ICAEW Economic Insight: Greater China Launch event presentation

BUSINESS WITH CONFIDENCE icaew.com

Douglas McWilliams

Chief Executive, Cebr

ICAEW Economic Insight: Greater ChinaLaunch event presentation


Objectives

• To provide an update on the prospects for the world economy

• To share our latest thinking on the economic outlook for the People’s Republic of China


Outline

• The world economy

• Oil and commodity prices

• The Chinese economy

• Implications for accountants


The world’s greatest ever economic event

• The East grows, the West falls back

• The real price of primary commodities like energy, minerals and food rises – inflation becomes increasingly a commodity price based phenomenon

• Growth/commodity price cycles become endemic

• It’s 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 economies

• The world’s wealth is moving towards countries which traditionally have high savings ratios creating a glut of savings


Cebr World Economic League Table (WELT) 2010

Countries 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

Rank Country $ GDP (billions) Rank Country $ GDP (billions)1 United States 14,527 16 Netherlands 7812 People's Republic of China 5,878 17 Turkey 7353 Japan 5,459 18 Indonesia 7074 Germany 3,286 19 Switzerland 5285 France 2,563 20 Poland 4696 United Kingdom 2,250 21 Belgium 4687 Brazil 2,090 22 Sweden 4598 Italy 2,055 23 Saudi Arabia 4489 India 1,632 24 Taiwan 43010 Russia 1,480 25 Norway 41311 Canada 1,577 26 Islamic Republic of Iran 40712 Spain 1,410 27 Austria 37713 Australia 1,237 28 Argentina 37014 Mexico 1,034 29 South Africa 36415 Korea 1,014 30 United Arab Emirates 302


Cebr World Economic League Table (WELT) 2020Rank Country $ GDP (billions) Change from 2010 Rank Country $ GDP (billions) Change from 2010

1 United States 21,278 - 16 Mexico 1,822 22 People's Republic of China 17,888 - 17 Turkey 1,555 -3 Japan 7,630 - 18 Taiwan 1,072 64 Russia 4,584 7 19 Netherlands 1,065 -35 India 4,501 4 20 Sweden 1,010 26 Brazil 4,262 1 21 Saudi Arabia 917 27 Germany 4,187 -3 22 Poland 858 -28 United Kingdom 3,975 -4 23 Switzerland 855 -49 France 3,689 -2 24 Islamic Republic of Iran 789 210 Italy 2,678 -2 25 Thailand 778 711 Canada 2,432 -1 26 Belgium 708 -512 Korea 2,268 3 27 Argentina 663 113 Australia 2,092 - 28 South Africa 648 114 Indonesia 2,068 4 29 Norway 605 -415 Spain 1,969 -3 30 United Arab Emirates 572 -


QE in the US has been augmented by US banks’ repatriation of capital

Source: Federal Reserve, European Central Bank


The monetary merry-go-round

• The Fed has already had two bouts of official monetary easing, has conducted open market operations and has committed not to raise rates till end 2014

• The ECB has spent two tranches of around €500 billion each ‘creating banking liquidity’ which has stabilised the European economic situation

• The PBoC (People’s 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 billion

• The Bank of England has announced two further bouts of QE – the latest an additional £50 billion on Feb 8th

Meanwhile 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 uncertainty

World real GDP, annual percentage change

-4%

-3%

-2%

-1%

0%

1%

2%

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4%

5%

2000

2001

2002

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2004

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2008

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2010

2011

2012

2013

2014

2015

2016

Source: IMF, Cebr analysis


10

-3%

-2%

-1%

0%

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2%

3%

4%

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US real GDP growth, annual change

United States economy shows resilience, but QE boost is unlikely to continue



Significant Eurozone downside risks remain

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Baseline scenario Downside scenario

Euro area real GDP, annual percentage change



Oil price may dip in 2012/13 as West ends monetary easing, but rise again in mid-decade

0

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Average of Brent, WTI & Dubai Fateh crude oil spot price, $/barrel, average across calendar year

Source: Macrobond, Cebr analysis


Commodity prices also to correct before recovering

75

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IMF non-fuel commodity price index (2005=100)



Impact of possible Euro breakup on world trade (% world trade deviation from base where Euro does not break up)

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

2012

2013

2014

2015

2016

2017

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2020

Source: CPB, Cebr analysis


Exports have been an important driver for Chinese growth so far….Mainland China monthly exports and trade balance in US dollars

Source: China NBS, Cebr analysis


…but the dependence on exports is reducing rapidlyContributions to economic growth by type of expenditure

Source: China NBS


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

Source: 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 change

Source: China NBS


Movement of the US dollar against renminbi since July 2005, annual percentage change

We expect that the renminbi will edge up against Western currencies

Source: Macrobond, Cebr analysis


Hong Kong is now the top ranked international financial centre

2011 2010 2009 2008Hong Kong 1 4 5 8China 19 22 26 24Singapore 4 3 4 10US 2 1 3 1UK 3 2 1 2

World 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 pastPeople’s Republic of China GDP growth forecasts

Source: Cebr analysis


Implications for the accountancy profession

• World economy currently being boosted by monetary easing in US and Europe

• But further monetary easing is less likely• We expect downward pressure on inflation as monetary easing comes

to an end• Risks 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 breakup

• Chinese growth is changing gear and becoming much more dependent on domestic demand

• Urban investment growth in property seems unlikely to keep growing• Chinese inflation has been kept low by availability of labour – as this

diminishes, will monetary policy have to become more counter-inflationary

• Mainland China is still on course to overtake the US and become the world’s largest economy

A world leader of the

accountancy and finance profession


ICAEW Economic Insight: Greater China Launch event presentation

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