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