1. Global Economic and Financial Prospects and Risks: 2006 Robert F. Wescott, Ph.D. Rome 5 December 2005

2. 6 Forces Shaping World Economy in 2006 1. Reversal of policy stimulus: negative 2. Still high energy prices: negative 3. Faster global productivity: positive 4. Tax/business policies: mixed 5. Trade openness: neutral 6. Demographics: mixed

3. Economic Policy Floodgates Closing Source: IMF WEO, Author’s calculations for China

4. Oil: A Growing Burden on the World Economy Source: EIA, IMF WEO

5. 6 Forces Shaping World Economy in 2006 1. Reversal of policy stimulus: negative 2. Still high energy prices: negative 3. Faster global productivity: positive 4. Tax/business policies: mixed 5. Trade openness: neutral 6. Demographics: mixed

6. Perceived Global Investment Risks Source: UBS Index of Investor Optimism, August 2005 Percent rating the region “low risk” minus percent rating it “high risk”

7. The dollar-euro in 2006 Shaped by long-run, medium-run, and short-run factors Long run: competitiveness, productivity (good for $) Medium run: current account imbalances (very bad for $) Short run: interest rate differentials, growth differentials (shifting to euro)

8. Risks to Ponder U.S. soft patch? Energy prices lead to negative industry effects? Housing bubble bursts? Wrong policies in Europe? Interest rates Loss of jobs to China Disequilibrium proves unsustainable? Hypothesis: U.S. consumes, China produces Weakened President Bush?

9. The Oil Price Pass-Through to Inflation is Falling Source: Bureau of Labor Statistics and Energy Information Agency

10. Why Isn’t the Dow at 12,800? (Because of Energy Prices) Source: Bureau of Economic Analysis, Yahoo! Finance

11. Housing Prices Rising Worldwide Percent Change, 1997-2005 Source: The Economist

12. Are Rising Interest Rates Killing the U.S. Refinancing Boom? Sources: Federal Reserve, Mortgage Bankers Association

13. Greenspan’s Medicine Would Help Europe (Real short-term interest rates) Fed funds / ECB policy rate deflated by “core” CPI inflation US real interest rate EU real interest rate Sources: Federal Reserve, Bureau of Labor Statistics, European Central Bank, European Commission

15. China’s Trend Has Been Sharply Upward Source: IMF WEO

16. High Tech Manufactures: Asia Rising, Europe Declining Source: National Science Foundation, “Science and Engineering Indicators 2004”

17. Percentage of 18-24 Year Olds in Science and Engineering Programs Source: National Science Foundation, Science and Engineering Indicators 2002

18. Can Disequilibrium Continue? (China produces, the U.S. consumes?) Source: IMF WEO

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

20. Bush’s Falling Political Capital Source: Gallup