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The Foreign Outlook: New Economy Hopes, Old Economy Problems presented by Andrew Hodge presented to FTA Revenue Estimating Conference Sept 2000 800 Baldwin.

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Presentation on theme: "The Foreign Outlook: New Economy Hopes, Old Economy Problems presented by Andrew Hodge presented to FTA Revenue Estimating Conference Sept 2000 800 Baldwin."— Presentation transcript:

1 The Foreign Outlook: New Economy Hopes, Old Economy Problems presented by Andrew Hodge presented to FTA Revenue Estimating Conference Sept 2000 800 Baldwin Tower Eddystone, PA 19022 Phone: (610) 490-2748 Fax: (610) 490-2770 Email: karl@wefa.com

2 FTA Sep 2000 Review of Recent Events U.S. Fed has been raising rates. It’s the same story in Europe and Canada. Oil and commodity prices, except Ag, are generally rising, may threaten Europe/Asia Greatest concerns: oil, equity market volatility Asia is growing rapidly — even Japan is growing. Russian economy is doing “okay” Only Latin America has serious problems, excluding Mexico which is more tied to the U.S.

3 FTA Sep 2000 Oil Price in Dollars Hurts Euro Price Hurts Even More

4 FTA Sep 2000 The Dollar The dollar has been strong on US growth, capital inflows, and problems for the euro and yen Slower US growth, higher foreign growth may turn dollar around Later possible loss of US confidence, deficits could add to decline. Depreciation would moderate import growth, raise import prices Dollar drop could aggravate any equity decline

5 FTA Sep 2000 US External Debt Service not a problem now

6 FTA Sep 2000 U.S. slowing, but “new” economy growth outpaces others Canada strong, Mexico accelerating Asia in Recovery. biggest risk now is oil. Growth in W. Europe is gaining strength. E. Europe: growth tied to Western Europe Commodity price improvement is helping Africa Middle East: oil prices up, economies recovering Latin America was in recession last year, but is recovering this year. It is still fragile Global Growth Overview

7 FTA Sep 2000 World Growth booming after 98-99 recessions World GDP (ex US)

8 FTA Sep 2000 World Growth Rates Baseline 9899 00 0102 United States 4.34.2 5.2 3.73.4 Canada 3.34.5 4.5 3.33.0 W. Europe 2.82.1 3.3 3.12.7 Latin America 0.9-0.7 3.6 4.3 4.4 Mexico 4.83.7 5.6 4.44.9 Middle East 0.62.6 5.9 4.44.0 Africa 4.03.2 4.6 5.05.6 Other Asia 4.65.7 5.9 6.56.7 Pacific Basin -4.85.9 6.7 5.75.9 Japan -2.50.3 1.9 3.12.7 NOTE: Latin America excludes Mexico; Asian regions exclude Japan

9 FTA Sep 2000 US Productivity Gains Here to Stay Good News Clear acceleration. A 5.1% rate vs year ago Supported by higher computer and communications investment Future Internet gains E-mail products 0 marginal cost. Increasing returns (networks) What to charge? Free “Consumer Surplus” New Hedonics/revisions Bad News/Questions Gains partly cyclical Needs future innovation to stay above zero Computer deflator distortion Quality declines? HMO and air travel Foreign countries catch up in application. Innovation? Wireless? Conclusions: Productivity gains mostly for real. Unique to US so far Future gains will require labor force economies Will hold near term at near 4% rate

10 FTA Sep 2000 US Productivity Accelerates Led by Manufacturing

11 FTA Sep 2000 How Fast Are These Markets Growing? (Percent Growth of World Sales in Constant Prices) World High TechSectors 14

12 FTA Sep 2000 US has Gained Share of World ICT Market (Percent Share of Total World Production) 18 World High Tech Sectors

13 FTA Sep 2000 Who Has The Fastest ICT Growth? (1999 percent real growth rate in the ICT sector) 30 World High Tech Sectors

14 FTA Sep 2000 Production Growth Rate of Communication Equipment Communication Tech Leaders 32

15 FTA Sep 2000 Canada Real GDP growth for 2000 — 4.5%, with 3.3% in 2001. Interest rates expected to increase to above U.S. rates by 2003. CA$ rises to 70 cents by 2003. Mexico Higher oil prices, booming US economy, and foreign investment will support real GDP growth of 5.6% in 2000 and 4.4% in 2001. Inflation will fall below 10%. The exchange rate depreciates to MP$12.8 by 2003. Canada and Mexico

16 FTA Sep 2000 W. Europe Oil is biggest problem now. Gas at $4 /gallon. Income deflation, strikes, consumer confidence. Benefits of EMU beginning to appear. European style efficiency gains from mergers, labor reforms. Growth has returned. Manufacturing now strong. Inflation still low, disposable income growth supporting consumer demand until now. Exports strong, euro weak. Interest rates still low, but rising to defend the euro and prevent inflation. ECB Refi rate at 4% by year- end. Fiscal policy much easier than last few years.

17 FTA Sep 2000 W. Europe Industrial Production Rising Rapidly on Weak Euro

18 FTA Sep 2000 Strong manufacturing sector growth underway Exports still very strong, exchange rates not a problem Domestic demand continues to strengthen Even Indonesia is growing, high oil price helps Key risk now is oil for those importers. Other concerns for Asia are more long-run – Financial Reform – Corporate Governance – Reduction of debt-overhang – Economic restructuring, end of Chaebols and Keiretsus? Asia

19 FTA Sep 2000 Recession is over, but growth remains weak. Oil? Consumer and business confidence are rising, but still low. Financial situation continues to improve The progress on financial reform is slow, but more and more effective. Softbank to buy Nippon Credit Bank. Finally sold Long-Term Credit Bank. Financial institutions are merging (Industrial Bank of Japan, Fuji and Dai-Ichi Kangyo have formed an alliance, for example) and restructuring. Fiscal policy will be a drag on growth in 2000 and 2001 Private sector recovery will drive growth of 1.9% and 3.1% in 2000 and 2001. Japan

20 FTA Sep 2000 Japan - New Economy Internet is driving household purchases

21 FTA Sep 2000 Real GDP Growth, Avg. 2000-02 Argentina Real GDP Per Capita, 1999, Thousands 1990 US$ Latin America: Growth by Market Size Brazil $579 bil. Mexico Ecuador Colombia Chile Peru Uruguay Venezuela Size of Bubble = Real GDP in 1999

22 FTA Sep 2000 Real GDP Growth, Avg. 2000-02 Real GDP Per Capita, 1999, Thousands 1990 US$ Iran UAE Nigeria Morocco Saudi Arabia Israel Kuwait Algeria Egypt Size of Bubble = Real GDP in 1999 South Africa $127 bil. Middle East and Africa: Growth by Market Size

23 FTA Sep 2000 Real GDP Growth, Avg. 2000-02 Russia $278 bil. Real GDP Per Capita, 1999, Thousands 1990 US$ Emerging Europe: Growth by Market Size Romania Ukraine Czech R. Hungary Slovenia SlovakiaPoland Size of Bubble = Real GDP in 1999

24 FTA Sep 2000 Risks A collapse in the global equity market – “Bubble” bursts in United States. Oil price spike hits most vulnerable Relapse into crisis in Asia or Japan Europe slumps again Brazil relapses (35% probability F ed/ECB actions cause recessions? Protectionism reduces trade growth Conclusion Weaker growth now more likely than global recession or stronger growth.

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