1 The shift and the shocks: prospects for the world economy Martin - PowerPoint PPT Presentation

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The shift and the shocks: prospects for the world economy Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Global Policy Dialogue 23 rd January London School of Economics

The shift and the shocks • Shift • Shocks • Prospects 3

1. The shift • In the 19 th century, there occurred the “great divergence” • In the second half of the 20 th century, convergence began, notably with Japan and the east Asian “tiger economies” • In the late 20 th and early 21 st centuries convergence spread to the Asian giants • Divergent growth is mirror image of converging incomes 4

1. The shift EMERGING COUNTRIES OUTPERFORM HUGELY GDP SINCE THE CRISIS Source: IMF, WEO database 170 160 150 140 130 120 110 100 90 2007 2008 2009 2010 2011 2012 Advanced economies Emerging and developing economies China India 5

1. The shift DEVELOPED COUNTRIES FALL, ASIA RISES SHARES IN WORLD OUTPUT (at PPP, per cent) Source: IMF WEO database, October 2011 100% 90% 80% 4 70% 7 60% 14 18 50% 25 40% 24 30% 20 18 20% 29 25 10% 20 18 0% 1990 2000 2010 2016 European Union United States Other advanced economies China India Other developing Asia Other emerging economies 6

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; – An increase in the surplus of desired savings and so the rise of the global imbalances; – Then an inflationary shock, as demand for raw materials soared; and throughout – Ongoing shift in global economic activity 7

2. The shocks • The economic collapse was large and enduring • The rescue was also dramatic: – Liabilities of the core financial system were nationalised; – Monetary policy is unprecedented; and – Fiscal policy has been put on a war-time footing. • 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”. Given the scale of affected economies, it could be longer. • Conventional fiscal and monetary firepower is used up. 8

2. The shocks: global THE LEGACY OF THE DEBT EXPLOSION HOUSEHOLD DEBT TO INCOME RATIO Source: IMF WEO, September 2011 180 160 140 120 100 80 60 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 United States Euro area United Kingdom Japan 9

2. The shocks: global A LONG DEPRESSION GDP IN THE GREAT RECESSION 104.0 102.0 100.0 98.0 96.0 94.0 92.0 90.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 US UK CANADA JAPAN ITALY FRANCE GERMANY 10

2. The shocks: global THE SOVEREIGN DEBT CRISIS NET PUBLIC DEBT OVER GDP (per cent) 180 160 Source: IMF WEO, October 2011 140 120 2006 100 2009 2012 80 2015 60 40 20 0 Japan Italy United States France United Kingdom Germany Canada 11

2. The shocks: global THE AGE OF PREMATURE RETRENCHMENT STRUCTURAL FISCAL DEFICIT (as per cent of GDP) 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 Canada France Germany Italy Japan United Kingdom United States 2008 2009 2010 2011 2012 12

13 0 1 2 3 4 5 6 7 8 2. The shocks: global 30/10/2009 FISCAL ROOM? YES 30/11/2009 30/12/2009 US 30/01/2010 28/02/2010 TEN-YEAR GOVERNMENT BOND YIELDS UK 30/03/2010 30/04/2010 Japan 30/05/2010 30/06/2010 30/07/2010 Germany 30/08/2010 30/09/2010 30/10/2010 France 30/11/2010 30/12/2010 30/01/2011 28/02/2011 Italy 30/03/2011 30/04/2011 Canada 30/05/2011 30/06/2011 30/07/2011 Spain 30/08/2011 30/09/2011 30/10/2011

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 14

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 • Too little, too confused and too late • The crisis is potentially terminal for the eurozone 15

2. The shocks - eurozone EUROZONE IMBALANCES CURRENT ACCOUNT BALANCES (per cent of GDP) 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 d m s y a d n l e y e a a n d n i c l n i c i u r a a g n a a n n a t e i t p u s o l a g m a I l n e u e S t t l l r e r r s i r r r A o F F G e e I E B P h G t e N 1999-2007 Average 2012 16

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 160 2003 2004 140 2005 120 2006 100 2007 2008 80 2009 60 2010 40 2011 2012 20 2015 0 Greece Italy Portugal Ireland Spain 17

18 2. The shocks - eurozone ROAD TO THE EUROZONE FISCAL CRISES 100 200 300 400 500 600 0 01/01/2007 01/03/2007 01/05/2007 01/07/2007 01/09/2007 01/11/2007 01/01/2008 01/03/2008 01/05/2008 Belgium 01/07/2008 SPREADS OVER BUNDS 01/09/2008 01/11/2008 Spain 01/01/2009 01/03/2009 01/05/2009 France 01/07/2009 01/09/2009 01/11/2009 Italy 01/01/2010 01/03/2010 Netherlands 01/05/2010 01/07/2010 01/09/2010 01/11/2010 01/01/2011 01/03/2011 01/05/2011 01/07/2011 01/09/2011 01/11/2011

19 2. The shocks - eurozone ROAD TO THE EUROZONE FISCAL CRISES 1000 1500 2000 2500 3000 3500 4000 -500 500 0 01/01/2007 01/03/2007 01/05/2007 01/07/2007 01/09/2007 01/11/2007 01/01/2008 01/03/2008 01/05/2008 01/07/2008 SPREADS OVER BUNDS 01/09/2008 Greece 01/11/2008 01/01/2009 01/03/2009 01/05/2009 Ireland 01/07/2009 01/09/2009 01/11/2009 Portugal 01/01/2010 01/03/2010 01/05/2010 01/07/2010 01/09/2010 01/11/2010 01/01/2011 01/03/2011 01/05/2011 01/07/2011 01/09/2011 01/11/2011

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 – “Imbalances” are a vital symptom of economic stress • So how might it all play out? • We do not know. There are too many unknowns. 20

2. The prospects: global GROWTH PROSPECTS DWINDLE FOR 2012 GROWTH FORECASTS FOR 2012 Spain Italy France Germany Eurozone Japan UK US -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Jun-11 Jan-12 21

2. The prospects: global GROWTH PROSPECTS DWINDLE FOR 2012 GROWTH FORECASTS FOR 2012 World Latin America Brazil Eastern Europe Russia Asia Pacific (without Japan) India China 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Jun-11 Jan-12 22

3. Prospects: global • Here are salient elements of global challenges: – Accelerating de-leveraging in the private sectors of overleveraged countries; – Rebalancing the world economy, to give over-leveraged economies to enjoy export-led growth, 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. 23

3. Prospects: eurozone • What is needed now in the eurozone are: – Financing while adjustment occurs, which will take at least 5 years and possibly 10 years, or more; – Adjustment via structural reforms and divergent inflation across the eurozone, with higher inflation in core countries and low inflation in vulnerable countries; – The big risk is a combination of premature fiscal tightening in the periphery and the absence of adjustment in the core; – That will lead to further deep recessions; – And a possible break-up. 24

3. Prospects • Some guesses: – Growth in high countries will remain weak for many years, with a significant chance of a true depression; – Headline inflation rates will fall; – Short-term official interest rates will remain low; – Countries with their own central banks will have low long- term bond rates; many eurozone countries will not; – Eurozone break-up risk remains; – The US will be the fastest growing of big economies; – Emerging countries will grow quickly, but there is some chance of crises there, too. 25

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