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FORECAST 2014: ECONOMIC FUNDAMENTALS AND GEOPOLITICAL RISKS

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Title: THE GEOPOLITICS OF THE EURO ZONE DEBT CRISIS Author: angelo Last modified by: NBC Created Date: 2/1/2009 8:19:27 PM Document presentation format – PowerPoint PPT presentation

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Title: FORECAST 2014: ECONOMIC FUNDAMENTALS AND GEOPOLITICAL RISKS


1
FORECAST 2014 ECONOMIC FUNDAMENTALS AND
GEOPOLITICAL RISKS
Presentation to NBF Clients London Club January
14, 2014 Pierre Fournier, Geopolitical Analyst
2
Key issues for 2014
  • Continued U.S. outperformance among advanced
    economies
  • U.S. mid-term elections more polarisation or a
    return to consensus politics
  • Stagnant growth and political tension in the Euro
    zone
  • Middle East crisis will keep global oil prices
    high, unless breakthrough emerges in Iran
    negotiations
  • Success of Chinas economic transition key to
    global stability
  • Oil and pipeline geopolitics occupy center stage
    in Canadian politics

3
United States sustainable economic
outperformance, but obstacles to rapid growth
remain
  • Positive fundamentals
  • Energy and resources, demographics,
    competitiveness on the rise and a path towards
    deficit and debt reduction
  • Socio-economic challenges
  • Unprecedented global competition
  • Employment growth subdued, decline in quality of
    jobs
  • Rising income inequalities and shrinking middle
    class
  • Public and private debt levels improve, but
    remain high
  • Insufficient investments in infrastructure,
    education and training
  • Stagnant private investments
  • Political risks acute polarization, a
    dysfunctional political system, conflicts over
    pensions and benefits, gridlock and the mid-term
    elections

3
4
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5
U.S. public opinion polls show high level of
dissatisfaction for direction of country and
Congress
  • Direction of country
  • Right direction 30.3
  • Wrong direction 63.17
  • Satisfaction with Congress
  • Satisfied 13.1
  • Dissatisfied 81.9

Source Average of polls, Real Clear Politics,
January 2014
6
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7
8
Income inequality in the U.S. skyrockets in the
last three decades
Source IRS and Forbes, August 2013
8
9
Source Forbes, August 2013
9
10
The extent of wealth inequality in the U.S. and
the gap between perception and reality
Percent wealth distribution by quintile
Source Norton, M.I., and Ariely, D. (2011),
Building a Better America -- One Wealth Quartile
at a Time, Perspectives on Psychological Science
10
11
Will stagnant private investments undermine
growth and profits?
Source The Financial Times, 2013
12
12
13
Bi-partisan debt reduction
14
A positive for the U.S. economy and public debt
the growth rate of health care spending slows
down
Overall spending on healthcare rose less than 4
for the fourth year in a row in 2012. This is
half the pace of the previous decade, and the
lowest rate of spending since the 1960s.
14
15
The other side of the coin public
underinvestment in economic growth
16
The mid-term elections for the U.S. Congress A
turning point?
  • The future of the Republican Party
  • The moderates vs. the Tea Party
  • A Republican majority in the Senate would weaken
    the Obama administration further
  • Keys issues growth, the role of government,
    inequalities and the middle class, energy and
    climate policies, minimum wage, regulations
  • A preview for the 2016 presidential election
    Will polarization and gridlock persist or will
    U.S. politics move back towards the center?

17
The United States manufacturing cost advantage
vs. Europe
17
18
Natural gas prices
Industrial electricity prices
Source Boston Consulting Group (based on average
2012 prices )
18
19
Despite harsh austerity measures, public debt
levels continue to rise
Five of the Euro-zones 17 members Ireland,
Greece, Italy, Belgium and Portugal carry
public debt larger than the size of their
economies. Two other countries, Spain and
France, have debt levels in the 90 range.
Portugal and Spains debt level has increased
by 15 over the last twelve months, Irelands by
18, and Italys by 7.
19
20
Europes emerging demographic crisis
Rapidly aging populations and smaller workforces
will make it much harder to stimulate growth, and
pay for increasing burden of age-related
expenditures.
20
21
Public opinion grows increasingly hostile towards
the EU
The government of Netherlands recently said the
goal of a closer union is no longer viable and
has come out with a list of powers it feels
should not be ceded to the EU. The EU has still
not been able to agree on a viable banking union
or form of debt mutualisation.
21
22
Multiple conflicts in the Middle East and North
Africa remain key systemic geopolitical risks
  • Escalation of sectarian conflicts (Sunni vs.
    Shiite, but also Kurds, Christians and others)
    between and within countries
  • Growing rift between moderate political Islam,
    radical/jihadi Islam and Arab monarchies
  • Western powers, particularly U.S., trapped
    between their short-term geopolitical interests
    and support for democracy and human rights
  • Decline of western influence and economic clout,
    anti-americanism on the rise
  • The return of military rule in Egypt will lead to
    long term economic and political instability
  • No end in sight for Syrian civil war, with high
    contagion risks
  • Iraq and its oil vulnerable to sectarian
    conflicts between Shias, Sunnis and Kurds

22
23
Multiple conflicts in the Middle East and North
Africa remain key systemic geopolitical risks
  • Yemen, Libya, Jordan, Tunisia and Lebanon all
    exposed to geopolitical risks
  • Longer term, Gulf State monarchies in a bind
  • Increasingly restless populations
  • Dependence on oil revenues
  • Cannot win free and fair elections
  • Bahrain Unsustainable rule of Sunni minority
    over Shia majority
  • Israeli-Palestinian peace talks a breakthrough
    unlikely
  • Iran nuclear deal would be positive for the
    world, and likely put downward pressure on oil
    prices
  • High levels of unemployment, inequality, poverty
    and corruption exacerbate risks

23
24
Oil and pipeline geopolitics in Canada
  • Prospects for WTI and WCS prices to improve
  • Keystone XL approval likely in 2014, as Obama
    chooses to focus on coal emissions
  • Keystone XL Not just about U.S. energy security,
    but also about supplying highly profitable Gulf
    Coast refineries, and ensuring global markets are
    less vulnerable to geopolitical events in the
    Middle East and elsewhere
  • The capacity of the Trans Mountain pipeline to
    British Columbia coast will be tripled to 900,00
    barrels per day
  • A modified Northern Gateway may yet see the light
    of day
  • Energy east project likely to be approved
  • A more regulated and potentially more expensive
    crude-by-rail- industry will continue to grow
  • Many other pipelines being built or planned in
    North America

24
25
Other determinants of global growth and
geopolitical stability
  • Political tensions in Asia China-Japan, North
    Korea
  • A key year ahead for the Chinese transition to a
    more sustainable growth model
  • Indias internal political divisions could become
    an obstacle to growth
  • A resurgent Russia overblown as a risk factor
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