Douglas McWilliamsChief Executive, CebrICAEW Economic Insight: Greater ChinaLaunch event presentation

ObjectivesTo provide an update on the prospects for the world economy

To share our latest thinking on the economic outlook for the Peoples Republic of China

OutlineThe world economyOil and commodity pricesThe Chinese economyImplications for accountants

The worlds greatest ever economic eventThe East grows, the West falls backThe real price of primary commodities like energy, minerals and food rises inflation becomes increasingly a commodity price based phenomenonGrowth/commodity price cycles become endemicIts a good time to be a capitalist in the East you will benefit from growth, in the West from cheaper labour (actually this was a prediction of Karl Marx!)The terms of trade move against Western economiesThe worlds wealth is moving towards countries which traditionally have high savings ratios creating a glut of savings

Cebr World Economic League Table (WELT) 2010Countries ranked in order of GDP in $ at current market prices. The GDP data for 2010 is taken from the IMF World Economic Outlook. Forecasts for 2011 and 2020 are Cebr forecasts based on our global economic prospects forecasts

Cebr World Economic League Table (WELT) 2020

QE in the US has been augmented by US banks repatriation of capitalSource: Federal Reserve, European Central Bank

The monetary merry-go-roundThe Fed has already had two bouts of official monetary easing, has conducted open market operations and has committed not to raise rates till end 2014The ECB has spent two tranches of around 500 billion each creating banking liquidity which has stabilised the European economic situationThe PBoC (Peoples Bank of China) has cut its reserve requirement ratio twice (in November and on 24 Feb). The 24 Feb announcement is expected to allow increased lending of $64 billionThe Bank of England has announced two further bouts of QE the latest an additional 50 billion on Feb 8thMeanwhile there is capital flight by non European banks from Europe only partly offset by European banks repatriating their own capital.

World growth is slowing but key risks are the Euro and impact of Middle East uncertaintyWorld real GDP, annual percentage changeSource: IMF, Cebr analysis

Chart1

0.04292000

0.0122811932001

0.0155385462002

0.020497212003

0.0311939412004

0.0272382192005

0.031756172006

0.0300967142007

0.0069150292008

-0.0307648932009

0.0313115512010

0.0289659292011

0.0282012

0.0262013

0.0312014

0.0332015

0.0372628072016

Baseline scenario

Sheet1

Baseline scenario

20004.29%

20010.012281193

20020.015538546

20030.02049721

20040.031193941

20050.027238219

20060.03175617

20070.030096714

20080.006915029

2009-0.030764893

20100.031311551

20110.028965929

20120.028

20130.026

20140.031

20150.033

20160.037262807

*US real GDP growth, annual changeUnited States economy shows resilience, but QE boost is unlikely to continueSource: IMF, Cebr analysis

Significant Eurozone downside risks remainEuro area real GDP, annual percentage changeSource: IMF, Cebr analysis

Oil price may dip in 2012/13 as West ends monetary easing, but rise again in mid-decade Average of Brent, WTI & Dubai Fateh crude oil spot price, $/barrel, average across calendar yearSource: Macrobond, Cebr analysis

Commodity prices also to correct before recoveringIMF non-fuel commodity price index (2005=100)Source: IMF, Cebr analysis

Impact of possible Euro breakup on world trade (% world trade deviation from base where Euro does not break up)Source: CPB, Cebr analysis

Exports have been an important driver for Chinese growth so far.Mainland China monthly exports and trade balance in US dollarsSource: China NBS, Cebr analysis

but the dependence on exports is reducing rapidlyContributions to economic growth by type of expenditureSource: China NBS

Investment growth, particularly in property, is likely to slowMainland China urban fixed asset investment, change YTD Y/YSource: China NBS

We expect Chinese inflation to be below the 4% target for most of the next 18 monthsConsumer price index, total index, index excluding food and food only, annual percentage changeSource: China NBS

Movement of the US dollar against renminbi since July 2005, annual percentage changeWe expect that the renminbi will edge up against Western currenciesSource: Macrobond, Cebr analysis

Hong Kong is now the top ranked international financial centreWorld Economic Forum ranking of international financial centres Source: World Economic Forum

Growth will continue to be strong, if slightly more subdued than in the recent pastPeoples Republic of China GDP growth forecastsSource: Cebr analysis

Implications for the accountancy profession

World economy currently being boosted by monetary easing in US and EuropeBut further monetary easing is less likelyWe expect downward pressure on inflation as monetary easing comes to an endRisks for the world economy are excess monetary growth leading to inflation, Middle East tensions leading to spikes in oil price and Euro problems leading to a disorderly breakupChinese growth is changing gear and becoming much more dependent on domestic demandUrban investment growth in property seems unlikely to keep growingChinese inflation has been kept low by availability of labour as this diminishes, will monetary policy have to become more counter-inflationaryMainland China is still on course to overtake the US and become the worlds largest economy

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