Transcript The Post GFC World - Melbourne Institute of Applied Economic and

Managing the Growth Shock
Warwick J. McKibbin
Director, ANU Research School of Economics
Presentation to the 2011 Economic & Social Outlook Conference, Melbourne
30 June, 2011
Focus
• What are the sources of Australia’s terms of
trade boom?
• Is this boom likely to continue?
• What Policies should be followed?
Overview
• Global Drivers of Growth
• China and India
• Loose global monetary policy
• Risks
– Fiscal Risks
– Euro Crisis
– Global Inflation and policy response
• Implications for relative prices of commodities
• Appropriate Policy Responses
The Beginning of the Great Convergence?
Source: Angus Maddison, The world economy: historical statistics, 2003 and IMF World Economic Outlook
database (September 2006) – Mark Thirlwelll, The Lowy Institute
Summary
• Global growth will be dominated by long term
trends from
– The emergence of the BRICS into the global
economy
– Large demographic changes
– Productivity and technical innovation
– Impact and response to environmental problems
• BUT short term risks
World GDP Growth*
Year-average
%
%
6
6
4
4
2
2
0
0
-2
1970
1977
1984
1991
 IMF forecasts
* Weighted by GDP at PPP exchange rates
Source: IMF
1998
2005
-2
2012
The Risks: Fiscal Adjustment
A slow motion train wreck
Government Debt to GDP
Source OECD Economic Outlook 88 Database (November 2010)
Required change in underlying primary balance to
stabilise debt by 2025 in per cent of potential GDP
Source OECD Economic Outlook 88 Database (November 2010)
The Risks: A Euro Crisis
Euro Area – Industrial Production
2005 average = 100
Index
Index
Germany
110
110
Italy
100
100
Euro area
Portugal
90
90
France
Spain
80
70
Greece
2006
2008
Source: Thomson Reuters
2010
2006
2008
2010
80
70
ECB Lending to Banks*
By national central bank
€b
€b
Fixed-rate tenders from
October 2008 onwards
Ireland
Spain
120
120
80
80
Greece
40
40
Italy
Portugal
0
2007
2008
2009
2010
* Lending provided through monetary policy operations only
Source: central banks
2011
0
The Risks: Global Inflation
Fed Holdings of Securities
Weekly
US$b
US$b
 Agency MBS
 Agency debt
 US Treasuries
2 000
2 000
1 500
1 500
1 000
1 000
500
0
500
l
J
l
S
D
2008
l
l
M
l
J
S
2009
l
l
D
l
M
l
J
S
2010
l
l
D
l
M
2011
0
IMF Food Price Index
SDR, 1995 = 100
Index
Index
Level
160
160
130
130
100
100
%
%
Year-ended change
30
30
0
0
-30
1980
1985
Sources: IMF; RBA
1990
1995
2000
2005
-30
2010
Consumer Price Inflation
Year-ended
%
US
6
%
Euro area
6
Headline
4
4
2
2
Core
0
0
-2
-2
-4
-4
2005
2007
2009
Source: Thomson Reuters
2011
2007
2009
2011
Asia – Policy Interest Rates
%
%
12
12
Indonesia
India
9
9
6
Philippines
China
South
Korea
3
0
3
Malaysia
Taiwan
l
l
2005
l
l
6
Thailand
l
2008
l
l
2011
l
l
2005
l
l
l
2008
l
l
2011
0
Commodity prices
• Rising because of
– Real growth in emerging economies (Chindia)
– Loose monetary policies raising nominal demand
Australia’s Terms of Trade
• Likely to fall from current highs because
– Global supply response
– Withdrawal of loose global monetary policy
– Rise in non commodity price inflation
• Other factors
– Global climate response will tax our comparative
advantage
Policy Responses
• Key is whether the boom in the terms of trade
is permanent or temporary
• Optimal response should not be based on our
ability to forecast but should manage the risks
of alternative futures
Policy Responses
• Need not need to be a contracting sector
– Expand effective labour supply
– Allow foreign capital and labour to flow in
• Create a Sovereign Wealth Fund
– Reduce excess demand which is increasing Dutch
Disease problems
• Less relative price adjustment in the short run
– Creates a pool of foreign currency assets that can
be used when the cycle turns
Conclusion
• Difficult but important to distinguish
between relative price changes and global
inflation – the 1970s is an important lesson
• Even though the terms of trade of
commodity exporters is likely to decline, the
overall income gains will be positive for the
world as developing countries becomes
wealthier