Seven Lean Years Explaining Persistent Global Economic Weakness 9 June 2015 Bank of Canada and European Central Bank Conference Tim Lane Deputy Governor Bank of Canada
The global economy remains weak and divergent Global growth rates below previous trend, with series of downside surprises Major groups of economies are on divergent paths Inflation persistently low in many economies Rival or complementary--explanations Prolonged fallout from the crisis Procyclical policy responses and other events Structural decline in potential growth rates These explanations have very different policy implications 2
Serial disappointment World GDP growth - Realised vs IMF forecasts (%, Annual world GDP growth) 6 % 5 4 3 2 1 Realised Forecast 0-1 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source : IMF WEO Last observation: October 2014 3
Inflation has been persistently slow in many advanced economies CPI inflation, Year-over-year percentage change % 6 5 3 2 0-2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-3 Canada United States Euro area Japan United Kingdom Note: Starting in April 2014 and ending in March 2015, Japanese inflation has been adjusted downward by 2 percentage points, based on Bank of Japan estimates of the effect of the increase in the value-added tax Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Japan Ministry of Internal Affairs and Communications, Bank of Japan, U.K. Office for National Statistics Last observation: April 2015 4
Nominal long-term interest rates 10-year government yields, monthly averages, % % 8 6 4 2 0 2000 2005 2010 2015 UK Germany US Canada 5
Investment has been on a lower track Investment as a share of GDP % 30 28 26 24 22 20 18 16 14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % 30 28 26 24 22 20 18 16 14 Canada United States Euro area Japan Note: Investment calculated as gross fixed capital formation Source : StatCan, BEA, EUROSTAT, CAO Last observation: 2014 Q4 6
Global trade has weakened post-crisis World merchandise trade as a share of GDP and investment Shares calculated from real values in 2005 USD. Annual data. % 250 % 60 230 55 210 50 190 45 170 40 2000 2003 2006 2009 2012 World trade/ investment (LHS) World trade/gdp (RHS) Note: World gross capital formation is used to represent investment. Sources: WDI, IMF IFS, IMF DoT Last observation: 2013 7
Commodity prices $US 150 Index 500 130 450 110 400 90 350 70 300 50 250 30 200 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 150 WTI crude oil (left axis) Brent crude oil (left axis) Non-energy commodity price index (right axis) Source: Bloomberg and Bank of Canada Last observation 1/6/2015 8
Fallout from the crisis It is well-known that recessions following financial crises have persistent effects Reinhart and Rogoff Balance-sheet repair deleveraging Many initial forecasts did not take this experience to heart Deleveraging process has been protracted, with varying results In the US, private sector debt has been brought down while public sector debt continues to mount In the EU, compressed spending did not prevent a further increase in household indebtedness Prolonged uncertainty 9
Deleveraging Domestic debt remains elevated in the euro area (Cumulative debt increase since 2001, as a share of GDP) 120 100 80 60 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-20 US euro area 10
Procyclical policy During the crisis, coordinated fiscal expansion key to preventing another Great Depression Starting in 2010, fiscal authorities in many countries started return to balance in some cases by choice Left monetary policy as only game in town Another perspective: asymmetric global rebalancing The deficit countries do most of the adjustment Financial reforms reinforced financial institutions ongoing postcrisis balance sheet adjustment 11
Fiscal consolidation Structural balance as a per cent of GDP in advanced economies % of GDP 2 2 0 0-2 -2-4 -4-6 -6-8 -8-10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Advanced economies aggregate United States Japan Canada Euro Area -10 Source: IMF WEO Notes: 2015 and 2016 are projected values by the IMF. The chart uses an aggregate series weighted by the IMF PPP weights. The advanced economies in the aggregate include: US, Japan, Germany, France, Italy, Spain, Australia, Canada, Denmark, Ireland, Korea, Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, United Kingdom 12
Fiscal consolidation has delayed the recovery Estimated effects of fiscal consolidation on the output gap % Output gap 2.0 Output gap without consolidation 1.0 0.0-1.0-2.0-3.0-4.0-5.0 2011 2012 2013 2014 2011 2012 2013 2014 United States Euro area Source : Staff calculation Last observation: 2014 13
Consequences of asymmetric adjustment 14
Euro area crisis and adjustment Three dimensions to crisis Asymmetric balance-of-payments adjustment Fiscal crisis Financial crisis Fragile confidence limited room to maneuver 15
Euro area rebalancing Current account balances pre and post crisis average $US billions 60 50 40 2005-2007 2010-2013 30 20 10 0-10 -20 Euro area Germany Periphery Source: IMF 16
Labour costs Nominal Unit Labor Costs Index: 2000=100 150 accumulation of imbalances only Spain has improved 150 140 140 130 130 120 120 110 110 100 100 90 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Euro area France Germany Italy Spain Source : Eurostat Last observation: 20014Q4 17
Financial fragmentation in euro area Interest rates have diverged in the euro area New loans, quarterly, % % % 6.0 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Italy Spain Euro Area Germany Source: ECB Last observation: 2015 Q1 18
Loan growth in the euro area has been anemic since the financial crisis Business loans in the euro area remain at a depressed level (Index: 2010=100) 104 102 100 98 96 94 92 90 2008 2009 2010 2011 2012 2013 2014 2015 Business loans Housing loans 19
The unemployment rate remains elevated Unemployment rates (%, annual data) % 13 12 11 10 9 8 7 6 5 4 2004 2006 2008 2010 2012 2014 United States Euro area Source: OECD Last observation: 2014 20
Events, dear boy, events Fiscal cliff Russia/Ukraine Arab Spring, Libya, Egypt, ISIS, Gaza South China Sea Japanese tsunami, floods in Thailand North Korea The Occupy movement Polar Vortex etc., etc. 21
Structural factors Meanwhile, potential growth also slowing for reasons largely independent of) the post-crisis adjustment Demographics Income inequality Increasing share of world GCP in EMEs with high savings rates Maturation of Chinese economy Secular stagnation arguments take these factors to an extreme 22
Long-run growth prospects have been revised down across advanced economies Average of GDP growth forecast 6-10 years out % 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Canada Euro area UK US Japan Source: Concensus Economics 2005 2015 23
Demographics: aging populations Share of population aged 65+ Labour force growth % % 35 2.5 30 2.0 25 1.5 1.0 20 0.5 15 0.0 10 5 Forecast -0.5-1.0-1.5 Forecast 0 1995 1900 2005 2010 2015 2020 2025 2030-2.0 1995 2000 2005 2010 2015 2020 2025 2030 Euro area US Japan China Euro area US Japan China Source: United N population statistics 24
Savings glut? Global, Advanced Economies and Emerging Market Savings Per cent of GDP % 35 30 25 20 1980 1985 1990 1995 2000 2005 2010 15 World Advanced economies Emerging markets Sources: IMF, World Economic Outlook, April 2014 Last observation: 2013 25
Slowing Chinese growth Real GDP Growth in China (Y/Y, % GDP growth) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: Haver and Consensus Forecasts (May 11, 2015) 26
Conclusion Appears to be some truth to all of competing explanations Implies that we need policy action across several fronts Structural reforms may help address longer-term growth potential But deficient demand, reflecting post-crisis adjustments, also needs to be addressed 27