Transcript Document

The Eurozone Crisis
– Potential Impacts
New Economy Briefing
Alan Wilson
[email protected]
24 October 2012
Outline
 Economic background
 Has the ECB done enough to stave off break-up?
 What might the consequences be?
Synchronised global slowdown
Manufacturing Purchasing Managers' Index
Index
65
60
55
50
45
40
US
Eurozone
Japan
UK
35
30
Values above 50 indicate
expansion in activity; values
below 50 indicate contraction
25
2005
2006
Source : PMI/Markit
3
2007
2008
2009
2010
2011
2012
Even the emergers have slowed…
BRICs: Industrial output
% year (3 month average)
China
20
15
India
10
5
0
Brazil
-5
-10
-15
Russia
-20
2001
2003
Source: Haver Analytics
2005
2007
2009
2011
…though public finances allow for stimulus
Budget deficits and government debt in 2011
Debt as a % of GDP
250
Japan
200
Greece
150
Singapore
100
Germany Korea
50
Turkey
Thailand
Brazil
Taiwan
China
Russia
Italy
France
US
Hungary
UK
Malaysia
India
Poland
Spain
0
0
2
Source : Oxford Economics
4
6
8
10
Deficit as a % of GDP
Outlook for UK export markets has weakened…
Changes to GDP forecasts (Jun12 - Oct12)
Difference compared with June 2012 forecast (%pts)
0.5
0.0
-0.5
-1.0
-1.5
-2.0
Eurozone
Other EU
US
-2.5
BRICs
-3.0
Rest of the world
-3.5
2010
2011
UK: Goods & services exports by destination
(2011)
2012
2013
2014
2015
2016
2017
Rest of the
world
30%
Source : Oxford Economics
BRICs
6%
Eurozone
42%
US
16%
Source : ONS 'Pink Book'
Other EU
6%
Oxford global forecast (50% probability)
 Steps to ensure Eurozone survival are taken, although they
are not enough to kick start significant growth
 Risk premia fall, and consumer and business confidence
gradually recover
 Recovery limited by public and private deleveraging and weak
job growth
 EMs robust as policy eases and growing middle class support
consumer spending and trade
Gradual UK recovery
UK: GDP forecast
% year
6
Forecast
4
2
0
-2
-4
-6
-8
2005
2007
2009
Source : Oxford Economics
2011
2013
2015
Eurozone crisis not the only risk
What do you consider to be the biggest 'tail risk'
Sep-12
Aug-12
US fiscal 'cliff'
EU sovereign debt
funding
Other
Chinese real
estate market
Commodity price /
Iran-Israel risk
0
10
Source: Bank of America Merrill Lynch
20
30
40
50
% saying
Impact of Scenarios on the UK economy
Global scenarios
UK GDP % difference from baseline at trough/peak
10.0
5.0
Upside
US fiscal
cliff
Baseline
0.0
China
hardlanding
Grexit
-5.0
Eurozone Multiple exits
-10.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
UK CPI % diff. from baseline at trough/peak
Source : Oxford Economics
Breakup looked imminent…
 Fear of a breakup
■ Potentially toxic as it paralyses financial and physical investment
■ ECB action targeted to address this risk.
■ Imminent breakup now seen less likely
 Too tight fiscal policy
■ Austerity has become part of the problem instead of the solution
■ Where has the Growth Pact gone?
 Social cost of reforms
■ Correcting competitiveness and current account imbalances comes at a
cost of (very) high unemployment for a (very) long time
 Slow pace of politics
…and had already started in banking
Typical interest rates on loans to businesses
%
8.0
7.0
Spain
6.0
5.0
4.0
Germany
3.0
2.0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source : ECB
12
… which prompted very strong ECB pledge to intervene
Sovereign bond spreads
% spread over German
bunds
6.5
Spain
6.0
5.5
5.0
Italy
4.5
4.0
3.5
3.0
2.5
2.0
01-Sep-11
24-Nov-11
16-Feb-12
10-May-12
Source: Oxford Economics\Haver Analytics
13
02-Aug-12
… but headwinds abound
 Fear of a breakup
■ Potentially toxic as it paralyses financial and physical investment
■ ECB action targeted to address this risk.
■ Imminent breakup now seen less likely
 Too tight fiscal policy
■ Austerity has become part of the problem instead of the solution
■ Where has the Growth Pact gone?
 Social cost of reforms
■ Correcting competitiveness and current account imbalances comes at a
cost of (very) high unemployment for a (very) long time
 Slow pace of politics
Public sector deleveraging to take years…
Discretionary fiscal tightening, 2011-13
% of GDP, total 2011-13
Germany
France
UK
Eurozone
Italy
Greece
Ireland
Portugal
Spain
0
2
4
Source : Oxford Economics/ Haver Analytics
15
6
8
10
… and debt not back to pre-crisis by end of decade
Eurozone: government debt
% of GDP
100
90
80
70
60
50
40
2000
2003
2006
2009
2012
2015
Source : Oxford Economics/Haver Analytics
16
2018
2021
Fiscal multipliers reinforce the problem
Fiscal tightening vs growth
Annual average GDP growth, 2010-12
4.0
Germany
3.0
US
2.0
UK
Spain
1.0
0.0
Italy
-1.0
-2.0
Portugal
-3.0
-4.0
y = -1.65x + 2.40
R 2 = 0.93
-5.0
Greece
-6.0
0
1
Source : Oxford Economics
2
3
4
5
Average fiscal tightening 2010-12, % of GDP
Reforms slowed by associated social costs
 Fear of a breakup
■ Potentially toxic as it paralyses financial and physical investment
■ ECB action targeted to address this risk.
■ Imminent breakup now seen less likely
 Too tight fiscal policy
■ Austerity has become part of the problem instead of the solution
■ Where has the Growth Pact gone?
 Social cost of reforms
■ Correcting competitiveness and current account imbalances comes at a
cost of (very) high unemployment for a (very) long time
 Slow pace of politics
Competitiveness disparities still to be addressed…
Unit labour costs
2000=100
160
Greece
150
140
Italy
130
120
France
110
100
Germany
90
Spain
80
2000
2002
Source: Oxford Economics
19
2004
2006
2008
2010
2012
…but medicine is socially painful
Eurozone: Unemployment rate
%
30
Greece
26
22
Spain
18
Portugal
14
10
Eurozone
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
6
Source: Oxford Economics
What is needed to hold Eurozone together?

ECB even more interventionist
■ unlimited bond purchases / possibly more Long Term Refinancing Operations (LTRO).

More bailouts
■ Greece allowed to not pay interest on debt to IMF, ECB etc and debt restructured
■ Full bailout for Spain
■ Further bailout for Portugal

Move towards fiscal & banking union
■ ECB to supervise all banks and set common rules
■ Eurozone-wide deposit guarantee scheme
■ Formalisation of transfers in fiscal union – including Eurozone bonds

Change in macro policy
■ Looser fiscal policy where there is room
Will it happen?
 Economic cost of collapse would be enormous
■ Future direction of European Union would also be challenged
■ Do not underestimate political investment in Eurozone
 So, our baseline forecast is that policy-makers will ultimately
do whatever is needed to hold Eurozone together
■ But the reform process will be erratic and slow
■ Some kind of ‘lost decade’ now seems most likely scenario
 Breakup risk remains high in medium term
Piecemeal policy action leading to Eurozone’s lost decade?
Eurozone GDP growth
% point difference from historical average (2.3% pa)
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
2010
2012
Source : Oxford Economics
23
2014
2016
2018
2020
2022
Eurozone exits (Probability 25%)
 Scenario of multiple exits in 2014Q1
 Fiscal austerity in Greece becomes unbearable; government
falls
 Similar developments in other peripheral countries as growth
and jobs fail to return
 Run on banks, massive shock to confidence, debt default
 This has very significant ramifications for the UK
Eurozone GDP growth drops to -6%
Eurozone*: GDP
% year
Forecast
6
4
Baseline
2
0
-2
-4
Multiple exits
-6
-8
* Remaining countries
-10
2005
2007
2009
2011
Source : Oxford Economics/Haver Analytics
2013
2015
2017
UK hit almost as hard as in the financial crisis…
UK: GDP
% year
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
2005
Forecast
Baseline
Multiple exits
2007
2009
2011
Source : Oxford Economics/Haver Analytics
2013
2015
2017
…as exports fall…
UK: Exports
% year
30
Forecast
25
20
Baseline
15
10
5
0
-5
Multiple exits
-10
-15
2005
2007
2009
2011
Source : Oxford Economics/Haver Analytics
2013
2015
2017
…recovery in consumer spending is killed off…
UK: Consumer Expenditure
% year
Forecast
6
4
Baseline
2
0
-2
-4
-6
2005
Multiple exits
2007
2009
2011
Source : Oxford Economics/Haver Analytics
2013
2015
2017
…and companies reduce investment
UK: Fixed Investment
% year
Forecast
15
10
Baseline
5
0
-5
Multiple exits
-10
-15
-20
2005
2007
2009
2011
Source : Oxford Economics/Haver Analytics
2013
2015
2017
Rates would cut rates to zero and more QE…
US: RSH
%
7
Baseline
Forecast
6
5
4
3
2
Multiple exits
1
0
2005
2007
2009
2011
Source : Oxford Economics/Haver Analytics
2013
2015
2017
…but house prices would still fall
UK: House prices
Level
Forecast
200
Baseline
190
180
170
160
150
140
130
120
Multiple exits
110
100
2005
2007
2009
2011
Source : Oxford Economics/Haver Analytics
2013
2015
2017
Summary
 International backdrop has deteriorated, particularly in the Eurozone but also
in emergers
 Major central banks have taken out extra insurance in response and
emergers have scope to use monetary and fiscal policy to soft land
 We expect the UK to return to growth in 2013 with growth of 1.2% followed
by growth of 2.3% in 2014, driven by domestic demand
 US fiscal cliff would delay UK recovery by yet another year
 Multiple Eurozone exits would have a much more serious impact –
deep recession and deflation
 North West already hit hard by recession, and Greater Manchester
unlikely to see growth before around 2017 if this happens.