Global Economic Trends & Processes

AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES

1

Global Economic Trends Global Economic Trends & Processes& Processes

Dr. Jacob A. Frenkel Dr. Jacob A. Frenkel Vice Chairman AIG, Chairman G30Vice Chairman AIG, Chairman G30

DRAFT -

The 8th Herzliya Conference

January 20-23 2008


01/18/200822

Global Equity MarketsGlobal Equity Markets

• U.S. Equity MarketsU.S. Equity Markets

• Global Equity Indices: Global Equity Indices: U.S. S&P 500 IndexU.S. S&P 500 Index

U.K. FTSE 100 IndexU.K. FTSE 100 Index

Germany DAX IndexGermany DAX Index

Japan NikkeiJapan Nikkei


01/18/200833

2006 20079,000

10,000

11,000

12,000

13,000

14,000

1,100

1,200

1,300

1,400

1,500

1,600

S&P 500

DowJones

(close - price)

Standard & Poors 500 Composite Index (Right) Dow Jones Industrial Average Index (Left)

Source: Bloomberg, Market Data, Last Observation 17 Jan 2008



01/18/200844

Source: Bloomberg, Market Data, Last Observation 17 Jan 2008

10/06 1/07 4/07 7/07 10/07 1/081,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

US S&P 500 Index

10/06 1/07 4/07 7/07 10/07 1/085,600

5,800

6,000

6,200

6,400

6,600

6,800United Kingdom FTSE 100 Index


Year-end 2006 Value


01/18/200855

Economic GrowthEconomic Growth

• Industrial CountriesIndustrial Countries

• Developing CountriesDeveloping Countries


01/18/200866

Source: IMF, av. annual growth rates, Asian NICs (Hong Kong, Korea, Singapore, Taiwan), last update 10/2007 (2007, 2008 forecast)

2000 2001 2002 2003 2004 2005 2006 2007 2008

0

2

4

6

8 (% from a year ago)

US Eurozone Japan Asian NIC

Asian NICs4.4%

Eurozone 2.1%

U.S. 1.9%

Japan 1.7%

Real GDP Growth (%) Industrial CountriesReal GDP Growth (%) Industrial Countries


01/18/20087

Real GDP Growth (%) Developing CountriesReal GDP Growth (%) Developing Countries

Source: IMF, av. annual growth rates, last update 10/2007 WEO (2007, 2008 forecast)

2000 2001 2002 2003 2004 2005 2006 2007 2008

0

2

4

6

8

10

(% from a year ago)

Russia Developing Asia Africa Central & Eastern Europe Latin America

Developing Asia 8.8%

Russia 6.5%

Africa 6.5%

Central & East. Europe

5.2%

Latin America 4.3%


01/18/200888

InflationInflation

• Headline InflationHeadline Inflation

• Oil-Price InflationOil-Price Inflation

• Gold-Price InflationGold-Price Inflation


01/18/200899

2000 2001 2002 2003 2004 2005 2006 2007

-2

-1

0

1

2

3

4

5

©FactSet Research Systems

(%)

Eurozone U.S. Japan

Headline CPI Inflation (%)Headline CPI Inflation (%)

Source: U.S. Dept. of Labor, Eurostat, Japan MIC, quarterly averages, last observation 12/2007, Japan 11/07

Eurozone3.1%

U.S. 4.1%

Japan0.6%


01/18/20081010

1999 2000 2001 2002 2003 2004 2005 2006 2007

10

20

30

40

50

60

70

80

90

100


(US$/Bb)

2005 av. $59.8

14 Jan ‘08 $90.5

2003 av. $30.8

2006 av. $65.9

2001 av. $24

2004 av. $39.6

Source: EcoWin, WTI Light Crude, USD/barrel, Last observation 17 Jan 2008

Oil Price per BarrelOil Price per Barrel


01/18/20081111

Source: EcoWin, WTI Light Crude, USD/barrel, Gold, USD/troy oz, Last observation 17 Jan 2008

Gold Price and Oil Price per BarrelGold Price and Oil Price per Barrel

1999 2000 2001 2002 2003 2004 2005 2006 2007200

300

400

500

600

700

800

900

10

20

30

40

50

60

70

80

90

100


($/troy oz) ($/Barrel)

Oil: 17 Jan $90.5

Gold: 17 Jan $894.5


01/18/20081212

Labor MarketLabor Market

• UnemploymentUnemployment

• Unit Labor CostUnit Labor Cost


01/18/20081313

2000 2001 2002 2003 2004 2005 2006 2007

4

5

6

7

8

9

(%)

U.S. Eurozone Japan

Eurozone7.2%

Japan3.8%

U.S. 5.0%

Source: National Statistical Institutes, quarterly end of period values, last observation US 12/2007, Eurozone & Japan 11/2007

Unemployment Rate (%)Unemployment Rate (%)


01/18/20081414

2002 2003 2004 2005 2006 200760

70

80

90

100

110

120

130(Index)

France Italy U.S. Germany

Relative Unit Labor Cost (Manuf. Sector) Relative Unit Labor Cost (Manuf. Sector)

Source: OECD, last observation Q4/2007 (2007 estimate)

Italy +31.0%

since 2002

Germany -5.05% since 2002

France +9.86%

since 2002

U.S. -31.61% since 2002


01/18/20081515

Current Account ImbalanceCurrent Account Imbalance

• International ImbalancesInternational Imbalances

• The Role Of AsiaThe Role Of Asia

• The Role of ChinaThe Role of China


01/18/20081616

($B)

-900

-600

-300

0

300

600

2000 2001 2002 2003 2004 2005 2006 2007 2008

Current Account of Balance of PaymentsCurrent Account of Balance of Payments

Eurozone -$51B

Asia$736B

U.S. - $788B

ME Oil Exp. plus Russia

$296B

Asia & Oil Exporters SaveAsia & Oil Exporters Save

Europe BalancesEurope Balances

US SpendsUS Spends

Source: IMF, av. annual growth , last update 10/2007 WEO Forecast (2007, 2008 forecast)


01/18/20081717

$824

$98

$294

$21$59

0

100

200

300

400

500

600

700

800

900

China Japan Russia Taiwan South Korea

($B)

$260$266

$436

$930

$1,455

0

200

400

600

800

1,000

1,200

1,400

1,600

China Japan Russia Taiwan South Korea

($B)

Source: Nat. Statistical Institutes, last update 10/2007, Foreign-Exchange Reserves excluding gold.

StockStock(September 2007)(September 2007)

StockStock(September 2007)(September 2007)

FlowFlow(2005 – Q3 2007)(2005 – Q3 2007)

FlowFlow(2005 – Q3 2007)(2005 – Q3 2007)

Accumulation of Foreign Exchange Reserves ($B)Accumulation of Foreign Exchange Reserves ($B)


01/18/20081818

U.S.U.S.&&

EUEU

People’sPeople’sRepublic ofRepublic of

ChinaChina

ExportsExports

ImportsImports

$500 $500 billionbillion

$185 billion$185 billion

AsiaAsia ImportsImports

ExportsExports



Source: National Bureau of Statistics of China, 12-months through October 2007

China’s Role in Global TradeChina’s Role in Global Trade


01/18/20081919

Labor Cost ComparisonLabor Cost ComparisonUnit Labor cost comparisons for manufacturing workers, 2002

(U.S. = 100)

ChinaChina $21.3$21.3

IndiaIndia $19.7$19.7

EU-15EU-15 $99.0$99.0

U.S.U.S. $100.00$100.00

JapanJapan $120.40$120.40Source: The Conference Board published 2006


01/18/20082020

% of income

53.2

32.830.2

28.4

22.0

10.3

0

10

20

30

40

50

60

CHINA INDIA KOREA, REP.OF

JAPAN EURO AREA(AGG.)

UNITEDSTATES

Source: EIU estimates, annual average rates, Last update 12/2007

National Savings Rate Comparison National Savings Rate Comparison Gross Domestic Savings: 2007 (% of GDP)Gross Domestic Savings: 2007 (% of GDP)


01/18/20082121

U.S. Housing U.S. Housing

• Housing Prices, Sales and InventoriesHousing Prices, Sales and Inventories

• MortgagesMortgages

• Delinquencies and ForeclosuresDelinquencies and Foreclosures


01/18/20082222

1996 1998 2000 2002 2004 2006 2008-8

-4

0

4

8

12

16(% from year ago)

Changes in U.S. Home PricesChanges in U.S. Home Prices

Source: National Asc. of Realtors, Annual growth in median home prices, quarterly averages, last Observation 11/2007

Nov 2007 -4.9%


01/18/20082323

1990 1992 1994 1996 1998 2000 2002 2004 2006 200880

85

90

95

100

105

110

115(in % of household income)

U.S. Household Real Estate WealthU.S. Household Real Estate Wealth

Q3 2007 103.20%

Source: Federal Reserve, Owners’ Equity in Household Real Estate as % of Disposable Household Income, last observation Q3/2007


01/18/20082424

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

0.4

0.6

0.8

1

1.2

0.8

1.2

1.6

2

(mill. units) (mill. units)

Housing Starts (Right) New Home Sales (Left)

Source: U.S. Dep. of Commerce, National Association of Realtors, quarterly averages, last observation Starts 12/2007, Sales 11/07

U.S. New Home Sales and Housing StartsU.S. New Home Sales and Housing Starts

New Home Sales: 0.68M

Housing Starts: 1.15M


01/18/20082525

2001 2002 2003 2004 2005 2006 20073

4

5

6

7

8

9

10

11(months)

Existing Home Inventories/Sales New Home Inventories/Sales

Source: U.S. Dep. of Commerce, National Association of Realtors, monthly values, last observation 11/2007

U.S. Home Inventory-to-Sale RatioU.S. Home Inventory-to-Sale Ratio

Existing Home: 10.1

New Home: 89.2


01/18/20082626

1999 2000 2001 2002 2003 2004 2005 2006 2007

4

5

6

7

8

9

6

8

10

12

14

16

(% of Total Loans)

Delinquencies, Subprime (Right) Delinquencies, Total (Left)

U.S. DelinquenciesU.S. Delinquencies

Source: Mortgage Bankers Association, last observation 9/30/2007

Q3 200716.31% (Right)

Q3 20075.59% (Left)


01/18/20082727

'99 '00 '01 '02 '03 '04 '05 '06 '07

2

4

6

8

10(% of Total Loans)

Foreclosures - subprime Foreclosures - total

U.S. ForeclosuresU.S. Foreclosures


Q3 20076.89%

Q3 20071.69%


01/18/20082828

Subprime ARM, 10%

Subprime Fixed, 4%

Alt-A ARM, 7%

Alt-A Fixed, 4%

Prime ARM, 16%

Prime Fixed, 59%

U.S. Composition Mortgage MarketU.S. Composition Mortgage Market



01/18/20082929

U.S. Financial Markets U.S. Financial Markets

• Asset-backed Commercial Papers (CP)Asset-backed Commercial Papers (CP)

• Financial Market Volatility Financial Market Volatility

• Credit Market SpreadsCredit Market Spreads


01/18/20083030

U.S. Composition of Asset-backed CP U.S. Composition of Asset-backed CP MarketMarket

Source: Federal Reserve, last update 17 Jan 2008

'01 '02 '03 '04 '05 '06 '07400

500

600

700

800

900

1,000

1,100

1,200

100

150

200

250

300

350

400($Bil.) ($Bil.)

Asset-backed CP (Left) Financial CP (Left) Corporate Non-Financial CP (Right)

Corporate non-financial

(right)

Asset-Backed (left)

Financials(left)


01/18/20083131

Source: CBOE VIX, Monthly averages, last observation 17 Jan 2008

1990 1992 1994 1996 1998 2000 2002 2004 2006 200810

15

20

25

30

35

40(%, expected annualized change in the S&P500 in the next 30 days)

30 Sep ‘98 38.20%

30 Sep ‘02 37.65%

28 Sep ‘01 35.07%

17 Jan ‘08

22.25%

U.S. Stock Volatility IndexU.S. Stock Volatility Index


01/18/20083232

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1

2

3

4

5

6


(percentage points) (percentage points)

Lehman High Yield Spreads vs TreasuriesLehman High Grade Yield Spreads vs Treasuries

Source: Market Rates, weekly averages, last update 10 Jan 2008

High Yield Spreads

High Grade Spreads

U.S. Credit Market SpreadsU.S. Credit Market Spreads


01/18/20083333

U.S. Recession?U.S. Recession?

• Retails Sales: Housing & Non-HousingRetails Sales: Housing & Non-Housing

• Construction SpendingConstruction Spending

• Corporate ProfitsCorporate Profits

• Investment: Business & Residential Investment: Business & Residential

• US Consumer Confidence and SpendingUS Consumer Confidence and Spending

• Exchange RatesExchange Rates


01/18/20083434

Source: The Census Bureau, Last Observation 11/2007

U.S. Change inU.S. Change in Retail SalesRetail Sales

'00 '01 '02 '03 '04 '05 '06 '07-4

0

4

8

12

16

Housing Related = Furniture + Household Furnishing + Building Material

(percentage points)

(% 1YR) Non-Housing Retail Sales(% 1YR) Housing Related Retail Sales (Furniture + HH Furnishing + Building Material)

Housing Related

Non-Housing


01/18/20083535

2003 2004 2005 2006 2007

-20

-10

0

10

20

(% change from a year ago)

Public Construction SpendingPrivate Nonresidential Construction Spending

Private Residential Construction Spendings

Source: U.S. Census Bureau, last observation 11/2007

Private Non-residential

Private Residential

Public

Res. Constr. Spending 2007-Q3 $519BNon-Res. Constr. Spending 2007-Q3 $356BPublic Constr. Spending 2007-Q3 $294B

U.S. Construction Spending By SectorU.S. Construction Spending By Sector


01/18/20083636

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-20

-15

-10

-5

0

5

10

15(Real, yoy%)

Residential Investment Business Investment

U.S. InvestmentU.S. Investment

Source: Bureau of Economic Analysis, Annual Rate, last observation 9/2007 (2007 estimate)

Business Investment

Residential Investment


01/18/20083737

1998 1999 2000 2001 2002 2003 2004 2005 2006 200725

26

27

28

29

30

31

32

33

34(Real, Annual Rate, SA)

Residential Investment as % of Total Investment

Residential Investment as a % Total Residential Investment as a % Total

Source: Bureau of Economic Analysis, Annual Rate, last observation 9/2007 (2007 estimate)


01/18/20083838

1992 1994 1996 1998 2000 2002 2004 2006-1

0

1

2

3

4

5

6

7

60

80

100

120

140

(% from year ago) (Index)

Consumer Confidence Consumer Spending

Source: Conference Board, BEA, period averages; last observation 11/2007 Consumer Spending, 12/07 Consumer Confidence

U.S. Consumer Confidence and SpendingU.S. Consumer Confidence and Spending

Consumer Confidence (right)

Real Consumer Spending (left)


01/18/20083939

1990 1992 1994 1996 1998 2000 2002 2004 2006 20085

6

7

8

(%)

U.S. Corporate Profits as % of GDPU.S. Corporate Profits as % of GDP

Q3 2007 8.24%

Source: U.S. Department of Commerce, last observation 9/2007


01/18/20084040

2000 2001 2002 2003 2004 2005 2006 200770

75

80

85

90

95

100

105

110

115(Index)

Source: Federal Reserve, 3/31/2000 = 100, end of quarter, last observation 17 Jan 2008.

17 Jan ‘0874.7

29 Mar ‘02112.46

Trade Weighted Value of U.S. Dollar Trade Weighted Value of U.S. Dollar


01/18/20084141

Long-term Demographic ChallengeLong-term Demographic Challenge

• Developed CountriesDeveloped Countries

• Developing CountriesDeveloping Countries

• U.S., Europe, Asia, AfricaU.S., Europe, Asia, Africa


01/18/20084242

Developed Countries Demographic ChallengeDeveloped Countries Demographic Challenge

Projected change in population 2005 - 2025:

+37.7M

Source: United Nations Populations Division


01/18/20084343

Developing Countries Demographic ChallengeDeveloping Countries Demographic Challenge


+1,402.8M



01/18/20084444

U.S. Demographic ChallengeU.S. Demographic Challenge


+51.9M



01/18/20084545

Europe Demographic ChallengeEurope Demographic Challenge


-21.2M



01/18/20084646

Asia Demographic ChallengeAsia Demographic Challenge


+882.7M



01/18/20084747

Japan Demographic ChallengeJapan Demographic Challenge


-3.3M



01/18/20084848

China Demographic ChallengeChina Demographic Challenge


+125.6M



01/18/20084949

India Demographic ChallengeIndia Demographic Challenge


+292.1M



01/18/20085050

Africa Demographic ChallengeAfrica Demographic Challenge


+438.6M



01/18/20085151

Israel Demographic ChallengeIsrael Demographic Challenge


+2.0M



01/18/20085252

RisksRisks

1. Risk of U.S. Housing collapse spreading throughout the economy1. Risk of U.S. Housing collapse spreading throughout the economy

2. Risk of ‘sub prime crisis’ spreading throughout credit markets2. Risk of ‘sub prime crisis’ spreading throughout credit markets

3. Risk of Rising Budget Deficits 3. Risk of Rising Budget Deficits

4. Impact of a widening the U.S. Current Account deficit 4. Impact of a widening the U.S. Current Account deficit

5. Excessive Concentration in financing the US Current Account5. Excessive Concentration in financing the US Current Account

6. Risk of a dis-orderly adjustments of Exchange Rates6. Risk of a dis-orderly adjustments of Exchange Rates

7. Risk of Protectionism7. Risk of Protectionism

8. Impact of demographic trends on long term Public Finances 8. Impact of demographic trends on long term Public Finances

9. Risk of further increases in oil prices: Inflation & Growth.9. Risk of further increases in oil prices: Inflation & Growth.

10. Risk of Terrorism10. Risk of Terrorism

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Global Economic Trends & Processes