Download Real GDP Growth – U.S. - Economics & Country Risk

Post-War Economic Scenarios:
The Long-Awaited Boom or More Stagnation?
Nariman Behravesh
Chief Economist
Copyright © 2003 Global Insight, Inc.
Outline of the Presentation
 Uncertainty about the outcome of the war in Iraq did inhibit
consumer and business spending
 Consumer and business fundamentals are stronger in
North America and non-Japan Asia than in Europe and
Japan
 The risks to the outlook are still predominantly on the
downside
 Post-war risk
 How big of a threat is a falling dollar to the rest of the
world economy?
Copyright © 2003 Global Insight, Inc.
4/29/2003
2
Economic Implications
of the Iraq War
Copyright © 2003 Global Insight, Inc.
Economic Implications of the War – So Far
 Coalition forces now control about 100% of Iraqi oil
supplies – the worst-case oil-disruption scenario is now
very unlikely, but sabotage is still possible
 The “war premium” has fallen despite some residual
volatility
 Oil prices
 U.S. dollar
 A messier than anticipated post-war picture could produce
more market volatility
Copyright © 2003 Global Insight, Inc.
4/29/2003
4
War and the Global Recovery
 The impact of war-related uncertainty may be overstated;
however, it did have an effect, especially on capital spending
 Consumer confidence has begun to rebound, but what will be the
impact on spending?
 Because of policy stimulus already in place, the post-war rebound
in the U.S. is likely to be stronger than in Europe or Japan
 It will take a couple of months after the end of the war for the
recovery to pick up steam
 Hardest hit have been the conflict-sensitive sectors (trade,
tourism, luxury goods, etc.)
 Longer-run damage to trade and the global economy from the
pre-war diplomatic fallout is likely to be limited
Copyright © 2003 Global Insight, Inc.
4/29/2003
5
U.S. Consumer Confidence Fell Sharply, But is
Beginning to Rebound
(University of Michigan Consumer Sentiment Survey)
110
100
90
April = 83
80
70
60
1978
Low point of
Gulf War = 65
1981
1984
1987
1990
1993
Copyright © 2003 Global Insight, Inc.
1996
1999
2002
4/29/2003
6
European Union Consumer Confidence Continues
to Decline from Highs in 2000
(European Commission Consumer Confidence Survey)
5
0
-5
-10
-15
-20
March = -20
-25
-30
1984
1986
1988
1990
1992
1994
Copyright © 2003 Global Insight, Inc.
1996
1998
2000
2002
4/29/2003
7
Japanese Consumer Confidence at Near-Record
Lows
(Current Consumption Survey, Japanese Cabinet Office)
48
46
44
42
40
38
36
1984
1986
1988
1990
1992
1994
Copyright © 2003 Global Insight, Inc.
1996
1998
2000
2002
4/29/2003
8
U.S. Consumers Support Global Growth While
Japanese and German Spending Lag
(Nominal retail sales, percent change from a year earlier,
six-month moving average)
10
5
0
-5
-10
1998
1999
2000
2001
United States
Japan
Copyright © 2003 Global Insight, Inc.
2002
2003
Germany
4/29/2003
9
European Consumer Spending Heading South
(Nominal retail sales, percent change from a year earlier,
six-month moving average)
7.5
6.0
4.5
3.0
1.5
0.0
-1.5
-3.0
-4.5
Jan-01
Jul-01
Jan-02
Germany
France
Copyright © 2003 Global Insight, Inc.
Jul-02
Jan-03
United Kingdom
4/29/2003
10
Eurozone Consumers Continue to Hold Back on
Spending
(Seasonally adjusted retail sales, percent change from a year earlier,
six-month moving average)
5
4
3
2
1
0
1998
1999
2000
2001
Copyright © 2003 Global Insight, Inc.
2002
2003
4/29/2003
11
Iraq War Scenarios
Copyright © 2003 Global Insight, Inc.
Baseline – Short War

Global Insight view for the past year

Limited coalition casualties

No major oil disruption

Oil prices average $32 in Q1, $28 in Q2, and $24 in the second half of 2003

After a brief rally, the dollar falls gradually, losing 8% of its value against
industrial country currencies during 2003

Rebounding confidence and stock prices help to bolster growth

Tax cuts plus additional $70 billion in defense spending help to sustain the
recovery in the U.S. – a little more fiscal flexibility in Europe

The Fed leaves interest rates unchanged, but the ECB cuts 50bp

90% probability
Copyright © 2003 Global Insight, Inc.
4/29/2003
13
Long Post-War Conflict
 Post-war conflict drags on for six months or more with
higher coalition casualties
 Confidence falls further and remains depressed longer
 Because of sabotage, oil prices spike to $50 per barrel and
average $35 per barrel in 2003
 Defense spending rises by $100 billion
 The dollar falls by more than 10% on a trade-weighted basis
 The Fed cuts interest rates by another 50 basis points
 10% probability
Copyright © 2003 Global Insight, Inc.
4/29/2003
14
World Growth
(Percent change, annual rate)
4
3.5
3
2.5
2
1.5
1
0.5
0
2001
2002
2003
2004
Long Post-War Conflict
2005
2006
2007
Baseline-Short War
Copyright © 2003 Global Insight, Inc.
4/29/2003
15
Post-War Scenarios
 The Long-Awaited Boom
 U.S. capital spending recovers
 Strong rebound in North America and non-Japan Asia in
second half of 2003
 Tepid recovery in Japan and Europe
 More Stagnation
 U.S. capital spending does not recover until early 2004
 Consumer spending decelerates further
 No rebound in growth until 2004
Copyright © 2003 Global Insight, Inc.
4/29/2003
16
Iraq’s Bright Post-War Future
 Oil revenues of $10-$15 billion in the first year and up to $20
billion in the second year
 Potentially lucrative agricultural sector – good land and lots
of water from the Tigris and the Euphrates rivers (the Fertile
Crescent of biblical times)
 Tourism could also be big – Najaf and Karbala are the two
holiest cities of the Shiite sect of Islam
 The large well-educated Iraqi diaspora will help to revive the
economy
Copyright © 2003 Global Insight, Inc.
4/29/2003
17
Post-War Economic Risk –
A Rapidly Falling U.S. Dollar
 The huge U.S. current account deficit will continue to pull
down the dollar…
 …However, growth differentials will prevent a hard landing
 What role will Asian central banks play in propping up the
dollar?
 What will the European Central Bank do if the euro rises
another 10% in each of the next two years?
Copyright © 2003 Global Insight, Inc.
4/29/2003
18
A Gaping Imbalance
(Billions of dollars)
(Percent of GDP)
200
2
0
0
-200
-2
-400
-4
-600
-6
-800
-8
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Current Account Deficit
Deficit as % of GDP
Copyright © 2003 Global Insight, Inc.
4/29/2003
19
The Dollar is Overvalued
(Real trade-weighted dollar index, 1996=1.0)
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Developing Countries
Industrial Countries
Copyright © 2003 Global Insight, Inc.
4/29/2003
20
Baseline Forecast
Copyright © 2003 Global Insight, Inc.
Sluggish World Growth
The world economy is in recession when real GDP growth is below 2%.
(Percent change in real GDP)
5
4
3
2
1
0
1986
1989
1992
1995
1998
Copyright © 2003 Global Insight, Inc.
2001
2004
2007
4/29/2003
22
Growth Imbalances
Real GDP Growth Rates
Canada
U.S.
U.K.
France
Germany
Italy
Japan
0
1
2
2002 2003
Copyright © 2003 Global Insight, Inc.
3
4
4/29/2003
23
Parallels with Japan
Japan
Weak Domestic Demand
Deflation
Real Interest Rates Too High
Real Exchange Rate Too High
Fiscal Rigidity
Financial Stress
Heavy Dependence on Bank Financing
High Debt Levels
Burst Asset Bubbles
Rigid Labor Markets
Poor Corporate Governance
•
•
•
•
•
•
•
•
•
•
•
Copyright © 2003 Global Insight, Inc.
U.S.
•
?
•
•
•
Germany
•
?
•
•
•
•
•
•
•
•
•
4/29/2003
24
Debt Is High in Much of the G7
Household debt as a percent of disposable personal income
140
130
Japan
120
110
United
Kingdom
100
United
States
90
80
Germany
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*
Source: OECD; National statistics
*Estimate
Copyright © 2003 Global Insight, Inc.
4/29/2003
25
U.S. – Reasons to Be Optimistic
 The worst-case war scenarios did not happen
 Inflation is not a threat
 Oil prices have fallen
 Interest rates are at a 41-year low
 Fiscal policy is (and will continue to be) stimulative
 The unemployment rate is not that high by historical standards
 Cash flow is strong – how will it be spent?
 Inventories are very low
 High-tech bust is over
 Productivity growth remains strong
Copyright © 2003 Global Insight, Inc.
4/29/2003
26
U.S. – Reasons to Be Pessimistic
 U.S. corporations are still extremely risk averse
 Capacity utilization is still very low
 Job losses continue
 Debt levels are high
 No help from the rest of the world
Copyright © 2003 Global Insight, Inc.
4/29/2003
27
No Employment Growth So Far
The U.S. lost 2.0 million jobs from March 2001 to March 2003
(Percent change, annual rate)
3
2
1
0
-1
-2
-3
1998
1999
2000
2001
2002
2003
Copyright © 2003 Global Insight, Inc.
2004
2005
2006
4/29/2003
28
The U.S. Expansion Will Strengthen
8
(Percent change, annual rate)
(Percent)
7
6
6
4
5
2
4
0
3
-2
2
1998
1999
2000
2001
2002
Real GDP Growth
2003
2004
2005
2006
Unemployment Rate
Copyright © 2003 Global Insight, Inc.
4/29/2003
29
Europe Remains a Drag on Global Growth
 Growth likely to remain subdued through the end of 2003
 Improving global economic/geopolitical outlook will be
crucial
 Exports will remain key to growth
 Recovery will be constrained by
 Tight monetary and fiscal policies
 Strong euro
 Structural problems will limit longer-term growth
Copyright © 2003 Global Insight, Inc.
4/29/2003
30
Forecasts for Europe
(Percent change in real GDP)
3
2
1
0
France
Germany
2001
Italy
2002
2003
Spain
2004
Copyright © 2003 Global Insight, Inc.
U.K.
2005
4/29/2003
31
The Dollar-Euro Exchange Rate
(Dollars per euro)
1.20
1.10
1.00
0.90
0.80
0.70
1997
1998
1999
2000
2001
2002
Copyright © 2003 Global Insight, Inc.
2003
2004
2005
4/29/2003
32
Japan – Another False Dawn?
 Third recession in a decade is barely over – due primarily to
exports
 Debt and deflation continue to present big problems
 Risk of a meltdown is far less than the risk of secular
stagnation
 Legacy of supply- and demand-side failures
 Mismatch of policy response and economic challenges
unparalleled in developed world
 Reforms are going nowhere – again
Copyright © 2003 Global Insight, Inc.
4/29/2003
33
Japan – Another Lost Decade?
(Percent change in real GDP)
7
6
5
4
3
2
1
0
-1
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Copyright © 2003 Global Insight, Inc.
4/29/2003
34
The Dollar-Yen Exchange Rate
(Yen per U.S. dollar)
150
140
130
120
110
100
90
80
1997
1998
1999
2000
2001
2002
Copyright © 2003 Global Insight, Inc.
2003
2004
2005
4/29/2003
35
Asia: Mini-Growth Locomotive?
 Outlook
 Strong growth will likely ease in 2003 – although exports are
booming
 China and Korea will continue to lead the pack
 Inflation will remain tame in the near-term
 Risks
 SARS
 Deflation
 Dependence on U.S. imports
 Non-economic shocks: terrorist attacks
 Rapid consumer credit expansion (South Korea, Hong Kong &
Thailand)
 Fiscal strain
 Under-valued exchange rates
 Excluding Japan, Asia produces more than a tenth of world GDP
and buys nearly a fifth of world imports
Copyright © 2003 Global Insight, Inc.
4/29/2003
36
Asian Growth
(Percent change in real GDP)
9
6
3
0
-3
China
Hong Kong
2001
2002
Taiwan
2003
India
2004
Copyright © 2003 Global Insight, Inc.
Australia
2005
4/29/2003
37
Asian Growth
(Percent change in real GDP)
9
6
3
0
-3
Indonesia
S. Korea
2001
Malaysia Philippines Singapore
2002
2003
2004
Copyright © 2003 Global Insight, Inc.
Thailand
2005
4/29/2003
38
Latin America: Economic Prospects
 Worst recession in two decades is almost over
 Super competitive currencies will help Argentina and Brazil
– as soon as the global economy recovers
 On the other hand, Mexico has lost competitiveness,
especially to China
 Argentina’s depression is ending
 Brazil’s huge challenge – restore growth, keep inflation low,
meet debt payments, and improve social conditions and
income distribution
Copyright © 2003 Global Insight, Inc.
4/29/2003
39
Latin America at a Glance
(Percent change in real GDP)
8
4
0
-4
-8
-12
-16
Latin
America
Argentina
2001
2002
Brazil
2003
Copyright © 2003 Global Insight, Inc.
Mexico
2004
Venezuela
2005
4/29/2003
40
Other Regions: Growing But Vulnerable
 Emerging Europe is being helped by investment flows from
and exports to the EU – but weak growth in Western Europe
is hurting
 Russia and other former Soviet republics are sensitive to oil
price gyrations – and slow progress on reforms is a drag on
growth
 Oil price volatility, the War Against Terrorism, the IsraeliPalestinian conflict, and the war against Iraq have all
undermined investment, construction, and tourism in the
Middle East and North Africa
 Weak commodity prices, the global recession, and the AIDS
epidemic have lowered growth prospects in sub-Saharan
Africa
Copyright © 2003 Global Insight, Inc.
4/29/2003
41
Growth in Other World Regions
(Percent change in real GDP)
7
6
5
4
3
2
1
0
Eastern Europe
FSU
2001
2002
Middle East
2003
2004
Copyright © 2003 Global Insight, Inc.
Africa
2005
4/29/2003
42
The Bottom Line
 A weak but sustained recovery is underway
 The short Iraq war will likely delay but not kill off the global
recovery
 The risks are still predominantly on the downside
 The large growth disparities – and resulting current
account imbalances – could force big currency realignments
 North America (among industrialized regions) and Asia
(among emerging regions) offer the best short- and
medium-term growth opportunities
Copyright © 2003 Global Insight, Inc.
4/29/2003
43