Download A tour of the world

A Tour of The World:
From Great Expectations to the
Economic Downturn
Based on • Olivier BlanchardMacroeconomics, 5/e Prentice Hall •
Figure 1 - 1
The United States
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1-1 The United States
Table 1-1
Growth, Unemployment, and Inflation in the United States Since 1970
1970–2006
(average)
1996–2006
(average)
2006
2007
2008
Output growth rate
3.1%
3.4%
3.3%
2.1%
2.5%
Unemployment rate
6.2
5.0
4.6
4.6
4.8
Inflation rate
4.0
2.0
2.9
2.6
2.2
Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average over the year. Inflation rate:
annual rate of change of the price level (GDP deflator).
The period 1996-2006 was one of the best decades in recent
memory:

The average rate of growth was 3.4% per year.

The average unemployment rate was 5.0%.

The average inflation rate was 2.0%.
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1-1 The United States before 2007
Rate of Growth of
Output per Hour in the
United States Since
1960.
The average rate of growth of
output per hour appears to
have increased again since
the mid-1990s.
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1-1 The United States
The U.S. Trade Deficit?
The U.S.Trade Deficit
Since 1990
The trade deficit increased
from about 1% of output in
1990 to about 6% of output in
2006.
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1-2 The European Union
The European Union
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1-2 The European Union
Table 1-2
Growth, Unemployment, and Inflation in the Five Major
European Countries Since 1970
1970–2006
(average)
1996–2006
(average)
2006
2007
2008
Output growth rate
2.3%
2.0%
2.7%
2.6%
2.2%
Unemployment rate
7.4
8.7
7.6
7.0
6.7
Inflation rate
5.4
1.8
1.7
1.8
2.2
Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average over the year.
Inflation rate: annual rate of change of the price level (GDP deflator).
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1-2 The European Union
The economic performance of the five countries in Table
1-2 has been far less impressive than that of the United
States over the same period:
 Average annual output growth from 1996 to 2006 was
only 2.0%.
 Low-output growth was accompanied by persistently
high unemployment.
 The only good news was about inflation. Average
annual inflation for these countries was 1.8%, much
lower than the 5.4% average over the period 1970 to
2006.
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1-2 The European Union
Unemployment Rates:
Continental Europe
Versus the United States
Since 1970
The unemployment rate in the
four largest continental
European countries has gone
from being much lower than the
U.S. unemployment rate to
being much higher.
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1-2 The European Union
How Can European Unemployment Be Reduced?
There is still disagreement about the causes of high
European unemployment:
 Politicians often blame macroeconomic policy.
 Most economists believe, however, that the source of
the problem is labor market institutions.
 Some economists point to what they call labor market
rigidities.
 Other economists point to the fact that unemployment
is not high everywhere in Europe.
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1-3 China
Figure 1 - 6
China
1-3 China
Table 1-3
Growth and Inflation in China Since 1980
1980–2006
1996–2006
2006
2007
2008
Output growth rate
9.3%
8.8%
10.7%
10.0%
9.5%
Inflation rate
5.4
3.3
1.5
2.5
2.2
Output growth rate: annual rate of growth of output (GDP). Inflation rate: annual rate of change of the price
level (GDP deflator).
Since 1980, Chinese output has grown at close to 10% per
year, and the forecasts were for more of the same.
This is a truly astonishing number: Compare it to the 3.1%
number achieved by the U.S. economy over the same
period. At that rate, output doubles every 7 years.
4. All this have changed in 2007
World growth is projected to fall to ½ percent in 2009, its lowest rate since World War
II. Despite wide-ranging policy actions, financial strains remain acute, pulling down
the real economy.
World GDP Growth
10
8
6
4
2
-2
-4
Advanced economies
Emerging and developing economies
World
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
0
Inflation is not an issue
Sluggish real activity and lower commodity prices have dampened inflation pressures . In the advanced economies,
headline inflation is expected to decline from 3½ percent in 2008 to a record low ¼ percent in 2009, Moreover, some
advanced economies are expected to experience a period of very low (or even negative) consumer price increases. In
emerging and developing economies, inflation is also expected to subside to 5¾ percent in 2009 and 5 percent in 2010,
down from 9½ percent in 2008.
Inflation
10
8
6
4
2
0
2000
2001
2002
World
2003
2004
Advanced economies
2005
2006
2007
2008
Emerging and developing economies
2009
2010
Global monetary and fiscal policies are providing
substantial support.
Central banks in the advanced economies have taken strong actions to cut policy rates and improve credit
provision..
To combat the downturn, many governments have announced fiscal packages to boost their economies.
Deficits are also expected to be boosted by the operation of automatic stabilizers and the impact on revenues
of sharp asset price declines, as well as the costs of financial sector rescues.
General Governement Fiscal Balances
(Percent of GDP)
1
0
-1
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-2
-3
-4
-5
-6
-7
-8
Advanced economies
Emerging and developing economies
World
How we got here?
Let us see the sequence of events in the American
Economy:
FROM ONE MARKET TO THE OTHER.
1. Housing Boom Burst (mid 2007).
2. Investment banks caught holding toxic assets
bought with lots of borrowed money.
3. Generalized uncertainty, confidence at its lowest
point. Recession in the real economy.
VICIOUS CIRCLES AND FROM AMERICA TO THE
WORLD ECONOMY
The Housing Market Bubble
The dream of a homeowners society (NINJA
MORTGAGES).
Interest rates: too low for too long.
An era of hyper confidence and big expectations.
GOLDEN AGE OF FINANCE
Financial innovation: Mortgages packed in CDO
(Subprime USA) High leveraged baank balance
sheets.
Limited regulation (Assets/Liabilities; short term
funding)
Great business while it lasted
The Financial turndown
Excess vulnerability due to toxic assets holding and
short term funding.
Most financial transactions occur in the shadow.
No transparency in the bank system. Sistemic Risk and
great uncertainty: THE CREDIT CRUNCH
Slow moving crisis (a soap opera) but in essence the
entire collapsing of the shadow financial system.
The Road to depression
Uncertainty over the future leads to high savings and
the postponement of consumption decisions.
Reduced demand translates into excess supply and
unemployment.
Fiscal effort today increases risk of a long recession.
Recession increases financial crises, reinforces the
credit crunch and creates a vicious circle.
The Road Ahead:
How to bring the financial system back to health?.
How to smooth the depression and restore market
confidence?
What role for the financial and monetary policy?
What role for fiscal policy?