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A
C o m pan y
The Foreign Outlook:
New Economy Hopes, Old
Economy Problems
presented by
Andrew Hodge
presented to
FTA Revenue Estimating Conference
Sept 2000
800 Baldwin Tower
Eddystone, PA 19022
Phone: (610) 490-2748
Fax: (610) 490-2770
Email: [email protected]
Review of Recent Events
U.S. Fed has been raising rates. It’s the same story
in Europe and Canada.
 Oil and commodity prices, except Ag, are generally
rising, may threaten Europe/Asia
 Greatest concerns: oil, equity market volatility
 Asia is growing rapidly — even Japan is growing.
 Russian economy is doing “okay”
 Only Latin America has serious problems,
excluding Mexico which is more tied to the U.S.

FTA Sep 2000
40
35
35
31
30
26
25
22
20
17
15
13
10
US$/barrel
Euro/barrel
J F MA MJ J A S O N D J F MA MJ J A
1999
2000
FTA Sep 2000
8
Euro/Barrel
US$/Barrel
Oil Price in Dollars Hurts
Euro Price Hurts Even More
The Dollar
 The dollar has been strong on US
growth, capital inflows, and problems
for the euro and yen
 Slower US growth, higher foreign
growth may turn dollar around
 Later possible loss of US confidence,
deficits could add to decline.
 Depreciation would moderate import
growth, raise import prices
 Dollar drop could aggravate any
equity decline
FTA Sep 2000
US External Debt Service
not a problem now
80
0
0
-80
-80
-160
-160
-240
-240
-320
Current Account Balance
Net factor income
-400
-320
-400
-480
-480
-560
-560
90 91 92 93 94 95 96 97 98 99 00 01
FTA Sep 2000
Billions of Current Dollars, SAAR
Billions of Current Dollars, SAAR
80
Global Growth Overview
U.S. slowing, but “new” economy growth
outpaces others
 Canada strong, Mexico accelerating
 Asia in Recovery. biggest risk now is oil.
 Growth in W. Europe is gaining strength.
 E. Europe: growth tied to Western Europe
 Commodity price improvement is helping Africa
 Middle East: oil prices up, economies recovering
 Latin America was in recession last year, but is
recovering this year. It is still fragile

FTA Sep 2000
World GDP (ex US)
Percent Change Year Ago
World Growth booming after 98-99 recessions
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
FTA Sep 2000
97
98
99
00
01
02
1.0
World Growth Rates
Baseline
98 99
00
01 02
United States
Canada
W. Europe
Latin America
Mexico
Middle East
Africa
Other Asia
Pacific Basin
Japan
4.3
3.3
2.8
0.9
4.8
0.6
4.0
4.6
-4.8
-2.5
5.2
4.5
3.3
3.6
5.6
5.9
4.6
5.9
6.7
1.9
3.7
3.3
3.1
4.3
4.4
4.4
5.0
6.5
5.7
3.1
4.2
4.5
2.1
-0.7
3.7
2.6
3.2
5.7
5.9
0.3
3.4
3.0
2.7
4.4
4.9
4.0
5.6
6.7
5.9
2.7
NOTE: Latin America excludes Mexico; Asian regions exclude Japan
FTA Sep 2000
US Productivity Gains
Here to Stay
Good News





Bad News/Questions
Gains partly cyclical
Needs future innovation to
stay above zero
Computer deflator
distortion
Quality declines? HMO and
air travel
Foreign countries catch up
in application. Innovation?
Wireless?
Clear acceleration. A 5.1% rate vs 
year ago

Supported by higher computer and
communications investment

Future Internet gains
E-mail products 0 marginal cost.

Increasing returns (networks) What
to charge?

Free “Consumer Surplus” New
Hedonics/revisions
Conclusions:
Productivity gains mostly for real. Unique to US so far
Future gains will require labor force economies
Will hold near term at near 4% rate
FTA Sep 2000
US Productivity Accelerates
Led by Manufacturing
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
90
FTA Sep 2000
91
92
93
94
95
96
97
98
99
00
-1
Percent Change Year Ago
Percent Change Year Ago
7
Output Per Hour, Manufacturing
Output Per Hour, Nonfarm Business
World High TechSectors
How Fast Are These Markets Growing?
(Percent Growth of World Sales in Constant Prices)
8
7
6
5
4
3
2
1
0
5 Yrs.To '97
1998
1999
K
no
wl
ed
iT
ge
FTA Sep 2000
IC
T
H
ec
h
G
oo
ds
Dr
ug
s&
Fi
na
nc
ia
l
M
ed
ici
ne
s
14
World High Tech Sectors
US has Gained Share of World ICT Market
(Percent Share of Total World Production)
40
35
30
25
20
15
10
5
0
1990
1995
1999
U.S.
FTA Sep 2000
Germany Other
& France Europe
Japan
Other
Asia
18
World High Tech Sectors
Who Has The Fastest ICT Growth?
(1999 percent real growth rate in the ICT sector)
40
35
30
25
20
15
10
5
0
-5
M
ico
ex
ea
n
pa
Ja
or
K
y
an
m
na
hi
C
d
an
nl
Fi
er
G
e
nc
.
.S
a
Fr
U
FTA Sep 2000
30
Communication Tech Leaders
Production Growth Rate of
Communication Equipment
50
40
30
1996
1997
1998
1999
20
10
0
-10
-20
U.S.
FTA Sep 2000
Japan
Germany
Mexico
Korea
32
Canada and Mexico




Canada
Real GDP growth for 2000 — 4.5%, with 3.3% in
2001.
Interest rates expected to increase to above U.S.
rates by 2003. CA$ rises to 70 cents by 2003.
Mexico
Higher oil prices, booming US economy, and
foreign investment will support real GDP growth of
5.6% in 2000 and 4.4% in 2001.
Inflation will fall below 10%. The exchange rate
depreciates to MP$12.8 by 2003.
FTA Sep 2000
W. Europe






Oil is biggest problem now. Gas at $4 /gallon. Income
deflation, strikes, consumer confidence.
Benefits of EMU beginning to appear. European style
efficiency gains from mergers, labor reforms.
Growth has returned. Manufacturing now strong.
Inflation still low, disposable income growth
supporting consumer demand until now. Exports
strong, euro weak.
Interest rates still low, but rising to defend the euro
and prevent inflation. ECB Refi rate at 4% by yearend.
Fiscal policy much easier than last few years.
FTA Sep 2000
W. Europe
% Change Year Ago, 3-Mo. Mov. Avg.
Industrial Production Rising Rapidly on Weak Euro
8
8
Germany
France
United Kingdom
Italy
6
4
6
4
2
2
0
0
-2
-2
-4
-4
-6
-6
96
FTA Sep 2000
97
98
99
00
Asia
Strong manufacturing sector growth underway
 Exports still very strong, exchange rates not a
problem
 Domestic demand continues to strengthen
 Even Indonesia is growing, high oil price helps
 Key risk now is oil for those importers. Other
concerns for Asia are more long-run

–
–
–
–
Financial Reform
Corporate Governance
Reduction of debt-overhang
Economic restructuring, end of Chaebols and Keiretsus?
FTA Sep 2000
Japan



Recession is over, but growth remains weak. Oil?
Consumer and business confidence are rising, but still
low.
Financial situation continues to improve




The progress on financial reform is slow, but more and more
effective. Softbank to buy Nippon Credit Bank.
Finally sold Long-Term Credit Bank. Financial institutions are
merging (Industrial Bank of Japan, Fuji and Dai-Ichi Kangyo
have formed an alliance, for example) and restructuring.
Fiscal policy will be a drag on growth in 2000 and
2001
Private sector recovery will drive growth of 1.9% and
3.1% in 2000 and 2001.
FTA Sep 2000
Japan - New Economy
60
60
40
40
20
20
0
0
-20
-40
-60
1997
FTA Sep 2000
-20
-40
Household PC Sales
Household Mobile Phone Sales
1998
1999
2000
-60
Percent Change Year Ago
Percent Change Year Ago
Internet is driving household purchases
Real GDP Per Capita, 1999,
Thousands 1990 US$
Latin America:
Growth by Market Size
6
Size of Bubble =
Real GDP in 1999
Argentina
5
Brazil
$579 bil.
4
Mexico
Chile
3
Uruguay
2
Peru
Venezuela
Ecuador
1
Colombia
0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Real GDP Growth, Avg. 2000-02
FTA Sep 2000
7.0
8.0
Real GDP Per Capita, 1999,
Thousands 1990 US$
Middle East and Africa:
Growth by Market Size
20
UAE
Size of Bubble =
Real GDP in 1999
15
Israel
Kuwait
10
Saudi Arabia
South Africa
$127 bil.
Egypt
5
Morocco
0
Iran
Algeria
Nigeria
-5
2.0
3.0
4.0
5.0
Real GDP Growth, Avg. 2000-02
FTA Sep 2000
6.0
7.0
Emerging Europe: Growth
by Market Size
Real GDP Per Capita, 1999,
Thousands 1990 US$
10
9
8
Slovenia
Size of Bubble =
Real GDP in 1999
7
6
Hungary
Czech R.
5
4
Russia
$278 bil.
3
2
Slovakia
Romania
Poland
1
Ukraine
0
-1
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Real GDP Growth, Avg. 2000-02
FTA Sep 2000
7.0
8.0
Risks

A collapse in the global equity market
–
“Bubble” bursts in United States.
Oil price spike hits most vulnerable
 Relapse into crisis in Asia or Japan
 Europe slumps again
 Brazil relapses (35% probability
 Fed/ECB actions cause recessions?
 Protectionism reduces trade growth
Conclusion
Weaker growth now more likely than global recession
or stronger growth.

FTA Sep 2000