Transcript Document

Jump-starting the Global Economy
Bold Policy Recommendations for the
G7 Countries
Nariman Behravesh
Chief Economist
Global Insight
October 28, 2002
Copyright © 2002 Global Insight
The Global Economy Today
•
The global economy’s mediocre recovery is running out of
steam.
•
A “crisis of confidence” and overly restrictive policies have
increased the risk of stagnation, and possibly a double-dip, in
some G7 economies.
•
•
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Domestic demand, particularly in Japan and the Eurozone, is
extremely weak - North America and non-Japan Asia are the
only sources of sustained growth.
Weak growth increases the vulnerability to geopolitical shocks
(terrorism, Iraq, North Korea, South Asia).
Bold policy actions are necessary to jump-start the global
economy and reduce this vulnerability.
Copyright © 2002 Global Insight
The Case For Action
•
•
•
G7 economies account for about 70% of global output
Recent estimates by Global Insight show that large, coordinated
interest rate cuts, plus sizeable fiscal boosts, are enough to increase
growth rates in the G7 countries by approximately:
• 0.7 percentage points in 2003
• 0.8 percentage points in 2004
These actions are not without risk:
• Bold policy actions are associated with a number of potential costs:
higher inflation, higher deficits and a worsening of the housing
bubbles in the United States and the United Kingdom.
• However, the asymmetric nature of the dangers facing
the global economy suggests these actions carry
smaller, more manageable risks than those associated
with doing nothing.
Copyright © 2002 Global Insight
Bold Policy Action - United States
Policy Actions
• Fed funds rate cut by 75 basis points.
• Additional fiscal stimulus of approximately
$50 billion in 2003 and 2004:
• Personal and corporate tax cuts
• Increased grants to state/local governments
Percent Change, Annual Rate
7
6
5
4
3
2
1
0
-1
-2
Impacts
+ Real GDP growth increases by 0.8 in 2003 and 2000 2001 2002 2003 2004 2005
1.3 percentage points in 2004.
Bold Action
Baseline
+ Inflation is higher by about 0.4 points for two
years, compared with the baseline.
+ The budget deficit, after rising to 3% of GDP in 2003 (following a surplus of 1% in
2001), returns to surplus by 2006.
+ The current account deficit is smaller, both in absolute terms and as a share of GDP,
compared with the baseline.
+ The U.S. dollar falls against other major currencies - slightly faster than the baseline.
Risks
–
–
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Worsening of housing “bubble”
Slower progress on reducing household and corporate debt levels
Improvement in the current account deficit still too gradual
Copyright © 2002 Global Insight
Bold Policy Action - Canada
Policy Actions
• Overnight interest rate cut by 50
basis points.
• Investment tax credits provided to
multinational corporations.
Percent Change, Annual Rate
7
6
5
4
3
2
1
0
-1
Impacts
2000
2001
2002
2003
2004
2005
+ Real GDP growth increases by 0.3
Bold Action
Baseline
points in 2003 and 0.1 points in 2004.
+ Small impact on inflation and other economic indicators (given both
the limited policy action and small boost to an economy).
Risks
– Higher inflation, as the output gap closes at a faster rate than the other
G7 economies.
Copyright © 2002 Global Insight
Bold Policy Action - Japan
Policy Actions
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Percent Change, Annual Rate
Tax cuts of 2.5 trillion yen
Supplementary budget of 4 trillion yen
Large bank bailout and debt write-offs
Bank of Japan accommodating fiscal
stimulus (0.8% of GDP) and bank bailout
10
8
6
4
2
0
-2
Impacts
=
+
+
–
-4
-6
Growth rates in 2003 and 2004 see little
Bold Action
Baseline
boost since the stimulus is offset by
lower consumption (due to higher unemployment).
However, thanks to aggressive restructuring, growth from 2005 to 2007 is nearly 1.0
point higher.
The yen depreciates in the near-term, eventually strengthening again.
The budget deficit soars in the short term, then falls as growth picks up.
Risks
–
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Uncontrollable budget deficit
Negative effects of restructuring overwhelm any positive impacts
Copyright © 2002 Global Insight
Bold Policy Action - Europe
Policy Actions
• The European Central Bank slashes its key interest rate by 150 basis
points.
• The Bank of England cuts overnight rates by 100 basis points.
•
More flexible fiscal policies in the Eurozone:
• Germany, France, and Italy allow their budget deficits to exceed
the 3% of GDP.
• Germany restores 2003 income tax cuts, while accelerating the
cuts scheduled for 2005 and eliminating the 2003 corporate tax
hike.
• France slashes income taxes by 30% over the next few years.
• Italy cuts taxes in 2003, while increasing government spending,
especially on infrastructure.
Copyright © 2002 Global Insight
Bold Policy Action - Europe
(continued)
Impacts
+ Boost in growth during 2003 and 2004 for Germany, France, and Italy in the
range of 0.8 to 1.4 percentage points.
+ U.K. growth rises by a smaller 0.4 points in 2003, and 0.8 points in 2004 (as
compared with the baseline), due to lack of additional fiscal stimulus.
+
Eurozone inflation rises briefly to nearly 2.5% in 2004, before dropping back
down to around 2% in 2005; the inflationary impact is a little larger in the U.K.
+
All three Eurozone economies breech the 3% ceiling on their respective
deficit-to-GDP ratios; however, each ratio falls to 2% or less by 2005
(thanks to faster growth).
+
Gradually, the euro rises against the U.S. dollar – at a slightly faster pace than
the baseline.
Risks
–
–
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Delays in progress on structural reforms
Entrenchment of higher inflation
Worsening of U.K. housing bubble
Copyright © 2002 Global Insight
Bold Policy Action - Europe
(continued)
Percent Change, Annual Rate - Germany
Percent Change, Annual Rate - U.K.
5
5
4
4
3
3
2
1
2
0
1
-1
0
2000
2001
2002
2003
Bold Action
2004
2005
-2
Bold Action
Baseline
Percent Change, Annual Rate - Italy
Percent Change, Annual Rate - France
6
5
4
3
2
1
0
-1
-2
2000
2001
2002
2003
Bold Action
2004
Baseline
2005
7
6
5
4
3
2
1
0
-1
-2
-3
Baseline
Bold Action
Copyright © 2002 Global Insight
Baseline
Good News for Emerging Markets
Asia
+ Faster growth, thanks to a strong export pull from the G7
+ Capital spending recovers
+ Stock markets and consumer confidence boosted
+ Less pressure to provide more fiscal and monetary stimulus
Latin America
+ Prospects for Argentina and Brazil improve.
+ Risks of another financial crisis diminish.
+ Capital begins flowing back into the region.
Copyright © 2002 Global Insight
Good News for Emerging Markets
(continued)
Emerging Europe
+ Stronger EU imports boost growth and reduce pressure to boost
fiscal policy.
+ More capital flows into the region, boosting investment.
+ Relaxation of Eurozone fiscal targets facilitates accession of
candidate countries.
Middle East and Africa
+ Strong export growth to the G7 helps region recover more
quickly.
+ Rising commodity prices improve both trade and fiscal balances.
Copyright © 2002 Global Insight