A Decade of Stagnation: Why? Adair Turner Chairman Institute for - - PowerPoint PPT Presentation

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Institute for New Economic Thinking A Decade of Stagnation: Why? Adair Turner Chairman Institute for New Economic Thinking INET Plenary Conference Edinburgh 21 st October 2017 ineteconomics.org | facebook.com/ineteconomics USA 300 Park

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A Decade of Stagnation: Why?

Adair Turner Chairman Institute for New Economic Thinking

INET Plenary Conference Edinburgh 21st October 2017

ineteconomics.org | facebook.com/ineteconomics

USA 300 Park Avenue South, 5th Floor, New York, NY 10010 | UK 22 Park Street, London W1K 2JB

Institute for

New Economic Thinking

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SLIDE 2

Institute for

New Economic Thinking

GDP per capita growth 2007-16

% per annum

1

1.88 0.6 0.8 5.4 7.8 Sub Saharan Africa Brazil Russia India China

Emerging Economies

0.2 0.5 Eurozon e UK Japan US 0.44 0.03

Advanced economies

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SLIDE 3

Institute for

New Economic Thinking

Successive market forecasts of BofE interest rates

2

Feb-09 Feb-10 Feb-11 Feb-13 Feb-14 Feb-15 Feb-16

0% 1% 2% 3% 4% 5% 6%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

May 08 – Aug 17

Source: Resolution Foundation and Bank of England Inflation Report, August 2016 Feb-17 Aug-17 Feb-12

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SLIDE 4

Institute for

New Economic Thinking

Sterling 10 year index-linked gilt:

Yield to maturity 1985 – 2017

Source: Bank of England Statistics

3

  • 2
  • 1

1 2 3 4 5 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Jun-16 Jun-17 3.85 3.59 2.54 1.95 1.22

  • 0.62
  • 1.8
  • 1.5

%

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SLIDE 5

Institute for

New Economic Thinking

4

Debt overhang Secular stagnation

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SLIDE 6

Institute for

New Economic Thinking

Private domestic credit as a % of GDP:

Advanced economies 1950 – 2011

5

Source: Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten, C. Reinhart & K. Rogoff, 2013

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SLIDE 7

Institute for

New Economic Thinking

Share of real estate lending in total bank lending

Source: “The Great Mortgaging”, Oscar Jordá, Moritz Schularick and Alan Taylor, 2014)

6 10% 20% 30% 40% 50% 60%

Percentage

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SLIDE 8

Institute for

New Economic Thinking

Credit and asset price cycles: upswing

7

Expectation of future asset price increases Increased credit extended

Low credit losses: high bank profits

  • Confidence reinforced
  • Increased capital base

Increased asset prices Increased lender supply of credit Favourable assessments of credit risk Increased borrower demand for credit

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SLIDE 9

Institute for

New Economic Thinking

Japanese government and corporate debt: 1990 – 2010

50 100 150 200 250 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Bank lending to non-financial corporates General Government debt 8 Source: BoJ Flow of Funds Accounts, IMF WEO database (April 2011), FSA calculations

% GDP

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SLIDE 10

Institute for

New Economic Thinking

Global debt continues to rise

Debt as % of GDP

9

Source: Bank for International Settlements 87th Annual Report, 2017

50 100 150 200 250 300 AES EMES ALL AES EMES ALL AES EMES ALL AES EMES ALL Households Non-financial Corporates General Government AEs EMEs AEs EMEs AEs EMEs AEs EMEs End-2007 End-2010 End-2013 End-2016

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SLIDE 11

Institute for

New Economic Thinking

Nominal GDP growth and fiscal balance

2007 – 2016

7.2 6.5 3.5

US UK Eurozone

2.8 2.7 1.5

US UK Eurozone

Source: IMF World Economic Database, April 2017; IMF Fiscal Monitor, 2017

Growth of nominal GDP % p.a. Average fiscal deficit as %

  • f GDP 2008-2016*

(*) General government Balance, Table 1, IMF Fiscal Monitor, April 2017

10

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SLIDE 12

Institute for

New Economic Thinking

Debt overhang : the unavoidable choice?

11

Sustained low growth and low inflation – debt burdens never decline Debt erosion via ultra low interest rates But leads to new debt creation Debt write-off, default and restructuring

But has disruptive / depressive effect

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SLIDE 13

Institute for

New Economic Thinking

12

Debt overhang Secular stagnation

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SLIDE 14

Institute for

New Economic Thinking

Sterling 10 year index-linked gilt:

Yield to maturity 1985 – 2017

Source: Bank of England Statistics

13

  • 2
  • 1

1 2 3 4 5 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Jun-16 Jun-17 3.85 3.59 2.54 1.95 1.22

  • 0.62
  • 1.8
  • 1.5

%

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SLIDE 15

Institute for

New Economic Thinking

Why did real rates fall so much even before the crisis?

14

Reduced investment needs?

  • In plant and machinery?

Ex-ante savings Ex-ante investment

Global imbalances? Inequality? Demographic effects?

  • In advanced economy

property and infrastructure?

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SLIDE 16

Institute for

New Economic Thinking

Drivers of a falling neutral real rate?

15

Source: Lukasz Rachel and Thomas Smith, Secular Drivers of the Global Real Interest Rate, Bank of England Working Paper No. 571, December 2015

Developed economies

Lower future growth Demographic effects Higher inequality Asian savings glut Cheaper capital goods Less public investment Rising spread Today Unexplained

1990

Likely reversal

X X X X X ? ?

≈ 4%

  • 1.0%
  • 0.9%
  • 0.45%
  • 0.25%
  • 0.5%
  • 0.2%
  • 0.7%
  • 0.5%
  • 0.5%
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SLIDE 17

Institute for

New Economic Thinking

Advanced economy investment as % of GDP:

1986 – 2015 five-year averages

Source: IMF World Economic Outlook Database, April 2016

16 19 21 23 25 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 25.1 23.6 23.5 22.3 21.8 20.7

%

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SLIDE 18

Institute for

New Economic Thinking

Wealth and employment in ICT businesses

Market Value ($bn) Employees (000s) 447(Sep 2016) ͠ 114,000 (Sep 2010) 555 ͠ 67,000 374 ͠ 14,500 1* ͠ 12 19* 55

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We have over 1 million users per engineer and this number has been steadily increasing

* Paid by Facebook

With only 32 engineers, one WhatsApp developer supports 14 million active users

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SLIDE 19

Institute for

New Economic Thinking

Capital in France 1700 – 2010

0% 100% 200% 300% 400% 500% 600% 700% 800%

1700 1750 1780 1810 1850 1880 1910 1920 1950 1970 1990 2000 2010

Net foreign assets Other domestic capital Housing Agricultural land

18

Source: Capital in the Twenty First Century, T. Piketty (2013)

% national income

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SLIDE 20

Institute for

New Economic Thinking

Dynamics in the modern economy

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Falling need / demand for capital goods Rising inequality Rising demand for positional goods – real estate

Real wages stagnant Increased savings

  • f rich

Information and communications technology

Low equilibrium real interest rates Potentially deficient demand Rising leverage among low-medium income

Ultra loose monetary policy Fundamental drivers of secular stagnation only offset by rising leverage Crisis and debt overhang Exacerbated secular stagnation problems Fundamental drivers of secular stagnation only offset by rising leverage

Crisis and debt overhang Exacerbates secular stagnation problem

Banks can create credit + purchasing power - easiest against real estate

Rising W/Y ratio – primarily real estate