Transcript Slide 1 - World Bank

ENSURING
AN EUROPEAN RECOVERY
Prakash Loungani
Advisor, Research Department, IMF
Co-Chair, Jobs & Growth Working Group, IMF
October 12, 2013
VIEWS EXPRESSED ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF .
I thank Ezgi Ozturk for excellent research assistance.
Outline
1. Recovery is here (fingers crossed)
2. Why did it take so long?
•
•
Comparison with Asian crisis countries
Comparison with previous global recoveries
3. How to keep it going
1. Recovery is here
(fingers crossed)
The annual projections …
WEO Real GDP Growth Projections
(percent change from a year earlier)
World
U.S.
Euro
Area
2013
(Oct. 2013)
2.9
1.6
-0.4
2.0
2.5
1.5
3.8
7.6
2013
(Jul. 2013)
3.1
1.7
-0.6
2.0
2.5
2.5
5.6
7.8
2014
(Oct. 2013)
3.6
2.6
1.0
1.2
2.5
3.0
5.1
7.3
2014
(Jul. 2013)
3.8
2.7
0.9
1.2
3.2
3.3
6.3
7.7
Japan
Brazil
Russia
India
China
4
Source: IMF, World Economic Outlook.
8
A closer look
Euro Area and Selected European Countries: GDP Growth
(Percent)
Euro area
Germany
France
Italy
Spain
2009
2010
2011
2012
2013
2014
2015
-4.4
-5.1
-3.1
-5.5
-3.8
2.0
3.9
1.7
1.7
-0.2
1.5
3.4
2.0
0.4
0.1
-0.6
0.9
0.0
-2.4
-1.6
-0.4
0.5
0.2
-1.8
-1.3
1.0
1.4
1.0
0.7
0.2
1.4
1.4
1.5
1.1
0.5
Source: IMF, World Economic Outlook database.
A dire unemployment situation
A lost generation?
Correlation between Change in
Unemployment and Change in GDP
(2012, in percent)
Change in Unemployment Rate
7
Euro Area
6
5
4
3
2
1
0
-1
-2
-3
-8
-6
-4
-2
Real GDP Growth
0
2
4
2. Why did it take so long?
Europe had worse initial fiscal position
than Asian crisis countries
4.0
KOR
THD
IDN
2.0
0.0
Fiscal balance (as % of GDP)
0
20
40
60
80
100
120
140
-2.0
-4.0
-6.0
POR
-8.0
-10.0
GRC
-12.0
IRE
-14.0
General government debt (% of GDP)
Data for Asian and European countries is for respectively 1996 and 2009.
Asia adjusted more via exchange rates,
Europe via domestic adjustment
5
POR
GRC
IRE
-5
THD
REER adjustment
-15
KOR
-25
-35
-45
IDN
-55
-6
-4
-2
0
2
4
6
8
10
Fiscal adjustment (% of GDP)
REER adjustment measured over 1997-98 for Asian countries and 2010-12 for European countries. Fiscal adjustment measured as
change in fiscal balance between 1996-2000 for Asian countries and 2009-2012 for European countries.
EUR access higher in % quota
but not in % of financing needs
50.0
IDN
IMF financing as % of gross financing needs
45.0
KOR
40.0
35.0
30.0
25.0
20.0
15.0
POR
GRC2
10.0
THD
GRC1
5.0
IRE
0.0
0
500
1000
1500
2000
2500
3000
3500
IMF financing as % of Quota
Financing needs comprise current account balance and short-term debt (at remaining maturity). For Korea, shortterm debt is on a maturity basis. The first Greek program (GRC1) was not fully disbursed.
Asia rebounded faster
110
Eurozone program countries
Asian program countries
Real GDP level, crisis start = 100
105
100
95
90
85
t-1
t
t+1
t+2
Simple group averages of real GDP levels
t+3
t+4
A Recovery on Track?
World Real GDP per capita
Figure 1. Real GDP Per Capita
(index, PPP weighted)
130
World
120
Global Recession Year
Average of previous recoveries
110
Recovery from the Great Recession
100
90
80
-4
-3
-2
-1
0
1
2
3
4
Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession.
Zero is the time of the global recession year. Each line show the PPP-weighted average of the
countries in the sample.
The Divergence in Recovery
between Advanced Countries and Emerging Markets
Figure 2. Real GDP per Capita: Advanced Countries and Emerging Markets
(index, PPP weighted)
Advanced Countries
Emerging Markets
130
130
120
120
110
110
100
100
90
90
80
80
-4 -3 -2 -1 0
1
2
3
4
-4 -3 -2 -1 0
1
2
3
4
Global Recession Year
Average of previous recoveries
Recovery from the Great Recession
Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession. Zero is the
time of the global recession year. Each line show the PPP-weighted average of the countries in the
respective group.
Divergence in Government Spending
between this Global Recovery and Past Global Recoveries
Figure 3. Real Primary Expenditure
(index, PPP weighted)
Advanced Countries
150
150
120
120
90
90
60
60
-4
-3
-2
-1
0
1
2
3
4
Average of previous recoveries
Emerging Markets
-4
-3
-2
-1
0
1
2
3
4
Recovery from the Great Recession
Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession. Zero is the
time of the global recession year. Each line show the PPP-weighted average of the countries in the
respective group.
Divergence in Government Spending
between this Global Recovery and Past Global Recoveries:
US and Euro Area
Deleveraging
3. How to keep it going
The (overloaded) policy agenda
• Banking union
• Macro policies
– Fiscal
– Monetary
• Labor market & structural policies
**
• External conditions
– US monetary policy actions
– Emerging market growth
Banking union
• Ongoing reforms should be expedited, including a
final agreement on the Bank Recovery and
Resolution and Deposit Guarantee Scheme (DGS)
Directives by the European Parliament.
• European partners should agree on a strong
resolution mechanism based on a centralized
authority, supported by a common fiscal
backstop, with powers to trigger resolution and
make decisions on burden-sharing to ensure
timely and least-cost resolution.
Fiscal policy
•
Fiscal consolidation inevitable in high-debt countries, but it also
reduces short-term growth. Getting the pace and composition of
consolidation right is therefore essential.
•
The pace and composition of adjustment should be attuned to country
circumstances.
– Pace: Where financing allows, adjustment should be conducted at a
gradual pace that balances the need to reduce structural deficits against
that of not undermining the recovery, and automatic stabilizers should
be allowed to operate.
– Composition: The expenditure and revenue mix in adjustment plans
should be calibrated to reduce negative short-term effects on economic
activity, while enhancing long-term growth prospects and protecting the
most vulnerable.
•
Fiscal adjustment should be based on credible medium-term plans.
Monetary policy
• Forward guidance that rates will remain low
• But also dependent on US monetary policy
actions
US conditions
Government Bond Yields and GDP Growth From
Consensus Forecast
Unemployment Rate
(percent)
10
50
9
49
(percent
3.0
May 22, 2013
2.5
8
48
Unemployment rate
(left scale)
7
47
Employment as
percent of population
6
46
2.0
GDP growth in 2013
1.5
5
45
GDP growth in 2014
10-year government bond yields
4
2006
44
07
08
09
10
11
12
Sources: Bloomberg, L.P., Consensus Forecast; and IMF staff estimates.
13
Jan. 2013
Mar. 13
May 13
Jul. 13
1.0
Sep. 13
25
Impact on Europe from US
developments
Key Interest Rates 2/
Policy Rate Expectations 1/
(percent; months on x-axis; dashed lines are from
the April 2013 WEO)
0.6
(percent)
7
U.S. average 30year fixed rate
mortgage
0.5
Germany
6
United States
United States
5
0.4
Europe
4
0.3
3
0.2
2
0.1
1
0
0
t
t+12
t+24
t+36
2007
08
09
10
11
12
Sep.
Source: Bloomberg, L.P.
13
1/ Expectations are based on the federal funds rate for the United States, the sterling overnight interbank average rate for the United Kingdom, and the euro interbank
offered forward rate for Europe; updated September 24, 2013.
26
2/ Interest rates are 10-year government bond yields unless noted otherwise.
But inflation pressures are very low. Thus, our WEO assumes that
monetary policy stays very accommodative in advanced economies.
Inflation and inflation expectations
remain subdued
Global aggregates: Headline Inflation
(year-over-year percent change; dashed lines are the six-to-ten-year
inflation expectations)
6
Euro area
5
United States
4
3
2
1
0
-1
-2
2002
04
Sources: Consensus Forecast; and IMF staff estimates.
06
08
10
12
14:
Q4
27
Getting macro right will help labor markets
• “There is sometimes the naïve belief that
unemployment must be due to a defect in the
labor market, as if the hole in a flat tire must
always be at the bottom, because that is where
the tire is flat” (Solow, 2000).
• "It takes a heap of Harberger triangles to fill an
Okun's gap.” (Tobin, 1977)
Framework
Large increase in unemployment in advanced economies
during the crisis
– Cyclical or structural unemployment?
– How to achieve the relative price adjustment in
periphery Euro countries?
– Can labor market reforms reduce the natural
unemployment rate and raise potential growth?
Staff Discussion Note (Blanchard, Jaumotte, Loungani) looks
at IMF advice in this light
2
Unemployment during the Great Recession
• Initial increase cyclical rather than structural
• Greater uncertainty about relative proportions now, but
remains largely cyclical in our view
• Beveridge curve quite stable; moreover shifts may not
be sign of increase in natural rate (Diamond 2013)
• Other measures of mismatch back to normal
• Lack of deflation not a sign of small unemployment gap
• Stability of Okun’s Law (even during the Great Recession)
suggests jobs will return if the growth returns.
• Hence focus of IMF policy recommendations remains on getting
growth back
3
“Labor Market Flexibility”:
Moving Beyond Mantras
Recommendations: Labor Market Policies
• Extension of unemployment benefits
• Iceland, Greece
• But reduction in Portugal
• Targeted interventions to help some groups
• Youth; Low-skilled; Long-term unemployed (see chart that follows)
• Move away from duality
• Too late to stop layoff of temporary workers
• But reduction in employment protection on permanent contracts could
help hiring as recovery takes hold
3
‘Recovery’ differs across groups
Youth (aged 15-24)
Older workers (aged 55-64)
Low-skilled (aged 25-64)
High-skilled (aged 25-64)
115.0
110.0
105.0
100.0
95.0
90.0
Ratio of each group's employ ment relativ e to ov erall employ ment,
a
OECD av erage,
b
2008 Q1-2011 Q4, index = 100 at the start of the
crisis
33
Competitiveness
• In some Euro area countries, need reduction in relative
wages
• Best way to achieve would be through national tripartite
agreement
• Experience of Latvia, Ireland, Greece
• Without such an agreement
•
•
•
•
More flexibility in wage-setting
Reduction in public sector wages
Reduction in minimum wage
Fiscal devaluations
• Higher inflation in North relative to South
3
Medium-run Growth
• Higher potential growth and lower natural rate of
unemployment desirable
• Product market reforms
– essential for medium-run but can hurt in the short-run
• Labor market reforms
–
–
–
–
move away from duality
more flexible wage-setting
Reduce tax distortions to raise participation, particularly for females
Raising retirement age and adjusting benefits to raise participation of older
workers
3