1 Scenarios for the World Economy Warwick J. McKibbin Centre for Applied Macroeconomic Analysis ANU,...

1

Scenarios for the World Economy

Warwick J. McKibbin

Centre for Applied Macroeconomic Analysis ANU,& The Lowy Institute for International Policy

& The Brookings Institution

Presentation to North American Die Casting Association Conference, Hawaii, 19 February 2007

2

Overview

• Near term outlook for the world economy• Key Issues in the Medium Term

Emergence of China and India Global trade imbalances Energy Futures Global Demographic Change Pandemic influenza

0

2

4

0

2

4

World GDPYear-average percentage change

200720011995198919831977Sources: data – IMF; forecasts – Consensus Economics

%% Forecasts – January 2007

30-year average

World GDP Growth Year-average, per cent

Share of world GDP*

2006 Estimate

2007 Consensus

forecast United States 20.1 3.4 2.4 Euro area 15.1 2.7 2.0 Japan 6.4 2.2 1.8 China 15.4 10.7 9.6 Other east Asia 6.9 5.1 4.8 India 6.0 8.4 7.8 Latin America 7.1 5.0 4.5 Emerging Europe

6.9 6.6 5.9

World 5.4 4.7 * 2005, at PPP exchange rates

l l l l l l l l l 125

120

115

110

105

100

1.05

1.10

1.15

1.20

1.25

1.30

1.35

Major Exchange Rates

Yen per US$(LHS, inverted scale)

Yen US$

US$ per Euro(RHS)

20052004M J S D M J S D M J

2006S D M

2007

l l l l l l l l l l l l l l l l l l l l l l l l30

40

50

60

70

30

40

50

60

70

WTI Crude Oil PriceUS$/barrel

US$/barrel

MarJunMarDecSep

Source: Bloomberg2005

Jun DecSep20072006

Mar

l l l l l l l l l l l l 60

80

100

120

140

160

180

200

60

80

100

120

140

160

180

200

Index Index

Share Price Indices1 January 2003 = 100

S&P 500

M2003J

Euro STOXX

S D2004

M

Topix

J S D M2005J S D

2006M J S D M

2007

l l l l l l l l l l l l0

100

200

300

400

500

600

0

100

200

300

400

500

600

Share Price Indices2 January 1995 = 100

1995

MSCI Latin America

Index Index

1997 1999 2001 2003 2005 2007

MSCI World

MSCI Emerging Asia

l l l l l l l l l l l l0.0

0.5

1.0

1.5

0.0

0.5

1.0

1.5

Volatility in Global Share Prices22-day moving average of the absolute daily percentage change

Average

2005

%%

20032001199919971995 2007

l l l l l l l -1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

%

US

%

Euro area

Canada

Australia

UK

Cash Rates

NZ

Sweden

Japan

Switzerland

20012000 2002 2003 2004 2005 2006 2007

11

The Emergence of China and India

12

Based on

• McKibbin, Thirlwell and Woo (2007) “The Emergence of China and India inot the World Economies” Lowy Institute (forthcoming)

13

Top ten countries by population

205020051950

55.90.17Ethpia59.20.13Japan61.70.05Italy10

54.00.18Congo57.30.13Ngeria59.90.05UK9

52.00.24Bangla55.20.14Bangla57.90.05Brazil8

49.40.25Brazil53.00.14Russia55.70.07Ger7

46.60.26Ngeria50.80.16Pak53.00.08Indon6

43.70.29Indon48.40.19Brazil49.90.08Japan5

40.60.31Pak45.50.22Indon46.60.10Russia4

37.20.40USA42.00.30USA42.50.16USA3

32.91.39China37.41.10India36.20.36India2

17.51.59India20.41.32China22.00.56China1

Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

205020051950


54.00.18Congo57.30.13Ngeria59.90.05UK9



46.60.26Ngeria50.80.16Pak53.00.08Indon6


40.60.31Pak45.50.22Indon46.60.10Russia4

37.20.40USA42.00.30USA42.50.16USA3



Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

14

Top ten countries by population

205020051950


54.00.18Congo57.30.13Ngeria59.90.05UK9



46.60.26Ngeria50.80.16Pak53.00.08Indon6


40.60.31Pak45.50.22Indon46.60.10Russia4

37.20.40USA42.00.30USA42.50.16USA3



Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

205020051950


54.00.18Congo57.30.13Ngeria59.90.05UK9



46.60.26Ngeria50.80.16Pak53.00.08Indon6


40.60.31Pak45.50.22Indon46.60.10Russia4

37.20.40USA42.00.30USA42.50.16USA3



Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

Cumul. %

Pop’n (bns)

China and India account for more than one third of the global population. In contrast,

Japan at the start of its economic takeoff was less than 4% of the global total.

15

World economic history is a tale of divergence

Source: Angus Maddison, The world economy: historical statistics, 2003

See Mark Thirlwell, http://www.lowyinstitute.org

0

4,000

8,000

12,000

16,000

20,000

1600 1700 1820 1870 1913 1950 1970 1980

China India US

GDP per capita

1990 dollars, PPP basis

Before 1980s, lacklustre economic

performance in Asia’s two giants

16

World economic history is a tale of divergence

Source: Angus Maddison, The world economy: historical statistics, 2003


0

4,000

8,000

12,000

16,000

20,000

1600 1700 1820 1870 1913 1950 1970 1980

China India US

GDP per capita

1990 dollars, PPP basis

Industrial Revolution and 1st Age of Globalisation

produced growing gap between

advanced world and majority of Asia’s

population

17

Now, the start of the Great Convergence?

Source: Angus Maddison, The world economy: historical statistics, 2003 and IMF World Economic Outlook database (September 2006)

0

5

10

15

20

1950 1960 1970 1980 1990 2000

China

India

GDP per capita

% of US level, PPP basis

Between 1980 and 2007, China is

expected to close GDP per capita gap with US from 6% to 19% of US levels

18

Measurement matters:Two views of the 12 largest economies in 2005

Source: IMF World Economic Outlook April 2006 database


0

5

10

15

20

25

30

Top 12 economies by GDP, US$

% of world GDP

0

5

10

15

20

25

Top 12 economies by GDP, PPP

% of world GDP

l l l l l l l l l l l60

100

140

180

220

260

300

60

100

140

180

220

260

300

Metal Prices2 January 2006 = 100, US$

Sources: Bloomberg; RBA

Index

Gold

Index

Dec-06Oct-06Aug-06

AluminiumLead

ZincCopper

Nickel

Feb-07Jun-06Apr-06

Table 4 Projections of Economic SizeOptimistic

2005 2010 2015 2020 2025United States 100.0 117.0 136.3 158.4 183.5Japan 100.0 113.4 128.2 144.4 162.3Europe 100.0 113.7 129.0 145.9 164.9Rest of OECD 100.0 118.6 139.4 162.9 189.2China 100.0 145.0 198.7 262.2 336.4India 100.0 144.9 200.1 267.1 347.5Other Asia 100.0 129.3 164.2 205.5 254.1Latin America 100.0 133.7 174.4 223.1 280.8Eastern Europe and Former Soviet Union 100.0 121.7 146.4 174.8 207.8Other Developing Countries 100.0 137.7 184.9 243.5 315.5World 100.0 121.3 146.2 175.3 209.1Source: Author's Calculations

21

Sensitivities

Global Imbalances

22

Based on

• Lee, McKibbin and Park (2006) “Transpacific Trade Imbalances: Causes and Cures” World Economy vol 29

• McKibbin and Stoeckel (2005) The United States

current account deficits and world markets

• Lee and McKibbin (2006) “Domestic Investment and External Imbalances in East Asia”, World Economic Forum

• McKibbin (2006) “The Global Macroeconomic Consequences of a Demographic Transition” Asian Economic Papers, MIT Press

23

Overview

• What are the macroeconomic imbalances?

• What are the sources of current account imbalances?

24

Two Aspects of Global Imbalances

• Global Savings in excess of global investment which shows up as low long term real interest rates

• National savings and investment imbalances which show up as current account imbalances between countries

Countries with national savings greater than national investment run current account surpluses

Countries with national investment greater than national savings run current account deficits

l l l l l l l l l l l 0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

10-year Government Bond Yields%%

US

Japan

Germany

200720052003200119991997

Current Accounts ($US Billion)

-1000

-800

-600

-400

-200

0

200

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Middle East

Japan

United States

China

NICs

ASEAN-4

International Monetary Fund, World Economic Outlook Database, April 2006

Current Accounts (%GDP)

-10

-5

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Middle East

Japan

United States

China

NICs

ASEAN-4


2004 2005 20060

50

100

150

200

250

0

50

100

150

200

250

Foreign Reserves AccumulationUS$b US$b

Middle East Japan Rest of Asia China

29

Number of Real Factors and not a Single cause

• US current deficit is an excess of US investment relative to US saving

• Pull US fiscal deficits Decline in household saving Strong productivity growth

• Push Decline in Asian investment rates (except China) Rising corporate and household saving in China Oil revenue recycling by Oil Exporters

1 Main drivers behind the decline in current account balance in the United States

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

1991 1993 1995 1997 1999 2001 2003 2005

US$

billi

on .

..

US fiscal deficit and

public dissav ing, low

personal sav ing rates

Japanese inv estment slump

US dot com inv estment boom Boom collapses

Asian financial crisis and

loss of inv estor confidence

Source: OECD Economic Outlook No. 76, December 2004

US Personal Savings Rate

0

1

2

3

4

5

6

7

8

9

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

US Fiscal Balance(%GDP)

-7

-6

-5

-4

-3

-2

-1

0

1

2

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: IMF WEO database 2005

Current Accounts (%GDP)

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

United States

China

NICs

ASEAN-4


Investment

0

5

10

15

20

25

30

35

40

45

50

1995 1996 1997 1998 1999 2000 2001 2002 2003

%G

DP

Malaysia Indonesia Thailand Korea

35

Conclusions on causes and cures

• Predominant contribution to the transpacific trade imbalance is US fiscal policy

• Weak Asian investment since the 97 Crisis also important for the Asian trade surpluses but less important for the transpacific balance

36

Conclusions on causes and cures

• US fiscal contraction and Asian fiscal expansion plus a recovery in Asian investment rates would have a significant impact on reducing each country’s overall trade position and would also reduce the Transpacific trade imbalance

37

Conclusions

• East Asia exchange rate revaluation has significant effects on slowing East Asia for a year but not in changing global trade balances

• The worsening in East Asian competitiveness plus weaker East Asian growth tends to offset each other in the spillover to other countries and have a minor impact on the relative saving and investment balances across the region.

38

Is the World Running out of Energy?

39

Implication: new drivers for global energy demand

Source: BP Statistical Review of World Energy (2006)


0

5

10

15

20

1965 1975 1985 1995 2005

China India

Share of world primary energy consumption% of total

40

The world’s top ten energy consumers

0

5

10

15

20

25

Share of primary energy consumption, 2005

% of world total


41

. . . as growing demand . . .


30

40

50

60

70

80

90

1970 1980 1990 2000

-4

-2

0

2

4

6

8

10consumption (LHS)

trend growth (RHS)

Oil consumption

millions of barrels per day % change

42

. . . met constrained supply

Source: IMF World Economic Outlook, September 2006: Spare capacity defined as production capacity that can be brought on line within 30 days and sustained for 90 days

0

3

6

9

12

1970 1975 1980 1985 1990 1995 2000 2005

Global spare oil production capacity

millions of barrels per day

43

US still dominates global oil demand


0

5

10

15

20

25

Share of global oil consumption, 2005

% of world total

US share of oil consumption roughly triple that of China

44

But China already drives consumption growth

Source: BP Statistical Review of World Energy (2006), author’s calculations

0

5

10

15

20

25

30

35

Source of growth in oil consumption, 2000-05

% of total growth in consumption

45

Despite still modest per capita consumption


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Oil consumption per capita, 2005

tonnes

46

There are Alternatives

Source: Cambridge Energy Research Associates, The Economist, AMP Capital Investors

20 30 40 50 60 70 80

Tar sands, cane ethanol,gas/coal to liquids

Shale oil

Corn ethanol

Biodiesel

US$ per barrel price threshold for alternative sources

47

Global Demographic Change

48

• Based on • McKibbin W. (2006) “The Global

Macroeconomic Consequences of a Demographic Transition”,Asian Economic Papers (forthcoming) MIT Press. Also published in “G-20 Workshop on Demographic Challenges and Migration”

• Battini N., CallenT. And W. McKibbin (2005) “The Global Impact of Demographic Change” IMF working paper – background paper to the September 2004 World Economic Outlook

49

Overview

• The world is in a major demographic transition with different characteristics in different countries

• In some countries the labor force is shrinking (former Soviet Union and Japan)

• Most analyses only focus on individual countries but the global adjustment is just as important

Figure 1: Population Growth Rate 1950-2050

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1950

-55

1955

-60

1960

-65

1965

-70

1970

-75

1975

-80

1980

-85

1985

-90

1990

-95

1995

-00

2000

-05

2005

-10

2010

-15

2015

-20

2020

-25

2025

-30

2030

-35

2035

-40

2040

-45

2045

-50

per

cen

tag

e p

er y

ear

USA

Japan

Europe

ROECD

Asia

Latin America

India

China

FSU

DCs

Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)

Figure 2: Elderly Dependency Ratio 1950-2050(ratio of adults 65+ to adults 15-65)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

rati

o

USA

Japan

Europe

ROECD

Asia

Latin America

India

China

FSU

DCs


Figure 3: Child Dependency Ratio 1950-2050(ratio of children 0-14 to adults 15-65)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.019

50

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

rati

o

USA

Japan

Europe

ROECD

Asia

Latin America

India

China

FSU

DCs


53

Economic Impacts

• Aggregate saving, consumption, wealth Composition of consumption bundles

• Investment ratesaggregateacross sectors

• Labor markets• Government budgets• => Global impacts on trade and financial

flows and asset prices including real exchange rates

54

Summary

• Demographic change projected over the next century has a significant impact on aggregate economic variables within countries as well as economic outcomes between countries

• We estimate that this is adding 1% of GDP to the US current deficit and 3% of GDP to the Japanese current account surplus

55

Pandemic Influenza

56

Based on

• McKibbin W. and A. Sidorenko (2006) “Global Macroeconomic Consequences of Pandemic Influenza” Lowy Institute Analysis, February.

57

Approach of Study

• Explore 4 possible scenarios based on pandemics of the 20th century Mild (1968 Hong Kong Flu) Moderate (1957 Asian Flu) Severe (lower estimates of 1918/19 Spanish Flu) Ultra (higher estimates of 1918/19 Spanish Flu)

58

Estimating the Impacts of a Pandemic

• Major shocks:

Reduction in labour force (due to mortality and illness, includes carers)

Increase in business costs (differentiated by sector);

Shift in consumer demand (away from affected sectors);

Re-evaluation of country risks

Number of Deaths(thousands)

0.0

5000.0

10000.0

15000.0

20000.0

25000.0

30000.0

35000.0

USA

Japa

nUK

Europ

e

Canad

a

Austra

lia

New Z

ealan

d

Indo

nesia

Mala

ysia

Philip

pines

Singa

pore

Thaila

nd

China

India

Taiwan

Korea

Hong

Kong

LDCs

EEFSU

OPEC

Th

ou

san

ds Mild

Moderate

Severe

Ultra

Global Deaths in millions: Mild (1.4); Moderate (14); Severe (71); Ultra (142)Source: McKibbin and Sidorenko (2006)

Table 7: First Year percentage GDP loss by regionMild Moderate Severe Ultra

USA -0.6 -1.4 -3.0 -5.5Japan -1.0 -3.3 -8.3 -15.8UK -0.7 -2.4 -5.8 -11.1Europe -0.7 -1.9 -4.3 -8.0Canada -0.7 -1.5 -3.1 -5.7Australia -0.8 -2.4 -5.6 -10.6New Zealand -1.4 -4.0 -9.4 -17.7Indonesia -0.9 -3.6 -9.2 -18.0Malaysia -0.8 -3.4 -8.4 -16.3Philippines -1.5 -7.3 -19.3 -37.8Singapore -0.9 -4.4 -11.1 -21.7Thailand -0.4 -2.1 -5.3 -10.3China -0.7 -2.1 -4.8 -9.1India -0.6 -2.1 -4.9 -9.3Taiwan -0.8 -2.9 -7.1 -13.8Korea -0.8 -3.2 -7.8 -15.1Hong Kong -1.2 -9.3 -26.8 -53.5LDCs -0.6 -2.4 -6.3 -12.2EEFSU -0.6 -1.4 -2.9 -5.4OPEC -0.7 -2.8 -7.0 -13.6Source: APG-Cubed model version 63A

61

Summary

• Even a mild pandemic has significant costs (0.8% of global GDP or $330 billion)

• A repeat of the 1918/19 Spanish flu could cost up to $4.4 trillion

• The impacts are larger on developing countries because of larger shocks and the relocation of international capital flows to the relative safe havens of the US and Europe

62

Overall Conclusion

• The future of the world economy is highly uncertain with both opportunities and risks

63

Background Papers

www.sensiblepolicy.com

www.economicscenarios.com

1 Scenarios for the World Economy Warwick J. McKibbin Centre for Applied Macroeconomic Analysis ANU,...

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