cade 2005 robert west

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Tendencias del Comercio Mundial Copyright © 2005 Global Insight, Inc. Presentada por: Robert West Managing Director, Global Trade & Transportation Global Insight 1-781-301-9078 robert.west@globalinsight.com Presentada a: CADE - 2005 Hotel Cesar Park Panama City, Panama 22 April, 2005

Outline and key global questions: 

Outline and key global questions The world outlook for 2005: Good but not great Is the U.S. recovery sustainable? Will a much weaker dollar threaten the global recovery? Will Europe (ever) recover? China’s economic malaria!! Is India next? What is the outlook for Global Trade? The Bottom Line

A Most Unusual World Recovery: 

A Most Unusual World Recovery U.S. consumer spending boom and Chinese investment boom have reinforced each other. A rising tide has lifted most boats. Global growth differentials remain large, mostly because of differences in macro policies. Weak jobs and wage growth in industrialized markets – not just the U.S. Bursts of growth interspersed with “soft patches” No threat of inflation, despite high oil prices… … So, interest rates remain low… … and property prices keep rising

World growth has peaked. : 

World growth has peaked. (Percent change, real GDP) The world economy is in recession when real GDP growth is below 2%.

Container trade normally grows faster than the world economy.: 

Container trade normally grows faster than the world economy. 2004 2005 GDP 4.1% 3.3% TEUs 9.0% 7.8%

Growth Is very uneven across the world.But the U.S. will remain the locomotive.: 

(Percent change, real GDP) Growth Is very uneven across the world. But the U.S. will remain the locomotive. Emerging markets achieve the fastest growth.

Outline and key global questions: 

Outline and key global questions The world outlook for 2005: Good but not great Is the U.S. recovery sustainable? Will a much weaker dollar threaten the global recovery? Will Europe (ever) recover? China’s economic malaria!! Is India next? What is the outlook for Global Trade? The Bottom Line

U.S. – Is the recovery sustainable? So far --- YES!: 

U.S. – Is the recovery sustainable? So far --- YES! Even before the recent oil crunch, growth was predicted to slow in response to rising interest rates, no further tax cuts, and weak consumer finances. However, inflation remains low and the Fed will increase interest rates gradually. Moreover, corporate finances are very strong – which is good news for capital spending and hiring. While consumer spending is expected to slow, a major consumer retrenchment is not the most likely scenario. Similarly, a housing crash is unlikely. Campaign promises notwithstanding, taxes will rise. Also, a widening current account deficit, though unsustainable in the medium- to long-run, is unlikely to derail the recovery. And speaking of housing . . .

House price inflation: 

House price inflation (Percent increase 1997-2004) Source: The Economist

The U.S. expansion now has real traction and keeps expanding.: 

(Annual percent change, 2000 dollars) (Unemployment rate - %) The U.S. expansion now has real traction and keeps expanding. Growth peaked in 2004 at 4.4%. 2005 will slow to 3.7% - or less. Q4/2004 was a positive surprise = 3.8%

U.S. core inflation is quiet. : 

(Percent change from a year earlier) U.S. core inflation is quiet.

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Industrial materials prices have peaked, but oil will remain “expensive.” (Global Insight Indexes, 2002:1=1.0) Strong demand from the U.S. and China is supporting oil prices. World oil demand is projected to increase 2.4% in 2005. Oil prices will average $50+ in 2005 and then fall to $48+ in 2006. $41.57 $50.23 $48.54

… so U.S. interest rates should increase gradually.: 

(Percent) … so U.S. interest rates should increase gradually.

U.S. corporate cash flow is at a high level by historical standards – so most businesses are healthy.: 

U.S. corporate cash flow is at a high level by historical standards – so most businesses are healthy. (Net corporate cash flow, percent of GDP)

U.S. Federal Budget: Revenues are too low: 

(Percent of GDP, fiscal years, unified budget) U.S. Federal Budget: Revenues are too low Despite the campaign promises, taxes will have to rise!

U.S. Current Account Deficit: $700 billion as far as the eye can see?: 

(Billions of dollars) (Percent of GDP) U.S. Current Account Deficit: $700 billion as far as the eye can see? $

US seaborne imports are dominated by OIL!: 

US seaborne imports are dominated by OIL!

US seaborne exports – By 2007 China will be the largest export market, beating Japan.: 

US seaborne exports – By 2007 China will be the largest export market, beating Japan.

The U.S. is expanding bilateral & regional Free Trade Agreements, reducing barriers to increased trade.: 

The U.S. is expanding bilateral & regional Free Trade Agreements, reducing barriers to increased trade. The U.S. makes strong demands on labor and environmental issues - but the U.S. will not truly open its agriculture sector. The Bush dream may not become real until 2010 at the latest! Central Americans may not like CAFTA, but the US Congress likes it even less!

Outline and key global questions: 

Outline and key global questions The world outlook for 2005: Good but not great Is the U.S. recovery sustainable? Will a much weaker dollar threaten the global recovery? Will Europe (ever) recover? China’s economic malaria!! Is India next? What is the outlook for Global Trade? The Bottom Line

Europe – Export-led growth is under threat.: 

Europe – Export-led growth is under threat. Most of the recent 2004 growth in the Eurozone was export-led – especially in Germany and Italy. Problem: Unlike Japan, export-led growth did not translate into a rebound in capital spending. Consumer spending is flat to down. Consequently, the Eurozone is very vulnerable to a slowdown in the U.S. and China and/or a further appreciation of the Euro. The EU wants to impose high import tariffs on bananas from Latin sources – a major threat to countries like Panama, and to the Canal. Finally, the policy environment is likely to remain growth-unfriendly and will probably not offset the impact of high oil prices or a stronger Euro.

Real GDP growth remains below trend in the Eurozone.: 

(Percent change) Real GDP growth remains below trend in the Eurozone.

The Euro will appreciate further.: 

(Dollars per euro) The Euro will appreciate further. If you are a brave tourist, expect to pay $10 for a glass of OJ in Paris by 2006. $

The U.S. dollar will fall - - - but not crash.: 

The U.S. dollar will fall - - - but not crash. Problem: The U.S. has been growing much faster than the rest of the world (except Asia). Problem: The ballooning current account deficit needs to be financed with capital inflows. Problem: Private investors are bailing out, foreign central banks (mostly in Asia) have taken up the slack. Three-part solution: The savings rate in the U.S. has to rise, the savings rate in the rest of the world has to decline, and the dollar has to fall further – the problem is global; therefore, the solution has to be global. A further dollar slide of 15% is in the cards, with the risk that it could be as much as 30%. A crash is unlikely, given the size of the U.S. economy, its locomotive role, and the reserve status of the dollar. Good news: The drop in the dollar so far has been benign. A falling dollar is unlikely to seriously threaten the global recovery.

Outline and key global questions: 

Outline and key global questions The world outlook for 2005: Good but not great Is the U.S. recovery sustainable? Will a much weaker dollar threaten the global recovery? Will Europe (ever) recover? China’s economic malaria!! Is India next? What is the outlook for Global Trade? The Bottom Line

China’s progress under market reforms – bigger and more open. Difficult to slow down.: 

China’s progress under market reforms – bigger and more open. Difficult to slow down. China is trying to slow down, but it grew 9.5% in 2004!!

There are 6 options to deal with an undervalued renminbi.: 

There are 6 options to deal with an undervalued renminbi. Revalue Widen band Float freely Basket peg Currently 5. Keep the peg 6. Managed Float Given Beijing’s desire to gradually liberalize the capital account, the balance between these 2 options could soon reach a tipping point. Beijing is likely to Keep the peg for another few years and then switch to a managed float. What Global Insight expects

China’s container exports will continue to grow at double-digit rates – NAFTA’s share hits 48% this year. : 

China’s container exports will continue to grow at double-digit rates – NAFTA’s share hits 48% this year. TEU exports climb by 17.4% in 2005. Economically, China will manage a soft landing.

Market penetration in some sectors is reaching saturation …: 

Market penetration in some sectors is reaching saturation … Footwear Electrical Appliances Textiles China exports as % of world shipments

Outline and key global questions: 

Outline and key global questions The world outlook for 2005: Good but not great Is the U.S. recovery sustainable? Will a much weaker dollar threaten the global recovery? Will Europe (ever) recover? China’s economic malaria!! Is India next? What is the outlook for Global Trade? The Bottom Line

India is ready for a take-off, like China, but in different sectors.: 

India is ready for a take-off, like China, but in different sectors. Free market reforms are now mandated – all political parties agree. Services are booming – running the back-office. Manufacturing (eg vehicles) is growing quickly. Economic output will average >5.5% through 2010. Container exports should average 8.7%/year to 2010. English helps a lot!!! Recent moves toward “sustainable” peace with Pakistan will permit focus to shift to China. 2005 will grow 6.4%, faster than 2004 (5.7%)

India’s container exports will expand to most major markets over the next 6 years: 2004-10.: 

India’s container exports will expand to most major markets over the next 6 years: 2004-10. 1 – Europe 8.6% 2 – USA, 7.7% Total TEUs will reach 2.2 million in 2010. India 3 – Malaysia, 8.1% 4 – China, 14.2% India-China combo would be an Asian counterbalance to the United States.

Outline and key global questions: 

Outline and key global questions The world outlook for 2005: Good but not great Is the U.S. recovery sustainable? Will a much weaker dollar threaten the global recovery? Will Europe (ever) recover? China’s economic malaria!! Is India next? What is the outlook for Global Trade? The Bottom Line

Other Emerging Markets – A rising tide has lifted most boats.: 

Other Emerging Markets – A rising tide has lifted most boats. The world recovery and the surge in commodities prices have boosted growth prospects in emerging markets. Chile, Peru, Colombia are local examples Low interest rates have reduced debt burdens, and exchange rates have become more flexible. Countries with currencies linked to the dollar have also benefited from a boost in competitiveness as the dollar weakens (Panama). However, high oil prices are hurting oil-importing emerging markets and could cut growth rates by as much as 2%. Sources of vulnerability: A U.S. consumer retrenchment A Chinese hard landing Another spike in oil prices

Other emerging markets are growing.: 

Other emerging markets are growing. (Percent change, real GDP)

8 billion tons of cargo were shipped internationally in 2004, a 4% increase over 2003.: 

8 billion tons of cargo were shipped internationally in 2004, a 4% increase over 2003. Growth will slow to 3.6% in 2005. Containerized cargo will grow the fastest – averaging 5.6% through 2010. Some of the fastest-growing container trades are on Panama Canal routes. 7.8% in 2005 = 77 million TEUs

Far East to US East Coast will grow substantially.: 

Far East to US East Coast will grow substantially. Eastbound – 7.3%/yr Westbound – 4.2%/yr

WCSA to USEC will continue to grow.: 

WCSA to USEC will continue to grow. Chile’s exports will continue to charge ahead – wine, table fruits. Peru’s container exports, including reefer, will grow to 80,000 to the USEC (northbound only). Ecuador (and Panama) could be damaged by the EU’s new banana tariff, which is exorbitant and discriminatory. Chile Ecuador Peru

Outline and key global questions: 

Outline and key global questions The world outlook for 2005: Good but not great Is the U.S. recovery sustainable? Will a much weaker dollar threaten the global recovery? Will Europe (ever) recover? China’s economic malaria!! Is India next? What is the outlook for Global Trade? The Bottom Line

Bottom Line - There is room for optimism!: 

Bottom Line - There is room for optimism! 2005 will be a good year but not a great year – especially compared with 2004 – for economies and for trade. 2005 should be a relatively strong year for most countries’ imports and exports – but not as good as 2004. A soft landing is the most likely scenario for China. $50 - $60 oil will do only limited damage – the US recovery will continue. The U.S. will continue to be the locomotive of trade growth (with help from China). The dollar will continue to fall but is not a big threat to the rest of the world or to global trade. The Panama Canal should benefit from continued strong growth on the Asia – USEC route, and from the globalization of manufacturing.

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Tendencias del Comercio Mundial Presentada por: Robert West Managing Director, Global Trade & Transportation Global Insight 1-781-301-9078 robert.west@globalinsight.com Presentada a: CADE - 2005 Hotel Cesar Park Panama City, Panama 22 April, 2005