Transcript Asia Assessment and Scenarios, November 2013

NS4053
Winter 2014
Asia Assessment and
Scenarios
Outline
•
Current World Economic Situation
• Overview, Patterns of Recovery, and Forecasts
•
• Major Themes Over the Next Several Years
Areas of Uncertainty
• Eurozone - Continued Stagnation?
•
• Emerging Economies – Slowdown Ahead?
Asia Overview
• Recent Capital Outflows and Financial Stress
• Economic Prospects
•
• Areas of Risk
Key Issues
• China’s Rebalancing
•
Implications of Global Trends for Defense Expenditures
2
Global Economy Overview I
• Before the crisis the main feature of the global economy
was its rapid integration – has continued at a slower pace
since the crisis
• Trade relative to GDP, capital flows relative to the global capital
stock and so on are all rising
• However, economic policies largely set at the national
level to benefit domestic economy
• These policies are increasingly affecting other economies
• External effects particularly important in the financial
sector due to potential for large and relatively abrupt
changes in
• Capital flows
• Asset prices
• Interest rates, exchange rates and
• Credit availability.
3
Global Economy Overview II
• The 2008-09 global economic crisis and its aftermath
illustrate this new reality
• Characterized by defective growth models in advanced
economies based on excess credit and domestic
aggregate demand
• Complicated by structural flaws and limited adjustment
mechanisms in Europe leading to
• Instability
• A crisis
• Large negative shock to the real economy
• Emerging economies were immediately affected by
• Credit tightening (including trade finance)
• Rapid declines in exports
• Resulting in similar shocks there
4
Global Economy Overview III
• This was followed by – extended version of the assisted
growth model in the advanced countries
• Unconventional monetary policy – United States
• Lowered cost of credit for debtors and those seeking to borrow
for business expansion
• Came at the at expense of savers – lower interest rates
• Did not work well because investment constrained by deficient
domestic demand relative to capacity
• Savers sought higher returns in emerging economies
• Causing increases in credit and causing upward pressure
on exchange rates and asset prices – responded with
• Limits on capital inflows
• Reserve accumulation and
• Measures to restrict credit and restrain asset-price inflation
5
Global Economy Overview IV
• Situation changed in May 2013 when U.S. Federal reserve
indicated it might taper its purchase of long-term assets
• Asset prices shifted and in emerging economies
• Capital rushed out,
• Caused credit markets to tighten and
• Exchange rates to fall
• At a minimum a short-term growth slowdown is nearly certain
• The reversals may have longer term adverse effects – although
not clear at this point
• While China’s output is affected by advanced country
economic performance – financial system largely isolated
• Capital account less open, foreign currency reserves of $2.5
trillion mean exchange rate is controllable
6
Global Economy Overview V
• Decentralized policy and growing externalities will result
in a partial de-globalization
• Not a good idea to run persistent current account deficits and
become dependent on (temporarily) low-cost foreign capital
• Open capital accounts may be replaced by rules-based
constraints on financial capital flows
• Lesson from crisis – substantial domestic ownership of
banking sector is critical because multilateral resolution
mechanisms in case of insolvency are largely nonexistent
• Pattern of accumulating reserves via current account surplus will
be more pronounced in order to manage exchange rates
• Public purchases of domestic assets to stabilize asset prices net
capital flows will become increasingly common.
• Successful countries will be those who learn to live with
growing policy interdependency without much policy
coordination
7
Crisis Has Accelerated Changes in World GDP
8
Decline of the G-8
9
Patterns of Future Pubic Debt
10
Debt Vulnerability
11
Today’s Global Themes
• Growth Prospects Weak
• DMs accelerating from 1.2% -- high debt, austerity
• EM GDP decelerating below 5%
• Private Sector deleveraging, lack of investment, financial sector
undercapitalization
• Long period of massive capital inflows into Ems (since 2003)
slowing or even partially reversing
• Tail Risks Remain (probabilities 10-30%)
• Hard Landing in China
• Disorderly events in EZ (more likely to be long stagnation)
• Military conflict with Iran leading to oil supply shock (low but
increasing in 2014
• Geopolitical Risks (North Korea, China-Japan, Egypt, Syria, Iraq
12
Industrial Recovery
13
Patterns of Growth Recovery
14
IMF Broad Forecast, April 2013
15
IMF October 2013 Forecast I
16
IMF Forecast October 2013 II
17
RGE Forecasts October 2013
18
Eurozone Slow-Down
19
Unemployment in the EZ
20
Eurozone Scenarios October 2013
• Base case (60%)
• Muddle through in 2013 and beyond increasingly problematic as
periphery governments under pressure to stop austerity/reform –
incremental solutions found
• Downside (30%)
• Collapsing Italian government and doubts about ECB asset
buying program
• Member states fiscal and political resources further strained
making future crises more difficult to resolve
• Upside (10%)
• Pro-reform governments are more resilient and world economy
stronger
• Progress towards true integration, banking union, common fiscal
sharing inches forward
21
Emerging Market Slowdown?
22
EMs Face Hurdles I
• Not a “BRIC wall” but a range of factors at play – Weak
financing, currency overvaluation or policy missteps will
take toll on economic
• Policy Induced Slowdown -- after some overheating,
many EMS tightened monetary policy in 2011
• Lack of Full Decoupling – from slow-growing DMs (EZ,
US)
• State Capitalism – distorting economic activity absorbing
resources leading to fall in potential growth
• Fallout from Chinese Slowdown – China is negatively
affecting growth across Ems (especially in South-East
Asia, Latin America, metal exporters.
• End of Commodities Super-cycle – many Ems affected –
Brazil, Russia, South Africa in particular
23
EMs Face Hurdles II
• Approaching end of US Federal Reserve QE and Easy
Money – will slow if not reverse trillions of EM capital
inflows
• Increasing Frequency of Large Current Account Deficits –
Many countries financing deficits in increasingly risky
ways
• Rising Political Risk in Many Ems – Busy electoral cycle
in 2014
• Macro and Financial Fragilities in some Ems – handful of
Ems have high and unsustainable debt rations that will
require coercive debt restructurings, particularly if a
sudden stop occurs.
• The Risk of a Middle Income Trap – many Ems running
out of easy sources of growth – have not laid a good
foundation through improved governance for further
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growth
EM Risk Rankings
25
Next Big Emerging Economies?
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Asian Analysis
• Asia Overview
• Recent Capital Outflows and Financial Stress
• Economic Prospects
• Areas of Risk
• Key Issues
• China’s Rebalancing
• Trans-Atlantic Partnership (TPP)
27
Asia 2013: Overview
• 2013: Asia as along with other emerging regions has
encountered a wave of capital outflows
• Overall impact manageable – but some countries have
been subject to greater stress
• Tighter global credit and domestic impediments in some
countries – will dampen growth
• This may be offset by gradual pickup in exports to
advanced countries and resilient domestic demand
• However conditions tighten further likely to see greater
variation across region
• Those with strong fundamentals and policy credibility
will be able to offset external developments
• Others that have delayed reforms, left fiscal
vulnerabilities, or tolerated too-high inflation may be
forced to respond with policy tightening – austerity.
28
Asia: Recent Developments I
•
•
Since April, U.S. Federal Reserve tapering has ignited capital outflows
from many emerging markets
Equity prices have fallen in some countries as well as exchange rates
falling – Indonesia hard hit – to support currencies have had to
increase interest rates and tighten credit thus slowing investment.
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Asia: Recent Developments II
• While the reversal of capital flows has reflected
increasing yields and more attractive investment
opportunities in advanced countries –
• Weaker growth prospects throughout Asia and country-specific
vulnerabilities have played a role
• Causes of weaker growth throughout emerging Asia
• Weak external demand from advanced countries and a
slowdown in China dampened industrial activity in region
• Domestic demand has also softened
• At same time a broader structural shift is underway with
increasing supply bottlenecks in India and declining returns to
investment in China
• As a result, potential growth in the major emerging Asian
economies has declined steadily
30
Asia: Recent Developments III
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Asia: Vulnerabilities
• Abundant global liquidity over last half-decade covered
up some vulnerabilities that are now exposed
• India and Indonesia are now running large current account
deficits and facing high inflation (including food prices)
• Some Indonesian inflation reinforced by a subsidized fuel price
increase
• Other concerns
• Large fiscal deficits in Malaysia
• Strong credit growth in recent years – Thailand, the Philippines
and ASEAN more broadly
• Overly simulative macroeconomic policies --Lao P.D.R, Mongolia
32
Variation Across Asia Region I
• Generalizations difficult with considerable growth
differences across region in 2013 and into 2014
• China
• China largely isolated from recent financial market volatilities
• Continued measures to slow credit growth and the excesses of
recent years should put economy on slower growth trajectory
• Growth projected to decelerate to 7.6% in 2013 and 7.3% in
2014
• Excess capacity in a number of industries and stable food prices
should mean inflation will remain under control
33
Variation Across Asia II
• Japan
• Country’s growth upswing has been bright spot in region as
Abenomics has reignited economy and is starting to lift country
out of chronic deflation
• Financial conditions have eased markedly as a result of
exchange weakening and an asset price rally triggered by
monetary easing
• Inflation and inflation expectations have increased, but well
below Bank of Japan’s target 2%
• Growth likely to reach 3.5% a year by end of 2013 driven by
weaker yean and recovering industrial demand
• Growth forecast to decelerate to 1.2 percent in 2014 owing to
waning reconstruction spending and the planned consumption
tax increase
• A new fiscal stimulus will be announced in December and may
increase the growth forecast
34
Japan: Regular Employment
35
Variation Across Asia III
• Korea
• Economy spurred by fiscal and monetary stimulus is set for
modest recovery
• India
• Fallout from recent financial stress has contributed to greater
vulnerability of corporate and bank balance sheets
• Further IMF downward revision of growth forecasts which were
already very low in historical context
• Reflects persistent supply constraints and slow progress on
structural reforms
• In most ASEAN countries growth should pick up
somewhat
• External demand will improve while domestic demand is likely to
improve reflecting stronger pubic infrastructure spending
(Thailand)
36
Variation Across Asia IV
• Indonesia
• May be a slowing in first half of 2014 due to
dampening domestic demand and weakness in
external sector
• Rapid IDR depreciation resulted in Bank of Indonesia
raising interest rates – may slow down investment
• Fuel price increases dampen private consumption
• Growth forecast at 5.7% (2013), 5.5% (2014), and
5.9% (2015)
• July 2014 elections critical in determining course of
growth
• Most likely high growth will return in the latter half of
the decade
37
Indonesian Inflation Forecast
38
IMF October 2013 Asia Growth Forecasts
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IMF October 2013 Asia Inflation Forecasts
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Risk Assessments I
• Asian Risk Assessment
41
Risk Assessment II
• Japan Risk Assessment
42
Risk Assessments III
• Indonesian Forecast Risk Analysis
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China’s Rebalancing I
Overview:
• China’s economy is currently going through a painful
transition to a more consumption based economy
• The days of double digit economic growth clearly over
• In the short run, slower growth is generating concern about
the nation’s near-and medium-term prospects
• There is an up-side to the gradual slowdown over the past
several years
• Growth in the coming years will be both robust and more sustainable
• The structural reforms that are central to the 12th Five Year Plan (20112015) will become somewhat easier to achieve
• On balance it appears China’s economy is headed in the
right direction, but still worrisome in the short-run
• However, key economic and political risks – including
corruption, social inequality and lack of progress in
governance reforms – must be addressed in order to assure
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long-term economic growth.
China: Quarterly GDP Growth
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Patterns of Growth Slowing I
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Patterns of Growth Slowing II
47
China: Short-Run Concerns
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China: Rebalancing I
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China’s Rebalancing II
China is making progress in other areas of rebalancing
• Since the yuan was first unlinked from the dollar in July
2005, the nominal yuan-dollar exchange rate has
appreciated by over 30% and the real rate by over 40%
• China has recently widened the yuan’s trading band and has
cautiously resumed many financial sector reforms that were
stalled since 2004
• The country is also continuing to promote the international
use of its currency for trade and investment purposes
• China’s traditional east-west development gap is also
shrinking as a result of the government’s “Go West”
investment policies
• In recent years, interior, not coastal provinces have grown
most rapidly
• Agriculture, main source of income for 30% population
continued strong – per capita rural growth has exceeded
urban growth
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• However, income and wealth inequality has increased.
China’s Global Investments
51
GDP Comparisons, 2007-2020
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China: Ageing Problem
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China’ Rebalancing III
•
•
Summing Up -- China’s economic adjustment after the 2008 crisis
has been impressive but risks may have intensified. These include:
•
Corruption and social inequality
•
The possibility of financial instability due to the proliferation of many new, poorly
supervised financial products as well as increased corporate leverage
•
Falling profit margins which have lowered business confidence
•
Though the housing market in big cities seems to have stabilized a large stock of
vacant apartments continues to weigh on prices
Widely reported over investment in basic infrastructure will by
contrast probably turn out to be less of a problem than
overinvestment in manufacturing and high end real estate
•
•
•
Most of the new infrastructure has been created ahead of needs as part of the
government’s strategy to stimulate new development opportunities.
Greatest risk facing China today is stagnant political reform,
including promotion of the rule of law
Without progress on this front, social inequality, and perceived
unfairness could jeopardize the transition to the next stage of
development and with it the country’s long term economic
prospects.
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China: 2013/14 Scenarios
• Base Case: GDP Growth falls to 4-6% growth (50%)
• Property and infrastructure investment contract some
• Investment in other sectors holds up (5-9%)
• Growth rebalances toward consumption
• Partial bailout of local governments
• Labor-market impact and/or the wealth effects from falling
property prices offset by policy actions
• Downside: of 3% Growth (20%)
• Real estate bust and debt problems lead to credit crunch and
investment collapse
• Upside of continued 6-8% growth (30%)
• Delay in rebalancing for 1-2 years, but inflation or excess
capacity still make this path unsustainable after 2014
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Can U.S. Defense Expenditures Compete for Resources? I
56
U.S. Actual vs Potential GDP
57
U.S. GDP Shift Away from Federal Spending
58
Expansion of Entitlements
59
U.S. Public Spending Patterns
60
U.S. Long-Term Deficit Picture
61
Long-Run Decline in U.S. Defense
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Global Defense Expenditures
• Although there are a few exceptions the is a stinking
contrast between rising defense expenditures in still
growing economies and austerity-induced cutbacks
elsewhere
• Robust growth in emerging world means that these
countries can increasingly afford to procure cutting edge
defense technologies
• Increased military spending is a zero sum game and will
inevitably generate arms races
• Certain countries – China, India, and Russia take the view
that their economic growth should be matched by
equally impressive developments in their military
capabilities
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Asia: Total Defense Spending by Country
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Asia: Growth in Defense Spending
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Asia: Growth in Per Soldier Spending
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European Defense Expenditures
67
European Defense Spending By Categories
68
Europe: Defense Spending by Country
69
Declining Allied Share of Global Military Spending
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General Lessons From the Crisis
• Nobody Really Understands the World Economy – economic
outcomes hard to predict because world economy is
continually in flux – “unknown unknowns” will always be
with us.
• That Goes Double for Financial Markets – financial markets
even more volatile than real economy – Starting with the
Dutch Tulip Bubble have had 350 years of financial crashes
and panics – unlikely to stop anytime soon – each one that
comes will take most people by surprise.
• The Battle of Financial Markets is Over: The Battle of State
Finance Has Begun – Speculators will test sovereign debt
markets. Clear that governments can no longer do
whatever it takes to fix economic problems. New, large and
unpredictable risks now hang over the global economy.
• The US and its allies will face a long period of slow growth
with contracting defense budets. This will require increased
cooperation, coordination, and flexibility in adapting to a
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fundamentally altered budgetary environment