Contraction and Recovery Tuesday 28 h April 2020 9.30-10.30am - - PowerPoint PPT Presentation
NIESRs latest research and quarterly forecasts on the UK and Global economy Covid Crisis: The UK and World Economy Contraction and Recovery Tuesday 28 h April 2020 9.30-10.30am Chair: Prof Jagjit Chadha, Director 09.30am Prof Jagjit Chadha:
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scarring
crisis
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by the end of this year.
4% reduction in productivity
(i) structural factors: tourism (ii) policy space (ii) EM portfolio outflows: Record outflow of US $ 100 bn in 2 months
Annual GDP (index 2019=100) Global GDP projection and scenario with additional downside risks associated with Covid-19 recurrence from 2020Q4 (level)
Central bank: Lower policy rate and QE/term funding Interventions in specific financial markets Counter-cyclical capital buffers lowered Treasury: Large fiscal stimulus programmes
economies over the last five years.
Allen, B and Moessner, R: The Fed’s enhanced swap lines and new interventions in the Treasury market. NIESR DP 513
drop is faster than GFC and Great Depression.
Source: NiGEM database and NIESR forecast. 60 70 80 90 100 110 120 130 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Level, index 2019 = 100
GDP (level, index 2019 = 100)
February May
US: 6.9 million new unemployment claims on 27 March, the highest number
See: Bell, D and Blanchflower, D: US and UK labour markets before and during the Covid-19 crash.
Source: U.S. Department of Labor 1000 2000 3000 4000 5000 6000 7000 8000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Thousands
US new Unemployment claims
assistance
t t+15 t+30 t+45 t+60 t+75 t+90
$bn Cumulative non-resident portfolio flows to EM in global shocks, time in days
Global Financial crisis COVID-19 Source: Haver, IIF
uncoordinated. GFC fiscal response was coordinated (G-20 London Summit “the greatest challenge to the world economy in modern times.” G-20 responded with a fiscal expansion worth US $5 trillion to raise output by 4 percent.
three years (2008-10) during the GFC.
not the case for the G20 group (IMF Fiscal Monitor, April 2020)
1. Debt (% of GDP) has risen across the world over the past 5 years (Table 1) 2. Total debt higher in developed economies at $129 trillion compared with $58 trillion in emerging
3. Non-financial corporate debt has risen sharply in France and China over the past decade.
2 4 6 8 10 2005 2008 2011 2014 2017 2020 US BBB corporate index option-adjusted spread (%) Source: St Louis Federal Reserve, economic database Government and non-financial private sector debt-to-GDP ratios (%)
Source: Bank for International Settlements, total credit statistics, November 2019. Figures are for 2014Q2 and 2019Q2. The darker shading in the table shows where debt-to-GDP ratios are higher than the preceding period.
4. Households and Corporates: reduction in income, tighter financial conditions and contagion effects will cause a wave of company defaults that could prolong the period of slower growth 5. Public sector debt will also rise: government will be confronted with important challenges in the medium term – tolerate higher debt or fiscal consolidation?
1. Covid-19 is a global pandemic. 2. The economic impact includes the direct consequences of domestic policy measures and the spillovers from measures imposed elsewhere. 3. Results: (i) Spillovers amplify the magnitude of domestic shocks by roughly 60 per cent. In other words, if all countries around the world suffered a 1 per cent domestic shock, the global economy would be expected to contract by 1.6 per cent after accounting for spillovers. (ii) Impact of spillovers in bigger in small, open economies.
Decomposition of first-year GDP impacts (per cent difference from base) Small open economies: decomposition of first-year GDP impacts (per cent difference from base)
Source: NiGEM simulations.
Policy co-ordination 1. Urgent need for co-ordination to address the pandemic itself (testing, reducing infection rates, equipment, medicine etc.). 2. Resist temptation to impose trade barriers. Restore global value chains and international trade, particularly important for developing countries. 3. Immediate need to provide liquidity and restore confidence in EM markets with the help of IMF and other multilateral agencies 4. Role for development financial institutions (IFC, EBRD) to complement these efforts by supporting industry, infrastructure projects, agriculture. Announcing a pipeline of investments can help build confidence and reverse the flow of capital. 5. Debt-write offs for the most indebted countries 6. Co-ordination of the international financial system’s response to pandemic 7. Euro area: package must provide meaningful support to countries such as Italy which do not have the fiscal space. Inflation and debt 1. How will inflation pan out over next few years? Are inflation expectations anchored in EM? How to manage public sector debt in the medium term?
Our main-case forecast scenario is a plausible outcome, but subject to substantial downside
Forecast helps think through scale of shock, its costs and policies to improve situation.
5 10 15 20 25 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Per cent Forecast
5 10 15 20 25 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Per cent Forecast
from Mid-May and no recurrence of virus.
£800 billion smaller (around 3½ per cent) over coming ten years than we expected three months ago.
NIESR GDP Tracker estimated GDP fall
Borrowing likely to rise above £200 billion in 2020-21, and debt to around 95 per cent
Counterpart to higher public sector borrowing is higher private sector saving – ie cost of support for the economy is borne by lower consumption. Asset purchases by BoE mean that borrowing is effectively at Bank Rate and that there will be more short-term monetary assets in private sector portfolios.
CJRS is helping to limit the rise in
Source: NIESR.
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