The document summarizes the global economic outlook and key issues. It finds that the world economy is growing reasonably well, led by the US, Russia, China, and India. However, risks remain from high oil prices, geopolitical instability, and trade protectionism. Rising oil prices have been inflationary. The US current account deficit is due to low savings. China is the world's second largest economy and may revalue its currency, shifting to domestic demand. Europe suffers from high unemployment and regulation while Japan is recovering due to exports to China.

1. Global
Outlook
Introduction
International Economic Environment

2. Global
Outlook
Global Economic Outlook 2006
• The world economy is performing reasonably well
• Strong growth in the US, Russia, China and India
• Japan is recovering thanks to the strong demand
coming from China
• Interest rates are low
• However risks subsist:
– Increased Oil prices
– Instability in oil exporting countries
– Protectionist sentiment in developed countries
– Huge financial imbaance between the US and the
rest of the world

3. Global
Outlook
Energy Economics
• The impact of oil price increase is less important than it
used to be (why?)
• First it seems that energy is used more efficiently
• The rise of oil prices is less significant than in 1970s
(when adjusted for inflation)
• Dollar decreased value has positively impacted the rise
of euro price of oil
• The oil increase has not have a big impact on
consumption
• The recent increase in oil price is due to an increase in
the demand not to supply

4. Global
Outlook
The impact of Oil
• Rising oil prices have been inflationary
• Increased oil prices acts like an increased tax on
imposed by foreigners
• Growth slows as the interest rates are increased to
offset the inflation

5. Global
Outlook
The US and umbalaced global economy
• Current account imbalance is the difference between
investment and savings
• The current account imbalance in the US is due to the
collapse in US savings
• Both households savings and govenment savings have
decreased
• In the same time chinese savings have increased
– Decreased currecy exchange rates have increased
foreign currency savings
– Increased enterprise savings
• Oil exporters have increased current account surpluses

6. Global
Outlook
The US and umbalanced global economy
• Low long term interest rates are a consequence of
Asian countries holding tresaury securities
• If these countries stop holding securities then the long
term interest rates are going to increase
• This will cause a decreased growth

7. Global
Outlook
China’s next step
• At Purchasing Power Parity, China is the second largest
economy in the world
• China is likely to revaluate its currency
• If the currency low level is maintained this will lead to
inflation
• Revaluation will lead china to shift towards domestic
demand
• Increased value currency will mean higher export prices
• For high value added products, imported components
are important
• Revaluation will not be a big shift in export growth but
an important increase in imported goods
• Decreased export prices will force chinese
manufacturers to be more efficient and price
competitive

8. Global
Outlook
China’s growth
• China’s growth has been less important than it should
be.
• Because other Asian countries in the same period of
development experience more intense growth
• The return on investment has been less important for
china then for he oher Asian countries
• Short term growth should slowdown
• However long term prospected growth should be more
important, if the necessary reforms are implemented
• The reforms are already underway

9. Global
Outlook
China’s growth
• Energy is used less efficiently in China than in other
countries this contributes to the increase in energy
prices

10. Global
Outlook
India : the next big thing?
• Emerging country and increased off shoring activities
• Greater openess to foreign investment
• More sensible monetary and fiscal policies
• India is positioned as a supplier of highly educated
english speaking professionals
• FDI remains low in comparison with other emerging
countries
• The problem is high and distorted taxe, regulations,
poor physical infrastructure and corruption

11. Global
Outlook
The Future of Reform
• Reform attempt to increase the wealth of the nation and
to distribute the wealth more fairly
• Government is makig efforts to create SEZ like Chinese
ones
• Stimulating industry and manufacturing
• Disproportaionate contribution of services means that
growth will not beneficiate to the poors
• Large budget deficit
• India’s growth is not as strong as chinese growth

12. Global
Outlook
Europe : can the sickness be cured
• High unemployment and low growth (Eurosclerosis)
• The solution is to deregulate the market but nothinf has
been done
• European live longer
• There is more retirees and less workers
• Europe slow growth is due in part to the heavy
regulation and subsidization
• Rules discourage the creation of new jobs
• Industries are protected from competition

13. Global
Outlook
What to do with the EU?
• High level of regulation
• Some countries to lower interest rates whereas others
need to increase it
• All this will lead to slow the growth and to a high
unemployment
• UK is an exeption because it has its own currency and a
high level of immigration and a lower level of regulation

14. Global
Outlook
Japan: is the sun rising again
• Economic renewal after 15 year of stagnant growth
• Export to china
• 15 years of cleaning the baance sheet and the nion
performing loans
• Wages are increasing and consumption as well