Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
1 The shift and the shocks: prospects for the world economy Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Global Policy Dialogue 23rd January London School of Economics The shift and the shocks • Shift • Shocks • Prospects 3 1. The shift • In the 19th century, there occurred the “great divergence” • In the second half of the 20th century, convergence began, notably with Japan and the east Asian “tiger economies” • In the late 20th and early 21st centuries convergence spread to the Asian giants • Divergent growth is mirror image of converging incomes 4 1. The shift EMERGING COUNTRIES OUTPERFORM HUGELY GDP SINCE THE CRISIS Source: IMF, WEO database 170 160 150 140 130 120 110 100 90 2007 2008 Advanced economies 5 2009 2010 2011 Emerging and developing economies 2012 China India 1. The shift DEVELOPED COUNTRIES FALL, ASIA RISES SHARES IN WORLD OUTPUT (at PPP, per cent) Source: IMF WEO database, October 2011 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4 25 24 14 18 20 18 29 25 20 18 1990 2000 2010 2016 European Union India 6 7 United States Other developing Asia Other advanced economies Other emerging economies China 1. The shift • The “great convergence” has had powerful consequences: – An ongoing “labour-supply shock”, which lowered relative wages of the relatively unskilled in high-income countries; – Initially, a dis-inflationary shock, as China lowered world prices for manufactures; – An increase in the surplus of desired savings and so the rise of the global imbalances; – Then an inflationary shock, as demand for raw materials soared; and throughout – Ongoing shift in global economic activity 7 2. The shocks • The economic collapse was large and enduring • The rescue was also dramatic: – Liabilities of the core financial system were nationalised; – Monetary policy is unprecedented; and – Fiscal policy has been put on a war-time footing. • This then is a “contained depression”. • According to Carmen Reinhart and Kenneth Rogoff, This Time is Different, it could take three years, to return to “normality”. Given the scale of affected economies, it could be longer. • Conventional fiscal and monetary firepower is used up. 8 2. The shocks: global THE LEGACY OF THE DEBT EXPLOSION Source: IMF WEO, September 2011 HOUSEHOLD DEBT TO INCOME RATIO 180 160 140 120 100 80 20 00 Q 1 20 00 Q 3 20 01 Q 1 20 01 Q 3 20 02 Q 1 20 02 Q 3 20 03 Q 1 20 03 Q 3 20 04 Q 1 20 04 Q 3 20 05 Q 1 20 05 Q 3 20 06 Q 1 20 06 Q 3 20 07 Q 1 20 07 Q 3 20 08 Q 1 20 08 Q 3 20 09 Q 1 20 09 Q 3 20 10 Q 1 20 10 Q 3 20 11 Q 1 60 United States 9 Euro area United Kingdom Japan 2. The shocks: global A LONG DEPRESSION GDP IN THE GREAT RECESSION 104.0 102.0 100.0 98.0 96.0 94.0 92.0 90.0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 US 10 Q1 2009 UK Q2 2009 CANADA Q3 2009 Q4 2009 JAPAN Q1 2010 ITALY Q2 2010 Q3 2010 FRANCE Q4 2010 Q1 2011 GERMANY Q2 2011 Q3 2011 2. The shocks: global THE SOVEREIGN DEBT CRISIS NET PUBLIC DEBT OVER GDP (per cent) 180 160 Source: IMF WEO, October 2011 140 120 2006 2009 2012 2015 100 80 60 40 20 0 Japan 11 Italy United States France United Kingdom Germany Canada 2. The shocks: global THE AGE OF PREMATURE RETRENCHMENT STRUCTURAL FISCAL DEFICIT (as per cent of GDP) 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 Canada France Germany 2008 12 Italy 2009 2010 Japan 2011 2012 United Kingdom United States US 30/12/2009 30/01/2010 30/03/2010 Japan 30/04/2010 30/05/2010 30/06/2010 Germany 30/07/2010 30/08/2010 30/09/2010 30/10/2010 France 30/11/2010 30/12/2010 30/01/2011 Italy 28/02/2011 30/03/2011 Canada 30/04/2011 30/05/2011 30/06/2011 30/07/2011 Spain 30/08/2011 30/09/2011 30/10/2011 TEN-YEAR GOVERNMENT BOND YIELDS UK 28/02/2010 FISCAL ROOM? YES 30/11/2009 2. The shocks: global 8 7 6 5 4 3 2 1 0 13 30/10/2009 2. The shocks - eurozone • The eurozone crisis is the world, in miniature • The core of the eurozone financial crisis is not a fiscal crisis • It is the interaction of balance of payments with financial crises, though huge debt stocks played a part in creating liquidity problems for sovereigns 14 2. The shocks - eurozone • The difficulty is largely the result of the divergences accumulated in the years of excess • What made everything seem so good was creating an acute long-term crisis • The failure of a true union stands revealed: neither financing in a crisis nor workable adjustment mechanisms • Too little, too confused and too late • The crisis is potentially terminal for the eurozone 15 2. The shocks - eurozone EUROZONE IMBALANCES CURRENT ACCOUNT BALANCES (per cent of GDP) 1999-2007 Average 16 2012 Es to n ia l Po rtu ga ce G re e ai n Sp d la n Ire Ita ly Fr an ce a Au st ri an y G er m um Be lg i s he rla nd N et Fi nl a nd 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 2. The shocks - eurozone ROAD TO THE EUROZONE FISCAL CRISES NET PUBLIC DEBT (relative to GDP) Source: World Economic Outlook database April 2011 180 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015 160 140 120 100 80 60 40 20 0 Greece 17 Italy Portugal Ireland Spain 01/05/2007 01/07/2007 01/09/2007 01/11/2007 01/01/2008 01/03/2008 01/05/2008 01/09/2008 01/11/2008 Spain 01/01/2009 01/03/2009 France 01/05/2009 01/07/2009 01/09/2009 Italy 01/11/2009 01/01/2010 Netherlands 01/03/2010 01/05/2010 01/07/2010 01/09/2010 01/11/2010 01/01/2011 01/03/2011 01/05/2011 01/07/2011 01/09/2011 01/11/2011 SPREADS OVER BUNDS Belgium 01/07/2008 2. The shocks - eurozone 600 500 400 300 200 100 0 01/03/2007 ROAD TO THE EUROZONE FISCAL CRISES 18 01/01/2007 01/05/2007 01/07/2007 01/09/2007 01/11/2007 01/01/2008 01/03/2008 01/05/2008 01/09/2008 Greece 01/11/2008 Ireland 01/05/2009 01/01/2009 01/03/2009 01/07/2009 01/09/2009 01/11/2009 Portugal 01/01/2010 01/03/2010 01/05/2010 01/07/2010 01/09/2010 01/11/2010 01/01/2011 01/03/2011 01/05/2011 01/07/2011 01/09/2011 01/11/2011 SPREADS OVER BUNDS 01/07/2008 2. The shocks - eurozone 4000 3500 3000 2500 2000 1500 1000 500 0 -500 01/03/2007 ROAD TO THE EUROZONE FISCAL CRISES 19 01/01/2007 3. Prospects • At the broadest level, we are watching the interaction of two huge events: – A secular shift in the location of economic activity; and – The collapse of a generational expansion in private and, to a lesser extent, public sector leverage in high-income countries – The eurozone crisis falls at the intersection of these processes – “Imbalances” are a vital symptom of economic stress • So how might it all play out? • We do not know. There are too many unknowns. 20 2. The prospects: global GROWTH PROSPECTS DWINDLE FOR 2012 GROWTH FORECASTS FOR 2012 Spain Italy France Germany Eurozone Japan UK US -2.0 -1.5 -1.0 -0.5 0.0 0.5 Jun-11 21 1.0 Jan-12 1.5 2.0 2.5 3.0 3.5 2. The prospects: global GROWTH PROSPECTS DWINDLE FOR 2012 GROWTH FORECASTS FOR 2012 World Latin America Brazil Eastern Europe Russia Asia Pacific (without Japan) India China 0.0 1.0 2.0 3.0 4.0 5.0 Jun-11 22 6.0 Jan-12 7.0 8.0 9.0 10.0 3. Prospects: global • Here are salient elements of global challenges: – Accelerating de-leveraging in the private sectors of overleveraged countries; – Rebalancing the world economy, to give over-leveraged economies to enjoy export-led growth, necessary when their private sectors run huge financial surpluses; – Reducing fiscal deficits in high-income countries, without killing the recovery; and – Avoiding excesses in emerging countries, despite easy financial and monetary conditions. 23 3. Prospects: eurozone • What is needed now in the eurozone are: – Financing while adjustment occurs, which will take at least 5 years and possibly 10 years, or more; – Adjustment via structural reforms and divergent inflation across the eurozone, with higher inflation in core countries and low inflation in vulnerable countries; – The big risk is a combination of premature fiscal tightening in the periphery and the absence of adjustment in the core; – That will lead to further deep recessions; – And a possible break-up. 24 3. Prospects • Some guesses: – Growth in high countries will remain weak for many years, with a significant chance of a true depression; – Headline inflation rates will fall; – Short-term official interest rates will remain low; – Countries with their own central banks will have low longterm bond rates; many eurozone countries will not; – Eurozone break-up risk remains; – The US will be the fastest growing of big economies; – Emerging countries will grow quickly, but there is some chance of crises there, too. 25 26