WHERE IS THE WORLD ECONOMY

HEADING?

Dr Derek Braddon

Reader in Economics

UWE, Bristol

Year 12 ECONOMICS CONFERENCE – 4TH JULY, 2005

THE GLOBAL ECONOMY• Gross World Product (GWP) = $53 trillion 2004• EU = 22% GWP• USA = 21% GWP• Japan = 7% GWP• China = 12% GWP• Russia = 3% GWP [Source: IMF est 2004]

• The Population Explosion• 1 billion people in the world in 1802• 2 billion in 1927• 3 billion in 1961• 4 billion in 1974• 5 billion in 1987• 6 billion in 1999……………2050 = 9 billion Source:[UN est 2004]

How did we do in 2004?

MAIN ISSUES AND PROBLEMS

• Inflation: rich nations = 1 to 4%; poor nations = 5 to 60%.

• Energy price problem, especially oil• Start of new inflation problem?• Major trade imbalances with USA• Economic growth: major industrialised

nations enjoying faster growth• The elimination of poverty and growing

concern about climate change

WORLD GDP GROWTH 2003 AND 2004

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

UK GERMANY JAPAN USA

20032004

STRONGER!

Source: Economist poll of GDP forecasts

WHAT IS DRIVING THE ECONOMIC RECOVERY?

• Very low interest rates

• Continued expansionary fiscal policy

• Recovery in company finances

• Buoyant consumer demand

• Some stock market recovery

GLOBAL SHORT TERM INTEREST RATES

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004

USAEUROJAPAN

Source: IMF

BUDGET DEFICITS COMPARED: 2004

-8

-7

-6

-5

-4

-3

-2

-1

0

% GDP

UKJAPANUSAEURO

Source: Economist

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

Source: Datastream

US: Equity pricesJan 1973=100

Technology MediaTelecoms (TMT)

US Market*

*Datastream market index

US Marketexcluding TMT

Jan 1973=100

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

Source: OEF

$ billion

US

Japan

World: Current account imbalances$ billion

Eurozone

Forecast

Asia

Three important developments

PRODUCER PRICES 2003/4

-3

-2

-1

0

1

2

3

4

5

UK GERMANY JAPAN USA

2003yr to sept

Source: Economist

JAPAN IS BACK!

• After more than a decade of stagnation, Japan looks as though it has turned the corner.

• At last Japan has become more “normal”!

HUGE CONSUMER DEBTS HUGE CONSUMER DEBTS IN UKIN UK

The story so far ….

So where are we now?

In the world:

• Little danger of deflation

• Growth generally healthy in rich nations

• Limited stock market recovery

• Main threats from energy prices and politics/terrorism

In Britain:• Still strongest growth in

Europe, BUT• Highest interest rates in

Western Europe – about to fall?

• ‘Soft landing’ to housing asset price bubble

• Fiscal imbalance

• BUT……….

Three Critical Issues…..

                                                                                                      

                

Oil – is the world running out ?

OIL: A supply and demand problem

• World oil demand is increasing, driven by increasing population, the industrialization of China and India and huge US appetite for oil.

• Supply is keeping up with demand at present but world oil production peaks around 2010-2015 when demand will then exceed supply.

• Among other consequences, the oil price will increase dramatically. Other fuel sources become economically viable – but can they replace oil at rate required?

OPEC estimates, 2004

Actual

The impact of a $10 pb rise in the world oil price % difference from base Year 1 Year 2 Long Run GDP UK -0.2 -0.5 -0.4 US -0.1 -0.5 -0.6 Eurozone -0.3 -0.4 -0.3 Japan -0.2 -0.5 -0.7 Inflation UK 0.2 0.5 0.0 US 0.4 0.4 0.0 Eurozone 0.2 0.4 0.0 Japan 0.3 0.4 0.0

AFRICA

A CONTINENT IN

CRISIS

AFRICA – THE STRUGGLE FOR

SURVIVAL• “Africa’s poverty is a scar on the conscience of the world” (Tony

Blair, World Economic Forum, Davos, June 2005). Only continent to have become poorer in last 25 years.

• 150m African children live below the poverty line and two-fifths of African children are malnourished (Oxfam).

• During this lecture, 900 children will have died from starvation and related illnesses, > two-thirds in Africa.

• WHO believes 34m people have AIDS, 25m of these are in sub-Saharan Africa. During this lecture, 400 children in Africa will have been made orphans due to AIDS.

• This is a continent that is staggering backwards on almost every front - education, sanitation, infant mortality, disease eradication - while the rest of the world moves forward into the 21st century.

AFRICA – THE STRUGGLE FOR SURVIVAL

• Universal free primary education in Africa, promised for 2015, at current rates will not occur until 2130.

• Half the population of sub-Saharan Africa live on less than $1 per day.

• Economists and politicians search for solutions:

• Aid and/or Trade? • Should the rich write-off African debts? (£8 billion per

year).• A Marshall Plan for Africa? (Nelson Mandela)

WAKING GIANTS:

The explosive growth of china and india“Let China sleep for, when she wakes, she will shake the world” (Napoleon Bonaparte, 1800)

CHINA• China’s GDP has quadrupled since 1978. Measured on

a purchasing power parity (PPP) basis, China in 2004 was the second-largest economy in the world after the US.

• Has the third largest stock of foreign direct investment in the world

• Has saving and investment = to 40% GDP

• Is the 3rd largest importer and 4th largest exporter in the world – huge impact on commodity market (esp. oil)

• Its imports will drive up price of commodities and its exports will cut prices of manufactured goods in world markets

INDIA• 10th most industrialised country in the world• 4th largest economy in terms of purchasing power• 3rd largest scientific and technical labour force in the

world with well-established IT base• 2nd largest exporter of computer software and home to

software developments centres of some of world’s largest companies. Over 200 of the Fortune Top 1000 global companies now use Indian software services and professionals

• Extremely well-educated and competitive labour force – another growing economic power for the future.

WHERE IS THE WORLD ECONOMY HEADING?

• In the short-run, faster economic growth for rich nations but with concerns about inflation returning and increasing job losses to Asia.

• In longer run, greater economic instability as the world tries to adjust to the emergence of new economic powers, resolve the issue of endemic poverty in Africa and contemplate a world without oil but with major climate change.

• The G8 leaders meet on Wednesday in Edinburgh –they are going to be busy!