The shift and the shocks Martin Wolf, Associate Editor & Chief Economics Commentator, Financial...

The shift and the shocksMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times

Leverhulme Globalisation Lecture Series

28th March 2012

Nottingham

2

The shift and the shocks

3

The shift and the shocks

• Shift

• Shocks

• Prospects

4

1. The shift

• The 19th century saw the “great divergence”

• The second half of the 20th century saw the beginning of convergence, with Japan and the east Asian “tiger economies”

• The late 20th and early 21st centuries saw convergence spread to the Asian giants

• Divergent growth is a mirror image of converging incomes

5

1. The shift

EMERGING COUNTRIES OUTPERFORM HUGELY

GDP GROWTH RATES IN THE WORLD ECONOMY(10-year moving average, end year)

012345

678

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

World Advanced economies Emerging and developing economies

Source: IMF WEO, September 2011

6

1. The shift

EMERGING COUNTRIES OUTPERFORM HUGELY

GDP SINCE THE CRISIS

90

100

110

120

130

140

150

160

170

2007 2008 2009 2010 2011 2012

Advanced economies Latin America and the CaribbeanSub-Saharan Africa ChinaIndia Central and eastern EuropeDeveloping Asia

Source: IMF, WEO database

7

1. The shift

• The shift helped cause the shocks, via:

– A “labour-supply shock”, which lowered relative wages of the relatively unskilled in high-income countries and encouraged household borrowing;

– A “dis-inflationary shock”, as China lowered world prices for manufactures, which encouraged loose monetary policy;

– Finally, an “inflationary shock”, as demand for raw materials soared, which made it more difficult to manage the crisis;

– Above all, a “savings shock”, which lowered the real rate of interest and caused a huge rise in global imbalances.

8

2. The shift

REAL INTEREST RATES

-1

0

1

2

3

4

5

6

Jan-1985 Jan-1987 Jan-1989 Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011

UK INDEX-LINKED US TIPS

Asian financial crisis

Western financial crisis

THE SAVINGS GLUT?

9

1. The shift

RISE OF IMBALANCES

GLOBAL CURRENT ACCOUNT IMBALANCES(as per cent of world GDP)

-3

-2

-1

0

1

2

3

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Germany and Japan China and emerging Asia Peripheral Europe Rest of World Oil Exporters US

Source: WEO, October 2011

10

1. The shift

RISE OF FOREIGN CURRENCY RESERVES

GLOBAL FOREIGN CURRENCY RESERVES ($bn)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

China Rest of developing Asia Rest of developing countries Industrial countries

11

2. The shocks

• The economic collapse was large and enduring

• The rescue was also dramatic:

– Liabilities of core financial system were nationalised;

– Fiscal policy put on a war-time footing; and

– Monetary policy extraordinarily aggressive;

• We are now living in a “contained depression”. There are big risks with this, but it is better than the alternative

• According to Carmen Reinhart and Kenneth Rogoff, This Time is Different, it could take another three years, to return to “normality”. Given the scale of affected economies, it could be far longer.

12

2. The shocks: global

THE LONG SLUMPGDP IN THE "GREAT RECESSION"

90

92

94

96

98

100

102

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

US Japan Germany France Italy UK

13


THE LEVERAGE CYCLE

DEBT OVER GDP(per cent, Q2 2011)

0

100

200

300

400

500

600

Japa

nUK

Spain

Franc

eIta

ly

South

Kor

ea US

Ger

man

y

Austra

lia

Canad

a

Households Non-financial Corporations

Financial Institutions Government

Source: McKinsey Global Institute 2012

14


THE US LEVERAGE CYCLE

TOTAL DOMESTIC BORROWING(as per cent of GDP)

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

I

2011

III

Households Non-financial Business Domestic Financial Sectors

Total Government Total Domestic

15


THE US LEVERAGE CYCLE

SECTORAL RATIOS OF US DEBT TO GDP

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Households Non-financial Business All Government Financial Sectors

16


MONETARY EXPANSIONCENTRAL BANK INTERVENTION RATES

0

1

2

3

4

5

6

7

31

/12

/20

04

30

/04

/20

05

31

/08

/20

05

31

/12

/20

05

30

/04

/20

06

31

/08

/20

06

31

/12

/20

06

30

/04

/20

07

31

/08

/20

07

31

/12

/20

07

30

/04

/20

08

31

/08

/20

08

31

/12

/20

08

30

/04

/20

09

31

/08

/20

09

31

/12

/20

09

30

/04

/20

10

31

/08

/20

10

31

/12

/20

10

30

/04

/20

11

31

/08

/20

11

31

/12

/20

11

US FEDERAL FUNDS UK BANK RATE ECB SHORT TERM REPO JAPAN TARGET RATE

17


UK BASE RATE SINCE THE 19TH CENTURY

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Oct

-94

Oct

-07

Oct

-20

Oct

-33

Oct

-46

Oct

-59

Oct

-72

Oct

-85

Oct

-98

Oct

-11

Oct

-24

Oct

-37

Oct

-50

Oct

-63

Oct

-76

Oct

-89

Oct

-02

Oct

-15

Oct

-28

Oct

-41

Oct

-54

Oct

-67

Oct

-80

Oct

-93

Oct

-06

THE ARRIVAL OF ULTRA-CHEAP MONEY

18


THE SOVEREIGN DEBT IMPACT

NET PUBLIC DEBT OVER GDP (per cent)

0

20

40

60

80

100

120

140

160

180

Japan Italy United States France United Kingdom Germany Canada

2006

2009

2012

2015

Source: IMF WEO, October 2011

19


FISCAL ROOM? YES - FOR SOME10-YEAR GOVERNMENT BOND YIELDS

(per cent)

0

1

2

3

4

5

6

05/0

1/20

07

05/0

4/20

07

05/0

7/20

07

05/1

0/20

07

05/0

1/20

08

05/0

4/20

08

05/0

7/20

08

05/1

0/20

08

05/0

1/20

09

05/0

4/20

09

05/0

7/20

09

05/1

0/20

09

05/0

1/20

10

05/0

4/20

10

05/0

7/20

10

05/1

0/20

10

05/0

1/20

11

05/0

4/20

11

05/0

7/20

11

05/1

0/20

11

05/0

1/20

12

Germany France US Japan UK

20

2. The shocks - eurozone

• The core of the eurozone financial crisis is not fiscal

• The fiscal crisis is more a symptom of the financial crisis than a cause of that crisis

• The crisis is largely the result of divergences accumulated in the years of excess: what made everything seem so good was in fact creating an acute long-term crisis

• External imbalances played a bigger role than fiscal imbalances: it mattered less whether the private or public sectors were being financed than how big the external finance was

21


THE GOOD, THE BAD AND THE UGLYCURRENT ACCOUNT IMBALANCES IN THE EUROZONE

(as a share of eurozone GDP)

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

France Germany Greece & Portugal Italy Netherlands Spain Rest Total

Source: IMF WEO Database October 2011

22


LOST COMPETITIVENESSUNIT LABOUR COSTS IN MANUFACTURING

RELATIVE TO GERMANY

60

80

100

120

140

160

180

200

Q1-1999

Q1-2000

Q1-2001

Q1-2002

Q1-2003

Q1-2004

Q1-2005

Q1-2006

Q1-2007

Q1-2008

Q1-2009

Q1-2010

Q1-2011

Portugal Italy Ireland Greece Spain

Source: OECD

23


ROAD TO THE EUROZONE FISCAL CRISES

NET PUBLIC DEBT(relative to GDP)

0

20

40

60

80

100

120

140

160

180

Greece Italy Portugal Ireland Spain

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2015

Source: World Economic Outlook database April 2011

24


ROAD TO THE EUROZONE FISCAL CRISES

10-YEAR SPREAD OVER BUNDS(percentage points)

-10

0

10

20

30

40

50

01

/01

/20

07

01

/04

/20

07

01

/07

/20

07

01

/10

/20

07

01

/01

/20

08

01

/04

/20

08

01

/07

/20

08

01

/10

/20

08

01

/01

/20

09

01

/04

/20

09

01

/07

/20

09

01

/10

/20

09

01

/01

/20

10

01

/04

/20

10

01

/07

/20

10

01

/10

/20

10

01

/01

/20

11

01

/04

/20

11

01

/07

/20

11

01

/10

/20

11

01

/01

/20

12

Portugal Ireland Greece

25


TRIUMPH OF THE EUROPEAN CENTRAL BANK

10-YEAR SPREAD OVER BUNDS(percentage points)

0

1

2

3

4

5

6

01

/01

/20

07

01

/04

/20

07

01

/07

/20

07

01

/10

/20

07

01

/01

/20

08

01

/04

/20

08

01

/07

/20

08

01

/10

/20

08

01

/01

/20

09

01

/04

/20

09

01

/07

/20

09

01

/10

/20

09

01

/01

/20

10

01

/04

/20

10

01

/07

/20

10

01

/10

/20

10

01

/01

/20

11

01

/04

/20

11

01

/07

/20

11

01

/10

/20

11

01

/01

/20

12

Italy Spain Belgium France

26



SPANISH BANK AND SOVEREIGN CDS SPREADS

0

100

200

300

400

500

600

01

/08

/20

08

01

/10

/20

08

01

/12

/20

08

01

/02

/20

09

01

/04

/20

09

01

/06

/20

09

01

/08

/20

09

01

/10

/20

09

01

/12

/20

09

01

/02

/20

10

01

/04

/20

10

01

/06

/20

10

01

/08

/20

10

01

/10

/20

10

01

/12

/20

10

01

/02

/20

11

01

/04

/20

11

01

/06

/20

11

01

/08

/20

11

01

/10

/20

11

01

/12

/20

11

01

/02

/20

12

Spain Santander BBVA

27


ITALIAN BANK AND SOVEREIGN CDS SPREADS

0

100

200

300

400

500

600

700

800

01

/08

/20

08

01

/10

/20

08

01

/12

/20

08

01

/02

/20

09

01

/04

/20

09

01

/06

/20

09

01

/08

/20

09

01

/10

/20

09

01

/12

/20

09

01

/02

/20

10

01

/04

/20

10

01

/06

/20

10

01

/08

/20

10

01

/10

/20

10

01

/12

/20

10

01

/02

/20

11

01

/04

/20

11

01

/06

/20

11

01

/08

/20

11

01

/10

/20

11

01

/12

/20

11

01

/02

/20

12

Italy Unicredit Intesa Sanpaolo Monte dei Paschi


28

3. Prospects

• At the broadest level, we are watching the interaction of two huge events:

– A secular shift in the location of economic activity; and

– The collapse of a generational expansion in private and, to a lesser extent, public sector leverage in high-income countries

– The eurozone crisis falls at the intersection of these processes

• So how might it all play out?

29

2. The prospects: global

GROWTH PROSPECTS DWINDLE FOR 2012

CONSENSUS FORECASTS FOR 2012

-2.0 -1.0 0.0 1.0 2.0 3.0 4.0

US

UK

Japan

Eurozone

Germany

France

Italy

Spain

Jun-11 Feb-12

30


GROWTH PROSPECTS POOR FOR 2013

CONSENSUS FORECASTS FOR 2013(February 2012)

0.0 0.5 1.0 1.5 2.0 2.5 3.0

US

UK

Japan

Eurozone

Germany

France

Italy

Spain

31



CONSENSUS FORECASTS FOR 2012

0.0 2.0 4.0 6.0 8.0 10.0

China

India

Asia Pacific (NB excluding Japan)

Russia

Eastern Europe

Brazil

Latin America

World

Jun-11 Feb-12

32



CONSENSUS FORECASTS FOR 2013 (February 2012)

0.0 2.0 4.0 6.0 8.0 10.0

China

India

Asia Pacific (NB excluding Japan)

Russia

Eastern Europe

Brazil

Latin America

World

33

3. Prospects: global

• Here are salient elements of global challenges :

– Accelerating de-leveraging in the private sectors of overleveraged countries;

– Rebalancing the world economy, to give over-leveraged economies export-led growth;

– Reducing fiscal deficits in high-income countries, without killing the recovery; and

– Avoiding excesses in emerging countries, despite the easy financial and monetary conditions.

34

3. Prospects: eurozone

• Here are salient elements of eurozone challenges :

– Financing with adjustment, which will take at least 5 years and possibly 10 years;

– By “adjustment”, I mean structural reforms and divergent inflation across the eurozone, with high inflation in core countries;

– The big danger is premature fiscal tightening in the periphery together with absence of adjustment in the core, which would generate prolonged recessions;

– And risks a collapse in political support for the project.

35

3. Prospects

• Some guesses about the future:

– The US will be much the most dynamic of big economies;

– Growth in high-income countries will remain weak;

– Inflation will remain contained;

– Short-term official interest rates will remain low;

– Countries with their own central banks will have low long-term bond rates; many eurozone countries will not;

– Eurozone break-up risk is significant;

– Emerging countries should continue to grow quickly, but there is a chance of crises there, too, now that finance is flowing towards them.

The shift and the shocks Martin Wolf, Associate Editor & Chief Economics Commentator, Financial...

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