Download 2. International Economic Developments

Central Bank of the Republic of Turkey
2. International Economic Developments
Global growth forecasts for 2011 are slightly upgraded amid the global
developments since the release of the October Inflation Report, while downside
risks to the growth outlook remain vigorous. The growth discrepancy between
advanced and emerging economies continued into the third quarter, with slowgrowing major advanced economies failing to reach pre-crisis GDP levels.
Moreover, due to disappearing base effects and ebbing stimulus effects in many
economies, the global growth rate is expected to slow down in 2011.
The US economic growth in the third quarter has been close to its
potential amid strong inventories, thus allaying concerns over the US growth
outlook. This outlook is also buoyed by the stronger-than-expected data
indicative of the final quarter of 2010. Furthermore, Fed's second round of
quantitative easing and the fiscal package extending tax cuts and
unemployment benefits have reinforced prospects for the US economy. In fact,
the minutes of the latest FOMC meeting confirm that the Fed expects growth to
pick up slightly further despite risk factors. High unemployment rates, the real
estate market distress amid the renewed housing slump and weak credit
expansion constitute downside risks.
Although the US economy rebounded during the third quarter, the euro
area growth slowed significantly owing to the decline in the demand for fixed
investment following the tensions in the EU periphery. Expectations for a fiscal
tightening across core euro area economies in 2011 create major uncertainty
amid the weak growth outlook. The sovereign concerns in the peripheral
countries are expected to shape the near-term growth outlook for the euro area
(Box 2.1). Although the announced rescue packages have currently prevented
the contagion of the Irish banking crisis, the prevailing high CDS rates for both
government and commercial bonds indicate that the concerns have yet to be
fully resolved. Moreover, struggling peripheral economies are facing a heavy
debt redemption for the first half of 2011, aggravating concerns about sovereign
debt sustainability.
Despite low and fragile growth in advanced economies, emerging
economies continued to grow rapidly in the fourth quarter. The most important
element of uncertainty for emerging economies is the accelerated capital
inflows fueled by the ongoing monetary expansion in advanced economies.
Inflation Report 2011-I
17
Central Bank of the Republic of Turkey
Accordingly, many emerging market central banks have more intensely adopted
unconventional policy instruments in order to cushion their economies against
loss of competitiveness and excessive credit expansion due to massive capital
inflows.
The period following the October Inflation Report was also marked by
rising commodity prices, particularly of agricultural products. Since food
accounts for a large proportion of the CPI basket in emerging economies, rising
food prices would have a major impact on inflation. In addition, the recent
depreciation of emerging market currencies adds an upside risk to inflation
outlook in the short term.
2.1. Global Growth
The global economic activity continues to recover slowly and gradually.
Emerging economies, particularly Asian and Latin American economies, were
the main drivers of global growth in the third quarter of 2010, while advanced
economies remained fragile (Graph 2.1.1). The strong recovery in emerging
economies brought production above pre-crisis levels. However, the global
production index weighted by the share of each country in Turkish exports
continued to hover below pre-crisis levels in the third quarter (Graph 2.1.2).
The fact that Turkey's export destinations recover at a slower pace will continue
to have a dampening effect on external demand in coming months.
Graph 2.1.1. Aggregated Growth Rates
(Percent)
Graph 2.1.2. Export and GDP-Weighted Global Production Index*
Advanced Economies
Emerging Economies
GDP-Weighted
10
148
8
146
Export-Weighted
144
6
142
4
140
2
138
0
136
-2
134
-4
132
130
-6
12341234123412341234123412341234123
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bloomberg, CBRT.
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2006
2007
2008
2009
2010
* 1996=100.
Source: Bloomberg, CBRT.
Production and inventory changes provided the largest contributions to
the US growth in the third quarter, while the contribution of fixed investments
decreased significantly (Table 2.1.1). Recent data also indicate that both the
18
Inflation Report 2011-I
Central Bank of the Republic of Turkey
second round of quantitative easing and the ongoing fiscal stimulus measures
spur economic growth, despite the gloomy outlook for real estates and the labor
market. Consumption and net exports continued to be the key drivers of the
euro area growth in the third quarter, whereas fixed investments created a drag
on growth. The fiscal tightening in the euro area, the weak external demand, the
mounting concerns about the sustainability of the export-led growth in core
economies and the renewed financial distress in the peripheral Europe all feed
into the clouded outlook for euro area growth in the upcoming period.
Table 2.1.1. Growth Decomposition in US and the Euro Area in 2010
(Annualized, Percent)
USA
2010-I
2010-II
2010-III
2010-I
1.3
1.5
1.7
0.8
-0.3
0.8
0,8
0.0
0.4
2.1
0.2
-0.4
2.6
0.8
1.6
2.8
-0.3
-3.5
-1.7
-2.0
3.7
1.7
2.6
1.2
Private Consumption
Public Sector
Fixed Investment
Inventory Changes
Net Exports
Total
Euro Area
2010-II
0.4
0.0
1.6
1.6
0.4
4.0
2010-III
0.4
0.4
-0.4
0.4
0.4
1.2
Source: Bloomberg.
The negative outlook of the labor markets in advanced economies
continues to dampen private consumption and hence economic growth. The US
unemployment declined to 9.4 percent in December, while the euro area
unemployment rose to 10.1 percent in November (Graph 2.1.3). Given that the
average unemployment spell is about 34 weeks in the US and the recently
announced fiscal package extends the length of the unemployment benefit, the
negative impact of unemployment on aggregate demand remains limited.
The JP Morgan Global PMI, the most recent data for the fourth quarter,
indicate that the third-quarter downtrend has ended as of September, with
manufacturing and services PMI posting gains in the fourth quarter
(Graph 2.1.4).
Graph 2.1.3. Unemployment in Advanced Economies
Graph 2.1.4. JP Morgan Global PMI
(Percent)
USA
Manufacturing
Euro Area
11
65
10
60
9
Services
55
8
50
7
45
6
Source: Bloomberg.
Inflation Report 2011-I
2010
2009
2008
2007
2005
2010
2009
2008
2007
2006
2005
2004
2003
30
2002
3
2001
35
2000
4
2006
40
5
Source: Bloomberg.
19
Central Bank of the Republic of Turkey
Consensus Economics revised its end-2011 global growth forecast
slightly upwards after the October Inflation Report (Table 2.1.2), mainly owing
to an upgrade in end-2011 US growth forecasts due to signs of a more robust
US economic recovery. Overall, the growth discrepancy between advanced and
emerging economies is expected to continue into 2011, albeit at a more
moderate pace. Furthermore, uncertainties regarding the growth outlook for
advanced economies may slow down the external demand of export-oriented
emerging economies over the upcoming period, hence making growth in those
economies to depend more on domestic demand.
Table 2.1.2. Growth Forecasts
World
USA
Euro Area
Eastern Europe
Latin America
Asia-Pasific
(Annual Percentage Change)
2010
October
December
3.7
3.9
2.7
2.8
1.6
1.7
4.0
3.9
5.,4
5.6
6.4
6.6
2011
October
3.1
2.4
1.4
3.9
4.0
5.1
December
3.2
2.7
1.5
3.9
4.0
5.0
Source: Consensus Forecasts.
2.2. Commodity Prices
Commodity prices were on rise during the fourth quarter amid the
ongoing global economic recovery (Graph 2.2.1). Unexpected weather
conditions affected food supply and energy demand, putting an additional
upward pressure on food and energy prices. Moreover, during the same period,
prices of industrial and precious metals continued to increase. Prices of
precious metals have especially risen on higher demand for these metals as a
hedge against inflation and economic risks. Meanwhile, crude oil prices picked
up as production quotas remained unchanged at the latest OPEC meeting
despite ample idle capacity. Oil producers violating quota limits have also cut
production in order to improve compliance with OPEC's output quotas. In
addition, adverse weather conditions drove crude oil prices higher
(Graph 2.2.2). In fact, historically trading below WTI, Brent crude oil prices
floated higher on the apparently wintry weather conditions in Europe.
20
Inflation Report 2011-I
Central Bank of the Republic of Turkey
Graph 2.2.1. S&P Goldman Sachs Commodity Prices*
180
Headline
Energy
Industrial Metals
Agriculture
Graph 2.2.2. Crude Oil (Brent) Prices
(USD/bbl)
Spot
Futures (1-15 October 2010)
Precious Metals
100
Futures (1-4 January 2011)
150
120
80
90
60
60
30
0712
0112
0711
0111
0710
0110
0709
0111
0710
0110
0709
0109
0708
0108
* January 2008=100.
Source: Goldman Sachs.
0109
40
0
Source: Bloomberg.
Economic growth is likely to be the key driver of energy prices in coming
months, once the effects of bad weather conditions taper off. The brisk demand
in emerging economies as well as the newly fiscal stimulus packages in
advanced economies are expected to spur energy demand. However, the
outlook for industrial metal prices would continue to rely on the growth
performance of emerging economies.
2.3. Global Inflation
CPI inflation has been trending upward in both advanced and emerging
economies since the end of the third quarter of 2010 amid rising commodity
prices and the ongoing global recovery. Core inflation has also edged up,
particularly in rapidly recovering emerging economies (Graphs 2.3.1 and 2.3.2).
Graph 2.3.1. CPI Inflation in Advanced and Emerging Economies
Graph 2.3.2. Core CPI Inflation in Advanced and
Emerging Economies
(Annual Percentage Change)
(Annual Percentage Change)
Advanced Economies
Advanced Economies
9
Emerging Economies
Emerging Economies
5
8
7
4
6
5
3
4
3
2
2
1
0
1
-1
Source: Bloomberg, CBRT.
Inflation Report 2011-I
0810
0410
1209
0809
0409
1208
0808
0408
1207
0807
0407
1206
0806
0406
0
1205
0810
0410
1209
0809
0409
1208
0808
0408
1207
0807
0407
1206
0806
0406
1205
-2
Source: Bloomberg, Datastream, CBRT.
21
Central Bank of the Republic of Turkey
The global inflation forecast for end-2011 was slightly revised upward in
December from the previous reporting period on higher inflation expectations
for the Eastern Europe and Asia-Pacific, while, inflation forecasts for the US
and the euro area remained unchanged (Table 2.3.1).
Table 2.3.1. Inflation Forecasts
(Annual Percentage Change)
2011
World
USA
Euro Area
Emerging Economies
Eastern Europe
Latin America
Asia-Pasific
October
2.6
1.5
1.6
December
2.7
1.5
1.6
5.7
7.1
2.3
6.0
7.0
2.7
Source: Consensus Forecasts.
2.4. Financial Conditions and Risk Indicators
In the fourth quarter, financial markets were dominated by the renewed
concerns about the sovereign debt sustainability in the European periphery and
the consequent rescue package, and the Fed's second round of quantitative
easing. As a result, the USD/euro parity has exhibited sharp volatility. On the
other hand, additional monetary expansion measures adopted by advanced
economies helped foster expectations of a prolonged environment of low
interest rates and ample liquidity in advanced economies, thus improving the
global risk sentiment. Accordingly, emerging economies have attracted more
capital in the form of portfolio investments.
Graph 2.4.1. OIS Spread
(Percent)
0.4
3-month USD
3-month Euro
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0111
1110
0910
0710
0510
0310
0110
0.0
Source: Bloomberg.
Across money markets, the OIS spread on both USD and the euro has
widened. The euro OIS spread was particularly wider on euro area debt woes
(Graph 2.4.1).
22
Inflation Report 2011-I
Central Bank of the Republic of Turkey
Although the risk perception about struggling euro area economies has
eased in early fourth quarter, mounting fears of a worse-than-expected Irish
banking crisis and concerns about counterparty risk have pushed the risk
premiums for other peripheral euro area economies higher (Graphs 2.4.2
and 2.4.3).
Graph 2.4.2. CDS Rates in Selected Countries
Graph 2.4.3. Bond Spreads in Selected Countries over
German Bonds
(Basis Point)
(10-Year, Percent)
Greece
Portugal
Ireland
Spain
1200
1000
Greece
1200
Portugal
Ireland
1000
1210
0910
0610
1210
Source: Bloomberg.
0310
0
1209
0
0609
200
0910
200
0610
400
0310
400
1209
600
0909
600
0609
800
0909
Spain
800
Source: Bloomberg.
Despite Europe's sovereign debt problem, the global risk appetite
picked up in the fourth quarter amid signs of an improved US growth outlook,
driving investors towards higher-risk assets and markets (Graph 2.4.4).
Accordingly, the risk premiums for emerging economies declined quarter-onquarter. After having appreciated until the end of October, emerging market
currencies began depreciating amid debt woes and adopted policy measures by
central banks (Graph 2.4.5).
Graph 2.4.5. Exchange Rate and Risk Premium Indicators
for Emerging Economies*
Graph 2.4.4. Global Risk Appetite
Credit Suisse Risk Appetite Index
VIX (right axis-reversed)
10
8
6
4
0
140
15
130
30
2
45
0
-2
60
Currency Basket
EMBI (right axis)
1500
1350
1200
1050
900
750
600
450
300
150
0
120
110
100
90
80
Source: Credit Suisse, Bloomberg.
70
1210
0810
0410
1209
0809
0409
60
1208
1210
0810
0410
1209
0809
0409
1208
0808
90
0408
-8
0808
75
-6
0408
-4
* Arithmetical average of the exchange rates of emerging market currencies
against the currency basket of 1 euro and 1 USD. Equals 100 on June 2007
and an upward movement denotes depreciation in emerging market
currencies.
Source: Bloomberg.
The growing risk appetite and ample liquidity helped stock markets
rebound in both advanced and emerging economies (Graph 2.4.6). Fed's
Inflation Report 2011-I
23
Central Bank of the Republic of Turkey
quantitative easing policy and promising growth figures increased prospects of
a rate hike in the US. Consequently, FOMC policy rate hike is expected to
come sooner and be more sizeable than envisioned in October (Graph 2.4.7).
Yet, the first rate hike is expected to come not earlier than the final quarter of
2011.
Graph 2.4.6. Global Stock Markets
Graph 2.4.7. Expectations of FOMC Rate Changes
MSCI - Emerging Economies
MSCI - Advanced Economies
0412
0112
0710
Source: Bloomberg.
1011
0.0
0711
50
0111
0.5
0110
100
0709
1.0
0109
150
0708
1.5
0108
200
0707
2.0
0107
250
0411
2.5
1012
January 29
April 30
July 30
October 29
December 31
0712
300
Source: Bloomberg.
US loans dropped further in the fourth quarter, albeit at a slower pace.
Yet, year-on-year changes are increasing due to base effects (Graph 2.4.8). In
the euro area, although loans remained broadly stable, housing loans continued
to rise steadily (Graph 2.4.9).
Graph 2.4.8. Credit Developments in the US*
Graph 2.4.9. Credit Developments in the Euro Area*
(Annual Percentage Change)
Business Loans
Housing Loans
30
Consumer Loans
Other Loans
(Annual Percentage Change)
Business Loans
Housing Loans
30
Consumer Loans
Other Loans
25
20
20
10
15
0
10
-10
* Off-balance sheet items have been consolidated into consumer loans and
adjusted accordingly as of April 2010.
Source: Fed.
2010
2009
2008
2007
2006
2004
2010
2009
2008
2007
2006
-5
2005
-30
2004
0
2005
5
-20
* 2008Q4 figures for insurance corporations and pension funds have been
revised.
Source: ECB.
2.5. Global Monetary Policy Developments
Both advanced and emerging economies have yet to normalize policy
rates that were slashed extremely during the crisis. While advanced economies
have maintained quantitative easing in the fourth quarter, the fast-growing
24
Inflation Report 2011-I
Central Bank of the Republic of Turkey
emerging economies facing inflationary pressures have engaged in quantitative
tightening.
The previous Report indicated that the sovereign debt problems in the EU
periphery created a major element of uncertainty about global growth
prospects, and therefore, suggested that central banks would postpone the
policy normalization process. Accordingly, excluding some Asia-Pacific and
Latin American economies facing inflationary pressures, neither advanced nor
emerging economies have started normalizing policy rates in the fourth quarter
(Graphs 2.5.1 and 2.5. 2). Indeed, in aggregated indices, global policy rates
were flat over the fourth quarter, and the composite policy rate for both
advanced and emerging economies remained largely unchanged quarter-onquarter (Graphs 2.5.3 and 2.5.4).
Graph 2.5.1. Policy Rate Changes in Advanced Economies*
Graph 2.5.2. Policy Rate Changes in Emerging Economies*
(Basis Point)
(Basis Point)
200
100
0
0
-100
-200
-400
-200
-600
-300
-800
October 2010 - December 2010
-500
-1200
Israel
Japan
Australia
Sweden
Czech Rep.
Norway
S. Korea
Canada
UK
USA
N. Zealand
Euro Area
September 2007 - September 2010
-600
October 2010 - December 2010
-1000
September 2007 - September 2010
-1400
Turkey
Colombia
Chile
S. Africa
Peru
Mexico
Hungary
Russia
India
Indonesia
Thailand
Poland
Malaysia
Brazil
Romania
-400
* As of December 2010.
Source: Bloomberg, CBRT.
Graph 2.5.3. Policy Rates in Advanced Economies
Graph 2.5.4. Policy Rates in Inflation-Targeting
Emerging Economies
(Percent)
(Percent)
5
20
18
4
16
14
3
12
10
2
8
6
Emerging Economies
2
Turkey*
0910
0510
0110
0909
0509
0109
0908
0508
0108
0907
0507
0107
0906
0
0506
0910
0510
0110
0909
0509
0109
0908
0508
0108
0907
0507
0107
0906
0506
0106
0
4
0106
1
* CBRT's overnight borrowing rate at the Interbank Money Market.
Source: Bloomberg, CBRT.
The quantitative easing across G3 economies that started in 2008
continued into the final quarter of 2010. In fact, following the first round of
Inflation Report 2011-I
25
Central Bank of the Republic of Turkey
quantitative easing that started in the last quarter of 2008 and ended in the first
quarter of 2010, a second round was launched on November 3, 2010. The
second package involving a purchase of 600 billion USD of securities by the
end of the second quarter of 2011, is expected to put downward pressure on
long-term interest rates and to reduce borrowing costs. However, the package
has so far pushed long-term interest rates up rather than down (Box 2.2).
Similarly, the Bank of Japan and the ECB continued to run an expansionary
monetary policy in order to soothe markets in the last quarter of 2010 as well.
Across emerging economies, central banks have resorted to quantitative
tightening to control the potential effects of the additional easing packages
implemented in advanced economies on their economies. Higher global
liquidity fueled by the above policy measures in advanced economies has
prompted a massive capital flow into emerging economies with higher yields,
exposing these economies to various risks. This massive capital flow, by
placing an upward pressure on exchange rates, may reduce the competitiveness,
and thus, can adversely affect the economic activity. Moreover, the possibility
of a sudden stop in capital flows warrants caution in terms of its potential
threats to financial stability. In addition, an excessive capital inflow may put an
additional pressure on the medium-term inflation outlook in emerging
economies that are already facing inflationary pressures due to rapid growth.
However, as raising policy rates to contain inflation will further accelerate
capital inflows, emerging economies have adopted various restrictive capital
controls to counteract any additional inflationary pressures (Table 2.5.1).
Table 2.5.1 Quantitative Easing in Emerging Economies
Changes in Required Reserve Ratio
(Percent)
Brazil
Colombia
Peru
China
Indonesia
South Korea
Philippines
Taiwan
Thailand
India
Poland
South Africa
Russia
Turkey
Capital Controls
During the Crisis
(-)
After the Crisis
(+)
More Restrictions on
Capital Inflow
Less Restrictions on
Capital Outflow
2
3
5
2
4
7
√
√
√
√
√
3
3
3
√
√
Other Measures*
√
√
√
√
2.5
0.5
1.5
0.5
5
TL: 1
FX: 2
2
TL: 2.4**
FX: 2
√
√
√
√
√
* Indonesia: Measures to encourage long-term investment. South Korea, Taiwan: Measures to control speculative flows. India: Measures to discourage
external borrowing. Russia: Tax adjustments to discourage borrowing in foreign currency.
** As of January 7, 2011, required reserve ratio for TL has been diversified according to maturity of the deposits. The figure presented in the table is the
weighted average.
Source: Relevant Central Bank websites, CBRT Financial Stability Report December 2010.
26
Inflation Report 2011-I
Central Bank of the Rep
public of Turkey
Asidde from cap
pital controlls, required reserve ratios that weere lowered
during thee crisis in order to helpp the lendin
ng channel operate
o
effeectively are
raised in most
m
emergiing economiies facing in
nflationary pressures,
p
leeading to a
tight monetary stancee. While m
many emerg
ging econom
mies lowereed required
d
the exit from
reserve raatios graduaally down to pre-crissis levels during
expansionaary policies, Brazil andd China raised required
d reserve raatios above
pre-crisis levels to tame their skyrocketing inflation
n. In sum,, emerging
Pacific and Latin
L
Americca, opted foor monetary
economiess, particularlly in Asia-P
tightening in the previous quarter by using qu
uantitative methods
m
(Tabble 2.5.1).
Advvanced econo
omies are eexpected to continue wiith quantitattive easing,
while emeerging econ
nomies are llikely to maintain
m
quaantitative tigghtening in
coming months.
m
The sovereign debt crisis in the EU periphery sstill posing
significantt downside risk to gloobal growth
h confirms that policyy rates are
unlikely too return to prre-crisis leveels in G3 ecconomies in the near futuure. Hence,
a policy raate hike is not expecteed before th
he last quartter of 2011.. However,
many emerging econo
omies, particcularly in Laatin America and Asia-PPacific, are
t take a steep towards nnormalizing
g monetary policies
p
by the second
expected to
quarter (Grraph 2.5.5).
Graph 22.5.5. Expected Policy Rates
(Basis Point)
G3
1.6
Latin America
Asia-Pacific
A
CEEM
MEA
1.4
1.2
1
0.8
0.6
0.4
0.2
2011-IV
22011-III
2011
1-II
Turkey
Poland
S. Africa
Czech Rep.
Thailand
S. Korea
India
Philippines
Indonesia
China
Peru
Mexico
Colombia
Brazil
Japan
Euro Area
USA
0
2011-I
Source: Bloomberg.
Inflation Repo
ort 2011-I
27
Central Bank of the Republic of Turkey
Box
2.1
The
The Sensitivity of the EU Periphery to the Debt Crisis
sovereign debt crisis that erupted in the peripheral euro area during the
second quarter of 2010 poses downside risk to global growth. A possible
contagion to other countries due to EU's integrated markets warrants a close
monitoring of peripheral economies. This Box analyzes the vulnerability of
peripheral economies amid the sovereign debt crisis that caused Greece and
Ireland to request assistance from the EU, and discusses cross-border banking
exposures, a key channel of contagion.
During
the rapidly spreading sovereign debt crisis in the EU periphery, firstly,
Greece asked the EU to activate a rescue package due to problems about its
sovereign debt rollover in May, and a bailout plan was announced on May 10.
The similar and integrated structure of peripheral economies fueled concerns
about Ireland, Portugal, Spain, Italy and Belgium with already distressed public
and banking sectors. Indeed, Ireland requested financial assistance for its
troubled banking sector, and EU announced a bailout plan on November 28.
This
Box derives a "vulnerability index" for the above-mentioned countries. The
index is based on Gros and Mayer (2010)1 and uses eight variables including main
indicators on public finances and economic activity as well as variables on
sovereign default and banking vulnerability. The stance of public finance is
captured by debt-to-GDP and fiscal deficit-to-GDP ratios. Requirement for
external finance is measured by current account-to-GDP ratio, while economic
activity is measured by the unemployment rate. Sovereign default risk is measured
by the CDS rate and bond spreads from 10-year German bonds. In order to
identify banking sector vulnerabilities, banking sector CDS rates and ECB funding
have been included to the analysis. To make these various measures
comparable, each variable, calculated as of the fourth quarter of 2010, is
standardized by subtracting the cross-country mean and dividing by the standard
deviation. The overall vulnerability index is the sum of these standardized variables
where fiscal balance and current account balance have a negative sign.
1
Gros, D. and Mayer, T. (2010), "How to Deal with Sovereign Default in Europe: Create the European Monetary Fund Now!",
CEPS Policy Brief, No. 202.
28
Inflation Report 2011-I
Central Bank of the Republic of Turkey
CDS
Banking CDS
ECB Funding***
Vulnerability Index
0.27
-1.28
0.07
1.74
1.70
1.09
0.69
7.52
-0.02
-2.01
0.55
0.30
0.41
0.53
1.14
1.60
5.41
Portugal
-0.65
0.37
-1.07
-0.35
0.09
0.03
0.41
-0.45
-0.21
Spain
-1.50
0.19
0.00
1.78
-0.49
-0.56
-0.71
-0.03
-1.69
Italy
0.93
0.59
0.52
-0.86
-0.76
-0.74
-0.93
-0.65
-4.12
Belgium
0.03
0.60
1.28
Source: Bloomberg, CBRT.
* IMF end-2010 forecasts for Ireland, Greece and Portugal.
** As of 2010Q3 for Greece.
*** As of November 2010 for all countries except Belgium.
-0.94
-0.99
-0.97
-0.99
-1.16
-6.91
Current Account/
GDP*
1.21
Ireland
Budget
Balance/GDP
Greece
Debt Stock/GDP
Unemployment**
Bond Spreads over
10-year German
Bonds
Table 1. Vulnerability Index in the Euro Area Periphery Countries
The index shows that Greece is the most vulnerable country in the euro area as of
end-2010, followed by Ireland, Portugal, Spain, Italy and Belgium, respectively
(Table 1). Reaching 130 percent of GDP, a strikingly high ratio compared to other
countries, the government debt has been the major component of Greece's
vulnerability, while banking sector vulnerabilities are much higher in Ireland. In
fact, while Greece has faced a fiscal crisis, Ireland has faced a banking crisis.
Despite the less damaged public finance, Portugal is the third most vulnerable
country due to the significantly higher current account deficit and very high
banking sector risks. In Spain, economic activity is still well below pre-crisis levels
and unemployment rate hovers around a dramatic 20 percent as of end-2010. In
Italy and in Belgium, the weakening public finances is a major concern. The debt
stock-to-GDP ratio is 120 percent in Italy, well above the average of countries,
and increases the vulnerability of the Italian economy. In Belgium, although the
debt stock-to-GDP ratio hovers around the average, considering that the
average 98 percent is already quite high, the high debt stock-to-GDP ratio stands
out as the primary driver of the Belgian economy’s vulnerability.
The
above table shows that one of the major factors that increase the
vulnerability of these countries is the vulnerabilities in the banking sector. Given
that the crisis in Ireland has erupted in the banking sector and in view of the
integrated structure of the EU banking sector, a cross-border contagion among
EU banking systems is very likely. Figure 1 shows the liabilities of peripheral banks to
foreign banks. In this context, German and UK banks are Ireland's two biggest
creditors, and therefore, a crisis in Irish banks would directly affect German and
British banking systems. In Portugal, the third most vulnerable economy after
Greece and Ireland, domestic banks are mostly debtor to Spanish banks. Thus,
given the high banking sector vulnerability in Portugal, a potential problem in
Portuguese banks may adversely affect Spain's large banking sector. As the
biggest creditors of Spanish banks are German, British and French banks, a
problem in the Spanish banking system may have a direct and significant impact
on the banking systems of EU's core economies. Hence, a “default” risk in the
peripheral banking systems carries the potential to significantly damage the
banking sectors of core EU countries.
Inflation Report 2011-I
29
Central Bank of
o the Republic of
o Turkey
Figure 1. Euro Area Perihperaal Countries Cross-Borrder Banking Sector Liabilities
L
*
(Billion USD, Gross)
Ireland
Greece
Portugal
138.6
6
36.8
62
2.6
37.22
49.8
2283.9
50.1
14
48.5
53.5
1.0
2.0
41.9
12.0
222.4
68.7
144.0
7.5
78.3
2.1
27.3
Italy
Spain
3.1
Belgium
35. 1
153.7
253.1
181.6
384.9
353
3.6
195.3
418.9
4
110.8
162.4
0.0 2
21.0
47.1
5.7
32.6
38.00
66.8
32.5
40.0
18
8.9
29.2
* As of June 2010.
Source: BIS.
In sum, vulnerabilities of the EU's pperiphery couuntries mainly originate frrom public
and bank
king sectors, and
a
any pro
oblems in the
ese countries would spill o
over across
core coun
ntries, especiially via the b
banking secttor. The sovereign debt c
crisis should
be closely
y monitored given the pe
eriphery's alre
eady trouble
ed public fina
ances and
high bank
king sector rissks as well as the sizeable redemption payments d ue in 2011.
It is critica
al for periphe
eral econom
mies to take all necessary
y measures iin order to
alleviate concerns
c
abo
out debt susttainability an
nd ensure a healthy
h
bankking system
over the upcoming
u
pe
eriod.
30
Inflation Re
eport 2011-I
Central Bank of the Republic of Turkey
Box
2.2
With
Causes of the Increase in the US Long-Term Nominal Bond
Returns Following the Second Round of Quantitative Easing
short-term interest rates approaching the zero bound, central banks in
advanced economies have resorted to unconventional monetary policies. One
of these policies has been the Fed's recent announcement of a second round of
"quantitative easing". This program which aims to purchase a total of 600 billion
USD of long-term Treasury securities by the end of the second quarter of 2011, was
first announced in Fed Chairman Bernanke's Jackson Hole speech on August 28,
2010 and put into effect on November 3, 2010.
The
above purchase may either
lower real and nominal bond yields
amid increased money supply or
Graph 1. Yields on 10-Year US Bonds
4.5
Launch of the
Second
Quantitative
Easing
Bernanke's Jackson
Hole Speech
4
push them up through increased
prospects for growth and inflation.
After the launch of the second
quantitative easing program, long-
3.5
3
2.5
term (10-year) bond yields have
arguments that the program has
failed.
Indeed,
some
call
the
0111
1210
1110
1010
0910
0810
0710
0610
0510
0410
0310
0210
2
0110
trended upward (Graph 1), fueling
Source: Bloomberg.
program ineffective due to rising yields, while some argue that the program has a
negative impact on inflation expectations. This Box suggests that the increase in
yields may not be due to the failure of the program, but rather due to
normalization of growth and inflation expectations.
In
order to better interpret this yield increase, the first factor to consider is the
strong possibility that bond prices were affected in advance as the program was
announced a few months before the launch date. The announcement of the
launch date has merely served to inform about the size of the program. As the
second round of purchases is not as high as, and in fact, smaller than expected,
the announcement of the launch date is unlikely to cause bond yields to fall or
inflation expectations to deteriorate.
Inflation Report 2011-I
31
Central Bank of the Republic of Turkey
Another
factor to consider is the
Table 1. National Income and Inflation Forecasts for US
National Income
2010
2011
3.3
3.1
3.1
3
2.9
2.8
2.7
2.4
2.7
2.4
2.7
2.4
2.8
2.7
difficulty to isolate the program's effects
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
from other influencing developments in
the same period. The most important of
these simultaneous developments are
the favorable readings on the US
economy during and after the launch
Inflation
2010
2011
1.7
1.7
1.7
1.5
1.6
1.4
1.6
1.4
1.6
1.5
1.6
1.4
1.6
1.5
Source: Consensus Forecasts.
of the program, and prospects of a robust growth replacing double dip fears.
Table
1 shows the month-on-month Consensus Economics forecasts of 250
participants with strong expertise in producing financial and economic forecasts
for the US economy. Growth forecasts were revised downward until the
announcement of the program, remained flat between the announcement and
the launch date, and have been upgraded following the launch date. The bond
yields in Graph 1 are largely consistent with the growth forecasts in Table 1.
Put differently, the announcement
to
6
European sovereign debt crisis and
5
rising double dip concerns (Graph
4
quantitative easing coincides with
the beginning of the period of
2
0111
0110
-6
0109
1
0108
hand, the launch date of the
0
0107
yields further down. On the other
3
0106
into safe-haven US bonds, pushing
0105
2). In this period, investors rushed
12
6
0104
due
0103
appetite
0102
risk
EU Sovereign Debt
Crisis
Credit Suisse Risk Appetite
Index (right axis)
0100
slumping
10-year US Bonds
7
0101
date coincides with a period of
Graph 2. Risk Appetite and Nominal Yields on US Bonds
Source: Bloomberg, Credit Suisse.
growing risk appetite amid relatively eased concerns about European debt
problems and a double dip recession, putting upward pressure on yields. It is
difficult to single out the effects of the second quantitative easing program where
the growing risk appetite is expected to push yields up.
32
Inflation Report 2011-I
Central Bank of the Republic of Turkey
The current nominal yields in the bond market can be explained by the increases
in real interest rates and/or the rise in inflation expectations fueled by increased
prospects of growth. The average 10-year real interest rates can be derived from
the yields on inflation-indexed bonds. The real interest rates on inflation-indexed
bonds are correlated with growth
Nominal Yields on 10-year US
Bonds
Real Yields on 10-year US
Bonds
10-year Inflation Compensation
(right axis)
remains
unchanged, changes in nominal
rapidly on November's positive
labor
force
data
and
announcement of tax incentives in
1.5
1
1
0.5
0.5
0
0
0111
increased
2
1.5
1210
but
first
2.5
2
1110
announcement,
the
3
1010
after
rates
0910
interest
3.5
2.5
0810
declined
real
4
0710
Accordingly,
4.5
3
0210
changes in inflation
expectations.2
4
Bernanke's Jackson
Hole Speech
3.5
0110
minus real interest rates reflect
0610
premium
Graph 3. Nominal and Real Yields on 10-Year US
the
0510
risk
that
0410
inflation
Assuming
0310
prospects.
Source: Bloomberg.
December (Graph 3). Hovering
around record lows during the first announcement in August, inflation
expectations increased gradually back to more normal levels afterwards.
To sum up, the recent upsurge in nominal US bond yields points to a normalization
in growth and inflation expectations. The current levels of interest rates can be
interpreted as a correction driven by expectations of a higher growth and the
eased uncertainty about double dip concerns and the European debt crisis. Yet,
the effects of quantitative easing cannot be clearly distinguished. The fact that
the decline in inflation expectations has ended and even been reversed after the
announcement of the second round of quantitative easing can be interpreted as
the contribution of the program to normalization. However, the fact that the
inflation compensation but not real interest rates has increased during both the
announcement and the launch of the program (Graph 3), suggests that market
participants expect the program to have a limited impact on economic growth in
the long run. The main factors affecting near-term growth prospects are favorable
economic data and announcements of fiscal incentives.
2
Assuming that inflation risk premium increases on heightened uncertainty, the increase in inflation compensation cannot be fully
attributed to rising inflation expectations.
Inflation Report 2011-I
33
Central Bank of the Republic of Turkey
34
Inflation Report 2011-I