The Big SHIFT World Economic Outlook 2012

1. The Big SHIFTWorld Economic Outlook 2012 Ángel Cabrera Thunderbird School of Global Management @CabreraAngel

2. SHIFT HAPPENSWorld Economic Outlook 2012 Ángel Cabrera Thunderbird School of Global Management @CabreraAngel

3. The Big SHIFTWorld Economic Outlook 2012 Ángel Cabrera Thunderbird School of Global Management @CabreraAngel

4. IMF September Forecast for 2012 • Advanced economies • +1.9% (-0.7% from June) • Emerging economies • +6.1% (-0.3% from June) • World • +4.0% (-0.5% from June)

5. IMF September Forecast for 2012 • United States • +1.8% (-0.9% from June) • Euro Area • +1.1% (-0.6% from June) • Japan • +2.3% (-0.6% from June)

6. Emerging Markets GDP Growth Composition of World Real GDP Average Real GDP per Capita N.A. W. Europe Asia Dev. Latin America CEEMEA Asia Emerging 2010-2030E CAGR $39T $73T $180T EM: 42% EM: 52% World 3.6% EM: 70% Source: Citi Investment Research & Analysis report “Global Growth Generators,” February 2011. Note: Asia Developed is comprised of Japan, Australia and New Zealand.

7. Rise of Emerging Markets Trade Flows EM Trade as a % of Total World Trade Exports/Imports Emerging Markets Developed Markets 2009 2009 Source: UN Conference on Trade and Development (UNCTAD) Handbook of Statistics 2010.

8. (1) Calculated using purchase power parity exchange rates. Source: Citi Investment Research & Analysis report “Global Growth Generators,” February 2011 and Pricewaterhouse Coopers, “UK Economic Outlook,” November 2009.

9. G7 vs. E7 • U.S., Japan, Germany, U.K., France, Italy and Canada • China, India, Brazil, Russia, Mexico, Indonesia and Turkey

10. G7 vs E7 Source: PWC.com

14. What world do you prefer • Option A: We grow at 2% while others grow at 1% • Option B: We grow at 3% while others grow at 6%

17. Should we worry?

23. Emerging Markets Driving Global GDP Growth 200% Japan Developed Emerging Italy France Canada UnitedKingdom Germany UnitedStates Netherlands Public Debt 2010 (%GDP) Spain Brazil Argentina India Turkey Mexico South Africa Indonesia Korea Australia China Saudi Arabia Russia Average GDP Growth 2010-2014 (%) Source: Citi, Economist Intelligence Unit.

25. Europanic • Interbank markets sign trouble • A run on Italian and Spanish debt can make Lehman Brothers seem trivial

26. Europanic

27. Summary • Explosive mix: • Slow recovery, even recession in developed economies • Increased fiscal and financial uncertainty • Rebalancing necessary • Internal: from public to private demand. • External: from advanced economy to developing economy demand • Worries about sovereign bonds, translated into worries about banks holding that debt

28. Areas of attention • Fiscal consolidation • Not too fast or it will kill • Not too slow or it will feed uncertainty • Just right! • Manage looming crisis • Support weak links that can trigger domino effect: european sovereign debt, banks, ease housing troubles • Rebalance global trade • Learn new acronyms • E7 • E2E

29. Global Business Dialogue - Nov 10-11 Thunderbird School of Global Management @Thunderbird

30. Global Trends and Business Drivers Emerging Markets • Sustained higher GDP growth • Rise of EM corporate multinationals • Growth in EM consumer demand • Growing trade and capital flows, particularly intra-EM • Rapid population growth in EM cities • Significant and growing demand for credit and investment in EM • Growing capital markets volumes and products • Financial re-intermediation as investment needs are met largely by traditional banking products (lending, cash management) Large Investment Needs Technology • Driving changes in consumer behavior and expectations • Improving efficiency • Increasing ability to store and use data

31. The Shift from G7 to E7 • Measured by GDP in purchasing power parity (PPP) terms, which adjusts for price level differences across countries, the largest E7 emerging economies seem likely to be bigger than the current G7 economies by 2020, and China seems likely to have overtaken the US by that date. India could also overtake the US by 2050 on this PPP basis.If instead we look at GDP at market exchange rates (MERs), which does not correct for price differences across economies but may be more relevant for practical business purposes, then the overtaking process is slower but equally inexorable. The Chinese economy would still be likely to be larger than that of the US before 2035 and the E7 would overtake the G7 before 2040. India would be clearly the third largest economy in the world by 2050, well ahead of Japan and not too far behind the US on this MER basis.

32. Its not all gloom for G7 • Although current fuel prices are at historical highs (at least in real U.S. dollar terms), food prices are at or below levels that prevailed before the mid-1990s. • The major shift in economic power to emerging countries such as China and India should be grasped by those in established economies as an opportunity for mutual benefit in terms of the economy and business as opposed to a zero sum competitive game that should be feared. • Rapid growth in consumer markets in the major emerging economies associated with a fast growing middle class will provide great new opportunities for Western companies that can establish themselves in these markets. • Even though relative GDP shares decline, the average per capita income will remain well above the E7. The rise of the E7 should boost average G7 incomes in absolute terms through the newly created market opportunities • G7 economies can specialize in their areas of comparative advantage and have access to a larger global market both at home and overseas • G7 customers will continue to benefit from low cost imports from the E7 and other emerging economies • Restructuring of emerging market economies will give rise to many more opportunities for private equity firms

33. Inflation still lower in G7 countries

34. Other Considerations • This changing world order poses both challenges and opportunities for businesses in the current advanced economies. On the one hand, competition from emerging market multinationals will increase steadily over time and the latter will move up the value chain in manufacturing and some services (including financial services given the weakness of the Western banking system after the crisis). • Until recently, emerging market economies have been largely immune to the adverse developments of the financial crisis. They have had to deal with volatile capital flows, but in general have continue to sustain high growth. Indeed, some are close to overheating, although prospects are more uncertain again for many others. Under certain risk scenarios, they may well suffer more adverse export conditions and even more volatile capital flows. Low exports and, perhaps, lower commodity prices will also create challenges for low-income countries. • Finally, there will also be challenges arising from the rapid rise of China, India and other emerging economies in terms of pressure on natural resources such as energy and water, as well as implications for climate change. Commodity prices will tend to remain high, so boosting exporters of these products (e.g Brazil. Russia, Indonesia, the Middle East) and increasing input costs for natural resource importers. Source: PWC.com

35. So What? • Too many companies in mature markets assume that the only reason to enter emerging countries is to pursue new customers. They fail to perceive the potential for innovation in those countries or to notice that a few visionary multinationals are successfully tapping that potential for much-needed ideas in products and services • There becomes an increased need to leverage “global bridgers” • This term coined by Nathan T. Washburn and B. Tom Hunsaker – two colleagues who teach at Thunderbird School of Global Management, is used to describe a new kind of manager that multinationals need to foster, cultivate and deploy globally. • These managers come up with innovations in emerging markets and bring home tested ideas that are integrated into their companies’ offerings worldwide. Source: hbr.org