World Economic OutlookAnother Strong Year…And Then What?
Nariman BehraveshChief Economist
Copyright © 2006 Global Insight, Inc. 2
Outline of the Presentation
• The “Great Moderation”: A Permanent Feature of the World Economy or a Temporary Phenomenon?
• The World Outlook: Is the Risk of a Boom-Bust Rising?
• … And, As the U.S. Economy Slows, Will Other Regions Pick Up the Slack?
• Despite the Recent Cyclical Pickup in Europe, the Medium- to Long-Term Challenges Remain Enormous
The “Great Moderation”A Permanent Feature of the World Economy
orA Temporary Phenomenon?
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The “Great Moderation” – Salient Features
• Lower growth volatility
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The “Great Moderation” – World Real GDP Growth
012345678
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
(Percent change)
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The “Great Moderation” – Salient Features
• Lower growth volatility• Lower levels and volatility of inflation
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The “Great Moderation” – G-7 Inflation
0
2
4
6
8
10
12
14
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
(G-7 GDP price deflator, percent change)
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The “Great Moderation” – Salient Features
• Lower growth volatility
• Lower levels and volatility of inflation
• Lower levels and volatility of interest rates (both short and long term, both real and nominal)…
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The “Great Moderation” – Short-Term Interest Rates
0
3
6
9
12
15
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Germany Japan United States
(Percent)
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The “Great Moderation” – Long-Term Interest Rates
0
3
6
9
12
15
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Germany Japan United States
(Percent)
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The “Great Moderation” – Real Long-Term Rates
-15-12-9-6-30369
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Germany Japan United States
(Real long-term interest rates, percent)
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The “Great Moderation” – Salient Features
• Lower growth volatility
• Lower levels and volatility of inflation
• Lower levels and volatility of interest rates (both short and long term, both real and nominal)…
• …But greater financial volatility (stock market crashes, foreign exchange crises, etc.)
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Dollar/Euro Exchange rate
0.0
0.3
0.6
0.9
1.2
1.5
1.8
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
(U.S. dollars per euro)
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Yen/Dollar Exchange Rate
050
100150200250300350400
1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
(Japanese yen per U.S. dollar)
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The “Great Moderation” – Salient Features
• Lower growth volatility
• Lower levels and volatility of inflation
• Lower levels and volatility of interest rates (both short and long term, both real and nominal)…
• …But greater financial volatility (stock market crashes, foreign exchange crises, etc.)
• Which period was the anomaly: The 1970s and 1980s or the 1990s and the 2000s?
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The “Great Moderation” – Plausible Explanations
• Better macro policies (especially monetary policies)
• Greater reliance on capital markets
• Increased global competition (including the deflationary impact of China’s rise on manufactured goods markets)
• Deregulation and increased domestic competition
• The rise of the service sectors
• Rapid technological changes, and improved productivity growth in some countries
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The “Great Moderation” – What Could End It?
• Much higher oil prices and an increase in inflation rates – what matters is not so much how high oil prices get, but how they gethigh
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15
30
45
60
75
2002 2003 2004 2005 2006 2007
(U.S. dollars per barrel, WTI)
Oil Prices Will Stay High for a While
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0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 20050
10
20
30
40
50
60
70
Nonferrous Metals (Left scale) Crude Oil (Right scale)
(1994-95=1.0)
With OPEC Surplus Gone, Oil Is Now Just Another Cyclical Commodity
(WTI, $/barrel)
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-2
0
2
4
6
8
NAFTA OtherAmericas
WesternEurope
EmergingEurope
Japan Other Asia
2004 2005 2006 2007
(Percent change)
Will Inflation Stay Low?
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The “Great Moderation” – What Could End It?
• Much higher oil prices and an increase in inflation rates – what matters is not so much how high oil prices get, but how they gethigh
• A sharp rise in long-term interest rates, which could lead to a housing crash
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0
1
2
3
4
5
6
7
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
U.S. Eurozone Canada Japan U.K.
(Percent)
Most Policy Interest Rates Are Rising, But Remain Low
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The “Great Moderation” – What Could End It?
• Much higher oil prices and an increase in inflation rates – what matters is not so much how high oil prices get, but how they gethigh
• A sharp rise in long-term interest rates, which could lead to a housing crash
• The ever-rising U.S. current account deficit and a “hard” landing of the dollar – how serious of a threat is this really?
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-1,000
-800
-600
-400
-200
0
200
400
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
United States Western Europe Japan Asia exc. Japan
(Billions of dollars)
Current Account Imbalances
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U.S. Current Account Balance as a Percent of GDP
-7.5
-6.0
-4.5
-3.0
-1.5
0.0
1.5
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
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Net Foreign Debt “Projection”
Norway (1977)U.S.(1894) U.S. (2003)
Mexico (1980)
Argentina (1980)
Brazil (1980)
U.S. (2007)
New Zealand (1999)
Ireland (1983)Australia (1996)
Finland (1994)Sweden (1994)
Canada (1980)
0
20
40
60
80
100
1999 2004 2009 2014 2019 2024 2029 2034
(Percent of GDP)
Source: IMF; Obstfeld & Rogoff
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U.S. Net Foreign Debt – Problem or Not?
-30
-20
-10
0
10
201980 1983 1986 1989 1992 1995 1998 2001 2004
(Percent of GDP)
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The “Great Moderation” – What Could End It?
• Much higher oil prices and an increase in inflation rates – what matters is not so much how high oil prices get, but how they gethigh
• A sharp rise in long-term interest rates, which could lead to a housing crash
• The ever-rising U.S. current account deficit and a “hard” landing of the dollar – how serious of a threat is this really?
• Protectionism
• Macro policy mistakes
• Bottom line: Chances are good that the “Great Moderation” will last a while longer, because the underlying causes are more structural than cyclical
The World Outlook:Is the Risk of a Boom-Bust Rising?
andAs the U.S. Economy Slows,
Will Other Regions Pick Up the Slack?
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Is the Risk of a Boom-Bust Rising?
• 2006 will be the third year of above-trend global growth
• U.S. growth will be strong in the first half – how much of a housing-induced slowdown in the second half?
• Eurozone growth has rebounded – but for how long?
• Japan’s recent growth rate has been remarkably strong –but can it last?
• There appears to be no slowing in China’s boom
• Record or near-record commodity prices are helping many emerging markets
Copyright © 2006 Global Insight, Inc. 31
-9
-6
-3
0
3
6
9
12
1999 2000 2001 2002 2003 2004 2005 2006
United States European Union Japan
(Annualized 6-month percent change)
OECD Leading Indicators Signal Acceleration
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-2-10123456
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real GDP Industrial Production
(Percent change)
Growth in the World Economy
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Signs of Stress?
• Core inflation is edging up
• Bond markets are getting a little more jittery
• Iceland, New Zealand, and Hungary have come under some financial stress – is this a sign of things to come?
• Stock markets in the Middle East have plummeted, despite continued high oil prices
• While a repeat of the Emerging Markets crisis of the 1990s seems unlikely, many economies are vulnerable to high interest rates in the G-7 and a drop in commodities prices
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As the U.S. Slows, Will Others Pick Up the Slack?
• U.S. consumer spending is likely to slow as the housing market cools – the only question is how much
• Consumer spending in Japan is showing signs of life…
• …However, Eurozone consumers remain very cautious
• While consumer spending in China and India will eventually rival that of the U.S., it will take some time before the “baton is passed” to these emerging giants
Copyright © 2006 Global Insight, Inc. 35
0
2
4
6
8
NAFTA OtherAmericas
WesternEurope
EmergingEurope
Japan OtherAsia
Mideast &Africa
2004 2005 2006 2007
(Percent change)
Real GDP Growth Is Still Uneven Across the World
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World Real GDP Growth Contributions
301415Western Europe
282829United States
1058Japan
244India
51815China
243737Asia-Pacific
Percent of World GDP in
US$, 2005
Percent of World Growth,
2005–25
Percent of World Growth,
2000–05
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United States – At a Crossroads?
• Big uncertainties for the United States– How much will core inflation rise?– How bad will the housing slump be?– The rise in interest rates will be determined by the answer to
these questions• Strong productivity gains and Fed vigilance will keep inflation
under control• Good news: Robust capital spending (thanks to very strong
corporate profits) and exports (thanks to a weaker dollar and a booming world economy) will offset weaker growth in consumer spending and housing
• Risk: Will protectionist pressures get much worse as the economy slows?
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United States
-1,000-800-600-400-200
0
2000 2002 2004 2006 200880
90
100
110
120
2000 2002 2004 2006 2008
0
1
2
3
4
2000 2002 2004 2006 2008012345
2000 2002 2004 2006 2008
Real GDP Growth Inflation
Real Exchange Rate* Current Account Balance**
*FRB broad index, March 1973=100**Billions of U.S. dollars
(Percent)
Copyright © 2006 Global Insight, Inc. 39
Eurozone – How Long Will the Rebound Last?
• Good news: Capital spending and exports have strengthened• Good news: Inflation remains tame• Key uncertainty: When will consumer spending pick up?• Business confidence remains much stronger than consumer
confidence• Business surveys are stronger than the hard data• Headwinds
– Rising interest rates– A stronger euro– Tighter fiscal policy– Political turmoil and paralysis
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Eurozone
-60-30
0306090
2000 2002 2004 2006 20080.5
0.7
0.9
1.1
1.3
2000 2002 2004 2006 2008
1.5
1.8
2.1
2.4
2.7
2000 2002 2004 2006 20080
1
2
3
4
2000 2002 2004 2006 2008
Real GDP Growth Inflation
Exchange Rate per US$* Current Account Balance**
*Year-end**Billions of U.S. dollars
(Percent)
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0
1
2
3
4
France Germany Italy Spain U.K.
2004 2005 2006 2007
(Percent change)
Real GDP Growth Rates Vary Across Europe
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0
1
2
3
4
Belgium Netherlands Norway Sweden Switzerland
2004 2005 2006 2007
(Percent change)
Real GDP Growth Rates Vary Across Europe
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Japan – Good Progress, But Many Challenges Lie Ahead
• Corporate and financial restructuring has come a long way – but the adjustment is still incomplete
• A more pro-active monetary policy is bringing an end to the era of deflation
• The growth rebound has been broad-based
• Short-term challenges
– A stronger yen
– Higher interest rates
– Tighter fiscal policy
Copyright © 2006 Global Insight, Inc. 44
-2
0
2
4
6
8
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
(Real GDP, percent change)
After the “Lost Decade,” Japan Moves Forward
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Japan
050
100150200250
2000 2002 2004 2006 200875
90
105
120
135
2000 2002 2004 2006 2008
-2-10123
2000 2002 2004 2006 20080
1
2
3
4
2000 2002 2004 2006 2008
Real GDP Growth Inflation
Exchange Rate per US$* Current Account Balance**
*Year-end**Billions of U.S. dollars
(Percent)
Copyright © 2006 Global Insight, Inc. 46
Japan – Good Progress, But Many Challenges Lie Ahead
• Corporate and financial restructuring has come a long way – but the adjustment is still incomplete
• A more pro-active monetary policy is bringing an end to the era of deflation
• The growth rebound has been broad-based• Short-term challenges
– A stronger yen– Higher interest rates– Tighter fiscal policy
• Long-term challenges– Rapidly aging population– High debt levels– Inefficient service sector
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0 30 60 90 120 150
Italy
France
Germany
United States
Canada
United Kingdom
Japan
1991 2003
Japan’s Heavy Household Debt Burden
(Household debt as a percent of disposable income)
Source: OECD
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0 20 40 60 80 100 120 140 160 180 200
United Kingdom
Canada
France
United States
Germany
Italy
Japan
(Government debt as a percent of GDP, 2005)
Japan’s Heavy Public Debt Burden
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Asia Is Supporting World Growth
• Asia will remain a powerhouse of global growth in 2006, with only a modest deceleration
• Momentum is shifting from exports to domestic demand, resulting in more-balanced growth – although growth is still too export-dependent
• Central banks are gradually raising interest rates to counter inflationary pressures, but policies remain accommodative
• Inflation remains under 4% in most Asian economies –exceptions include Indonesia, India, and the Philippines
• High saving rates relative to investment rates mean that these economies will continue to be capital exporters
• Exchange rates across Asia will rise as part of a global trade adjustment
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Asia-Pacific’s Key Economies
• China’s rapid growth will eventually decelerate as the government curbs excessive state investment
• India will maintain high growth, led by its software, biotech, and business and financial services industries
• South Korea’s economy is accelerating as consumer spending rebounds and capital investment strengthens
• A gradual slowdown exports to the U.S. and China will temper growth in Taiwan and Hong Kong
• Despite surging investment in the mining sector, Australia’s economic growth is restrained by a strong currency, cooling housing market, and rising debt burdens
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Real GDP Growth in Asian Economies
0
2
4
6
8
10
12
China South Korea India Taiwan Hong Kong
2004 2005 2006 2007
(Percent change)
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0
2
4
6
8
10
Australia Indonesia Singapore Malaysia Philippines
2004 2005 2006 2007
(Percent change)
Real GDP Growth in Asian Economies
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China Is Emerging as a Global Economic Power
• China’s rapid expansion has been driven by exports and investment
• Growth will moderate as investment and exports decelerate, while imports accelerate and consumer spending picks up moderately
• Price controls in the energy sector have created inefficiencies and excess investment in energy-intensive industries
• Under the new managed float, the renminbi will appreciate modestly and gradually, by about 3–5% annually
• China’s closed and rigid political system will become increasingly incompatible with its market-oriented economy over the long-term
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China
0
30
60
90
120
2000 2002 2004 2006 20086.5
7.0
7.5
8.0
8.5
2000 2002 2004 2006 2008
-2
0
2
4
6
2000 2002 2004 2006 20080
3
6
9
12
2000 2002 2004 2006 2008
Real GDP Growth Inflation
Exchange Rate per US$* Current Account Balance**
*Year-end**Billions of U.S. dollars
(Percent)
Copyright © 2006 Global Insight, Inc. 55
India Will Sustain 6–7% Real GDP Growth
• Economic reforms are slowly gaining momentum, opening the economy to more trade and foreign investment
• Information technology services, pharmaceuticals, business outsourcing, and financial services are driving export growth
• India’s labor force has strong engineering and analytical skills, an advantage in high-value manufacturing
• The population of 1.1 billion is growing 1.5% annually
• But India is still a relatively closed economy with high tariffs, an overbearing bureaucracy, inadequate infrastructure, and a huge fiscal deficit
Copyright © 2006 Global Insight, Inc. 56
India
-45
-30
-15
0
15
2000 2002 2004 2006 200842
44
46
48
50
2000 2002 2004 2006 2008
3.63.94.24.54.85.1
2000 2002 2004 2006 200802468
10
2000 2002 2004 2006 2008
Real GDP Growth Inflation
Exchange Rate per US$* Current Account Balance**
*Year-end**Billions of U.S. dollars
Copyright © 2006 Global Insight, Inc. 57
Other Emerging Markets Are Enjoying the Boom
0
2
4
6
8
10
Central Europe &Balkans
Commonwealthof Indep. States
Middle East &Africa
Latin America &Caribbean
2004 2005 2006 2007
(Real GDP, percent change)
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Latin America Is Growing, But Risks Are High
• A growing world economy, competitive currencies, and high commodity prices are supporting Latin American growth, but a retreat from market reforms of the 1990s dims long-term prospects
• Mexico’s economy has rebounded, but progress on structural reforms has been slow and the political transition is uncertain
• In Brazil, corruption scandals have weakened the ruling party, while high interest rates are restraining growth
• Argentina’s economy has rebounded strongly, but production bottlenecks are fueling double-digit inflation
• In Venezuela, the oil windfall has enabled President Chavez to increase public spending, but macroeconomic imbalances are accumulating under price and exchange rate controls
• Chile’s growth will be supported by high copper prices, a favorable investment climate, and fiscal surpluses
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Emerging Europe Is Still Attracting Investment
• A pick-up in Eurozone economies in 2006 will boost exports
• Countries that joined the European Union in May 2004 are benefiting from foreign investment and transfer payments
• Political stability has led to an investment boom in Turkey
• Falling trade barriers, low costs, and privatization will spark industrial development in Romania, Bulgaria, and Croatia
• Turkmenistan, Azerbaijan, and Kazakhstan will achieve the highest growth rates as a result of oil and gas development
• Russia’s strong economic growth is overly dependent on energy; an appreciating ruble, the slow pace of reforms, and increasing centralization have elevated investment risks
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Middle East Prospers Despite Instability
• Near-term strength in oil export revenues will support public spending, energy-related investment, and economic growth
• The region will enjoy record trade and fiscal surpluses in 2006
• Entry into the World Trade Organization will enable Saudi Arabiato boost non-oil exports and diversify its economy
• In Iran, an unstable policy environment is discouraging needed investments – mounting tensions with the West over Iran’s nuclear program could lead to economic sanctions
• Despite continuing insurgency, Iraq has made considerable progress toward a new political order – its economy is booming
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Africa Benefits from Commodity Boom
• Rising commodity prices have helped the region
• Poor governance is a major obstacle to development
• Capital flight, the AIDS epidemic, and political instability hinder growth in Sub-Saharan Africa
• South Africa is benefiting from rapid growth in capital investment and booming precious metals markets; a strong rand has restrained exports
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A Comparison of Key Emerging Markets in 2005
6.35,350143763Russia
42,050
12,890
7,260
4,320
725
1,700
GDP per Capita ($)
297
24
106
184
1,097
1,309
Population(Millions)
6.4306Saudi Arabia
3.512,487United States
3.0769Mexico
2.3796Brazil
7.8795India
9.92,225China
Real GDP Growth, %
GDP ($Billions)
Despite the Recent Cyclical Pickup in Europe, the Medium- to Long-Term Challenges Remain
Enormous
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Long-Term Challenges Facing the Eurozone
• Three of the most serious challenges facing the Eurozone
– Decelerating productivity
– Poor university education
– Underutilization of labor force
• Poor productivity growth has less to do with R&D spending and more to do with rigid labor markets and a poor entrepreneurial culture
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Total Factor Productivity Growth
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
Italy
Spain
EU-15
France
Germany
United Kingdom
United States
Sweden
1995-2000 2000-2004
(Percent change)
Source: Groningen Growth and Development Center (GGDC), Total Economy Growth Accounting Database
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Expenditures on Research and Development
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Spain
Italy
United Kingdom
EU-15
United States
France
Sweden
Germany
1995-2000 2000-2004
(Percent of GDP)
Source: Eurostat
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Strictness of Labor Protection
0 2 4 6
(Index*)
* Higher number reflects stronger regulationSource: OECD Employment Outlook 2004
0 2 4 6
France
Germany
Italy
Spain
Sweden
United Kingdom
United States
Regular Employment Temporary Employment
Late 1980s Late 1990s 2003
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Product Market Regulation
0.0 0.5 1.0 1.5 2.0 2.5 3.0
United Kingdom
United States
Sweden
Germany
Spain
France
Italy
1998 2003
(Index*)
* Higher number reflects stronger regulationSource: Conway, Janod and Nicoletti (2005)
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Venture Capital Investment, 2000-04
0.00 0.02 0.04 0.06
(Percent of GDP)
Source: Eurostat0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14
France
Germany
Italy
Spain
Sweden
United Kingdom
EU-15
United States
Early-Stage Expansion and Replacement
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Long-Term Challenges Facing the Eurozone
• Three of the most serious challenges facing the Eurozone
– Decelerating productivity
– Poor university education
– Underutilization of labor force
• Poor productivity growth has less to do with R&D spending and more to do with rigid labor markets and a poor entrepreneurial culture
• While Europe was the birthplace of the modern university, no Eurozone universities are now ranked among the top 40 of the world
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Educational Attainment, 2002
0 2 4 6 8 10 12 14 16
PortugalItaly
SpainGreeceFrance
BelgiumAustria
HungaryPolandCzech
FinlandSwedenSlovakia
JapanIreland
U.K.U.S.A.
SwitzerlandLuxembourg
DenmarkGermany
IcelandNetherlands
Norway(Average years of schooling, adult population)
Source: OECD
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Top World Universities* in 2005
U.S.Univ. of California, San Diego13
U.S.Cornell Univ.12
U.S.Yale Univ.11
U.K.Univ. of Oxford10
U.S.Univ. of Chicago9
U.S.Princeton Univ.8
U.S.Columbia Univ.7
U.S.California Inst. of Tech.6
U.S.Massachusetts Inst. of Tech. (MIT)5
U.S.Univ. of California, Berkeley4
U.S.Stanford Univ.3
U.K.Univ. of Cambridge2
U.S.Harvard Univ.1
CtryInstitutionWorld Rank
GermanyUniv. of Munich51
FranceUniv. of Paris46
SwedenKarolinska Inst. of Stockholm45
U.S.Univ. of California, Los Angeles14
U.S.Univ. of Pennsylvania15
U.S.Univ. of Wisconsin, Madison16
U.S.Univ. of Washington, Seattle17
U.S.Univ. of California, San Francisco18
U.S.Johns Hopkins Univ.19
JapanTokyo Univ.20
Neth.Univ. of Utrecht41
Switz.Swiss Fed. Inst. of Tech, Zurich27
CanadaUniv. of Toronto24
CtryInstitutionWorld Rank
* Ranked by a mix of indicators of academic and research performance, including Nobel prizes and articles in respected publicationsSource: Jiao Tong University, Shanghai
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Private Expenditures on University Education
0 10 20 30 40 50 60 70
United StatesUnited Kingdom
SpainSlovakiaPortugal
NetherlandsItaly
HungaryGermany
FranceAustria
2001 1995
(Share of total expenditures on university education)
Source: OECD
Copyright © 2006 Global Insight, Inc. 74
Long-Term Challenges Facing the Eurozone
• Three of the most serious challenges facing the Eurozone
– Decelerating productivity
– Poor university education
– Underutilization of labor force
• Poor productivity growth has less to do with R&D spending and more to do with rigid labor markets and a poor entrepreneurial culture
• While Europe was the birthplace of the modern university, no Eurozone universities are now ranked among the top 40 of the world
• Many of the large Eurozone economies have some of the highest rates of long-term and youth unemployment…
Copyright © 2006 Global Insight, Inc. 75
Long-Term Unemployment Rates, 2004
0 10 20 30 40 50 60
United States
Sweden
United Kingdom
Spain
France
Italy
Germany
(Percent of total unemployment, 12 months or longer)
Source: OECD
Copyright © 2006 Global Insight, Inc. 76
Youth Unemployment Rates, 2004
0 5 10 15 20 25
United Kingdom
Germany
United States
Sweden
Spain
France
Italy
(Percent of youth labor force, under 25 years old)
Source: OECD
Copyright © 2006 Global Insight, Inc. 77
Long-Term Challenges Facing the Eurozone
• Three of the most serious challenges facing the Eurozone
– Decelerating productivity
– Poor university education
– Underutilization of labor force
• Poor productivity growth has less to do with R&D spending and more to do with rigid labor markets and a poor entrepreneurial culture
• While Europe was the birthplace of the modern university, no Eurozone universities are now ranked among the top 40 of the world
• Many of the large Eurozone economies have some of the highest rates of long-term and youth unemployment…
• ...And some of the lowest labor-force participation rates for women, young workers, and old workers
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Labor-Force Participation Rates
0 10 20 30 40 50 60 70 80
Italy
France
Germany
Spain
United Kingdom
United States
Sweden
Ages 15-24 Ages 55+
(Percent)
Source: OECD
Copyright © 2006 Global Insight, Inc. 79
0
10
20
30
40
50
United States France Germany Italy
1975 2000 2025 2050
Aging in the U.S., France, Germany, and Italy
(Persons aged 60 years and older as a percent of total population)
Source: United Nations (2002)
Copyright © 2006 Global Insight, Inc. 80
0
15
30
45
60
75
Italy France Germany United States
1982 1992 2002*
Female Labor-Force Participation
(Percent of the total female population aged 15-64)
Source: OECD (2003)* The numbers for France and the United States are for 2001 and 2000, respectively
Copyright © 2006 Global Insight, Inc. 81
Long-Term Challenges Facing the Eurozone (cont.)
• Poor productivity growth, along with underutilization of labor, will exacerbate the pension funding challenge
• Reforms have been too timid and too focused on cutting benefits rather than freeing up the economies
• The European Social Model has not performed well in the “Age of Schumpeter”
• What the Eurozone needs– More competition in product and labor markets– More private provision of university education– Fewer disincentives to joining or staying in the labor force
• Without reforms, the insider/outsider chasm will inevitably widen and political turmoil will become even worse
Copyright © 2006 Global Insight, Inc. 82
Bottom Line
• The structural changes that have brought about the “Great Moderation” are likely to continue
• Still, there is a growing risk of a boom-bust at the global level
• While in the near term Japanese and Eurozone growth has picked up, in the medium term the U.S. and China will continue to be the primary growth engines
• Emerging markets are benefiting from the global boom, but are increasingly vulnerable to higher interest rates and lower commodity prices
• Europe is faced with some daunting (but ultimately manageable) challenges that will require strong leadership – which so far has been lacking
The Premier Forum on the Direction of the Global Economy