OECD ECONOMIC OUTLOOK Policies to Promote Sustained and Inclusive - PowerPoint PPT Presentation

OECD ECONOMIC OUTLOOK Policies to Promote Sustained and Inclusive Growth The Hague, Netherlands January 26, 2016 Catherine L. Mann OECD Chief Economist http://www.oecd.org/economy/economicoutlook.htm

Main Themes Global trade weakness—harbinger of global slowdown? Focus on China – real vs financial linkages Stronger investment is key – what holds it back? What policies to support more robust, inclusive growth? What are the costs of policy inaction? 2

Global GDP growth: modest projected upturn (smooth slowdown in China, more robust investment in advanced economies) Global GDP Real GDP Annual percentage changes 2014 2015 2016 2017 World 1 3.3 2.9 3.3 3.6 United States 2.4 2.4 2.5 2.4 Euro area 0.9 1.5 1.8 1.9 Japan -0.1 0.6 1.0 0.5 China 7.3 6.8 6.5 6.2 India 2 7.3 7.2 7.3 7.4 Netherlands 1.0 2.0 2.3 2.7 Brazil 0.2 -3.1 -1.2 1.8 1. Moving nominal GDP weights using purchasing power parities. 2. Fiscal years starting in April. 3 Source: OECD November 2015 Economic Outlook database.

Dramatic slowdown in global trade growth Harbinger of slower growth or set to rebound? Import volumes Global trade volumes and GDP 4 Source: OECD November 2015 Economic Outlook database.

Netherlands robust export performance bucking the general trend A. Export performance B. European Union is the key goods export market Index 2007 = 100 As a percentage of GDP 110 90 Netherlands France BRIICS 80 Germany United Kingdom European Union United States OECD 70 United States 105 Other 60 Total 50 100 40 30 95 20 10 90 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 1982 1986 1990 1994 1998 2002 2006 2010 2014 5

China import growth particularly weak China’s growth increasingly difficult to forecast China: Real GDP and import volumes GDP forecasts for China and number of forecasters Note: 2015 is change in the first three quarters vs 2014. Import Sources: Bloomberg. volumes are deflated based on OECD estimates. Nominal imports during the first three quarters of 2015 were down 8 per cent. 6 Sources: OECD November 2015 Economic Outlook database.

China: renewed financial turmoil Some technical factors, but also expectations, herding CSI 300 index (rebased, Jan 5 2015 = 100) Yuan/USD exchange rate 6,7 6,7 150 140 6,6 6,6 Offshore Onshore 130 6,5 6,5 120 110 6,4 6,4 100 90 6,3 6,3 80 6,2 6,2 70 6,1 6,1 7

Worries about the pace of China slowdown But some bright(ish) spots, responding to policies Services PMI Manufacturing PMI 56 56 NBS Caixin 52 52 55 55 NBS Caixin 51 51 54 54 53 53 50 50 52 52 49 49 51 51 48 48 50 50 47 47 49 49 46 46 Car sales Property prices (yoy % chg) QoQ Units 2.400.000 70 annualised Units 10 (%) 60 2.300.000 8 50 6 2.200.000 4 40 2 2.100.000 0 30 2.000.000 -2 20 -4 1.900.000 -6 10 -8 1.800.000 0 1.700.000 -10 8 jan-15 mrt-15 mei-15 jul-15 sep-15 nov-15

Contagion is unpredictable; Yuan/$ appears key Market returns to date in 2016 Yuan/USD exchange rate and VIX index (in USD terms; per cent) of US equity price volatility 45 6,7 CBOE VIX 40 6,6 Yuan/USD 0 35 6,5 -2 -4 30 6,4 -6 25 6,3 -8 -10 20 6,2 -12 15 6,1 -14 -16 10 6,0 -18 9

EMEs more affected by risk aversion and RMB EMBI+ Composite stripped spread b. b. p. 475 475 450 450 425 425 400 400 375 375 350 350 325 325 300 300 275 275 10

Simulation: Moderate effect of a sharper Chinese slowdown, plus financial spillovers GDP growth impact of a domestic demand shock in China plus financial spillovers Two percentage point decline in the growth rate for two years, 10% reduction in global equity prices and a 20 basis point increase in the equity risk premium in all countries 11

Consumption in the Advanced countries Tighter labour markets & new policies should yield healthier wage growth, but haven’t yet Compensation per employee Unemployment rate 12 Source: OECD November 2015 Economic Outlook database.

Real investment in the Advanced countries overall sluggish, but varied prospects; Netherlands is strong Real Fixed Investment Real fixed investment Real fixed investment Index 2008 Q1 = 100 Index 2008q1 = 100 120 120 Netherlands United States 115 115 Japan 110 110 Euro area OECD commodity exporters 105 105 100 100 95 95 90 90 85 85 80 80 75 75 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1. OECD commodity exporters includes Australia, Canada, Chile, Mexico and Norway. 13 Source: OECD November 2015 Economic Outlook database.

Euro area investment impaired by credit channel Non-performing loans, evergreening Combined debt of households Bank credit to non-financial corporations and non-financial corporations Year-on-year percentage change 14 Source: Eurostat; OECD National Accounts Database.

Netherlands exemplifies risk aversion non-financial corporations, yielding external surplus B. ... owing to non-financial corporations A. Net savings of corporations are large... As a percentage of GDP As a percentage of GDP 25 12 Corporations Financial Households corporations 20 10 General government Non-financial Current account balance corporations 15 8 Corporations 10 6 5 4 0 2 -5 0 -10 -2 1982 1986 1990 1994 1998 2002 2006 2010 2014 1982 1986 1990 1994 1998 2002 2006 2010 2014 15

Collective action on public investment Could support growth without worsening debt ratios 1 st year effects of a ½ per cent of GDP public investment stimulus by all OECD economies Change from baseline Collective action, quality projects, and structural policy efforts are required to realise these gains Note : Simulation using the NiGEM model, based on a two-year increase in the level of government investment equivalent to ½ per cent of GDP per annum in all OECD countries. The euro area figures are a weighted average of Germany, France and Italy. 16 Source : OECD calculations.

Outlook depends on structural policy ambition but pace of improvement has stalled The pace of reform continues to slow Fully implemented measures as a share of Going for Growth reform recommendations 0,7 2011-12 2013-14 2015 (current pace) 0,6 0,5 0,4 0,3 0,2 0,1 0 Euro area deficit Euro area surplus Other EU economies Non-EU economies economies Among advanced economies Note: The chart illustrates the pace of reform in previous periods captured by the indicator of reform responsiveness (RRI) and the hypothetical level of responsiveness in 2015 based on two different scenarios. See the Going for Growth 2010 issue for an explanation on RRI, and the main text on how the hypothetical RRI is computed. Following Ollivaud and Schwellnus (2013), the euro area surplus economies are defined as the euro area members for which the current account surplus was on average larger than 1% of GDP over the period 2000-05 (Austria, Belgium, Germany, Finland, Luxembourg and the Netherlands). The euro area deficit economies include the remaining members of the OECD euro area (France, Estonia, Greece, Ireland, Italy, Portugal, the Slovak Republic, Slovenia and Spain). 17 Source: OECD calculations.

Policies to support productivity are key Netherlands well situated, but could trade more with frontier firms Estimated frontier spillover (% pa) associated with a 2% point increase in MFP growth at the global productivity frontier Netherlands 0,5 Globalisation Reallocation Knowledge-Based Capital Maximum 0,4 (Canada) Maximum (Belgium) Maximum (Finland) Maximum Maximum (Sweden) (Belgium) 0,3 0,2 Minimum (Canada) 0,1 Minimum Minimum Minimum (Australia) (Italy) (Italy) Minimum (Austria) 0,0 Trade with the Frontier Participation in GVCs Efficiency of skill Managerial quality Business R&D allocation

Costs of Inaction? Slowing potential output Economies cannot make good on promises—to old, young, investors— and inflation remains below target Growth Potential Output per capita; and contributions average annual percentage change of potential GDP per capita Core inflation Note : Consumer prices excluding food and energy. The private consumption deflator is used for the United States. For Japan, excludes the estimated impact of the consumption tax increases in Source: June 2015 OECD Economic Outlook database. April 2014 and April 2017. Source: OECD November 2015 Economic Outlook database.

Summary Despite recent weakness, global trade and GDP are projected to recover in 2016-17 Revived investment and wage growth from effective policies underpin the projections Renewed ambition on structural reforms need to support monetary and fiscal efforts Collective action, including infrastructure spending & regulatory harmonization (esp Europe) would help Costs of inaction: Further slowing of potential output and prospects 20