Download Long-Run Economic Trends

Long-Run Economic
Trends
Presented to:
OCA Interdisciplinary Seminar
September 25th, 2015
Marc Lévesque, Vice President
Economics and Market Strategy
Economics and Market Strategy
Key Issues
Is the global economy shifting to a permanently slower
growth track? “Secular stagnation” vs cyclical trends and
supply-side constraints.
Canada’s long-term growth prospects.
A low interest-rate world: drivers and long-run prospects
Economics and Market Strategy
Key Issues
Is the global economy shifting to a permanently slower
growth track? “Secular stagnation” vs cyclical trends and
supply-side constraints.
Canada’s long-term growth prospects.
A low interest-rate world: drivers and long-run prospects
Economics and Market Strategy
Global Economic Growth on a Slower Track
Economics and Market Strategy
Output Gaps Still Substantial
Economics and Market Strategy
Emerging Economies Gaps Also Wide
Economics and Market Strategy
Global Inflation Trends Very Subdued
Economics and Market Strategy
Interest Rates Stunningly Low
Economics and Market Strategy
Why is Growth So Slow?
Three Key Issues:
– Potential Growth
– Deviations of growth from potential
– One-off changes in the level of growth without a change
in the actual growth rate
Economics and Market Strategy
Potential Growth
The long-term potential growth rate of the economy may
be declining.
Potential growth is determined by the growth in productive
inputs (Labour and Capital) plus the growth in the
efficiency of those inputs to produce output.
Slower potential growth may be the result of
demographics, technological advances (heightened role of
IT sectors that do not require much capital spending),
reversion of Total Factor Productivity (TFP) to historical
norm.
Economics and Market Strategy
Potential Growth
Often seen as a supply-side version of “secular
stagnation”, although the Summers story is unequivocally
about aggregate demand.
If the supply side is the culprit, the output gap can be
closed, eventually generating inflation pressures and
higher interest rates
Economics and Market Strategy
Persistent Deviations of Growth from Potential
Demand-side story: the issue is chronically weak
aggregate demand, excess of savings over investment.
This is the Summers “Secular Stagnation”.
Depressed investment and consumption spending prevent
the economy from reaching potential.
Ultimately can reduce aggregate supply because of low
rates of capital formation and loss of workers’ skills due to
LT unemployment.
Summers observes that we have never seen full
employment over the past several decades without the
development of a bubble.
Economics and Market Strategy
Persistent Deviations of Growth from Potential
Implies persistent output gaps, chronically weak inflation,
mega-low interest rates. Negative real rates required to
balance aggregate supply and demand.
Monetary policy alone is not sufficient to generate full
employment because of the zero lower bound.
Policymakers forced to choose between sluggish growth
and bubbles
Greater reliance on fiscal policy is the solution
Economics and Market Strategy
One-Off Changes in Level of GDP
Supply-side damage due to depreciation of employment
skills
Growth eventually returns to pre-crisis rate but not precrisis trajectory
Leads to persistent output gaps, low inflation, low interest
rates
Symptom: permanent fall in labour force participation rates
Economics and Market Strategy
Some Observations
Increasingly, the evidence points to supply-side factors
Potential growth has fallen but the U.S. economy is
closing the output gap and the unemployment rate has
fallen. This does not smell of an aggregate demand
problem.
It is hard to believe that negative real rates will not
eventually spur private investment.
Economics and Market Strategy
Some Observations
Summers’ claim that full employment over the past several
decades has not been achievable without a financial bubble
is questionable. The tech bubble came late in the 1990s
cycle. And several headwinds offset the housing bubble in
the 2000s.
Much of the slow growth relative to potential probably
comes from the impact of the GFC on credit conditions, the
slow recovery in housing, fiscal policy issues – all cyclical
factors. We believe there will be some “normalization” over
time.
Much of the Secular Stagnation debate is focussed on the
U.S., ignoring the international element
Economics and Market Strategy
U.S. Output and Unemployment Gaps Closing
Economics and Market Strategy
U.S. Potential GDP has Declined
Economics and Market Strategy
Productivity Growth has Weakened
Economics and Market Strategy
Slower Labour Force Growth Ahead
Economics and Market Strategy
Potential Falling in Most Advanced Economies
Economics and Market Strategy
Eurozone Labour Force Poised to Decline
Economics and Market Strategy
With Tight Credit Conditions…
Economics and Market Strategy
…and Public Deleveraging Adding to the Mix
Economics and Market Strategy
China’s Labour Force Also Set to Decline
Economics and Market Strategy
With Trend Growth Continuing to Moderate
Economics and Market Strategy
Key Issues
Is the global economy shifting to a permanently slower
growth track? “Secular stagnation” vs cyclical trends and
supply-side constraints.
Canada’s long-term growth prospects.
A low interest-rate world: drivers and long-run prospects
Economics and Market Strategy
The Commodity Price Boom Has Run its Course
Source: Bank of Canada
Economics and Market Strategy
China is the Marginal Driver of Commodity Demand
Economics and Market Strategy
The Favorable Urbanization Trend in the EMs will
Help Support Commodities
Economics and Market Strategy
But Falling Real Commodity Prices are the
Historical Norm, Not the Exception
Economics and Market Strategy
Canada’s Global Export Share Has Declined
Source: IMF
Economics and Market Strategy
Canada’s Productivity Record Has Not Fared Well
Against its Peers
Economics and Market Strategy
Labor Productivity Growth Slowed in the Last
Decades
Economics and Market Strategy
Business Investment a Shrinking Share of GDP
Source: Statistics Canada
Economics and Market Strategy
Canada’s Long Term Outlook
Canada has benefited from a massive windfall gains from elevated
energy and other prices. Support, however, has been undermined by
a structural shift in commodity prices.
Although commodity prices will recover some of their recent losses,
slower global potential growth points to limited gains going forward.
Canadian trade performance has deteriorated, and Canada has been
losing market share abroad. Slower U.S. potential growth and
Canada’s poor productivity performance point to only a modest kick
from Canada’s external sector -- although a weaker Canadian dollar
and some diversification into faster-growing emerging markets will
help.
Slower growth in Canada’s labour force will also limit potential growth
These headwinds could mean that the average rate of potential
growth for the Canadian economy will be closer to 2% going
forward than the 2.5% to 3% Canada enjoyed in the first half of the
past decade and the second half of the 1990s.
Economics and Market Strategy
Key Issues
Is the global economy shifting to a permanently slower
growth track? “Secular stagnation” vs cyclical trends and
supply-side constraints.
Canada’s long-term growth prospects.
A low interest-rate world: drivers and long-run prospects
Economics and Market Strategy
The Legacy of the GFC Still Lingers in the Form of
Higher Savings
Economics and Market Strategy
Recent Increase in Savings Coming From
Developed Economies
Economics and Market Strategy
Ongoing Deleveraging in the DMs Contribute to the
Imbalance Between Supply/Demand for Funds
Economics and Market Strategy
Monetary Policy Settings Will Remain Highly
Accommodative
Economics and Market Strategy
Burst in Developed Economy Net Savings Likely to
Subside
Economics and Market Strategy
Rates Still Low for Some Time
At a very high level, the current low-interest rate
environment largely reflects the global savings-investment
balance – the supply and demand for loanable funds.
The combination of private and public-sector deleveraging
and depressed business investment within developed
economies has been instrumental in holding down rates.
Extremely accommodative monetary policy (low short rates
and QE) and low inflation have also come into play.
Economics and Market Strategy
Rates Still Low for Some Time
Going forward, net savings are likely to diminish while
monetary policy will eventually normalize. However, it will
take time before serious upward pressure on global interest
rates will occur – we see rate “normalization” happening
later rather than sooner.
Economics and Market Strategy