Transcript Four views of sovereign debt crises

Comment to Professor Nouriel Roubini on:
Effects of the Recent Oil Shock on the Global Economy in
2005-2006: How Much of a Global Slowdown?
CICLO DE CONFERÊNCIAS MEI
Perspectivas da Economia Mundial
Miguel Lebre de Freitas
GEE- Gabinete de Estudos e Estratégia
Real effects of the current oil shock not so significant so
far:
- Real oil prices did not rise that much
- Sounder monetary policies
– Lower dependency
– Financial innovation
– Until now consumers have reacted to the oil shock as if it was a
temporary shock (when a shock to real income is temporary and
there are no liquidity constraints, it is optimal to maintain the
consumption level and reduce savings).
Risks to global stability
However, the global situation is fragile
- Investment in most of Asia (taking out China) is too low, and high
consumption in the U.S. is financed by rapidly increasing debt, coupled
with high housing prices, while growth of domestic demand in Europe
and Japan is too weak.
- The persistency of high oil prices could trigger a global crises
Oil prices interact with the global business cycle:
– In the short run, oil demand and supply are inelastic, causing significant
price swings, namely in response to the global business cycle.
– OPEC countries are aware of this and usually try to adjust production
plans so as to not cause recessions in the West.
– The current situation, however, is of low spare capacity in oil producing
countries and low refinery capacity in oil consuming countries (Hog
Cycle).
Moreover, the demand for oil is expected to keep rising
Three Scenarios
1. BW2 (with Asia playing the role of Europe in BW1):
US economy financed by Asian banks, preventing the dollar depreciation and
the interest rates from rising. In this scenario, exchange rate stability will fuel
global growth. Oil prices will remain high. For how long?
2. Moderate slowdown in the US
As the inflation rate surges, the Fed rises the interest rates, leading to a
flattening of the housing bubble. Consumers’ confidence and expenditures
will fall and the US current account will improve. Oil prices fall back.
3. US and global hard landing
The (persistent) oil price shock triggers a consumption retrenchment, a bursting
of the housing bubble, a deterioration of the US fiscal position and a
massive flow of capital out of US.
To avoid the hard landing:
– Coordination of macroeconomic policies would be desirable
– But there are political difficulties.
– Thus, the likelihood of an orderly global rebalance is low.
On the global prospects
With no question, there are some important and increasing risks:
– The widening of global imbalances:
– Higher and volatile oil prices, in a context of geo-political
uncertainty
But:
– Global growth has been robust despite the oil prices
– Inflation has picked up slightly, but it remains at moderate levels.
– The global financial system is now much more resilient, with
markets relatively stable.
– The recent move towards flex in Asia (namely China) is good
news for the global imbalance.
Still:
The risk of a global recession is not ruled out
(IFM Managing Director, Mr. Rodrigo De Rato, 22 Sept:
“oil prices have become certainly a threat for the world economy”).
My question:
- If oil prices were indeed to stay high (optimistic scenario)
- The shock was of a permanent nature
- In the absence of significant investments aiming the
expansion of the existing energy producing capacity
- In the absence of effective efforts attain a greater
efficiency in energy use
- What would be the implications for a small, energydependent and energy-inefficient country like Portugal?
Real price of Oil in Portugal (as of August 2005)
70
16,0
Preço relativo do petróleo
14,0
60
Preço do Petróleo em US$
12,0
50
10,0
40
8,0
,
30
6,0
20
4,0
10
2,0
0
Source: GEE
Ago-05
(Jan-Jun)
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
0,0
Aggregate demand effects:
In the current circumstances, in which households are
somehow leveraged and interest rates are at historically
low levels, a dump in consumption expenditures
following a permanent rise in oil prices (and following the
corresponding ECB reaction) would be difficult to avoid.
Asymmetric Incidence
Intensidade Energética
Consumo total de energia final (tep)/ PIB (milhares de dólares a preços e taxas de câmbio de 1995)
Portugal
0,15
Finlândia
0,15
Luxemburgo
0,14
Grécia
0,14
Bélgica
0,13
Espanha
0,13
Holanda
0,12
Suécia
0,12
Reino Unido
0,12
Itália
0,11
Irlanda
0,11
França
0,10
Áustria
0,09
Alemanha
0,09
Dinamarca
0,07
Supply side effects:
- In general, since oil is an input to many goods, producers would
bear losses.
- The impact on output and unemployment will depend on real
wages: the shock will be smoother, the greater the ability of the
firms to pass the burden to consumers and the more flexible
nominal wages are, wherever the “pass through” is limited.
– In sectors in which final goods are price-elastic (tradables),
producers will take the hit.
– As profit margins and returns on capital fall, capital will move
away from energy-inefficient units to energy-efficient units
(Disciplinary device?).
– Adjustment costs: since factors do not move instantaneously
from one sector to the other, unemployment rates may bust,
propagating the business cycle.
Asymmetric Incidence
Grau de intensidade energética por sector
(Consumo de energia final/PIB Industrial)
0,70
Outros sectores
0,34
0,04
0,03
Engenharia
Portugal
0,14
Têxteis
0,09
Bens de consumo
(alimentação, tabaco)
UE 15
0,10
0,12
0,50
Papel e pasta de papel
0,19
0,86
Químicos
0,32
1,05
Minerais não metálicos
0,42
0,19
Metais não férricos
0,51
0,58
Ferro e Aço
1,19
0
0,2
0,4
0,6
0,8
1
1,2
Asymmetric Incidence
Autonomia Energética
Produção própria/ Consumo total de energia primária (2001)
1,37
1,12
0,78
0,67
0,50
0,45
0,38
0,35
0,32
0,26
0,22
0,15
0,14
0,12
Luxemburgo
Irlanda
Portugal
Itália
Bélgica
Espanha
Áustria
Grécia
Alemanha
Finlândia
França
Suécia
Holanda
Reino Unido
Dinamarca
0,02
Current Account Adjustment :
In a energy-dependent economy, an oil price shock acts as a transfer to
oil producing countries abroad.
– In the short run, a current account deficit will emerge.
– If the shock is permanent, as external liabilities accumulate, capital
inflows will become more difficult to sustain, calling for a real exchange
rate depreciation
– In the past, this was achieved by nominal exchange rate depreciation
(1974-1985). The fall in oil prices in 1986, in turn, was followed by a
real appreciation.
– In the present circumstances, no such mechanism exist.
– Moreover, low efficiency in energy use is constraining the
competitiveness of exporting firms and hence, the ability of the
domestic supply to switch from nontradables to tradables.
In sum, in a theoretical scenario of a permanent oil shock, with no new
investments in alternative energy sources and without an effective
move towards energy-saving technologies, the optimistic scenario
could be quite painful to Portugal.