MONETARY AND FISCAL POLICIES DURING THE NEXT RECESSION

Transcription

1 OXYGEN EVENTS CONFERENCE GALA PERFORMANCE 2017 MONETARY AND FISCAL POLICIES DURING THE NEXT RECESSION - THE CASE OF ROMANIA - Ph.D. Andrei RĂDULESCU Senior Economist, Banca Transilvania Researcher, Institute for World Economy, Romanian Academy BUCHAREST 17 th NOVEMBER 2017

2 MOTTO(S) There have been three great inventions since the beginning of time: fire, the wheel, and central banking. Will Rogers Victorians heard with grave attention that the Bank Rate had been raised. They did not know what it meant. But they knew that it was an act of extreme wisdom. John Kenneth Galbraith "3.0 percent means 3.0 percent and not 3.2 percent. Theo Waigel "The four most dangerous words in finance are 'this time is different'. Martin Wolf

3 CONTENT I. INTRODUCTION II. GLOBAL AND EUROPEAN MACROECONOMIC CLIMATE III. ROMANIAN ECONOMY IN THE POST-CRISIS CYCLE IV. POLICY-MIX IN ROMANIA V. BT MACROECONOMIC SCENARIO FOR ROMANIA VI. CONCLUSIONS

4 INTRODUCTION

5 END-OF-CYCLE POLICY-MIX CHALLENGES The accumulation of maturity signs for the global post-crisis cycle Romanian economy highly integrated with the EU economic cycle Strong divergence between the overheating consumption and sluggish investments The acceleration of the economy accompanied by the return of twin deficits An expansionary and pro-cyclical, but unsustainable policy-mix At present there lacks maneuver room in case of shocks A rebalance of the policy-mix starting 2018 very likely Several challenges in terms of real economic convergence and development

6 GLOBAL AND EUROPEAN MACROECONOMIC CLIMATE

7 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 STRONG GLOBAL MACRO-FINANCIAL CLIMATE 56 Real economy vs. financial economy PMI Composite MSCI Global (rhs) 200 Source: Bloomberg

8 US ECONOMY THE MATURITY OF THE CYCLE 4.5% Labor productivity and employment in US 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Labor productivity (%, YoY) -1.0% Source: BT based on US Bureau of Labor Statistics (BLS) Employment (%, YoY)

9 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 EU ECONOMY AT THE PEAK OF THE CYCLE 35 Investor confidence in Euro Zone Source: Sentix

10 THE END OF DELEVERAGING IN EUROPE 120 Domestic credit to private sector / GDP (%) Euro Zone Romania Source: Eurostat, NBR, BT

11 INCREASING CONVERGENCE IN EUROLAND Standard deviation for GDP/capita in Euroland Cyclical component Structural component (rhs) 0 Source: own estimates based on the methodology, using Eurostat, AMECO databases

12 Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 UNSUSTAINABLE MONETARY DIVERGENCE 3 Monetary policy rate differential (FED vs. ECB) Source: Federal Reserve, European Central Bank, BT forecasts

13 ROMANIAN ECONOMY IN THE POST-CRISIS CYCLE

14 ROMANIA THE CHAMPION OF GROWTH IN EU 10 GDP (%, YoY) Euro Zone -8 Source: Eurostat, BT forecasts Romania

15 THE PEAK OF THE CYCLE Romanian GDP accelerated to 5.9% YoY in 1H2017 (and 7% YoY during 9M2017), the highest paces since 2008, evolution supported by the expansionary policy-mix Household consumption up by 7.6% YoY, due to the increase of the real disposable income, the dynamics of the credit markets and the wealth effect However, the fixed investments contracted by 0.3% YoY in 1H2017, given the increase of the labor costs, the decline of the public investments and the policymix related uncertainties and distortions Negative contribution of the net foreign demand The intensification of the twin deficits Unemployment at record low levels The inflexion of the YoY CPI dynamics NBR ready to start a new monetary cycle

16 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q 17 STRONG CONSUMPTION vs. LOW INVESTMENTS 20 Private consumption vs. fixed investments (%, YoY) Source: Eurostat, AMECO, INS Investițiile productive (%, an/an) Consumul privat (%, an/an) -60

17 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 IT&C THE STAR OF THE ECONOMY 40 Value added by sector (%, YoY, MA4) Industry Trade, transport, HORECA IT&C -30 Source: National Institute of Statistics (NIS)

18 RETURN OF TWIN DEFICITS 10 GDP, public finance and current account GDP (%, YoY) Budget deficit (% GDP) Current account deficit (% GDP) -16 Source: AMECO, IMF, Banca Transilvania forecasts

19 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 LABOR MARKETS (OVER)HEATING 20 Labor markets climate The real wage (MA12, %, YoY) Unemployment rate (%, MA12) -10 Source: Romanian Statistics Office (INS), Banca Transilvania estimates 5.0

20 POLICY-MIX IN ROMANIA

21 CONVERGENCE GOES ON WITH LOWER PACE 9.0% 8.0% The dynamics of the structural component of GDP/capita (YoY) Romania Euro Area 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Source: the results of the methodology applied by using data from Eurostat and AMECO

22 STRONG PRO-CYCLICAL FISCAL POLICY 6% Output gap vs. structural budget deficit 0% 4% -1% 2% 0% -2% -2% -3% -4% -4% -6% -8% -10% -5% -6% Output gap (pp) Structural budget deficit (% GDP) (rhs) -12% Source: the results of the methodology applied by using data from Eurostat and AMECO -7%

23 AN EXPANSIONARY MONETARY POLICY 16 NBR rate vs. Taylor rule rate TAYLORRATE NBRRATE Source: the results of the methodology applied by using data from Eurostat, NBR, Bloomberg

24 MACROECONOMIC EQUILIBRIA AT RISK AGAIN 16 Investments Savings differential (% GDP) Sursa: IMF, October 2017

25 BT MACROECONOMIC SCENARIO FOR ROMANIA

26 A LANDING IN SIGHT

27 CONCLUSIONS

28 MANEUVER ROOM NEEDED FOR NEXT CRISIS A policy-mix rebalancing needed in order to build maneuver room for the end of cycle The financing costs would be higher than forecasted in the mid-run if the rebalancing is postponed The degree of freedom in terms of monetary policy is relatively low, due to the strong macro-financial integration of Romania with the Euroland and the high speed of capital flows, in a context of unprecedented expansionary ECB policy Without a rethink of the fiscal policy there increases the risks for Excessive Deficit Procedure, with negative consequences for the sovereign rating A stronger coordination of monetary and fiscal policies important to avoid boom/bust Structural reforms needed for sustainable development and for a successful integration in OECD and Euro Area in the future

29 THANK YOU! Ph. D. Andrei RĂDULESCU Tel: (004)