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Transcript of How Serious of a Threat Is Global Deflation? Nariman Behravesh Farid Abolfathi John Mothersole Dan...
Copyright © 2002 Global Insight
How Serious of a ThreatHow Serious of a Threat
Is Is
Global Deflation?Global Deflation?
Nariman Behravesh Nariman Behravesh Farid AbolfathiFarid Abolfathi
John MothersoleJohn MothersoleDan RyanDan RyanTodd LeeTodd Lee
Howard ArcherHoward Archer
Global Insight TeleconferenceGlobal Insight Teleconference
December 17, 2002December 17, 2002
Copyright © 2002 Global Insight
1990s: A Deflationary Wave1990s: A Deflationary Wave
• The bursting of the Japanese asset and The bursting of the Japanese asset and investment bubblesinvestment bubbles
• The Asian CrisisThe Asian Crisis
• Deflation spreads to other parts of AsiaDeflation spreads to other parts of Asia
• The bursting of the high-tech bubble The bursting of the high-tech bubble
• Worldwide manufacturing deflationWorldwide manufacturing deflation
2Copyright © 2002 Global Insight
Copyright © 2002 Global Insight
Commodity PricesCommodity Prices
Copyright © 2002 Global Insight
Though Up in 2002, Commodity Prices Though Up in 2002, Commodity Prices Remain Well Below Recent LevelsRemain Well Below Recent Levels
2.0
2.4
2.8
3.2
1996 1997 1998 1999 2000 2001 2002
Commodity Research Bureau's Spot Market Commodity Price Index
Copyright © 2002 Global Insight
With Prices For Many Soft Since JulyWith Prices For Many Soft Since July
0.8
1.0
1.2
1.4
1.6
2001 2002
Global Insight's World Manufacturing Cost Index less Oil & Shipping Rates*
(*Prices for ethylene, nonferrous metals, lumber, cotton, pulp, steel scrap, rubber and DRAM's)
Copyright © 2002 Global Insight
Insights From Japan’s Insights From Japan’s DeflationDeflation
Copyright © 2002 Global Insight
Disinflation, Deflation
Inflation Rates in Japan
-3
-2
-1
0
1
2
3
4
5
1985 1990 1995 2000
CPI GDP Deflator
Copyright © 2002 Global Insight
Bursting Bubbles
• JAPAN• Stock market peak: December 1989.• Inflation: rising in 1990, volatile in 1991 (with surges
above 4% m/m)• GDP growth: 3+% q/q through 1991. • Overnight call rate peak: March 1991.
• United States• Stock market peak: August 2000.• Federal funds peak: January 2001.
Copyright © 2002 Global Insight
Interest Rate Response
Real Interest Rates (Bubble peak at 0)
-3-2
-10
123
45
67
-1 0 1 2
Japan U.S.
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Japan’s Slow Response Due To:
• Unfamiliarity with slow growth.• Return to “normal” (3-4%) growth rate expected.
• Anti-inflation bias.• Post-WWII generation of policymakers.
• Emphasis on fiscal rather than monetary expansion.• Public works projects.
Copyright © 2002 Global Insight
Problems Peculiar to Japan
• Structural problems.• Overly-dependent on manufacturing, construction,
exports.• Low productivity in services.
• Bad Loans + Extreme Asset Deflation• Bad loans estimated at 8-40% of GDP• Asset prices now 1/4th of peak value.
• Money hoarding. Due to uncertainty, risk aversion.• 1990: M1 = 25% of GDP• Today: M1 = 65% of GDP
Copyright © 2002 Global Insight
Japan: Causing Global Deflation?
Japanese Price Level
50
60
70
80
90
100
110
120
130
140
1990 1995 2000
In US$ In Euros
Copyright © 2002 Global Insight
AsiaAsia
Copyright © 2002 Global Insight
Asia Recovery ContinuesAsia Recovery Continues
-10
-5
0
5
10
AUS CHN HKG IND IDN KOR MYS PHL SGP TWN THA
Q4/01 Q1/02 Q2/02 Q3/02
(Real GDP, percent change from a year earlier)
Copyright © 2002 Global Insight
Recovery Still Driven by ExportsRecovery Still Driven by Exports
(Percent change from a year earlier, Q3/2002)
-20
-10
0
10
20
30
AUS CHN* HKG IDN KOR MYS PHL SGP# TWN THA+
Private Consumption Business Investment Exports
* Private consumption represented by real retail sales; business investment from q1-q3; exports in nominal dollar terms
# Exports in nominal U.S. dollar
+ 2002 Q2 data
Copyright © 2002 Global Insight
Consumer Demand is CoolingConsumer Demand is Cooling
-6
-3
0
3
6
9
12
AUS CHN* HKG IDN KOR MYS PHL SGP TWN THA
Q4/01 Q1/02 Q2/02 Q3/02
(Real NIA Private Consumption, percent change from a year earlier)
*Real retail sales
Copyright © 2002 Global Insight
Exports Are SizzlingExports Are Sizzling
-30
-20
-10
0
10
20
30
AUS CHN* HKG IND* IDN KOR MYS PHL SGP* TWN THA
Q4/01 Q1/02 Q2/02 Q3/02
(Real NIA Exports, percent change from a year earlier)
*Exports in nominal U.S. dollar
Copyright © 2002 Global Insight
Asia Exports Rely on US ImportsAsia Exports Rely on US Imports
(Percent change from a year earlier)
-20
0
20
40
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02
Asia Exports U.S. Imports
Copyright © 2002 Global Insight
Interest Rates Are near All-Time LowsInterest Rates Are near All-Time Lows
0
5
10
15
20
25
30
Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02
Australia New Zealand Malaysia Taiw an Thailand
Japan Korea India Singapore Philippines
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Liquidity Decelerates Despite Low Interest RatesLiquidity Decelerates Despite Low Interest Rates
Singapore
0.0
2.0
4.0
6.0
8.0
Jan-01 Jul-01 Jan-02 Jul-02
M2 3-Month Treasury Bills Rate
South Korea
0
5
10
15
20
25
Jan-01 Jul-01 Jan-02 Jul-02
M2 Call Rate
Hong Kong
-5
0
5
10
Jan-01 Jul-01 Jan-02 Jul-02
M2 Base Rate
Taiwan
0
2
4
6
8
Jan-01 Jul-01 Jan-02 Jul-02
M2 Rediscount Rate
Percent change from a year earlier
Copyright © 2002 Global Insight
Deflation Remains A ConcernDeflation Remains A Concern
(CPI, percent change from a year earlier)
-5
0
5
10
15
CHN HKG IND IDN KOR MYS PHL SGP TWN THA
2001 2002 Jan-Oct
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Deflation Remains A ConcernDeflation Remains A Concern
(Percent change from a year earlier, 2002 Q3)
-15
-10
-5
0
5
10
AUS HKG IDN KOR* MYS PHL TWN THA*
GDP Deflator Import Price Deflator* Second quarter data
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Fiscal Strain in AsiaFiscal Strain in Asia
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
AUS CHN HKG IND IDN KOR MYS NZL PHL SGP
2001 2002
(Fiscal balance over GDP, percent)
Copyright © 2002 Global Insight
Outlook And RisksOutlook And Risks
• OutlookOutlook• Cautiously optimistic about 2003• Inflation will remain subdued in the near-term• Accommodative fiscal and monetary policy will continue• US growth rebound in 2nd half 2002 will boost exports • China, India, Korea, and Malaysia will lead the pack
• RisksRisks• Deflation• Dependence on U.S. imports• Non-economic shocks: Terrorist attacks, War on Iraq• Rapid consumer credit expansion• Fiscal strain
Copyright © 2002 Global Insight
Real GDP Growth OutlookReal GDP Growth Outlook
(Percent change)
-2
0
2
4
6
8
10
China Hong Kong Taiwan India Australia
2001 2002 2003 2004
Copyright © 2002 Global Insight
Real GDP Growth OutlookReal GDP Growth Outlook
(Percent change)
-2
0
2
4
6
8
10
Indonesia Korea Malaysia Philippines Singapore
2001 2002 2003 2004
Copyright © 2002 Global Insight
Who Is Next?Who Is Next?
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Parallels with JapanParallels with Japan
JapanJapan U.S.U.S. GermanyGermany
Weak Domestic DemandWeak Domestic Demand •• ••
DeflationDeflation •• ??
Real Interest Rates Too HighReal Interest Rates Too High •• ••
Real Exchange Rate Too HighReal Exchange Rate Too High •• •• ••
Fiscal RigidityFiscal Rigidity •• ••
Financial StressFinancial Stress •• ?? ••
Heavy Dependence on Bank Heavy Dependence on Bank FinancingFinancing
•• ••
High Debt LevelsHigh Debt Levels •• •• ••
Burst Asset BubblesBurst Asset Bubbles •• •• ••
Rigid Labor MarketsRigid Labor Markets •• ••
Poor Corporate GovernancePoor Corporate Governance •• •• ••
Copyright © 2002 Global Insight
Growth in Real Domestic Demand Growth in Real Domestic Demand Versus Real GDPVersus Real GDP
United States
0
1
2
3
4
5
6
1999 2000 2001 2002
Per
cen
t C
han
ge
Real GDP
Real DomesticDemand
Copyright © 2002 Global Insight
Growth in Real Domestic Demand Growth in Real Domestic Demand Versus Real GDPVersus Real GDP
Germany
-2
-1
0
1
2
3
4
1999 2000 2001 2002
Per
cen
t C
han
ge
Real GDP
Real DomesticDemand
Copyright © 2002 Global Insight
Growth in Real Domestic Demand Growth in Real Domestic Demand Versus Real GDPVersus Real GDP
Japan
-1
0
1
2
3
1999 2000 2001 2002
Per
cen
t C
han
ge
Real GDP
Real DomesticDemand
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Debt is High in Much of the G7Debt is High in Much of the G7
Hosehold debt as a percent of disposable personal income
United States
United Kingdom
Germany
Japan
80
90
100
110
120
130
140
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*
Source: OECD; National statistics *Estimate
Copyright © 2002 Global Insight
United StatesUnited States
Copyright © 2002 Global Insight
U.S. - Deflation Is Not A Threat U.S. - Deflation Is Not A Threat
• U.S. growth has been closer to trend than most U.S. growth has been closer to trend than most other industrialized economiesother industrialized economies
• Policy has been and continues to be aggressively Policy has been and continues to be aggressively expansionaryexpansionary
• A falling dollar will helpA falling dollar will help
• Service sector inflation is still chugging along Service sector inflation is still chugging along
• However, there is no room for complacencyHowever, there is no room for complacency
34Copyright © 2002 Global Insight
Copyright © 2002 Global Insight
U.S. - Growth vs. PotentialU.S. - Growth vs. Potential
Percent change from a year earlier
0
1
2
3
4
5
1990-99 2000 2001 2002 2003 2004
Per
cen
t ch
ang
e in
rea
l G
DP
Potential History/Forecast
Copyright © 2002 Global Insight
U.S. Consumer Price InflationU.S. Consumer Price Inflation
-2
-1
0
1
2
3
4
5
Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02
Goods Services Overall
Percent change from a year earlier
Copyright © 2002 Global Insight
Western EuropeWestern Europe
Copyright © 2002 Global Insight
Western Europe overall deflation Western Europe overall deflation risks limited risks limited
• Growth in Western Europe averaged near to 2% over last Growth in Western Europe averaged near to 2% over last decade, so not a major output gap yet.decade, so not a major output gap yet.
• Core Eurozone inflation stayed in 2.4-2.6% range through Core Eurozone inflation stayed in 2.4-2.6% range through 2002. Inflation sticky in the dominant services sector.2002. Inflation sticky in the dominant services sector.
• Money supply growth strong, even allowing for distortions.Money supply growth strong, even allowing for distortions.
• ECB still has significant scope to cut interest rates. 50bp ECB still has significant scope to cut interest rates. 50bp cut on December brought key rate down to 2.75%.cut on December brought key rate down to 2.75%.
• If deflation really becomes a threat, there is ample scope If deflation really becomes a threat, there is ample scope for fiscal stimulus in the region, But authorities would have for fiscal stimulus in the region, But authorities would have to at least make the Stability and Growth Pact more flexible.to at least make the Stability and Growth Pact more flexible.
Copyright © 2002 Global Insight
Eurozone - Growth vs. PotentialEurozone - Growth vs. Potential
Percent change from a year earlier
0
1
2
3
4
1990-99 2000 2001 2002 2003 2004
Per
cen
t ch
ang
e in
rea
l G
DP
Potential History/Forecast
Copyright © 2002 Global Insight
Eurozone Consumer Price Inflation: Eurozone Consumer Price Inflation: Goods and ServicesGoods and Services
0
1
2
3
4
Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02
Goods Services Overall
Percent change from a year earlier
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Western European Latest Annual Western European Latest Annual Inflation RatesInflation Rates
CPICPI CPICPI
CoreCore
PPIPPI CPI CPI CPICPI
CoreCore
PPIPPI
AustriaAustria 1.81.8 n.a.n.a. 1.21.2 NetherlandsNetherlands 3.2*3.2* n.a.n.a. 3.23.2
BelgiumBelgium 1.1*1.1* n.a.n.a. 0.70.7 NorwayNorway 2.1*2.1* 2.0*2.0* 3.3*3.3*
DenmarkDenmark 2.7*2.7* 3.1*3.1* 0.80.8 PortugalPortugal 4.0*4.0* n.a.n.a. 1.41.4
FinlandFinland 1.6*1.6* n.a.n.a. 0.50.5 SpainSpain 3.9*3.9* 3.6*3.6* 1.61.6
FranceFrance 2.2*2.2* 2.0*2.0* 0.60.6 SwedenSweden 2.3*2.3* 2.1*2.1* -1.0-1.0
GermanyGermany 1.1*1.1* 0.8*0.8* 0.30.3 SwitzerlandSwitzerland 0.90.9 1.01.0 -0.4-0.4
GreeceGreece 3.6*3.6* n.a.n.a. 1.91.9 UKUK 2.12.1 2.32.3 0.60.6
IrelandIreland 4.8*4.8* n.a.n.a. -0.4-0.4 EurozoneEurozone 2.2*2.2* 2.42.4 0.90.9
ItalyItaly 2.8*2.8* n.a.n.a. 1.11.1
Copyright © 2002 Global Insight
Germany Deflation RisksGermany Deflation Risks
• Large output gap developing. GDP growth averaged just 1.3% Large output gap developing. GDP growth averaged just 1.3% over 10-years 1993-2002. Growth forecast at 1.0% in 2003, after over 10-years 1993-2002. Growth forecast at 1.0% in 2003, after 0.3% in 2002 and 0.7% in 2001.0.3% in 2002 and 0.7% in 2001.
• Unemployment at 10%. Consumer confidence at 5-year low.Unemployment at 10%. Consumer confidence at 5-year low.
• Major structural problems - Labor & product market rigidities.Major structural problems - Labor & product market rigidities.
• Stock market been weakest performing of the major industrialized Stock market been weakest performing of the major industrialized countries this year.countries this year.
• Debt levels have risen. Bankruptcies up sharply.Debt levels have risen. Bankruptcies up sharply.
• Property prices have fallen, but not collapsing.Property prices have fallen, but not collapsing.
• Banking sector problems mounting, but not as bad as in Japan. Banking sector problems mounting, but not as bad as in Japan. No signs of a significant credit crunch.No signs of a significant credit crunch.
• Locked into euro at too high a rate? Will euro rise markedly Locked into euro at too high a rate? Will euro rise markedly against dollar?against dollar?
• Real interest rates too high. Fiscal policy restrictive.Real interest rates too high. Fiscal policy restrictive.
• Policy paralysis?Policy paralysis?
Copyright © 2002 Global Insight
Germany vs. JapanGermany vs. Japan
Percent change from a year earlier
0201009998979695
4
2
0
-2
-4
4
2
0
-2
-4
German Growth (q-o-q) Japanese Growth (q-o-q)Japanese Annual Inflation German Annual Inflation
Copyright © 2002 Global Insight
Reasons to Remain WorriedReasons to Remain Worried
• Weak domestic demand and growing output gapsWeak domestic demand and growing output gaps
• Huge amounts of excess capacity in goods-Huge amounts of excess capacity in goods-producing industriesproducing industries
• Weak commodity pricesWeak commodity prices
• Overvalued exchange rates Overvalued exchange rates
• Potential for policy mistakesPotential for policy mistakes
44Copyright © 2002 Global Insight