NIESR’s latest research and quarterly forecasts on the UK and Global economy Covid Crisis: The UK and World Economy Contraction and Recovery Tuesday 28 h April 2020 9.30-10.30am Chair: Prof Jagjit Chadha, Director 09.30am Prof Jagjit Chadha: Opening Remarks 09.40 Amit Kara: Prospects for the Global Economy 09.55 Dr Garry Young: Prospects for the UK Economy 10.15 Q&A National Institute of Economic and Social Research 1
National Institute Economic Review No. 252, May 2020 Director’s Remarks Monetary Policy in Troubled Times Jagjit S. Chadha National Institute of Economic and Social Research 2
The Covid-19 Crisis – Policy Confronting Uncertainty • Sombre and difficult times for this country and the world – enormous pressure on policy-makers • NIESR Commentary regularly examines monetary and fiscal policy • Issues of co-ordination, dominance, targets and instruments all exposed by the risk and uncertainty of this crisis • Arbitrary fiscal rules serve little purpose and we need to build targets related to a social welfare criterion • Monetary policy can support but cannot undermine long run price and financial stability, and operational independence National Institute of Economic and Social Research 3
UK GDP path prior and following Covid-19 • Rapid decline may yet leave scarring • Compare to the financial crisis • Box A on 1921 – with 12- 15% and equivalent rebound the following quarter National Institute of Economic and Social Research 4
Fiscal Policy Must set quantum of risk to absorb and uncertainty to offset and then quantity of resources to transfer 1. Lockdowns are economic instruments to control the spread of Covid-19 2. Labour supply constrained and also with shortages and excesses in some areas 3. The economic shock falls more heavily on families in lower income deciles 4. Government – national and regional – need to be ready to kick start projects when lockdowns are eased 5. Fiscal multipliers may be quite large this time National Institute of Economic and Social Research 5
Monetary Menu • Conventional space: i. Buying more government debt ii. Buying riskier assets iii. Completing forward guidance iv. Publishing interest rate forecasts v. Negative policy interest rates • Unconventional space: i. Yield curve control ii. Monetary financing iii. Helicopter money drop • Normal service commitment – a fundamental constraint “Do No Harm” National Institute of Economic and Social Research 6
Prospects for the World economy National Institute Economic Review Issue 252, May 2020 Barry Naisbitt with Janine Boshoff, Dawn Holland, Ian Hurst, Amit Kara , Iana Liadze, Corrado Macchiarelli, Xuxin Mao, Patricia Sanchez Juanino, Craig Thamotheram and Kemar Whyte. National Institute of Economic and Social Research
Main points • World GDP to fall by 3.5% this year and bounce by 7% next year. • Inflation forecast for 2020 revised lower because of the collapse in activity and lower oil prices. • We assume peak GDP impact of the crisis is in 2020 Q2 and that the lockdown is phased out by the end of this year. - Demand shock: consumer spending + business investment (risk premium) - Supply shock: people not working for 3 months 4% reduction in productivity - Policy stimulus: worth around 2.5% of GDP will reduce GDP loss by 1/3 National Institute of Economic and Social Research
Main points • Economic response will vary: (i) structural factors : tourism (ii) policy space (ii) EM portfolio outflows : Record outflow of US $ 100 bn in 2 months • HUGE uncertainty: risk to our GDP growth forecast is skewed to the downside Global GDP projection and scenario with additional downside Annual GDP (index 2019=100) risks associated with Covid-19 recurrence from 2020Q4 (level) National Institute of Economic and Social Research
Main points • G7 policy response has been big, synchronised but uncoordinated . Central bank: Lower policy rate and QE/term funding Allen, B and Moessner, R: Interventions in specific financial markets The Fed’s enhanced swap lines and new interventions Counter-cyclical capital buffers lowered in the Treasury market. NIESR DP 513 Treasury: Large fiscal stimulus programmes • NiGEM simulations show that spillovers will amplify the impact of the domestic policy measures. The spillover impact is particularly big for small open economies. • Debt levels (household, corporate and government) has risen in developed and emerging economies over the last five years. National Institute of Economic and Social Research
The economic impact in perspective: GDP • Global GDP expected to fall by 3.5% this year, compared with 0.1% during the Global Financial Crisis. The drop is faster than GFC and Great Depression. • GDP level remains lower than our earlier forecast because of scarring • Phasing: China will recover faster than others. GDP (level, index 2019 = 100) 130 120 Level, index 2019 = 100 110 100 90 80 70 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 February May Source: NiGEM database and NIESR forecast . National Institute of Economic and Social Research
The economic impact in perspective: unemployment US new Unemployment claims 8000 7000 6000 Thousands 5000 4000 3000 2000 1000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: U.S. Department of Labor US: 6.9 million new unemployment claims on 27 March, the highest number on record. The following week saw a further 6.6 million claims. See: Bell, D and Blanchflower, D: US and UK labour markets before and during the Covid-19 crash. National Institute of Economic and Social Research
The financial impact in perspective: portfolio flows Cumulative non-resident portfolio flows to EM in global shocks, time in days 0 -10 -20 -30 -40 $bn -50 -60 -70 -80 -90 -100 t t+15 t+30 t+45 t+60 t+75 t+90 Global Financial crisis COVID-19 Source: Haver, IIF - Record outflow of US $ 100 bn in 2 months, 3 times the size seen during the GFC - More than 100 countries have approached the IMF for emergency financial assistance National Institute of Economic and Social Research
The fiscal policy response in perspective 1. Covid-19 fiscal policy response is synchronized but largely uncoordinated . GFC fiscal response was coordinated (G-20 London Summit “the greatest challenge to the world economy in modern times.” G -20 responded with a fiscal expansion worth US $5 trillion to raise output by 4 percent. 2. Fiscal policy response faster this time. The fiscal response was spread over three years (2008-10) during the GFC. 3. The fiscal policy response of the G7 is bigger than during GFC but that is not the case for the G20 group (IMF Fiscal Monitor, April 2020) National Institute of Economic and Social Research
The importance of debt 1. Debt (% of GDP) has risen across the world over the past 5 years (Table 1) 2. Total debt higher in developed economies at $129 trillion compared with $58 trillion in emerging economies. This holds as a % of GDP as well. 3. Non-financial corporate debt has risen sharply in France and China over the past decade. 4. Households and Corporates: reduction in Government and non-financial private sector debt-to-GDP ratios (%) income, tighter financial conditions and contagion effects will cause a wave of company defaults that could prolong the period of slower growth 5. Public sector debt will also rise: government will be confronted with important challenges in the medium term – tolerate higher debt or fiscal consolidation? 10 US BBB corporate index option-adjusted spread (%) 8 6 4 2 0 Source: Bank for International Settlements, total credit statistics, November 2019. Figures 2005 2008 2011 2014 2017 2020 are for 2014Q2 and 2019Q2. The darker shading in the table shows where debt-to-GDP ratios are higher than the preceding period. Source: St Louis Federal Reserve, economic database National Institute of Economic and Social Research
The importance of spillovers Decomposition of first-year GDP impacts (per cent difference from base) 1. Covid-19 is a global pandemic. 2. The economic impact includes the direct consequences of domestic policy measures and the spillovers from measures imposed elsewhere. 3. Results: Small open economies: decomposition of first-year GDP impacts (per cent difference from base) (i) Spillovers amplify the magnitude of domestic shocks by roughly 60 per cent. In other words, if all countries around the world suffered a 1 per cent domestic shock, the global economy would be expected to contract by 1.6 per cent after accounting for spillovers. (ii) Impact of spillovers in bigger in small, open economies. Source: NiGEM simulations. National Institute of Economic and Social Research
Recommend
More recommend
