Global Economic Global Economic Shifts in 2007 and Shifts in 2007 and
BeyondBeyondRobert F. Wescott, Ph.D.Robert F. Wescott, Ph.D.
Pioneer Investments ColloquiaPioneer Investments Colloquia
PraguePrague
29 November 200629 November 2006
A Major Geopolitical Shift
Global Liquidity Now Global Liquidity Now Slowing Slowing
U.S. monetary base plus world foreign U.S. monetary base plus world foreign exchange holdings (percent change, year on exchange holdings (percent change, year on
year)year)
0%
5%
10%
15%
20%
25%
30%
2000
Q1
2000
Q3
2001
Q1
2001
Q3
2002
Q1
2002
Q3
2003
Q1
2003
Q3
2004
Q1
2004
Q3
2005
Q1
2005
Q3
Sources: Federal Reserve, IMF COFER database
Oil: A Continuing Oil: A Continuing Burden on the World Burden on the World
EconomyEconomy
Source: EIA, IMF WEO
0%
1%
2%
3%
4%
5%
6%
7%
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
Global Slowdown Trigger Level?
What’s Hurting Investment What’s Hurting Investment Climate “A Lot”?Climate “A Lot”?
54% 53% 52% 36% 26%
Source: UBS Index of Investor Optimism, Nov. 27, 2006
Housing Prices Rising Housing Prices Rising WorldwideWorldwide
-50% 0% 50% 100% 150% 200% 250%
Hong KongJapan
GermanySwitzerland
SwedenCanadaFrance
DenmarkBelgium
N. ZealandItalyU.S.
NetherlandsAustralia
BritainSpain
IrelandS. Africa
Percent Change, 1997-2005
Source: The Economist
5.3%
29.6%
20.6%
81.3%
Share of TotalEmployment, 2005
2004 2005 2001- 2005
Housing’s Disproportionate Housing’s Disproportionate Contribution to U.S. Job Contribution to U.S. Job
GrowthGrowth
Source: BLS
Mortgage Equity Withdrawal Can Mortgage Equity Withdrawal Can Almost Entirely Explain the Almost Entirely Explain the
Decline in U.S. SavingDecline in U.S. Saving
Source: Federal Reserve, BEA, Office of Thrift Supervision, ISI
-2%
0%
2%
4%
6%
8%
10%
12%Household Savings RateMortgage Equity Withdrawal
Housing’s Contribution to Housing’s Contribution to U.S. GDP Growth, 2001-05U.S. GDP Growth, 2001-05
ChannelChannel Growth, Growth, ‘01-’05‘01-’05
Effect on Effect on GDPGDP
ContributioContribution to GDP n to GDP GrowthGrowth
Residential Residential InvestmentInvestment $343 billion$343 billion 100%100% $343 billion$343 billion
Housing Housing WealthWealth
$4,286 $4,286 billionbillion 7%7% $300 billion$300 billion
Cash Out Cash Out From From
RefinancingRefinancing
$1,219 $1,219 billionbillion 100%100% $1,219 $1,219
billionbillion
Total housing contribution to GDP Total housing contribution to GDP growth:growth:
$1,862 $1,862 billionbillion
Total U.S. GDP growth:Total U.S. GDP growth: $2,918 $2,918 billionbillion
Housing share of GDP growth Housing share of GDP growth (percent):(percent): 64%64%
U.S. Housing Downturns Tend to U.S. Housing Downturns Tend to be Deepbe Deep
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%1973-75 1978-80 1981-82 1984 1986-91
Decline in Housing Starts, Last Five Housing Market Downturns
Source: Census Bureau
Average Decline: 51.2%
40
45
50
55
60
65
70
75
2002.02 2002.10 2003.06 2004.02 2004.10 2005.06 2006.02
U.S. Housing Bubble Already U.S. Housing Bubble Already Burst!Burst!
Source: National Association of Home Builders
NAHB/Wells Fargo Housing Market Index, 2002-2006
8 Ways Global Economy Will 8 Ways Global Economy Will Change in 2007 and BeyondChange in 2007 and Beyond
1. Centers of activity will shift1. Centers of activity will shift 2. Consumer landscape will change2. Consumer landscape will change 3. Energy and environmental problems will grow3. Energy and environmental problems will grow 4. Emerging markets will have both inflationary 4. Emerging markets will have both inflationary
and and deflationary effectsdeflationary effects 5. Battleground for talent will heat up5. Battleground for talent will heat up 6. Emerging markets will have faster productivity 6. Emerging markets will have faster productivity
growth growth and appreciating currenciesand appreciating currencies 7. Investors beware: diversification will keep 7. Investors beware: diversification will keep
fallingfalling 8. Disequilibrium pressures will correct8. Disequilibrium pressures will correct
1. Centers of economic 1. Centers of economic activity will shift activity will shift
profoundly – globally and profoundly – globally and regionallyregionally
Today Asia (excluding Japan) Today Asia (excluding Japan) represents 13% of world GDP; the represents 13% of world GDP; the E.U. represents 30%.E.U. represents 30%.
In 2025 Asia and the E.U. will each In 2025 Asia and the E.U. will each be 20%-22% of the world economy.be 20%-22% of the world economy.
The U.S. will remain the world’s The U.S. will remain the world’s largest economy.largest economy.
Regional shifts: toward regional Regional shifts: toward regional capital cities (Kansei, Kanto)capital cities (Kansei, Kanto)
China’s Trend Has China’s Trend Has Been Sharply Been Sharply
UpwardUpwardShare 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
0
3
6
9
12
15
1980 1986 1992 1998 2004
Sources: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund
0
2
4
6
8
10
1820 1845 1870
0
5
10
15
20
25
1860 1882 1913
0
2
4
6
8
10
1950 1956 1962 1968 1974
China, 1980-2005
U.K., 1820-1870 U.S., 1860-1913
Japan, 1950-1974
GDP, % of World Total, PPP BasisGDP, % of World Total, PPP Basis
2. The consumer 2. The consumer landscape will expand landscape will expand
significantlysignificantly $5,000 in income is a threshold above which $5,000 in income is a threshold above which
spending can go to discretionary items (like spending can go to discretionary items (like Italian silk scarves)Italian silk scarves)
Spending power in emerging markets will Spending power in emerging markets will jump from $4 trillion today to $10 trillion in jump from $4 trillion today to $10 trillion in 2025.2025.
Already Poland has more people with a Danish Already Poland has more people with a Danish income level than Denmark.income level than Denmark.
Soon China will have more people with a Soon China will have more people with a German income level than Germany.German income level than Germany.
Vehicles Registered per Vehicles Registered per CapitaCapita
Vehicle Vehicle RegistratRegistrat
ionion
Country/YearCountry/Year Per Capita Per Capita IncomeIncome
0.010.01
(1 in (1 in 100)100)
China, 1997China, 1997 $3,695$3,695
Korea, 1973Korea, 1973 $3,465$3,465
0.050.05
(1 in 20)(1 in 20)Korea, 1988Korea, 1988 $8,934$8,934
Taiwan, 1981Taiwan, 1981 $6,628$6,628
Mexico, 1974Mexico, 1974 $7,639$7,639
0.10.1
(1 in 10)(1 in 10)Korea, 1991Korea, 1991 $10,973$10,973
Taiwan, 1987Taiwan, 1987 $9,992$9,992
Mexico, 1981Mexico, 1981 $10,030$10,030
0.20.2
(1 in 5)(1 in 5)Japan, 1971Japan, 1971 $11,400$11,400
Korea, 1995Korea, 1995 $13,864$13,864
Taiwan, 1992Taiwan, 1992 $13,458$13,458
3. Demand for natural 3. Demand for natural resources will grow; put resources will grow; put
strain on the strain on the environmentenvironment
Oil demand projected to grow 50% Oil demand projected to grow 50% in the next 20 yearsin the next 20 years
But China cannot use oil and coal But China cannot use oil and coal as U.S. and Europe doas U.S. and Europe do
Growing demands for steel, Growing demands for steel, aluminum, copper, minerals, wateraluminum, copper, minerals, water
Pressing need for alternate fuels, Pressing need for alternate fuels, new transportation technologynew transportation technology
4. For Goods that China 4. For Goods that China BuysBuys……
0%
10%
20%
30%
40%
50%
60%
70%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Copper Iron Aluminum
China’s Share of World Imports of Metal Ores & ConcentratesChina’s Share of World Imports of Metal Ores & Concentrates
Source: UN ComTradeSource: UN ComTrade
……Prices Go Prices Go UpUp
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Copper Iron Aluminum
Source: United States Geological SurveySource: United States Geological Survey
Average US Market Spot Prices, Indexed to 1996 PricesAverage US Market Spot Prices, Indexed to 1996 Prices
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
Bil
lio
n Y
uan
But for Goods that China But for Goods that China SellsSells……
China’s exports have increased 3X in 5 years
……Prices Are Held Prices Are Held DownDown
95
105
115
125
135
145
155
1991 1993 1995 1997 1999 2001 2003 2005
U.S. Import Non-energy Import Price Index 1990 = 100
U.S. Core CPI, Index 1990 = 100
5. Battleground for talent 5. Battleground for talent will shiftwill shift
Shift from production to knowledge-Shift from production to knowledge-intensive industries (science, technology, intensive industries (science, technology, culture, arts, entertainment)culture, arts, entertainment)
In U.S., 5% of jobs were in these industries In U.S., 5% of jobs were in these industries in 1900, but 40% today are.in 1900, but 40% today are.
In Italy, 13% are today, but this will In Italy, 13% are today, but this will increase.increase.
33 million university-educated young 33 million university-educated young professionals in developing countries today professionals in developing countries today (more than twice the number in advanced (more than twice the number in advanced countries)countries)
TalentTalent
0%
5%
10%
15%
20%
25%
30%
Denm
ark
Austri
a
Portu
gal
Italy
Franc
e
Irela
nd
Greec
e
Belgi
um
Sweden
Finlan
d
Germ
any
Spain
U.K.
Nethe
rlands U.S
.
Percent of population ages 25-64 with a B.A. degree or above
Source: Florida and Tinagli, “Europe in the Creative Age,” Feb. 2004
6. Key Attractions of Emerging 6. Key Attractions of Emerging Markets:Markets:
Rapid Productivity Growth & Appreciating Rapid Productivity Growth & Appreciating CurrenciesCurrencies
0
5
10
15
20
25
30
35
40
45
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: IMFSource: IMF
While Poland’s productivity has
increased 4.2% a year, the Zloty has
appreciated by roughly 3% per year against the
currencies of all its trading partners.
Polish Zloty, real effective exchange rate, % change from 1995
Average Correlation Between US & Emerging Market Average Correlation Between US & Emerging Market Equity Indices Equity Indices
-0.3
-0.1
0.1
0.3
0.5
0.7
0.9
1989 1991 1993 1995 1997 1999 2001 2003 2005
7. Global Markets Move as One!7. Global Markets Move as One!Tighter Linkages Between Equity Tighter Linkages Between Equity
MarketsMarkets
Source: Global Financial Data. Equity market indices for Argentina, Brazil, China, India, Mexico, Source: Global Financial Data. Equity market indices for Argentina, Brazil, China, India, Mexico, South Africa, South Korea, Taiwan, Turkey, Venezuela, and the United States. South Africa, South Korea, Taiwan, Turkey, Venezuela, and the United States.
8. Risk: Can Disequilibrium 8. Risk: Can Disequilibrium Continue?Continue?
Source: IMF WEO
-8
-6
-4
-2
0
2
4
6
8
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Current Account Balance as a Percent of GDP
China Produces
The US Consumes