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Wim Boonstra, Rabobank The Netherlands
Thank you very much. Good morning. It's a-- well, thanks to the organisation for inviting me for the
second time, which tells me that I didn't mess up the previous time completely. Very happy to be
back here, and I want to discuss the world economy. I will be very briefly on the baseline scenario,
and then spend most of my time on the risks I see looming at the horizon. But for a start, what did I
tell you the previous time? These two slides are the summary of my previous presentation two years
ago, and when I read them back, they're-- well, many of these things are still on the agenda.
What we see in this actions with European Central Bank have helped, but more European
cooperation is necessary to solve the problems. Yes, and that's the big problem of today as well. In
the United States, budgetary [INAUDIBLE] return on the agenda. Well, they returned, but they were
not that important after all.
In China, still thinking about what will the transformation of the Chinese economy do for the world
economy? Well, it's still on the agenda. And monetary policy won't work I said three years ago, and
now we're three years down the line, and I think more and more people start to realise that monetary
policy alone is not enough to help a sound recovery of the world economy.
Emerging markets at the time were seen as potential engines for world economic growth. Well, they
did, but today, many of them are over-debted. The other slides-- again, the most noteworthy risk at
the time, a new escalation of the Euro crisis. Well, the Euro crisis isn't solved yet for the time being,
but underlying, there are big problems. I will come to that later. And the reshuffling of currencies-well, today, we changed our vocabulary. We were talking about currency wars. It's basically the
same thing.
And Japan-- Abenomics is still not working, and a hard landing of China is still one of the risks that
people see. So more or less, I thought, well, after these two slides, I basically can stop my
presentation because that was on the agenda two years ago, and it's determining a lot of discussions
today as well. But alas, there is a lot more to be said.
I will start with a brief summary of the economic environment. And well, it is not too bad. It's not
spectacular, but it's not too bad. We see economic growth in United States of America for many
years in a row. And there is some fear of some deceleration of growth next year, but so far, so good
this year. There will be some economic growth there. The UK is more or less US-light. It's not too
bad. In the Eurozone, we see a slow recovery of economic growth. The average figures look quite
well for European standards. And in Japan, it's still the same thing-- Abenomics not delivering, the
yen weakening, big fiscal problems, low growth, deflation. It's not very healthy.
Emerging markets are a more different and difficult thing. Some major emerging markets are deep
in recession. Brazil, for example, is deeply disappointing. They messed up. They had a big boom in
commodity prices, and they didn't spend the money wisely. So now, they have financial problems,
economic problems. The economy is shrinking by 3% to 4%-- a political mess in the country.
Argentina has a crisis every 10 years. We're now in-- it has arrived. Russia, which is suffering from
the low oil prices among other things-- shrinking, declining large economies.
Other emerging markets are doing quite well. Of course, we're talking about Indonesia and
especially India, which will be the star performer of this years.
This table-- I will skip it after five seconds, I think. The most important thing here is if you look at
the figures of the Eurozone, you see here that the Eurozone is growing by 1.5% to 2% this year and
next, but if you look at the lines below Eurozone and you see the growth performs of individual
countries, and they're widely diverging. And the starting position of those countries is also-- well,
there's enormous variety within Europe, and I will come to that later more in detail.
And then, the risks and uncertainties-- and it's important that we understand the difference between a
risk and an uncertainty. A risk is a thing we can deal with. We know what's happening if stock
prices decline at 5% or 10%. We have our models. We can calculate to fix our portfolios. We can
see what we'll do for the economy. It's input for model scenario analysis. Great. We can deal with
that. We should be able to deal with that.
Uncertainties are, by the way-- we know that things can go wrong, but we do not exactly know the
transmission channels. We do not exactly know what will be the ultimate effect, how serious it will
be. It's just a big if. And a lot of the recent scenarios I will discuss today are very big questions,
especially, again, in Europe.
And we have political risks, of course, of uncertainties in the Middle East where the wars are going
on, proxy wars between Saudi Arabia and Iran, countries that refuse to cooperate on almost every
front. In a cynical situation, where Turkey buys oil from IS and sells it to Syria, and the world's just
watching-- in NATO, tensions between Turkey, which is a prominent NATO member, and the rest
of NATO that doesn't like at all what Turkey is doing against Russia and [INAUDIBLE]. It's a mess.
It's a mess. And a dire consequence for Europe is enormous inflow of refugees, which is more or
less derailing the cooperation within Europe.
In the US, also a political risk-- what would happen if Donald Trump would become president of the
United States of America? I have no idea, but my intuition tells we that might be not good news.
OK, now we go to the economic [INAUDIBLE]. I'm more certain there. First, I will discuss the
exchange rate developments, low oil prices, and the financial markets, which are in turmoil, and
nobody knows exactly why. Well, I will try to-- although I'm not a financial market analyst, but I
think I have some gut feeling what's going on, underlying there. And then I will focus on Europe,
just to have a happy ending of presentation.
Currency wars are no solutions. Everybody knows the theory. If you have a currency, you can
decline its value. It improves your competitive position, so it helps your exports. That's good news.
There's only one precondition. You cannot do it all at the same time because if all countries want to
have a more competitive exchange rate, then the only thing is that you see is that there's a race to the
bottom in interest rates, in liquidity in the markets, with no effects on exchange rates at all. And we
don't have an exchange rate towards the moon or Mars, so it doesn't help, really.
Exchange rates are zero sum games, and exchange rates which are very volatile are even negative
sum games. And what is happening today is that there is no cooperation between central banks.
Central banks are running out of options. They stopped their cooperation in the course of the last
three, four years, and it's just rather a mess. And this graph illustrates it a little, but it also illustrates
that markets can be nervous about nothing.
What you see here are the real effective exchange rates, and those are the exchange rates corrected
for inflation and from international trade patterns. It's more or less the best indicator we have of
competitive positions. And if it goes up, you become more expensive, and if it goes down, you get
cheaper. It's quite an easy graph. And there-- a number of countries in here. The red line there is
China.
And actually, China is a textbook example of how to run an exchange rate, although it's not the free
exchange rate, which is one of their problems, that they have to liberate the currency. But if you
look at a country, fast growing country, saving surplus, a surplus on the current account and the
balance of payments, the textbooks describe you have to have an appreciating currency, and China
has had an appreciating currency.
The recent turmoil in the currency here is just minor compared to the large movement, but it started
a whole panic in financial markets about China starting currency wars, etc., etc. Well, from an
economic point of view, they didn't. The country that actually does is Japan. Also a surplus country,
the government has terrible public finances. I think they're the worst of any industrial country in
peace time. Public debt's 250% of GDP. I've never seen it before in peacetime in a country.
Both Japanese companies and consumers-- they save, and they save a lot. Even retired Japanese save
for the old age because they know that they don't have much to expect from the government, I'm
afraid. And so as a whole, Japan is a surplus country. And in spite of that, Japan has a depreciating
currency, and it's the only thing of Abenomics that's feasible. The [INAUDIBLE] Abenomics,
economic reform and restoration of fiscal [INAUDIBLE] in the country-- well, it's not there.
Another thing here, and then I'll stop here-- the blue one is the dollar. If you see the orange one and
the blue one, the dollar and the euro, they are surprisingly stable over the long run against each
other. But a recent movement here is that the dollar is increasing in value. The euro is becoming
cheaper. The euro is also a surplus economy-- substantial service on current account-- and the
United States is a deficit economy with huge foreign debts in dollars, so they don't care.
And this is certainly not a good direction for the dollar to go, and if this would go on for the longer
time, well, I will just recall the previous crisis started in the United States when something in the
housing market there ran out of hand and spread all over the world. I don't like to see stronger
dollars because in the end, it will turn sooner or later in financial turmoil.
And the low oil prices-- they're here to stay for us for years. There are new kids in town. The United
States, indeed, is an energy-exporting country now, which changed the whole geopolitical situation
as well in the Middle East, as we have noticed earlier. We see that the Iran is back as a major
supplier. The [INAUDIBLE] hate Iran, so they keep on pumping just to annoy each other. So the
supply side will be flooding the markets this year, next year. And in the end, of course, there's a
decline in investment in new wells. So there will be a stop to this movement, but it's not in the short
term. This is good news for consumers, and this is bad news for producers. This is basically the
bottom line.
And financial markets are highly volatile, and then the question is, why? And when in January the
markets started with what they were doing, the first story was, well, it is all to do with China. China
is slowing down. So OK, China's slowing down. This has been in the forecast for a number of years
now, that China is slowing down. They actually are slowing down. The figure for the beginning of
last year already showed that they were slowing down. So where's the news?
In spite of the slowing down, we had a major bubble in the Chinese stock markets last year, and
nobody said, ooh, hey, China's slowing down. Let's have a party on the stock market. It has nothing
to do with the real economy. Chinese stock markets are very, very volatile simply because they're
small compared to the economy, and it's more gambling than serious investors going on there. At
least that's my opinion, and I know many people that agree on that.
A more important cause here is that there is a gradual loss in confidence in policymakers, and it is
not only central banks. Increasing number of analysts say what the central banks are doing-pumping money in the money market, quantitative easing, declining interest rates, bringing in
below-zero territory-- today, 20% of the world economy already is operating with negative interest
rates. That doesn't make sense from an economic point of view. And the effects on the real economy
are not there.
This quantitative easing thing, for example, is just the central bank pumping money in the money
markets, but this money does not end in the pocket of the consumer. It doesn't end in the pocket of
the businesses. It just stays in the financial system, driving down interest rates all over the world,
going to emerging markets, creating bubbles all over the world. But the real economy is hardly
touched, and more and more analysts lose their confidence in this policy.
And what's the reaction by the central banks? Well, we do still the same, but in larger quantities.
And I read reports from JP Morgan, for example, that say, well, interest rates can go down to minus
4.5, and then I think I'm in monetary economies that say this is madness. This is madness. This will
not work.
And also, in China, it's of course a different story, but one of the things we see is that policymakers
are losing their grip on [INAUDIBLE]. And actually, that's what they have to do because Chinese
authorities have to learn that you cannot steer a money market by a decree by the Communist Party.
That is not working anymore. If you want to have a full-fledged market economy, you need to have
a convertible currency and open balance of payments. And, well, they are not used to this. So there
is a lot of-- well, people know that more volatile is going on, and policymakers in China don't like
this.
This slide is just a brief illustration here what I said. The economy in China, the light blue one-- it
was already slowing down, and what you see, in spite of that last year, we had a serious two-bubble
period in the Chinese stock markets. They're just two worlds apart, the real economy and what the
stock markets in China are doing.
If you look at what's going on in China, of course China is a major success story. 40 years ago, it
was a huge, extremely poor, backwater economy. And since they started with the deregulation and
their reforms, China has evolved to one of the largest economies in the world, a major
exporting/importing country, and that the millennium goal of let's fight poverty has been met is fully
to the credit of China, moving hundreds of million people out of poverty to middle income status. So
it's a success story.
But what they have to do is change the growth model, and the growth model was export led. It was
industry led. There was a lot of property building going on, real estate things. And they will have to
change to a more consumer-led economy, more free markets, and a change from industry to
services, a movement we all went through, as when we came from old status to modern industrial
status, as we are today in Australia or in Europe.
And this is a turbulent and uncertain environment, so what you may expect is not a strong
slowdown, but there will be a change in trade with China. They will import less hard commodities.
They will import more consumer goods and import more food, I suppose, especially in the longer
term. So there will be changes. There will be volatility when we have to settle this.
But in the end, China will go on. And even if growth would slow down to 4%, which is not our
baseline scenario, but even in that case, China would be one of the major engines of the world
economy still. So no reason for panic there, but expect a lot of volatility in Chinese financial
markets.
Back to the financial markets. High interest rates are not a problem. Interest rates are extremely low,
and quantitative easing is not effective. And here you can see this illustrated, how central banks all
went in negative territory. There are more of them. Sweden, Denmark-- Japan is in the picture. And
it's an increasing group of countries.
The problem is that low interest rates are in themselves quite harmful for the economy. And for
negative interest rates, that becomes even worse. They undermine the business model of financial
institutions, and many people would say, well, I don't care that much about financial institutions.
Remember the crisis? But if a bank cannot function, it also cannot deliver the services to its clients.
So negative interest rates, extremely low interest rates are bad for financial stability from the
supervisory point of view. For pension funds, they're deadly. In the Netherlands, we have a major
crisis in the pension funds, which our huge-- compared to any other country in the world-- but with
zero interest rates, suddenly your liabilities blow up, and it all becomes more or less [INAUDIBLE],
if you don't care. There are bubbles, and there-- well, it's not a good thing.
What should be happening is that we should have what we call a big reset of monetary policy. And
there are more options here. If you read The Economist two weeks ago, they had a whole set of
options how to get out of this mess. The first thing, the precondition is cooperation between central
banks should be back on the agenda. It's extremely important, and I was very happy that the
[INAUDIBLE] 20 last weekend came to the same conclusion. It's a first step.
The second thing is interest rates should be back in positive territory. Again, that's better for the
economy. That's the normal way to run a country because interest rates reflect some long-term
inflation expectations, which should be brought back into the system, and they also play a role in
allocation of capital, which is very difficult with negative interest rates.
So one of the ideas we had, two colleagues of mine and myself, is what we should do is a
combination of a big fiscal impulse to the economy, to be financed by a very gradual increase in
valued-added taxes over years in predictable small steps, bringing back inflationary expectations.
And monetary policy should have a reset mercifully by the major central banks, with policy rates
slightly in the positive. Stop with the buying of all these bonds they are doing. Stop quantitative
easing, and go back to normal. And the IMF, of course-- very necessary in this, important in this
scenario, just to help emerging markets. It is one of the options.
Another option is, of course, start spending money that actually comes with the people. So do major
infrastructure projects in Europe. We can use some of them. And finance those with new money,
monetary financing. Well, in Germany, that's cursing in church. That's not allowed by European
law, so it's not an option left. But it could have helped. It could have helped.
And a third option, increasing popular, and the people among you read The Financial Times last
week-- it's good old helicopter money back on the agenda. Central banks should bring an enormous
amount of new money into circulation, but not by buying bonds, but by buying anyone who's a
taxpayer-- his bank account-- with a couple of thousand euros or dollars or whatever. Just make sure
that the money that's brought into circulation will also be spent.
Well, all these proposals are very radical, and I know they're not on a policy agenda, so they're-well, they're future. But without such radical solutions, I am afraid that we are just-- we'll run deeper
into this debt-- [INAUDIBLE] of quantitative easing. And when the next recession comes-- and as
we know in market economies, they go up or they come down. On average, they go up if things go
right. But during the next recession, we're still completely out of all monetary options, and then we
have to choose more radical things. So remind me of my proposal when I'm allowed to come back in
three years' time.
Focus on Europe-- how much time do I have, [INAUDIBLE]? Not much. OK. Not much. OK.
Europe is deeply in trouble, period. Cooperation is very bad, and the problem is that Europe is an
ageing continent. We have still huge unemployment. This picture shows the real problem in Europe.
Youth unemployment [INAUDIBLE] in Europe is over 40% of the population. This is not
sustainable. Not politically, and not economically and socially. Europe needs a much higher
economic growth than it has, and this is a fundamental drag fundamental source of instability within
the Eurozone.
Europe is shrinking. This picture summarises the whole thing. It's an ageing continent, and we have
less and less people to pay for the retired people that live longer, happily, and have higher health
care costs, but the economic base is shrinking.
And the whole thing-- and against such a background, the inflow of immigrants could, of course, be
a good thing because immigrants-- we have flows of immigrants in the past in Europe, and what
they actually did over the centuries, they usually [INAUDIBLE] preclude for a period of high
economic growth and wealth. In the Netherlands, our golden age was caused by an enormous inflow
of people from other parts of Europe. But instead of this blessing in disguise, the cooperation has
collapsed, and what Europe is doing is reintroducing border barriers.
You live in a big country, but if you are in Europe and you take your car and you drive a day, you at
least meet four or five country borders. And there were barriers there in the past, and you have to
wait. Sometime you have to wait for hours, and every trip was controlled. It was a major drag on
trade. And all these things have gone, thanks to European integration and cooperation. And now,
they are gradually bringing them back, and this is extremely, extremely harmful for the economic
potential of Europe. Politicians in Europe, at least, who don't exactly know what they're doing-The Brexit-- I'm almost there. Bad for Europe because we lose a major member, the United
Kingdom, if they would say no to Europe. And also, very, very bad for England themselves because
out of Europe, England is not that spectacular economy [INAUDIBLE] FDI inflows will disappear.
The city of London will suffer, and in the end, Scotland will demand a new referendum because
Scotland wants to stay in the European Union, which in the end, may be if-- so in the end, it may be
a fairly expensive way to get rid of the Scottish. But it's absolutely a lose-lose situation here, this
Brexit thing. So lesson two, never choose a real dangerous gambler as prime minister.
Demise of the euro would be bad, and it's not because Europe is that important, but Europe as a
whole is a major economy, the largest economy in the world, largest exporter/importer, major
political diplomatic force. So in the future, Western values like we like-- at least I like them-- free
trade, human rights, all that kind of stuff-- well, Europe is its fortress, is one of its fortresses.
But a splintered Europe, if the European Union would fall apart-- which I don't expect-- but with
this risk scenario, then the influence of Europe on many, many fields will more or less gradually
disappear between now and the next 50 years. So this is much larger than European wealth. It is all
about the state of Western values in a world which is changing because the US and Europe still are a
major influence here, but the US with a splintered Europe is much more lonely there.
Coming to conclusions-- the economy is in better sheep than many people think, although it's not too
strong. Large risks-- Europe cooperation is in worse shape than three years ago because then it was
only money, the Greek crisis, and we had a central bank which could print money if necessary and
deal-- just solve the problem, which they did. But the problems we face today, our political
problems, have to be solved by politicians, and their track record in Europe is not too good on that.
In the end, I'm not too pessimistic because I think that everybody realises that there's so much at
stake that common sense will prevail, but it may take longer than we like, so expect a lot of turmoil
and turbulence coming from Europe in the year ahead. Thank you very much.
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