Fed Forum Outlook for the Global Economy Matthew Higgins Economist - PowerPoint PPT Presentation

Fed Forum Outlook for the Global Economy Matthew Higgins Economist and Assistant Vice President Federal Reserve Bank of New York March 13, 2008 In collaboration with the World Trade Center Buffalo Niagara

Largely Supportive Global Environment � Growth slowing outside U.S., but global recovery expected to remain on track � Inflationary pressures building in some countries--central banks reluctant to ease � U.S. slowdown and rate cuts have led to weaker dollar, stabilizing current account deficit � Key question: Can foreign economies shake off U.S. slowdown, global credit crunch?

Foreign growth expected to slow, but not drastically Growth Forecast, Major Foreign Economies ( percent y/y ) 2007 2008F 2009F Euro Zone 2.6 1.7 2.0 Japan 1.9 1.3 1.9 United Kingdom 3.0 1.9 2.2 Canada 2.6 1.9 2.6 China 11.3 9.8 9.4 NIEs 5.5 4.7 5.0 Brazil 4.6 4.6 4.3 Mexico 3.0 2.8 3.6 Memo: U.S. 2.2 1.5 2.3 Sources: National sources for 2007, Blue Chip economics for 2008 and 2009.

EMs now about one-third of global GDP Percentage Distribution* Global GDP ($U.S. trn.) Global Total $53.6 Other Advanced Emerging United States 13.9 43 31 Other Advanced 23.2 Emerging 16.5 United States 26 Note: Figures are estimates for 2007 * At current exchange rates

… and more than 40 percent of non-U.S. GDP Percentage Distribution* Global GDP ($U.S. trn.) Global Total $53.6 Other Advanced Emerging United States 13.8 58 42 Other Advanced 23.2 Emerging 16.5 Note: Figures are estimates for 2007 * At current exchange rates

EMs contributing two-thirds of foreign growth Foreign real GDP: percent growth and contributions 5 Emerging Contribution 4 Advanced Contribution 3 2 1 0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F Sources: FRBNY and IMF forecasts using dollar GDP weights.

Dollar near bottom of historical range Real trade-weighted U.S. dollar. Index, average = 100 130 120 110 100 90 February 89 80 1973 1978 1983 1988 1993 1998 2003 2008

$U.S. weakness = big gain in U.S. competitiveness Export Prices for Capital Goods in $U.S. Terms Index, 2001 = 100 170 November 161 United States 150 Euro zone 130 110 February 90 101 70 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Exports Supporting Growth Percent of GDP Percent of GDP 15 15 2007Q4 12.3 12 12 Exports 9 9 2007Q4 6 6 4.1 Residential Investment 3 3 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Bureau of Economic Analysis

U.S. export growth strongest to EMs Percent change from year ago 25 North America 20 Emerging Advanced 15 10 5 0 2004 2005 2006 2007 Source: U.S. Department of Commerce, Bureau of Economic Analysis

U.S. core import prices still close to flat Index, 2000=100 Index, 2000=100 340 340 323 300 300 Oil 260 260 220 220 180 160 180 Industrial Feb 140 Supplies 140 Core Goods 100 100 100 60 60 20 20 1985 1990 1995 2000 2005 1985 1990 1995 2000 2005 Core goods includes capital goods, autos, and consumer goods

Three Key Questions � Can foreign economies shake off U.S. slowdown, global credit market tightening? � Could China see a hard landing? Stalls adjustment of global imbalances � � Might foreign investors shift away from dollar assets? Weaker dollar, higher interest rates �

New U.S. recession may be underway ISM indexes. Indexes above 50 signals expansion 60 50 Manufacturing Services 40 99 00 01 02 03 04 05 06 07 08

Global stress in the inter-bank market Spread of LIBOR Rate over expected average overnight rates (3 Month) Euro Area and UK United States Spread (Basis Points) Spread (Basis Points) 120 120 100 100 United Kingdom 80 80 60 60 40 40 20 20 Euro Area 0 0 -20 -20 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Source: Bloomberg

Banks tightening business lending standards Balance Tightening Balance Tightening, SA 60 60 Euro Zone 45 United States 40 30 20 15 0 0 -15 -20 -30 90 93 96 99 02 05 08

Euro Zone: Slowing growth, rising inflation Diffusion indexes, boom/bust line = 50 Percent 3.5 65 Jan 3.2 3 60 Headline PMI Services 2.5 55 2 50 Jan 1.5 1.7 PMI Manufacturing Core 45 1 0.5 40 99 00 01 02 03 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08

EMU monetary policy on hold for now Expected Average Overnight Rate Over the Next Six Months (Swap Rate) 4.4 4.3 4.2 Swap Rate 4.1 4.0 Refi Rate 3.9 3.8 3.7 Jul-07 Oct-07 Jan-08 Apr-08 Source: Bloomberg

Japan: Falling confidence, mixed data—slowdown ahead? Diffusion Index: Source: Shoko Chukin Bank Percent change, SAAR 55 40 20 30 15 50 20 10 10 5 45 0 0 -10 -5 Real Exports -20 40 -10 Industrial Production -30 -15 Note: Dots show METI survey for Feb., March -40 -20 35 00 01 02 03 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08

Japanese monetary policy also on hold Expected Average Overnight Rate Over the Next Six Months (Swap Rate) 0.8 0.7 Swap Rate 0.6 0.5 Policy Rate 0.4 0.3 Jul-07 Oct-07 Jan-08 Apr-08 Source: Bloomberg

EM Asia export growth tied to advanced cycle NIE+ Real Exports and G7 Real Imports, % growth Q/Q-4 25 15 20 10 15 10 5 5 0 0 -5 NIE+ Exports -5 -10 G7. Real Imports -15 -10 99 00 01 02 03 04 05 06 07 08

Mexico: Outlook tied to U.S. growth, oil prices Monetary Policy Rate, percent Real GDP Growth, SA 12 10 Blue Chip Mexico 2008: 2.8 8 10 Mexican 6 7.5 8 policy rate U.S. 4 3.0 6 2 Fed Funds 4 target 0 0.6 3.0 2 -2 0 -4 2004 2005 2006 2007 2008 2004 2005 2006 2007 Consumer Prices, percent change (y/y) 5.5 Blue Chip 2008: 3.8 5 Headline 4.5 Upper 4.0 bound 4 Core 3.7 3.5 Inflation target 3 2.5 2004 2005 2006 2007 2008

Brazil: Outlook tied to commodity prices Monetary Policy Rate, percent Real GDP Growth, SA 22 12 Blue Chip 10 2008: 4.6 20 8 6.9 18 6 16 4 2 14 0 11.25 12 -2 10 -4 2004 2005 2006 2007 2008 2004 2005 2006 2007 Consumer Prices, percent change (y/y) 12 Blue Chip 2008: 4.1 10 Core 8 Upper bound 6 4.6 4 Inflation target Headline 2 2004 2005 2006 2007 2008

Chinese growth: beginning to moderate? GDP growth, percent change from year-ago quarter 15 14 13 12 Q4 11.2 11 10 9 Forecast 8 7 6 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Inflationary pressure building in China? Corporate goods prices, percent change (y/y) 12 10 8.9 8 Investment Goods 6 8.2 4 2 0 Consumer Goods -2 -4 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008

U.S. current account deficit absorbs bulk of foreign current account surpluses Asia Oil Exporters $640 billion $465 billion Other and United States Unallocated (-755 billion) (-350 billion) Figures are data or estimates for 2007

Official investors direct bulk of global surpluses Reserves and Other Official Investments ( $U.S. billions ) 2005 2006 2007E EM Oil Exporters 329 429 430 China 215 260 420 Other Emerging Asia 87 103 185 Other Emerging 103 116 190 Total 734 908 1,225 Memo: U.S. Current Acount Deficit 755 811 756 Sources: October 2007 IMF WEO, staff and market estimates

Major Global Investment Pools, by Type $U.S. trillions 0 5 10 15 20 25 Mutual funds Pension funds Insurance assets Central bank FX reserves Sovereign wealth funds Hedge funds Private equity Source: McKinsey Global Institute, market estimates. Figures refer variously to end-2006 and end-2007.

Reference Slides

There are four trillion dollar EM economies Mexico 887 Korea 987 1,155 India Russia 1,205 1,317 Brazil China 3,223 0 500 1,000 1,500 2,000 2,500 3,000 3,500 Note: Figures are for 2007

Dollar near bottom of historical range Real trade-weighted U.S. dollar. Index, average = 100 140 vs. advanced economy currencies vs. EM currencies 130 120 110 100 Feb. 90 95 Feb. 85 80 1973 1978 1983 1988 1993 1998 2003 2008