford Economic
Forecasting
Can Asia keep growth going?
• Technically Asia could sustain world growth - it is a large, fast growing part of world GDP
• So it could keep the average global growth rate high even if the US and EU weaken
• But is Asia too vulnerable to a US slowdown – how much does Asian growth fall if US growth drops by 1%?
GLOBAL 17 Oxford Economic
Forecasting
JAPANCHINA
AllOther
Other Emerging
ASIA
US
EU 25 TOTAL
Global GDP at PPP - total $53tr in 2005
Source: OEF/WDI GDP at 2000 constant prices, PPP rates
GLOBAL 18 Oxford Economic
Forecasting
0
2
4
6
8
10
12
100.00 1000.00 10000.00 100000.00
Source: OEF
World growth league (average 2006-2015)
Avg size of economy 2006-2015 (US$bns 2000 constant prices)
% a
vera
ge G
DP
gro
wth
200
6-20
15
India
Bubble size: scaledto population
(average 2006-2015)
ChinaTurkey
Mexico
Brazil US
EU25 excl UK
Russia
Japan
UK
GLOBAL 19 Oxford Economic
Forecasting
0
1
2
3
4
5
6
2000 2003 2006 2009
0
1
2
3
4
5
6
World and US GDP growth% year
Source: OEF
Weaker US scenario
World GDP growth (at PPP)
% year
US GDP growth
Weaker US Scenario
GLOBAL 20 Oxford Economic
Forecasting
0
2
4
6
8
10
12
14
2000 2003 2006 2009
0
2
4
6
8
10
12
14
GDP growth, Japan, China and Emerging Asia% year
Source: OEF
Weaker US scenario
Emerging Asia growth
% year
China GDP growth
Weaker US Scenario
Weaker US Scenario
Japan GDP growth
GLOBAL 21 Oxford Economic
Forecasting
Can Asia support growth elsewhere?
• Weak trade prices help OECD consumers and keep inflation low
• Fiscal policy – encouraging expansions to boost growth in Asia may not be appropriate – but what about private demand?
• China’s consumer demand could grow faster – supporting growth and also cutting the trade surplus
GLOBAL 22 Oxford Economic
Forecasting
Faster Chinese consumption?
Swing in GDP versus base after 1 year 5 years
Scenarios:
1% point per annum higher +0.6% +1.5%
Chinese consumer growth
And
Impact on China’s current account In US dollar billion -5 -
50
GLOBAL 23 Oxford Economic
Forecasting
China’s risk is investment
• A collapse in China’s rampant rate of investment may be a bigger threat to Asia than a US slowdown
• High risk as investment for the 2008 Olympics is completed
• China’s growth could slump to 2-3%?
• But risk is most likely to 2009-2010 – and low impacts on US and Europe
GLOBAL 24 Oxford Economic
Forecasting
-20
-10
0
10
20
30
40
1983 1987 1991 1995 1999 2003 2007
-20
-10
0
10
20
30
40
Source:OEF
% yearChina's risk is investment
GDP
Investment
% year
Exports
Forecast
GLOBAL 25 Oxford Economic
Forecasting
Impacts on Global GDPCrisis in China in 2008-2009 like that of 1989 Investment and imports growth dives from +20% to –
15%
Swing in GDP versus base 2010
China -12 to 13%And impact on:US -0.5%Eurozone -0.8%Japan -1.9% HK and Taiwan -6.0%India -1.1%Korea and Thailand -4.0%
World GDP at PPP -3.5 to 4.0%
GLOBAL 26 Oxford Economic
Forecasting
What can Europe do to respond?
• Be careful to keep the recovery going – policy should be flexible
• Maintain consumer sentiment – Europe’s property markets have been strong, unemployment is down and consumption has picked up this year
• Exporters: look for growth opportunities in the markets – follow demand