RISI EUROPEAN CONFERENCE (Barcelona, 6 March 2018) The European Economy Things look good just now. Can this last? Andrea Boltho Magdalen College University of Oxford and Oxford Economics
CONCLUSIONS OF RISI'S AMSTERDAM CONFERENCE 7 March 2017 THE EUROPEAN ECONOMY JUST NOW America, China and even Japan are growing, while several large emerging markets (e.g. Brazil and Russia) are recovering Activity is also rising in Eastern Europe, in Northern Europe, in the UK and even in the Eurozone In other words, all is well! Except that there is huge uncertainty due to past and possibly future political shocks
AND HOW ABOUT NOW? As we just heard, the world outside Europe seems to be doing well America and China are both growing and so are most Emerging Markets and even Japan Across Europe activity is strengthening. The Eurozone's 2½ per cent GDP growth in 2017 was the fastest since 2007 and 2018 could deliver something similar Nor does inflation look like posing a threat Fiscal and monetary policy will become less accommodating, but only gradually What cannot be ruled out is renewed currency appreciation On balance, however, the good times should last Yet, eventually, a recession will come!
64 PMI INDEX - LAST YEAR MANUFACTURING SECTOR (3 months moving averages) 64 PMI INDEX - THIS YEAR MANUFACTURING SECTOR (3 months moving averages) Germany 62 62 60 60 58 56 Germany 58 56 Italy France U.K. 54 U.K. Spain 54 Spain 52 Italy 52 50 France 50 48 Jan Apr. July Oct. Jan Apr. July Oct. Jan -15-16 -17 48 Jan 15 April July Oct. Jan April July Oct. Jan 17 April July Oct. Jan -16 16-18
5 EUROPE'S RECOVERY (GDP; per cent changes; 3 qtrs. mv. avrgs.) Eastern Europe* EUROPEAN GDP GROWTH (GDP; per cent changes; 3 qtrs. mv. avrgs.) 4 4 3 Spain Germany 2 3 Scandin.** France 2 Euro Zone 1 Italy U.K. 0 1 EuroZone feb. 17 forecast -1 0-2 -1 2012 2013 2014 2015 2016 2017 2018 2019 2020 * Exluding Russia. ** Denmark, Finland, Norway, Sweden. Source: Oxford Economics. -3 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Oxford Economics.
W.EUROPEAN GDP AND PULP & PAPER PRODUCTION (% changes; 3 qtrs. mov. avrgs.) W.EUROPE GDP AND PULP & PAPER PRODUCTION (average annual percentage changes) 8 GDP Pulp & Paper 4 1980s 2.3 3.0 GDP 1990s 2.1 2.7 0 Pulp & Paper 2000s 1.5 1.6-4 2010s 1.6 0.4-8 Source: Oxford Economics. 2005 2007 2009 2011 2013 2015 2017 2019 Source: Oxford Economics.
INFLATION (CPI; per cent changes) 3 U.K. 2 Euro Zone 1 0 2014 2015 2016 2017 2018 2019 2020 Source: Oxford Economics.
WHY SUCH A GENERALIZED IMPROVEMENT? The role of policies Less fiscal austerity Easy monetary policy The absence of major negative shocks
OECD ESTIMATES OF FISCAL POLICY IMPACT IN 2010-19 (changes in the structural balance in % of GDP) 1 Eurozone OECD ESTIMATES OF FISCAL POLICY IMPACT IN 2010-19 (changes in the structural balance in % of GDP) 1 0.5 Scandinavia* 0 0.5 0-0.5 2010-16 2017 2018 2019 ann.aver. * Denmark, Finland, Norway, Sweden. Source: OECD, December 2017. OECD ESTIMATES OF FISCAL POLICY IMPACT IN 2010-19 (changes in the structural balance in % of GDP) 1 United Kingdom 0.5 0-0.5 2010-16 2017 2018 2019 ann.aver. Source: OECD, December 2017. -0.5 2010-16 2017 2018 2019 ann.aver. Sources: OECD, December 2017; IMF, October 2017 (for 2017).
6 SHORT-TERM INTEREST RATES 5 4 3 2 United States 1 U.K. 0 Eurozone 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
INTEREST RATES - SHORT INTEREST RATES - LONG 2 3 UK UK Euro Zone 2 1 Germany 1 Eurozone 0 0 2014 2015 2016 2017 2018 2019 2020 Source: Oxford Economics. 2014 2015 2016 2017 2018 2019 2020 Source: Oxford Economics.
1.4 EURO-DOLLAR EXCHANGE RATE (euros per dollar) 1.3 Forecast Feb.2018 1.2 1.1 Forecast Feb.2017 1 2012 2014 2016 2018 2020 Source: Oxford Economics.
WESTERN EUROPE - GROWTH OF GDP (three years moving averages) 4 Eurozone UK Scandinavia 2 0 1970 1980 1990 2000 2010
RECESSIONS SEEM INEVITABLE (or expansions do not die of old age) Recessions in Western Europe: 1974-1975 1981-1982 gap 7 years 1992-1993 gap 11 years 2002-2003 gap 10 years 2008-2009 gap 6 years 2012-2013 gap 4 years 2020-2021?? gap 8 years??
WHAT COULD GO WRONG? An acrimonious Brexit Too small to matter A trade war (or Trump goes mad) Rather unlikely (but not impossible) Renewed Eurozone tensions Possible A new financial crisis More than possible 4.0 Anything else? North Korea The Middle East Who knows...
BREXIT - THE SHORT-RUN EFFECTS Inevitably, Brexit has had some negative effects on UK activity so far In particular, the sharp fall in the pound's value has raised inflation thereby reducing purchasing power and lowering the growth of private consumption In addition, firms in the tradeable sector are postponing investment in view of the uncertainties surrounding the final outcome of the negotiations
3 UK GDP GROWTH (% changes; 3 quarter moving averages) pre-brexit forecast (June 2016) DIFFERENCES 2016-2020 Jun.16 Jan.18 (forecasts) GDP growth rate 2.2 1.8 difference - 0.4 % per annum 2 Present forecast (Feb. 2018) 2017 Q4 Jun.16 Jan.18 (estimates) GDP ( bn.) 496.2 492.7 difference - 3.5 bn equals - 275 mil. per week 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Oxford Economics.
BREXIT - THE LONGER-RUN IMPACT There is still a lot of uncertainty on what the final settlement will look like, but even if one were to assume a "hard" Brexit with no trade agreement, most estimates suggest that the macro-economic effects for the UK will not be catastrophic. Oxford Economics, for instance, concludes, that even in its most unfavourable scenario, UK GDP would be only 3.9% lower in 2030 than it would otherwise have been The OECD has presented more pessimistic conclusions. In its most extreme case, 2030 GDP could be 7.7% lower than otherwise. And the UK government, has more recently 4.0 put forward a -8% figure by 2032 In other words, growth over the next 10 to 15 years could be cut by 0.3 to 0.7 per cent per annum For the rest of Europe, the negative effects would be rather small, with the exception of Ireland
A TRADE WAR (OR TRUMP GOES MAD) He has already taken the US out of the Trans Pacific Partnership He has imposed (or is imposing) tariffs on washing machines, solar panels, steel and aluminium So far these are mere pinpricks Assume he now takes the US out of NAFTA And imposes tariffs of 45% on Chinese imports, of 35% on Mexican imports and of 20% on Korean imports 4.0 And imposes tariffs, or other restrictions, on imports from the European Union Everybody retaliates Consequences? Not a world recession but certainly a slowdown
A TRADE WAR SCENARIO (per cent differences in GDP forecasts from central scenario) 2018 2019 2020 United States -0.2-0.7 0 Eurozone -0.4-0.3 0.2 China -0.5-0.6-0.3 World -0.2-0.5-0.1 Source: Oxford Economics.
POTENTIAL EURO TENSIONS The Eurozone remains a fragile construction While European unification led to rapid income per capita convergence between 1960 and 2000, this has now stopped and monetary union may have something to do with this Reforming EMU will be difficult given weak (or non-existent) governments in Germany and Italy 4.0 Tensions on financial markets could thus re-emerge forcing weaker countries into renewed austerity (as was the case in 2012-2013)
EURO ZONE INCOME DIFFERENTIAL (GDP per capita in purchasing power parity) 90 EZ South*/ EZ North** 80 70 60 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 * Italy, Spain, Greece, Port. **Germany, France, Benelux, Austria, Finl. Sources: Maddison, Conference Board, Oxford Economics.
GROWTH OF PRODUCTIVITY (GDP per employed; 1999 Q.1 = 100) GROWTH OF EARNINGS (1999 Q.1 = 100) 115 EZ North* 150 EZ South** 140 110 EZ North* 130 105 EZ South** 120 110 100 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 * Germ., France, Benelux, Austr., Finl. ** Italy, Spain, Greece, Portug. 100 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 * Germ., France, Benelux, Aust., Finl. ** Italy, Spain, Greece Portugal.
REAL EXCHANGE RATES (1999 Q.1 = 100) 20 UNEMPLOYMENT (in percent of the labour force) 130 EZ South** Eurozone South** 120 15 110 EZ North* 10 100 Eurozone North* 90 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 * Germ., France, Benelux, Aust., Finl. ** Italy, Spain, Greece Portugal. Source: IMF 5 2007 2009 2011 2013 2015 2017 * Germ., France, Benelux, Aust., Finl. ** Italy, Spain, Greece Portugal. Source: Oxford Economics.
THE ITALIAN SITUATION As expected, the 4th March elections have not delivered a real majority Whatever coalition emerges, if any, it is unlikely to tackle Italy's two main problems: absence of productivity growth and massive public debt Three of the four leading parties promised both higher public expenditure and lower taxes! Expect sluggish growth at best and, possibly, renewed crises
6 SHORT-TERM INTEREST RATES 5 4 3 Sweden 2 Eurozone United States 1 U.K. 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
EUROPEAN HOUSE PRICES* (1995 Q1 = 100) Sweden 220 U.K. 170 France Spain 120 Italy Germany 70 1995 1998 2001 2004 2007 2010 2013 2016 * In real terms.
WORLD STOCK MARKETS (1995 Q1 = 100) Sweden 500 400 Standard & Poor 300 EuroStoxx FTSE100 200 100 1995 1998 2001 2004 2007 2010 2013 2016
STOCK MARKETS (1 January 2017 = 100) 130 125 S&P 500 120 115 Euro Stoxx 110 105 FTSE 100 95 1.1.17 15.3.17 13.6.17 6.9.17 29.11.17 28.2.18
CONCLUSIONS The world economy is at present enjoying a generalized upswing Europe is, possibly, in a better position than many emerging markets (weighed down by high debt levels), or the United States (weighed down by Trump's unpredictability) Policies are accommodating, confidence is rising, unemployment is declining and while populism is still strong, this may not affect 4.0 the economy unduly Continuing solid growth in Europe is thus feasible for a number of years. But be prepared for possible shocks