ICAEW Economic Insight: Greater China Launch event presentation

1. ICAEW Economic Insight: Greater ChinaLaunch event presentation Douglas McWilliams Chief Executive, Cebr

2. Objectives • To provide an update on the prospects for the world economy • To share our latest thinking on the economic outlook for the People’s Republic of China

3. Outline • The world economy • Oil and commodity prices • The Chinese economy • Implications for accountants

4. The world’s greatest ever economic event • The East grows, the West falls back • The real price of primary commodities like energy, minerals and food rises – inflation becomes increasingly a commodity price based phenomenon • Growth/commodity price cycles become endemic • It’s a good time to be a capitalist – in the East you will benefit from growth, in the West from cheaper labour (actually this was a prediction of Karl Marx!) • The terms of trade move against Western economies • The world’s wealth is moving towards countries which traditionally have high savings ratios creating a glut of savings

5. Cebr World Economic League Table (WELT) 2010 Countries ranked in order of GDP in $ at current market prices. The GDP data for 2010 is taken from the IMF World Economic Outlook. Forecasts for 2011 and 2020 are Cebr forecasts based on our global economic prospects forecasts

6. Cebr World Economic League Table (WELT) 2020

7. QE in the US has been augmented by US banks’ repatriation of capital Source: Federal Reserve, European Central Bank

8. The monetary merry-go-round • The Fed has already had two bouts of official monetary easing, has conducted open market operations and has committed not to raise rates till end 2014 • The ECB has spent two tranches of around €500 billion each ‘creating banking liquidity’ which has stabilised the European economic situation • The PBoC (People’s Bank of China) has cut its reserve requirement ratio twice (in November and on 24 Feb). The 24 Feb announcement is expected to allow increased lending of $64 billion • The Bank of England has announced two further bouts of QE – the latest an additional £50 billion on Feb 8th Meanwhile there is capital flight by non European banks from Europe only partly offset by European banks repatriating their own capital.

9. World growth is slowing but key risks are the Euro and impact of Middle East uncertainty World real GDP, annual percentage change Source: IMF, Cebr analysis

10. United States economy shows resilience, but QE boost is unlikely to continue US real GDP growth, annual change Source: IMF, Cebr analysis 10

11. Significant Eurozone downside risks remain Euro area real GDP, annual percentage change Source: IMF, Cebr analysis

12. Oil price may dip in 2012/13 as West ends monetary easing, but rise again in mid-decade Average of Brent, WTI & Dubai Fateh crude oil spot price, $/barrel, average across calendar year Source: Macrobond, Cebr analysis

13. Commodity prices also to correct before recovering IMF non-fuel commodity price index (2005=100) Source: IMF, Cebr analysis

14. Impact of possible Euro breakup on world trade (% world trade deviation from base where Euro does not break up) Source: CPB, Cebr analysis

15. Exports have been an important driver for Chinese growth so far…. Mainland China monthly exports and trade balance in US dollars Source: China NBS, Cebr analysis

16. …but the dependence on exports is reducing rapidly Contributions to economic growth by type of expenditure Source: China NBS

17. Investment growth, particularly in property, is likely to slow Mainland China urban fixed asset investment, change YTD Y/Y Source: China NBS

18. We expect Chinese inflation to be below the 4% target for most of the next 18 months Consumer price index, total index, index excluding food and food only, annual percentage change Source: China NBS

19. We expect that the renminbi will edge up against Western currencies Movement of the US dollar against renminbi since July 2005, annual percentage change Source: Macrobond, Cebr analysis

20. Hong Kong is now the top ranked international financial centre World Economic Forum ranking of international financial centres Source: World Economic Forum

21. Growth will continue to be strong, if slightly more subdued than in the recent past People’s Republic of China GDP growth forecasts Source: Cebr analysis

22. Implications for the accountancy profession • World economy currently being boosted by monetary easing in US and Europe • But further monetary easing is less likely • We expect downward pressure on inflation as monetary easing comes to an end • Risks for the world economy are excess monetary growth leading to inflation, Middle East tensions leading to spikes in oil price and Euro problems leading to a disorderly breakup • Chinese growth is changing gear and becoming much more dependent on domestic demand • Urban investment growth in property seems unlikely to keep growing • Chinese inflation has been kept low by availability of labour – as this diminishes, will monetary policy have to become more counter-inflationary • Mainland China is still on course to overtake the US and become the world’s largest economy