1 The shift and the shocks: prospects for the world economy Martin - - PowerPoint PPT Presentation

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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

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The shift and the shocks

• Shift
• Shocks
• Prospects

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• 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

90 100 110 120 130 140 150 160 170 2007 2008 2009 2010 2011 2012 Advanced economies Emerging and developing economies China India

Source: IMF, WEO database

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• 1. The shift

DEVELOPED COUNTRIES FALL, ASIA RISES

SHARES IN WORLD OUTPUT (at PPP, per cent)

29 25 20 18 25 24 20 18 4 7 14 18 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1990 2000 2010 2016 European Union United States Other advanced economies China India Other developing Asia Other emerging economies

Source: IMF WEO database, October 2011

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• 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

• f 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

HOUSEHOLD DEBT TO INCOME RATIO

60 80 100 120 140 160 180

2 Q 1 2 Q 3 2 1 Q 1 2 1 Q 3 2 2 Q 1 2 2 Q 3 2 3 Q 1 2 3 Q 3 2 4 Q 1 2 4 Q 3 2 5 Q 1 2 5 Q 3 2 6 Q 1 2 6 Q 3 2 7 Q 1 2 7 Q 3 2 8 Q 1 2 8 Q 3 2 9 Q 1 2 9 Q 3 2 1 Q 1 2 1 Q 3 2 1 1 Q 1

United States Euro area United Kingdom Japan

Source: IMF WEO, September 2011

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• 2. The shocks: global

A LONG DEPRESSION

GDP IN THE GREAT RECESSION

90.0 92.0 94.0 96.0 98.0 100.0 102.0 104.0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 US UK CANADA JAPAN ITALY FRANCE GERMANY

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• 2. The shocks: global

THE SOVEREIGN DEBT CRISIS

NET PUBLIC DEBT OVER GDP (per cent)

20 40 60 80 100 120 140 160 180 Japan Italy United States France United Kingdom Germany Canada

2006 2009 2012 2015

Source: IMF WEO, October 2011

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• 2. The shocks: global

STRUCTURAL FISCAL DEFICIT (as per cent of GDP)

• 9
• 8
• 7
• 6
• 5
• 4
• 3
• 2
• 1

Canada France Germany Italy Japan United Kingdom United States

2008 2009 2010 2011 2012

THE AGE OF PREMATURE RETRENCHMENT

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• 2. The shocks: global

FISCAL ROOM? YES

TEN-YEAR GOVERNMENT BOND YIELDS

1 2 3 4 5 6 7 8

30/10/2009 30/11/2009 30/12/2009 30/01/2010 28/02/2010 30/03/2010 30/04/2010 30/05/2010 30/06/2010 30/07/2010 30/08/2010 30/09/2010 30/10/2010 30/11/2010 30/12/2010 30/01/2011 28/02/2011 30/03/2011 30/04/2011 30/05/2011 30/06/2011 30/07/2011 30/08/2011 30/09/2011 30/10/2011

US UK Japan Germany France Italy Canada Spain

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• 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

CURRENT ACCOUNT BALANCES (per cent of GDP)

• 12.0
• 10.0
• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0

F i n l a n d N e t h e r l a n d s B e l g i u m G e r m a n y A u s t r i a F r a n c e I t a l y I r e l a n d S p a i n G r e e c e P

• r

t u g a l E s t

• n

i a 1999-2007 Average 2012

EUROZONE IMBALANCES

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• 2. The shocks - eurozone

ROAD TO THE EUROZONE FISCAL CRISES

NET PUBLIC DEBT (relative to GDP)

20 40 60 80 100 120 140 160 180 Greece Italy Portugal Ireland Spain

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015

Source: World Economic Outlook database April 2011

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• 2. The shocks - eurozone

ROAD TO THE EUROZONE FISCAL CRISES

SPREADS OVER BUNDS

100 200 300 400 500 600 01/01/2007 01/03/2007 01/05/2007 01/07/2007 01/09/2007 01/11/2007 01/01/2008 01/03/2008 01/05/2008 01/07/2008 01/09/2008 01/11/2008 01/01/2009 01/03/2009 01/05/2009 01/07/2009 01/09/2009 01/11/2009 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

Belgium Spain France Italy Netherlands

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• 2. The shocks - eurozone

ROAD TO THE EUROZONE FISCAL CRISES

SPREADS OVER BUNDS

• 500

500 1000 1500 2000 2500 3000 3500 4000

01/01/2007 01/03/2007 01/05/2007 01/07/2007 01/09/2007 01/11/2007 01/01/2008 01/03/2008 01/05/2008 01/07/2008 01/09/2008 01/11/2008 01/01/2009 01/03/2009 01/05/2009 01/07/2009 01/09/2009 01/11/2009 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

Greece Ireland Portugal

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• 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

• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 US UK Japan Eurozone Germany France Italy Spain Jun-11 Jan-12

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• 2. The prospects: global

GROWTH PROSPECTS DWINDLE FOR 2012

GROWTH FORECASTS FOR 2012

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 China India Asia Pacific (without Japan) Russia Eastern Europe Brazil Latin America World Jun-11 Jan-12

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• 3. Prospects: global
• Here are salient elements of global challenges:

– Accelerating de-leveraging in the private sectors of

• verleveraged 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 long- term 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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