Post on 29-May-2020
Monetary policy & unemploymentEcon 4325 - Monetary policy and business fluctuationsGuest lectureUiO, February 26 2007
Harald Magnus Andreassenhma@first.no
2
Some good advices
hRead history
hRead economic & financial history
hRead history on economic theory (development)
hDon’t trust old truths nor old people, and even less new truths – and not mine
3
First Securities ASA
hBrokerage/investment bank/merchant bank− Equities, corporate− Merchant bank – with Swedbank, trading all sorts of int. rate/fixed income
instruments− 160 employees− 22 analysts (the best &…)− 7- 8% + af revenues on Oslo Stock Exchange
hWe are better bean counters, than dreamers
hWe give goods advices
hOur clients appreciates us
hWe hire business economists all the time, and economists from time to time. Our trainee-program works!
4
The real proof of the pudding:
Firsts anbefalingerOslo Børs Mnd- Uke-(OSEBX) port. Kjøp Salg port.
1999 18% 26% 46% -1%2000 -2% 6% 40% -9%2001 -15% -1% 6% -51% 30%2002 -31% -23% -9% -52% 1%2003 49% 43% 54% 26% 32%2004 35% 36% 47% 21% 88%2005 42% 52% 105% 8% 103%2006 31% 37% 44% 8% 59%
Samlet siden 99 156% 307% 1223% -62%Siden 2001 121% 205% 543% -58% 949%
This should not have been possible!
First portfolios
-
200
400
600
800
1,000
1,200
1,400
1,600
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
SellOSEBX
Monthly port.
Weekly Port.
Buy
5
The business cycle & markets
hThe stock market
hThe bond market
6
Long term: Real fundamentals decide
A Tobins q, calculated from the balance sheet
7
The Oslo Stock exchange is volatile, it must be oil…
OSEBX and the oil price
Source: Reuters EcoWin
96 97 98 99 00 01 02 03 04 05 06 07 08
US
D/B
arre
l
0
10
20
30
40
50
60
70
80
90
Inde
x
50
100
150
200
250
300
350
400
450
500
OSEBX
Brent
S&P 500 and OSEBX Sector Distribution, July 2006
0 % 10 % 20 % 30 % 40 % 50 %
Materials
Telecom
Utilities
Cons Staples
Energy
Healthcare
Cons Disc
Industrials/Other
IT
Financials S&P 500OSEBX/Synthetic Index
8
But wait a bit: OSE is even more dependent on aluminiumor India??
OSEBX and Bombay SE Index
Source: Reuters EcoWin
97 98 99 00 01 02 03 04 05 06 07 08
Inde
x
0
2500
5000
7500
10000
12500
15000
Inde
x
50
100
150
200
250
300
350
400
450
500
Bombay SE Index
OSEBX
OSEBX and Aluminum
Source: Reuters EcoWin
97 98 99 00 01 02 03 04 05 06 07 08
USD
/tonn
e
1200
Inde
x
100
200
400 Aluminium
9
In the end: The OSE is dependent on the cycle abroad!
Global growth
Oil Raw. Mat alum. Shipping
OSE
India (China)
10
A big swinger
Oslo Børs Pris/Bok
Source: EcoWin, First Securities
86 88 90 92 94 96 98 00 02 04 060.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
94
96
98
100
102
104
106
108
11
A quite close connection
Source: EcoWin, First Securities
12
The stock market vs. actual earnings
Not only a long term connection!!
Oslo Børs: Indeks vs. inntjening pr aksje
Source: EcoWin, First Sec.
84 86 88 90 92 94 96 98 00 02 04 06
OSE
BX
10
20
40
80
160
320
Rec
urrin
g EP
S
0.7
1.4
2.8
5.6
11.2
22.4 EPS
Indeks
13
Interest rates vs the cycle. Not that difficult??
14
For investors: The long end vs. the short end
15
Asset allocation: The cycle is important!
Source: EcoWin, First Securities
FIRST
16
What am I looking at?
hDemand cycles (”Keynes”)− C, I, G-T, X-M
hSupply cycles (Real business cycle)
hWhat’s most important?− Markets are mostly “Keynesian” (animal spirit, risk appetite, financial
condition, monetary/fiscal policy impulses/responses)− Late followers of fashion? Or realistic, what works?
17
Household, corporate net financial investment (cash flow)
Source: EcoWin, First Securities
65 70 75 80 85 90 95 00 05-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0 In % of GDP
Output gap
'Savings'
Recessions shaded
What’s driving the cycle
1 Bad times
2 Soft landing
3 ’Happy’ days
18
G-T, quite important – with the ‘right’ sign!
h Keynes is of course dead, but…Source: EcoWin, First Securities
Recessions shaded
19
Not only in the US
20
Not only in the US…
vs. GDP output gapFinland Private sector net financial investments
Source: EcoWin, First Securities
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08-12.5-10.0-7.5-5.0-2.50.02.55.07.5
10.012.5
-12.5-10.0-7.5-5.0-2.50.02.55.07.5
10.012.5
Source: OECD/First
Net fin. investment
Output gap
In pct of GDP
vs. GDP output gapSweden Private sector net financial investments
Source: EcoWin, First Securities
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08-7.5-5.0-2.50.02.55.07.5
10.012.5
-7.5-5.0-2.50.02.55.07.5
10.012.5
Source: OECD/First
Net fin. investment
Output gap
In pct of GDP
21
The supply side
Source: EcoWin, First Securities
Short term cycles: Capacity utilisationLong term cycels: Technology ++
22
When does the cycle turn down?
1) Shortage of labour – wage inflation, price inflation− Central banks are forced to hike (too much)− Corporate profits squeezed
2) Private or public sector spending cuts (also without higher rates)
− Corporate over investments, on borrowed fundsInventory cycles
− Too low household savings
− Public deficits
3) Bad luck (wars, terror, plague or cholera, or an oil chock)
23
A global fall in the unemployment rate
hGrowht has beem well above trend everywhere
Source: EcoWin, First Securities
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 060
2
4
6
8
10
12
0
2
4
6
8
10
12
FIRST
Per cent of the labour force
24
The world is new!
World GDPDeveloped vs. emerging markets
-1.00.01.02.03.04.05.06.07.0
65 70 75 80 85 90 95 00 05 10
Contribution from rich countries and poor,of which China
25
But how new is the world??
26
A new world? The short term Phillips curve
27
A new world?USA Productivity, nonfarm business sector
Source: EcoWin, First Securities
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
y/y
q/q, annual rateNormal/low productivity growth
High wage inflation
High growth in unit labour cost
High GDP inflation
.. and core CPI inflation well abovenormal
USA Unit labor cost vs. GDP price deflator
Source: EcoWin, First Securities
83 85 87 89 91 93 95 97 99 01 03 05-2
-1
0
1
2
3
4
5
6
-2
-1
0
1
2
3
4
5
6 Change y/y
GDP price deflator (core)
Unit labour cost, non farm bus.
28
Still not any disaster!!
USA KPI Energipriser vs. andre priser
Source: EcoWin, First Securities
65 70 75 80 85 90 95 00 05-20
-10
0
10
20
30
40
50
0.0
2.5
5.0
7.5
10.0
12.5
15.0
Energi
KPI samlet
KPI eks energi
29
.. And the Fed is not that preoccupied with the CPI
Source: EcoWin, First Securities
FIRST Fed easing shaded
30
… it’s the economy, stupid!
31
The cycle, business surveys are more important
When does the Fed start cutting?US - ISM vs. Fed funds
Source: EcoWin, First Securities
85 87 89 91 93 95 97 99 01 03 05 07-2147
-2147
Fed funds - 5y CPI
37.540.042.545.047.550.052.555.057.560.062.565.0
37.540.042.545.047.550.052.555.057.560.062.565.0
FIRST
ISM
oo o
Fed cutting shaded
o
32
By the way: What drives earnings expectations?
Source: EcoWin, First Securities
FIRST Recessions shaded
33
EMU: Falling unemployment but still low wage inflation
34
EMU: Low wage inflation, low cost inflation, low inflation
Source: EcoWin, First Securities
35
Inntjeningsforventingene ikke så utsatt i EMU?
Source: EcoWin, First Securities
FIRST
36
Interest rates are on their way up but still low?
37
More liquidity in the system
38
Some asset inflation
39
What if?
40
Somewhat interconnected?
hHowever: Inflation is not a common problem, not imbalanceshChina, India much more important than before
Source: EcoWin, First Securities
US recessioins shaded
41
Some others are still saving!
Estimates based on saving ratios, housing investmentsHousehold net financial investment
Source: EcoWin, First Securities
80 82 84 86 88 90 92 94 96 98 00 02 04-5.0-2.50.02.55.07.5
10.012.515.0
-5.0-2.50.02.55.07.5
10.012.515.0
FirstUSA
Germany
Japan
Husholdningens finansinvesteringer, anslag
42
A special case?
h Hvilken strek er et snitt av 30 OECD-landh Hvilken strek er en liten åpen, oljeavhengig…. økonomi?
BNP OECD vs. Fastlands-Norge
Source: EcoWin, First Securities
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-3
-2
-1
0
1
2
3
4
5
6
-3
-2
-1
0
1
2
3
4
5
6
FIRST
Vekst år/år
43
BNP OECD vs. Fastlands-Norge
Source: EcoWin, First Securities
80 82 84 86 88 90 92 94 96 98 00 02 04 06-3
-2
-1
0
1
2
3
4
5
6
-3
-2
-1
0
1
2
3
4
5
6 Vekst år/år
FIRST
Fastlands-Norge
OECD
A special case?
44
The economy is firing on all cylinders
Private demandDeviation from trend, % of Mainland GDP
-6%
-4%
-2%
0%
2%
4%
6%
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Mainland business
Households
Petroleum inv.
45
Fiscal policy: Slightly expansionary
Structural budget deficit ex. oilvs spedning rule
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1995 1997 1999 2001 2003 2005 2007 2009Sources: Ministry of Finance, First
Oil revenue spending rule
In per cent of GDP
Actual deficit
Norway - Fiscal policyvs. GDP (Mainland)
-6
-4
-2
0
2
4
1980 1985 1990 1995 2000 2005 2010*) Change in ex. oil structural deficitSources: Ministry of Finance, OECD
Per cent
Output gap (OECD/FIRST)
Change in deficit in per cent of GDP *)
And will remain so
46
’G’ not that important vs. the private sector
Privat og offentlig etterspørselAvvik fra trend, % av Fastlands-BNP
-8%-6%-4%-2%0%2%4%6%8%
10%
1980 1984 1988 1992 1996 2000 2004 2008-8%-6%-4%-2%0%2%4%6%8%10%
Forbruk + investeringer, inkl olje
Offentlig etterspørsel
First
47
Savings: The flip side of spendings
The credit market important?Liberalised credit in the 80’ies, ultra low rates now?
Source: Reuters EcoWin
OECD/First
48
Strong credit growth, house price boom
House prices vs. Norges Bank's forecasts
Source: EcoWin, First Securities
01 02 03 04 05 06 07 08 09-5
0
5
10
15
20
-5
0
5
10
15
20
NB's forecasts
yoy growth %
Fuelled by historically low interest rates!
49
Seen it before?
50
It might be a new world. But it might bee too low rates too.
Household debt, Norges Bank's f'castsDebt in % of disp. income ex. insurance int. income
100
120
140
160
180
200
220
240
260
1980 1985 1990 1995 2000 2005 2010
FS 03/2
FS 04/2FS 05/2
Forecasts from Financial Stability Reports
FS 03/2 - high
First/Norges Bank
FS 06/1
FS 06/2
51
Some asset inflation
52
Housing starts at 23 year high
Housing starts vs. order book
Source: EcoWin, First Securities
88 90 92 94 96 98 00 02 04 0612.515.017.520.022.525.027.530.032.535.037.5
25
50
75
100
125
150
175Real orders: Adjusted for cost of building
Housing starts
Orders, volume
53
Capacity utilisation is record high! Norway Resource shortages in manufacturing
Source: EcoWin, First Securities
84 86 88 90 92 94 96 98 00 02 04 0610152025303540455055
10152025303540455055 Indicator & trend, seas. adj
SSB/First
Deviation between actual and potential productionOutput gap
Source: EcoWin, First Securities
70 75 80 85 90 95 00 05 10-6-5-4-3-2-101234
-6-5-4-3-2-101234
Ministry of Finance
% of potential GDP OECD
Norges Bank
54
Remarkable improvement in the labour market
Norway - Labour market
Source: EcoWin, First Securities
84 86 88 90 92 94 96 98 00 02 04 060.10.20.30.40.50.60.70.80.91.01.1
1
2
3
4
5
6
7
8
9
Vacancies
In % Unemployment, incl. measures
Labour market is tight, despite dynamic labour immigration
Open unemployment rate at 18 year low
Norway Employment
Source: EcoWin, First Securities
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06-4-2024
-4-2024
Change % y/y
1.972.042.112.182.252.322.39
1.972.042.112.182.252.322.39 In millions
55
Consequently: Wage growth is definitely picking up
Norway - Wage inflation, private sector
Source: EcoWin, First Securities
98 99 00 01 02 03 04 05 06 07 082
3
4
5
6
7
8
9
10
2
3
4
5
6
7
8
9
10
Wage cost per hour (Nat. acc)
Annual wage (TRC)
Change y/y
Wage index, average
Est
Vacancies/unemployed vs. wage growthNorway: Wages vs. the labour market
Source: EcoWin, First Securities
80 82 84 86 88 90 92 94 96 98 00 02 04 06 080.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
23456789
101112
no\v-u-lonn
V/U ratioWages "TRC"
Est.
Quarterly statistics, National accounts & tax payments indicates wage growth on the rise
Norway Unemployment vs. wage inflation 1994 - 2007
2.02.53.03.54.04.55.05.56.06.5
1.0 2.0 3.0 4.0 5.0 6.0Unemployment (Aetat)
Wag
e in
flatio
n (T
BU)
2006
19942005
Norges Bank est(incl. pensions).
First est t
2007
56
Productivity might be slowing down, unit labour cost no doubt increasing
Norway - Unit labour cost vs. CPI
Source: EcoWin, First Securities
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
Unit lab. cost business x energy
Growth y/yCPI/CPI-ATE
Norway Mainland GDP, productivity
Source: EcoWin, First Securities
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08-3-2-1012345678
-3-2-1012345678
Mainland GDP, business ex energy
Productivity (GDP/hours worked)
y/y, smoothed
Less reason to woory about’too low’ inflation
57
We know Norges Bank’s reaction function
Norges Bank rate vs. unemployment
Source: EcoWin, First Securities
97 98 99 00 01 02 03 04 05 06 07 08
1
2
3
4
5
6
7
8
92.0
2.5
3.0
3.5
4.0
4.5
Unemployment, NAV %
Norges Bank deposit rate, scale inverted
Norges Bank behind the curve?
Mind the gap!
58
The monetary policy dilemma
hHigh GDP growth, the supply side has turned out to be more flexiblethan assumed
hStrong growht in credit and house prices
h… but inflation has been low, and well below target
hAn now, pressure on capacity is no doubt strengthening − Lower unemployment, increasing wage growth
h… but inflation remains far below target
What should Norges Bank then do?
59
”The problem”: Inflation is too low
Change y/yNorway Inflation measures
Source: EcoWin, First Securities
96 97 98 99 00 01 02 03 04 05 06 07-2
-1
0
1
2
3
4
5
-2
-1
0
1
2
3
4
5Headline CPI
Sources: SSB, First
Mainland GDP deflator ex energy
CPI-AT
Is inflation too low?
Really?
60
Bom, falleri, falleri, bom, bom
Norges Bank CPI-ATE estimates
-0.5
-
0.5
1.0
1.5
2.0
2.5
3.0
jan.02 jan.03 jan.04 jan.05 jan.06 jan.07 jan.08
IR 2/02 IR 3/02
IR 1/03
IR 2/03
IR 3/03IR 2/04IR 1/04
IR = Inflation ReportOutcome
IR 3/04
IR 1/05
IR 3/05
IR 2/05
IR 2/06IR 1/06
IR 3/06
61
Inflation expectations on the rise
Expected inflation 2 - 5 years ahead
2.25
2.50
2.75
3.00
1 kv 02 1 kv 03 1 kv 04 1 kv 05 1 kv 06
Average economists, businesses and employer's org
Kilde: tns Gallup/Norges Bank
High capacity utilisation, higher inflation
Companies pricing plans
-10-505
101520253035
1 kv 02 1 kv 03 1 kv 04 1 kv 05 1 kv 06
Net share of companies that report prices will rise faster
Source: tns Gallup/Norges Bank
62
Norges Bank is trying!
Norwegian interest rate(s)
0
4
8
12
16
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Kilde: Norges Bank/First
Average
63
Even so, Norge Bank is speeding up
Inflation reports in 2006Norges Banks rate projections
Source: EcoWin, First Securities
04 05 06 07 08 091.502.002.503.003.504.004.505.005.50
1.502.002.503.003.504.004.505.005.50
IR 2 2006
IR 1 2006
IR 3 2006
64
… but the bank is way behind the curve?
Interest rates and growth
Source: EcoWin, First Securities
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09123456789
1011
123456789
1011
Nominal GDP-growth (Mainland)
3 m. money market rate Norges B's paths
Nov 06
Mar 06
65
Norges Bank policy rate at relatively low levelsCentral bank rates
Source: EcoWin, First Securities
00 01 02 03 04 05 06 070
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8
Sweden
Norway
EMUUSAUK
New Zealand
AUS
Norges Bank policy rate
Source: EcoWin, First Securities
95 96 97 98 99 00 01 02 03 04 05 06 07 08 091.0
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
8.0
FIRST NB projection IR 3/2006
Neutral rate estimat
Low relative to other countries…
…and relative to “normal” levels
66
A stable connection?
NOK TWI vs. interest rate diff.
Source: EcoWin, First Securities
Jan05
Apr Jul Oct Jan06
Apr Jul Oct Jan07
949596979899
100101102103104-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
2 y swap vs. trading partners
NOK TWI
67
But what about the exchange rate?
hWe don’t need 4 pp more than the others this timehThe NOK is not strong; the world, the corp sector & the stock
market ishThe oil prce is higher, we ‘need’ a stronger currency
68
In December 2002: Norway at the topPengemarkedsrente
Source: EcoWin, First Securities
SVE NOR EMU CAN UK USA AUST NEW Z ISL0123456789
101112
0123456789
101112
Desember 2002
69
Now: Norway is close to the bottomPengemarkedsrente
Source: EcoWin, First Securities
SVE NOR EMU CAN UK USA AUST NEW Z ISL0123456789
101112
0123456789
101112
70
What is important for the NOK exchange rate now?
NOK vs. oil, interest rates
Source: EcoWin, First Securities
02 03 04 05 06 07
-15.0
-10.0
-5.0
0.0
5.0
-15.0
-10.0
-5.0
0.0
5.0
Oil price contribution
Interest rate contribution
90.0
95.0
100.0
105.0
110.0
90.0
95.0
100.0
105.0
110.0 FIRST NOK actual (TWI)
Model, est from 2005
2 år swap rate differanse: 1pp diff + 2% on NOK
71 72
Conclusions – monetary policy
hThe Norwegian economy is over stimulated by the strongest world ec. growth in 40 years and the lowest interest rate in 200/60 years
+ an oil boom
hThe labour market is tightening rapidly, wage inflation in the rise− Even if immigration is record high
hUnusual rapid increase in credit & house prices show that borrowing cost is low
hA substantial fall in private sector savings
h Inflation is low, and might remain low (we expect it up)
hBut is low inflation enought to keep rates well below a neutral rate? NO! Risk analysis is important!