Grasshoppers, Ants and Locusts: the future of the world economy

Transcription

1 Ralph Miliband Series on the Restructuring of World Power Grasshoppers, Ants and Locusts: the future of the world economy Martin Wolf Associate editor and chief economics commentator, Financial Times Professor David Held Chair, LSE 1

2 Ants, grasshoppers and locusts: prospects for the world economy Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Ralph Miliband Lecture 16 th March 2011 London School of Economics

3 Ants, grasshoppers and locusts 3

4 Ants, grasshoppers and locusts 1. Who are our dramatis personae? 2. What lay behind the crisis? 3. Where are advanced countries now? 4. Why do emerging economies matter? 5. Why does rebalancing matter? 6. Why is the eurozone the world in miniature? 7. Conclusion 4

5 1. Who are our dramatis personae? I explain where we are in terms of ants and grasshoppers and locusts: Ants save: Surplus countries; and Western non-financial companies; Grasshoppers spend: Deficit countries; and Households in these countries. Locusts intermediate. These relationships need to change if we are to have a healthy world economy. 5

6 2. What lay behind the crisis? What we have seen is a developing country crisis at the core of the world economy. Why? 1. Undue belief in the great moderation ; 2. Emergence of global imbalances and extraordinary reserve accumulations in the late 1990s and early 2000s; 3. Accommodative monetary policy aimed at targeting inflation; 4. Low real and nominal interest rates and a reach for yield ; 5. Innovation in the financial sector, to provide notionally safe, highyielding assets 64,000 triple-a rated securities; and 6. Failures of commission (risk-weighted capital ratios and reliance on ratings) and omission (deregulation of securities and housing markets) in financial regulation. 6

7 2. What lay behind the crisis? Imbalances THE RISE OF THE IMBALANCES GLOBAL CURRENT ACCOUNT IMBALANCES - PAST AND PROSPECT (share of world GDP) 4 3 Source: IMF, WEO October US OIL DEU+JPN OCADC CHN+EMA ROW Discrepancy 7

8 2. What lay behind the crisis? Imbalances FOREIGN CURRENCY INTERVENTION GLOBAL CURRENCY RESERVES $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 China Japan Other Asia Other developing Other industrial 8

9 2. What lay behind the crisis? Imbalances US FINANCIAL BALANCES FROM 1990 (per cent of GDP) 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% 2008-I 1990-I 1990-IV 1991-III 1992-II 1993-I 1993-IV 1994-III 1995-II 1996-I 1996-IV 1997-III 1998-II 1999-I 1999-IV 2000-III 2001-II 2002-I 2002-IV 2003-III 2004-II 2005-I 2005-IV 2006-III 2007-II 2008-IV 2009-III 2010-II HOW THE US IMBALANCES EMERGED Government Financial Balance Household Financial Balance Business Financial Balance Foreign Financial Balance 9

10 2. What lay behind the crisis? Imbalances HOW NON-FINANCIAL CORPORATES SAVED NET CORPORATE SAVINGS 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% Germany Japan UK USA 10

11 What lay behind the crisis? Leverage HOW NON-FINANCIAL CORPORATES SAVED US PRIVATE SECTOR DEBT OVER GDP 300.0% 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% Households Non-financial Business Financial Sectors 11

12 2. What caused the crisis? Leverage HOW NON-FINANCIAL CORPORATES SAVED PRIVATE SECTOR DEBT (relative to GDP) 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% III Households Non-financial Business Financial Sectors 12

13 3. Where are the advanced countries now? The economic collapse was large. The rescue has been dramatic: Implicitly, the entire liabilities of the core financial system were nationalised; Monetary policy has been unprecedented; and Fiscal policy has been on a war-time footing. This has worked. But we are not back to normal. 13

14 3. Where are the advanced countries now? Carmen Reinhart and Kenneth Rogoff, in their masterpiece, This Time is Different, argue that the consequences of previous financial crises in advanced countries includes: Profound declines in output and employment: the unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years, while output falls (from peak to trough) average over 9 percent Exploding public debt: debt rises by an average of 86 percent of GDP. The main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system, but the recessions. By these standards, we have done quite well. Nevertheless,.. 14

15 3. Where are the advanced countries now? THE DECLINE IN HIGH-INCOME COUNTRIES GDP AFTER THE CRISIS Q Q Q Q Q Q Q Q Q Q Q Q France Germany Italy Japan UK US 15

16 3. Where are the advanced countries now? A WEAK RECOVERY IN 2011? SUCCESSIVE CONSENSUS FORECASTS FOR US UK Japan Eurozone Germany France Italy Spain Jan-10 Jun-10 Nov-10 Jan-11 16

17 3. Where are the advanced countries now? THE US LEVERAGE CYCLE 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% TOTAL US PRIVATE BORROWING (as per cent of GDP) Households Non-financial Business Domestic Financial Sectors Total Domestic Private

18 3. Where are the advanced countries now? FISCAL FIREPOWER USED EXPLOSION OF FISCAL DEFICITS (as per cent of GDP) Canada France Germany Italy Japan United Kingdom United States

19 3. Where are the advanced countries now? THE SOVEREIGN DEBT CRISIS NET PUBLIC SECTOR DEBT OVER GDP Source: IMF Canada France Germany Italy Japan United Kingdom United States

20 4. Why do emerging economies matter? The rapid rise of emerging countries, above all China has played a crucial role in this story Three aspects may be particularly important: Dis-inflationary shock; Real wages and the credit cycle; Global imbalances It is particularly remarkable that China has emerged as the fastest growing country in the world and the largest capital exporter. Thus it combines the twin roles of the UK and US in the late 19 th century. 20

21 4. Why do emerging economies matter? CRISIS WHAT CRISIS? Source: Federal Reserve GDP IN THE CRISIS Emerging Economies Advanced Economies 21

22 4. Why do emerging economies matter? MORE STRONG GROWTH IN 2011? SUCCESSIVE CONSENSUS FORECASTS FOR China India Asia Pacific (NB Excluding Japan) Russia Eastern Europe Brazil Latin America World Jan-10 Jun-10 Nov-10 Jan-11 22

23 4. Why do emerging economies matter? CHINA RISES TO THE TOP OF THE SURPLUS LIST CURRENT ACCOUNT BALANCES ($bn) $500.0 $400.0 $300.0 $200.0 $100.0 $0.0 -$ China Germany Japan 23

24 4. Why do emerging economies matter? HOW INVESTMENT SOARED 60.0 COMPOSITION OF CHINA'S FINAL DEMAND Private consumption Government consumption GFCF Net exports 24

25 5. Why does rebalancing matter? The crisis has left important high-income countries with damaged financial systems, overleveraged household sectors and large fiscal deficits These advanced countries are no longer in a position to absorb net exports of capital from emerging economies and the chronic surplus advanced countries will not take up the slack If damaged advanced countries are to recover, while de-leveraging their private sectors and reducing fiscal deficits, they will need higher corporate investment or a large shift in net exports, or both 25

26 5. Why does rebalancing matter? HOW PRIVATE DEFICITS COLLAPSED CHANGE IN SECTORAL BALANCES (per cent of GDP) Source:IMF, WEO October Germany Japan France Italy UK US General Government Net Capital Inflow Private 26

27 5. Why does rebalancing matter? HOW PRIVATE DEFICITS COLLAPSED FINANCIAL BALANCES IN Germany Japan France Italy UK US 2010 General Government 2010 Net Capital Inflow 2010 Private 27

28 5. Why does rebalancing matter? CURRENT ACCOUNT BALANCES 2010 ($bn) $400 $300 $200 $100 $0 $6 $6 $26 $29 -$100 -$58 -$52 -$50 -$46 -$44 -$44 -$38 -$30 -$15 -$12 -$11 -$200 -$300 -$400 -$500 -$467 -$ $70 $166 $200 $270 Germany China Japan THE CHALLENGE OF ADJUSTMENT Source: IMF. WEO database October 2010 United States Italy Brazil United Kingdom France Canada India Turkey Australia South Africa Mexico EU Argentina Indonesia Korea Saudi Arabia Russia

29 5. Why does rebalancing matter? THE GLIMMERINGS OF ADJUSTMENT BALANCE OF PAYMENTS OF EMERGING ECONOMIES ($bn) Source: IIF f 2011f Current Account Balance Official Inflows Resident Lending Private Inflows Equity Investment abroad by residents Reserves (-=increase) 29

30 6. Why is the eurozone the world in miniature? The eurozone is the world in miniature The eurozone is facing a long-running crisis It needs to restructure debt But it also needs to rebalance Can it do so? 30

31 6. Why is the eurozone the world in miniature? THE GOOD, THE BAD AND THE UGLY CURRENT ACCOUNT IMBALANCES IN THE EUROZONE (as a share of eurozone GDP) 3.0% Source: IMF, WEO, April % 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% Germany Netherlands Spain France Italy Portugal and Greece Eurozone 31

32 6. Why is the eurozone the world in miniature? ROAD TO THE FISCAL DEFICITS Source: IMF, WEO, April 2010 GENERAL GOVERNMENT BALANCE (as per cent of GDP) Portugal Ireland Spain Greece 32

33 6. Why is the eurozone the world in miniature? ROAD TO THE FISCAL DEFICITS Source: OECD NET PUBLIC DEBT (ratio to GDP) Greece Ireland Portugal Spain 33

34 6. Why is the eurozone the world in miniature? THE GOOD, THE BAD AND THE UGLY NUMBER OF BREACHES OF THE 3 PER CENT DEFICIT RULE Greece Italy France Germany Portugal Austria Source: Unicredit Ireland Netherlands Spain Belgium Finland Luxembourg 34

35 6. Why is the eurozone the world in miniature? THE GOOD, THE BAD AND THE UGLY SPREADS OVER BUNDS /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/ /01/ /07/2010 Portugal Italy Ireland Greece Spain 35

36 6. Why is the eurozone the world in miniature? LOST COMPETITIVENESS IN THE PERIPHERY UNIT LABOUR COSTS (Total economy relative to Germany (Q = 100)) Feb-99 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Eurozone Spain France Ireland Italy 36

37 7. Conclusion The world economy has changed in big ways: End of private leverage cycle in high-income countries; End of reliance on US as borrower and spender of last resort; Emergence of huge developed country sovereign debt problems; Big challenge of global rebalancing and returning to stable global growth. Grasshoppers become antlike and ants become grasshopperlike and locusts behave themselves! Is this too much to hope for? Perhaps 37

38 Ralph Miliband Series on the Restructuring of World Power Grasshoppers, Ants and Locusts: the future of the world economy Martin Wolf Associate editor and chief economics commentator, Financial Times Professor David Held Chair, LSE 38