Global Economic Outlook: Secular Trends and Emerging Risks Mark A. Wynne Vice President & Associate Director of Research Director, Globalization Institute Federal Reserve Bank of Dallas Presentation to Houston chapter NABE September 27, 2019
Outline • Fundamental drivers of long run prosperity • Demographics • Productivity growth • Trade • Global outlook • Still on course to expand in 2019 and 2020 • Risks • Debt • China • Europe: Brexit, Italy • Trade • Black swans
Fundamental drivers • Demographics • Aging populations in many countries, shrinking populations in some • Productivity growth • Most important determinant of improvements in living standards over time • Globalization • Driven by policy (tariffs etc.) and technology (containerization etc.) • More economic activity now takes place in the so-called emerging market economies than in the advanced economies
Demographics • Aging populations in almost all advanced economies • Declining working age population • Declining total population • Strains on public finances • Implications for innovation and productivity growth • Implications for the “natural” rate of interest, r*
A century and a half of world population growth Percent 5.5 0-14 4.5 15-64 65+ 3.5 2.5 1.5 0.5 -0.5 -1.5 -2.5 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s 2050s 2060s 2070s 2080s 2090s NOTE: Data represent decade averages
A tipping point… Working age population (15-64) as share of total (world) Share 0.67 0.65 0.63 Global peak: 2014 (0.66) 0.61 0.59 0.57 0.55 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
More people over 65 than under 5! Billions 1.8 1.6 Over 65 Under 5 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Push versus pull…
Push versus pull…
Demography and economic activity • Productive capacity of a nation depends on three things: • Population • Capital stock, both physical & intangible • State of technology or productivity (“ideas”) • Contribution of population depends on • Size of population of working age • Participation rate • Hours worked
Labor force participation rates for prime age workers in the G7 Share 0.95 0.90 0.85 0.80 0.75 0.70 U.S. Japan Germany U.K. Canada France 0.65 Italy 0.60 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Participation rates for prime age U.S. males now among the lowest in the G7 Share 1.00 0.98 0.96 0.94 0.92 0.90 0.88 U.S. Japan Germany U.K. 0.86 Canada France 0.84 Italy 0.82 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Gains by U.S. prime age women have now stalled Share 0.9 0.8 0.7 0.6 0.5 U.S. Japan Germany U.K. Canada France 0.4 Italy 0.3 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
But when U.S. workers do participate they work more hours Average Hours Worked per Week 45 U.S. Japan Germany U.K. Canada France 40 Italy 35 30 25 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Stagnating productivity growth in the U.S. (Utilization adjusted TFP growth) Percent 6 5 1948-73 avg.: 2.1 percent 4 1995-2007 avg.: 1.5 percent 3 2 1 0 -1 -2 1973-95 avg.: 0.6 percent 2007-18 avg.: 0.3 percent -3 1948 1958 1968 1978 1988 1998 2008 2018
…and across the OECD (Median TFP growth) Percent 3 1985-2007 avg.: 1.1 percent 2 1 0 -1 -2 2007-2017 avg.: 0.1 percent -3 1985 1990 1995 2000 2005 2010 2015
New York Times July 17, 2019
Disruption… • “We’re also testing the use of autonomous vehicles for delivery. I believe…that the primary place that that’s going to start is in last mile delivery…[which is]…always the most challenging…I’m not sure I’m ready to put an 80,000-pound missile on the highways in Texas on I35 without a driver there.” • Craig Boyan speaking at TED 2.0 • “…up in Frisco, we did an eight-month trial of autonomous vehicles to take our office tenants. We have 10,000 people that work in buildings that we built and we owned … At the end of the eight months, I’d say that one of the learning lessons for us was that it was harder for the customer to adapt to it. It seemed weird to get into a vehicle with nobody there driving… So, on the driverless car experiment, that’s still a big hurdle. This is still a big psychological hurdle” • Craig Hall speaking at TED 2.0
Globalization in reverse? (Exports of goods and services as a share of global GDP) Percent 35 Great trade boom 30 Globalization 2.0 Berlin Wall comes down 25 20 Great trade collapse 15 Great trade stagnation precedes trade war 10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Globalization in reverse? (Average Tariff for All Imports, 1800-2019) Percent 60 50 40 30 20 10 0 1800 1815 1830 1845 1860 1875 1890 1905 1920 1935 1950 1965 1980 1995 2010
Globalization in reverse? • Recent votes in U.K, France, U.S. and elsewhere have heightened awareness of the scale of discontent with open borders • Western democracies appear to have done a poor job at facilitating movement from declining sectors into emerging sectors • Lingering after effects of the global financial crisis may also be playing into this • Support for liberal international economic order more fragile than it has been in a long time • Do recent trade actions by the U.S. signal a permanent change in policy, or are they part of a broader based renegotiation of the rules of the game?
Where are we now? (PMIs) Index 65 U.S. 60 Global 55 50 45 Purchasing Managers’ Indexes for Manufacturing 40 provide our most timely read on the state of the U.S. and global economy 35 Expansion: >50 Contraction: <50 30 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Consensus Forecasts for 2019 & 2020 Real GDP Growth Latest Observed 2019 Consensus 2020 Consensus Forecasts Forecasts 2017 2018 YoY QoQ Latest Latest United States 2.2 2.9 2.3 2.0 Q2 2.3 1.8 World (ex. U.S.) GDP-Weighted 4.3 4.0 3.2 3.3 Q2 3.4 3.5 World (ex. U.S.) Trade-Weighted 3.5 3.0 2.2 2.5 Q2 2.2 2.4 Advanced (ex. U.S.) GDP–Weighted 2.4 1.7 1.2 1.3 Q2 1.2 1.2 Advanced (ex. U.S.) Trade-Weighted 2.5 1.8 1.3 2.0 Q2 1.3 1.3 Emerging GDP–Weighted 5.3 5.2 4.2 4.2 Q2 4.4 4.7 Emerging Trade-Weighted 4.5 4.3 3.1 3.1 Q2 3.1 3.6
Consensus Forecasts for 2019 & 2020 Real GDP Growth – Advanced Economies Latest Observed 2019 Consensus 2020 Consensus Forecasts Forecasts 2017 2018 YoY QoQ Latest Latest Advanced (ex. U.S.) GDP–Weighted 2.4 1.2 1.3 1.3 Q2 1.2 1.3 Advanced (ex. U.S.) Trade-Weighted 2.5 1.3 2.0 2.1 Q2 1.3 1.4 Euro Area 2.5 1.9 0.8 0.8 Q2 1.1 1.2 Japan 1.9 0.8 1.3 1.8 Q2 1.0 0.3 United Kingdom 1.8 1.4 1.2 -0.8 Q2 1.2 1.2 Canada 3.0 1.9 1.6 3.7 Q2 1.5 1.7
Consensus Forecasts for 2019 & 2020 Real GDP Growth – Emerging Economies Latest Observed 2019 Consensus 2020 Consensus Forecasts Forecasts 2017 2018 YoY QoQ Latest Latest Emerging GDP–Weighted 5.3 5.2 4.2 4.2 Q2 4.4 4.7 Emerging Trade-Weighted 4.5 4.3 3.2 3.1 Q2 3.1 3.6 China 6.8 6.6 6.2 5.5 Q2 6.2 6.0 India 6.9 7.4 5.0 2.9 Q2 6.8 6.8* Russia 1.7 2.2 0.8 4.4 Q2 1.1 1.9 Brazil 1.1 1.1 1.0 1.8 Q2 0.9 2.1 Mexico 2.4 2.0 0.3 0.1 Q2 0.5 1.4 South Africa 1.4 0.8 1.0 3.1 Q2 0.5 1.7
The world has changed! GDP based on PPP, share of world total Percent 65 Advanced Emerging 60 55 50 45 40 On the eve of the Global Financial Crisis there was about as much economic activity taking place in the emerging market 35 economies as in the advanced economies of North America, Europe and Japan 30 1992 1997 2002 2007 2012 2017 2022
The world has really changed! GDP based on PPP, share of world total Percent 25 U.S. China 20 15 10 By some measures China became the world’s largest economy in 2014 5 0 1992 1997 2002 2007 2012 2017 2022
Impact of China slowdown on U.S. in 2000…. Percent, deviation from baseline 0.2 0.0 -0.2 -0.4 -0.6 10% - 90% confidence bounds China US -0.8 -1.0 -1.2 0 1 2 3 4 5 6 7 8
…and today Percent, deviation from baseline 0.2 0.0 -0.2 -0.4 -0.6 10% - 90% confidence bounds China US -0.8 -1.0 -1.2 0 1 2 3 4 5 6 7 8
Risks • Debt • Problematic in both private and public sectors • China • Rebalancing towards less dependence on debt fueled growth • Europe • BREXIT; Italy • Trade • Trade war or new rules? • Black swans • Geopolitical risks
Economic policy uncertainty increased in the UK and EU after the BREXIT referendum Mean=100 1300 BREXIT referendum Index based on news articles from 1100 two newspapers from each of the five largest European economies 900 (FT & Times of London for the UK) U.K. 700 Europe 500 300 100 Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 Jan '19
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