Global Economic Outlook

EXPORT FORUM October 14, 2015

James Breece

I appreciate the invitation, but…

Some things are for certain…

Outline 1. Driving forces in todays’ global economy 2. All eyes on China

– Past, present, and future – Financial markets – Domino effect

3. Global Outlook – Revisions

4. Potential export markets

Driving forces in today’s global economy

• China’s slower growth • Japan’s “lost decade” – really two decades • Europe’s double/triple dip recession • Commodity prices falling – hurting emerging markets • Emerging market countries’ debt based in U.S. $ • Aging population in many developed countries • Potential interest rate hike by the Federal Reserve

Bank in an uncertain global economy

Big Picture…

• Mild growth in the U.S.

• Some Green Shoots in Europe – But not enough to make up for China and the

emerging market countries

• Resulting in a slower World economy over the next several years (if not longer)

Mao to Now

• Over the last 30 years Beijing developed policies to stimulate each component of aggregate demand [Y=C+I+G+X]

• Intentionally pegged their currency to the U.S. dollar

Starting to run out of policy options

for continued growth

First Phase: EXPORTS (X)

• Special trade zones along the southeast coast – Low taxes, cheap and abundant labor, national

resources, and developed sea ports – Manufacturing base

Second Phase: PRIVATE AND PUBLIC INVESTMENT (I+G)

• Build up of infrastructure and capacity – Sea/air ports, trains, highways,

and telecommunications

• Phase 1 and 2 created the world’s largest labor migration – nearly 350 million people (size of the U.S. population)

Significant social issues

Third Phase HOUSEHOLD CONSUMPTION (C)

• Over 70% of U.S. GDP is household consumption

• In China, it’s only 35% - room to grow • Skeptical about policy:

– Cash economy; not accustomed to borrowing – SAVE mentality – Limited services rendered and goods purchased

Impact of China’s growth

1980 2015 North America 30.3 28.1 Europe 32.2 20.8 South America 4 3.8 Asia 20.2 33 Africa 1.5 1.6 Data: International Monetary Fund

World share of Global GDP

Financial Markets

• While the national government has modest debt and large foreign reserves (mainly U.S. Treasuries)

• Metropolitan and Provincial governments unknowingly mounted significant debt

With rising debt and labor costs and no new sustainable stimulus package, global investors became skittish of the Chinese

economy

• The Chinese stock market bubble burst– trading at a price-earnings ratio of 70:1

• Other global market bubbles also burst

– U.S. (trading at 17:1)

When Shanghai sneezes, the world catches a cold

Resulting in:

• Financial capital leaving China causing a devaluation of the Yuan

• Maybe a desirable event that helps promote exports again…

Upshot…

The financial markets’ realignment signifies that the global economy is adjusting to a slowing Chinese economy

The Chinese miracle maybe over

Significance of a slowing China…

Direct effect: Slower growth from 12% to 6% represents lost GDP equal to the GDP of Saudi Arabia

Global Impact of a slowing China

China’s Imports…by country

China’s Imports…by goods

• World commodity prices fell – hurting Saudi Arabia, African countries, Russia, Australia, and Canada

• Many emerging market countries hold debt in U.S. currency – Causing financial capital outflow and devaluating

their currencies

Global Outlook • Slower world growth • A time of:

– Volatility – Uncertainty – Conflicts

• Consensus forecast overview…

Conference Board

OECD

IMF April 2015 Outlook for 2020

World Bank…

2015 2016 2017

World 2.8 3.3 3.2

U.S. 2.7 2.8 2.4

Euro Area 1.5 1.8 1.6

Japan 1.1 1.7 1.2

Russia -2.7 0.7 2.5

China 7.1 7.0 6.9

Brazil -1.3 1.1 2.0

Mexico 2.6 3.2 3.5

India 7.5 7.9 8.0

Nigeria 4.5 5.0 5.5

Annual GDP growth rates

IMF Revisions… As of Oct. 6, 2015

OECD Revisions… As of Oct. 8, 2015

• Sees further slow down in: – U.S., China, Japan, U.K., Canada, South Africa,

Russia, and Brazil

• Eurozone will avoid a slowdown: – Pickup in France and Italy

Potential Export Markets

2015 2016 2017

World 2.8 3.3 3.2

U.S. 2.7 2.8 2.4

Euro Area 1.5 1.8 1.6

Japan 1.1 1.7 1.2

Russia -2.7 0.7 2.5

China 7.1 7.0 6.9

Brazil -1.3 1.1 2.0

Mexico 2.6 3.2 3.5

India 7.5 7.9 8.0

Nigeria 4.5 5.0 5.5

Annual GDP growth rates

World Bank…

China’s Cities

10 Largest Cities 10 Fastest Growing Cities

Shanghai Guiyang

Beijing Xiangyang

Tianjin Hengyang

Guangzhou Chongqing

Shenzhen Suqian

Dongguan Huainan

Taipei Hauibei

Chengdu Zhuzhou

Hong Kong Zhengzhou

Hangzhou Chengdu

Points to remember…

• Slower growth – NOT recession • China is still growing twice the U.S. rate • Consider Mexico and India • Pick your markets carefully • Don’t take your eye off domestic markets