WHERE IS THE WORLD ECONOMY HEADING?

Jonathan Bradley

Dean of Students and Principal Lecturer in Economics

Year 12 Economics Conference University of the West of England Wednesday 25 June 2008

THIS LECTURE

• The global economy

• Resources and the environment

• New economic superpowers

• Poverty

• What’s going to happen in the world and in the UK?

THE GLOBAL ECONOMY

• Gross World Product (GWP) = $61,258,714 mn 2005• EU = 22% GWP• USA = 21% GWP • Japan = 7% GWP • China = 12% GWP• Russia = 3% GWP [Source: IMF 2006]

• 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 = ???? Source:[UN est 2005]

POPULATION

• UN estimate for 2050 = 9 billion

• An extra 3 billion

• Source:[UN est 2005]

GLOBAL SHORT TERM INTEREST RATES

0

1

2

3

4

5

6

2002 2003 2004 2005 2006 2007 2008

USAEUROJAPAN

Source: IMF

WORLD GDP GROWTH 2007 AND 2008 (est)

01

23

45

678

910

UK Euro area JAPAN USA China

20072008

Slowing down, except

ChinaSource: Economist poll of GDP forecasts, except

for 2007 China – author guess!

est

BUDGET DEFICITS COMPARED 2008 (est)

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

% GDP

UKJAPANUSAEURO

Source: Economist

SO WHERE ARE WE NOW?

• Renewed threat of inflation• Impact of rising interest rates• Can growth impetus be maintained?• Problem of US deficits and world’s

ability to finance them• Convergence of new challenges for global

economy – unprecedented combination of pressures

THE ENERGY ISSUE

A CLASSIC SUPPLY & DEMAND BATTLE

OIL

• 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, 2006

OIL PRICE

0

20

40

60

80

100

120

140

160

73 77 81 85 89 93 97 1 5 8

$ barrel

PRICE OF A LITRE OF UNLEADED IN JUNE 2009???

20% lower = 96 p10% lower = £1.08Same = £1.2010% higher = £1.3220% higher = £1.44

EMERGING SUPERPOWERS

India and China

Demographic Trends in Japan, China & India

Source: United Nations, World Population Prospects, 2004 Revision, Medium variant

UNITED NATIONS POPULATION & PROJECTIONS China, India & Japan

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Ch

ina,

Ind

ia

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Jap

an

CHINA INDIA JAPAN

WINNING THE ECONOMIC FUTURE: INNOVATION AND DESIGN

• USA and Europe seem to assume that future growth for them is innovation and design-led while India and China will act as low-cost producers.

• Appealing idea for economists since it maintains the Ricardian comparative advantage thesis intact – therefore, theory appears to strengthen this view of future world prospects

• Growing case-study evidence however that suggests the ‘design and innovation’ element of business is being embedded more and more into leading companies in both emerging economies.

CHINA

Growth has been very rapid GDP growth at constant prices

0

2

4

6

8

10

12

14

16

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

China: Trade Surplus

0

50

100

150

200

250

300

2001 2002 2003 2004 2005 2006 2007 2008

$ billion

Source: Capital Economics

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 USA.

• 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 – huge competitive challenge to existing players

INDIA

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.

ENDING POVERTY

Can we save Africa?

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.

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 (SSA) live on less than $1 per day.

• Africa's > $200 billion debt burden is the single biggest obstacle to the continent's development.

• SSA countries spend almost $14 bn annually on debt service but receive only $10 bn in aid.

• G8 finance ministers agreed at a meeting in London on 11 June 2005 to write off $40bn in debt owed by 18 of the world's poorest countries, most of them in sub-Saharan Africa.

• Promising step forward but of 40 countries targeted, only 18 have yet reached ‘Millennium Development Goals’ to qualify for debt write-off.

SO WHERE is THE WORLD ECONOMY HEADING?

• USA recession, but probably not serious

• Europe varied, but still generally slower

• Japan will keep going

• Rest of world: contrast between resource-rich and resource-poor

…..AND THE UK ECONOMY?

• Rather sick!

• Slowing down

• Big public sector deficit

• Weak currency

• Rising unemployment

• Rising inflation

• Serious danger of stagflation

HOUSE PRICES: rate of change

HOUSE PRICES: average

UK interest rates

• Source: Daily Telegraph

INFLATION

0

5

10

15

20

25

76 0 1 2 3 4 5 6 7 8 forc

june cpi

The squeeze on household budgets

THE TIGHTENING SQUEEZE

                                                                                                                                                                              

THIS?

OR THIS?