Download The shift and the shocks: prospects for the world economy

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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
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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
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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.
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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
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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
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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.
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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.
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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.
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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.
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