1 scenarios for the world economy warwick j. mckibbin centre for applied macroeconomic analysis anu,...
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1
Scenarios for the World Economy
Warwick J. McKibbin
Centre for Applied Macroeconomic Analysis ANU,& The Lowy Institute for International Policy
& The Brookings Institution
Presentation to North American Die Casting Association Conference, Hawaii, 19 February 2007
2
Overview
• Near term outlook for the world economy• Key Issues in the Medium Term
Emergence of China and India Global trade imbalances Energy Futures Global Demographic Change Pandemic influenza
0
2
4
0
2
4
World GDPYear-average percentage change
200720011995198919831977Sources: data – IMF; forecasts – Consensus Economics
%% Forecasts – January 2007
30-year average
World GDP Growth Year-average, per cent
Share of world GDP*
2006 Estimate
2007 Consensus
forecast United States 20.1 3.4 2.4 Euro area 15.1 2.7 2.0 Japan 6.4 2.2 1.8 China 15.4 10.7 9.6 Other east Asia 6.9 5.1 4.8 India 6.0 8.4 7.8 Latin America 7.1 5.0 4.5 Emerging Europe
6.9 6.6 5.9
World 5.4 4.7 * 2005, at PPP exchange rates
l l l l l l l l l 125
120
115
110
105
100
1.05
1.10
1.15
1.20
1.25
1.30
1.35
Major Exchange Rates
Yen per US$(LHS, inverted scale)
Yen US$
US$ per Euro(RHS)
20052004M J S D M J S D M J
2006S D M
2007
l l l l l l l l l l l l l l l l l l l l l l l l30
40
50
60
70
30
40
50
60
70
WTI Crude Oil PriceUS$/barrel
US$/barrel
MarJunMarDecSep
Source: Bloomberg2005
Jun DecSep20072006
Mar
l l l l l l l l l l l l 60
80
100
120
140
160
180
200
60
80
100
120
140
160
180
200
Index Index
Share Price Indices1 January 2003 = 100
S&P 500
M2003J
Euro STOXX
S D2004
M
Topix
J S D M2005J S D
2006M J S D M
2007
l l l l l l l l l l l l0
100
200
300
400
500
600
0
100
200
300
400
500
600
Share Price Indices2 January 1995 = 100
1995
MSCI Latin America
Index Index
1997 1999 2001 2003 2005 2007
MSCI World
MSCI Emerging Asia
l l l l l l l l l l l l0.0
0.5
1.0
1.5
0.0
0.5
1.0
1.5
Volatility in Global Share Prices22-day moving average of the absolute daily percentage change
Average
2005
%%
20032001199919971995 2007
l l l l l l l -1
0
1
2
3
4
5
6
7
-1
0
1
2
3
4
5
6
7
%
US
%
Euro area
Canada
Australia
UK
Cash Rates
NZ
Sweden
Japan
Switzerland
20012000 2002 2003 2004 2005 2006 2007
12
Based on
• McKibbin, Thirlwell and Woo (2007) “The Emergence of China and India inot the World Economies” Lowy Institute (forthcoming)
13
Top ten countries by population
205020051950
55.90.17Ethpia59.20.13Japan61.70.05Italy10
54.00.18Congo57.30.13Ngeria59.90.05UK9
52.00.24Bangla55.20.14Bangla57.90.05Brazil8
49.40.25Brazil53.00.14Russia55.70.07Ger7
46.60.26Ngeria50.80.16Pak53.00.08Indon6
43.70.29Indon48.40.19Brazil49.90.08Japan5
40.60.31Pak45.50.22Indon46.60.10Russia4
37.20.40USA42.00.30USA42.50.16USA3
32.91.39China37.41.10India36.20.36India2
17.51.59India20.41.32China22.00.56China1
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
205020051950
55.90.17Ethpia59.20.13Japan61.70.05Italy10
54.00.18Congo57.30.13Ngeria59.90.05UK9
52.00.24Bangla55.20.14Bangla57.90.05Brazil8
49.40.25Brazil53.00.14Russia55.70.07Ger7
46.60.26Ngeria50.80.16Pak53.00.08Indon6
43.70.29Indon48.40.19Brazil49.90.08Japan5
40.60.31Pak45.50.22Indon46.60.10Russia4
37.20.40USA42.00.30USA42.50.16USA3
32.91.39China37.41.10India36.20.36India2
17.51.59India20.41.32China22.00.56China1
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
14
Top ten countries by population
205020051950
55.90.17Ethpia59.20.13Japan61.70.05Italy10
54.00.18Congo57.30.13Ngeria59.90.05UK9
52.00.24Bangla55.20.14Bangla57.90.05Brazil8
49.40.25Brazil53.00.14Russia55.70.07Ger7
46.60.26Ngeria50.80.16Pak53.00.08Indon6
43.70.29Indon48.40.19Brazil49.90.08Japan5
40.60.31Pak45.50.22Indon46.60.10Russia4
37.20.40USA42.00.30USA42.50.16USA3
32.91.39China37.41.10India36.20.36India2
17.51.59India20.41.32China22.00.56China1
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
205020051950
55.90.17Ethpia59.20.13Japan61.70.05Italy10
54.00.18Congo57.30.13Ngeria59.90.05UK9
52.00.24Bangla55.20.14Bangla57.90.05Brazil8
49.40.25Brazil53.00.14Russia55.70.07Ger7
46.60.26Ngeria50.80.16Pak53.00.08Indon6
43.70.29Indon48.40.19Brazil49.90.08Japan5
40.60.31Pak45.50.22Indon46.60.10Russia4
37.20.40USA42.00.30USA42.50.16USA3
32.91.39China37.41.10India36.20.36India2
17.51.59India20.41.32China22.00.56China1
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
Cumul. %
Pop’n (bns)
China and India account for more than one third of the global population. In contrast,
Japan at the start of its economic takeoff was less than 4% of the global total.
15
World economic history is a tale of divergence
Source: Angus Maddison, The world economy: historical statistics, 2003
See Mark Thirlwell, http://www.lowyinstitute.org
0
4,000
8,000
12,000
16,000
20,000
1600 1700 1820 1870 1913 1950 1970 1980
China India US
GDP per capita
1990 dollars, PPP basis
Before 1980s, lacklustre economic
performance in Asia’s two giants
16
World economic history is a tale of divergence
Source: Angus Maddison, The world economy: historical statistics, 2003
See Mark Thirlwell, http://www.lowyinstitute.org
0
4,000
8,000
12,000
16,000
20,000
1600 1700 1820 1870 1913 1950 1970 1980
China India US
GDP per capita
1990 dollars, PPP basis
Industrial Revolution and 1st Age of Globalisation
produced growing gap between
advanced world and majority of Asia’s
population
17
Now, the start of the Great Convergence?
Source: Angus Maddison, The world economy: historical statistics, 2003 and IMF World Economic Outlook database (September 2006)
0
5
10
15
20
1950 1960 1970 1980 1990 2000
China
India
GDP per capita
% of US level, PPP basis
Between 1980 and 2007, China is
expected to close GDP per capita gap with US from 6% to 19% of US levels
18
Measurement matters:Two views of the 12 largest economies in 2005
Source: IMF World Economic Outlook April 2006 database
See Mark Thirlwell, http://www.lowyinstitute.org
0
5
10
15
20
25
30
Top 12 economies by GDP, US$
% of world GDP
0
5
10
15
20
25
Top 12 economies by GDP, PPP
% of world GDP
l l l l l l l l l l l60
100
140
180
220
260
300
60
100
140
180
220
260
300
Metal Prices2 January 2006 = 100, US$
Sources: Bloomberg; RBA
Index
Gold
Index
Dec-06Oct-06Aug-06
AluminiumLead
ZincCopper
Nickel
Feb-07Jun-06Apr-06
Table 4 Projections of Economic SizeOptimistic
2005 2010 2015 2020 2025United States 100.0 117.0 136.3 158.4 183.5Japan 100.0 113.4 128.2 144.4 162.3Europe 100.0 113.7 129.0 145.9 164.9Rest of OECD 100.0 118.6 139.4 162.9 189.2China 100.0 145.0 198.7 262.2 336.4India 100.0 144.9 200.1 267.1 347.5Other Asia 100.0 129.3 164.2 205.5 254.1Latin America 100.0 133.7 174.4 223.1 280.8Eastern Europe and Former Soviet Union 100.0 121.7 146.4 174.8 207.8Other Developing Countries 100.0 137.7 184.9 243.5 315.5World 100.0 121.3 146.2 175.3 209.1Source: Author's Calculations
22
Based on
• Lee, McKibbin and Park (2006) “Transpacific Trade Imbalances: Causes and Cures” World Economy vol 29
• McKibbin and Stoeckel (2005) The United States
current account deficits and world markets
• Lee and McKibbin (2006) “Domestic Investment and External Imbalances in East Asia”, World Economic Forum
• McKibbin (2006) “The Global Macroeconomic Consequences of a Demographic Transition” Asian Economic Papers, MIT Press
23
Overview
• What are the macroeconomic imbalances?
• What are the sources of current account imbalances?
24
Two Aspects of Global Imbalances
• Global Savings in excess of global investment which shows up as low long term real interest rates
• National savings and investment imbalances which show up as current account imbalances between countries
Countries with national savings greater than national investment run current account surpluses
Countries with national investment greater than national savings run current account deficits
l l l l l l l l l l l 0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
10-year Government Bond Yields%%
US
Japan
Germany
200720052003200119991997
Current Accounts ($US Billion)
-1000
-800
-600
-400
-200
0
200
400
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Middle East
Japan
United States
China
NICs
ASEAN-4
International Monetary Fund, World Economic Outlook Database, April 2006
Current Accounts (%GDP)
-10
-5
0
5
10
15
20
25
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Middle East
Japan
United States
China
NICs
ASEAN-4
International Monetary Fund, World Economic Outlook Database, April 2006
2004 2005 20060
50
100
150
200
250
0
50
100
150
200
250
Foreign Reserves AccumulationUS$b US$b
Middle East Japan Rest of Asia China
29
Number of Real Factors and not a Single cause
• US current deficit is an excess of US investment relative to US saving
• Pull US fiscal deficits Decline in household saving Strong productivity growth
• Push Decline in Asian investment rates (except China) Rising corporate and household saving in China Oil revenue recycling by Oil Exporters
1 Main drivers behind the decline in current account balance in the United States
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
1991 1993 1995 1997 1999 2001 2003 2005
US$
billi
on .
..
US fiscal deficit and
public dissav ing, low
personal sav ing rates
Japanese inv estment slump
US dot com inv estment boom Boom collapses
Asian financial crisis and
loss of inv estor confidence
Source: OECD Economic Outlook No. 76, December 2004
US Personal Savings Rate
0
1
2
3
4
5
6
7
8
9
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
US Fiscal Balance(%GDP)
-7
-6
-5
-4
-3
-2
-1
0
1
2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: IMF WEO database 2005
Current Accounts (%GDP)
-8
-6
-4
-2
0
2
4
6
8
10
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
United States
China
NICs
ASEAN-4
International Monetary Fund, World Economic Outlook Database, April 2006
Investment
0
5
10
15
20
25
30
35
40
45
50
1995 1996 1997 1998 1999 2000 2001 2002 2003
%G
DP
Malaysia Indonesia Thailand Korea
35
Conclusions on causes and cures
• Predominant contribution to the transpacific trade imbalance is US fiscal policy
• Weak Asian investment since the 97 Crisis also important for the Asian trade surpluses but less important for the transpacific balance
36
Conclusions on causes and cures
• US fiscal contraction and Asian fiscal expansion plus a recovery in Asian investment rates would have a significant impact on reducing each country’s overall trade position and would also reduce the Transpacific trade imbalance
37
Conclusions
• East Asia exchange rate revaluation has significant effects on slowing East Asia for a year but not in changing global trade balances
• The worsening in East Asian competitiveness plus weaker East Asian growth tends to offset each other in the spillover to other countries and have a minor impact on the relative saving and investment balances across the region.
39
Implication: new drivers for global energy demand
Source: BP Statistical Review of World Energy (2006)
See Mark Thirlwell, http://www.lowyinstitute.org
0
5
10
15
20
1965 1975 1985 1995 2005
China India
Share of world primary energy consumption% of total
40
The world’s top ten energy consumers
0
5
10
15
20
25
Share of primary energy consumption, 2005
% of world total
Source: BP Statistical Review of World Energy (2006)
41
. . . as growing demand . . .
Source: BP Statistical Review of World Energy (2006)
30
40
50
60
70
80
90
1970 1980 1990 2000
-4
-2
0
2
4
6
8
10consumption (LHS)
trend growth (RHS)
Oil consumption
millions of barrels per day % change
42
. . . met constrained supply
Source: IMF World Economic Outlook, September 2006: Spare capacity defined as production capacity that can be brought on line within 30 days and sustained for 90 days
0
3
6
9
12
1970 1975 1980 1985 1990 1995 2000 2005
Global spare oil production capacity
millions of barrels per day
43
US still dominates global oil demand
Source: BP Statistical Review of World Energy (2006)
0
5
10
15
20
25
Share of global oil consumption, 2005
% of world total
US share of oil consumption roughly triple that of China
44
But China already drives consumption growth
Source: BP Statistical Review of World Energy (2006), author’s calculations
0
5
10
15
20
25
30
35
Source of growth in oil consumption, 2000-05
% of total growth in consumption
45
Despite still modest per capita consumption
Source: BP Statistical Review of World Energy (2006)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Oil consumption per capita, 2005
tonnes
46
There are Alternatives
Source: Cambridge Energy Research Associates, The Economist, AMP Capital Investors
20 30 40 50 60 70 80
Tar sands, cane ethanol,gas/coal to liquids
Shale oil
Corn ethanol
Biodiesel
US$ per barrel price threshold for alternative sources
48
• Based on • McKibbin W. (2006) “The Global
Macroeconomic Consequences of a Demographic Transition”,Asian Economic Papers (forthcoming) MIT Press. Also published in “G-20 Workshop on Demographic Challenges and Migration”
• Battini N., CallenT. And W. McKibbin (2005) “The Global Impact of Demographic Change” IMF working paper – background paper to the September 2004 World Economic Outlook
49
Overview
• The world is in a major demographic transition with different characteristics in different countries
• In some countries the labor force is shrinking (former Soviet Union and Japan)
• Most analyses only focus on individual countries but the global adjustment is just as important
Figure 1: Population Growth Rate 1950-2050
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1950
-55
1955
-60
1960
-65
1965
-70
1970
-75
1975
-80
1980
-85
1985
-90
1990
-95
1995
-00
2000
-05
2005
-10
2010
-15
2015
-20
2020
-25
2025
-30
2030
-35
2035
-40
2040
-45
2045
-50
per
cen
tag
e p
er y
ear
USA
Japan
Europe
ROECD
Asia
Latin America
India
China
FSU
DCs
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
Figure 2: Elderly Dependency Ratio 1950-2050(ratio of adults 65+ to adults 15-65)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
rati
o
USA
Japan
Europe
ROECD
Asia
Latin America
India
China
FSU
DCs
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
Figure 3: Child Dependency Ratio 1950-2050(ratio of children 0-14 to adults 15-65)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.019
50
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
rati
o
USA
Japan
Europe
ROECD
Asia
Latin America
India
China
FSU
DCs
Source: UN, World Population Prospects: The 2004 Revision (Medium Variant)
53
Economic Impacts
• Aggregate saving, consumption, wealth Composition of consumption bundles
• Investment ratesaggregateacross sectors
• Labor markets• Government budgets• => Global impacts on trade and financial
flows and asset prices including real exchange rates
54
Summary
• Demographic change projected over the next century has a significant impact on aggregate economic variables within countries as well as economic outcomes between countries
• We estimate that this is adding 1% of GDP to the US current deficit and 3% of GDP to the Japanese current account surplus
56
Based on
• McKibbin W. and A. Sidorenko (2006) “Global Macroeconomic Consequences of Pandemic Influenza” Lowy Institute Analysis, February.
57
Approach of Study
• Explore 4 possible scenarios based on pandemics of the 20th century Mild (1968 Hong Kong Flu) Moderate (1957 Asian Flu) Severe (lower estimates of 1918/19 Spanish Flu) Ultra (higher estimates of 1918/19 Spanish Flu)
58
Estimating the Impacts of a Pandemic
• Major shocks:
Reduction in labour force (due to mortality and illness, includes carers)
Increase in business costs (differentiated by sector);
Shift in consumer demand (away from affected sectors);
Re-evaluation of country risks
Number of Deaths(thousands)
0.0
5000.0
10000.0
15000.0
20000.0
25000.0
30000.0
35000.0
USA
Japa
nUK
Europ
e
Canad
a
Austra
lia
New Z
ealan
d
Indo
nesia
Mala
ysia
Philip
pines
Singa
pore
Thaila
nd
China
India
Taiwan
Korea
Hong
Kong
LDCs
EEFSU
OPEC
Th
ou
san
ds Mild
Moderate
Severe
Ultra
Global Deaths in millions: Mild (1.4); Moderate (14); Severe (71); Ultra (142)Source: McKibbin and Sidorenko (2006)
Table 7: First Year percentage GDP loss by regionMild Moderate Severe Ultra
USA -0.6 -1.4 -3.0 -5.5Japan -1.0 -3.3 -8.3 -15.8UK -0.7 -2.4 -5.8 -11.1Europe -0.7 -1.9 -4.3 -8.0Canada -0.7 -1.5 -3.1 -5.7Australia -0.8 -2.4 -5.6 -10.6New Zealand -1.4 -4.0 -9.4 -17.7Indonesia -0.9 -3.6 -9.2 -18.0Malaysia -0.8 -3.4 -8.4 -16.3Philippines -1.5 -7.3 -19.3 -37.8Singapore -0.9 -4.4 -11.1 -21.7Thailand -0.4 -2.1 -5.3 -10.3China -0.7 -2.1 -4.8 -9.1India -0.6 -2.1 -4.9 -9.3Taiwan -0.8 -2.9 -7.1 -13.8Korea -0.8 -3.2 -7.8 -15.1Hong Kong -1.2 -9.3 -26.8 -53.5LDCs -0.6 -2.4 -6.3 -12.2EEFSU -0.6 -1.4 -2.9 -5.4OPEC -0.7 -2.8 -7.0 -13.6Source: APG-Cubed model version 63A
61
Summary
• Even a mild pandemic has significant costs (0.8% of global GDP or $330 billion)
• A repeat of the 1918/19 Spanish flu could cost up to $4.4 trillion
• The impacts are larger on developing countries because of larger shocks and the relocation of international capital flows to the relative safe havens of the US and Europe
62
Overall Conclusion
• The future of the world economy is highly uncertain with both opportunities and risks