ECONOMIC ASSESSMENT Tailwinds driving a modest acceleration... but - - PowerPoint PPT Presentation

OECD INTERIM GLOBAL ECONOMIC ASSESSMENT

Tailwinds driving a modest acceleration... but storm clouds on the horizon?

http://www.oecd.org/economy/economicoutlook.htm

Paris, 18th March 2015 11h00 Paris time

Catherine L. Mann

OECD Chief Economist

Key messages

Positive surprises support somewhat better growth prospects

• Stronger incoming data
• Lower oil prices
• Easing by ECB and other central banks

Inconsistent real and financial signals point to risks

• Abnormally low inflation and interest rates
• Rapid moves in exchange rates and asset prices
• Still lagging real investment and employment

Policy implications: Balanced policy packages needed

• Implement stable medium-term fiscal path
• Reinvigorate structural policies appropriate to each economy
• Reduce over-reliance on monetary policy

2

Growth prospects have improved slightly compared to a few months ago

GDP growth1 Volume, per cent

• 1. Economies representing over 70% of global GDP measured at 2013 PPP exchange rates .

Source: November 2014 OECD Economic Outlook database; OECD National Accounts database; and OECD calculations. 3 1 2 3 4 5 1 2 3 4 5 November 2014 Outlook forecasts March Interim Outlook forecasts

The oil price drop is positive for global growth

Brent crude price USD per barrel

4

Impact of fall in oil price between 2014 and 2015 on trade balance1 Billions of US dollars

• 1. Assumed average oil price (Brent) of $57 per barrel in 2015.

Source: Datastream; ICIC Pricing; OECD November 2014 Economic Outlook database; and OECD calculations

• 600
• 400
• 200

200 400 600

• 600
• 400
• 200

200 400 600

40 50 60 70 80 90 100 110 120 40 50 60 70 80 90 100 110 120 $85 per barrel = November 2014 Outlook assumption

Many central banks have eased monetary policy

5

Note: size of bubbles indicates relative GDP (at PPP). Russia, which raised policy rates sharply in December before cutting twice since, is not included as an easer over this period.

Timeline of easing decisions since December 2014

Central banks of countries accounting for about 48%

• f global GDP have eased
• ver the past 3 months

Egypt India Switzerland Peru Turkey Canada Euro area Australia Israel China Serbia Korea Pakistan Singapore Romania Denmark Sweden Indonesia

January 2015 → ← February 2015 March 2015 →

India Norway Switzerland

← December 2014

Iceland Poland Denmark Denmark Denmark China Thailand Romania Turkey Morocco Uzbekistan Botswana

The ECB’s action is working through financial markets

Yield curves

Instantaneous forward rates Source: ECB; Bank of England; Datastream .

Nominal effective exchange rate

Index, Jan 2014 = 100

6

• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1 2 3 4 5 6 7 8 9 10 Years

March 2014 November 2014

March 2015

84 86 88 90 92 94 96 98 100 102 84 86 88 90 92 94 96 98 100 102

Announcement of expansion of the asset purchase Depreciation

Interim Outlook – small upward revisions, still only moderate growth

1. GDP at market prices adjusted for working days. In the case of Germany, this differs from the “headline” measure, which does not include the working day adjustment. The unadjusted number for Germany would be higher by 0.2 percentage points in 2015 and by 0.1 percentage point in 2016. 2. Economies representing over 70% of global GDP measured at 2013 PPP exchange rates.

7

Real GDP1 Percentage change

2014 Column1 Column2 March 2015 Interim Forecasts difference from November Outlook March 2015 Interim Forecasts2 difference2from November Outlook United States 2.4 3.1 0.0 3.0 0.0 Euro area 0.9 1.4 0.3 2.0 0.3 Japan 0.0 1.0 0.2 1.4 0.4 Germany 1.6 1.7 0.6 2.2 0.4 France 0.4 1.1 0.3 1.7 0.2 Italy

• 0.4

0.6 0.4 1.3 0.3 United Kingdom 2.6 2.6

• 0.1

2.5 0.0 Canada 2.5 2.2

• 0.4

2.1

• 0.3

China 7.4 7.0

• 0.1

6.9 0.0 India 7.3 7.7 1.3 8.0 1.4 Brazil 0.0

• 0.5
• 2.0

1.2

• 0.8

Aggregate2 3.7 4.0 0.1 4.3 0.2 2015 2016

A welcome fall in unemployment, but low employment rates suggest that slack remains

Employment and unemployment rates G7 countries, per cent

Source: OECD National Accounts database; OECD Main Economic Indicators database; and OECD calculations . 8

55 56 57 58 59 60 4 5 6 7 8 9 Unemployment rate (left scale) Employment rate (right scale)

Real wage and labour productivity G7 countries, average growth rates, per cent

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 2000Q2-2009Q4 2010Q1-2014Q4 Real wage growth Labour productivity growth

United States – continued cyclical recovery, despite weather

9

Cyclical recovery continues, though

• ne-offs (e.g. severe winter weather)

may mask underlying strength Absent brinksmanship, fiscal policy is expected to remain neutral Federal Reserve likely to delay first interest rate increase due to low inflation and dollar appreciation Domestic demand growing faster than

• utput – the United States is adding to

demand in the rest of the world Estimated effect of lower energy prices on share of energy in household spending Nominal effective exchange rate

Trade weighted, broad currency index 2010 = 100

1 2 3 4 5 6 1 2 3 4 5 6 2014 2015

Households save approx. $90/month on energy 90 95 100 105 110 115 90 95 100 105 110 115

Source: Bureau of Economic Analysis; and OECD calculations. Source: US Federal Reserve.

Retail trade

3-month moving average volume index, 2010=100

Euro area – tailwinds offer escape from stagnation

PMI

New Orders/Incoming New Business Source: ECB; Eurostat; Markit; Datastream . 10

Mortgage rates

Per cent

Share prices

Euro Stoxx 50 index, Jan 2011=100

96 97 98 99 100 101 96 97 98 99 100 101 40 45 50 55 60 40 45 50 55 60

Values above 50 indicate expansion

2.0 2.5 3.0 3.5 4.0 4.5 5.0 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Average Difference between max. and min. 60 70 80 90 100 110 120 130 140 60 70 80 90 100 110 120 130 140

Euro area – fiscal policy needs to complement monetary and structural policies

Stable, medium-term fiscal path needed to support demand

Ad hoc extensions of deadlines (12 since 2009) create uncertainty, and reduce fiscal multipliers, thus undermining objective of the extension Complexity of rules may lead to poor policy decisions, and ‘gamesmanship’’

11

Change in underlying primary balance

% of potential GDP

• 5
• 4
• 3
• 2
• 1

1 2 3 4 5

• 5
• 4
• 3
• 2
• 1

1 2 3 4 5 Euro area 2007-2009 2009-2011 2011-2013 2013-2015

Source: OECD November 2014 Economic Outlook database.

The Juncker Plan could spur demand and supply, as well as promote structural improvements

12

The Juncker Plan helps complete the Single Market, especially in network industries Reducing regulatory differences by one fifth could increase cross- border FDI in the EU by up to 25% and trade intensity by up to 15% Spillovers from collective action enhance the growth impact of investment

Electricity prices for industrial users

Index EU average = 100; 2012 or latest available 20 40 60 80 100 120 140 160 20 40 60 80 100 120 140 160

Germany United Kingdom France Spain Greece Portugal

Public investment

Volume index, 2009 = 100

40 60 80 100 120 140 160 180 40 60 80 100 120 140

Sources: IEA; OECD National Accounts database.

Japan – getting growth and inflation back on track, and staying there

13

Low oil prices and the latest monetary and fiscal stimulus provide a welcome impetus for near-term growth Implementation of structural policies (the “third arrow”) is critical to raise productivity and growth The scale of the challenge of reducing the public debt burden remains exceptionally large

Labour productivity growth

Per cent

Public debts and deficits

Per cent of GDP

• 6
• 4
• 2

2 4 6 8

• 6
• 4
• 2

2 4 6 8

Source: OECD National Accounts database.

60 120 180 240 5 10 15 20 Overall budget deficit (left scale) Government gross liabilities (right scale)

China – growth slowing gradually to the

• fficial target of around 7%

14

Lower oil prices and policy stimulus are counterbalancing factors weighing

• n growth, notably weakness in the

real estate and financial sectors Slowing domestic demand creates tension between meeting growth targets and rebalancing the economy Service sector liberalisation would unleash a new growth drive

Gap between floor space started and sold

Millions of square meters

Real total domestic expenditure

Year-on-year percentage change, 3-quarter moving average

60 65 70 75 80 85 90 95 100 105

Real property price

Index 2010=100

10 20 30 40 50 60 70 80 4 5 6 7 8 9 10 11 4 5 6 7 8 9 10 11

Sources: CEIC; and OECD National Accounts database.

India – now leading the growth pack, but facing numerous challenges

The improvement partly reflects data revisions. The underlying acceleration is slower, with sluggish investment and exports and emerging obstacles to structural reforms.

15

• 20
• 15
• 10
• 5

5 10 15 20 25 30

• 20
• 15
• 10
• 5

5 10 15 20 25 30 GDP (new series) GDP (old series) Gross fixed capital formation Exports of goods and services

GDP, exports and investment

Volume, 4-quarter moving average, year-on-year percentage change

Source: Indian Central Statistics Office; and OECD calculations.

Offsetting the positive – commodity economies

The fall in commodity prices goes well beyond oil, and is hurting commodity-exporting economies like Brazil

16

Brazil: contribution to GDP

Volume , year-on-year percentage change

60 70 80 90 100 110 120 60 70 80 90 100 110 120 Agricultural raw materials Metals and Minerals Food and Tropical Beverages

Source: Brazilian Institute of Geography and Statistics (IBGE); Datastream.

Non-oil commodity prices

Index, 2011=100

• 6
• 4
• 2

2 4 6 8 10 12 14

• 6
• 4
• 2

2 4 6 8 10 12 14 Imports Exports Consumption Investment GDP

Structural reform momentum has slowed and should be reinvigorated

17

During the last two years, most advanced countries did less in areas identified as priorities by the OECD than in the previous period Responsiveness rate1, Going for Growth recommendations

• 1. Share of recommendations in Going for Growth 2011 for which 'significant' action has been taken, with an

adjustment to reflect the fact that some areas of reform are more difficult than others. Source: OECD Going for Growth (2015).

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 2013-14 2011-12

Storm Clouds:

Disconnect between modest real economy and strong financial signals

18

Deflation risks:

The oil price fall added disinflationary impetus when inflation was already low

19

Number of countries with negative 12- month headline inflation rate Headline inflation in OECD countries

Per cent

Where inflation was already too low, the challenge of getting back to target has increased Deflation increases the vulnerability of indebted households, firms and governments and aggravates stagnation risks

• 5

5 10 15 20 25 30

• 5

5 10 15 20 25 30 25th percentile Median 75th percentile 5 10 15 20 25 5 10 15 20 25

Source: OECD Main Economic Indicators database.

Negative term premium:

Nominal interest rates are extraordinarily low, and in many cases now negative

20

Medium-term bonds of several governments are now trading at negative nominal yields Bond yields are far below historical norms in most countries 10-year government bond yields Per cent

2 4 6 8 10 12 2 4 6 8 10 12 Q4-2014 1980-2007 average

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 Denmark Japan Switzerland Sweden Germany France Austria Belgium Netherlands

3-year government bond yields Per cent

Source: Datastream.

Suppressed risk premium:

Prolonged ultra-low interest rates are building up vulnerabilities

21

US bond and foreign exchange volatility

Index, January 2014=100

Credit default swap prices

United States high-yield corporate, basis points

40 60 80 100 120 140 160 40 60 80 100 120 140 160 2010 2011 2012 2013 2014 2015

Average, 2005- present

MSCI World equity index

January 1990=100

50 100 150 200 250 300 350 50 100 150 200 250 300 350

Source: Datastream.

70 85 100 115 130 145 160 175 190 205 50 100 150 200 250 300 350 400 450 Foreign exchange market volatility (left scale) Treasury note volatility (rightscale)

Summing up: Improved prospects, but no room for complacency

22

Global economy may be at a turning point

• Falling energy prices underpin acceleration in growth
• Downward push on inflation gives room to central banks to support demand

Mutually reinforcing fiscal, monetary, structural policies are needed

• Maintain monetary stimulus as appropriate
• Implement consistent medium-term fiscal policy
• Re-invigorate and target structural reforms

Over-reliance on monetary policy is a concern

• Evidence of mis-pricing of risks and exchange rate overshooting
• Monetary policy alone has not revived real investment