MGSM 840 Syndicate Project APPENDIX 1

Major Global Economic Conditions

According to the International Monetary Fund, the world’s Gross Domestic Product (GDP) in 2006 is US$48.14 Trillion. The breakdown of the GDP globally is as follow:

• European Union (US$14.53T)

• United States (US$13.24T)

• Japan (US$4.37T)

• China (US$2.63T) excluding Hong Kong,

• Canada (US$1.27T),

• Brazil (US$1.07T),

• Russia (US$0.98T)

In assessing global macro economic environment, it is representative of the world’s economy to just consider the European Union, United States & Canada, Japan and China. This makes the economic modeling much easier to comprehend.

Macro Economic View

United States of America, USA

Current Economic Situation

• High interest regime to control inflation.

• Housing defaults on the rise.

• Lower household savings rate of ~1% of income.

• Budget Deficit

  • At an annual >6% of the GDP, USA needs around US$772B a year of funding.

  • Iraq war extraordinary budget causing additional strain on the balance of payment.

  • Depends heavily on China, Japan, Korea and Middle East countries to finance their budget deficit.

• Stock market on all time high.

Near term forecast

• Inflation may be under control.

• If housing defaults and housing starts slow down, this could undermine consumer confidence. Problem of borrowings from housing to finance consumption will also cause a problem in the USA.

• Interest rates likely to remain stable in the next two quarters but could lower.

• GDP likely to slow down, but for the country to go into a recession is unlikely.

• Balance of payment still an issue.

Euro-zone

Current Economic Situation

• Inflation is high and capacity usage in manufacturing is still tight, central banks are expected to continue to raise interest rates¹.

• Funds looking for yield will likely transfer away from US and find its way to the Euro.

• The Euro will strengthen in the coming quarters against the USD.

Japan

• The interest rate remains at 0.5% and CPI is -0.1% (March 2007). The Bank of Japan interest rate will likely stay at 0.5% for the rest of 2007 and probably into 2008.

• The entire economy is expected to be sluggish and will not contribute materially to capital appreciation holding the yen or otherwise.

China²

• Strong GDP growth of greater than 10%.

• Rising income.

• Rising foreign exchange reserves approaching US$1.2 Trillion. Due to the huge trade surplus, to ease pressure on Yuan appreciating, the China central bank takes the approach of currency sanitizing (taking the surplus out of the economy) by investing in the US Government treasury bills.

• M1 money growth is at >10% signifying short term currency inflows.

• Headline inflation is estimated to rise at 1.8% for 2007.

• China likely to raise the bank adequacy ratio to reduce credit for investments to slow investment growth.

• Infrastructure investments continue unabated with Olympics around 2008.

• Growth in investments and exports will moderate in 2008.

In the 1 to 3 year time horizon, investments with currency denomination in the US dollar will likely see an erosion of capital versus the Euro or the China Yuan. US dollar versus Japanese Yen will be fairly stable.

1 http://www.economy.com/dismal/pro/article.asp?cid=74481, Dismal Scientist, Macro Roundup: Europe

2 Moody’s Economy.com 2007 China Outlook, by Helen Kevans in Sydney and Virendra Singh in West Chester.