Presented at the Bankers Association for Finance and Trades 81st Annual Meeting The Global Marketpla

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(No Transcript)
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Merli Baroudi
Director, Risk Services The Economist
Intelligence Unit Global Risks--at the crossroads
Presented at the Bankers Association for
Finance and Trades81st Annual MeetingThe
Global Marketplace-At the Crossroads May 4-7,
2003The Arizona Biltmore, Phoenix, AZ
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We are here!
World GDP growth,
Y on Y
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Key forecast assumptions

• Global economy currently very weak
• Emerging markets will be sluggish as a result
• domestic demand and regional trade flows assume a
  new importance for the emerging world
• Expect only a gradual return to trend growth in
  the developed world

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Global growth forecast
World GDP growth,
2002 2.9 2003 3.1 2004 3.9 2005 4.1
Y on Y
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Three world scenarios

• Strong economic rebound
• Persistent weak growth
• Crushing recession

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Direct risks to global recovery
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Key risk US dollar crash

• US current-account deficit unsustainable
• foreigners become reluctant to inject US45bn a
  month into US
• dollar crashes to US1.301 and 105US1
• US Inflationary pressures rise
• US interest rates increase
• Loss of price competitiveness
• Europe, Japan
• Emerging regions stall

30 chance
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Key risk steep plunge in US demand

• Consumers/corporates retrench
• weak balance sheets force private sector to save
  
• Prompts aggressive response
• immediate fiscal easing, lowers chance of
  recession
• but in longer term, worsens fiscal deficit and
  leads to higher interest rates and aggressive
  fiscal tightening

15 chance
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Key risk global deflation

• Extent of asset-price bubble
• Japan
• US
• Germany
• Corporate over investment
• Japan
• US
• Germany -
• Large private-sector debts
• Japan
• US
• Germany

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Key risk global deflation

• Weak banking system
• Japan
• US -
• Germany
• Severe structural rigidities
• Japan
• US -
• Germany
• Political/social paralysis
• Japan
• US -
• Germany

20 chance
10 chance
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Indirect risks to global recovery
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Key risk major terrorist attack on NATO country

• Global risk aversion returns
• Fear not assuaged by stimulus or security
  measures
• Long term asset prices fall
• Demand for tougher, wider response increases
• Civil liberties in West curtailed
• Reprisals aggravate tensions
• War against terror broadens to Syria, Iran,
  Pakistan, Egypt?

15 chance
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Key risk Severe Acute Respiratory Syndrome
(SARS)

• Still uncertainty
• cause/transmission
• Containment an issue
• Peaked in HK, Singapore?
• In China SARS is spreading
• Risk of spreading to India
• Economic impact
• US 50bn in foreign investment to China
  imperilled
• Industries seriously affected
• 1st tiertravel, tourism, retail sales
• 2nd tierconsumer, electronics,food

10 chance
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Key risk another major emerging markets crisis

• Contagion from emerging markets crisis tips world
  into recession
• Brazil, Turkey, and to a lesser extent,
  Indonesia are most likely candidates
• Mostly likely in combination with other risks
  factors
• Would need to be a severe crisis, possibly at
  least two major economies

5 chance
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Key risk nuclear war in the Koreas

• Possible trigger
• US initiates pre-emptive surgical strike N
  Korea retaliates with nuclear weapons
• N Korea launches nuclear attack on S Korea
  US/SK retaliate
• Unprecedented fallout
• Large numbers of casualties on both sides
• Regional powers drawn into conflict

5 chance
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Key upside risk very low world oil prices

• Regime change in Iraq removes threat to oil
  supplies
• war adds less to US deficit
• progress on Palestine/Israel possible
• Iraqs large oil reserves ready for development
• Venezuelan referendum later this year could see
  Hugo Chavez, key OPEC supporter, ousted

10 chance
Low oil price scenario
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Risks to a weak recovery

• Main risks
• Economic
• US economy falters badly
• Political
• Terrorist actions and/or reprisals heightens
  uncertainty and insecurity
• Not baseline scenarios (lt50 chance)
• But still real risks
• Individual events could drastically increase
  their probability