J.P.Morgan Chase S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Mega Trends in the Global Economic System Prof. Jacob A. Frenkel Chairman, JPMorgan Chase International Chairman of the Board of Trustees, Group of Thirty (G30) Group of Thirty (G30) Hezeliya Conference June 9, 2014

6/5/ Global Economic Trends Growth in the Global Economy Growth in the Global Economy International Trade International Trade Global Monetary Policies Global Monetary Policies The Euro-System: Turning the Corner The Euro-System: Turning the Corner US and Euro Area Labor Markets US and Euro Area Labor Markets Long-Term Considerations: Long-Term Considerations: I. Demographic Challenges II. Fiscal Challenges

6/5/ Global Growth Projections Global Growth Projections The Rise of Developing Countries The Rise of Developing Countries Economic Growth

4 J.P.Morgan Chase 6/5/2014 Global GDP Growth

5 J.P.Morgan Chase 6/5/2014 Real GDP Growth, Select Countries

6 J.P.Morgan Chase 6/5/2014 Global GDP Shares

7 J.P.Morgan Chase 6/5/2014 Ease of Doing Business by Region

6/5/ The Volume of World Trade The Volume of World Trade China and the Trading System China and the Trading System International Reserves International Reserves Global Trade, Reserves and Savings

9 J.P.Morgan Chase 6/5/2014 World Trade Volume

10 J.P.Morgan Chase 6/5/2014 China’s Role in Global Trade (bill. Usd) U.S.&EU People’s Republic of China Exports Imports Imports Exports Asia

11 J.P.Morgan Chase 6/5/2014 European Union Exports by Destination

12 J.P.Morgan Chase 6/5/2014 U.S. Exports by Destination

13 J.P.Morgan Chase 6/5/2014 Foreign Exchange Reserves (Bill. Usd)

6/5/ Global Policy Rates Global Policy Rates Central Bank Balance Sheets Central Bank Balance Sheets Forward Guidance Forward Guidance Global Monetary Policies

15 J.P.Morgan Chase 6/5/2014 Central Bank Policy Interest Rate

16 J.P.Morgan Chase 6/5/2014 Total Assets of Key Central Banks (indexed levels)

17 J.P.Morgan Chase 6/5/2014 Composition of Federal Reserve Assets

18 J.P.Morgan Chase 6/5/2014 Composition of ECB Liquidity Facilities

6/5/ GDP Growth: Gradual Recovery GDP Growth: Gradual Recovery Structural Challenges: Structural Challenges: -- Unemployment -- Unemployment -- Productivity -- Productivity Declining Bond Spreads Declining Bond Spreads The Euro-System: Turning the Corner

20 J.P.Morgan Chase 6/5/2014 Real GDP Growth, Euro area countries

21 J.P.Morgan Chase 6/5/2014 Unemployment Rate: Euro Area Countries

22 J.P.Morgan Chase 6/5/2014 Relative Unit Labor Cost, Total Economy

23 J.P.Morgan Chase 6/5/ yr Sovereign Bond Spreads

6/5/ Unemployment Unemployment Labor Force Participation Labor Force Participation Cyclical or Structural? Cyclical or Structural? - the Role of Education - the Role of Education - the Duration of Unemployment - the Duration of Unemployment US and Euro Area Labor Markets

25 J.P.Morgan Chase 6/5/2014 Unemployment Rate: US and Euro Area

26 J.P.Morgan Chase 6/5/2014 Labor Force Participation: US and Euro Area

27 J.P.Morgan Chase 6/5/2014 US Unemployment: Actual and Hypothetical

28 J.P.Morgan Chase 6/5/2014 U.S. Unemployment, by Level of Education

29 J.P.Morgan Chase 6/5/2014 Euro Area Unemployment by Level of Education

30 J.P.Morgan Chase 6/5/2014 U.S. Unemployment, by Duration

31 J.P.Morgan Chase 6/5/2014 Euro Area Unemployment, by Duration

6/5/ Demographic Challenges Demographic Challenges Fiscal Challenges Fiscal Challenges Long-Term Considerations

33 J.P.Morgan Chase 6/5/2014 World Demographic Challenge

34 J.P.Morgan Chase 6/5/2014 Developing Countries Demographic Challenge

35 J.P.Morgan Chase 6/5/2014 Developed Countries Demographic Challenge

36 J.P.Morgan Chase 6/5/2014 U.S. Demographic Challenge

37 J.P.Morgan Chase 6/5/2014 Europe Demographic Challenge

38 J.P.Morgan Chase 6/5/2014 Japan Demographic Challenge

39 J.P.Morgan Chase 6/5/2014 China Demographic Challenge

40 J.P.Morgan Chase 6/5/2014 India Demographic Challenge

41 J.P.Morgan Chase 6/5/2014 Africa Demographic Challenge

42 J.P.Morgan Chase 6/5/2014 Middle East Demographic Challenge

43 J.P.Morgan Chase 6/5/2014 Population and GDP by region Nominal GDP Population

6/5/ US Demographic Challenge Age of Medicare eligibility: 65 Age of Medicare eligibility: 65 Age of Social Security eligibility, reduced benefits: 62; full benefits: 67 (for those born after 1960) Age of Social Security eligibility, reduced benefits: 62; full benefits: 67 (for those born after 1960) Age group share of total population:

45 J.P.Morgan Chase 6/5/2014 Expenditures on healthcare and social security as a share of primary spending

46 J.P.Morgan Chase 6/5/2014 Composition of US Federal Expenditures Aging accounts for 2/3 of projected rise in expenditures on social security and healthcare (CBO) Aging accounts for 2/3 of projected rise in expenditures on social security and healthcare (CBO) Healthcare includes Medicare (17% of noninterest spending in 2012, 25% in 2035) and Medicaid, CHIP, and exchange subsidies (combined for 8% of noninterest spending in 2012, 14% in 2035) Healthcare includes Medicare (17% of noninterest spending in 2012, 25% in 2035) and Medicaid, CHIP, and exchange subsidies (combined for 8% of noninterest spending in 2012, 14% in 2035) Share of government spending (ex interest payments):

6/5/

48 J.P.Morgan Chase 6/5/2014 FEDERAL RESERVE’s Forward Guidance “the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer- term inflation expectations continue to be well anchored.” January 29, 2014 “In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation…The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” April 30, 2014

49 J.P.Morgan Chase 6/5/2014 Bank of England’s Forward Guidance “Looking beyond the immediate decision, the Committee discussed how to set policy to achieve the 2% inflation target, while supporting the recovery, once the 7% unemployment threshold had been reached. Despite the sharp fall in unemployment, the Committee judged that there remained scope to absorb spare capacity further before raising Bank Rate. When Bank Rate did begin to rise, it expected that the appropriate path, so as to eliminate slack over the next two or three years and keep inflation close to target, would be gradual.” -Minutes of the MPC meeting 5 and 6 February 2014, released February 19, 2014 “The LFS unemployment rate had fallen below the Committee’s 7% threshold in the data for the three months to February. The policy guidance the Committee had provided in August 2013 had therefore ceased to apply. The Committee reaffirmed the subsequent guidance set out in its February Inflation Report on how it would seek to achieve the inflation target over the policy horizon. A key feature of the guidance was that, given the likely persistence of headwinds weighing on the economy, when Bank Rate did begin to rise, it was expected to do so only gradually.” -Minutes of the MPC meeting 8 May 2014, released May 21, 2014

50 J.P.Morgan Chase 6/5/2014 ECB’s and BoJ’s Forward Guidance ECB’s and BoJ’s Forward Guidance ECB “Concerning our forward guidance, the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation. This expectation is further underpinned by our decisions today. Moreover, if req uired, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation.” -ECB President Mario Draghi, Introductory statement, June 5, BOJ “Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” -Statement of Monetary Policy, May 21, 2014

51 J.P.Morgan Chase 6/5/2014 Perspectives on Global Spillovers from DM Central Bank Policy RBI Governor Raghuram Rajan, April 28, 2014: “More problematic, the disregard for spillovers could put the global economy on a dangerous path of unconventional monetary tit for tat. To ensure stable and sustainable economic growth, world leaders must re-examine the international rules of the monetary game, with advanced and emerging economies alike adopting more mutually beneficial monetary policies.” Central Bank of Brazil President Tombini, April 11, 2014: “I am a bit skeptical about the capacity of jurisdictions to effectively and fully coordinate policies…Brazil has a long history of riding global financial cycles…Of course we think there are spillovers from monetary policy in advanced economies. The world is a very financially integrated place. But we have learned how to ride this.” South African Reserve Bank Governor Marcus, February 3, 2014: “When the advanced economies were really at the depth of the crisis, it was the emerging markets that helped stabilize, that helped create some balance to the global outlook…The challenge here is if the advanced economies say OK, you are on your own, the scale of the emerging markets is such that it’s going to impact on this fragile recovery.”