Global Economic Trends & Processes: 1 Global Economic Trends & Processes Dr. Jacob A. Frenkel Vice Chairman AIG, Chairman G30 DRAFT - The 8th Herzliya Conference January 20-23 2008


Slide2: 01/18/2008 2 2 Global Equity Markets U.S. Equity Markets Global Equity Indices: U.S. S&P 500 Index U.K. FTSE 100 Index Germany DAX Index Japan Nikkei


Slide3: 01/18/2008 3 3 Source: Bloomberg, Market Data, Last Observation 17 Jan 2008 Global Equity Markets


Slide4: 01/18/2008 4 4 Source: Bloomberg, Market Data, Last Observation 17 Jan 2008 Global Equity Markets Year-end 2006 Value


Economic Growth: 01/18/2008 5 5 Economic Growth Industrial Countries Developing Countries


Real GDP Growth (%) Industrial Countries: 01/18/2008 6 6 Source: IMF, av. annual growth rates, Asian NICs (Hong Kong, Korea, Singapore, Taiwan), last update 10/2007 (2007, 2008 forecast) Asian NICs 4.4% Eurozone 2.1% U.S. 1.9% Japan 1.7% Real GDP Growth (%) Industrial Countries


Real GDP Growth (%) Developing Countries: 01/18/2008 7 Real GDP Growth (%) Developing Countries Source: IMF, av. annual growth rates, last update 10/2007 WEO (2007, 2008 forecast) Developing Asia 8.8% Russia 6.5% Africa 6.5% Central & East. Europe 5.2% Latin America 4.3%


Inflation: 01/18/2008 8 8 Inflation Headline Inflation Oil-Price Inflation Gold-Price Inflation


Headline CPI Inflation (%): 01/18/2008 9 9 Headline CPI Inflation (%) Source: U.S. Dept. of Labor, Eurostat, Japan MIC, quarterly averages, last observation 12/2007, Japan 11/07 Eurozone 3.1% U.S. 4.1% Japan 0.6%


Slide10: 01/18/2008 10 10 2005 av. $59.8 14 Jan ‘08 $90.5 2003 av. $30.8 2006 av. $65.9 2001 av. $24 2004 av. $39.6 Source: EcoWin, WTI Light Crude, USD/barrel, Last observation 17 Jan 2008 Oil Price per Barrel


Slide11: 01/18/2008 11 11 Source: EcoWin, WTI Light Crude, USD/barrel, Gold, USD/troy oz, Last observation 17 Jan 2008 Gold Price and Oil Price per Barrel Oil: 17 Jan $90.5 Gold: 17 Jan $894.5


Labor Market: 01/18/2008 12 12 Labor Market Unemployment Unit Labor Cost


Slide13: 01/18/2008 13 13 Eurozone 7.2% Japan 3.8% U.S. 5.0% Source: National Statistical Institutes, quarterly end of period values, last observation US 12/2007, Eurozone & Japan 11/2007 Unemployment Rate (%)


Slide14: 01/18/2008 14 14 Relative Unit Labor Cost (Manuf. Sector) Source: OECD, last observation Q4/2007 (2007 estimate) Italy +31.0% since 2002 Germany -5.05% since 2002 France +9.86% since 2002 U.S. -31.61% since 2002


Current Account Imbalance: 01/18/2008 15 15 Current Account Imbalance International Imbalances The Role Of Asia The Role of China


 Current Account of Balance of Payments: 01/18/2008 16 16 Current Account of Balance of Payments Eurozone -$51B Asia $736B U.S. - $788B ME Oil Exp. plus Russia $296B Asia & Oil Exporters Save Europe Balances US Spends Source: IMF, av. annual growth , last update 10/2007 WEO Forecast (2007, 2008 forecast)


Slide17: 01/18/2008 17 17 Source: Nat. Statistical Institutes, last update 10/2007, Foreign-Exchange Reserves excluding gold. Stock (September 2007) Flow (2005 – Q3 2007) Accumulation of Foreign Exchange Reserves ($B)


Slide18: 01/18/2008 18 18 Exports Imports $500 billion $185 billion Imports Exports $644 billion $588 billion Source: National Bureau of Statistics of China, 12-months through October 2007 China’s Role in Global Trade


Slide19: 01/18/2008 19 19 Labor Cost Comparison Unit Labor cost comparisons for manufacturing workers, 2002 (U.S. = 100) Source: The Conference Board published 2006


National Savings Rate Comparison : 01/18/2008 20 20 Source: EIU estimates, annual average rates, Last update 12/2007 National Savings Rate Comparison Gross Domestic Savings: 2007 (% of GDP)


U.S. Housing : 01/18/2008 21 21 U.S. Housing Housing Prices, Sales and Inventories Mortgages Delinquencies and Foreclosures


Slide22: 01/18/2008 22 22 Changes in U.S. Home Prices Source: National Asc. of Realtors, Annual growth in median home prices, quarterly averages, last Observation 11/2007 Nov 2007 -4.9%


Slide23: 01/18/2008 23 23 U.S. Household Real Estate Wealth Q3 2007 103.20% Source: Federal Reserve, Owners’ Equity in Household Real Estate as % of Disposable Household Income, last observation Q3/2007


U.S. New Home Sales and Housing Starts: 01/18/2008 24 24 Source: U.S. Dep. of Commerce, National Association of Realtors, quarterly averages, last observation Starts 12/2007, Sales 11/07 U.S. New Home Sales and Housing Starts New Home Sales: 0.68M Housing Starts: 1.15M


U.S. Home Inventory-to-Sale Ratio: 01/18/2008 25 25 Source: U.S. Dep. of Commerce, National Association of Realtors, monthly values, last observation 11/2007 U.S. Home Inventory-to-Sale Ratio Existing Home: 10.1 New Home: 89.2


Slide26: 01/18/2008 26 26 U.S. Delinquencies Source: Mortgage Bankers Association, last observation 9/30/2007 Q3 2007 16.31% (Right) Q3 2007 5.59% (Left)


Slide27: 01/18/2008 27 27 U.S. Foreclosures Source: Mortgage Bankers Association, last observation 9/30/2007 Q3 2007 6.89% Q3 2007 1.69%


Slide28: 01/18/2008 28 28 U.S. Composition Mortgage Market Source: Mortgage Bankers Association, last observation 6/30/2007


U.S. Financial Markets : 01/18/2008 29 29 U.S. Financial Markets Asset-backed Commercial Papers (CP) Financial Market Volatility Credit Market Spreads


Slide30: 01/18/2008 30 30 U.S. Composition of Asset-backed CP Market Source: Federal Reserve, last update 17 Jan 2008 Corporate non-financial (right) Asset-Backed (left) Financials (left)


Slide31: 01/18/2008 31 31 Source: CBOE VIX, Monthly averages, last observation 17 Jan 2008 30 Sep ‘98 38.20% 30 Sep ‘02 37.65% 28 Sep ‘01 35.07% 17 Jan ‘08 22.25% U.S. Stock Volatility Index


U.S. Credit Market Spreads: 01/18/2008 32 32 Source: Market Rates, weekly averages, last update 10 Jan 2008 High Yield Spreads High Grade Spreads U.S. Credit Market Spreads


U.S. Recession?: 01/18/2008 33 33 U.S. Recession? Retails Sales: Housing & Non-Housing Construction Spending Corporate Profits Investment: Business & Residential US Consumer Confidence and Spending Exchange Rates


Slide34: 01/18/2008 34 34 Source: The Census Bureau, Last Observation 11/2007 U.S. Change in Retail Sales Housing Related Non-Housing


Slide35: 01/18/2008 35 35 Source: U.S. Census Bureau, last observation 11/2007 Private Non-residential Private Residential Public Res. Constr. Spending 2007-Q3 $519B Non-Res. Constr. Spending 2007-Q3 $356B Public Constr. Spending 2007-Q3 $294B U.S. Construction Spending By Sector


Slide36: 01/18/2008 36 36 U.S. Investment Source: Bureau of Economic Analysis, Annual Rate, last observation 9/2007 (2007 estimate) Business Investment Residential Investment


Slide37: 01/18/2008 37 37 Residential Investment as a % Total Source: Bureau of Economic Analysis, Annual Rate, last observation 9/2007 (2007 estimate)


U.S. Consumer Confidence and Spending: 01/18/2008 38 38 Source: Conference Board, BEA, period averages; last observation 11/2007 Consumer Spending, 12/07 Consumer Confidence U.S. Consumer Confidence and Spending Consumer Confidence (right) Real Consumer Spending (left)


U.S. Corporate Profits as % of GDP: 01/18/2008 39 39 U.S. Corporate Profits as % of GDP Q3 2007 8.24% Source: U.S. Department of Commerce, last observation 9/2007


Slide40: 01/18/2008 40 40 Source: Federal Reserve, 3/31/2000 = 100, end of quarter, last observation 17 Jan 2008. 17 Jan ‘08 74.7 29 Mar ‘02 112.46 Trade Weighted Value of U.S. Dollar


Long-term Demographic Challenge: 01/18/2008 41 41 Long-term Demographic Challenge Developed Countries Developing Countries U.S., Europe, Asia, Africa


Developed Countries Demographic Challenge: 01/18/2008 42 42 Developed Countries Demographic Challenge Projected change in population 2005 - 2025: +37.7M Source: United Nations Populations Division


Developing Countries Demographic Challenge: 01/18/2008 43 43 Developing Countries Demographic Challenge Projected change in population 2005 - 2025: +1,402.8M Source: United Nations Populations Division


U.S. Demographic Challenge: 01/18/2008 44 44 U.S. Demographic Challenge Projected change in population 2005 - 2025: +51.9M Source: United Nations Populations Division


Europe Demographic Challenge: 01/18/2008 45 45 Europe Demographic Challenge Projected change in population 2005 - 2025: -21.2M Source: United Nations Populations Division


Asia Demographic Challenge: 01/18/2008 46 46 Asia Demographic Challenge Projected change in population 2005 - 2025: +882.7M Source: United Nations Populations Division


Japan Demographic Challenge: 01/18/2008 47 47 Japan Demographic Challenge Projected change in population 2005 - 2025: -3.3M Source: United Nations Populations Division


China Demographic Challenge: 01/18/2008 48 48 China Demographic Challenge Projected change in population 2005 - 2025: +125.6M Source: United Nations Populations Division


India Demographic Challenge: 01/18/2008 49 49 India Demographic Challenge Projected change in population 2005 - 2025: +292.1M Source: United Nations Populations Division


Africa Demographic Challenge: 01/18/2008 50 50 Africa Demographic Challenge Projected change in population 2005 - 2025: +438.6M Source: United Nations Populations Division


Israel Demographic Challenge: 01/18/2008 51 51 Israel Demographic Challenge Projected change in population 2005 - 2025: +2.0M Source: United Nations Populations Division


Risks: 01/18/2008 52 52 Risks 1. Risk of U.S. Housing collapse spreading throughout the economy 2. Risk of ‘sub prime crisis’ spreading throughout credit markets 3. Risk of Rising Budget Deficits 4. Impact of a widening the U.S. Current Account deficit 5. Excessive Concentration in financing the US Current Account 6. Risk of a dis-orderly adjustments of Exchange Rates 7. Risk of Protectionism 8. Impact of demographic trends on long term Public Finances 9. Risk of further increases in oil prices: Inflation & Growth. 10. Risk of Terrorism