Trade wars and rising protectionism: A danger for the synchronized global economic recovery?

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1 Trade wars and rising protectionism: A danger for the synchronized global economic recovery? Maja Kadievska Vojnovikj Vice-governor Sector of Financial Market Operations and Payment Systems National Bank of the Republic of Macedonia ASTANA ECONOMIC FORUM MAY 17-18, 2018

2 GOOD NEWS A broad-based pickup in GDP growth rates in led by investment; Headline inflation has picked up, core inflation remains soft, in AEs inflation still under target, but edging up in response to stronger demand; Some of the world s major central banks already did, and other are cautiously preparing to unwind the unconventional policies of the post-crisis period. The health of the financial system has been improved, but much focus was put only to restore the banking system to stability after its near-collapse in BAD NEWS The weakest post-recession recovery on record; Productivity growth remains puzzlingly weak; Wage growth remains tepid in most AEs; Inflation in asset prices; High levels of indebtedness particularly among non-financial sector; Global imbalances are still high; Technological developments such as DLT and algorithmic trading are imposing new challenges to financial regulators and markets. Financial stability risks- Argentina? Medium-term global outlook remains clouded by geopolitical tensions and rising protectionism - trade wars?! Waning support for global integration, dialogue and coordination is highly elevated!!!

3 Economic developments Solid global growth in 2017 Widest dispersed growth between countries since 2010 Growth stronger than projections, with upside surprises in H in AEs as well as EMDEs Growth pick-up is led by investment Stronger investment spending in AEs and end to fixed investment contractions in commodity exporters 1 5,0 GDP (y-o-y,%) 2,0 1,5 Contributions to the change in real GDP (p.p) 1,0 FI: commodity exporters + Brazil, Colombia, Peru 0,5-5,0 FI: other EMDEs FI: China and India -1-0,5 Fixed investment Inventories -15,0-2 World US Euro-area CESEE-12-1,0-1,5 Private consumption Public consumtion Net exports AEs EMDEs Source: IMF WEO, April 2018

4 Economic developments Headline inflation has picked up, reflecting stronger fuel prices, but core inflation remains soft in AEs inflation still under target, but edging up in response to stronger demand Wage growth remains tepid in most AEs still elevated share of workers involuntarily working part-time new entrants earning lower wages than retiring workers 2 18,0 16,0 14,0 12,0 1 Inflation (average,%) 3,0 4,0 5,0 Unemployment rate and wage growth rate in AEs (% ) Unemployment Aes (l.h. inverted scale) Wage rate AEs* 14,0 12,0 1 8,0 8,0 6,0 6,0 6,0 4,0 7,0 4,0 2,0 2,0-2,0 8,0 9,0-2,0 World US Euro-area CESEE-12 Source: IMF WEO, April 2018 *Wages according to OECD (AEs according to WEO definition excluding Macao, Malta, Puerto Rico, San Marino, Taiwan POC)

5 Economic developments Positive outlook for wages - as they are already rising in US and start to move upward in EA as well The January uptick in US hourly earnings growth was welcome sign of a firming labor market In advanced Europe, external competition, automations and technological progress may also dampen wage growth In Central and Southeastern Europe*, productivity is rising, but wages are also rising Wage growth stronger in service sectors (including professional services, wholesale and retail trade, and real estate) relative to industrial sector, which is most exposed to external competition 25,0 2 Net earnings (y-o-y change, %) Real labor productivity per person (index 2010=100) 15, , , Euro-area EU CEE+ SEE(EU)+MKD -15,0-2 US EU Euro-area CEE+ SEE(EU)+MKD 5 Source: Eurostat. Source: Eurostat. * IMF, REO, Europe hitting its stride, Nov. 2017

6 Trade developments Global trade is highly correlated to global investment - recovered strongly in 2017 Upsurge more pronounced in EMDEs reflecting improved investment growth in commodity exporters Historically, world merchandise trade volumes have grown around 1.5 times faster than GDP In 1990s ratio rose to 2.0, but fell back to 1.0 in the five years following GFC ( ) 2 15,0 World Trade and Investments (y-o-y, %) 2 Ratio of world trade growth to real GDP growth (% change and ratio) 4 15, ,0 5, ,0-5,0 Trade volume of goods and services GDP growth -2-15,0-15,0 Ratio of trade growth to GDP growth (r.h) -3 Investment Volume of imports of goods Source: IMF WEO, April 2018 Source: WTO Trade statistics and outlook, 12 April 2018

7 Trade developments Global trade was growing rapidly in the period between 1990 and 2008 After the fall in the period of GFC, global trade recovered till 2014, when again is starting to moderate US is running deficit in CA, but the Ex and Im levels are relatively low as share of GDP, so less influenced by slower global trade On contrary, EA is more reliant on global trade 6 5 Global trade developments (in % of world GDP) ,0 1 Trade developments in USA (in % of own GDP) Trade balance Exports Imports 2 15,0 1 5,0 5, , Trade developments in EA (in % of own GDP) Trade balance Exports Imports Euro area USA CESEE-12 BRICS Total trade -2 Source: IMF Direction of trade statistics data

8 Global Imbalances Global Imbalances reached the peak before GFC -then moderately narrowed and somewhat reconfigured 3,00 Current account balances (% of world GDP) 2,00 1,00 0-1,00-2,00-3,00 USA GBR Deficit EMs AE Comm Exp CHN DEM NLD JPN Other deficit EA (other) Surpluse AEs Other surplus Oil exporters Emerging and Developing Europe Source: IMF WEO Source: IMF, 2017 External sector report

9 AE Comm Exp Deficit EMs Other deficit Other surplus CHN GBR USA Euro area Surpluse AEs JPN Global imbalances The reconfiguration of global imbalances since was driven by confluence of factors sharp drop in commodity prices, particularly sharp for oil, redistributed income away from commodity exporters towards commodity importers difference in the cyclical positions among systemic economies supported net import growth and currencies in US and UK, especially relative to Euro area and Japan Current account reconfiguration (% of world GDP) Contribution to change in current account balance, -16 (in %) USA Deficit EMs Other deficit GBR AE Comm Exp EA (other) JPN Other surplus CHN Surpluse AEs NLD DEM Oil exporters Income balance GDP growth Terms of trade direct effect Net export value CA/GDP change -0,8-0,6-0,4-0,2 0,2 0,4 0,6 0,8 Source: IMF, 2017 External sector report

10 Global imbalances Net export data as share of US GDP show high US-China trade deficit ( % of US GDP), and US-Germany trade deficit growing steadily Structural changes needed both in US and net- exporters countries 1,60 1,40 Bilateral trade deficit (% of US GDP) DEM CHN JPN USA 1,20 CHN JPN DEM 1,00 Households 0,80 0,60 Business 0,40 Government 0,20 0 Mar.93 Mar.98 Mar.03 Mar.08 Mar.13 Net-exports SURPLUS SURPLUS SURPLUS DEFICIT Source: Rabobank, Global trade, markets, politics and tensions, 23 April 2018

11 Rising Protectionism New sets of tariffs introduced by US administration in 2018, risk to worsen trade tensions Direct impact is likely to be modest goods affected by the measures account only around 2% of US imports and Chinese exports and less than ½% of world trade 100 US trade balance (USD bn.) China Canada Germany Mexico Japan Total trade balance -900 Source: Reuters, Datastream

12 Globalization Trade - Benefits 7. Innovation 9. Jobs 1. Variety of goods 2. Outlet for surpluses 3. Reduction of market fluctuation s 5. Production efficiency 8. Investment 4. Lower costs 6.Resourc e specializat ion 10. Peace 3 Preferential trade agreements (annual average for the period) Source: Design of trade agreements database

13 Globalization Trade - Benefits World merchandise trade volumes have grown around 1.5 times faster than GDP Global trade is contributing to increase in living standards and reduction in poverty 35 World trade and GDP growth (index 1980=100 ) Trade volume of goods and services Source: WTO Trade statistics and outlook, 12 April 2018 GDP growth Source: Towards a Better Globalization: How Germany Can Respond to the Critics, Better Policies Series, OECD, April 2017 Cerdeiro D. and Komaromi A. Trade and Income in the Long Run: Are There Really Gains and Are They Widely Shared? IMF WP 17/231, IMF, 2017.

14 State Aid Trade defence Import tariff Trade Finance Public procurement localisation Other localisation requirement Export taxes or restriction Non tariff barrier Investment ]Measure Export incentive (other than trade finance) Rising Protectionism- G20 In Nov.2008, G20 pledged not to engage in protectionism State aid, trade defense actions, import tariff increases and trade finance are most used protectionist policy instrument Number of instruments Policy instruments used in protectionist manner since Jan.2015 total Source: CEPR, The 21 st Global Trade Alert report, 2017 In January 2015 GTA in 19 th report concluded that global trade is not growing slower it is not growing at all. The plateau in global trade coincided with a spike in protectionism.

15 Basic metals Special-purpose machinery General-purpose machinery Basic chemicals Transport equipment Fabricated metal products Electricity, gas etc. Electrical machinery Agricultural products Other chemicals Rising Protectionism Metals, machinery and chemical sectors have frequently been affected by G20 protectionism measures On worldwide level, food-related sectors enter 10 most affected by the protectionism measures Number of instruments 1200 Most affected sectors with protectionist measures of G since Jan.2015 total Source: CEPR, The 21 st Global Trade Alert report, 2017

16 Rising Protectionism - Impact Implications from protectionist policies differ for deficit and surplus countries -scenario deficit country introduces non tariff barrier for 2 years on imports from surplus country Deficit country Trade balance improves by compressing imports, REER appreciates resulting in transitory reduction of exports However, GDP declines on average by 0.1% in first 3ys,due to lower consumption and investment Surplus country Trade balance decline (0.3 of GDP after 3y) led by reduction in exports partially offset by REER depreciation Average reduction of output during first 3ys, when barriers lifted output and trade balance quickly unwind Global impact Trade restriction can narrow global imbalances but their impact is small, as real effective rates partly offset the effect of trade barriers. Moreover the world is worse off, and global GDP experiences an average decline of 0.1 percent while protectionist policies are in place. Imbalances in rest of the world are roughly unchanged. Global GDP losses increase with duration of protectionist policies, and impact on global imbalances lessens. Additionally, protectionism would likely increase global uncertainty and financial volatility with material effects on global investment. Source: IMF, 2017 External sector report, Box 6 Trade, Protectionism, Global imbalances and Growth 0,40 Trade balance 0,30 (% of GDP) 0,20 0,10 0-0,10-0,20-0,30 1,00 Exports and Imports (%) 0-1,00-2,00-3,00-4,00-5,00 0,50 0-0,50-1,00-1,50 0,20 0,10 0-0,10-0,20-0,30-0,40 REER ( - appreciation, %) GDP (%) Deficit Surplus Exports (deficit) Imports (deficit) Exports (surplus) Imports (surplus) Deficit Surplus Deficit Surplus

17 Rising Protectionism - Impact OECD estimates potential negative effects to world GDP from trade restrictions in major economies ECB simulations point to material impact on global trade and output in the event of trade tensions escalate Deutsche Bundesbank simulations indicate to possibility of considerable macroeconomic damage caused by imposition of duties, including in the imposing country Simulations point to higher prices and lower economic output in US in response to hypothetical shock of US permanently imposing general import duty of 20% on import prices with adverse effects on other countries exports and GDP Source: Towards a Better Globalization: How Germany Can Respond to the Critics, Better Policies Series, OECD, April 2017.

18 Conclusions Protectionism is pronounced since GFC Evidence that G20 resort to protectionism is getting worse over time In 2017 US, but also some EU countries (Italy) accelerated their resort to trade distortions Although the some reconfiguration in global imbalances was since, still on global level, sustained excess imbalances, amid smaller output gaps point to need for recalibrating the policy mix in excess deficit and surplus economies alike Reducing large and persistent excess global imbalances will require increased focus on structural reform policies Countries whose populations are aging, need to accumulate assets for many years that they can draw down when workers retire Young and rapidly growing economies with ample investment opportunities benefit from sustained foreign funding Current favorable juncture offers a window to enact policies and reforms that protects the upswing and rise medium-term growth to the benefit of all

19 Excess deficit countries Excess surplus countries Conclusions Countries Policies Structural reforms Countries Korea Thailand China Japan Germany Netherlands Fiscal policy to support demand Reduced reliance on mon. policy Fiscal and credit policies to support domestic rebalancing and fin. sector vulnerabilities Supportive fiscal policy Tax and spending policies to promote private investments, labor force participation and consumption Tighter monetary and easier fiscal orientation Reducing barriers to foreign competition and domestic investment in certain sectors Expanding social safety nets to discourage precautionary savings Encouraging labor force participation by the groups with relatively high consumption propensities Facilitating private sector balance sheet repair Korea Thailand China Japan Germany Netherlands Thailand Limit FX interventions and allow exchange rate flexibility Expanding social safety nets to discourage precautionary savings Thailand Canada Consolidation plan to reverse the projected strengthening of the currency and widening CA deficit Improving the skill base of workers and innovation in the export sector Canada USA Fiscal consolidation Monetary policy normalization Lowering costs of doing business USA Turkey Tighten monetary policy and build FX reserves Reducing the generosity of pension systems Turkey France Italy Spain S.Arabia Internal devaluation supported by fiscal consolidation that will help in productivity-enhancing labor market reforms Implementing labor market reforms aimed at nominal wage increases and reducing ULC France Italy Spain S.Arabia

20 THANK YOU FOR YOUR ATTENTION!