Macroeconomic Musings in a Slow-Growth World presented to MacKay - - PowerPoint PPT Presentation
Macroeconomic Musings in a Slow-Growth World presented to MacKay CEO Breakfast May 27, 2015 Jock Finlayson EVP and Chief Policy Officer 2 What Do Business Leaders Think of Economists? Any company that has an economist on staff
EVP and Chief Policy Officer
May 27, 2015
2 Source: “Buffett: stock prices would be high if rates were ‘normal’,” Reuters, May 2, 2015.
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4
Source: Bank of Canada, Monetary Policy Report, April 2015. 5
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128 130 132 134 136 138 140 142
02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: US Bureau of Economic Analysis latest: April 2015 7
(percentage of working-age Americans in the labor force) 61% 62% 63% 64% 65% 66% 67% 2006 2007 2008 2009 2010 2011 2012 2013 2014
8 Source: US Bureau of Labour Statistics.
The Federal Reserve estimates that ¾ of the decline in labor force participation is permanent/structural and won’t be reversed with continued economic expansion.
Source: US Census Bureau, seasonally adjusted data
300 500 700 900 1100 1300 1500 07 08 09 10 11 12 13 14 15 US Housing Starts, SA, thousands
Latest: April 2015 9
Forecast
200 400 600 800 1000 1200 1400 1600 1800 2000
Source: Harvard Joint Center for Housing Studies; US Census Bureau Housing Vacancy Survey. 10
‘Normal’ Range
$49,000 $50,000 $51,000 $52,000 $53,000 $54,000 $55,000 $56,000 $57,000 $58,000 2000 2007 2009 2010 2011 2012 2013 2014
Source: Sentier Research. All Years measured as of June except for 2007 (Dec) and 2000 (Jan). 11
$3,000 + gap
Source: BlackRock. * 454 of these companies were listed continuously over the period. 12
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80 90 100 110 120 130 140 150 160 170 1998 2000 2002 2004 2006 2008 2010 2012 2014 Canada US
14 Source: Bank of Canada.
0% 5% 10% 15% 20% 25% 30% 1994 2004 2013 2014 Q4
15 Source: CIBC World Markets. *Merchandise exports only; excludes services. Q4 2014 figure is an estimate
16 Source: Canadian Association of Petroleum Producers.
847 75,040 13,811 1,698 39 9,399
4,227 10,859 304 20 167
10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 BC Alta Sask Man Ont, Que, NB Offshore Nfld
Value of Producers’ Sales 2013, millions $ Oil Natural Gas
0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 04 05 06 07 08 09 10 11 12 13 14 15 16
US $ per Canadian $, monthly averages with quarterly forecasts history TD Scotiabank BMO
Source: Bank of Canada, noon rate Latest: April 2015 17
18 Source: BMO Economics, May 2015.
Canada 2014 2.5 2015 1.8 2016 2.2
Sub-par economic recovery from 2008-09 financial crisis and 6 years of near-zero short-term interest rates have fed a gloomier outlook Four scenarios: » Secular stagnation thesis (protracted deficiency of demand in major advanced countries, savings > investment) » Structural pessimism (unfavourable demographics, high debt levels, growing inequality, slowing innovation act to depress potential GDP growth) » Emerging markets to the rescue (rapid growth in emerging markets propels the global economy forward) » Techno-managerial optimism (technological innovation, combined with better management and smart public policy, promise a future of robust growth in GDP and living standards; epitomized by Eric Brynjolfsson and Andrew McAfee, The Second Machine Age)
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20 Sources: Charles I. Jones, “The Facts of Economic Growth,” National Bureau of Economic Research, Working Paper #21142, May 2015.
Note: Data are from Maddison (2008) for the “West,” i.e. Western Europe plus the United States. A Similar pattern holds using the “world” numbers from Maddison.
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Assuming past rates of productivity growth continue, world GDP growth will slow by ~40% and per capita GDP by ~20%, compared to the preceding 50 years.
22 Source: McKinsey Global Institute, Global Growth: Can Productivity Save the Day in an Aging World? *G20 minus the EU but with Nigeria added.
Past 50 years Next 50 years at historical productivity growth
GDP
Employment growth Productivity growth 1.75 1.85 3.6 0.3 1.8
2.1 Past 50 years Next 50 years at historical productivity growth
Per capita GDP
Employment per capita growth Productivity growth 0.3 1.8 2.1 1.8
Idea developed in the 1930s and recently revived to explain a period of sluggish GDP growth with low inflation and high levels of debt. Risk of a slow-growth “trap” Analytical focus is on persistent weak demand. Absent offsetting equilibrating forces, this reduces not just current GDP, but also potential output growth via negative effects
Monetary policy cannot stimulate demand sufficiently to exit from stagnation…with central banks’ policy interest rates pinned at/near zero, it’s impossible to lower real interest rates so that “desired investment” will match “desired saving” One suggested remedy is fiscal stimulus, particularly via stepped-up public investment in infrastructure. But not all countries have fiscal space to act Secular stagnation is a demand-side story, framed around short/medium-term. It differs from economic growth narratives that concentrate on supply side factors affecting growth potential
23 An excellent source: C. Teulings and R. Baldwin, eds., Secular Stagnation: Facts, Causes and Cures. A VoxEU.org e-book published in 2014; available at www.VoxEU.org
24 Source: Mervyn King “Measuring the World Real Interest Rate”, via http://www.voxeu.org/article/larry-summers-secular-stagnation.
World 212% All Emerging Markets 151% All Developed Economies 272% Hungary 223% Japan 411% China 217% Sweden 293% Poland 137% Canada 284% South Africa 127% UK 276% Brazil 121% US 264% India 120% Eurozone 257% Turkey 105% Mexico 77% Indonesia 65%
25 Source: Deleveraging? What Deleveraging? Geneva Reports on the World Economy, September 2014.
Total global debt, ex-financial sector, rose from 162% of GDP in 2001 to 173% in 2007 – and then to 212% by 2013
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Source: L. Rawdanowicz et al, “Secular Stagnation: Evidence and Implications for Economic Policy,” OECD Economics Department Working Papers, No. 1169, 2014.
Source: Finance Canada; Eurostat. * the trough or low point of recession varies across the countries shown.
5.6 10.1 11.0 13.2 15.0
10 20 Greece Portugal Spain Italy France UK Germany USA Canada
Cumulative % change through 2014 Q4
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A well-known scholar whose work focuses on US economic growth. He has been a noted skeptic on US productivity since the late 1970s – today he is cautious about the prospects for future productivity and real income gains His key baseline starting point is: real GDP per capita in the US rose at an average annual rate of 2.0% from 1891 to 2007 In recent work, Gordon predicts that, over the next 30+ years, economic growth in America will be significantly lower, averaging on an annual basis: » +0.9% for real GDP per capita – i.e.,~ half the growth rate over 1891-2007; » +1.2% for labour productivity; » +0.4% for real income per capita “for the bottom 99% of the population”; and, » +0.2% for real disposable income for the “bottom 99%”
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Source: Gordon, “The Demise of US Economic Growth: Restatement, Rebuttal, Reflections,” National Bureau of Economic Research, Working Paper #19895, February 2014; and “Revisiting US Productivity Growth over the Past Century with a View of the Future,” in D. Prasada Roa and Bart van Ark, eds., World Economic Performance: Past, Present and Future, Edward Elgar, 2013.
Gordon points to four “headwinds” that, together, are expected to exert persistent downward pressure on future growth in productivity and real incomes in the US:
directing overall spending toward the most affluent 10% and 1% of the population
which lowers potential GDP growth. Reduced public sector outlays on education, research, infrastructure, etc. compound the problem This analysis is also relevant to other OECD economies The US may be in a worse situation on headwinds 2 and 3 above compared to some other economies…but it is much better positioned on headwind 1
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30 Sources: Morgan Stanley Research.
Gordon is skeptical that accelerating innovation can offset the effects of the four headwinds He finds that the impact of innovation on US economic growth, via productivity increases, has exhibited a long-term downward trend since the early 1970s
during the subsequent 40 years Gordon believes previous cycles of technological innovation delivered greater advances in productivity, real incomes and living standards than the innovations associated with the “third industrial revolution” in the 1990s and 2000s Compare: railways, automobiles, national highway system, electricity, in-door plumbing, telephones, air conditioning, air travel, urban skyscrapers, electric typewriters, household appliances, and advances in infectious diseases, public health and other fields of medicine with…personal computing, the internet, e-mail, mobile phones, movie and music streaming, multiplying social media platforms, ATMs, the bio-tech industry, robots, etc.
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1.6 0.9 1.35 1.6 1.7 0.9 0.7 1.18 0.3 0.85
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
US Canada EZ UK OECD Total
Avg 2004-07 Avg 2010-13
32 Sources: OECD, CIBC World Markets.
0.6 0.45 0.61 1.2 1.65 3.27 1.55 1.48 0.4 0.7 0.68 0.62
0.5 1 1.5 2 2.5 3 3.5
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2012 Percent per year
33 Source: Robert Gordon, 2013.
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1.2 1.3 5.7 8.0 2 4 6 8 10 1950 1970 1990 2010 2030 2050
Population by region using U.N. medium variant projection (billions of people) Less developed regions Developed regions 2010 total = 6.9 billion 2050 total = 9.3 billion
Sources: BC Investment Management Corporation, United Nations Department of Economic and Social Affairs. 35
0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1950 1960 1970 1980 1990 2000 2010 2020 2030 Advanced Economies Developing Economies
Source: United Nations; European Central Bank. 36
United States, 23% Japan, 7% Euro area, 17% Other OECD, 18% Other non- OECD, 11% China, 17% India, 7%
2011
United States, 18% Japan, 4% Euro area, 12% Other OECD, 15% Other non- OECD, 12% China, 28% India, 11%
2030
United States, 16% Japan, 3% Euro area, 9% Other OECD, 14% Other non- OECD, 12% China, 28% India, 18%
2060
Source: Long-term Growth Scenarios, OECD Economics Department Working Paper.
1Global GDP is taken as sum of GDP for 34 OECD and 8 non-OECD G20 countries.
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Promoted by technology gurus, Silicon Valley boosters, many consulting firms (notably McKinsey), and some business school academics Emphasizes the power of technological innovation to drive new wealth creation, employment, and economic activity The historical evidence broadly supports the argument that technological innovation has positive effects on living standards, productivity, and real incomes When asked about lagging productivity techno-optimists respond by saying that: » the data on GDP and productivity are flawed/inadequate; » we are at an early stage in the current wave of technological innovation…as time passes, the innovations associated with the “second machine age” will generate large advances in economy-wide productivity Yet…the slowdown in productivity growth across the OECD increasingly looks like a secular trend, not a short-term dip
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Sources: McKinsey & Company, McKinsey Global Institute analysis.
Range of sized potential economic impacts Impact from other potential applications (not sized) Low High X–Y
$ trillion, annual
Renewable energy 0.2–0.3 Advanced oil and gas exploration and recovery 0.1–0.5 Advanced materials 0.2–0.5 3D printing 0.2–0.6 Energy storage 0.1–0.6 Next-generation genomics 0.7–1.6 Autonomous and near- autonomous vehicles 0.2–1.9 Advanced robotics 1.7–4.5 Cloud technology 1.7–6.2 Internet of Things 2.7–6.2 Automation of knowledge work 5.2–6.7 Mobile Internet 3.7–10.8
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Expand the technological/managerial/knowledge “frontier” via fundamental operational improvements, business innovations, and sophisticated technologies that go beyond current practice/knowledge “Catch up” via the widespread adoption/rapid diffusion of best practices in management, business organization, public policy, use of technology, skills development, etc. to increase productivity »Globally, catch-up accounts for ¾ of McKinsey’s estimate of future productivity growth potential A question: For the world as a whole, productivity can offset the effects of adverse demographics only if it grows 80% faster than in the preceding 50 years. In the OECD, productivity gains would need to be even greater to fully counter the impact of negative
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