Global Economic Issues Carmen M. Reinhart Harvard University - PowerPoint PPT Presentation

Global Economic Issues Carmen M. Reinhart Harvard University Economic Advisory Panel Meetings Federal Reserve Bank of New York, May 15, 2015 Reinhart 1

 Europe: (i) Delayed recovery, (ii) deflationary tendencies (iii) Debt overhangs and their resolution (iv) Greece?  Global finance: Equilibrium real interest rates, QE in Europe and Japan, financial repression?  Emerging markets: (i) Capital flow bonanzas and their aftermath (ii) Where are we in the boom-bust cycle? (iii) persistence and duration--Commodities? China? Reinhart 2

The 2007-2009 Crisis: Severity measures  It is premature to construct a definitive measure of the severity of the recent crises  Of the twelve countries experiencing a systemic crisis starting in 2007-2008 (France, Germany, Greece, Iceland, Ireland, Italy, Netherlands, Portugal, Spain, Ukraine, UK, and US), only Germany and the US have reached their pre-crisis peak in per capita GDP. Reinhart 3

Output, Crises and Recovery Reinhart and Rogoff (2014) updated with World Economic Outlook, April 2015 12 Systemic banking crises, 2007-2008 % change Number of years Peak to Peak to Peak to Severity Breakeven Year Country trough trough recovery index year 1 2008 France -3.8 2 9 12.8 2016 2 2008 Germany -5.3 1 3 8.3 2011 2021?? 3 2008 Greece -25.8 6 14 39.8 4 2007 Iceland -9.9 3 9 18.9 2016 5 2007 Ireland -12.6 3 11 23.6 2018 2021?? 6 2008 Italy -10.8 7 14 24.8 7 2008 Netherlands -5.0 5 10 15.0 2018 8 2008 Portugal -7.4 6 12 19.4 2019 9 2008 Spain -9.0 6 11 20.0 2018 10 2008 Ukraine -14.8 1 12 26.8 2020 11 2007 United Kingdom -5.9 5 8 13.9 2015 12 2007 United States -4.8 2 6 10.8 2013 Summary: Mean -9.6 3.9 9.9 19.5 Median -8.2 4.0 10.5 19.2 Standard deviation 6.1 2.2 3.2 8.6 Note: The italics denote any calculations in which IMF estimates for 2015-2020 are used. Reinhart 4

 The number of years to recover the pre- crisis peak in per capita GDP in 100 of the worst crises since the 1840s is about 8 years (the median is 6 1/2 years).  In the 2007-2008 wave of crises, the average may come in closer to 10 years. Reinhart 5

The incidence of deflation and high inflation, 22 advanced economies, 1945-2015 Share of 100 countries 90 80 Share with annual inflation above 10% 70 60 50 Share with deflation 40 30 20 Iceland 10 Japan 2008-2009 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Reinhart 6

What factors have made this crisis so protracted? What is the end-game? The list includes:  the synchronous nature of the crisis,  the absence of greater exchange rate adjustment,  austerity,  the dearth of credit — (external or domestic),  the lack of deleveraging and write-downs (private or public) almost a decade later. Reinhart 7

Private Domestic Credit as a Percent of GDP Advanced Economies, 1950-2014 Lack of deleveraging 180 (even after 7 years) 160 140 120 100 80 60 40 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Reinhart 8 8

Gross Total (Public plus Private) External Debt as a Percent of GDP: 22 Advanced Economies, 1970-2014 300 Average 250 22 Advanced Economies 200 150 100 50 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Reinhart 9 9

Public debt as a percent of GDP: Advanced Economies: 1900-2015 Reinhart Reinhart Reinhart 10

What is the endgame? Throughout history, debt/GDP ratios have been reduced by: (i) economic growth; (ii) fiscal adjustment/austerity; (iii) explicit default or restructuring; (iv) a sudden surprise burst in inflation; and (v) a steady dosage of financial repression that is accompanied by an equally steady dosage of inflation. Reinhart Reinhart 11

Official debt is the Greek story now Arslanalp and Tsuda, (2014) Greece 100% 200 90% 180 80% 160 70% 140 Percent of GDP Percent of total 60% 120 50% 100 40% 80 30% 60 20% 40 10% 20 0% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 100% 100 Domestic central bank Domestic bank Domestic nonbank Foreign official sector Percent Percent of total of GDP 0% 0 1 xxx. 2004 2005 2006 2007 2008 2009 2010 2011 2012 Foreign bank Foreign nonbank Total debt (rhs) Reinhart 12

"World" Real Short-term Interest Rates, 1870-2015 Reinhart 13

Real T-bill Rates Frequency Distributions: 22 Advanced Economies, 1945-2015 Percent of 1946-1979 1980-2007 2008-2015 observations 35 Real Interest rate on T-bills 30 Share of obsevations at or below: 1945-1979 1980-2007 2008-2015 -1 percent -33.9 -5.7 -28.8 25 0 -47.8 -11.3 -57.7 1 percent -62.8 -23.1 -85.9 2 percent -76.5 -38.8 -95.5 20 15 10 5 0 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 real interest rate on 3-month T-bills (percent) Reinhart Reinhart 14

The cross-country incidence of negative real interest rates in advanced economies (left scale, tan bars) (right scale, red bars) Share of Number of countries with countries with negative real rates negative real rates 100 16 Rates are on 3-month T-bills 90 22 advanced economies, 1945-2015 14 80 12 70 10 60 50 8 40 6 30 4 20 2 10 0 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Reinhart 15

Crisis probabilities and the capital flow cycle Reinhart and Reinhart (2015) Probability of a crisis, by type, and the benefit of observing a current account bonanza Share of countries, 1982 to 2014, percent 0% 10% 20% 30% 40% 0% 10% 20% 30% 40% Banking External default Unconditional Domestic default Conditional Inflation crisis Shaded bars are statistically significant. Currency Emerging market Advanced Source: Reinhart and Reinhart (2009) and Reinhart (2010), updated. Reinhart 16

By early 2013, in major emerging markets  Current account deficits had reappeared  As did credit booms  And currency overvaluation  Growth had begun to slow  Inflation had resurfaced as a concern And then came the announcement of QE tapering… Reinhart 17

Real Commodity Prices: 1854-2015 4.2 Real commodity prices index (2005 = 1) Boughton (1991) 1854-1979 IMF WEO, 1980-2015, Non-Fuel Price Index deflated by Advanced Economy CPI 3.7 3.2 2.7 2.2 1.7 1.2 0.7 1854 1864 1874 1884 1894 1904 1914 1924 1934 1944 1954 1964 1974 1984 1994 2004 2014 Reinhart 18

The share of EMs with significant current account deficits has risen markedly Percent 75 Share of emerging market and developing countries Debt crisis with a current account deficit greater than 3 percent of GDP (2-year moving average) 70 65 The Asian and Global financial Russian crises crisis 60 55 50 45 40 35 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Reinhart 19

China’s fall and rise, 1500 -2013 Percent 35 30 China's share in world real GDP 1500-2013 25 20 15 10 5 0 150017001870196119631965196719691971197319751977197919811983198519871989199119931995199719992001200320052007200920112013 Reinhart Reinhart 20