GLOBAL MACROECONOMIC SCENARIOS

Transcription

1 _ ACP2005: Best Case Scenario GLOBAL MACROECONOMIC SCENARIOS AND WORLD TRADE STATISTICS AND FORECAST FOR THE PANAMA CANAL AUTHORITY Contract SAA Global Macroeconomic Outlook: Best Case World United States Canada Japan China Taiwan Hong Kong S. Korea United Kingdom Germany France Italy Venezuela Ecuador Chile August, Hartwell Avenue, Lexington, MA Tel Fax

2 _ ACP2005: Best Case Scenario TABLE OF CONTENTS WORLD MACROECONOMIC OUTLOOK - BEST CASE... 3 I. NORTH AMERICA... 5 UNITED STATES...5 CANADA...8 II. ASIA JAPAN...11 CHINA...14 SOUTH KOREA...17 HONG KONG...20 TAIWAN...23 III. EUROPE UNITED KINGDOM...26 GERMANY...29 FRANCE...32 ITALY...35 IV. SOUTH AMERICA VENEZUELA...38 ECUADOR...41 CHILE...45 Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 2

3 _ ACP2005: Best Case Scenario World Macroeconomic Outlook - Best Case Global Insight used its global macroeconomic scenario model to generate a series of scenarios for the world, and the scenario driven by the assumptions below is called the Best Case scenario. Global Insight gives this scenario a 15% probability. Productivity growth is 0.5 percentage points higher every year than in the base case. Long-term interest rates are 1 percentage point lower every year than in the base case. World oil prices are 10 $/barrel lower every year than in the base case. All of the scenario work was developed around the baseline case, which has a 70% probability. Therefore, the world macroeconomic outlook, below, shows the comparisons of this best case with the base case outlook. Under the above assumptions, world economic output is improved. Best Case vs. Base Case 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Best Case - World Baseline In the baseline, world economic growth is expected to average 3.1% per year over the full forecast period, while in the best case, this growth is magnified to 3.5% per year, a significant difference on the positive side. In 2025, the difference in nominal terms is more than $8.5 trillion. The major industrialized countries all contribute to this improved outlook, including the U.S., China, Europe, and Japan (to a lesser extent). Developing nations, such as Brazil, Chile, Malaysia, India, etc., also show improved performance in this best case as a result of open trade policies, and the pull-effect from the industrialized nations. There are implications, as well, for unemployment and inflation in this best case scenario. Unemployment is slightly lower than in the base case, under the best case assumptions, which include higher productivity. This small difference in the two scenario's unemployment rates is shown in the chart below. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 3

4 _ ACP2005: Best Case Scenario Unemployment Rate - Baseline vs. Best Case Baseline The higher economic output is good for the jobs market; however, the assumed higher rates of productivity imply a lower demand for labor inputs. Hence, the best case shows only a modest improvement in unemployment. In terms of inflation, the higher rate of economic growth generates stronger increases in prices (CPI), as shown in the chart below. While this scenario is the "best" case, it does produce higher rates of inflation worldwide. Best Case Inflation - Baseline vs. Best Case Baseline Best Case Higher demand produces increases in most inputs prices as well Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 4

5 _ ACP2005: Best Case Scenario I. North America United States Under the best case conditions, US growth is much faster than in the baseline case: over the medium term, , GDP increases at an annual rate of 3.9%, significantly higher than the baseline growth rate of 3.2%. Over the entire forecast horizon out to 2025, average best case growth is 0.5 percentage points higher than baseline (3.5% vs. 3.0%). These gains reflect the benefits of higher productivity, moderate oil prices, low interest rates, and also faster growth overseas which assists US exports. The accumulated effect of faster growth means that, by 2025, GDP is 10% higher than baseline, equal to $2,062 billion (constant 2000 dollars) of additional output. 5.00% Real GDP Growth Rate 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Best Case Baseline The sectoral composition of the economy is essentially the same. This means that growth is relatively balanced, with the shares of consumption, investment, etc. roughly the same in 2025 for both cases. This is true for both nominal and real shares of the economy. Regarding nominal GDP, it grows at an average rate of 5.7% in the forecast, compared to 5.5% in the baseline. Given the real GDP growth rates, this means that inflation as measured by the GDP deflator is 2.2% in the best case vs. 2.4% baseline. This difference of 0.2 percentage points also shows up in CPI inflation as well. These results are as expected: inflation is lower, despite faster growth, thanks to higher productivity and lower oil prices. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 5

6 _ ACP2005: Best Case Scenario The profile of the trade deficit is basically the same as the baseline: it is initially greater than 5% of GDP and ends with a small surplus of 0.1% of GDP in In fact the trade balance is slightly higher in the best case, but only by roughly $20 billion in most years. Again, this illustrates the balanced growth that takes place, raising both exports and imports to the same extent. Although personal income gains in proportion to nominal GDP, actual wages lag somewhat behind: wage growth in the baseline averages 4.6%, and rises by 0.1 percentage point to 4.7% in the best case (whereas nominal GDP growth, as mentioned above, increases by 0.2 percentage point). Thus higher productivity growth, although it does raise wages, raises non-wage income to a greater extent. In other words, wages as a share of GDP are slightly lower in the best case. Regardless, the employment situation is much better in the best case: the unemployment rate is 4.8% on average, compare with 5.0% baseline. Although improved productivity lowers labor demand in the first year the jobless rate is slightly higher than baseline rising demand quickly puts these increasingly-productive workers to use. Lastly, the government budget deficit improves dramatically in the best case: as a share of GDP, the budget balance starts at roughly -4% of GDP and increases to -0.4% in 2025 (in the baseline it rises to only -1.9%). This improvement largely reflects the increased tax revenues generated by faster growth, which outstrips the rise in more-generous expenditures. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 6

7 ACP2005: Best Case Scenario USA Avg. Anuual Compound Growth Nominal GDP, billion US dollars 9, , , , Nominal GDP per capita, US dollars 34,714 41,834 52, , Real GDP, billion real 2000 US dollars 9, , , , Real GDP per capita, real 2000 US dollars 34,713 38,119 44,129 64, Real private consumption, billion real 2000 US dollars 6, , , , Real government consumption, billion real 2000 US dollars 1, , , , Real fixed investment, billion real 2000 US dollars 1, , , , Real exports, billion real 2000 US dollars 1, , , , Real imports, billion real 2000 US dollars 1, , , , Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing 1, , , , Utilities Construction Wholesale & Retail Trade 1, , , , Transport & Communication , FIRE 3, , , , Other Services 2, , , , Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 7

8 Canada In the best case scenario, Canada benefits from faster productivity growth both at home and abroad, as the latter stimulate exports and from lower interest rates; lower oil prices, however, tend to depress output by curtailing activity in the oil patch. The net impact of these three factors on Canada's domestic economy is less than their impact on the rest of the world, including the United States, where oil extraction and exploration account for a lower share of activity. Still, the overall effect is to boost growth: GDP grows at an average annual rate of 2.8% over the forecast period, compared to 2.4% in the baseline. This means that by 2025, output is nearly 10% higher than the baseline, an additional $129 billion in real 2000 dollars. The higher productivity growth raises the growth rate in wages. Meanwhile, the lower crude oil prices also boost consumers' real income. In combination with lower borrowing costs, these factors result in a faster pace of consumer spending than in the baseline. Lower interest rates and stronger demand, both domestically and abroad, result in a higher pace of capital investment. Lower oil prices provide a partial offset by depressing investment in the oil patch. The stronger capital accumulation, on top of faster productivity growth, allows Canadian businesses to expand exports at a stronger pace to meet the improved external demand. Increased demand for imports to meet part of the domestic demand and to be used as inputs in the production of exports moderates the positive impact on Canadian GDP growth. 4.00% Real GDP Growth Rate 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% Best Case Baseline In sectoral terms, the non-trade components (private consumption, government consumption, fixed investment) for the best case in 2025 are slightly smaller as a share of Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 8

9 GDP than the baseline, whereas the real trade balance is larger. This is because the positive impact of this scenario on Canada's domestic economy is less than the positive impact on the rest of the world. This wedge is fundamentally due to Canada's trade surplus in oil and other energy products with the rest of the world. Mainly thanks to the faster growth of the US, real Canadian exports grow at a 4.3% pace to 2025 (0.6 percentage points faster than baseline exports), and real import growth is 4.5% (0.5 percentage points above baseline). In nominal terms, however, the external surplus is smaller than baseline by roughly 0.5 percentage points. The profile is the same, however, with a large nominal trade surplus in the medium term, trending down to a small deficit at the end of the forecast period. Inflation is lower in the best case, due to higher productivity and lower oil prices. In the best case, prices rise at an average annual rate of 1.7% (for the GDP deflator) or 1.8% (for the consumer price index); in contrast, the baseline inflation numbers are both 1.9% per year. Note that, with interest rates one full percentage point lower, real interest rates are lower in the best case and thus provide stimulus to the economy. The exchange rate shows only mild changes. The Canadian dollar is slightly weaker than baseline over the next ten years, due to the terms of trade deterioration caused by lower oil prices, but it then gradually makes up the difference and ends up at virtually the same level in 2025, 1.09 C$/$. The labor market benefits from the faster growth. Aside from the first year, when higher productivity temporarily reduces labor demand, the unemployment rate is lower than baseline by 0.3 percentage points. In both cases the jobless rate trends down over time, but in the best case it reaches 6.2% in 2025 compared to 6.65% in the baseline. Lastly, the government budget balance is higher, thanks to increased tax revenue generated by faster growth. As a share of GDP, the balance is higher by 1.3 percentage points on average. Though the balance trends down over time for both cases, the baseline balance goes into deficit in 2015, whereas the best case numbers do not go negative until Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 9

10 CANADA Avg. Anuual Compound Growth Nominal GDP, billion US dollars , , , Nominal GDP per capita, US dollars 23,646 34,139 43,777 82, Real GDP, billion real 2000 US dollars , Real GDP per capita, real 2000 US dollars 23,644 25,698 29,288 40, Real private consumption, billion real 2000 US dollars Real government consumption, billion real 2000 US dollars Real fixed investment, billion real 2000 US dollars Real exports, billion real 2000 US dollars Real imports, billion real 2000 US dollars Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing Utilities Construction Wholesale & Retail Trade Transport & Communication FIRE Other Services Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 10

11 II. Asia Japan The best case conditions - more rapid productivity growth, lower interest rates (both nominal and real), and lower oil prices - allow Japan to achieve a faster growth rate over the forecast period. In the medium term, , the real GDP growth rate averages 2.4% compared to 1.9% in the baseline forecast. For the long term, the growth rate average for is 2.0% in the best case, compared to 1.5% baseline. Note that the deceleration of growth, largely due to demographic changes (i.e. a shrinking population and workforce) occurs under both baseline and scenario. Moreover, the growth difference between the baseline and scenario decreases slightly to 0.4 percentage point toward the end of the forecast: although the productivity growth rate remains 0.5 percentage point higher, this is partially offset by reduced work effort (due to the higher level of output and an improved standard of living) and less efficient allocation of investment funds (since higher returns are easier to obtain). 3.00% Real GDP Growth Rate 2.50% 2.00% 1.50% 1.00% 0.50% Best Case Baseline Despite faster real growth, the growth rate of nominal GDP is virtually unchanged out to 2025, averaging 2.6% in the baseline and 2.7% in the best case scenario. This reflects the reduced rate of inflation: the annual inflation rate is nearly 0.3 percentage points lower in the best case. This in turn is driven by the lower price of oil. But the most notable results are the effects on trade. The annual growth rate of Japan s real (volume) exports is nearly 0.7 percentage point higher in the best case; by 2025 this puts real exports 16% higher Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 11

12 than baseline, a gain of $185 billion in constant 2000 dollars. Imports are also higher in the best case: the annual growth rate is 0.3 percentage point higher than baseline growth; by 2025 real imports are 9% larger than baseline, a gain of $94 billion in constant dollars. Note that the increase to exports exceeds the increase in imports, because the assumption of higher productivity disproportionately impacts exports, Japan s most productive sector. In addition, faster world growth creates additional demand for Japanese goods, and allows Japan s trade surplus to continue for a longer period of time: the trade balance goes into deficit in 2016 in the baseline forecast, but not until 2023 in the best case scenario. Consumption rises more quickly in the best case, driven by higher incomes and lower real prices for consumption goods as a result of high productivity. But as a share of GDP, consumption is actually lower, reaching 60.5% of GDP in 2025 compared to 61.8% in the baseline. Capital investment follows the opposite pattern: driven by higher returns, capex reaches 16.4% of GDP in 2025 compared to 16.1% in the baseline case. Lastly, as mentioned above, the trade balance is higher as a share of GDP in the best case, reflecting the success of Japan's export sector. The exchange rate profile changes little in the best case: it strengthens less rapidly in the medium term, but by 2025 is at nearly the same level as in the baseline, with the yen slightly stronger than 90 per dollar. In either case, an appreciation to this level is necessary to close the current account surplus, necessitated by the decline in Japan s savings rate and the fact that foreign investments become less attractive. But, as noted above, even with a similar exchange rate profile, the trade surplus lasts longer, and Japan accumulates more foreign assets, in the best case scenario. The employment situation is better, as expected: over the forecast horizon, the unemployment rate is lower by 0.3 percentage points on average. Interestingly, the jobless rate is above baseline in 2005, but this is mainly due to the assumption of higher productivity, which initially reduces the demand for labor. Lastly, the fiscal position of the government is also better: in the baseline, the budget deficit gradually improves to 4% of GDP by 2025, whereas in the best case it improves quickly to 3% of GDP and eventually reaches 2.5% of GDP. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 12

13 JAPAN Avg. Anuual Compound Growth Nominal GDP, billion US dollars 4, , , , Nominal GDP per capita, US dollars 37,449 40,181 53,317 91, Real GDP, billion real 2000 US dollars 4, , , , Real GDP per capita, real 2000 US dollars 37,414 39,332 44,302 61, Real private consumption, billion real 2000 US dollars 2, , , , Real government consumption, billion real 2000 US dollars , , Real fixed investment, billion real 2000 US dollars 1, , , , Real exports, billion real 2000 US dollars , Real imports, billion real 2000 US dollars , Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing 1, , , , Utilities Construction Wholesale & Retail Trade , Transport & Communication FIRE 1, , , , Other Services 1, , , , Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 13

14 China In the best case scenario, China's real GDP growth will average 7.4% from 2005 to 2025, one full percent point higher than in the base case. The economy will flourish mainly due to faster productivity gains. Improve efficiency through structural reforms has been the secret of China's economic success since Since China was moving from a highly inefficient central planning economy to a market based system, the country was able boost productivity substantially in the early stages of reform. 9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% Real GDP Growth Rate 5.00% Best Case Baseline But China's economic development hit a bottleneck in the mid-1990s, as the country's massive and inefficient state owned enterprises (SOE) and state banking sector began to weigh on the economy. Recognized the seriousness of these problems, Beijing began attempting to reform these two sectors in But because of the high premium Beijing places on stability, the central government has continued the gradualist approach to the SOE and state owned bank reforms. Consequently, the structural flaws in the system have remained unresolved to a large extent. In the base case, though we assume eventual success in the SOE and state banks reform, we also assume the government to continue to muddle through for sometime before resolving the structural flaws in the system. In the best case, however, these reforms will get pushed through much more swiftly, without causing too much short term pain on the economy in general and labor market in particular. Other positive external factors contribute to this success as well lower long term interest rates would spur investment as well as private consumption, cheaper oil will help corporate China's profit margin. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 14

15 Private consumption growth averages 7.8% in in the best case scenario, compared with base case's 6.9% in the same period. Investment growth is even more robust in the best case, averaging 8.7% between 2005 and 2025, 1.3% higher then the average rate in the base case. A restructured state banking sector will be particularly positive to private investment. There has been much pent up private investment demand because state banks have had long discriminated against private firms in their lending practice. Naturally, when this bias is removed, private investment booms. Successful reform's positive impact on the trade sector is less pronounced, however. For the trade sector has always been the most efficient segment in the Chinese economy, given its exposure to foreign competition. Export growth in the best case averages 10.9% in , compared with 9.9% in the base case; import growth in the best case averages 11.9% in the next 20 years, 1% higher than the base case. Inflation will be lower in the best case, despite stronger domestic demand and lower interest rates. Faster productivity advancement and lower oil prices will offset these inflationary forces. Consumer price inflation in the best case averages 2.6% in the period, compared with 3.0% of the base case average inflation rate. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 15

16 CHINA Avg. Anuual Compound Growth Nominal GDP, billion US dollars 1, , , , Nominal GDP per capita, US dollars 856 1,381 2,537 11, Real GDP, billion real 2000 US dollars 1, , , , Real GDP per capita, real 2000 US dollars 856 1,247 1,777 4, Real private consumption, billion real 2000 US dollars , Real government consumption, billion real 2000 US dollars , Real fixed investment, billion real 2000 US dollars , , Real exports, billion real 2000 US dollars , , Real imports, billion real 2000 US dollars , , Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing , , Utilities Construction Wholesale & Retail Trade Transport & Communication FIRE Other Services Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 16

17 South Korea Korea's economy performs much better in the best case scenario. This reflects the direct effects of higher productivity growth, lower interest rates and lower oil prices; it also reflects the positive repercussion effects from faster growth overseas that leads to increased purchases of Korean exports. The net result is to raise the GDP growth rate to 6.2% from the baseline 5.6% over the next five years. Long-term growth likewise sees an increase, to 3.6% from 3.3%. Note that the differential shrinks over time, as higher return investments are exhausted sooner than in the baseline, but the growth rate is always higher in the best case. Population growth slows and then levels out in both scenarios; as a result, growth in GDP per capita is 0.4 percentage point lower than overall GDP growth in the medium term, but only 0.1 percentage point lower in the long run. 8.50% 7.50% 6.50% 5.50% 4.50% 3.50% 2.50% 1.50% Real GDP Growth Rate 0.50% Best Case Baseline The growth rate of nominal GDP also increases, but by only 0.3 percentage point in the medium term and 0.1 in the long term. This is less than the increase to real growth, thus the inflation rate (as measured by the GDP deflator) increases at a slower pace in the best case. This is driven by both faster productivity growth which generates greater output and thus reduces price pressures and by lower oil prices. This easing of inflation is also partly responsible for the lowering of interest rates. But there is no significant change in the exchange rate. This follows from the fact that the trade balance as a share of GDP is largely unchanged from the base case; this in turn stems from the fact that slightly higher inflation, which tends to lower competitiveness, has been offset by improved productivity. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 17

18 The government fiscal balance also does better in the best case, with faster growth raising tax revenues faster than expenditure growth. The baseline shows the surplus shifting permanently into deficit in 2018, whereas the best case has the surplus generally remaining greater than 1% of GDP out to Lastly, the best case shows a beneficial effect on the labor market. With the exception of the first year where the initial productivity gain temporarily lowers demand for labor the unemployment rate quickly falls below the baseline path, and by 2010 is a half-percentage point lower (3.2% vs. 3.7% baseline). In later years, the jobless rate slowly increases in both scenarios, reflecting gradual deindustrialization and the greater mismatch between workers' skills and job requirements. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 18

19 KOREA Avg. Anuual Compound Growth Nominal GDP, billion US dollars , , Nominal GDP per capita, US dollars 10,861 15,832 23,149 49, Real GDP, billion real 2000 US dollars , Real GDP per capita, real 2000 US dollars 10,859 13,286 17,597 29, Real private consumption, billion real 2000 US dollars Real government consumption, billion real 2000 US dollars Real fixed investment, billion real 2000 US dollars Real exports, billion real 2000 US dollars Real imports, billion real 2000 US dollars Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing Utilities Construction Wholesale & Retail Trade Transport & Communication FIRE Other Services Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 19

20 Hong Kong In the best case scenario, Hong Kong's real GDP is projected to grow by an average of 5.5% over the period, before moderating to 3.9% in This is compared with the average of 4.8% and 3.5% for and in our baseline forecast. Hong Kong has enjoyed rising foreign direct investment in recent years as it has maintained its status as the gateway to the Chinese market. With rapid economic development, China is becoming a rising interest to foreign investors, but its financial system is poor and capital market is underdeveloped. On the other hand, Hong Kong is famous for its sound logistics and financial system, limited government regulation, and a simple tax structure. With Hong Kong's closer integration with China, it has been the popular choice for investors and multinationals to set up the headquarters. We assume this advantage would be maintained over time, and should remain as a big boost to the economy and lead to rising productivity. 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% Real GDP Growth Rate 2.50% Best Case Baseline The assumption of higher productivity growth implies an increase in capital stock, which is reflected from an average of 6.7% increase in the real fixed investment during ; higher than 6% expected in the baseline forecast. Indeed, continued foreign direct investment, coupled with lower interest rates and falling oil prices, should help lift local business sentiment. In addition, confidence would also be raised as the mainland China opens up its business and visitors coming into the territory. For the whole forecast period, fixed investment is projected to expand 5.8% in the best case scenario, compared Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 20

21 with 5.3% in the baseline. In nominal terms, fixed investment is projected to grow by 7.1% in , compared with 6.6% in the baseline forecast. As a result of rising productivity and higher profit margins, companies will have more positive hiring plans. The average unemployment rate is expected to fall, to 4.3% during , from 5.4% in Moreover, higher productivity growth with improved efficiency also implies lower costs, and hence lower overall prices. This, coupled with falling oil prices, implies that consumer price inflation rate would ease, to 1.8% during the whole period, down from 2.1% in the baseline forecast. On the consumer front, consumer spending is expected to increase by 3.9% in the best case scenario for the whole forecast period, up from 3.5% in the baseline. Higher consumer spending is a result of improved employment condition, loosened monetary environment, and more upbeat consumer confidence. In the best case scenario, consumer spending is projected to expand by 4.9% in , before moderating to 3.5% in In addition, the underlying assumptions also give us a better government fiscal balance, along with higher government consumption, which is expected to grow 1.4% in and 1.2% in In addition, in the best case scenario, foreign demand for Hong Kong's goods and services should also increase, in tandem with accelerating foreign economic growth. In this case, Hong Kong's exports are projected to climb 8.5% in and 6.2% in , compared with 7.3% and 5.3% in the baseline forecast, respectively. For the whole forecast period, exports would grow 6.9% in the best case, up from 6% in the baseline. Reflecting on stronger domestic demand, imports are expected to expand 7% in , up from 6.2% in the baseline. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 21

22 HONG KONG Avg. Anuual Compound Growth Nominal GDP, billion US dollars Nominal GDP per capita, US dollars 24,807 24,899 33,118 72, Real GDP, billion real 2000 US dollars Real GDP per capita, real 2000 US dollars 24,807 28,852 36,358 58, Real private consumption, billion real 2000 US dollars Real government consumption, billion real 2000 US dollars Real fixed investment, billion real 2000 US dollars Real exports, billion real 2000 US dollars , Real imports, billion real 2000 US dollars , Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing Utilities Construction Wholesale & Retail Trade Transport & Communication FIRE Other Services Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 22

23 Taiwan Taiwan's real GDP growth increase in the best case scenario in comparison with our baseline forecast. Real GDP is projected to expand by an average of 5% in the period of , followed by 3.8% in This is faster than the average of 4.4% for and 3.5% for in the baseline. Several assumptions are responsible for the stronger result in the best case scenario. We assume that domestic political condition and the cross-strait relation would remain stable or even improve with time during the whole forecast period. Indeed, we expect that the Taiwanese government would finally make progress in the long over-due opening up the three links with China; namely, transportation, business, and postal links. 5.50% Real GDP Growth Rate 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% Best Case Baseline We also assume that Taiwan's government would be more prudent towards its fiscal and other policies. It, for example, would reduce the tendency to raise redundant government spending in an attempt to win over voters, but rather would increase spending on progrowth activity, including education and technology research funding. In addition, it would be keen on continuing tackling the bad-loans problem in the financial system and proceed with monetary reforms. These could lead to higher productive growth, while stronger consumer and business confidence could also be implied from the above upbeat assumptions. In the best case scenario, consumer spending is projected to rise by an average 4.1% for the whole forecast period, compared with 3.6% in the baseline forecast. Higher consumer spending is attributable to the positive environment that boosts consumer sentiment; Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 23

24 including lower interest rates, lower inflation, a stronger labor market, and a stable political condition. In addition, the assumptions applied in this case also give us an improved government fiscal balance, along with higher government consumption, which is expected to grow 1.1% in and 1% in Lower inflation is implied by the assumption of higher productivity growth, as rising business efficiency would reduce costs. In addition, lower oil prices would also reduce cost-push inflationary pressure. Consumer price inflation is projected to stand at 2% in in the best case scenario, lower than the baseline's 2.3%. Meanwhile, with the business condition improving and business confidence rising, companies would proceed with more hiring plans. Unemployment rate is expected to fall to 3.4% in , from 3.8% in Taiwan's real fixed investment is projected to expand 7.6% in , compared with 6.8% in the baseline forecast, as the business sector gains more confidence and efficiency. This is under the assumption that the island's high-tech sector maintains its competitive edge. In addition, boosted by advancing in technology, companies would raise investment on equipment and software, as well as increase other capital expenditure. Lower interest rates and lower inflationary environment would also contribute to rising fixed investment. For the whole forecast period, fixed investment would expand by 6.4% in the best case, up from 5.9% in the baseline. On the external front, global demand for Taiwan's goods and services would increase in the best case scenario compared with the baseline. Taiwan's exports would increase by 8.2% in and 4.5% in in the best case, up from the baseline's 6.8% in and 3.6% in For the whole forecast period, exports would grow 5.6% in the best case, compared with 4.5% in the baseline. Meanwhile, imports are projected to grow by 6.1% in , up from 5% in the baseline, boosted by higher domestic demand. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 24

25 TAIWAN Avg. Anuual Compound Growth Nominal GDP, billion US dollars , Nominal GDP per capita, US dollars 13,913 15,388 23,269 63, Real GDP, billion real 2000 US dollars Real GDP per capita, real 2000 US dollars 13,913 15,751 19,405 31, Real private consumption, billion real 2000 US dollars Real government consumption, billion real 2000 US dollars Real fixed investment, billion real 2000 US dollars Real exports, billion real 2000 US dollars Real imports, billion real 2000 US dollars Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing Utilities Construction Wholesale & Retail Trade Transport & Communication FIRE Other Services Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 25

26 III. Europe United Kingdom Under the best case scenario with increased productivity growth, lower interest rates and reduced oil prices, real GDP growth in the United Kingdom averages an impressive 3.5% per annum over the five-year period This is 0.9 percentage points up from the 2.6% average expansion rate achieved under the baseline, and broadly in line with the average expansion of 3.3% that occurred over the seven-year period As a result, U.K. GDP stands at US$1.27 trillion in 2009 in real (2000 US$) terms under the best case scenario, compared to US$1.21 trillion under the baseline. 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% Real GDP Growth Rate 2.00% Best Case Baseline Both private consumption and fixed investment will benefit in particular from lower interest rates, which will also boost the important housing market, thereby further supporting the consumer sector. Higher productivity growth will also boost companies' profitability, as will lower oil prices that will alleviate the squeeze on their margins. Consequently, investment and employment rises. This in turn leads to higher incomes. Against this favorable backdrop,, real private fixed investment becomes a more significant growth driver. It increases at an annual average rate of 6.0% between 2005 and 2009, virtually double the 3.1% rate achieved in the baseline. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 26

27 Furthermore, average annual growth in real private consumption between 2005 and 2009 increases to 3.3% compared to 2.6% in the baseline, enhancing its role as a growth driver. In real terms, private consumption rises to US$846 billion in 2009 under the best case scenario from US$817 billion in the baseline. Meanwhile, average annual government spending growth in real terms increases modestly to 3.2% in the best case scenario from 2.8% in the baseline, as public finances are boosted by stronger growth. The U.K trade sector will benefit, as exports are supported by the stronger global growth resulting from higher productivity growth, reduced oil prices, and lower interest rates. Furthermore, imports are boosted by more robust UK domestic demand. In real terms, U.K. annual average export growth amounts to 5.0% in the best case scenario compared to 4.8% in the baseline. As a result, U.K. exports are increased to US$358 billion in 2009 from US$355 billion. Meanwhile, annual average import growth is boosted to 5.9% from 4.8%. Consequently, U.K imports amount to US$442 billion in real terms in 2009 under the best case scenario, compared to US$420 billion under the baseline. During the complete forecast period , GDP growth averages 2.9% per annum under the best case scenario, compared to 2.4% under the baseline. Consequently, by the year 2025, GDP is 9.2% higher at US$1.94 trillion in real terms under the best case scenario, than it is under the baseline. Consumer spending expands at a healthier real annual average rate of 3.3% under the best case scenario during the 21-year period, compared to 2.5% under the baseline. As a result, it is 7.8% higher at US$1.30 trillion in real terms by Even so, its share of GDP is actually less at 58.6% in 2025, under the best case scenario, than it is under the baseline (59.9%) or the worst case (60.7%). This is largely because other sectors benefit even more from higher productivity, lower interest rates, and softer oil prices. In particular, the share of fixed investment rises to 23.3% of GDP in 2025 under the best case scenario compared to 21.7% under the baseline, and just 20.6% under the worst case scenario. Indeed, the real annual average increase in private fixed investment is a significantly enhanced 3.9% during in the best case, compared to the baseline's 3.0%. This means that it is 18.7% higher in real terms by 2025 at US$357 million. Meanwhile, annual average real growth in public consumption improves to 3.0% from 2.6%. The trade sector is also stronger, with real exports 5.0% higher at US$828 million in 2025, and imports up by 7.2% at US$1.0 trillion. In real terms, export growth is projected to average 5.3% a year over the period under the best case scenario compared with 5.1% under the baseline. Even so, the U.K. remains a net importer at the end of the forecast period. This is because average annual import growth is lifted from 5.0% to 5.4%. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 27

28 UNITED KINGDOM Avg. Anuual Compound Growth Nominal GDP, billion US dollars 1, , , , Nominal GDP per capita, US dollars 24,279 41,134 52,940 94, Real GDP, billion real 2000 US dollars 1, , , , Real GDP per capita, real 2000 US dollars 24,249 27,155 31,555 44, Real private consumption, billion real 2000 US dollars , , , Real government consumption, billion real 2000 US dollars Real fixed investment, billion real 2000 US dollars Real exports, billion real 2000 US dollars , Real imports, billion real 2000 US dollars , Real GDP by sector, billion real 2000 US dollars: Agriculture Mining Manufacturing Utilities Construction Wholesale & Retail Trade Transport & Communication FIRE Other Services Share change, percentage points Private consumption share of GDP Government consumption share of GDP Fixed investment share of GDP Exports share of GDP Imports share of GDP Net extports share of GDP Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 28

29 Germany Real GDP growth in Germany averages 2.2% per annum over the five-year period in the best case scenario, as it benefits from the benign combination of higher productivity growth, softer oil prices, and lower interest rates. This is 0.55 percentage point higher than the 1.65% average expansion rate achieved under the baseline. Consequently, German real GDP stands at US$2.13 trillion in 2009 under the best case scenario, compared to US$2.07 trillion under the baseline. 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% Real GDP Growth Rate 1.00% Best Case Baseline Germany gains more markedly than some of the other European countries due to the fact that it relieves heavily on oil imports. Real private fixed investment benefits especially from lower interest rates and the better margins resulting from lower oil prices and improved productivity. In addition, business confidence should be higher, further supporting investment. It increases at an annual average rate of 3.0% during , higher than the 2.4% rate achieved in the baseline. Meanwhile, average annual growth in real private consumption between 2005 and 2009 is improved to 2.2% from 1.7%, largely reflecting higher employment creation and significant real income gains. In real terms, private consumption is increased to US$1.233 trillion in 2009 under the best case scenario from US$1.201 trillion in the baseline. Finally, average annual government spending growth in real terms jumps to 1.3% in the best case scenario from 0.8% in the baseline, as poor public finances enjoy the fruits of stronger growth. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 29

30 The German trade sector will expand, as exports are lifted by the higher global growth that is expected under the best case scenario, and imports are boosted by the stronger domestic demand. In real terms, annual average export growth in Germany amounts to 5.1% in the best case scenario compared to 4.7% in the baseline. As a result, real German exports are increased to US$984.0 billion in 2009 from US$964.5 billion. Meanwhile, annual average import growth is raised to 5.6% from 5.1%. Consequently, German imports amount to US$906.6 billion in 2009 under the best case scenario, compared to US$ billion under the baseline. Over the whole forecast period , GDP growth averages 2.1% per annum under the best case scenario, compared to 1.6% under the baseline. Consequently, by the year 2025, real GDP is 9.9% higher at US$2.92 trillion in real terms under the best case scenario, than it is under the baseline. Consumer spending expands at a brisker real annual average rate of 2.1% under the best case scenario during the 21-year period, compared to 1.6% under the baseline. As a result, in real terms is 9.2% higher at US$1.69 trillion by However, consumer spending's share of total GDP is actually less in 2025 under the best case scenario at 62.0%, than it is under either the baseline (62.2%) or the worst case scenario (62.5). This is because other sectors of the economy benefit even more from higher productivity growth, and lower interest rates and oil prices. Encouragingly, the real annual average increase in private fixed investment is increased to 2.3% from 1.8%. This means that it is 10.1% higher in real terms by 2025 at US$565.3 billion. Its share of total GDP is therefore 18.1% under the best case scenario, compared to 18.0% under the baseline and 17.9% under the worst case. Meanwhile, annual average real growth in public consumption is lifted to 1.7% from 1.2%. As a result, in real terms is 9.9% higher at US$518.6 billion by The trade sector is significantly stronger, with real exports improved by 8.6% at US$2.059 trillion in 2025, and imports up by 7.9% at US$1.954 trillion. In real terms, export growth is projected to average 4.8% a year over the period under the best case scenario compared with 4.4% under the baseline. Average annual import growth is lifted from 4.7% to 5.1%. Consequently, Germany remains a net exporter at the end of the forecast period. Global Insight, Inc. Copyright 2005 GLOBAL INSIGHT 30