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

2. 2 GLOBALOxford 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

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6. 6 GLOBALOxford Economic Forecasting 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

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10. 10 GLOBALOxford Economic Forecasting 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

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16. 16 GLOBALOxford Economic Forecasting 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%?

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21. 21 GLOBALOxford Economic Forecasting 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

22. 22 GLOBALOxford Economic Forecasting Faster Chinese consumption? Swing in GDP versus base after 1 year 5 years Scenarios: 1% point per annum higher +0.6% +1.5% Chinese consumer growth And Impact on China ’ s current account In US dollar billion -5 -50

23. 23 GLOBALOxford 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

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25. 25 GLOBALOxford Economic Forecasting 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 -12 to 13% And impact on: US -0.5% Eurozone -0.8% Japan -1.9% HK and Taiwan -6.0% India -1.1% Korea and Thailand -4.0% World GDP at PPP -3.5 to 4.0%

26. 26 GLOBALOxford 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