Transcript M. Singer – Economic developments globally and in Europe

Economic developments
globally and in Europe:
The CNB view
Miroslav Singer
Governor, Czech National Bank
2012 Israel Business Conference
Tel Aviv, 9 December 2012
M.
Singer
Economic
Waiting
Sound
Czech
Inside
or
Republic:
money:
Developments
with
Outside
developments
the
Czech
Euro
Current
the
Euro
Adoption:
experience
inrecord
the
Situation
globally
Area
Czech
The
and
and
Economy,
Czech
in
Outlook
Europe:
case
Risks
the
and
CNB
Outlook
view
M.
-––
Czech
Czech
Present
Republic:
Republic:
Conditions,
Staying
Future
Monetary
challenges
Ahead
Policy
of
the
and
and
Curve
opportunities
Outlook
with
Regard
in
Czech
to
Republic
Monetary
Policy
M.
Singer:
Financial
Crisis:
Likely
Impacts
on
the
CR
and
Lessons
for
the
Supervisors
M.
Singer
Singer
–
–Recent
The
Czech
Czech
Czech
economy
Republic:
economy
and
Can
and
development
crisis
in
low
Eurozone:
in
rates
Europe:
be
CNB
sustained?
Outlook
view
and
Challenges
M.Singer
M.
Singer:
Singer:
The
Present
Consumer
economic
Crisis:
Conditions,
and
protection
Impacts
financial
on
Monetary
crisis
the
in
CR
financial
from
and
the
Policy
Lessons
point
services:
and
of
for
view
the
Outlook
CNB
Supervisors
of
the
approach
Czech
for sector
CR
banks
M.
Singer
–Financial
Macroeconomic
developments,
monetary
policy
and
financial
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Overview
•
•
•
•
Global macroeconomic developments
Debt crisis in euro area
Some adjustments and policies adopted recently in euro area
Risks in euro area
M. Singer – Economic developments globally and in Europe: The CNB view
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Recent developments in advanced
economies
• Growth in advanced economies is low and slowing in most
countries (negative feedback through foreign trade)
• Unemployment remains high in advanced economies
• Domestic demand is weak (uncertainty among households and
investors)
• Simultaneous fiscal consolidation is going on in many countries
• Households, banks and sovereigns are reducing their leverage
• Some imbalances are decreasing (current account)
• Persisting tensions on financial markets – banks are maintaining
strict credit standards (partly due to regulatory pressures)
• Central banks do not have much scope for stimulation
Advanced economies are vulnerable and remain a
brake on, and the main uncertainty for, global growth
M. Singer – Economic developments globally and in Europe: The CNB view
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GDP forecasts: USA
3,0
CF
IMF
2,5
y-o-y growth in %
2,2
2,2
OECD
EC
2,8
Fed
2,3
2,3
2,1
2,0
2,1
1,9
1,9
1,5
1,0
0,5
0,0
2012
2013
Source: Consensus Forecasts, IMF, OECD, European Commission, Federal Reserve System
The USA will grow at approximately the same pace
in 2013 as this year
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Risks to global economy
• USA


Fall off fiscal cliff in USA (major automatic budget cuts)
Insufficiently credible medium-term fiscal consolidation framework
• Asia and Japan



Imbalances in China
Under-ambitious medium-term fiscal consolidation in Japan
Fading of post-earthquake stimulus and new taxes in Japan in 2014
• EMU


Spread of recession from periphery to core of EMU
Excessive fiscal consolidation in some countries  slowing growth
(high fiscal multipliers)
The financial risks have decreased slightly in recent
weeks but remain high; the risks to growth are on
the downside
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Debt crisis in euro area
• Some countries were living “beyond their means” before crisis
(Greece in long term!)
• Others (e.g. Spain, Ireland) were living within their means, but
1) bank bailouts, 2) demand stimulus during crisis, and
3) recession then worsened their fiscal situation significantly
• Market financing of public debt became too expensive (or
impossible) for some countries at some point in time
• Greece’s debts escalated out of control in 2010
• Peripheral EMU economies are on verge of debt spiral
• Debt crisis: budget consolidation took priority over stabilising effect
of public finances  procyclical fiscal policy
In many EMU countries, fiscal policy became an additional
source of shocks rather than a shock absorber
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Financial fragmentation in euro area
• Financial fragmentation strengthened in 2012 H1, when capital
flowed out of peripheral countries into core countries and
outside EMU
• Cross-border bank loans shrank in volume
• Financial fragmentation manifested itself in growth in CDS
spreads
• Capital outflow fostered growth in imbalances in TARGET2
• After introduction of outright monetary transactions (OMTs),
signs are that financial fragmentation has stopped deepening
Financial fragmentation is reducing the effectiveness
of ECB monetary policy and reducing/eliminating the
benefits of low interest rates
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Bank deposits in selected EMU
countries (as % of GDP)
1,8
Greece
1,6
Ireland
Italy
1,4
Portugal
Spain
1,2
1,0
0,8
0,6
0,4
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: GDP data for Greece start in 2011 Q2: Eurostat estimate
Source: ECB, Eurostat
Bank deposits in Greece, Ireland and Spain have
fallen recently  price of loans is ceteris paribus
higher than in core countries (further disintegration)
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Some adjustments and policies
recently adopted in EU 1/2
• Reduction of CA deficits due not only to slowing economic
growth, but also to modest improvement in competitiveness
• Imbalances in TARGET2 (main creditor – Germany; main
debtors – southern countries): imbalances within EMU turning
into less apparent form
• Partial structural reforms: reduction of structural imbalances
• Continuing fiscal consolidation focused on reducing budget
deficits: desirable solution to debt crisis
• BoE quantitative easing introduced to boost economy (July)
• Creation of EFSF and ESM: distribution of impacts to other
countries (+ IMF) through fiscal transfers
M. Singer – Economic developments globally and in Europe: The CNB view
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Some adjustments and policies
recently adopted in EU 2/2
• Activation of Outright Monetary Transactions (government bond
purchases on secondary markets) in September; aim:


to enhance functioning of monetary policy transmission mechanism
to reduce high government bond yields
 distribution of impacts of crisis via ECB balance sheet
• Entry into force of European Stability Mechanism (ESM) (Oct.)
• Progress towards establishing Banking Union  timetable for
establishment of Single Supervisory Mechanism (SSM)
• Since September, tensions on financial markets have eased and
yields on gov. bonds of southern countries have fallen slightly
While fiscal consolidation is the solution to the causes
of the debt crisis, other policies are distributing the
load of the debt crisis to others and are “buying time”
M. Singer – Economic developments globally and in Europe: The CNB view
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GDP in EU in 2012 Q3
(seasonally adjusted data)
6
5,3
4
3,4 3,3
2,5
1,9
0,9 0,9 0,8 0,7
0,5 0,4
0,1
0
-0,1 -0,3
-0,5 -0,6
-0,8
-2
-1,1
-1,4 -1,5 -1,6 -1,6
-2,3 -2,4
-2,9
-3,4
-4
-6
-7,2
Note: Data for Ireland, Luxembourg and Malta are for 2012 Q2
R
G
PT
I
SL
O
C
R
ES
P
H
U
N
C
YP
N
L
FI
N
O
M
R
D
K
B
L*
IR
U
K
F
A
T
S
B
U
L
X*
L*
LU
A
D
M
PO
L
SK
LI
T
T
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-8
LA
y-o-y change in %
2
Source: Eurostat
The situation in the EU paints a very mixed picture of
growth patterns (the EU contracted by 0.6% yoy)
M. Singer – Economic developments globally and in Europe: The CNB view
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GDP forecasts: EMU
1,0
0,8
0,9
CF
IMF
OECD
EC
ECB
y-o-y growth in %
0,6
0,5
0,4
0,2
0,2
0,1
0,0
0,0
-0,1
-0,2
-0,4
-0,4
-0,6
-0,4
-0,4
-0,5
2012
2013
Source: Consensus Forecasts, IMF, OECD, European Commission, European Central Bank
This year’s contraction in the euro area will be
replaced by a slow recovery next year
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Risks in euro area
1/2
• Negative feedback between: 1) vulnerable financial system
2) slowly growing economies and 3) indebted public finance –
fragile equilibrium persists
• Fiscal consolidation is strongly procyclical  pressures to ease
fiscal restriction are growing
• Some countries’ debts will stabilise only in a few years’ time and at
high level – with economic growth slowing there is growing risk of
debt spiral in some countries
• Persisting problems in following areas:
 lack of structural cohesion (slow introduction of structural reforms)
 unsatisfactory institutional framework (some changes happening,
but not always in right direction)
 inadequate functioning of (and compliance with) regulations
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Risks in euro area
2/2
• ECB single monetary policy is fostering widening differences between
southern countries and core countries:
 interest rates are still too high for southern periphery
 exchange rate of euro is weak for core but strong for periphery
• Absence of exchange rate adjustment mechanism within EMU is
leading to adjustment via:
 economic growth
 wages and prices (competitive disinflation)
 unemployment and outflow of labour force (brain drain)
• Survival of euro area in its current form is conditional on:
 non-standard policies of ECB
 loans and fiscal transfers between countries
 political “solidarity” between member countries (and others)
The threat of collapse of the euro area, with potentially
catastrophic consequences, has decreased recently
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Thank you
Miroslav Singer
[email protected]
Tel: +420 224 412 000
Česká národní banka
Na Příkopě 28
115 03 Praha 1
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Additional slides
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Czech Republic and euro
• Any escalation of debt crisis can be expected, ceteris paribus,
to increase projected costs of euro area membership
• Situation in euro area is developing extremely quickly
• It is very uncertain how euro area will look in two or three
years  balance of costs and benefits of euro adoption is
subject to exceptionally high uncertainty; this uncertainty has
increased compared to last year
• Delaying euro adoption seems to be most sensible response
to future uncertainties and unknown distribution of costs and
benefits
Given the current uncertainties about the future
form of the euro area, a commitment to adopt the
euro would be tantamount to a blank cheque
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