1. The global economy has shifted significantly over the past decade, with emerging economies like China, India, and Brazil contributing more to global GDP growth than advanced economies. 2. While the 2008 financial crisis impacted all economies, emerging markets rebounded more quickly and have continued to see strong growth, leading the recovery of the global economy. 3. Looking ahead, growth in advanced economies like the US, UK, and Eurozone is expected to remain subdued as they deal with high debt levels, while Asia and Latin America will likely remain the main drivers of global economic expansion.

1. The World Economy: Global boom cooling, but no freeze ’ A Presentation for ICAS Business Breakfast in Aberdeen’ Nick Parsons Head of Research UK and Europe, Global Head FX Research National Australia Bank, [email_address] November 24 th 2011

2. The world economy

3. The global economy was worth 61,963,000 million US dollars at the end of 2010. GDP of the wealthiest country is more than twice the second placed country and three times as much as the third. The top four countries account for half the world’s GDP. The United Kingdom is still the world’s 6 th largest economy World Source: IMF, National Australia Bank Research 2010 Global economic league table (GDP USD millions) 1 United States 16,106,896 11 India 1,430,020 2 China 5,745,133 12 Spain 1,374,779 3 Japan 5,390,897 13 Australia 1,219,722 4 Germany 3,305,898 14 Mexico 1,004,042 5 France 2,555,439 15 South Korea 986,256 6 United Kingdom 2,258,565 16 Netherlands 770,312 7 Italy 2,036,687 17 Turkey 729,051 8 Brazil 2,023,528 18 Indonesia 695,059 9 Canada 1,563,664 19 Switzerland 522,435 10 Russia 1,476,912 20 Belgium 461,331

4. Advanced economies are no longer driving global GDP growth Up to 2000, global growth was driven largely by industrialised nations, but the sharp slowdown in activity following the dotcom bust was followed by the rise in emerging markets. All three country blocs suffered a similar “V shaped” slowdown and recovery The key point is that Emerging and developing economies never crossed the zero line: there was no recession Going forward, industrialised countries will become much less important drivers of global growth. All growth forecasts have shifted lower over past 3 months. World Source: IMF WEO, National Australia Bank Research

5. Asia/EM still driving, but now with headwinds In the rebound of 2009/2010 advanced economies did not quite recover to the point where industrial output rose back to pre-GFC levels. Now they look even less likely to as demand and output falter. EM and Asian economies surged post-GFC levels but some signs of cooling are now apparent as policy tightening to deal with fall-out of QE takes effect. Monetary policy had been tightened in Asia and Latin America though Brazil has been quick to cut interest rates in response to concerns about a possible slowdown in growth. World Source: IMF WEO, National Australia Bank Research 80 90 100 110 120 130 140 150 160 2007 2008 2009 2010 2011 Industrial Production (Jan 2007 =100) Asia Emerging markets Advanced economies World

6. World economy has grown for two years, although some slowdown is now seen China and India grew strongly despite global downturn. Without their contribution, world economy would have shrunk more than 2% in 2009. By 2010, global economic growth was back above the average of the last 25 years. 2011 began brightly but fiscal consolidation and sovereign debt crisis have put the brakes on firmly. Debt-driven Western consumers are unable to drive recovery. UK faces several years of sub-trend economic growth. World Source: National Australia Bank Research Annual Average 2008 2009 2010 2011 (f) 2012 (f) US 0.4 -3.5 3.0 1.8 2.4 Japan -1.2 -6.3 4.0 -0.6 3.3 UK 0.8 -4.9 1.3 1.0 1.6 Eurozone 0.5 -4.1 1.7 1.7 0.4 Canada 0.4 -2.7 3.2 2.8 2.2 Australia 3.1 1.3 2.7 2.0 4.2 New Zealand 0.0 0.2 1.1 3.6 3.6 China 9.5 9.2 10.3 9.2 8.2 India 7.5 7.0 9.0 7.5 6.9 Latin America 4.1 -2.0 6.5 4.8 3.8 World 3.0 -1.1 4.6 3.8 3.7 2013 (f) 3.1 1.9 2.1 1.1 2.8 3.1 3.1 8.0 6.0 3.0 3.6

7. The changing global economy

8. World 1 United States 1 2 China 7 3 Japan 2 4 Germany 3 5 France 5 6 United Kingdom 4 7 Italy 6 8 Brazil 10 9 Canada 8 10 Russia 21 11 India 12 12 Spain 9 13 Australia 14 14 Mexico 11 15 South Korea 13 16 Netherlands 15 17 Turkey 22 18 Indonesia 27 19 Switzerland 18 20 Belgium 20 2010 2000 2010 2000 Global economic league table changes over the past decade Russia, Turkey and Indonesia have shown biggest move up the league table in the past decade China has moved up 4 places, with its GDP increasing fourfold over the past 10 years. Taiwan, Argentina and Sweden have dropped out of the top 20 Source: National Australia Bank Research

9. World Change in share of global GDP over past decade Six out of the seven countries which make up the “G7” have seen their share in global GDP fall over the last decade Only Canada has managed to increase its share The biggest winners have been China, Russia, Brazil, India, Indonesia and Australia Source: National Australia Bank Research - 6.0 - 4.0 - 2.0 0.0 2.0 4.0 6.0 Japan United States Germany United Kingdom France Italy Belgium Netherlands Switzerland Mexico South Korea Canada Spain Turkey Australia Indonesia India Brazil Russia China

10. World Change in share of global GDP over the past decade US has moved from 29.9% of world GDP to 24.8%, whilst Japan has moved from 14.3% to 8.8% China has more than doubled its share of world GDP from 3.7% to 8.7% Half of world GDP used to come from the US and Japan. It now comes from these two plus China. Source: National Australia Bank Research Germany Japan France United States 2010 UK China Japan Germany UK China France 2000 United States

11. World China has consistently outstripped other countries in economic growth China grew at an average annual rate of 9.6% since from 2000 -2010 The fastest growing economy in G7 (Canada) grew at just 3.0% Nine of the top ten fastest growing countries are in Asia Source: National Australia Bank Research 9.6% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Japan Italy Germany Switzerland France Netherlands USA UK New Zealand Canada Brazil Indonesia Thailand Australia Spain Hong Kong Taiwan South Korea Phillipines Malaysia Singapore UAE India Vietnam China Real GDP Growth 2000-2010 (average annual % change)

12. World While the rest of the world crashed in 2008/09, China fared well Global growth had been running at + 4.9% for 4 years prior to the downturn; the best run of sustained growth since the early 1970’s. It then slumped -1.5% in 2009. The advanced economies (US, Europe, Japan, UK etc) tumbled from above 3% to -4%. Chinese growth, by contrast, did not even fall to the 7.6% low of the last 18 years, easing back from 13% in 2007 to 8.5% in 2009. We forecast +9.3% in 2011 and 8.2% in 2012. Source: OECD - 5 0 5 10 15 20 1980 1987 1994 2001 2008 Annual percentage change China Advanced economies World

13. World BRICs will soon contribute over half the growth in global GDP From 1990-2000 when BRIC nations were adding over 30% to global growth, the current decade will see them add over 60% In contrast G7 has gone from over 40% to just above 10%. G7’s share of global GDP is around 50% from 70% a decade ago, while the BRICs are up to 30% from 10-15% Source: National Australia Bank Research 32.2% 61.3% 19.8% 46.3% 41.1% 12.8% BRIC G7 1990 - 2000 2000 - 2008 2008 - 2014

14. T rends in global population

15. World Distribution of world population One third of the world’s entire population lives in China and India Two-thirds of the entire population lives in these sixteen countries Five of the seven countries which have seen their GDP rise fastest over the last decade are also in the top ten of the world’s most populous countries. Source: National Australia Bank Research 0 200 400 600 800 1,000 1,200 1,400 1,600 China India United States Indonesia Brazil Pakistan Bangladesh Nigeria Russia Japan Mexico Philippines Vietnam Germany Ethiopia Egypt millions

16. World GDP per capita Relative to population, China is still a very poor country. GDP per capita today is just $3,500 versus $46,400 in the US. This has climbed from around $1,000 in 2000 and is expected to climb to $6,000 by 2014, but by then the U.S. will be on $54,000 Measured per capita China’s growth leaves it about 101st in the world Source: IMF, National Australia Bank 0 10,000 20,000 30,000 40,000 50,000 60,000 Canada France Germany Italy Japan UK US China USD 1980 1986 1992 1998 2004 2012

17. World 1 United States 8 2 Japan 9 3 China 101 4 Germany 26 5 France 28 6 United Kingdom 24 7 Italy 32 8 Brazil 81 9 Spain 27 10 Canada 19 11 Russia 56 12 India 134 13 Australia 17 14 Mexico 64 15 South Korea 37 16 Netherlands 16 17 Turkey 78 18 Indonesia 127 19 Switzerland 13 20 Belgium 21 2009 GDP per capita 2009 GDP per capita Global economic league table and per capita position All the top 7 countries measured by GDP per capita have population below 5 million: Liechtenstein, Qatar, Luxembourg, Norway, Kuwait, Singapore and Brunei China, India and Indonesia do not even make the top 100 Source: IMF, National Australia Bank

18. Conclusions

19. G7/10 growth will be the most subdued around the world Developed world will be significantly held back by challenges from public and private sector debt and the health of its banking systems. Governments have to scale back fiscal stimulus, individuals need to reduce borrowing Banks still have a long way to go to rebuild their balance sheets G7/10 growth will be subdued But, whilst individual countries flirt with, or even enter recession, the world economy will be boosted by continued gains in Asia and Latin America. Japan, meantime, will grow strongly in 2012 driven by infrastructure investment. Conclusions Source: National Australia Bank Research Annual Average 2008 2009 2010 2011 (f) 2012 (f) US 0.4 -3.5 3.0 1.8 2.4 Japan -1.2 -6.3 4.0 -0.6 3.3 UK 0.8 -4.9 1.3 1.0 1.6 Eurozone 0.5 -4.1 1.7 1.7 0.4 Canada 0.4 -2.7 3.2 2.8 2.2 Australia 3.1 1.3 2.7 2.0 4.2 New Zealand 0.0 0.2 1.1 3.6 3.6 China 9.5 9.2 10.3 9.2 8.2 India 7.5 7.0 9.0 7.5 6.9 Latin America 4.1 -2.0 6.5 4.8 3.8 World 3.0 -1.1 4.6 3.8 3.7 2013 (f) 3.1 1.9 2.1 1.1 2.8 3.1 3.1 8.0 6.0 3.0 3.6

20. Conclusions Economic growth in the developed world is likely to be relatively subdued for some time to come; the main engines of growth will be Asia and Latin America, with Japan reconstruction providing some boost in 2012. Risks of a “double-dip” are growing significantly. Cost of mortgage borrowing is at an all-time low across the developed world but little appetite from households to take on more debt. Large corporates are cash-rich, seeking protection against “Credit Crunch II”. For the UK, we expect 2011 growth of just 1.3% in 2011, rising to 1.6% in 2012. Whatever banks’ willingness to lend, they still face significant challenges in terms of their ability to do so: balance sheets, funding concerns, regulatory capital increases. Property still takes up too great a share of banks’ balance sheets with limited capacity for additional net lending. Areas of fresh or continued interest for bank lending are agriculture, commodities, renewable energy and infrastructure. Huge disparity of income in fast growing, high population countries leaves an enormous number of people still on subsistence wages. China, India and Indonesia do not even make the top 100 per capita income countries Population growth, higher real incomes in Asia and continued growth for the world economy will maintain trend of upward prices for industrial commodities.

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