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Challenges for the World Challenges for the World EconomyEconomy
Goldman Sachs Goldman Sachs
Jim O’NeillJim O’NeillManaging Director &Managing Director &
Head of Global Economic Research Head of Global Economic Research
November 2008November 2008
2
GLI vs IPGLI vs IP
-7-6-5-4-3-2-101234567
98 99 00 01 02 03 04 05 06 07 08
% yoy
GLI
G7 IP
3
US Financial Conditions IndexUS Financial Conditions Index
97.5
98.0
98.5
99.0
99.5
100.0
100.5
101.0
101.5
102.0
102.5
00 01 02 03 04 05 06 07 08 09
Index
US FCI
Easier Conditions
4
China Lead IndicatorsChina Lead Indicators
2
4
6
8
10
12
14
16
18
97 98 99 00 01 02 03 04 05 06 07 08
% yoy
96
97
98
99
100
101
102
103
104
105Index
1996=100
GSCA (lhs)
CEMAC-GS Leading Indicator (rhs)
5
China FCIChina FCI
103
104
105
106
107
108
109
110
111
112
00 01 02 03 04 05 06 07 08
Index
Easier Conditions
China FCI
6
Ted-SpreadTed-Spread
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
85 87 89 91 93 95 97 99 01 03 05 07 09
%
spread
7
Credit SpreadsCredit Spreads
30
50
70
90
110
130
150
170
190
210
230
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
bp
200
300
400
500
600
700
800
900
1000
1100
1200bp
CDX IG (lhs)
CDX HY (rhs)
8
Credit SpreadsCredit Spreads
-100
0
100
200
300
400
500
600
700
800
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
bpAA
BBB
BB
9
US House Prices vs IncomeUS House Prices vs Income
2.5
3.0
3.5
4.0
4.5
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
3.0
4.0
5.0
6.0
7.0
8.0
9.0
House Price/Income Ratio* (left)
Mortgage Rate (right, inverted)
Percent
* S.a. median home price divided by median family income.Source: Department of Commerce. FRB. NAR.
Ratio
10
Weakness in US Housing ContinuesWeakness in US Housing Continues
1.0
1.5
2.0
2.5
3.0
3.5
4.0
66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Ratio
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5% GDP
Sales/Inventories Ratio, New Homes* (left)
Residential Investment (right)
* Using three-month moving averages of sales.Source: Department of Commerce.
11
US EmploymentUS Employment
-400
-300
-200
-100
0
100
200
300
400
500
600
00 01 02 03 04 05 06 07 08
Thousands US: Change in Nonfarm Payrolls
12
US Retail SalesUS Retail Sales
-6
-4
-2
0
2
4
6
8
10
12
00 01 02 03 04 05 06 07 08
% yoy
13
US Export and Import GrowthUS Export and Import Growth
-15
-10
-5
0
5
10
15
20
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
3M MA,% yoy
Exports
Non-oil Imports
14
Share of Private Consumption Share of Private Consumption in US GDPin US GDP
0.63
0.64
0.65
0.66
0.67
0.68
0.69
0.7
0.71
0.72
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
Share
*2008 data is based on the f irst tw o quartersSource:BEA/ Haver
15
Domestic Demand and Growth Domestic Demand and Growth Contributions, Last 8 YearsContributions, Last 8 Years
0
5
10
15
20
25
30
35
40
45
China Russia India Brazil BRICs US Euroland
%
Demand Contribution
Growth Contribution
2000-2007 average contribution in USD terms
16
Retail Sales US and BRICsRetail Sales US and BRICs
-6
-2
2
6
10
14
18
22
26
30
34
04 05 06 07 08
%yoy USA Brazil BRICsRussia China India*
* Private final consumption
17
Retail Sales ContributionRetail Sales Contribution
0
0.2
0.4
0.6
0.8
1
1.2
04 05 06 07
pps
US
BRICS
Real Contribution to World Consumption*
* Calculated from real retail sales for Brazil, Russia, China, and US. India calculation uses real private consumption. Annual averages 2004-2006, and latest data point for 2007.
18
Recent Trend in Recent Trend in Nominal Retail SalesNominal Retail Sales
-20000
-10000
0
10000
20000
30000
40000
50000
60000
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08
Million Dollars
China
US
Change in Retail Sales Since Jan 2007
19
Recent Trend inRecent Trend inReal Retail SalesReal Retail Sales
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08
USD Million Jan 2007
China
US
Change in Real Retail Sales Since Jan 2007
20
Past and Future Potential Past and Future Potential Chinese UrbanisationChinese Urbanisation
0
10
20
30
40
50
60
70
1950 1960 1970 1980 1990 2000 2010 2020 2030
% population
Chinese Urbanisation Rate
UN Forecasts
21
The Largest Economies in 2050The Largest Economies in 2050
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
China
United S
tate
sIn
diaEU-5
Brazi
l
Russia
United K
ingdom
Japan
France
Ger
man
y
Canada
Italy
GDP 2007 US$bn
22
The Largest Economies in 2050The Largest Economies in 2050
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Ch
ina
US
Ind
ia
EU
-5
Bra
zil
Ru
ssia
UK
Jap
an
NM
-12
GC
C
Nig
eria
Ph
ilip
pin
es
Can
ada
Ital
y
Ko
rea
Iran
Sau
di
Ara
bia
So
uth
Afr
ica
Th
aila
nd
GDP 2007 US$bn
Source: Goldman Sachs
...but in 2050, the BRICs and N-11 will dominate
23
BRICs & N11. 2007 Growth BRICs & N11. 2007 Growth Environment Score (GES)Environment Score (GES)
0
1
2
3
4
5
6
7
8
Ru
ss
ia
Bra
zil
Ch
ina
Ind
ia
Ko
rea
Me
xic
o
Tu
rke
y
Nig
eri
a
Vie
tna
m
Ira
n
Eg
yp
t
Pa
kis
tan
Ph
ilip
pin
es
Ind
on
es
ia
Ba
ng
lad
es
h
1997-2007 Change1997 GES2007 Average Developing1997 Average Developing
24
BoJ TankanBoJ Tankan
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
96 97 98 99 00 01 02 03 04 05 06 07 08
%, DIBoJ Large manufacturers
BoJ Large nonmanufacturers
25
Japanese Exports to the US Japanese Exports to the US and Chinaand China
-20
-10
0
10
20
30
40
50
60
95 96 97 98 99 00 01 02 03 04 05 06 07 08
3M MA.%yoy US
China
26
Euroland Leading Indicator vs Euroland Leading Indicator vs Industrial ProductionIndustrial Production
Euroland IP and leading indicator (3m/3m)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
97 98 99 00 01 02 03 04 05 06 07 08 09
qoq
IP, 3m/3m
Leading indicator
27
German Employment German Employment
26,000
26,500
27,000
27,500
28,000
28,500
99 00 01 02 03 04 05 06 07 08
Thousand peopleEmployment fully covered by social
security ('real jobs')
28
German Exports to the BRICsGerman Exports to the BRICs
50
150
250
350
450
550
650
00 01 02 03 04 05 06 07 08
IndexJan 2000= 1003-Mth Average
ChinaIndiaRussiaBrazil
Source: Bundesbank, GS calculationsSource: Bundesbank, GS calculations
29
French Manufacturing and French Manufacturing and Services PMIServices PMI
-25
-20
-15
-10
-5
0
5
10
15
20
25
00 01 02 03 04 05 06 07 08
Manufacturing
Services
France Business Confidence InidcatorsIndex
30
UK Services PMIUK Services PMI
40
45
50
55
60
65
97 98 99 00 01 02 03 04 05 06 07 08
Index
UK Services PMI
31
Inflation?Inflation?
32
US Import Prices from ChinaUS Import Prices from China
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
Jan-05 Jan-06 Jan-07 Jan-08
% yoy
US Import Prices from ChinaSeries2
33
Non-Energy Import Prices in Non-Energy Import Prices in US, Euroland and UKUS, Euroland and UK
-10
-5
0
5
10
15
20
95 96 97 98 99 00 01 02 03 04 05 06 07 08
% yoy
US
Euroland
UK
34
Core CPI in US and EurolandCore CPI in US and Euroland
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
95 96 97 98 99 00 01 02 03 04 05 06 07 08
% yoy
US
Euroland
35
Inflation Expectations in USInflation Expectations in US
2.5
2.6
2.7
2.8
2.9
3.0
3.1
3.2
3.3
3.4
3.5
95 96 97 98 99 00 01 02 03 04 05 06 07 08
% yoy University of Michigan 5-yrInflation Expectations
36
Commodity Price Pressure Commodity Price Pressure to Easeto Ease
-80
-40
0
40
80
120
160
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
%yoyCrude price
Corn/Wheat
37
World Output GapWorld Output Gap
-3
-2
-1
0
1
2
3
1980 1984 1988 1992 1996 2000 2004 2008
% of GDP
Trend = 4.0%
Trend = 3.5%
Source: IMF, GS estimates
38
UK InflationUK Inflation
UK Inflation forecasts with different oil scenarios
0
1
2
3
4
5
6
06 07 08 09
%yoy
Using baseline oil forecast and +/-$20 oil forecasts
39
Eurozone InflationEurozone Inflation
0
1
2
3
4
5
Jan-06 Jan-07 Jan-08 Jan-09
%yoy
Oil $20 higher
Oil $20 lower
Baseline Forecast
GS Forecast
40
US BBoP vs Current AccountUS BBoP vs Current Account
-7
-6
-5
-4
-3
-2
-1
0
1
2
95 96 97 98 99 00 01 02 03 04 05 06 07 08
%GDP 4-qtr ma
BBoP
Current Account
41
BRICs BBoP vs Current AccountBRICs BBoP vs Current Account
-2
0
2
4
6
8
10
12
97 98 99 00 01 02 03 04 05 06 07
% GDP
Current Account
BBoP
42
Euroland: BBoP vs Current Euroland: BBoP vs Current AccountAccount
-4
-3
-2
-1
0
1
2
3
4
98 99 00 01 02 03 04 05 06 07 08
BBoP
Current Account
% of GDP12-Month Mov. Avg.
43
Japan: BBoP vs Current Japan: BBoP vs Current AccountAccount
-2
-1
0
1
2
3
4
5
6
7
95 96 97 98 99 00 01 02 03 04 05 06 07 08
BBoP
Current Account
% of GDP12-Month Mov. Avg.
44
GDP ForecastsGDP Forecasts
GS Consensus* GS Consensus*
USA 2.8 2.0 1.3 1.4 -0.8 -0.6
Japan 2.4 2.2 0.3 0.6 -0.6 -0.1
Euroland 3.0 2.6 1.0 1.0 -0.3 -0.2
UK 2.8 3.0 0.8 0.9 -0.3 -0.9
Europe 3.3 3.0 1.3 1.3 0.1 0.0
Spain 3.9 3.7 1.3 1.3 -0.8 -0.5
China 11.6 11.9 9.0 9.5 7.5 8.1
India 9.6 9.0 6.7 7.1 5.8 6.6
BRICs 9.4 9.8 7.7 8.0 6.0 6.8
Advanced Economies
3.1 2.7 1.4 1.4 -0.1 0.0
World 5.0 4.9 3.3 3.4 1.8 2.1
* Consensus Economics November 2008
2006 200720092008
% yoy
45
Domestic Demand Domestic Demand Forecasts (%)Forecasts (%)
% yoy 2006 2007 2008 (f) 2009 (f)
US 2.6 1.4 -0.1 -1.5
Japan 1.7 1.1 -0.5 -0.3
Euroland 2.9 2.4 0.7 -0.4
UK 2.6 3.6 0.6 -1.0
Spain 5.0 4.3 0.9 -2.3
China 9.9 9.4 8.9 6.9
India 8.2 9.9 7.9 6.9
BRICs 8.7 9.4 8.6 6.2
Advanced Economies
2.8 2.3 0.6 -0.3
World 4.6 4.5 3.1 1.9
46
Inflation ForecastsInflation Forecasts
GS Consensus* GS Consensus*
USA 3.2 2.9 4.2 4.2 1.0 1.4
Japan 0.2 0.1 1.6 1.6 0.5 0.6
Euroland 2.2 2.1 3.4 3.4 1.8 1.8
UK 2.3 2.4 3.8 3.8 2.2 2.5
Europe 2.1 2.2 3.6 3.6 2.0 2.3
Spain 3.6 2.8 4.2 4.4 1.7 2.5
China 1.5 4.8 6.1 6.3 1.0 2.7
India 5.5 4.6 11.5 10.0 5.3 6.1
BRICs 4.2 5.6 8.5 8.2 4.5 4.8
Advanced Economies
2.3 2.2 3.6 3.6 1.5 1.7
World 3.4 3.6 5.9 5.5 3.2 3.2
* Consensus Economics November 2008.
2006 200720092008
% yoy
47
G7 Real Bond YieldsG7 Real Bond Yields
1
2
3
4
5
6
7
8
86 88 90 92 94 96 98 00 02 04 06 08
%
+1 Std Dev
Average (time span)
-1 Std Dev
*Italy included from March 1991
G7 Real 10-Year Bond Yields*
48
Updated Estimates for theUpdated Estimates for theEquity Risk Premium*Equity Risk Premium*
Real GDP Growth
Real Earnings Growth +
Dividend Yield =
Expected Real
Return -
Real Bond Yield =
Implied ERP
Expected Inflation
Expected Nominal Return
US 3.0 3.0 3.2 6.2 2.8 3.4 2.0 8.2
Japan 1.5 1.5 2.8 4.3 1.0 3.3 0.5 4.8
UK 2.8 2.8 5.6 8.4 2.7 5.7 2.0 10.4
Europe ex UK 2.3 2.3 5.3 7.5 2.7 4.9 2.0 9.5
World 2.5 2.5 4.0 6.5 2.5 4.0 1.8 8.3
Optimistic World 4.0 4.0 4.0 8.0 2.5 5.5 1.8 9.8*Calculated as of 13 November 2008.
49
P/E RatiosP/E Ratios
Japan 11.9x
United States 10.8x
India 10.4x
Europe 8.5x
China 8.1x
Brazil 6.2x
Russia 3.9x
MSCI 12-Month Forward PEs
50
Unlike 2003, ‘q’ Measure Unlike 2003, ‘q’ Measure Shows Equities Are CheapShows Equities Are Cheap
-130%
-80%
-30%
20%
70%
120%
1952 1960 1968 1976 1984 1992 2000 2008
%-150%
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
%Real equity returns, next 10 years,inverted, RHSQ relative to its post-war average, LHS
Marketovervalued
Marketundervalued
Source: GS estimates
51
Cyclically Adjusted P/E Not Cyclically Adjusted P/E Not Demanding.Demanding.
-150
-100
-50
0
50
100
150
52 56 60 64 68 72 76 80 84 88 92 96 00 04 08
%,P/E relative to long-run average
Cyclicallyadjusted P/E,US market
52
Interest Rate ForecastsInterest Rate Forecasts3-month horizon 6-month horizon 12-month horizon
Current* Forward Forecast Forward Forecast Forward Forecast
US 3M 2.2 2.0 1.2 1.9 1.0 2.2 1.0
10Y 3.7 3.9 3.5 4.0 3.6 4.2 4.0
Canada 3M 2.5 2.0 2.1 1.7 2.1 1.9 2.1
10Y 3.6 3.7 3.7 3.8 3.7 4.0 4.0
Australia 3M 4.7 4.4 4.7 3.7 4.7 4.0 4.6
10Y 5.0 5.1 5.2 5.1 5.3 5.3 5.6
Japan 3M 0.8 0.8 0.6 0.7 0.6 0.7 0.6
10Y 1.5 1.5 1.5 1.6 1.6 1.7 1.9
Euroland 3M 4.2 3.0 2.7 2.8 2.6 2.8 2.3
10Y 3.7 3.8 3.5 3.9 3.5 4.0 3.9
UK 3M 4.0 3.5 3.3 2.7 2.6 2.9 2.7
10Y 4.1 4.1 4.1 4.2 4.1 4.3 4.4
Sweden 3M 4.5 3.8 3.6 3.2 3.4 3.0 2.9
10Y 3.3 3.3 3.5 3.3 3.6 3.4 4.0
Switzerland 3M 1.5 1.8 1.8 1.5 1.5 1.7 1.5
10Y 2.5 2.6 2.6 2.7 2.7 3.0 2.9Close 14 November 08
53
Foreign Exchange ForecastsForeign Exchange Forecasts
3-months 6-months 12-months
Current* Forward Forecast Forward Forecast Forward Forecast
EUR/$ 1.27 1.27 1.20 1.27 1.30 1.27 1.30
$/¥ 96.7 96.4 90.0 96.0 100.0 95.3 105.0
EUR/¥ 123.1 122.3 108.0 121.6 130.0 120.6 136.5
EUR/CHF 1.51 1.50 1.44 1.50 1.48 1.49 1.52
CHF/¥ 81.43 81.32 75.00 81.18 87.84 80.77 89.80
$/CHF 1.19 1.18 1.20 1.18 1.14 1.18 1.17
EUR/£ 0.86 0.86 0.81 0.86 0.81 0.86 0.78
£/$ 1.49 1.48 1.48 1.48 1.60 1.48 1.67
£/¥ 143.7 142.7 133.3 141.9 160.5 140.5 175.0
£/CHF 1.76 1.75 1.78 1.75 1.83 1.74 1.95
EUR/NOK 8.75 8.79 8.70 8.81 8.40 8.85 8.00
EUR/SEK 10.00 10.00 10.30 10.00 9.80 10.02 9.50
A$/$ 0.66 0.65 0.64 0.65 0.71 0.65 0.71
NZ$/$ 0.56 0.56 0.52 0.55 0.54 0.54 0.55
$/C$ 1.22 1.22 1.22 1.22 1.15 1.22 1.15
$/CNY 6.83 6.89 6.82 6.92 6.82 6.94 6.62* Close 14 November 08
54
Source for all tables / charts is Goldman Sachs Economic Research unless otherwise stated
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