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WORLD ECONOMIC OUTLOOK is FOR thisHOW the LONG? LOW Economic GROWTH ANDoutlook: HIGH RISK: new normal? ICTF, Berlin, October 2015 Freddy Van den Spiegel Economic advisor Professor VUB and Vlerick Business School Freddy Van den Spiegel Economic Advisor. The view of IMF 2 1. The crisis, started in 2007 2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector 3 US: HOUSES PRICES ( in USD) Department of Commerce and National Association of Retailors figures 260.000 250.000 240.000 230.000 220.000 210.000 200.000 190.000 180.000 170.000 160.000 150.000 140.000 130.000 120.000 110.000 100.000 90.000 80.000 70.000 60.000 50.000 40.000 30.000 20.000 New houses Existing houses 260.000 250.000 240.000 230.000 220.000 210.000 200.000 190.000 180.000 170.000 160.000 150.000 140.000 130.000 120.000 110.000 100.000 90.000 80.000 70.000 60.000 50.000 40.000 30.000 20.000 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Groupe BNP ParibasBNP Paribas Group 4 | 4 EUROSTOXX FINANCIALS 5 1. The crisis, starting in 2007 2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector 2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers 6 EUROSTOXX FINANCIALS 7 Bank How fared the most solid banks in Western Europe? Intervention HSBC Holdings 12,5bn GBP private capital injection Crédit Agricole Group 3bn EUR capital injection (subordinate debt) Royal Bank of Scotland 58% nationalised Santander 2bn EUR capital raised from private investors BNP Paribas 5,1bn capital injection (preferred shares) Barclays Bank £7bn private capital injection, use of credit guarantees HBOS taken over by Lloyds TSB, 44% nationalised UniCredit seeking 4bn EUR from Italian and Austrian governments Rabobank Group no capital injection ING Bank 10bn EUR capital Injection, 80% government guarantee on 27,7bn Alt-A UBS 5,3bn USD capital injection, 60bn USD bad assets removed Deutsche Bank no capital injection ABN AMRO Bank nationalised Crédit Mutuel 1,2bn EUR capital injection (subordinate debt) Société Générale 3,4bn EUR capital injection (subordinate debt + preferred shares) Credit Suisse group private capital injection of 10bn CHF BBVA no capital injection Lloyds TSB 50% nationalised Groupe Caisse d'Epargne 1,1bn EUR capital injection (subordinate debt) Groupe Banques Populaires 0,95bn EUR capital injection (subordinate debt) Groupe BNP ParibasBNP Paribas Group 8 | 8 Bank How fared the most solid banks in the USA? Intervention Bank of America expanding (Merrill Lynch, Countrywide), 45bn USD capital injection Citigroup 50bn USD capital injection + 306bn USD bad asset guarantee, breaking up JP Morgan Chase expanding (Bear Stearns, WaMu), 25bn USD capital injection Wachovia Corporation failure Wells Fargo expanding (Wachovia), 25bn USD capital injection Washington Mutual failure U.S. Bancorp 6,6bn USD capital injection Countrywide Financial Corp. sold SunTrust Banks 4,9bn USD capital injection (preference shares) Capital One Fin. Corp. 3,6bn USD capital injection National City Corp. sold Regions Financials Group 3,5bn USD capital injection PNC Financial Services Group expanding (National City), 7,6bn capital injection (preference shares) Fifth Third bancorp 3,4bn USD capital injection KeyCorp 2,5bn USD capital injection BB & T Corp 3,1bn USD capital injection State Street Corp 2bn USD capital injection Bank of New York 3bn USD capital injection Comerica 2,3bn USD capital injection Merril Lynch Bank USA sold Groupe BNP ParibasBNP Paribas Group 9 | 9 1. The crisis, starting in 2007 2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector 2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers 2009: Worldwide recession and housing crashes in Europe 10 WORLD GDP GROWTH 11 12 1. The crisis, starting in 2007 2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector 2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers 2009: Worldwide recession and housing crashes in Europe 2010: Increasing government debt 13 14 1. The crisis, starting in 2007 2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector 2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers 2009: Worldwide recession and housing crashes in Europe 2010: Increasing government debt, collapse of European economies 2011: the EURO sovereign crisis starts 15 16 1. The crisis, starting in 2007 2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector 2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers 2009: Worldwide recession and housing crashes in Europe 2010: Increasing government debt, collapse of European economies 2011: the EURO sovereign crisis starts 2012: EUROZONE back in recession 17 18 1. The crisis, starting in 2007 2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector 2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers 2009: Worldwide recession and housing crashes in Europe 2010: Increasing government debt, collapse of European economies 2011: the EURO sovereign crisis starts 2012: EUROZONE back in recession 2013: EUROZONE problems remain 2014: EUROZONE towards QE, the ultimate weapon 2015: collapse of the emerging economies 19 20 21 22 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 23 WORLD ECONOMIC OUTLOOK GDP GROWTH 2013 2014 2015 WORLD 3,4 3,4 3,5 US 2,2 2,4 3,1 EURO -0,5 0,9 1,5 JAPAN 1,6 -0,1 1 EMERGING 5,0 4,6 4,3 IMF world economic outlook april 2015 2016 3,8 3,1 1,6 1,2 4,7 24 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? BUT DETERIORATING CONFIDENCE! WHY? 25 26 McKinsey survey 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth 27 28 29 30 31 32 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth but the appreciation of the USD could become problematic 33 34 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth but the appreciation of the USD could become problematic And low oil prices kill shale oil 35 36 37 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth but the appreciation of the USD could become problematic And low oil prices kill shale oil End of QE soon? 38 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth Europe seems to be slowly recovering 39 40 41 42 43 EUROSTOXX 50 44 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth Europe seems to be slowly recovering – Supported by a lower Euro – And by a QE programme – But internal political uncertainty remains with Grexit and Brexit – And external political uncertainty about the Middle East, Northern Africa and Ukraine 45 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth Europe seems to be slowly recovering The emerging economies are no longer a club of winners 46 BRICS GDP GROWTH (%) 2015 2014 2013 2016 6,8 -1,0 7,5 -3,8 6,3 1,0 7,5 -1,1 7,4 7,8 CHINA 0,1 2,7 BRAZIL 7,2 6,9 INDIA 0,6 1,3 RUSSIA IMF World economic outlook april 2015 47 china Investment and Consumption, % of GDP 55 50 45 Consumer Spending Share 40 Investment Share 35 30 25 20 48 1980 1985 1990 1995 2000 2005 2010 49 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3. How did we arrive where we are? 50 The origin of the actual situation: an extra-ordinary environment since 1990 51 The extra ordinary environment since 1990. Technological Revolution + Worldwide Deregulation 52 The extra ordinary environment since 1990. Technological Revolution + Economic Globalisation Worldwide Deregulation 53 1. The extra ordinary environment since 1990. Technological Revolution + Asian savings glut Economic Globalisation Worldwide Deregulation Asian deflationary pressure 54 The extra ordinary environment since 1990. Technological Revolution + Asian savings glut Easy money to finance global imbalances Economic Globalisation Worldwide Deregulation Asian deflationary pressure Stable, low interest rates 55 SAVINGS QUOTE CHINA 56 57 The extra ordinary environment since 1990. Technological Revolution + Asian savings glut Easy money to finance global imbalances Economic Globalisation Worldwide Deregulation Asian deflationary pressure + Financial Technology Stable, low interest rates 58 The extra ordinary environment since 1990. Technological Revolution + Asian savings glut Easy money to finance global imbalances Economic Globalisation Worldwide Deregulation Asian deflationary pressure + Financial Technology Happy days Global Economic Growth Stable, low interest rates 59 The virtuous circle GROWTH RISK PREMIUM LEVERAGE & BUBBLES EASY LOANS 60 The extra ordinary environment since 1990. But underneath unsustainable bottle necks developed. • Imbalances of the US. 61 62 63 64 65 The extra ordinary environment since 1990. But underneath unsustainable bottle necks developed. • Imbalances of the US. • Savings glut of Asia. 66 67 68 The extra ordinary environment since 1990. But underneath unsustainable bottle necks developed. • Imbalances of the US. • Savings glut of Asia. • Unsustainable financial leverage in US and Europe. 69 70 House Price Evolution (rebased Q1 2000 = 100) 260 240 220 Spain UK Ireland 200 180 160 140 120 100 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 71 The extra ordinary environment since 1990. The situation of the Western world • Over indebted (governments and/or private households) • Depending on foreign savings • Loosing economic power • Loosing geopolitical influence The situation of the rest of the world • Waking up after the dream • Stuck in the middle • Need to adapt , but to what? • THE GOLDEN YEARS OF EASY GLOBALIZATION SEEM TE BE OVER “BACK TO NORMAL” SEEMS UNLIKELY 72 80.000 70.000 60.000 50.000 Advanced economies 40.000 Emerging market and developing economies 30.000 20.000 10.000 2018 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 0 73 CLEARLY NOT A CRISIS BUT A REGIME SWITCH 74 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3. How did we arrive where we are? 4. What are the major risks and bottlenecks? Low growth combined with a wall of debt: a dangerous combination 75 Source: ICMB 76 GLOBAL DEBT 77 78 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3. How did we arrive where we are? 4. What are the major risks and bottlenecks? Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West 79 80 81 82 83 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3. How did we arrive where we are? 4. What are the major risks and bottlenecks? Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges 84 GLOBAL CONFLICT TRACKER 85 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3. How did we arrive where we are? 4. What are the major risks and bottlenecks? Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges QE 86 QE: impact and exit? The US experience Start in 2009 -LT yield down -Funding government deficit -Currency down -Overheating in Latin America and Asia -Supporting growth Exit in 2014-2015 -Reaction of LT yield -Capital outflows in overheated and imbalanced economies: problem for the emerging world -Dollar appreciation: potential problem for US growth 87 - RATHER REASSURING 88 THE ROAD TO QE FOR EUROPE •Excessive debt, growing after the crisis 89 90 THE ROAD TO QE •Excessive debt, growing after the crisis •An almost fatal second political crisis: the eurocrisis 91 92 THE ROAD TO QE •Excessive debt, growing after the crisis •An almost fatal second political crisis: the eurocrisis • Short term rescue operations but no solutions • Normal monetary policy does not function anymore • • • The transmission mechanism through banks does not function Lower interest rate is not effective More liquidity does not help 93 94 Balace sheet total ECB 95 95 THE ROAD TO QE •Excessive debt, growing after the crisis •An almost fatal second political crisis: the eurocrisis • Short term rescue operations but no solutions • Normal monetary policy does not function anymore • • • • The transmission mechanism through banks does not function Lower interest rate is not effective More liquidity does not help All debt is potentially “bad” if no growth • BUT GROWTH NEEDS LOANS AND WE HAVE ALREADY TOO MUCH: A DILEMMA 96 THE ROAD TO QE •Excessive debt, growing after the crisis •An almost fatal second political crisis: the eurocrisis • Short term rescue operations but no solutions • Normal monetary policy does not function anymore • The new paradigms: • • Saving is irresponsible Generalized austerity creates depression 97 THE ROAD TO QE •Excessive debt, growing after the crisis •An almost fatal second political crisis: the eurocrisis • Short term rescue operations but no solutions • Normal monetary policy does not function anymore • The new paradigms • QE and financial repression as the only way out 98 99 QE: impact until now SO FAR SO GOOD - fast depreciation euro on announcement - recovery of stock market - decline in spreads (except Greece) 100 101 QE: impact until now SO FAR SO GOOD - fast depreciation euro on announcement - recovery of stock market - decline in spreads (except Greece) BUT ALSO UNKNOWN TERRITORY - jump into negative yields - and increasing volatility 102 103 104 QE: impact until now SO FAR SO GOOD - fast depreciation euro on announcement - recovery of stock market - decline in spreads (except Greece) BUT ALSO UNKNOWN TERRITORY - jump into negative yields - and increasing volatility - or is the effect already over? (stock market, forex, interest rates,…) 105 QE: impact until now And what after QE -Scenario where QE is successful and ends: difficult for periphery -Scenario where QE does not deliver: dangerous for periphery UNLESS PERIPHERY GOES TO FAST AND SUCCESSFUL STRUCTURAL REFORM BUT NO REASON TO PANIC YET: THANKS TO QE? 106 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3. How did we arrive where we are? 4. What are the major risks and bottlenecks? Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges QE The political future of Europe 107 1. The crisis, starting in 2007 2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3. How did we arrive where we are? 4. What are the major risks and bottlenecks? Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges QE The political future of Europe A recovery without jobs? The digital disruption of society 108 CONCLUSIONS. • In the short run, everything seems under control • But the worldwide system has not stabilised (yet) • Politics are back. 109 CONCLUSIONS. Politics will dominate the agenda: a challenging balancing act. • Normalise banking system. • Deleverage the economy. • Normalise central bank policy and balance sheets. • Stabilise public debt levels. • Develop new regulatory framework for the financial industry. • Revive international trade (or switch to protectionism?) • Solve global environmental issues. • Towards a new financial, economic and political world order. • WITHOUT KILLING THE RECOVERY. 110 CONCLUSIONS. • Living in an interconnected world economy • Politics are back. • From west to east: a story that will continue, but probably less spectacular 111 CONCLUSIONS. G7 vs Developing Asia: Real GDP Growth (% YoY) 14 12 G7 Developing Asia 10 8 6 4 2 0 -2 1990 1995 2000 2005 2010 2015 -4 -6 112 113 80.000 70.000 60.000 50.000 Advanced economies 40.000 Emerging market and developing economies 30.000 20.000 10.000 2018 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 0 114 CONCLUSIONS. • Living in an interconnected world economy • Politics are back. • From west to east: a story that will continue, but probably less spectacular • Fortunately, the process of globalisation is not broken 115 CONCLUSIONS. Challenges for everybody: adapt to the “new normal”. • The road to adapt to the new global economic reality will be long and bumpy. • But this does not mean necessarily that the economy will be weak all the time. • But it does mean that uncertainty has replaced risk; models will not help and the recent past not relevant • Nobody can imagine how the world will look like in 10 years but it will definitely be different. Frightening or challenging? 116 Return to Keynes “If we consistently act on the optimistic hypothesis, this hypothesis will tend to be realised; whilst by acting on the pessimistic hypothesis we can keep ourselves for ever in the pit of want.” 8 November 1931 117117 Thank you 118