PRESENTATION BY JACOB A. FRENKEL AT THE FORUM: INTELLIGENCE ON THE WORLD, EUROPE, AND ITALY. Villa d'este, Cernobbio - September 7, 8 and 9, 2012

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1 PRESENTATION BY JACOB A. FRENKEL AT THE FORUM: INTELLIGENCE ON THE WORLD, EUROPE, AND ITALY Villa d'este, Cernobbio - September 7, 8 and 9, 1 Working paper, September 1. Kindly authorized by the Author. This document is reserved to customers of The European House-Ambrosetti s updating services for their personal use. No part of it may be copied, made available in any way to third parties or used in any form, commercial or not, without The European House-Ambrosetti s prior written consent. Further information on terms and conditions can be found at Copyright absolved

2 Imbalances in The World Economic System Dr. Jacob A. Frenkel Chairman, JPMorgan Chase International Chairman of the Board of Trustees, Group of Thirty (G3) S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Intelligence on the World, Europe, and Italy The European House, Ambrosetti Cernobbio, Italy September 7-9, 1 J.P.Morgan Chase Five Global Imbalances Imbalances in Global Growth Imbalances in International Payments Imbalances in Macro Policies Imbalances in the Euro-System Long-term Demographic Imbalances

3 Imbalances in Global Growth Global Growth Projections The Rise of Developing Countries 3 Global GDP Growth (%) 6 5 (Percent change) 1: 5.3% 11: 3.9% 1: 3.5% 13: 3.9% Forecasts World Growth Source: IMF, last update Jul 1, WEO (1 & 13 Forecast) 4 J.P.Morgan Chase

4 Real GDP Growth (%) World Economy GDP Growth (Avg Annual Growth Rate, Constant Prices) Country World Industrial Countries Developing Countries Source: IMF, last update Jul 1, WEO (11 & 1 Forecast) 5 J.P.Morgan Chase Real GDP Growth (%), Select Countries 16 (Annual % Change) Forecasts Euro Area, GDP Growth China, GDP growth US, GDP Growth Japan, GDP Growth India, GDP growth China, 13: 8.5% India, 13: 6.5% Japan, 13: 1.5% US, 13:.3% Euro Area, 13:.7% Source: IMF, last update Jul 1, WEO (1 & 13 forecast) 6 J.P.Morgan Chase

5 Global GDP Shares IMF Forecast India, 3% China, 4% Latin America 9% 8% Other Advanced Economies 1% Other Emerging Economies India, 6% Latin America 9% Other Advanced Economies 8% 18% Other Emerging Economies China 14% EU-7 9% 1% 5% United States % % United States Japan EU-7 Japan, 6% Source: IMF, WEO Database, last update Apr 17 1, WEO 7 J.P.Morgan Chase Imbalances in International Payments The Volume of World Trade China and the Trading System The Destinations of Exports Current Account Imbalances Savings Imbalances 8

6 World Trade Volume 13 (Percent change) 1: 1.8% 11: 5.9% 1: 3.8% 13: 5.1% IMF Forecasts World trade volume Source: IMF, av. Annual growth rates, last update Jul 1, WEO (1 & 13 forecast). 9 J.P.Morgan Chase China s Role in Global Trade (bill. Usd) Asia Exports $1,5 Imports People s Republic of China Exports $37 Imports $1,13 $759 U.S. & EU Source: National Bureau of Statistics of China, 1-months through July 1 1 J.P.Morgan Chase

7 European Union Exports by Destination 1 Asia ex China, 38.% Asia ex China, 39.8% US, 4.1% US, 56.6% China,.1% China, 5.% Source: Eurostat, Last Observation: Mar 1 11 J.P.Morgan Chase U.S. Exports by Destination 1 Asia ex China, 44.3% EU, 48.1% Asia ex China, 36.% EU, 4.5% China, 7.6% China, 1.3% Source: US Department of Commerce, Last Observation: Jun 1 1 J.P.Morgan Chase

8 Current Account of Balance of Payments (U.S. dollars, bill.) Asia & Oil Exporters Save Middle East, N. Africa, & Russia, 13: $443B Asia, 13: $498B Europe Balances Eu ro area, 13: $15B US Spends -5 IMF Forecasts -7 Euro area US, 13: - United States $499B Middle East, N. Africa, & Russia Asia Source: IMF, last update Apr 17 1, WEO (1 Forecast) 13 J.P.Morgan Chase Gross National Savings as a % of GDP 5 45 (1 savings rate, % of GDP) China India Japan Euro Area United States Source: IIF August 11 (China, India); IMF WEO (Japan, Euro area, US; last Update: 4/17/1) 14 J.P.Morgan Chase

9 Imbalances in Macro Policies Central Banks Interest Rates Nominal and Real Interest Rates Central Banks Balance Sheets Fiscal Deficits and Public Debt 15 Central Banks Policy Interest Rates 6 (%) Canada, 1.% EUR,.75% UK.5% US.5% United Kingdom Japan Eurozone Canada United States Japan.1% Source: Bloomberg Market Data, Last observation: 4 Sep, 1 16 J.P.Morgan Chase

10 Nominal and Real Rates: Developed Markets 5 (%, 1mo moving avg.) 4 3 Nominal 1-1 Real Real avg. Policy Rate Nominal avg. Policy Rate Source: JPMorgan Chase, National Statistical Institutest, Last Observation: Nominal - March 1997; Real - February 7 17 J.P.Morgan Chase Total Assets of Key Central Banks (indexed levels) 35 (indexed, end of June 7 = 1) Fed: 34 ECB Federal Reserve 3 5 Current Assets Billions of $ Total 6,695 Of Which: Fed,815 ECB 3,88 ECB: Current Assets % of GDP Fed 18.% ECB 3.3% 5 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-1 Source: Bloomberg; Last Observation: ECB, Aug 31, 1; Federal Reserve, Aug 9, J.P.Morgan Chase

11 Fiscal Positions: General Government Balance - (Percent of GDP) Euro Area, 13: -.7% -4-6 US, 13: -6.3% Japan, 13: -8.7% IMF Forecasts United States Euro Area Japan Source: IMF, WEO Database, last update Apr 17 1, WEO (1 & 13 forecast) 19 J.P.Morgan Chase Fiscal Positions: Net Debt 15 (Percent of GDP) IMF Forecasts Euro Area United States Japan Japan, 13: 14.7% US, 13: 86.7% Euro Area, 13: 71.5% Source: IMF, WEO Database, last update Apr 17 1, WEO (1 & 13 forecast) J.P.Morgan Chase

12 Imbalances in the Euro-System Growth Rates Imbalances Unemployment & Productivity Budget Deficits and Public Debt Savings and Payments Imbalances Spreads, Yields, and CDS Bad Zones 1 Real GDP Growth (%), Select Euro area countries 6 (Percent change) 4 Ireland, 13:.% JPMorgan Forecast Ireland Italy Germany Greece Spain Germany, 13: 1.4% Greece, 13:.% Ita ly, 13: -.3% Spain, 13: -.6% Source: IMF, last update Jul 1, WEO (1 & 13 forecast) J.P.Morgan Chase

13 Unemployment Rate (%): US and Euro area (%) Eu ro area : 11.3% United States Euro area United States: 8.3% Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 1 Jul 1 Source: Eurostat and BLS; Last observation for Euro area July 1, For US, July 1 3 J.P.Morgan Chase Relative Unit Labor Costs, Manufacturing Sector 15 (index, Q1 1 = 1) Euro Area: Stage EMU Euro adoption United States Euro Area US: 56 Source: OECD, last observation Q4/11 4 J.P.Morgan Chase

14 Unemployment Rate (%): Select Euro Area Countries (% of Labor Force) Germany Greece Ireland Spain Italy Sp ain: 5.1% Greece:.9% Ireland: 14.7% 1 9 Italy: 1.7% 6 3 Germany: 6.8% Source: Eurostat, Last Observation: Ireland, Germany (7/1); Italy, Spain (6/1); Greece (5/1) 5 J.P.Morgan Chase Relative Unit Labor Costs, Manufacturing Sector (index, Q1 1 = 1) Stage EMU Euro adoption Ita ly: Euro Area: Spain: Germany: 96 Germany Greece Italy Spain Euro Area Source: OECD, Last observation: Q4/11 6 J.P.Morgan Chase

15 Fiscal Position: General Government Balance Select Euro Area Economies 4 (Percent of GDP) Germany, 13: -.6% Italy, 13: -1.5% Ireland, 13: -7.4% Greece, 13: -4.6% Sp ain, 13: -5.7% -6 IMF Forecast Germany Greece Ireland Spain Italy Source: IMF, WEO Database, last update Apr 17 1, WEO (1 & 13 forecast) 7 J.P.Morgan Chase Fiscal Positions: Net Debt Select Euro Area Economies (Percent of GDP) IMF Forecast Germany Greece Ireland Spain Italy Greece, 13: 16.9% 14 1 Ireland, 13: 17.% Italy, 13: 1.6% Sp ain, 13: 71.8% Germany, 13: 53.4% Source: IMF, WEO Database, last update Apr 17 1, WEO (1 & 13 forecast) 8 J.P.Morgan Chase

16 Change in Gross National Saving Rate: Select European Counties ( 11) (Difference, in % between & 7 in Saving Rate) Change between -7 (Difference, in % between 11 & 7 in saving rate) Change between Germany UK Italy Spain France Ireland Greece Portugal Germany UK Italy Spain France Ireland Greece Portugal Source: Eurostat, Last Update: 11 9 J.P.Morgan Chase Euro Area Current Account Balance (% of GDP) 8 (Percent of GDP) 6 4 Germany, 13: 4.9% Eu ro area, 13: 1.% Italy, 13: -1.5% GIPS, 13: -.% -8 IMF Forecast Germany Ireland, Spain, Greece, & Portugal -1 Italy Euro area Source: IMF, WEO Database, last update Apr 17 1, WEO (1 & 13 forecast) 3 J.P.Morgan Chase

17 1yr Government Bond Yields 8 (Yield, %-pts) Germany Italy Italy: 5.668% 4 3 Germany: 1.391% 1 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-1 Aug-1 Source: Bloomberg Market Data, Last Observation: Sep 4, 1 31 J.P.Morgan Chase 1yr Sovereign Bond Spreads (spread in basis points) Italy 1yr sov spread to bunds Spain 1yr sov spread to bunds France 1yr sov spread to bunds Spain: 55bp Ita ly: 433bp France: 83bp Source: Reuters, last update 3 Sep, 1 3 J.P.Morgan Chase

18 Italy 1yr Sovereign Spread and Gross Debt (spread in basis points) 5 4 Introduction of euro Completion of euro changeover Italy 1yr sov spread to bunds (left axis) Italy government gross debt, % of GDP (right axis) (% of GDP) Debt: 13% 15 1 Spread: 433bp Source: For 1yr yields, Reuters, last update 3 Sep, 1; for gross debt, IMF World Economic Outlook, last update 17 Apr J.P.Morgan Chase Italian Sovereign Yield Curve Yield (%-pts) // /3/11 1/4/1.5 1yr yr 3yr 5yr 1yr yr 3yr Maturity Source: Bloomberg Market Data, Last Observation: Sep 5, 1 34 J.P.Morgan Chase

19 German Sovereign Yield Curve Yield (%-pts) // /4/1 1/3/ yr yr 3yr 5yr 1yr yr 3yr Maturity Source: Bloomberg Market Data, Last Observation: Sep 5, 1 35 J.P.Morgan Chase European Sovereign and Corporate CDS Spreads 4 35 (CDS, spread in basis points) itraxx Western Europe SovX (sovereign), generic 5y itraxx Europe HG Corporate, generic 5y itraxx Europe Senior Financial, generic 5y Financial: 4bp Sovereign: 9bp Corporate: 145bp 1 5 Oct-9 Mar-1 Aug-1 Jan-11 Jun-11 Nov-11 Apr-1 Sep-1 Source: Markiit itraxx data, Last Observation: Sep 3, 1 36 J.P.Morgan Chase

20 Gross Government Debt and Budget Deficit (% of GDP 11) Gross General Government Debt (% of GDP), Germany Austria Portugal Italy Belgium France Euro Area Netherlands Spain Greece UK "Bad" - Zone" Japan Ireland US General Government Balance (% of GDP), 11 Source: IMF, last update Apr 17 1, WEO (11 estimate) 37 J.P.Morgan Chase Current Account Balance and Budget Deficit (% of GDP 11) 1 Current Account Balance (% of GDP), Sweden Germany Netherlands Austria Euro Area Belgium France Italy Czech Portugal Bulgaria Ireland Spain -8 Japan UK US Greece "Bad" - Zone" -1-1 General Government Balance (% of GDP), 11 Source: IMF, last update Apr 17 1, WEO (11 estimate) 38 J.P.Morgan Chase

21 Gross National Saving Rate and Budget Deficit (% of GDP 11) 3 Gross National Saving Rate (% of GDP), Sweden Austria Bulgaria Germany Belgium Czech Euro Area France Italy Portugal Slovak Republic Spain UK Greece Japan US Ireland "Bad" - Zone" General Government Balance (% of GDP), 11 Source: IMF, last update Apr 17 1, WEO (11 estimate); Eurostat (11 estimate, EA13) 39 J.P.Morgan Chase Long-Term Demographic Imbalances The World Developing Countries Developed Countries Dependency Ratio 4

22 World Demographic Challenge Change in population, 1-3 (millions) Age Source: UN Populations Division, last update 1 Projected change in population 1: 71M from 1-3: 1516M 3: 8517M 41 J.P.Morgan Chase Developing Countries Demographic Challenge Change in population, 1-3 (millions) Age Source: UN Populations Division, last update 1 Projected change in population 1: 571M from 1-3: 146M 3: 7138M 4 J.P.Morgan Chase

23 Developed Countries Demographic Challenge Change in population, 1-3 (millions) Age Source: UN Populations Division, last update 1 Projected change in population 1: 189M from 1-3: 9M 3: 1379M 43 J.P.Morgan Chase Dependency Ratio 1 (Dependency Ratio, %, ratio population aged to population aged -14) 9 8 Japan W. Europe 7 United States 6 Brazil 5 4 India Brazil Western Euope Japan United States of America India Source: UN Population Division 44 J.P.Morgan Chase

24 U.S. Unemployment, by Duration (Share of total unemployed) 5 7+wks: 4.7% to 14wks: 4.3% <5wks: 1.3% 1 Less than 5wks 5 to 14wks 15 to 6wks 7 weeks or more to 6wks: 13.8% Source: Bureau of Labor Statistics, Last Observation: July 1 45 J.P.Morgan Chase U.S. Unemployment, by Duration (Share of total unemployed) Less than 5wks 5 to 14wks 15 to 6wks 7 weeks or more 7+wks: 4.7% to 14wks: 4.3% <5wks: 1.3% to 6wks: 13.8% Source: Bureau of Labor Statistics, Last Observation: July 1 46 J.P.Morgan Chase

25 U.S. Unemployment, by Level of Education (Unemployment Rate in %) No high school diploma High school diploma Total Some college College degree or higher No HS diploma: 1.7% HS diploma: 8.7% 8 Total: 8.3% 6 Some college: 7.1% 4 College or higher: 4.1% 5 1 Source: Bureau of Labor Statistics, Last Observation: July 1 47 J.P.Morgan Chase