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Global Economic and Financial Prospects and Risks: 2006

Global Economic and Financial Prospects and Risks: 2006. Robert F. Wescott, Ph.D. Rome 5 December 2005. 6 Forces Shaping World Economy in 2006. 1. Reversal of policy stimulus: negative 2. Still high energy prices: negative 3. Faster global productivity: positive

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Global Economic and Financial Prospects and Risks: 2006

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  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 Percent rating the region “low risk” minus percent rating it “high risk” Source: UBS Index of Investor Optimism, August 2005

  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 EU real interest rate US real interest rate Sources: Federal Reserve, Bureau of Labor Statistics, European Central Bank, European Commission

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

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

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

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

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

  19. Bush’s Falling Political Capital Source: Gallup

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