VANESSA ROSSI OXFORD ECONOMICS THE GLOBAL ECONOMY IN

VANESSA ROSSI, OXFORD ECONOMICS THE GLOBAL ECONOMY IN 2007 GLOBAL 1 Oxford Economic Forecasting

A Robust Global Economy • The global economy has continued to forge ahead in spite of various obstacles being put in its way • This summer saw a slowdown in US growth to under 3% while oil and commodity prices remain high – but global growth in 2006 will be above 2005 • This is partly due to the long awaited recovery in Europe, with growth above 2. 5% • But it also reflects strength in big developing countries, mostly China and India where growth is in the 9 -11% range this year GLOBAL 2 Oxford Economic Forecasting

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Risks to 2007 • Oil markets will continue to be tight and volatile – and even if crude prices fall, governments look set to the gap with taxes • But oil no longer has a powerful impact on world growth – on its own it will not cause a recession • Other concerns are the US and China – can growth keep going? • And the financial market “wild card” may return – linked to global liquidity and Japan GLOBAL 6 Oxford Economic Forecasting

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US downside scenario The slowdown underway in the US is certainly one concern for the global economy A modest downside scenario for the US might be: § A 10% fall in house prices over the next year § A further fall in residential investment that takes spending to 20% below its peak, rather than 15% § AND in addition § Flat rather than falling oil prices, plus a pick up in wage inflation might constrain the Fed from cutting short rates GLOBAL 10 Oxford Economic Forecasting

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Can Asia keep growth going? • Technically Asia could sustain world growth - it is a large, fast growing part of world GDP • So it could keep the average global growth rate high even if the US and EU weaken • But is Asia too vulnerable to a US slowdown – how much does Asian growth fall if US growth drops by 1%? GLOBAL 16 Oxford Economic Forecasting

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Can Asia support growth elsewhere? • Weak trade prices help OECD consumers and keep inflation low • Fiscal policy – encouraging expansions to boost growth in Asia may not be appropriate – but what about private demand? • China’s consumer demand could grow faster – supporting growth and also cutting the trade surplus GLOBAL 21 Oxford Economic Forecasting

Faster Chinese consumption? Swing in GDP versus base after Scenarios: 1 year 1% point per annum higher Chinese consumer growth +0. 6% 5 years +1. 5% And Impact on China’s current account In US dollar billion GLOBAL 22 -5 -50 Oxford Economic Forecasting

China’s risk is investment • A collapse in China’s rampant rate of investment may be a bigger threat to Asia than a US slowdown • High risk as investment for the 2008 Olympics is completed • China’s growth could slump to 2 -3%? • But risk is most likely to 2009 -2010 – and low impacts on US and Europe GLOBAL 23 Oxford Economic Forecasting

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Impacts on Global GDP Crisis in China in 2008 -2009 like that of 1989 Investment and imports growth dives from +20% to – 15% Swing in GDP versus base 2010 China And impact on: US Eurozone Japan HK and Taiwan India Korea and Thailand -0. 5% -0. 8% -1. 9% -6. 0% -1. 1% -4. 0% World GDP at PPP -3. 5 to 4. 0% GLOBAL -12 to 13% 25 Oxford Economic Forecasting

What can Europe do to respond? • Be careful to keep the recovery going – policy should be flexible • Maintain consumer sentiment – Europe’s property markets have been strong, unemployment is down and consumption has picked up this year • Exporters: look for growth opportunities in the markets – follow demand GLOBAL 26 Oxford Economic Forecasting