URBAN LAND INSTITUTE 2012 ULI FALL MEETING (Denver, 18 October 2012) The Global Economic Outlook Dark clouds on the horizon Andrea Boltho Magdalen College University of Oxford Oxford Economics and REAG
CLOUDS ON THE HORIZON Rising food and oil prices? Unpredictable A Chinese hard landing? Rather unlikely A US fiscal policy disaster? Improbable A Euro breakdown? Unfortunately possible
STOCK MARKETS (1 June 2007 = 100) 100 S&P 500 90 FTSE 80 70 EuroStoxx50 60 50 Nikkei 40 2007 2008 2009 2010 2011 2012
COMMODITY PRICES (January 2006 = 100; in dollars) Food commds. 200 Oil 170 140 110 80 50 2006 2007 2008 2009 2010 2011 2012
60 CHINA'S PMI INDICES (3 months moving averages) GOVERNMENT DEBT/GDP RATIOS Official 100 United States Eurozone 55 80 50 60 Private (HSBC) 40 45 20 China 40 2006 2007 2008 2009 2010 2011 2012 0 2000 2002 2004 2006 2008 2010 2012 2014
105 CHINA - HOUSE PRICES* (2010 = 100) 100 95 90 85 80 2006 2007 2008 2009 2010 2011 2012 * In real terms.
110 CONSUMER CONFIDENCE (3 months moving averages) 0-5 60 PMI INDICES (3 months moving averages) United States 90 Eurozone (r.h.scale) -10 50-15 70-20 Eurozone -25 40 50 United States (l.h.sc.) -30 30 2006 2007 2008 2009 2010 2011 2012-35 30 2006 2007 2008 2009 2010 2011 2012
US AND EUROZONE HOUSEHOLD DEBT/GDP RATIOS 150 US AND EUROZONE CORPORATE* DEBT/GDP RATIOS 100 United States Eurozone 130 80 Eurozone 110 60 90 United States 40 70 20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 50 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 * Non-financial corporations.
GROWTH IN LENDING TO THE BUSINESS SECTOR (per cent changes; 3 mnths. mov.avrgs.) 20 United States 15 10 Eurozone 5 0-5 -10-15 -20 2005 2006 2007 2008 2009 2010 2011 12
US - HOUSE PRICES* (2000 = 100) EUROZONE - HOUSE PRICES* (1980 = 100) 170 180 150 160 130 140 110 120 1980-2000 trend line (1.5% p.a.) * 90 1968-2000 trend line (0.35% p.a.) 100 70 1970 1975 1980 1985 1990 1995 2000 2005 2010 *BIS (1968-75); OFHEO (1975-87); Schiller-Case (1987-2011). In real terms. * Jan.-July 2012. 80 1980 1985 1990 1995 2000 2005 2010 *In real terms. * 1st half 2012. *
EUROPE - A NEW RECESSION? 4 (GDP; per cent changes; 3 qtrs. mv. avrgs.) United States 2 0 Eurozone -2-4 2007 2008 2009 2010 2011 2012 2013 2014 Source: Oxford Economics.
RECESSION AND RECOVERY 107 (GDP; levels; 2007 Q1 = 100) Sweden Germany 102 USA Euro Zone U.K. Japan 97 Italy 92 2007 2008 2009 2010 2011 2012
THE EUROZONE'S PROBLEMS The immediate problem is one of deficits and debt in a number of Southern countries. These are seen as excessive by financial markets The medium-run problem is one of insufficient competitiveness in a number of, again, Southern countries And there could be an even longer-run problem that has to do with different and diverging governance standards between Northern and Southern Europe
GOVERNMENT DEBT/GDP RATIOS GOVERNMENT DEBT/GDP RATIOS 180 Greece 160 160 140 140 Italy 120 120 100 Netherlands Belgium 100 Ireland 80 Austria 80 Portugal 60 Germany 60 Spain 40 Finland 40 20 20 0 1990 1996 2002 2008 2014 1990 1996 2002 2008 2014
HOW TO DEAL WITH EXCESSIVE DEFICITS AND DEBT? The easiest way to eliminate both is to have growth and inflation. Unfortunately, neither are forthcoming The standard answer is, therefore, to enforce austerity: cut public expenditure and raise taxation The problem with this medicine is that it depresses economic activity: as a ratio to GDP deficits and debt either do not decline or they may even increase
REDUCTIONS IN PUBLIC DEBT (in percentage points of GDP) USA (1946-1980) UK (1947-1991) Total reduction 89 212 due to: Fiscal policy -21-124 Growth 56 98 Inflation 53 228 Source: W.Buiter.
4 GREEK AND EUROZONE GDP GROWTH (per cent changes; 3 years mov. avrgs.) Greece 20 15 GREECE'S PUBLIC DEFICIT AND DEBT (in per cent of GDP) Debt (r.h.sc.) 200 180 2 0 Eurozone 10 5 Includes significant "hair cut"* in 2012 160 0-2 140-5 -4-10 120-15 -6 2004 2006 2008 2010 2012 2014 Deficit (l.h.sc.) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 100
WHAT ELSE CAN GREECE DO? Leaving the euro seems, by now, to be a distinct possibility The hope would be to replicate Argentina's experience... but Argentina's conditions at the time were very different from Greece's conditions today - hence huge risks In either case, if Greece leaves there is a high danger of contagion
GREECE AND ARGENTINA (GDP; levels; 2011 Q1 or 2000 Q1 = 100) 110 Argentina (2000-05) 100 90 * Greece in EMU (2011-16) 80 2000 2001 2002 2003 2004 2005 * Argentina's devaluation: January 2002.
CAN THE EUROPEAN CENTRAL BANK PREVENT CONTAGION? Yes in theory, since the ECB can print money and buy public sector debt (it has unlimited firing power) The recently announced OMT (Outright Monetary Transactions) programme goes in this direction But many in Germany (and elsewhere) are opposed to this. Why? Two major reasons: i) Fear of future inflation ii) Fear of future indiscipline and profligacy in the weaker countries
ITALY AND SPAIN - BOND YIELD DIFFERENTIALS* 26.7.12: Draghi's "Whatever it takes" 6 Spain- Germ. 6.9.12: OMT Announcem. 5 Italy- Germ. 4 3 June July August September Oct. * Difference between yields on 10 year Spanish or Italian Euro bonds and equivalent German 10 year Eurobonds.
2,600 U.S. - MONETARY BASE AND INFLATION Monetary base ($ bill.) 6 5 2,300 2,000 Inflation (% ch.; r.h.sc.) 4 3 1,700 2 1,400 1 1,100 800 August 2008: 843 bn August 2012: 2,653 bn 0-1 500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-2
WHAT HAPPENS IF CONTAGION SPREADS? Severe consequences in the short-run (and not just in the Eurozone) One possible scenario would be for Southern Europe to return to separate currencies, while Northern Europe retains the Euro Introducing new currencies is difficult. Banks and financial markets may have to be closed; deposits might have to be frozen; capital control would seem inevitable; currencies would swing wildly (with the Northern Euro rising sharply); contracts would have to be renegotiated, etc., etc. The economic costs of this could be huge and the turmoil could well last for at least two-three years
EMU BREAKDOWN (GDP; per cent changes; 3 qtrs. mv. avrgs.) 4 Central scenario United States 2 Euro zone 0-2 -4-6 EMU breakdown 2007 2008 2009 2010 2011 2012 2013 2014 2015
US - MAJOR EXPORT MARKETS 2011 $ bn. in % of total World 1481 100.0 Canada 281 19.0 Mexico 198 13.3 Euro Z. 197* 13.3 China 104 7.0 Japan 66 4.5 * Or 1.5 per cent of US GDP.
GROWTH OF EARNINGS (1999 Q.1 = 100) Spain PRODUCTIVITY GROWTH (GDP per employee; 1999 Q.1 = 100) Germany 140 Italy 110 France France 130 105 120 Italy Spain Germany 100 110 100 1999 2001 2003 2005 2007 2009 2011 95 1999 2001 2003 2005 2007 2009 2011
TOTAL REAL EXCHANGE RATES (1999 Q.1 = 100) Italy 135 125 Spain 115 France 105 95 Germany 85 75 1999 2001 2003 2005 2007 2009 2011 Source: IMF. United States
EUROZONE CURRENT ACCOUNT BALANCES (in per cent of GDP) 6 "North"* 4 2 0-2 -4-6 "South"** 2008 2010 2012 2014 2008 2010 2012 2014 * Germany, Netherlands, Belgium, Austria and Finland. ** Italy, Spain, Greece and Portugal.
WHO WILL FINANCE ALL THESE DEFICITS? Any deficit must be financed In existing monetary unions the deficits of uncompetitive areas either do not persist, because wages decline (e.g. in the US) or, if they persist, they are financed by the country's richer regions (e.g. in Italy, or in Spain, or in Belgium, etc.). No such mechanism exists in the Eurozone and public opinion in the richer countries is hardly likely to favour one! In its absence, either the "weak" regions/ countries improve their competitiveness, or they are condemned to low growth/ high unemployment
30 EMU - NORTH-SOUTH CONVERGENCE ESTIMATES OF SIZE OF SHADOW ECONOMY (in per cent of GDP) 1998-2000 25 20 15 10 5 0 USA EZ Nth.EZ Sth. Source: F.Schneider.
30 EMU - NORTH-SOUTH CONVERGENCE ESTIMATES OF SIZE OF SHADOW ECONOMY (in per cent of GDP) 1998-2000 2010-11 25 20 15 10 5 0 USA EZ Nth.EZ Sth. Source: F.Schneider. USA EZ Nth.EZ Sth.
6 EMU - NORTH-SOUTH CONVERGENCE PERCEPTIONS OF CORRUPTION 1999-2000 2010-11 4 2 0 USA EZ Nth. EZ Sth. USA EZ Nth. EZ Sth. Source: Transparency International.
GOVERNANCE STANDARDS PRESENCE OF THE RULE OF LAW (deviations from international average) 2 1998-2000 2009-10 1.5 1 0.5 0 USA EZ Nth.EZ Sth. USA EZ Nth.EZ Sth. Source: World Bank.