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THE BIG SHIFT

WORLD ECONOMIC OUTLOOK 2012Ángel CabreraThunderbird School of Global Management

@CabreraAngel

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SHIFT HAPPENS

WORLD ECONOMIC OUTLOOK 2012Ángel CabreraThunderbird School of Global Management

@CabreraAngel

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THE BIG SHIFT

WORLD ECONOMIC OUTLOOK 2012Ángel CabreraThunderbird School of Global Management

@CabreraAngel

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IMF September Forecast for 2012

• Advanced economies• +1.9% (-0.7% from June)

• Emerging economies• +6.1% (-0.3% from June)

• World• +4.0% (-0.5% from June)

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IMF September Forecast for 2012

• United States• +1.8% (-0.9% from June)

• Euro Area• +1.1% (-0.6% from June)

• Japan• +2.3% (-0.6% from June)

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Emerging Markets GDP Growth

Average Real GDP per Capita

2010-2030ECAGR

World3.6%

$39T $73T $180T

N.A. W. Europe Asia Dev. Asia EmergingCEEMEALatin America

Source: Citi Investment Research & Analysis report “Global Growth Generators,” February 2011.  Note: Asia Developed is comprised of Japan, Australia and New Zealand.

Composition of World Real GDP

EM:

52%

EM:42%

EM:70%

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Rise of Emerging Markets Trade Flows

Exports/ImportsEM Trade as a % of Total World Trade

EmergingMarkets

DevelopedMarkets

Source: UN Conference on Trade and Development (UNCTAD) Handbook of Statistics 2010.

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(1) Calculated using purchase power parity exchange rates.Source: Citi Investment Research & Analysis report “Global Growth Generators,” February 2011 and Pricewaterhouse Coopers, “UK Economic Outlook,”

November 2009.

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G7 vs. E7

• U.S., Japan, Germany,U.K., France, Italy andCanada

• China, India, Brazil,Russia, Mexico,

Indonesia and Turkey

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G7 vs E7

Source: PWC.com

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What world do you prefer• Option A: We grow at 2% while others grow at 1%

• Option B: We grow at 3% while others grow at 6%

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SHOULD WE WORRY?

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Source: Citi, Economist Intelligence Unit.

   P  u   b   l   i  c   D  e   b   t   2   0   1   0

   (   %   G   D   P   )

Average GDP Growth 2010-2014 (%)

UnitedStates

Developed

Emerging

Australia

Brazil

China

India

IndonesiaKorea

Mexico

Russia

Saudi Arabia

South Africa

Turkey

200%

Argentina

CanadaFrance

Germany

Italy

Japan

NetherlandsSpain

UnitedKingdom

Emerging Markets Driving Global GDP Growth 

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Europanic

• Interbank markets signtrouble

• A run on Italian and

Spanish debt canmake LehmanBrothers seem trivial

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Europanic

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Summary• Explosive mix:

• Slow recovery, evenrecession in developedeconomies

• Increased fiscal and financial

uncertainty• Rebalancing necessary

• Internal: from public to privatedemand.

• External: from advancedeconomy to developingeconomy demand

• Worries about sovereignbonds, translated intoworries about banksholding that debt

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Areas of attention• Fiscal consolidation

• Not too fast or it will kill• Not too slow or it will feed uncertainty• Just right!

• Manage looming crisis• Support weak links that can trigger domino effect: european

sovereign debt, banks, ease housing troubles

• Rebalance global trade

• Learn new acronyms• E7• E2E

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GLOBAL BUSINESSDIALOGUE - NOV 10-11Thunderbird School of GlobalManagement

@Thunderbird

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Global Trends and Business Drivers

Emerging Markets

Large InvestmentNeeds

Technology

 – Sustained higher GDP growth – Rise of EM corporate multinationals

 – Growth in EM consumer demand

 – Growing trade and capital flows, particularly intra-EM

 – Rapid population growth in EM cities

 – Driving changes in consumer behavior and expectations

 – Improving efficiency

 – Increasing ability to store and use data

 – Significant and growing demand for credit and investment inEM

 – Growing capital markets volumes and products

 – Financial re-intermediation as investment needs are metlargely by traditional banking products (lending, cash

management)

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The Shift from G7 to E7• Measured by GDP in purchasing power parity (PPP) terms,

which adjusts for price level differences across countries, thelargest E7 emerging economies seem likely to be bigger thanthe current G7 economies by 2020, and China seems likely tohave overtaken the US by that date. India could also overtakethe US by 2050 on this PPP basis.

If instead we look at GDP at market exchange rates (MERs),which does not correct for price differences across economiesbut may be more relevant for practical business purposes, thenthe overtaking process is slower but equally inexorable. TheChinese economy would still be likely to be larger than that ofthe US before 2035 and the E7 would overtake the G7 before2040. India would be clearly the third largest economy in theworld by 2050, well ahead of Japan and not too far behind theUS on this MER basis.

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Its not all gloom for G7• Although current fuel prices are at historical highs (at least in real U.S. dollar

terms), food prices are at or below levels that prevailed before the mid-1990s.• The major shift in economic power to emerging countries such as China and India

should be grasped by those in established economies as an opportunity formutual benefit in terms of the economy and business as opposed to a zero sumcompetitive game that should be feared.

• Rapid growth in consumer markets in the major emerging economies associated

with a fast growing middle class will provide great new opportunities for Westerncompanies that can establish themselves in these markets.• Even though relative GDP shares decline, the average per capita income will

remain well above the E7. The rise of the E7 should boost average G7 incomes inabsolute terms through the newly created market opportunities

• G7 economies can specialize in their areas of comparative advantage and haveaccess to a larger global market both at home and overseas

• G7 customers will continue to benefit from low cost imports from the E7 and otheremerging economies• Restructuring of emerging market economies will give rise to many more

opportunities for private equity firms

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Inflation still lower in G7 countries

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Other Considerations• This changing world order poses both challenges and opportunities for

businesses in the current advanced economies. On the one hand,

competition from emerging market multinationals will increase steadily overtime and the latter will move up the value chain in manufacturing and someservices (including financial services given the weakness of the Westernbanking system after the crisis).

• Until recently, emerging market economies have been largely immune to the

adverse developments of the financial crisis. They have had to deal withvolatile capital flows, but in general have continue to sustain high growth.Indeed, some are close to overheating, although prospects are moreuncertain again for many others. Under certain risk scenarios, they may wellsuffer more adverse export conditions and even more volatile capital flows.Low exports and, perhaps, lower commodity prices will also create challenges

for low-income countries.• Finally, there will also be challenges arising from the rapid rise of China, India

and other emerging economies in terms of pressure on natural resourcessuch as energy and water, as well as implications for climate change.Commodity prices will tend to remain high, so boosting exporters of theseproducts (e.g Brazil. Russia, Indonesia, the Middle East) and increasing input

costs for natural resource importers.Source: PWC.com

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So What?• Too many companies in mature markets assume that the only

reason to enter emerging countries is to pursue newcustomers. They fail to perceive the potential for innovation inthose countries or to notice that a few visionary multinationalsare successfully tapping that potential for much-needed ideas

in products and services• There becomes an increased need to leverage “global

bridgers”

• This term coined by Nathan T. Washburn and B. Tom Hunsaker – two colleagues who teach at Thunderbird School of Global

Management, is used to describe a new kind of manager thatmultinationals need to foster, cultivate and deploy globally.

• These managers come up with innovations in emergingmarkets and bring home tested ideas that are integrated intotheir companies’ offerings worldwide.

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