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Possible Tripwires for the Global Possible Tripwires for the Global Economy: 2005-06Economy: 2005-06
Robert F. Wescott, Ph.D.
ISEO Conference
Bergamo
4 July 2005
Energy, Deficits, and Dollar Worry Energy, Deficits, and Dollar Worry Financial MarketsFinancial Markets
0%
10%
20%
30%
40%
50%
60%
70%
80%
Source: UBS Index of Investor Optimism, May 2005
Factors “Hurting” Investment Climate “A Lot”Energy Prices
OutsourcingBudget Deficits Bad
Accounting Illegal Immigration
Falling Dollar
Iraq
Threat of Terrorism
Possible Global TripwiresPossible Global Tripwires Removal of policy support: greater than realized? Oil prices: more slowing than expected? Can U.S. consumers keep driving the world economy? Widening shift from labor to capital in industrial
countries hurting growth? Fracturing of international relations: Is Osama bin
Laden winning? Shoehorning China into the world economy and
China’s international relations George W. Bush: leadership challenges?
2005: Economic Policy Floodgates 2005: Economic Policy Floodgates ClosingClosing
-5
-4
-3
-2
-1
0
1
2
-5 -4 -3 -2 -1 0 1 2
2000-2004
2004-2005
US
Canada
Germany
US
Italy
Euro AreaGermany
FranceUK
Euro Area
FranceItaly
JapanUK
Japan
Canada
Tighter Fiscal PolicyEasier Fiscal Policy
% change in real six month LIBOR
Change in structural fiscal balance as a % of GDP
China
China
Tighter Monetary Policy
Easier Monetary Policy
Source: IMF WEO, Author’s calculations for China
Oil: A Growing Burden on Oil: A Growing Burden on the World Economythe World Economy
World Oil Expenditure as Percent of World GDP
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Global Recession Trigger Level?
Source: EIA
$20 per Barrel Higher Oil Prices Will Lower $20 per Barrel Higher Oil Prices Will Lower Economic Growth, Boost Inflation, and Economic Growth, Boost Inflation, and
Raise the Unemployment RateRaise the Unemployment Rate
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Real GDPGrowth
CPI Inflation Core CPIInflation
UnemploymentRate
1st Year 2nd Year
Source: Average of model results from Macroeconomic Advisers, Global Insight, and the International Monetary Fund
Out of Control?Out of Control?The U.S. Trade DeficitThe U.S. Trade Deficit
-700
-600
-500
-400
-300
-200
-100
0
100
200
Bill
ion
s o
f U
S d
olla
rs
United States
Italy
France
Japan
Germany
Source: BEA, OECD
First Main Cause: American First Main Cause: American Households Save Almost NothingHouseholds Save Almost Nothing
Household Savings Rates
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FranceGermany
United States
Source: OECD
Second Main Cause: Second Main Cause: U.S. Budget DeficitsU.S. Budget Deficits
U.S. Government Budget Deficit as a Percentage of GDP
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: BEA
Foreign Official Purchases of U.S. Debt Foreign Official Purchases of U.S. Debt Have Declined for More than a YearHave Declined for More than a Year
Net Foreign Purchases of U.S. Treasury Bonds and Notes(6 mo. MA)
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
mill
ions
of d
olla
rs
Foreign Private
Foreign Official
Source: U.S. Treasury Department
U.S. Debt, Total and Total U.S. Debt, Total and Total Held by Private SectorHeld by Private Sector
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
1985Mar.
1986Mar.
1987Mar.
1988Mar.
1989Mar
1990Mar
1991Mar
1992Mar
1993Mar
1994Mar
1995Mar.
1996Mar.
1997Mar.
1998Mar.
1999Mar
2000Mar
2001Mar
2002Mar
2003Mar
2004Mar
Total US Debt Held by Public
Total US Debt Held by Private Sector*
Source: U.S. Treasury, Federal Reserve
Despite Strong U.S. Investment, 20-Year Despite Strong U.S. Investment, 20-Year Trend for Large Economies is DownTrend for Large Economies is Down
Source: IMF WEO
Average Investment Share of GDP
18
19
20
21
22
23
24
25
26
Per
cent
of
GD
P
Historically, Rising Interest Rates Historically, Rising Interest Rates Add Financial PressuresAdd Financial Pressures
Monthly Fed Funds Rate
0
2
4
6
8
10
12
14
16
18
20
???
Black Monday
Continental Illinois Bank
Franklin National Bank
S&L Crisis
Penn Central Railroad
Latin American Crisis
High Tech Bubble
Mexican Crisis
Source: Federal Reserve
Financial Sectors to Watch Closely in Financial Sectors to Watch Closely in 2005-06 as Interest Rates Rise2005-06 as Interest Rates Rise
AIG
Sub-primeLoans
AirlinesU.S.
Housing
Chinese Banking
Corporate Governance Risks
Autos
Falling U.S. Real Wages for Falling U.S. Real Wages for the First Time in a Decadethe First Time in a Decade
Real Avg Hourly Earnings, % Chg. YA
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Source: Bureau of Labor Statistics
Profit Share Has Jumped Profit Share Has Jumped under President Bushunder President Bush
Profits as a share of GDP
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
197
0-I
197
2-I
197
4-I
197
6-I
197
8-I
198
0-I
198
2-I
198
4-I
198
6-I
198
8-I
199
0-I
199
2-I
199
4-I
199
6-I
199
8-I
200
0-I
200
2-I
200
4-I
Reagan fires air traffic controllers
GW Bush inaugurated
Clinton raises minimum wage
Source: BEA
The Bush Legacy: Consumer The Bush Legacy: Consumer Patterns Tilting Toward the RichPatterns Tilting Toward the Rich
How Spending Has Changed by Quintile in the Bush Administration
Source: BLS, Consumer Expenditure Survey 2003
Bottom Quintile
2nd Quintile
3rd Quintile
4th Quintile
Top Quintile
1997-2000
Recreation, cultural events
+28.6% +29.5% -1.5% -0.7% +11.0%
Boats, recreational vehicles
+85.5% -10.3% +49.4% +13.0% -32.5%
Air travel, public transportation
+35.9% +25.3% +22.9% +9.5% +5.3%
2000-2003
Recreation, cultural events
-33.8% -25.2% -2.4% +4.8% -0.7%
Boats, recreational vehicles
-55.8% +14.6% +16.2% -2.3% +49.6%
Air travel, public transportation
-27.4% -7.1% -25.0% -1.4% -3.9%
Returns to Capital Continue to Returns to Capital Continue to Increase Faster than Wages Increase Faster than Wages
0%
2%
4%
6%
8%
10%
12%
Average HourlyEarnings, Non-
Supervisory Workers
All Income Dividends Entrepreneurial Income
Percent change 2004 Q1 to 2005 Q1
Source: BEA and BLS
Income Inequality Affecting Income Inequality Affecting Consumer Spending?Consumer Spending?
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Wal-Mart Target JC Penney's Nordstrom NeimanMarcus
Abercrombie& Fitch
AmericanEagle
Source: International Council of Shopping Centers-UBS
Same-store Sales, April 2005 vs. April 2004
Germany: A Decade without Germany: A Decade without Wage GrowthWage GrowthGerman Real Wage Growth
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: OECD, IMF WEO
German Wage Share Falling: German Wage Share Falling: A Shift from Labor to CapitalA Shift from Labor to Capital
German Wage Share of GDP
50%
51%
52%
53%
54%
55%
56%
57%
58%
59%
60%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: OECD
Down 5% points since re-unification
A Fracturing of International A Fracturing of International Relations?Relations?
Pre-9/11 (2000)
After Fall of Saddam
(2003)
Today (2005)
UK 83 70 55
France 62 43 43
Germany 78 45 41
Russia 37 36 52
Turkey 52 15 23
(Percent reporting favorable view of the United States)
Source: Pew Research Center for the People and the Press, June 2005
Do You Support the U.S.-Led Do You Support the U.S.-Led War on Terror?War on Terror?
0
10
20
30
40
50
60
70
80
U.S. U.K. France Germany Canada Spain Pakistan Turkey
(Percent responding “yes”)
Should Western Europe be more Should Western Europe be more independent from the U.S.?independent from the U.S.?
0
10
20
30
40
50
60
70
80
U.S. Spain U.K. Netherlands Germany France
(Percent saying “yes”)
Big Big differences differences
between between U.S. and U.S. and
most other most other countriescountries
Source: Pew Research Center for Public and Press, June 22, 2005
13.2
6.9
20.9
4.3
2.9
10.6
8.3
7.58.4
21.621.9
5.3 4.9
3.33.5
0
5
10
15
20
25
1994 1999 2004
pe
rce
nta
ge
U.S.
China
Japan
Germany
Italy
China’s Trend Has Been Sharply Upward (Share of world economy, PPP basis)
Source: IMF WEO
China’s Exports Are Increasing China’s Exports Are Increasing as a Share of World Tradeas a Share of World Trade
1.6%12.4%
6.9%
11.1%
5.6%
7.7%1.7%
53.0%
Others
5.2%
10.9%
5.2%
4.8%
5.9%
2.4%
9.3%56.3%
1990 2003
Source: World Bank, World Development Indicators 2005
Others
0
3
6
9
12
15
1980 1986 1992 1998 2004
Source: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund
0
2
4
6
8
10
1820 1845 1870
0
5
10
15
20
25
1860 1882 1913
0
2
4
6
8
10
1950 1956 1962 1968 1974
China, 1980-2005
U.K., 1820-1870 U.S., 1860-1913
Japan, 1950-1974
GDP, % of World Total, PPP BasisGDP, % of World Total, PPP Basis
0
50
100
150
200
250
300
350
1980 1986 1992 1998 2004
Sources: International Iron and Steel Institute, Japan Iron and Steel Federation, Barraclough: Steelmaking, Hogan: The Economic History of the Iron and Steel Industry in the U.S, Hudson & Sadler: The International Steel Industry
05
10152025303540
1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910
0
20
40
60
80
100
120
140
1950 1956 1962 1968 1974
China, 1980-2005
U.S., 1860-1913 Japan, 1950-1974
Steel Production, Millions of tonsSteel Production, Millions of tons
<10% of world (1843)
36% of world (1900)
<5% of world (1950)
19% of world (1974)
<4% of world (1980)
29% of world (2005)
George Bush’s Political CapitalGeorge Bush’s Political Capital
President Bush's Job Approval Rating
40
50
60
70
80
90
100
5/23
-26/
05
3/18
-20/
05
1/3-
5/05
10/1
1-14
/04
7/30
- 8/
1/04
5/2-
4/04
2/6-
8/04
11/1
4-16
/03
8/25
-26/
03
5/30
- 6/
1/03
3/24
-25/
03
1/31
- 2/
2/03
12/9
-10/
02
10/3
-6/0
2
7/29
-31/
02
6/3-
6/02
3/22
-24/
02
1/7-
9/02
10/5
-6/0
1
7/19
-22/
01
4/20
-22/
01
September 11 Attacks
Invasion of Iraq Capture of
Saddam Hussein
Re-election and
Inauguration
Source: Gallup
Among Presidents Early in Their Among Presidents Early in Their Second Terms, Bush is Quite Second Terms, Bush is Quite
UnpopularUnpopularPresident Positive Negative Differential Date
Johnson 66% 21% +45% 24-29 June 1965
Eisenhower 64% 22% +42% 6-11 June 1957
Truman 57% 26% +31% 11-14 June 1949
Reagan 58% 32% +26% 7-10 June 1985
Clinton 55% 35% +20% 26-29 June 1997
Nixon 44% 45% -1% 22-25 June 1973
GW Bush 47% 51% -4% 16-19 June 2005
Source: Gallup Presidential Approval Ratings
Are U.S. Casualties in Iraq Are U.S. Casualties in Iraq Worth It?Worth It?
Source: Washington Post, June 8, 2005
Americans Feel the Country is Americans Feel the Country is “Losing Ground” on Most Issues“Losing Ground” on Most Issues
Losing Ground Making Progress
Budget deficit 65% 6%
Social Security’s finances 63% 6%
Health care system 62% 9%
Medicare’s finances 56% 5%
Job availability 55% 15%
Illegal immigration 52% 11%
Quality of education 50% 20%
Illegal drugs 46% 16%
Political corruption 41% 10%
Environmental pollution 37% 21%
International Terrorism 31% 36%
Source: Pew Research Center, May 19, 2005