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Possible Tripwires for the Global Economy: 2005-06 Robert F. Wescott, Ph.D. ISEO Conference Bergamo 4 July 2005.

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Presentation on theme: "Possible Tripwires for the Global Economy: 2005-06 Robert F. Wescott, Ph.D. ISEO Conference Bergamo 4 July 2005."— Presentation transcript:

1 Possible Tripwires for the Global Economy: Robert F. Wescott, Ph.D. ISEO Conference Bergamo 4 July 2005

2 Energy, Deficits, and Dollar Worry Financial Markets Source: UBS Index of Investor Optimism, May 2005 Factors “Hurting” Investment Climate “A Lot” Energy Prices Outsourcing Budget Deficits Bad Accounting Illegal Immigration Falling Dollar Iraq Threat of Terrorism

3 Possible Global Tripwires Removal of policy support: greater than realized? Oil prices: more slowing than expected? Can U.S. consumers keep driving the world economy? Widening shift from labor to capital in industrial countries hurting growth? Fracturing of international relations: Is Osama bin Laden winning? Shoehorning China into the world economy and China’s international relations George W. Bush: leadership challenges?

4 2005: Economic Policy Floodgates Closing Source: IMF WEO, Author’s calculations for China

5 Oil: A Growing Burden on the World Economy Source: EIA

6 $20 per Barrel Higher Oil Prices Will Lower Economic Growth, Boost Inflation, and Raise the Unemployment Rate Source: Average of model results from Macroeconomic Advisers, Global Insight, and the International Monetary Fund

7 Out of Control? The U.S. Trade Deficit Source: BEA, OECD

8 First Main Cause: American Households Save Almost Nothing Source: OECD

9 Second Main Cause: U.S. Budget Deficits Source: BEA

10 Foreign Official Purchases of U.S. Debt Have Declined for More than a Year Source: U.S. Treasury Department

11 U.S. Debt, Total and Total Held by Private Sector Source: U.S. Treasury, Federal Reserve

12 Despite Strong U.S. Investment, 20-Year Trend for Large Economies is Down Source: IMF WEO

13 Historically, Rising Interest Rates Add Financial Pressures Source: Federal Reserve

14 Financial Sectors to Watch Closely in as Interest Rates Rise AIG Sub-prime Loans Airlines U.S. Housing Chinese Banking Corporate Governance Risks Autos

15 Falling U.S. Real Wages for the First Time in a Decade Source: Bureau of Labor Statistics

16 Profit Share Has Jumped under President Bush Source: BEA

17 The Bush Legacy: Consumer Patterns Tilting Toward the Rich How Spending Has Changed by Quintile in the Bush Administration Source: BLS, Consumer Expenditure Survey 2003 Bottom Quintile 2 nd Quintile 3 rd Quintile 4 th Quintile Top Quintile Recreation, cultural events +28.6%+29.5%-1.5%-0.7%+11.0% Boats, recreational vehicles +85.5%-10.3%+49.4%+13.0%-32.5% Air travel, public transportation +35.9%+25.3%+22.9%+9.5%+5.3% Recreation, cultural events -33.8%-25.2%-2.4%+4.8%-0.7% Boats, recreational vehicles -55.8%+14.6%+16.2%-2.3%+49.6% Air travel, public transportation -27.4%-7.1%-25.0%-1.4%-3.9%

18 Returns to Capital Continue to Increase Faster than Wages Percent change 2004 Q1 to 2005 Q1 Source: BEA and BLS

19 Income Inequality Affecting Consumer Spending? Source: International Council of Shopping Centers-UBS Same-store Sales, April 2005 vs. April 2004

20 Germany: A Decade without Wage Growth Source: OECD, IMF WEO

21 German Wage Share Falling: A Shift from Labor to Capital Source: OECD Down 5% points since re-unification

22 A Fracturing of International Relations? Pre-9/11 (2000) After Fall of Saddam (2003) Today (2005) UK France6243 Germany Russia Turkey (Percent reporting favorable view of the United States) Source: Pew Research Center for the People and the Press, June 2005

23 Do You Support the U.S.-Led War on Terror? (Percent responding “yes”)

24 Should Western Europe be more independent from the U.S.? (Percent saying “yes”)

25 Big differences between U.S. and most other countries Source: Pew Research Center for Public and Press, June 22, 2005

26 U.S. China Japan Germany Italy China’s Trend Has Been Sharply Upward (Share of world economy, PPP basis) Source: IMF WEO

27 China’s Exports Are Increasing as a Share of World Trade Source: World Bank, World Development Indicators 2005 Others

28 Source: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund China, U.K., U.S., Japan, GDP, % of World Total, PPP Basis

29 Sources: International Iron and Steel Institute, Japan Iron and Steel Federation, Barraclough: Steelmaking, Hogan: The Economic History of the Iron and Steel Industry in the U.S, Hudson & Sadler: The International Steel Industry China, U.S., Japan, Steel Production, Millions of tons <10% of world (1843) 36% of world (1900) <5% of world (1950) 19% of world (1974) <4% of world (1980) 29% of world (2005)

30 George Bush’s Political Capital Source: Gallup

31 Among Presidents Early in Their Second Terms, Bush is Quite Unpopular PresidentPositiveNegativeDifferentialDate Johnson66%21%+45% June 1965 Eisenhower64%22%+42% 6-11 June 1957 Truman57%26%+31% June 1949 Reagan58%32%+26% 7-10 June 1985 Clinton55%35%+20% June 1997 Nixon44%45%-1% June 1973 GW Bush47%51%-4% June 2005 Source: Gallup Presidential Approval Ratings

32 Are U.S. Casualties in Iraq Worth It? Source: Washington Post, June 8, 2005

33 Americans Feel the Country is “Losing Ground” on Most Issues Losing GroundMaking Progress Budget deficit65%6% Social Security’s finances63%6% Health care system62%9% Medicare’s finances56%5% Job availability55%15% Illegal immigration52%11% Quality of education50%20% Illegal drugs46%16% Political corruption41%10% Environmental pollution37%21% International Terrorism31%36% Source: Pew Research Center, May 19, 2005

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