Transcript slides wolf 2012 - Oxonia - The Oxford Institute for Economic Policy

The shift and the shocks:
prospects for the world economy
Martin Wolf, Associate Editor & Chief
Economics Commentator, Financial Times
Oxonia
15th February 2012
Oxford
The shift and the shocks
2
The shift and the shocks
• Shift
• Shocks
• Prospects
3
1. The shift
• In the 19th century, there occurred what Kenneth
Pomeranz called the “great divergence”
• In the second half of the 20th century, convergence
began, with Japan and the east Asian “tiger
economies”
• In the late 20th and early 21st centuries convergence
spread to Asian giants
• Today’s divergent growth is a mirror image of
converging incomes
4
1. The shift
EMERGING COUNTRIES OUTPERFORM HUGELY
Source: IMF, WEO database
GDP SINCE THE CRISIS
170
160
150
140
130
120
110
100
90
2007
2008
Advanced economies
Sub-Saharan Africa
India
Developing Asia
5
2009
2010
2011
2012
Latin America and the Caribbean
China
Central and eastern Europe
1. The shift
EMERGING COUNTRIES OUTPERFORM HUGELY
GDP GROWTH RATES IN THE WORLD ECONOMY
(10-year moving average, end year)
Source: IMF WEO, September 2011
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
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
8
7
6
5
4
3
2
1
0
World
6
Advanced economies
Emerging and developing economies
1. The shift
UNEVEN PACE OF CATCH-UP GROWTH
GDP PER HEAD AS A SHARE OF US GDP PER
HEAD (at PPP)
45.0%
Forecast
Source: IMF, WEO database, October 2011
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
Brazil
7
China
India
Indonesia
Mexico
Russia
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0.0%
Turkey
1. The shift
• Risks to the great convergence:
– In the long run, it is hard to believe that the catch-up process
will not continue, provided the world avoids huge shocks;
– But it is not going to be smooth, as we can see from past
performance;
– China is exposed to excessive reliance on investment, high
dependence on exports and property bubbles;
– If China slowed substantially, the impact on commodity
exporters could be substantial;
– But China still has a big catch-up potential
8
1. The shift
• The “great convergence” has had powerful
consequences:
– An ongoing “labour-supply shock”, which lowered relative
wages of the relatively unskilled in high-income countries;
– Initially, a dis-inflationary shock, as China lowered world
prices for manufactures;
– Then an inflationary shock, as demand for raw materials
soared;
– An increase in the surplus of desired savings and so the rise
of the global imbalances;
– and throughout, an ongoing shift in global economic activity
9
2. The shift
THE SAVINGS GLUT?
REAL INTEREST RATES
6
Asian financial crisis
5
4
Western financial crisis
3
2
1
0
-1
Jan-1985 Jan-1987 Jan-1989 Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011
UK INDEX-LINKED
10
US TIPS
1. The shift
RISE OF IMBALANCES
GLOBAL CURRENT ACCOUNT IMBALANCES
(as per cent of world GDP)
Source: WEO, October 2011
3
2
1
0
-1
-2
-3
1996
1997
1998
1999
Germany and Japan
11
2000
2001
2002
2003
2004
2005
China and emerging Asia
2006
2007
2008
2009
Peripheral Europe
2010
2011
2012
Rest of World
2013
2014
2015
Oil Exporters
2016
US
1. The shift
RISE OF FOREIGN CURRENCY RESERVES
GLOBAL FOREIGN CURRENCY RESERVES ($bn)
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
China
12
Rest of developing Asia
Rest of developing countries
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
$0
Industrial countries
2. The shocks
• The economic collapse was large and enduring
• The rescue was also dramatic:
– Liabilities of the core financial system were nationalised;
– Fiscal policy was put on a war-time footing; and
– Monetary policy has remained unprecedented;
• This then is a “contained depression”.
• According to Carmen Reinhart and Kenneth Rogoff,
This Time is Different, it could take three years, to
return to “normality”. But, given the scale of affected
economies, it could be longer.
13
2. The shocks: global
THE LEVERAGE CYCLE
Source: OECD
HOUSEHOLD DEBT
(over disposable income)
200.0
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
UK
Canada
US
2000
14
Japan
2007
Germany
2009
2010
France
Italy
2. The shocks: global
THE US LEVERAGE CYCLE
SECTORAL RATIOS OF US DEBT TO GDP
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
Households
15
Non-financial Business
All Government
Financial Sectors
10
20
08
20
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
19
74
0.0%
2. The shocks: global
THE LONG SLUMP
GDP IN THE GREAT RECESSION
104.0
102.0
100.0
98.0
96.0
94.0
92.0
90.0
Q1
2008
Q2
2008
Q3
2008
Q4
2008
US
16
Q1
2009
UK
Q2
2009
CANADA
Q3
2009
Q4
2009
JAPAN
Q1
2010
ITALY
Q2
2010
Q3
2010
FRANCE
Q4
2010
Q1
2011
GERMANY
Q2
2011
Q3
2011
2. The shocks: global
THE SOVEREIGN DEBT IMPACT
NET PUBLIC DEBT OVER GDP (per cent)
180
160
Source: IMF WEO, October 2011
140
120
2006
2009
2012
2015
100
80
60
40
20
0
Japan
17
Italy
United States
France
United Kingdom
Germany
Canada
0
18
Germany
France
UK
US
Japan
Canada
Italy
Spain
01/01/2012
01/11/2011
01/09/2011
01/07/2011
01/05/2011
01/03/2011
01/01/2011
01/11/2010
01/09/2010
01/07/2010
01/05/2010
01/03/2010
01/01/2010
01/11/2009
01/09/2009
01/07/2009
01/05/2009
01/03/2009
01/01/2009
01/11/2008
01/09/2008
01/07/2008
01/05/2008
01/03/2008
01/01/2008
2. The shocks: global
FISCAL ROOM? YES, FOR SOME, NOT ALL
10-YEAR GOVERNMENT BOND YIELDS
(percentage points)
8
7
6
5
4
3
2
1
2. The shocks - eurozone
• The eurozone crisis is the world, in miniature
• The core of the eurozone financial crisis is not a
fiscal crisis
• It is the interaction of balance of payments with
financial crises, though huge debt stocks played a
part in creating liquidity problems for sovereigns
19
2. The shocks - eurozone
• The difficulty is largely the result of the divergences
accumulated in the years of excess: what made
everything seem so good was creating an acute
long-term crisis
• The failure of a true union stands revealed: neither
financing in a crisis nor workable adjustment
mechanisms
• Everything invented on the fly – too little, too
confused, too late
• The crisis is possibly terminal
20
2. The shocks - eurozone
THE GOOD, THE BAD AND THE UGLY
CURRENT ACCOUNT IMBALANCES IN THE EUROZONE
(per cent of Eurozone GDP)
Source: IMF, World Economic Outlook database, April 2011
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Germany
21
Netherlands
France
Italy
Spain
Portugal & Greece
Rest
Eurozone
2. The shocks - eurozone
LOST COMPETITIVENESS
UNIT LABOUR COSTS IN MANUFACTURING
RELATIVE TO GERMANY
Source: OECD
200
180
160
140
120
100
80
60
Q11999
Q12000
Q12001
Q12002
Q12003
Portugal
22
Q12004
Q12005
Italy
Ireland
Q12006
Q12007
Greece
Q12008
Spain
Q12009
Q12010
Q12011
2. The shocks - eurozone
ROAD TO THE EUROZONE FISCAL CRISES
NET PUBLIC DEBT
(relative to GDP)
Source: World Economic Outlook database April 2011
180
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2015
160
140
120
100
80
60
40
20
0
Greece
23
Italy
Portugal
Ireland
Spain
24
Portugal
Ireland
Greece
01/01/2012
01/11/2011
01/09/2011
01/07/2011
01/05/2011
01/03/2011
01/01/2011
01/11/2010
01/09/2010
01/07/2010
01/05/2010
01/03/2010
01/01/2010
01/11/2009
01/09/2009
01/07/2009
01/05/2009
01/03/2009
01/01/2009
01/11/2008
01/09/2008
01/07/2008
01/05/2008
01/03/2008
01/01/2008
01/11/2007
01/09/2007
01/07/2007
01/05/2007
01/03/2007
01/01/2007
2. The shocks - eurozone
ROAD TO THE EUROZONE FISCAL CRISES
10-YEAR GOVERNMENT BOND SPREADS OVER BUNDS
(percentage points)
40
35
30
25
20
15
10
5
0
-5
3. Prospects
•
At the broadest level, we are watching the
interaction of two huge events:
– A secular shift in the location of economic activity; and
– The collapse of a generational expansion in private and, to
a lesser extent, public sector leverage in high-income
countries
– The eurozone crisis falls at the intersection of these
processes
•
So how might it all play out?
•
We do not know. There are too many unknowns.
25
2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012
GROWTH FORECASTS FOR 2012
Spain
Italy
France
Germany
Eurozone
Japan
UK
US
-2.0
-1.0
0.0
1.0
Jun-11
26
2.0
Jan-12
3.0
4.0
2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012
GROWTH FORECASTS FOR 2012
World
Latin America
Brazil
Eastern Europe
Russia
Asia Pacific (NB excluding Japan)
India
China
0.0
1.0
2.0
3.0
4.0
5.0
Jun-11
27
6.0
Jan-12
7.0
8.0
9.0
10.0
3. Prospects: global
•
Here are salient elements of immediate global
challenges:
– Accelerating de-leveraging in the private sectors of
overleveraged countries;
– Rebalancing the world economy, to give over-leveraged
economies export-led growth, which is necessary when
their private sectors run huge financial surpluses;
– Reducing fiscal deficits in high-income countries, without
killing the recovery; and
– Avoiding excesses in emerging countries, despite easy
financial and monetary conditions.
28
3. Prospects: eurozone
• What is needed now in the eurozone are:
– Financing with adjustment, which will take at least 5 years
and possibly 10 years, or more;
– Adjustment means structural reforms and divergent inflation
across the eurozone, with high inflation in core countries and
low inflation in vulnerable countries;
– The big danger would be premature fiscal tightening in the
periphery together with absence of adjustment in the core;
– That would lead to deeper recessions;
– And a possible break-up.
29
3. Prospects
• Some guesses:
– The US will be the most dynamic of big economies;
– Growth in high countries will remain weak, with some possibility of
still worse;
– Headline inflation rates will fall;
– Short-term official interest rates will remain low, for a long time;
– Countries with their own central banks will have low long-term bond
rates; many eurozone countries will not;
– Eurozone break-up risk is significant;
– Emerging countries should grow quickly, but there is a chance of
crises there, too.
30