Mega Trends in the Global
Economic System
Prof. Jacob A. Frenkel
STRICTLY PRIVATE AND CONFIDENTIAL
Chairman, JPMorgan Chase International
Chairman of the Board of Trustees,
Group of Thirty (G30)
Hezeliya Conference
June 9, 2014
J.P.Morgan Chase
Global Economic Trends
• Growth in the Global Economy
• International Trade
• Global Monetary Policies
• The Euro-System: Turning the Corner
• US and Euro Area Labor Markets
• Long-Term Considerations:
I. Demographic Challenges
II. Fiscal Challenges
6/5/2014
2
Economic Growth
• Global Growth Projections
• The Rise of Developing Countries
6/5/2014
3
Global GDP Growth
6
(Percent change)
5
5.2
5.1
4.7
4
5.2
4.7
4.1
3.8
3
5.3
3.9
3.8
3.7
3.9
3.6
3.3
3.2
2.8
2.6
3.0
2.7
2.3
2
1
#N/A
0
-0.4
World Growth
-1
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: IMF, last update Apr 08 2014, WEO (2014 & 2015 Forecast)
6/5/2014
4
J.P.Morgan Chase
Real GDP Growth, Select Countries
14
(Annual % Change)
12
C hina,
2 0 15:
7 .3 %
10
India,
2 0 15:
6 .4 %
8
6
US, 2 015:
2 .9 %
4
2
0
-2
-4
US, GDP Growth
Euro Area, GDP Growth
Japan, GDP Growth
China, GDP growth
Japan,
2 0 15:
1 .0 %
Euro Area,
2 0 15:2.0%
India, GDP growth
-6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: IMF, last update Apr 8 2014, WEO (2014 & 2015 forecast); For US and Euro area, 2014 & 2015 are JPM forecast,
last update May 30, 2014.
6/5/2014
5
J.P.Morgan Chase
Global GDP Shares
2014 IMF Forecast
1990
Latin
America
Other
Advanced
Economies
India, 3%
China, 4%
9%
Latin
America
Other
Emerging India, 6%
Economies
8%
Other
Advanced
Economies
Other
Emerging
Economies
8%
9%
12%
18%
China
14%
28%
25%
EU-27
10%
20%
United
States
20%
EU-27
Japan
United
States
Japan, 5%
Source: IMF, WEO Database, last update Apr 8 2014, WEO
6/5/2014
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Ease of Doing Business by Region
(2013, unweighted average across region, lower = easier to do business)
MENA
103.2
Emerging Latin
America
100.6
Emerging Asia
55.2
Developed
Economies
29.6
0
20
40
60
80
100
120
Source: World Bank, last update June 2013.
6/5/2014
7
J.P.Morgan Chase
Global Trade, Reserves and Savings
•
The Volume of World Trade
• China and the Trading System
• International Reserves
6/5/2014
8
World Trade Volume
13
(Percent change)
12.8
11.9
10.9
9.6
8.9
10.1
10.1
9.3
8.0
8
6.7
7.6
7.1
7.0
5.9
4.5
4.9
4.8
7.9
6.2
5.9
5.5
5.3
4.3
4.0
3.1
2.8 3.0
2.8
3
0.1
-2
-7
World trade volume
-10.6
-12
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: IMF, av. Annual growth rates, last update Apr 08 2014, WEO (2014 & 2015 forecast).
6/5/2014
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J.P.Morgan Chase
China’s Role in Global Trade (bill. Usd)
Exports
Exports
$419
$1,211
Asia
Imports
People’s
Republic of
China
Imports
$774
$1,171
U.S.
&
EU
Source: National Bureau of Statistics of China, 12-months through April 2014
6/5/2014
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European Union Exports by Destination
2000
2014
Asia ex
China,
37.9%
Asia ex
China,
38.2%
US, 40.9%
US, 56.6%
China,
21.3%
China,
5.2%
Source: Customs General Administration, Last Observation: Mar 2014
6/5/2014
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U.S. Exports by Destination
2000
2014
Asia ex
China,
34.2%
Asia ex
China,
44.3%
EU, 43.3%
EU, 48.1%
China,
22.5%
China,
7.6%
Source: Eurostat, Last Observation: Feb 2014
6/5/2014
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J.P.Morgan Chase
Foreign Exchange Reserves (Bill. Usd)
($B)
4,000
$3,948
3,500
3,000
2,500
2,000
1,500
$1,217
1,000
500
$415
$422
Russia
Taiwan
$356
0
China
Japan
Korea
Source: Nat'l Statistical Institutes, Foreign-Exchange Reserves ex. Gold, Last Observation: April 2014; China (3/14)
6/5/2014
13
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Global Monetary Policies
• Global Policy Rates
• Central Bank Balance Sheets
• Forward Guidance
6/5/2014
14
Central Bank Policy Interest Rate
6
(%)
Latest observation (%):
6 Jun 2014
US
0.25
UK
0.50
Japan
0.10
EUR
0.15
Canada
1.00
5
4
3
EUR
2
C anada
1
UK
0
United Kingdom
Japan
Eurozone
Canada
J apan
United States
US
-1
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg Market Data, Last observation: 6 Jun, 2014
6/5/2014
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J.P.Morgan Chase
Total Assets of Key Central Banks
(indexed levels)
500
BoJ
450
400
250
200
ECB
Federal Reserve
Current Assets
% of GDP
Fed
ECB
BoJ
350
300
F ed: 498
(indexed, end of June 2007 = 100)
24.7%
22.5%
51.6%
Q E3
Q E2
Current Assets
Billions of $
Total
Of Which:
Fed
ECB
BoJ
LTRO repayments
BoJ: 254
9,814
4,323
2,996
2,496
LT ROs
150
EC B: 182
PM Abe assumes
of f ice
100
50
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Source: Bloomberg; Last Observation: Fed: May 28, 2014; ECB: May 30, 2014; BoJ: May 31, 2014.
6/5/2014
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J.P.Morgan Chase
Composition of Federal Reserve Assets
100
(% of total assets)
O ther
O ther
O ther
80
Treasuries
M BS
M BS
60
Agencies
Treasuries
40
Treasuries
20
0
Jun 2007
Jun 2010
May 2014
Source: Federal Reserve, Bloomberg, Last Observation: May 28, 2014.
6/5/2014
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Composition of ECB Liquidity Facilities
(% of total liquidity measures)
100
80
Lon g-term
ref i
op erations
( LTROs),
ma turity
b tw 3mo
a nd 36mo
60
LT ROs
LT ROs
40
M a in refi
op erations,
ma turity of
1mo or
less
20
M a in refi
op erations
0
Jun 2007
Mar 2012
May 2014
Note: March 2012 follows two rounds of 36-month LTRO auctions that occurred December 21, 2011 and February 29, 2012.
Source: EC B, Last Observation: May 30, 2014
6/5/2014
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The Euro-System: Turning the Corner
• GDP Growth: Gradual Recovery
• Structural Challenges:
-- Unemployment
-- Productivity
• Declining Bond Spreads
6/5/2014
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Real GDP Growth, Euro area countries
6
(Percent change)
G reece,
2015: 2.9%
5
4
G ermany,
2015: 2.3%
3
Eu ro area ,
2015: 2.0%
2
1
Sp ain,
2015: 2.0%
0
GDP growth forecast
-1
-2
Euro area
-3
Germany
-4
Italy
-5
Spain
-6
Greece
2014
2015
1.2
2.3
0.3
1.2
0.6
2.0
2.3
1.5
2.0
2.9
Ita ly, 2015:
1.5%
-7
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: IMF, last update Apr 8 2014, WEO (2014 & 2015 forecast); For Euro area, Germany, Italy, & Spain, JPM forecast, last update
May 30, 2014.
6/5/2014
20
J.P.Morgan Chase
Unemployment Rate: Euro Area Countries
G reece:
27.4%
(% of Labor Force)
Germany
Spain
Greece
Italy
Euro area
25
Sp ain:
25.1%
20
Ita ly:
12.6%
15
Eu ro area :
11.7%
10
G ermany:
6.7%
5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2012 2013 2014 2015
Source: Eurostat, Last Observation: Germany (5/14); Italy, Spain, Euro area (4/14); Greece (3/14)
6/5/2014
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J.P.Morgan Chase
Relative Unit Labor Cost, Total Economy
135
(index, Q1 2001 = 100)
130
125
G reece
Euro
adoption
Last observation:
Q4 2013
Euro Area
108.2
Germany
91.6
Italy
118.6
Spain
102.3
Greece
96.6
120
115
Ita ly
110
Sp ain
Eu ro
Area
105
100
95
90
85
Greece
Euro Area
Italy
Spain
Germany
G ermany
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Note: Relative unit labor cost is a weighted average of changes in unit labor costs (converted to USD terms) relative to trading
partners, with weights derived from manufactured goods exports.
Source: OECD, Last observation: Q4 2013
6/5/2014
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J.P.Morgan Chase
10yr Sovereign Bond Spreads
600
(spread in basis points)
550
Italy 10yr sov spread to bunds
Spain 10yr sov spread to bunds
500
450
Sp ain
400
350
300
250
200
Ita ly
150
100
Latest observation (bp)
5 Jun 2014
Italy
153
Spain
142
50
0
-50
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Source: For 10yr yields, Reuters, Bloomberg, last update 05 Jun, 2014; for gross debt, IMF World Economic Outlook, last update 8 Oct 2013.
6/5/2014
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J.P.Morgan Chase
US and Euro Area Labor Markets
•
Unemployment
• Labor Force Participation
• Cyclical or Structural?
- the Role of Education
- the Duration of Unemployment
6/5/2014
24
Unemployment Rate: US and Euro Area
(%)
Eu ro area :
11.7%
12.5
United States
11.5
Euro area
10.5
9.5
8.5
7.5
6.5
5.5
Un ited
States:
6.3%
4.5
3.5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Eurostat and BLS; Last observation for Euro area April 2014, For US, May 2014
6/5/2014
25
J.P.Morgan Chase
Labor Force Participation: US and Euro Area
(%)
68
66
64
Un ited
States:
62.8%
62
60
58
Eu ro area :
57.0%
56
United States
Euro area
54
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Eurostat and BLS; Last observation for Euro area Q4 2013, For US, May 2014
6/5/2014
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J.P.Morgan Chase
US Unemployment: Actual and Hypothetical
12
(%)
11
A lt:
11. 0%
10
9
8
7
6
Ac tual:
6.3%
5
Actual
4
Assuming 2006 participation rate (66.2%)
3
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Bureau of Labor Statistics, Last Observation: May 2014
6/5/2014
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J.P.Morgan Chase
U.S. Unemployment, by Level of Education
16
(Unemployment Rate in %)
14
No high school diploma
High school diploma
Total
Some college
College degree or higher
No HS
diploma:
9.1%
12
10
Total:
6.3%
8
HS
diploma:
6.5%
6
Some
college:
5.5%
4
College
or
higher:
3.2%
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bureau of Labor Statistics, Last Observation: May 2014
6/5/2014
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J.P.Morgan Chase
Euro Area Unemployment by Level of
Education
Pre-primary,
p rimary, and
lower secondary:
20.2%
(%)
22
20
18
16
Eu ro area
total:
11.7%
14
12
Up per
sec ondary and
p ost-secondary
n on-tertiary:
10.3%
10
8
6
Tertiary:
7.4%
4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Eurostat, Last observation Q4 2013
6/5/2014
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J.P.Morgan Chase
U.S. Unemployment, by Duration
(Share of total unemployed)
50
27+wks:
34.6%
40
<5wks:
26.2%
30
5 to
14wks:
24.5%
20
10
Less than 5wks
15 to
26wks:
14.8%
5 to 14wks
15 to 26wks
27 weeks or more
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bureau of Labor Statistics, Last Observation: May 2014
6/5/2014
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J.P.Morgan Chase
Euro Area Unemployment, by Duration
(%)
12+ mo:
52.0%
50
40
6 to 11 months
1 to 5 months
12 months or more
Less than 1 month
1 to 5 mo:
28.3%
30
6 to 11
mo:
14.1%
20
10
<1 mo:
5.4%
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Eurostat, Last observation Q4 2013
6/5/2014
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J.P.Morgan Chase
Long-Term Considerations
6/5/2014
•
Demographic Challenges
•
Fiscal Challenges
32
World Demographic Challenge
Change in population, 2010-2030 (millions)
350
300
250
200
150
100
50
0
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030: 1516M
33
80+
2010:
2030:
7001M
8517M
J.P.Morgan Chase
Developing Countries Demographic
Challenge
Change in population, 2010-2030 (millions)
300
250
200
150
100
50
0
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030: 1426M
34
80+
2010:
2030:
5712M
7138M
J.P.Morgan Chase
Developed Countries Demographic
Challenge
Change in population, 2010-2030 (millions)
50
40
30
20
10
0
- 10
- 20
- 30
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030:
90M
35
80+
2010:
2030:
1289M
1379M
J.P.Morgan Chase
U.S. Demographic Challenge
Change in population, 2010-2030 (millions)
18
16
14
12
10
8
6
4
2
0
- 2
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030:
58M
36
80+
2010:
2030:
322M
381M
J.P.Morgan Chase
Europe Demographic Challenge
Change in population, 2010-2030 (millions)
25
20
15
10
5
0
- 5
- 10
- 15
- 20
- 25
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030:
16M
37
80+
2010:
2030:
769M
786M
J.P.Morgan Chase
Japan Demographic Challenge
Change in population, 2010-2030 (millions)
12
10
8
6
4
2
0
- 2
- 4
- 6
- 8
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030:
1M
38
80+
2010:
2030:
135M
135M
J.P.Morgan Chase
China Demographic Challenge
Change in population, 2010-2030 (millions)
100
80
60
40
20
0
- 20
- 40
- 60
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030:
73M
39
80+
2010:
2030:
1360M
1432M
J.P.Morgan Chase
India Demographic Challenge
Change in population, 2010-2030 (millions)
70
60
50
40
30
20
10
0
- 10
- 20
0-9
10-19
20-29
30-39
40-49
Age
Source: UN Populations Division, last update 2010
6/5/2014
50-59
60-69
70-79
Projected change in population
from 2010 - 2030:
309M
40
80+
2010:
2030:
1233M
1542M
J.P.Morgan Chase
Africa Demographic Challenge
Change in population, 2010-2030 (millions)
120
100
80
60
40
20
0
0-9
10-19
20-29
30-39
Source: UN Populations Division, last update 2010
6/5/2014
40-49
Age
50-59
60-69
70-79
Projected change in population
from 2010 - 2030:
545M
41
80+
2010:
2030:
1027M
1572M
J.P.Morgan Chase
Middle East Demographic Challenge
Change in population, 2010-2030 (millions)
25
20
15
10
5
0
- 5
0-9
10-19
20-29
30-39
Source: UN Populations Division, last update 2010
6/5/2014
40-49
Age
50-59
60-69
Projected change in population
from 2010 - 2030:
81M
42
70-79
80+
2010:
2030:
232M
313M
J.P.Morgan Chase
Population and GDP by region
Population
Nominal GDP
Middle East
& North
Africa
0.4 bn
5%
Rest of
World
2.1 bn
29%
Rest of
World
13%
EM Latam
7%
Middle
East &
North
Africa
5%
OECD
1.0
14%
EM Latam
0.5 bn
7%
OECD
54%
EM Asia
3.3 bn
45%
EM Asia
21%
Source: For population, UN World Population Prospects, last update: Apr 14, 2014; for GDP, World Bank, last update Apr 8, 2014.
6/5/2014
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US Demographic Challenge
Age group share of total population:
1950
2010
65+
2050
65+
8%
65+
13%
21%
87%
92%
0-64
0-64
79%
0-64
Source: UN Population Division, 2010 revision.
6/5/2014
•
Age of Medicare eligibility: 65
•
Age of Social Security eligibility, reduced benefits: 62; full benefits: 67 (for those born after 1960)
44
Expenditures on healthcare and social
security as a share of primary spending
(% of primary expenditures)
38
38
Healthcare
36
Social Security
36
34
34
Healthcare
32
32
30
30
28
28
26
26
24
24
Social Security
22
22
20
20
18
2000
18
2005
2010
2015
2020
2025
2030
2035
Source: Congressional Budget Office, last updated September, 2013
6/5/2014
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J.P.Morgan Chase
Composition of US Federal Expenditures
Share of government spending (ex interest payments):
2035
2012
Social
Security:
23%
All other:
53%
Social
Security:
24%
All other:
38%
Healthcare:
25%
Healthcare:
39%
•
Aging accounts for 2/3 of projected rise in expenditures on social security and healthcare (CBO)
•
Healthcare includes Medicare (17% of noninterest spending in 2012, 25% in 2035) and Medicaid,
CHIP, and exchange subsidies (combined for 8% of noninterest spending in 2012, 14% in 2035)
Source: Congressional Budget Office, 2012 Long-Term Budget Update, 5 June, 2012.
6/5/2014
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6/5/2014
47
FEDERAL RESERVE’s Forward Guidance
“the Committee today reaffirmed its view that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the asset
purchase program ends and the economic recovery strengthens. The
Committee also reaffirmed its expectation that the current exceptionally low
target range for the federal funds rate of 0 to 1/4 percent will be appropriate at
least as long as the unemployment rate remains above 6-1/2 percent, inflation
between one and two years ahead is projected to be no more than a half
percentage point above the Committee's 2 percent longer-run goal, and longerterm inflation expectations continue to be well anchored.” January 29, 2014
“In determining how long to maintain the current 0 to 1/4 percent target range
for the federal funds rate, the Committee will assess progress--both realized
and expected--toward its objectives of maximum employment and 2 percent
inflation…The Committee continues to anticipate, based on its assessment of
these factors, that it likely will be appropriate to maintain the current target
range for the federal funds rate for a considerable time after the asset purchase
program ends, especially if projected inflation continues to run below the
Committee's 2 percent longer-run goal, and provided that longer-term inflation
expectations remain well anchored.” April 30, 2014
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Bank of England’s Forward Guidance
“Looking beyond the immediate decision, the Committee discussed how to set
policy to achieve the 2% inflation target, while supporting the recovery, once the
7% unemployment threshold had been reached. Despite the sharp fall in
unemployment, the Committee judged that there remained scope to absorb
spare capacity further before raising Bank Rate. When Bank Rate did begin to
rise, it expected that the appropriate path, so as to eliminate slack over the next
two or three years and keep inflation close to target, would be gradual.”
-Minutes of the MPC meeting 5 and 6 February 2014, released February 19, 2014
“The LFS unemployment rate had fallen below the Committee’s 7% threshold in
the data for the three months to February. The policy guidance the Committee
had provided in August 2013 had therefore ceased to apply. The Committee
reaffirmed the subsequent guidance set out in its February Inflation Report on
how it would seek to achieve the inflation target over the policy horizon. A key
feature of the guidance was that, given the likely persistence of headwinds
weighing on the economy, when Bank Rate did begin to rise, it was expected to
do so only gradually.”
-Minutes of the MPC meeting 8 May 2014, released May 21, 2014
6/5/2014
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J.P.Morgan Chase
ECB’s and BoJ’s Forward Guidance
ECB
“Concerning our forward guidance, the key ECB interest rates will remain at
present levels for an extended period of time in view of the current outlook for
inflation. This expectation is further underpinned by our decisions today.
Moreover, if req uired, we will act swiftly with further monetary policy easing.
The Governing Council is unanimous in its commitment to using also
unconventional instruments within its mandate should it become necessary to
further address risks of too prolonged a period of low inflation.”
-ECB President Mario Draghi, Introductory statement, June 5, 2014
--------------------
BOJ
“Quantitative and qualitative monetary easing (QQE) has been exerting its
intended effects, and the Bank will continue with the QQE, aiming to achieve the
price stability target of 2 percent, as long as it is necessary for maintaining that
target in a stable manner.”
-Statement of Monetary Policy, May 21, 2014
6/5/2014
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J.P.Morgan Chase
Perspectives on Global Spillovers from
DM Central Bank Policy
RBI Governor Raghuram Rajan, April 28, 2014:
“More problematic, the disregard for spillovers could put the global economy
on a dangerous path of unconventional monetary tit for tat. To ensure stable
and sustainable economic growth, world leaders must re-examine the
international rules of the monetary game, with advanced and emerging
economies alike adopting more mutually beneficial monetary policies.”
Central Bank of Brazil President Tombini, April 11, 2014:
“I am a bit skeptical about the capacity of jurisdictions to effectively and fully
coordinate policies…Brazil has a long history of riding global financial
cycles…Of course we think there are spillovers from monetary policy in
advanced economies. The world is a very financially integrated place. But we
have learned how to ride this.”
South African Reserve Bank Governor Marcus, February 3, 2014:
“When the advanced economies were really at the depth of the crisis, it was
the emerging markets that helped stabilize, that helped create some balance
to the global outlook…The challenge here is if the advanced economies say
OK, you are on your own, the scale of the emerging markets is such that it’s
J.P.Morgan Chase
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going
6/5/2014 to impact on this fragile recovery.”