Transcript Financing Hypergrowth - Herbert Giersch Stiftung

The State of the Business Cycle
Frankfurt, 13 April 2005
Dr Holger Schmieding
European Economics
Bank of America, London
+44 20 7174 4924
Longer-term Themes: From Worker to Consumer Power

Globalisation spreading to more countries, more sectors, more workers

Rise of Emerging Eurasia, from Bratislava to Bangalore and Beijing

Shift from labour to profit income

Helped by the information technology revolution, productivity growth
remains high in US, despite some signs of a slowdown

IT revolution strengthens consumer choice

Increased pace of supply growth and reduced wage pressures constrain
inflation risks

The demographic challenge: Germany and Japan vs the US and France
2
US Productivity Growth Still Strong
8
Productivity in US business sector
5-year average
6
4
2
0
-2
Mar-52
Mar-62
Mar-72
Mar-82
Mar-92
Mar-02
Labour productivity in US business sector, annualized change in %. Source: BLS
Remember the “new economy”? There was some kernel of truth in the notion.
3
Erosion of Union Power Paves the Way for Reforms
Union Members in % of German Workers
36
32
28
24
Unionisation Rate
20
Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04
Source: DGB; DAG
Would Hartz IV have been possible 10 years ago?
4
Cyclical Themes: US Healthy - Europe Vulnerable

US is removing its extraordinary monetary and fiscal stimulus.

Inflation Outlook: Globalisation and technological advances augment the pace of supply
growth, the erosion of union power reduces the risks of wage inflation, increased consumer
choice enhances competitive pressures. Inflation risks now look more subdued than in the
last 3 decades.

US outlook: Sound fundamentals. We expect only a slight growth deceleration in 2005 as
consumers gradually raise their savings rate in response to more normal interest rates.
Worries about the US twin deficits are overdone.

Eurozone: A modest pick-up in domestic demand will be largely offset by a reduced external
stimulus in 2005. Growth below trend until late 2005.

Japan: Structural progress, but Japan’s upswing is too vulnerable to bear a slowdown in
Chinese demand and a strong Yen at the same time. BoJ rates on hold until mid-2006.

Oil: The renewed surge in oil prices will hit global growth in Q2 and Q3, in the Eurozone
slightly more so than in the more flexible US. Expect a modest fall in oil prices later in 2005.

Asset bubbles?
5
US Corporate Health Restored
12%
11%
Corporate Profits in US GDP
10%
9%
8%
7%
6%
5%
Mar-60
Mar-65
Mar-70
Mar-75
Mar-80
Mar-85
Mar-90
Mar-95
Mar-00
Mar-05
Share of pre-tax profits in US nominal GDP. Source: BEA
US corporate profits have recovered back to normal.
6
US Households Are Rich – Not Overindebted
US Household Wealth Back on Trend
50
Real Net Worth of US Households in $ trn
40
30
20
10
Mar-60
Mar-70
Mar-80
Mar-90
Mar-00
Source: Fed
US households are more heavily indebted than before. However, they are also more
wealthy. Real wealth adjusted for debt is back on trend.
7
US Consumers: Excessive Debt Burden?
US Households: Debt Service and Interest Income
20
Debt Service
Interest Income
18
16
14
12
10
Mar-80
Mar-85
Mar-90
Mar-95
Mar-00
Mar-05
In % of disposable income. Source: Fed; BEA
In line with lower nominal interest rates, interest income has fallen. Many households
would benefit from higher interest rates.
8
US Consumer: Help from the Labour Market
Strong Rebound in US Employment
6
5
Employment Growth in %
4
3
2
1
0
-1
-2
Jan-80
Jan-84
Jan-88
Jan-92
Jan-96
Jan-00
Jan-04
Yoy change in %. Source: BLS
Although higher interest rates will be a burden for some households, extra income
from an improving labour market should offset this even for lower-income groups
who are not major recipients of interest income.
9
Fiscal Deficits – Signs of Improvement in US
US Federal Tax Revenues: Growing Again
15
10
5
0
US Federal Tax Revenues
-5
-10
-15
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Yoy change of 12-month rolling sum, in %. Source: US Treasury; BEA
The US fiscal balance has started to improve, helped by a rebound in tax revenues.
Tax cuts are over. Capital gains tax receipts are recovering. We expect US tax
revenues to rise by at least 6% per year.
10
House Prices: Spot the Bubble
House Prices Relative to Earnings
1.8
1.6
US
UK
1.4
1.2
1
0.8
Mar-74
Mar-79
Mar-84
Mar-89
Mar-94
Mar-99
Mar-04
Average earnings for UK; average weekly earnings for US; rebased to 1974-2003 average = 1. Source: ONS; ODPM; BLS; Bloomberg
The UK has a serious house price problem – the US does not. In a fast-growth
economy such as the US, real estate prices should rise in real terms over time. In the
UK, supply constraints add to the volatility of house prices.
11
Japan: The China Factor
Losing Momentum: Japanese Exports to China
50
40
Exports to China
30
20
10
0
-10
-20
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Yoy change in Japanese exports to China, 3-month average. Source: MoF
Japanese export growth has started to falter. A slowdown in Chinese demand for
investment goods will likely dampen Japanese GDP growth to around 1% in 2005.
12
Eurozone Outlook

The big external stimulus already faded last summer

Leading indicators have turned down again

Investment: Only a modest upturn likely

Consumption: Higher oil prices restrain growth in disposable income

Technical rebound in Q1 GDP likely to be followed by weaker Q2; expect
some strengthening back to trend growth in late 2005 if oil prices and the
euro decline.

Huge disparities within the Eurozone

Real estate boom in “Club Med”: Liquidity-driven bubble - or sustainable
adjustment to EMU-related permanent decline in interest rates?
13
Eurozone Leading Indicators Turning South Again
Cyclical Rebound in Confidence Already Over
10
5
0
-5
-10
-15
-20
-25
Consumer confidence
Industrial confidence
-30
-35
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Source: EU Commission survey
Industrial confidence has fallen sharply, the halting rebound in consumer
confidence has stalled.
14
Eurozone Export Outlook: Mediocre at Best
Export Growth Has Peaked
14
4.5
12
10
3.5
8
6
2.5
4
2
1.5
Eurozone export growth
0
Trading partner GDP growth (RHS)
-2
Q1 1994
0.5
Q1 1996
Q1 1998
Q1 2000
Q1 2002
Q1 2004
Yoy changes in %; Bank of America forecasts for trading partner growth from 1Q05 onwards. Source: Eurostat; BoA
The rate of demand growth among trading partners and the lagged impact of
exchange rate changes drive Eurozone exports. A deceleration of global demand has
started to reduce export growth.
15
Eurozone Domestic Demand: Investment Outlook
Profits Recovery Points to Stronger Investment
12
8
4
0
Profits
Investment
-4
-8
Mar-92
Mar-94
Mar-96
Mar-98
Mar-00
Mar-02
Mar-04
Yoy change in %, gross fixed capital formation and gross operating surplus including mixed income. Source: Eurostat
Buoyant profits support investment.
16
Eurozone Consumption: A German Problem
Real Private Consumption
140
US
Eurozone ex Germany
Germany
130
120
110
100
Mar-95
Mar-97
Mar-99
Mar-01
Mar-03
Mar-05
Consumption levels, 1Q95=100. Source: Eurostat
The weakness in German consumption is weighing on the Eurozone as a whole.
17
German Outlook
 Regaining
cost competitiveness within the Eurozone thanks to wage
restraint
 Hoping
for the lagged impact of recent labour market reforms
 Leading
indicators have turned down again
 Significant
 No
decline in household savings rate unlikely
support from the housing market
 Decline
in working age population and continuing transfers to East
Germany will make further benefit cuts inevitable
18
The Demographic Burden
Germany: Working Age Population Shrinking
1.5
1.2
yoy change in %
0.9
0.6
0.3
0
-0.3
1980
1983
1986
1989
1992
1995
1998
2001
2004
Source: OECD; OECD forecasts for 2004-05
Is Germany reforming fast enough to cope with the demographic challenge?
19
The Demise of Wage Inflation?
Labour Cost Pressures Receding
4
4
3
3
2
2
Euro Labour Costs, 1yr fwd
Euro Service CPI
1
Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
1
Total hourly labour costs in whole economy, advanced by one year; service CPI and service CPI excluding German health care
charges on right-hand scale; yoy in %. Source: Eurostat
Wage inflation has fallen sharply in the Eurozone, following years of weak domestic
demand. We look for headline inflation to drop below the ECB’s 2% pain threshold
again in June.
20
Eurozone Inflation: Oil Matters
Oil Price Scenarios: Inflation Impact
1.0
0.5
0.0
-0.5
Brent at €35
-1.0
Jan-04
May-04
Sep-04
€30
Jan-05
€40
May-05
Sep-05
Jan-06
May-06
Direct and indirect impact of oil prices on headline inflation. Source: Eurostat; BoA forecasts from April 2005 onwards
We expect oil prices to moderate to €35 per barrel Brent crude by end-2005. Nearterm, oil prices pose the greatest risk to our inflation forecast.
21
Global Economic Forecasts
IMF
WEIGHT
GDP
Unemployment
change
(%)
%
2005 2006 2004 2005 2006 2004
3.0
3.3
3.7
3.7
3.8
3.7
5.5
5.2
5.0
2.7
2.6
3.2
7.2
7.2
7.0
1.8
3.8
3.6
4.1
4.3
9.8
9.5
9.2
7.5
3.8
3.7
3.8
3.6
3.7
5.2
3.7
1.3 15.6 14.3 14.0 3.1
5.3
5.0
9.1
8.8
8.1
2.8
100.00
37.55
29.42
2.44
4.68
1.36
1.73
0.35
0.20
%
2004
3.8
4.4
4.4
2.8
5.3
5.3
4.4
8.8
5.7
EUROPE
34.50
2.6
2.0
2.4
Eurozone
23.09
1.8
1.4
2.1
WORLD
THE AMERICAS
United States
Canada
Latin America
Brazil
Mexico
Argentina
Chile
Germany
CPI
Current Account
Budget Balance
change
% of GDP
% of GDP
2005 2006 2004 2005 2006 2004 2005 2006
2.9
2.3
2.6
2.5
-5.7
2.6
-5.9
1.6
-5.4
1.2
-3.6
0.7
-3.3
0.5
-2.8
0.2
5.6
4.2
8.9
3.0
5.2
3.9
12.1
3.1
1.5
-1.3
4.3
1.7
0.8
-1.7
3.7
3.0
0.3
-2.0
2.1
0.8
-2.8
-2.7
2.5
1.5
-3.2
-2.9
2.1
1.3
-3.0
-3.2
1.9
1.0
0.6
0.3
0.2
-2.7
-2.7
-2.1
8.8
8.9
8.5
2.1
1.9
1.6
6.64
1.0
0.8
1.8
9.6
9.8
9.4
1.7
1.7
1.4
-3.7
-3.5
-2.9
France
Italy
Other Western Europe
United Kingdom
4.87
4.06
7.90
5.23
2.4
1.0
2.9
3.1
1.9
0.8
2.3
2.3
2.2
1.9
2.2
2.0
10.0
8.1
9.9
8.0
9.7
7.9
2.3
2.3
1.9
1.8
1.8
1.8
-3.7
-3.0
-3.0
-3.8
-3.5
-3.0
4.8
4.7
4.9
1.3
1.7
1.6
-2.2
-1.7
-1.0
-3.6
-3.5
-3.6
Switzerland
Sweden
Norway
Other Europe
Russia
0.88
0.83
0.61
3.93
1.19
1.7
3.0
3.4
6.2
6.3
1.3
2.9
3.5
5.0
6.1
1.8
3.2
2.7
4.3
4.6
3.9
5.5
3.9
4.0
5.3
4.2
3.6
5.0
4.2
0.8
0.4
0.5
1.4
0.5
1.5
1.5
1.6
2.1
11.4
8.1
13.7
10.1
7.6
12.2
9.7
6.7
10.9
-1.0
-0.5
6.0
-0.6
0.0
5.0
-0.2
0.5
5.0
7.7
7.5
7.0
10.9
12.1
9.5
10.8
5.2
2.0
3.6
1.5
0.2
0.66
9.9
5.4
4.7
10.1
9.5
9.1
10.7
8.6
9.3
-4.8
-4.5
-4.0
-7.5
-6.0
-5.4
Poland
Czech Republic
Hungary
ASIA & PACIFIC
0.58
0.25
0.23
24.21
5.4
4.3
4.0
4.7
3.8
3.3
3.5
3.4
3.7
3.1
3.4
4.1
19.6
9.4
6.1
19.0
8.9
5.9
18.5
8.4
5.3
3.5
2.9
6.8
2.6
2.0
3.6
2.7
2.9
3.7
-2.1
-5.9
-8.4
-2.4
-5.5
-7.8
-2.8
-5.2
-7.0
-6.4
-5.8
-5.5
-6.7
-5.1
-5.3
5.9
-4.6
-4.8
Japan
12.00
2.6
1.1
2.6
4.7
4.4
4.1
-0.1
-0.2
0.1
3.7
3.5
3.7
-7.0
-6.5
-6.3
3.90
6.81
1.64
1.50
3.76
9.5
5.8
3.4
3.2
3.9
8.0
4.9
2.9
3.0
4.3
7.5
5.0
3.6
3.7
3.8
8.5
8.0
7.5
3.9
3.0
2.5
2.5
3.0
2.6
-3.0
-2.0
-1.0
5.6
5.2
5.4
2.3
2.7
2.9
-6.4
-6.1
-5.4
0.8
0.6
0.6
Turkey
China
Other Asia
Oceania
Australia
AFRICA / MID EAST
22