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
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
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
INTRODUCTION
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
GLOBAL AND EUROPEAN MACROECONOMIC CLIMATE
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 550 55 54 53 52 51 50 49 500 450 400 350 300 250 48 PMI Composite MSCI Global (rhs) 200 Source: Bloomberg
1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 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)
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 30 25 20 15 10 5 0-5 -10-15 -20 Source: Sentix
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 THE END OF DELEVERAGING IN EUROPE 120 Domestic credit to private sector / GDP (%) 100 80 60 Euro Zone Romania 40 20 0 Source: Eurostat, NBR, BT
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 INCREASING CONVERGENCE IN EUROLAND 5 4.5 4 3.5 3 2.5 2 1.5 1 Standard deviation for GDP/capita in Euroland 2.5 2 1.5 1 0.5 0.5 0 Cyclical component Structural component (rhs) 0 Source: own estimates based on the methodology, using Eurostat, AMECO databases
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) 2 1 0-1 -2-3 -4 Source: Federal Reserve, European Central Bank, BT forecasts
ROMANIAN ECONOMY IN THE POST-CRISIS CYCLE
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ROMANIA THE CHAMPION OF GROWTH IN EU 10 GDP (%, YoY) 8 6 4 2 0-2 -4-6 Euro Zone -8 Source: Eurostat, BT forecasts Romania
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
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) 60 15 40 10 20 5 0 0-5 -20-10 -40-15 Source: Eurostat, AMECO, INS Investițiile productive (%, an/an) Consumul privat (%, an/an) -60
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) 30 20 10 0-10 -20 Industry Trade, transport, HORECA IT&C -30 Source: National Institute of Statistics (NIS)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 RETURN OF TWIN DEFICITS 10 GDP, public finance and current account 0 8-2 6 4-4 -6 2 0-2 -4-8 -10-12 -6-14 -8 GDP (%, YoY) Budget deficit (% GDP) Current account deficit (% GDP) -16 Source: AMECO, IMF, Banca Transilvania forecasts
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 7.5 15 7.0 10 6.5 5 6.0 0-5 5.5 The real wage (MA12, %, YoY) Unemployment rate (%, MA12) -10 Source: Romanian Statistics Office (INS), Banca Transilvania estimates 5.0
POLICY-MIX IN ROMANIA
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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%
AN EXPANSIONARY MONETARY POLICY 16 NBR rate vs. Taylor rule rate 14 12 10 8 6 4 2 0 TAYLORRATE NBRRATE 2006 2008 2010 2012 2014 2016 Source: the results of the methodology applied by using data from Eurostat, NBR, Bloomberg
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 MACROECONOMIC EQUILIBRIA AT RISK AGAIN 16 Investments Savings differential (% GDP) 14 12 10 8 6 4 2 0 Sursa: IMF, October 2017
BT MACROECONOMIC SCENARIO FOR ROMANIA
A LANDING IN SIGHT
CONCLUSIONS
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
THANK YOU! Ph. D. Andrei RĂDULESCU E-mail: andrei.radulescu@btrl.ro Tel: (004) 0730 727 516