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Outlook for the Global Economy: Nariman Behravesh Chief Economist, IHS February 24, 2011

Outlook for the Global Economy: Nariman Behravesh Chief Economist, IHS February 24, 2011. The Global Economic Outlook. The U.S. economy has picked up steam and will grow faster than Europe or Japan Emerging markets will slow a little, but still grow much more rapidly than the developed world

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Outlook for the Global Economy: Nariman Behravesh Chief Economist, IHS February 24, 2011

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  1. Outlook for the Global Economy:Nariman Behravesh Chief Economist, IHSFebruary 24, 2011

  2. The Global Economic Outlook • The U.S. economy has picked up steam and will grow faster than Europe or Japan • Emerging markets will slow a little, but still grow much more rapidly than the developed world • Commodity prices will move up (the only question is how much) – inflation will not be a problem in developed economies (there is still lots of slack), but will become a growing concern in the emerging world • Interest rates will remain on hold in the G-7 for a while longer, but keep rising in the BRICs • The dollar will decline against most currencies, with the possible exception of the euro • The spillover from the troubles in Egypt is limited – for now

  3. The U.S. Recovery Has Picked Up Steam • The U.S. economy will be firing on more cylinders in 2011 • Net exports will contribute to growth and housing will (hopefully) stop being a drag by mid-year; nonresidential construction has turned the corner • The pace of consumer spending has also accelerated, thanks to a gradual improvement in the employment outlook and diminished worries about a double-dip • By far the best news is that business optimism is the highest in three years and cash flow remains very strong • The Obama-Republican tax package will add around 0.6 percentage point to growth in 2011, but much of the recent rebound is not stimulus related • Don’t expect any significant action on the deficit until after 2012 • Bottom line: growth in the next few year swill average 3% to 3.5% 3

  4. Growth in Europe and Japan Will Be Sluggish • The pace of growth in Europe will be quite slow • Fiscal austerity and sovereign debt/banking jitters will be major drags on the recovery • Export growth (thanks to a weaker euro) and stronger consumer spending in Germany will provide some support to the recovery • Northern Europe (with the exception of Ireland) will continue to see decent (1.5% to 2.5%) growth, whereas Southern Europe will grow less than 1% and some economies (Greece and Portugal) will contract again this year • Eurozone growth will average between 1.5% and 2% in the next few years, U.K. growth will average 2% to 2.5% • Japan’s recovery was unsustainably strong in 2010 (4.3%) and will decelerate considerably to only 1.5% to 2% 4

  5. The United States Outpaces Eurozone and Japan (Real GDP, percent change)

  6. Emerging Markets Will Slow, But Still Grow Much Faster Than the Developed World • A multi-speed recovery will likely remain a salient feature of the global economy, with most emerging markets in the fast lane • Some large economies (Brazil and China) will slow a little because of policy tightening… • …Others (India and Russia) will not slow much – if at all • Strong global demand and rising commodity prices are helping growth prospects – but creating inflation headaches • Asia will remain the growth leader • The emerging world will grow about 6.5% in 2011, compared with about 2.4% for the developed world 6

  7. Still a Multi-Speed World (Real GDP, percent change)

  8. Commodity Prices Will Move Up – The Only Question Is How Much • The rollercoaster ride of commodity prices will continue into 2011 • However, with strong global growth over the next year, the upward pressure on commodity prices will increase • The level of inventories, exchange rate movements and speculative activity will also influence the extent of price rises for specific commodities • The recent surge in food prices has also be caused by bad weather and bad policies • In the end, most commodity prices can be expected to rise by at least 10% in 2011 8

  9. Industrial Materials Prices Have Been Volatile (IHS Global Insight Indexes, 2002:1=1.0)

  10. Soft Commodity Prices (IHS Global Insight Index, 2005:1=1.0)

  11. Oil and Gas Prices ($/barrel) ($/mmbtu)

  12. Limited Spillover from Egypt – So Far • The relatively peaceful resolution of social unrest in Egypt may encourage similar unrest elsewhere • Some of the most vulnerable countries to a “domino” effect include Yemen, Libya, Iran, Syria and Bahrain – Saudi Arabia is a medium vulnerability country, at least in the near-term • Even in Egypt, this is just the beginning • The Egyptian military’s tight security of the Suez Canal and Sumed pipeline has calmed market fears • Roughly 3% of the world’s oil goes through the Suez Canal, versus 17% through the Straits of Hormuz 12

  13. Inflation: Low in the Developed World, Rising in Emerging Markets • Consumer inflation in the advanced economies will average around 2% next three years, compared with about 5.5% in the emerging world • In the United States and Europe, core inflation will remain well within the comfort zone – in Japan deflation will persist for some time • Strong growth and loose monetary policies are exerting upward pressures on inflation in key emerging economies, including India, China, Brazil and Russia • Also at risk of rising inflation are countries that peg (or strongly manage) their exchange rates to the dollar – mostly in Asia and the Middle East • Solution? Tighten fiscal policy 13

  14. Inflation Will Be Low in the Advanced Countries, Higher in Emerging Markets (Percent change) * Excluding Zimbabwe

  15. Interest Rates Will Be on Hold in the G-7 for a While Longer, But Keep Rising in the BRICs • The Fed, the European Central Bank, Bank of England, Bank of Japan and Bank of Canada are all going keep interest rates on hold for at least the first half of 2011 • The Fed and the BoJ are likely to keep rates low even longer • In contrast, central banks in many large emerging economies (e.g., Brazil, China and India) have already raised rates and will keep tightening in 2011 • Monetary policy in a couple of developed economies (Australia and Norway) has also become somewhat more restrictive 15

  16. Policy Interest Rates in the Advanced Countries Will Stay Low (Percent, end of quarter)

  17. Policy Interest Rates in BRICs Are Rising (Percent, end of quarter) * One-year loan rate

  18. The Dollar Will Decline Against Most Currencies, With the Exception of the Euro • The two-speed world and still-large global imbalances will have a predictable effect on exchange rates – downward pressure on the currencies of slow-growing economies and upward pressure on the currencies of fast-growing economies • In particular, the U.S. dollar will keep falling against most currencies, especially those of emerging markets – including China • On the other hand, further sovereign debt problems in Europe could strengthen the dollar relative to the euro • With strong global growth prospects and no post-QE II collapse of the U.S. dollar, the risk of a “currency war” has subsided – even if the rhetoric has not • The dollar will not lose its status as the world’s premier reserve currency for sometime 18

  19. The U.S. Dollar: Secular Weakness Against Emerging Market Currencies (2005=1.0, inflation-adjusted)

  20. U.S. Dollar Exchange Rates Canadian Dollar Euro (Canadian dollars per U.S. dollar, quarterly averages) (Euro per U.S. dollar, quarterly averages) Japanese Yen Chinese Renminbi (Yen per U.S. dollar, quarterly averages) (Yuan per U.S. dollar, quarterly averages)

  21. Top Risks in the Near-Term • More sovereign debt restructuring and banking problems in Europe • Much higher inflation in emerging markets and boom-busts • Property bubbles – especially in China • Spike in commodity prices – including oil • Stronger growth in consumer spending – U.S., Europe and Asia • Continued robust growth in productivity • Much greater business optimism and spending 21

  22. Implications and Growth Drivers • Emerging markets will continue to offer the best growth opportunities for some time … • … But beware of the risk of boom-busts in key markets, such as Brazil, China and India • The rising price of oil, food and other commodities could darken an otherwise rosy outlook – especially in emerging markets • The (almost) inevitable need to restructure debt in the Eurozone means more volatility in exchange rates and interest rates – not just for Europe • Pricing power will be very limited in the U.S., Europe and Japan • Major growth drivers in the coming decade will include: the rise of the middle class populations in emerging markets; aging populations in the developed economies and China; the quest for green growth; and the unrelenting pressures to boost competitiveness and productivity

  23. Thank you! nariman.behravesh@ihs.com

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