Impacts of the Global Economy on Asia Pacific Travel. 29 June 2007 John Walker

Impacts of the Global Economy on Asia Pacific Travel 29 June 2007 John Walker jwalker@oxfordeconomics.com

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World economy strongest for 30 years 6 5 World: GDP growth % year measured on a PPP basis Forecast 4 3 2 1 0 1996 1998 2000 2002 2004 2006 2008 Source: Oxford Economics

especially given the rise in oil price Oil price $/barrel 90 80 70 60 50 40 30 Real (1995 US prices) F'cast 20 10 Nominal 0 1973 1977 1981 1985 1989 Source: Oxford Economics 1993 1997 2001 2005 2009

World GDP Growth % Change on Previous Year World GDP Growth % Change on previous year 2003 2004 2005 2006 2007 2008 US 2.5 3.9 3.2 3.3 2.2 3.1 Japan 1.5 2.7 1.9 2.2 2.4 2.2 Eurozone 0.8 1.8 1.6 2.9 2.7 2.3 UK 2.7 3.3 1.9 2.8 2.8 2.6 South Korea 3.1 4.7 4.2 5.0 4.4 4.9 China 10.0 10.1 10.4 10.7 10.5 10.4 Other Asia 3.7 6.4 4.7 5.2 4.6 4.7 Mexico 1.4 4.2 2.8 4.8 3.1 3.8 Other Latin America 2.1 6.4 5.5 5.9 5.5 4.4 Eastern Europe 5.8 6.7 5.2 6.5 6.4 5.7 World 2.6 4.0 3.5 4.0 3.6 3.7 World (PPP) 3.6 4.9 4.7 5.3 4.9 4.9

Aspects of Globalisation Surging trade in goods and services M&A activity grows across countries and sectors At the expense of physical Investment?? Portfolio flows take on additional importance More stable than they think but.

China and India continue to boom Emerging Markets: GDP Growth % year 16 14 China Forecast 12 10 8 India 6 4 2 All emergers average 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 Source: Oxford Economics

China: Trade balance $bn 240 200 12 month moving total Total 160 120 Hong Kong 80 40 US EU 0-40 Japan -80 Rest of World ex oil -120-160 1994 1996 1998 2000 2002 2004 2006 Source: Oxford Economics

Europe: Industrial production % year 12 3 month moving average 9 Germany 6 France 3 0-3 Italy -6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Haver Analytics

Globalisation driving world trade

holding down inflation... World: CPI inflation % year 8 7 US 6 Eurozone 5 Forecast 4 3 2 1 0-1 Japan -2 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Oxford Economics

helped by low wage growth

India Sectoral Employment Manufacturing Services Agriculture 223 million Source: WDI

Aspects of Globalisation Surging trade in goods and services M&A activity grows across countries and sectors At the expense of physical Investment?? Portfolio flows take on additional importance More stable than they think but.

World: Long term interest rates % 8 7 6 5 US 4 3 Eurozone 2 1 Japan 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Haver Analytics

World: Stockmarkets Jan 1996=100 350 300 250 DAX 200 S&P 500 150 FTSE 100 100 MSCI Emerging Markets index 50 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Haver Analytics

..fuelling new surge in M&A activity M&A activity by region US$ trillions 4.2 M&A activity by region '000 deals 35 3.6 Global 30 Global 3.0 25 2.4 20 1.8 US 1.2 Europe 0.6 Asia (inc Japan) 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Dealogic 15 Europe 10 5 Other US 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Dealogic

M&A boom broadly based Global M&A by industrial sector US$ bn Telecommunications 800 Finance 700 Computers & Electronics 600 Utility & Energy 500 Real Estate/Property 400 300 200 100 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Dealogic

Helping countries like the US and UK International: Services output 1990=100 160 150 140 UK US 130 120 110 Japan Western Europe (excl UK) 100 90 1990 1992 1994 1996 1998 2000 2002 2004 Source: Oxford Economics

Aspects of Globalisation Surging trade in goods and services M&A activity grows across countries and sectors At the expense of physical Investment?? Portfolio flows take on additional importance More stable than they think but.

World: Business investment % year 20 Eurozone 15 10 US 5 0-5 -10-15 Japan -20 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Oxford Economics

US: Housing activity Millions 2.4 2.0 1.6 Housing starts 1.2 0.8 0.4 New home sales 0.0 1993 1995 1997 1999 2001 2003 2005 2007 Source: Haver Analytics

Why is investment not stronger? M&A makes companies more cautious. More services and less manufacturing. Capital goods prices falling sharply and productivity rising sharply Switch of production to Emerging markets

Aspects of Globalisation Surging trade in goods and services M&A activity grows across countries and sectors At the expense of physical Investment?? Portfolio flows take on additional importance More stable than they think but.

Global current account balances 2006 US Australia Canada UK Old Europe Japan New Asia OPEC ROW Anglosphere Non-Anglosphere World discrepancy Eurozone, Norway, Switzerland, Denmark US, Australia, Canada, UK -1000-750 -500-250 0 250 500 750 1000 Source: Oxford Economics ($bn)

US financial account in 2006 (US$bn) US Financial Account in 2005 (US$bn) Estimate* 2004 2005 2006 US assets abroad -868-427 -1,055 US private assets -872-446 -1,060 Direct Investment -244-9 -228 Foreign securities -147-180 -214 US claims reported by non bank -120-44 -134 US claims reported by US banks -362-213 -484 Foreign assets in US 1,450 1,212 1,723 Official assets 388 199 310 Direct investment 133 110 180 US treasury securities 103 199-4 US securities other than treasury 381 474 603 US liabilities reported by US banks 337 180 423 * Estimated from 2006 Q3 figures Source: US Bureau of Economic Analysis

Assets in the US owned by Rest of World Foreign assets held in the US % 18 16 14 12 10 8 6 4 2 Foreign private wealth in US as share of US market Foreign private wealth in US as share of own wealth 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source : Oxford Economics

Aspects of Globalisation Surging trade in goods and services M&A activity grows across countries and sectors At the expense of physical Investment?? Portfolio flows take on additional importance More stable than they think but.

But greater volatility at the sector level US: Motor vehicles and engineering output % year 15 10 Engineering 5 0-5 -10 Motor vehicles -15-20 2000 2001 2002 2003 2004 2005 2006 2007 Source: Oxford Economics

Some of the Risks An end to low long-term interest rates Widening risk spreads A problem in private equity Global decline in housing Trade war

Asia-Pacific tourism spending flows Travel & Tourism Spending - 2006 US$ bn 40 35 30 Outbound spending Inbound spending 25 20 15 10 5 0 China India Japan Korea Chinese Taipei Source : Tourism Economics Hong Kong Australia

Asia-Pacific tourism spending flows Travel & Tourism Spending - 2016 US$ bn 180 160 140 120 Outbound spending Inbound spending 100 80 60 40 20 0 China India Japan Korea Chinese Taipei Source : Tourism Economics Hong Kong Australia

Outbound spending growth exceeds incomes Outbound Spending & Incomes - 1996-2006 average annual growth 30% 25% 20% Outbound spending Disposable income per capita 15% 10% 5% 0% -5% China India Japan Korea Chinese Taipei Source : Tourism Economics Hong Kong Australia

Outbound spending growth exceeds incomes Outbound Spending & Incomes - 2006-2016 average annual growth 25% 20% Outbound spending Disposable income per capita 15% 10% 5% 0% China India Japan Korea Chinese Taipei Source : Tourism Economics Hong Kong Australia

Asia-Pacific total Region: Outbound Spending & Income % year 30% Forecast 25% 20% Outbound Spending 15% 10% 5% 0% Disposable Income (per capita) -5% -10% -15% 1996 2000 2004 2008 2012 2016 Source : Tourism Economics

China China: Outbound Spending & Income % year 80% Forecast 70% 60% 50% 40% 30% Outbound Spending 20% 10% 0% Disposable Income (per capita) -10% 1996 2000 2004 2008 2012 2016 Source : Tourism Economics

India India: Outbound Spending & Income % year 70% Forecast 60% 50% Outbound Spending 40% 30% 20% 10% 0% Disposable Income (per capita) -10% 1996 2000 2004 2008 2012 2016 Source : Tourism Economics

Japan Japan: Outbound Spending & Income % year 40% Forecast 30% Outbound Spending 20% 10% 0% -10% -20% Disposable Income (per capita) -30% 1996 2000 2004 2008 2012 2016 Source : Tourism Economics

Change in regional out-spending shares Other 35% 2006 Japan 22% Other 31% 2016 Japan 14% Australia 6% Australia 9% Korea 12% India 5% China 17% Korea 9% India 10% China 30%

Thank You! John Walker President and Chief Economist Oxford Economics jwalker@oxfordeconomics.com June 2007

The Economist Commodity Price Index - (US$ terms,2000=100) Aggregates 325 300 275 250 225 200 175 150 125 100 All Items Food Industrial Metals 75 Monthly average 50 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Source : Oxford Economics/Haver Analytics Oil