Focusing on the horizon

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Focusing on the horizon The world in
2030 Robin Bew, Chief Economist EIU New York
Open House, November, 2005
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Presentation road map

• Immediate issues
• The long term perspective
• The world today
• The future challenge
• What does it all mean?

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Immediate issues
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The developed markets

• US economy to weaken
• Healthy businesses, over-extended consumers
• Debt, housing, oil
• Japan recovered from its lost decade
• But vulnerable to weakening exports
• Euro zone hype?
• Market friendly reforms
• But nowhere near enough

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Emerging market focus

• Asia
• trade slowdown, high oil prices, Chinese
  developments
• East Europe the CIS
• productivity, trade, oil
• Latin America
• better policy capital market access, but still
  vulnerable
• Middle East
• awash with liquidity, but security issues
• Africa
• institutional failure in the second tier countries

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Oil market outlook

• Crude oil demand / supply balance
• Tight market, but stocks at reasonable levels
• Problems downstream - not just hurricanes
• biasing demand for light vs heavy
• Demand
• slowing as prices bite, especially in Asia
• Supply
• OPEC quotas temporarily abandoned
• Investment plans - Nigeria, Algeria, Libya, Saudi
  
• Light to Super Light
• Supply demand balance and mix will improve
• but only slowly

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The long-term perspective
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The best way to reach your long-term destination
is to focus on the horizon, not on your feet.
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The world in 2005
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The state of the world in 2005
You cant understand the future if you dont
understand today

• Which are the largest economies?
• Where is global purchasing power?
• Is this the same thing?

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G7 dominate the global economy?
These 10 countries account for 70 of global
demand, when assessed in US
US trn market prices
2005
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Big beasts include some emerging mkts
Purchasing power is more evenly split, with
emerging markets more important.
US PPP trn
2005
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Market sizing art or science?

• G7 dominates at market exchange rates
• The FX rate at which companies sell and
  repatriate profits
• But FX rates vary over time
• Prices vary across countries for non-traded goods
• Mkt FX rates can understate market size as less
  income is spent on the basics
• Emerging markets more important at PPP rates
• Values all sales at US prices, not local prices
• Gives a measure of purchasing power
• US100 goes the same everywhere
• But PPP rates highly subjective
• Not the rate at which you can sell or repatriate
  profits
• Can overstate the market

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Addressable markets

• Populations and incomes
• Whos big?
• Whos rich?
• What can we sell?
• The importance of price points
• Poor doesnt always mean small market
• Changing world
• The role of growth

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Income and population disparities
GDP per head in US
US market prices
2005
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Important markets for some goods
Sales, volumes, US 100
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But only a few wealthy households
Pop 269m
Millions of households with income over US5,000
Pop 127m
Pop 83m
Pop 127m
Pop 181m
Pop 1.3bn
Pop 1.1bn
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But emerging markets are growing fast
Average change in real GDP, 1996-2005
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The world in 2030
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Key changes

• Economic mass shifts to Asia
• Away from Europe
• Emerging world becomes more important
• But not the most important
• Emerging world remains more dynamic
• Demography and productivity
• Star performers catch up with the developed
  world?

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Changing global demand
US trn
GDP at mkt exchange rates
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EU, Japan lose out to emerging mkts
of global GDP
14 more
14 less
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Relative market size G7 vs E7
GDP, US trn
60 of G7
20 of G7
G7 US, Japan, Germany, UK, France, Italy,
Canada E7 China, Brazil, Korea, India, Russia,
Mexico, Taiwan
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G7 bigger, E7 Dynamic
G7 US1 of demand today will be US170 in
2030 E7 US1 of demand today will be US290 in
2030
Yet in 2030, G7 is a US80trn market, E7 is only
US50trn
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How do they manage it?

• Sources of growth
• Demographics
• Need labour force growth
• Productivity
• Need to lift output per worker
• Emerging world advantages
• Generally more favourable demographics
• Productivity growth is easier to achieve

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How do they manage it?
Growth drivers
Avg change, 2005-30
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Key player performance
Avg change, 2005-30
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Real growth performance
Real GDP, 2005 100
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Will they catch up?
Yes, in terms of purchasing power
US trn at PPP
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Will they catch up?
No, in terms of cash values
US trn at market prices
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Collective vs individuals

• Big populations yield big economies
• In 2030, Chinese population will be 1.5bn
• But income per head also counts
• Determined by productivity performance
• Which is impressive
• But not impressive enough
• Even in 2030, income levels will disappoint
• Implications for the business community

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Productivity gap
Output per worker
GDP per head in US PPP
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Collectively rich, individually poor
US GDP in 2030
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What does it mean?
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Making sense of it all

• Everywhere gets bigger
• EU, Japan relative losers, E7 relative gainers
• China / India are the true emerging giants
• E7 economies remain far short of G7
• Purchasing power reaches G7 levels for a few, but
  cash values fall short
• Demographics and productivity growth
• Both are emerging world advantages
• But far short of that needed to catch-up
• OECD remains far more productive
• Collective income vs personal income
• Many people, but (fairly) poor

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Political implications

• Geopolitical power
• Stems from absolute size, or income per head?
• China and India will still be poor
• US, Japan, Europe will still be rich
• G7 will dominate world in absolute and per capita
  terms
• Population shifts
• Europe and Japan will be old
• US also, to a lesser degree
• Pensions and healthcare challenges
• China old before it gets rich
• Russian demographic crisis
• India the one to watch

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Business implications

• OECD is still the key market
• Largest aggregate consumption
• Most able to afford high end products
• E7 importance increased
• Income levels rising
• Mass market for low-end products
• Collective spending
• Infrastructure, defence
• Source of growth, rather than scale
• Need to avoid starry-eyed optimism

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The end
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How to find out more

• Long term forecast are available in
• EIU Country Forecasts
• A report covering the outlook for the economic,
  business and political environment over the long
  term. Available for 60 markets.
• EIU CountryData
• A database of economic data and forecasts,
  covering 150 markets.
• EIU Market Indicators and Forecasts
• A database of market sizing and industry
  information, covering 60 markets.