How Serious of a Threat Is Global Deflation?

Transcription

1 How Serious of a Threat Is Global Deflation? Nariman Behravesh Farid Abolfathi John Mothersole Dan Ryan Todd Lee Howard Archer Global Insight Teleconference December 17, 22

2 199s: A Deflationary Wave The bursting of the Japanese asset and investment bubbles The Asian Crisis Deflation spreads to other parts of Asia The bursting of the high-tech bubble Worldwide manufacturing deflation Copyright 22 Global Insight 2

3 Commodity Prices Copyright 22 Global Insight

4 Though Up in 22, Commodity Prices Remain Well Below Recent Levels Commodity Research Bureau's Spot Market Commodity Price Index

5 With Prices For Many Soft Since July Global Insight's World Manufacturing Cost Index less Oil & Shipping Rates* (*Prices for ethylene, nonferrous metals, lumber, cotton, pulp, steel scrap, rubber and DRAM's)

6 Insights From Japan s Deflation

7 Disinflation, Deflation Inflation Rates in Japan CPI GDP Deflator

8 Bursting Bubbles JAPAN Stock market peak: December Inflation: rising in 199, volatile in 1991 (with surges above 4% m/m) GDP growth: 3+% q/q through Overnight call rate peak: March United States Stock market peak: August 2. Federal funds peak: January 21. Copyright 22 Global Insight

9 Interest Rate Response Real Interest Rates (Bubble peak at ) Japan U.S. Copyright 22 Global Insight

10 Japan s Slow Response Due To: Unfamiliarity with slow growth. Return to normal (3-4%) growth rate expected. Anti-inflation bias. Post-WWII generation of policymakers. Emphasis on fiscal rather than monetary expansion. Public works projects.

11 Problems Peculiar to Japan Structural problems. Overly-dependent on manufacturing, construction, exports. Low productivity in services. Bad Loans + Extreme Asset Deflation Bad loans estimated at 8-4% of GDP Asset prices now 1/4 th of peak value. Money hoarding. Due to uncertainty, risk aversion. 199: M1 = 25% of GDP Today: M1 = 65% of GDP Copyright 22 Global Insight

12 Japan: Causing Global Deflation? Japanese Price Level In US$ In Euros Copyright 22 Global Insight

13 Asia Copyright 22 Global Insight

14 Asia Recovery Continues (Real GDP, percent change from a year earlier) AUS CHN HKG IND IDN KOR MYS PHL SGP TWN THA Q4/1 Q1/2 Q2/2 Q3/2

15 Recovery Still Driven by Exports (Percent change from a year earlier, Q3/22) AUS CHN* HKG IDN KOR MYS PHL SGP# TWN THA+ Private Consumption Business Investment Exports * Private consumption represented by real retail sales; business investment from q1-q3; exports in nominal dollar terms # Exports in nominal U.S. dollar + 22 Q2 data

16 Consumer Demand is Cooling (Real NIA Private Consumption, percent change from a year earlier) AUS CHN* HKG IDN KOR MYS PHL SGP TWN THA Q4/1 Q1/2 Q2/2 Q3/2 *Real retail sales

17 Exports Are Sizzling (Real NIA Exports, percent change from a year earlier) AUS CHN* HKG IND* IDN KOR MYS PHL SGP* TWN THA *Exports in nominal U.S. dollar Q4/1 Q1/2 Q2/2 Q3/2

18 Asia Exports Rely on US Imports (Percent change from a year earlier) Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Asia Exports U.S. Imports Copyright 22 Global Insight

19 Interest Rates Are near All-Time Lows Jan-9 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Australia New Zealand Malaysia Taiw an Thailand Japan Korea India Singapore Philippines

20 Liquidity Decelerates Despite Low Interest Rates Percent change from a year earlier Taiwan Singapore Jan-1 Jul-1 Jan-2 Jul-2. Jan-1 Jul-1 Jan-2 Jul-2 M2 Rediscount Rate M2 3-Month Treasury Bills Rate South Korea Hong Kong Jan-1 Jul-1 Jan-2 Jul-2-5 Jan-1 Jul-1 Jan-2 Jul-2 M2 Call Rate M2 Base Rate Copyright 22 Global Insight

21 Deflation Remains A Concern (CPI, percent change from a year earlier) CHN HKG IND IDN KOR MYS PHL SGP TWN THA Jan-Oct

22 Deflation Remains A Concern (Percent change from a year earlier, 22 Q3) AUS HKG IDN KOR* MYS PHL TWN THA* * Second quarter data GDP Deflator Import Price Deflator

23 Fiscal Strain in Asia (Fiscal balance over GDP, percent) AUS CHN HKG IND IDN KOR MYS NZL PHL SGP 21 22

24 Outlook And Risks Outlook Cautiously optimistic about 23 Inflation will remain subdued in the near-term Accommodative fiscal and monetary policy will continue US growth rebound in 2 nd half 22 will boost exports China, India, Korea, and Malaysia will lead the pack Risks Deflation Dependence on U.S. imports Non-economic shocks: Terrorist attacks, War on Iraq Rapid consumer credit expansion Fiscal strain

25 Real GDP Growth Outlook (Percent change) China Hong Kong Taiwan India Australia

26 Real GDP Growth Outlook (Percent change) -2 Indonesia Korea Malaysia Philippines Singapore

27 Who Is Next? Copyright 22 Global Insight

28 Parallels with Japan Japan U.S. Germany Weak Domestic Demand Deflation? Real Interest Rates Too High Real Exchange Rate Too High Fiscal Rigidity Financial Stress? Heavy Dependence on Bank Financing High Debt Levels Burst Asset Bubbles Rigid Labor Markets Poor Corporate Governance

29 Growth in Real Domestic Demand Versus Real GDP United States 6 Percent Change Real GDP Real Domestic Demand

30 Growth in Real Domestic Demand Versus Real GDP Germany Percent Change Real GDP Real Domestic Demand

31 Growth in Real Domestic Demand Versus Real GDP Japan Percent Change Real GDP Real Domestic Demand

32 Debt is High in Much of the G United Kingdom Hosehold debt as a percent of disposable personal income Japan Germany United States * Source: OECD; National statistics *Estimate

33 United States Copyright 22 Global Insight

34 U.S. - Deflation Is Not A Threat U.S. growth has been closer to trend than most other industrialized economies Policy has been and continues to be aggressively expansionary A falling dollar will help Service sector inflation is still chugging along However, there is no room for complacency Copyright 22 Global Insight 34

35 U.S. - Growth vs. Potential Percent change in real GDP Percent change from a year earlier Potential History/Forecast

36 U.S. Consumer Price Inflation Percent change from a year earlier Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Goods Services Overall Copyright 22 Global Insight

37 Western Europe Copyright 22 Global Insight

38 Western Europe overall deflation risks limited Growth in Western Europe averaged near to 2% over last decade, so not a major output gap yet. Core Eurozone inflation stayed in % 2.6% range through 22. Inflation sticky in the dominant services sector. Money supply growth strong, even allowing for distortions. ECB still has significant scope to cut interest rates. 5bp cut on December brought key rate down to 2.75%. If deflation really becomes a threat, there is ample scope for fiscal stimulus in the region, But authorities would have to at least make the Stability and Growth Pact more flexible.

39 Eurozone - Growth vs. Potential Percent change in real GDP Percent change from a year earlier Potential History/Forecast

40 Eurozone Consumer Price Inflation: Goods and Services 4 Percent change from a year earlier Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Goods Services Overall

41 Western European Latest Annual Western European Latest Annual Inflation Rates Inflation Rates n.a. n.a. 4.* 4.* Portugal Portugal * 3.1* 2.7* 2.7* Denmark Denmark n.a. n.a. 2.8* 2.8* Italy Italy * 2.2* Eurozone Eurozone n.a. n.a. 4.8* 4.8* Ireland Ireland UK UK n.a. n.a. 3.6* 3.6* Greece Greece Switzerland Switzerland.3.3.8*.8* 1.1* 1.1* Germany Germany * 2.1* 2.3* 2.3* Sweden Sweden * 2.* 2.2* 2.2* France France * 3.6* 3.9* 3.9* Spain Spain.5.5 n.a. n.a. 1.6* 1.6* Finland Finland 3.3* 3.3* 2.* 2.* 2.1* 2.1* Norway Norway.7.7 n.a. n.a. 1.1* 1.1* Belgium Belgium n.a. n.a. 3.2* 3.2* Netherlands Netherlands n.a. n.a Austria Austria PPI PPI CPI CPI Core Core CPI CPI PPI PPI CPI CPI Core Core CPI CPI

42 Germany Deflation Risks Large output gap developing. GDP growth averaged just 1.3% over 1-years Growth forecast at 1.% in 23, after.3% in 22 and.7% in 21. Unemployment at 1%. Consumer confidence at 5-year 5 low. Major structural problems - Labor & product market rigidities. Stock market been weakest performing of the major industrialized countries this year. Debt levels have risen. Bankruptcies up sharply. Property prices have fallen, but not collapsing. Banking sector problems mounting, but not as bad as in Japan. No signs of a significant credit crunch. Locked into euro at too high a rate? Will euro rise markedly against dollar? Real interest rates too high. Fiscal policy restrictive. Policy paralysis?

43 Germany vs. Japan 4 Percent change from a year earlier German Growth (q-o-q) Japanese Annual Inflation Japanese Growth (q-o-q) German Annual Inflation -4

44 Reasons to Remain Worried Weak domestic demand and growing output gaps Huge amounts of excess capacity in goods- producing industries Weak commodity prices Overvalued exchange rates Potential for policy mistakes Copyright 22 Global Insight 44