The Global Economic Outlook: The Global Economic Outlook:

More Bad News Ahead More Bad News Ahead

Pam WoodallPam Woodall

Asia Economics Editor, The EconomistAsia Economics Editor, The EconomistJune 2008June 2008

Key pointsKey points

The current US recession will be much deeper than in The current US recession will be much deeper than in 1991 or 2001 1991 or 2001

Yet Asia’s growth will slow by less than in previous US Yet Asia’s growth will slow by less than in previous US recessions: it is now less dependent on US demandrecessions: it is now less dependent on US demand

Asia is increasingly important as the main engine of Asia is increasingly important as the main engine of global growth. global growth.

The beginning of the end for the dollar as the main The beginning of the end for the dollar as the main reserve currencyreserve currency

Global growth: fastest for over 30 yearsGlobal growth: fastest for over 30 years

0

2

4

Two main engines of global Two main engines of global economic growth:economic growth:

1. US housing bubble and 1. US housing bubble and consumer spending boomconsumer spending boom

2. Rapid growth in China, 2. Rapid growth in China, India and other emerging India and other emerging economies: the most economies: the most powerful economic powerful economic revolution in historyrevolution in history

World GDP, % increase

Five years ending:

US personal savingUS personal saving

A sign in a US bank: A sign in a US bank:

““We can loan you We can loan you enough money to enough money to get you completely get you completely out of debt.”out of debt.”

-2

0

2

4

6

8

1992 1997 2002 2007

as % of disposable income

American consumers on a bingeAmerican consumers on a binge

The biggest bubble in historyThe biggest bubble in history

90

100

110

120

130

140

150

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Ratio of US house prices to average income 1975-2000 average = 100

Source: The Economist

The worst is now over?The worst is now over?

" I am convinced we have now passed through the " I am convinced we have now passed through the worst and we shall rapidly recover. There has been no worst and we shall rapidly recover. There has been no significant bank or industrial failure. That danger, significant bank or industrial failure. That danger, too, is safely behind us.“too, is safely behind us.“

– – Herbert Hoover, President of the United States, Herbert Hoover, President of the United States,

May 1, 1930May 1, 1930

The biggest house-price crash in historyThe biggest house-price crash in history

-15

-10

-5

0

5

10

15

20

1920 1930 1940 1950 1960 1970 1980 1990 2000Source: Robert Shiller

US house prices, % change on previous year

Falling house prices will hit Falling house prices will hit consumer spendingconsumer spending

% change on year ago, 12-month moving average

-8

-4

0

4

8

71 75 79 83 87 91 95 99 03 07

Real house prices Consumer spending

Comparison of financial crisesComparison of financial crises

0

10

20

30

US S&Ls1986-95

Japan 1990-99

Asia crisis1997-99

US 2007-

% GDP

Total financial losses

Source: IMF

0

200

400

600

800

1000

US S&Ls1986-95

Japan 1990-99

Asia crisis1997-99

US 2007-

$ billion

The biggest oil shock in historyThe biggest oil shock in history

Higher oil prices act Higher oil prices act like a tax increaselike a tax increase

Rising inflation could Rising inflation could limit the Fed’s room to limit the Fed’s room to cut interest ratescut interest rates

0

30

60

90

120

150

2002

2003

2004

2005

2006

2007

2008

zz

Crude oil price, $/barrel

America in the jaws of recessionAmerica in the jaws of recession

Worst financial crisis since Worst financial crisis since the Great Depression the Great Depression

Interest-rate/tax cuts less Interest-rate/tax cuts less effective than in 2001-02 effective than in 2001-02

Weak dollar will lift exports, Weak dollar will lift exports, but only 12% of GDP but only 12% of GDP (consumer spending 70%)(consumer spending 70%)

The deepest US recession The deepest US recession for several decadesfor several decades

House Prices, % change 1997-2007House Prices, % change 1997-2007

-30

0

30

60

90

120

150

180

210

240

Source: The Economist

Personal Saving as Personal Saving as % disposable income% disposable income

In most European In most European countries households countries households borrowed less as borrowed less as house prices soaredhouse prices soared

A drop in house A drop in house prices is less likely prices is less likely to trigger recessionto trigger recession

-3

0

3

6

9

12

1992 1997 2002 2007

France

US

Less sign of a binge in EuropeLess sign of a binge in Europe

UK

Germany

Don’t write off JapanDon’t write off Japan

Still the world’s second Still the world’s second biggest economybiggest economy

Fastest growth in GDP Fastest growth in GDP per head among the per head among the big three economiesbig three economies

No recession 2008, but No recession 2008, but moderate growthmoderate growth

0

1

2

Japan US Germany

GDP per head GDP

z

% growth annual average 2003-07

Europe and Japan keep chugging as the Europe and Japan keep chugging as the US economy stallsUS economy stalls

0

1

2

3

4

2004 2005 2006 2007 2008forecast

US Japan EUGDP, % increase

If America sneezes will Asia catch a cold?If America sneezes will Asia catch a cold?

As US demand has As US demand has slowed, Asia continues to slowed, Asia continues to boomboom

Asia’s exports to rest of Asia’s exports to rest of world remain robustworld remain robust

Stronger domestic Stronger domestic demand in Asiademand in Asia

Growth %

0

3

6

9

2004 2005 2006 2007 2008

Emerging Asia’s GDP

US domestic demand

Asia’s non-US exports remain strongAsia’s non-US exports remain strong

0

10

20

30

2003 2004 2005 2006 2007 2008

Asia is now less Asia is now less dependent on the USdependent on the US

China’s exports to China’s exports to US: 34% of total in US: 34% of total in 1999, now 24%1999, now 24%

Asia’s exports% change on year ago

to rest of the world

to US

China’s growth is driven largely by China’s growth is driven largely by domestic demand NOT exportsdomestic demand NOT exports

0

4

8

12

Domestic demand Net exports

Breakdown of China’s GDP growth %

Housing bubbles everywhere but AsiaHousing bubbles everywhere but Asia

-20

0

20

40

60

% change in house prices relative to average income 2000-2007

Asian economies’ exposure to Asian economies’ exposure to a US recessiona US recession

Smaller Asian Smaller Asian economies are more economies are more dependent on USdependent on US

But all in better But all in better economic shape than economic shape than in past. Room for in past. Room for fiscal stimulus to fiscal stimulus to boost spending boost spending

0 10 20 30

Hong KongMalaysia

SingaporeTaiwan

ThailandPhilippines

ChinaS. Korea

IndonesiaIndia Japan

Exports to US as % GDP

Asia hit hard by America’s 2001 recessionAsia hit hard by America’s 2001 recession

GDP growth %

-30369

12 2000 2001

Asia will slow by much less than in 2001Asia will slow by much less than in 2001

GDP growth, %

0

4

8

122007 2008 forecast

The return of inflationThe return of inflation

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007 2008

Average world Average world inflation rate: 5.5%--inflation rate: 5.5%--highest since 1999highest since 1999

Biggest increase is in Biggest increase is in emerging economiesemerging economies

Measured correctly, Measured correctly, two-thirds of the two-thirds of the world’s population world’s population have double-digit have double-digit inflationinflation

CPI inflation, %

G7 Developed economies

Emerging economies

Inflation: not just food pricesInflation: not just food prices

Money-supply growth 2000=100

Food as % of consumer-price index

100

200

300

400

0 20 40 60

G7Brazil

MexicoS. Africa

PolandArgentina

ChinaSaudi Arabia

ThailandRussia

IndonesiaIndia

Emerging economies

G7

Asia is more important than the USAsia is more important than the US as a driver of global growth as a driver of global growth

% of world GDP growth*

0

10

20

30

40

50

1970-80 1980-90 1990-2000 2000-07

Asia US

* At purchasing-power parity

Asia leaps aheadAsia leaps ahead

15

25

35

1980 1984 1988 1992 1996 2000 2004 2008

% of world GDP*

Asia

* At purchasing-power parity

EU

US

The world’s five biggest economiesThe world’s five biggest economies

0 20 40 60 80 100

UK

China

Germany

Japan

US

0 20 40 60 80 100 120

Russia

Japan

India

US

China

2006 2030 Goldman Sachs forecasts

US =100*

* GDPs converted at market exchange rates

The dwindling dollarThe dwindling dollar

60

80

100

120

140

160

75 78 81 84 87 90 93 96 99 02 05 08

Trade-weighted index, January 1973=100

The dollar has further to fallThe dollar has further to fall

The beginning of the end The beginning of the end for the dollar as the main for the dollar as the main reserve currencyreserve currency

Central banks and private Central banks and private investors becoming more investors becoming more reluctant to hold dollarsreluctant to hold dollars

The dollar's decline is The dollar's decline is already equivalent to the already equivalent to the biggest default in historybiggest default in history

The new world orderThe new world order

Thanks to the vigour of Asia and other emerging Thanks to the vigour of Asia and other emerging economies, a US recession need not drag the whole economies, a US recession need not drag the whole world into recessionworld into recession

A prolonged downturn in the US, while emerging A prolonged downturn in the US, while emerging economies continue to grow rapidly will reinforce the economies continue to grow rapidly will reinforce the shift in global power from the old industrial world to shift in global power from the old industrial world to the new emerging marketsthe new emerging markets

In future the world economy will be steered not by In future the world economy will be steered not by the US and Europe, but increasingly by Asiathe US and Europe, but increasingly by Asia