Understanding the Macroeconomic Scenario: Global Demand, Global Supply Chains

Transcription

1 Understanding the Macroeconomic Scenario: Global Demand, Global Supply Chains 12 June 2014 Fabio Sdogati,

2 Table of Contents 1. Economic Scenario after the Great Recession 2. Structural Changes: International Fragmentation of Production 3. In the Way of a Conclusion 2

3 1.1 Economic Scenario after the Great Recession The impact of the Great Recession: Real GDP, cumulative change over the period Switzerland Sweden* United States Germany France Japan United Kingdom Spain Portugal* Italy Greece -23,7% -8,5% -5,9% -6,7% -1,3% 0,7% 0,3% 8,2% 6,1% 5,9% 4,2% -30% -25% -20% -15% -10% -5% 0% 5% 10% Source: IMF World Economic Outlook April 2014; *GDP of 2013 has been estimated 3

4 1.2 Global Economic Scenario Real GDP growth rate forecasts for the years 2014 and 2015 Japan* USA* Latin America Euro Area* Developing Asia Source: World Economic Outlook, April 2014; *OECD Economic Outlook, May

5 1.3 Economic Scenario: High per Capita Income Countries Real GDP growth rate forecasts for the years 2014 and 2015 Japan USA DEU FRA ITA ESP GER FRA ITA ESP UK Source: OECD Economic Outlook, May

6 1.4 Economic Scenario: Emerging Market Economies Real GDP growth rate forecasts for the years 2014 and 2015 Turkey* Russia China Mexico Vietnam** Brazil India Indonesia Source: OECD Economic Outlook, May 2014; * IMF World Economic Outlook, April 2014, **IMF World Economic Outlook, October

7 1.5 Hints of a Secular Stagnation 1. On November 16th, arguing that the crisis is not over, Summers raised the concern that the stagnation - i.e. a chronic demand deficit - might prove to be the new normal; 2. There are several reasons for this: i. A saving glut coming from Asia and from inequalities in income distribution ii. iii. A long-term IT-induced decline in the relative price of capital goods that has reduced needed investment relative to saving Declining rates of population or productivity growth 7

8 1.5 Hints of a Secular Stagnation US Annual Real GDP (Billions of chained 2009 dollars) and trend, Source: Bureau of Economic Analysis, January

9 Billions of 1.5 Hints of a Secular Stagnation European Union (28 Countries) Annual Real GDP (Billions of chained 2005 euros) and trend, annual data, Real GDP Trend of Real GDP Source: European Commission, May

10 1.5 Hints of a Secular Stagnation Population (15-64) growth rate, annual data, ,0% 1,5% 1,0% 0,5% 0,0% -0,5% USA EU 27 Japan -1,0% -1,5% -2,0% Source: OECD.Stat, May

11 % 1.5 Hints of a Secular Stagnation Employment rate in European Union (28 Countries) by age group, annual data, From 15 to 64 years From 55 to 64 years Source: Eurostat, May

12 Hints of a Secular Stagnation Average income (with capital gains) in the United States of America, $ Top 1% Top 5-1% Top 10-5% Bottom 90% Source: Piketty, Thomas and Saez, Emmanuel (2007). Income and Wage Inequality in the United States ; in Atkinson, A. B. and Piketty, T. (editors) Top Incomes over the Twentieth Century. A Contrast Between Continental European and English-Speaking Countries, Oxford University Press, chapter 5. Series updated by the same authors. 12

13 Hints of a Secular Stagnation Growth of average income (with capital gains) in the United States of America, Top 1% Top 5-1% Top 10-5% Bottom 90% Source: Piketty, Thomas and Saez, Emmanuel (2007). Income and Wage Inequality in the United States ; in Atkinson, A. B. and Piketty, T. (editors) Top Incomes over the Twentieth Century. A Contrast Between Continental European and English-Speaking Countries, Oxford University Press, chapter 5. Series updated by the same authors. 13

14 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan The Spectre of Deflation in Europe Annual rate of change in prices, monthly data, from Jan to Apr. 2014, except for the euro zone, which is through May ,0 3,0 2,0 1,0 0,0-1,0-2,0-3,0 Euro area Germany Euro area Italy Euro area Spain Euro area Greece Source: Eurostat, June

15 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan The Spectre of Deflation in Europe Annual rate of change in prices, monthly data, from Jan to Apr. 2014, except for the euro zone, which is through May ,0 3,0 2,0 1,0 0,0-1,0-2,0-3,0 Euro area Portugal Euro area Ireland Euro area France Source: Eurostat, June

16 1.7 The Future of Monetary Policy 1. ECB will continue to expect its key interest rates to remain at present or lower levels for an extended period of time and the Governing Council is confirmed its commitment to using also unconventional instruments; with high probability, another round of monetary easing would arrive in June; 2. From December 2013 to April 2014 FED has reduced to 45 billions of dollars per month its assets purchase program; currently FOMC is considering through which tools tie up surplus liquidity in the financial system and rising interest rates before complete its tapering program; 3. The minutes of the BoE s May Monetary Policy Committee meeting said that, for some members, the case for holding rather than raising rates was becoming more balanced. 16

17 1.8 International Price Competitiveness and Exchange Rate The Real Exchange Rate is ratio between the price of the foreign-produced good converted in domestic currency, and the home currency price of the home good R e P P * R $ $ The real exchange rate is an indicator of international price competitiveness for home goods: R < 1 The home good is not competitive R = 1 International consumer is indifferent between home and foreign good R > 1 Home good is internationally competitive 17

18 1.8 International Price Competitiveness and Exchange Rate Hypothesis about the structure of production prices: P w * mp e 1 a z P: home good price, in home currency w: labor cost, in home currency, per unit of time a: labor productivity, in units of output per unit of labor in the unit of time m: physical units of imports to produce one unit of the home good P*: price of the foreign good in foreign currency e: nominal bilateral exchange rate, /$ z: marginal profit rate, as a percentage of production cost 18

19 1.8 International Price Competitiveness and Exchange Rate The structural determinants of competitiveness R ep P $ e (w (w $ a a US EU m m US EU P P $ 1 ) (1 z e EU e) (1 z ) US ) Determinant Labor Cost Productivity Profit Rate Exchange Rate Who can modify it? Firms, Trade Unions, Government Firms Central Bank 19

20 1.8 International Price Competitiveness and Exchange Rate US Dollar Exchange rate ($ per unit of foreign currency) growth versus developed markets currencies, daily data, April 2013 May 2014 (April 2013=100) Sterling Euro Yen Australian dollar Source: FRED St. Louis, June

21 International Price Competitiveness and Exchange Rate US Dollar Exchange rate ($ per unit of foreign currency) growth versus emerging market economies currencies, daily data, April 2013 May 2014 (April 2013=100) Korean won Pesos Rupee Real Source: FED, June

22 2.1 Structural Changes: International Fragmentation of Production At the core of the real economy there is a paradigmatic change of the productive process organization. For the last thirty years we have been experiencing the spread of a new way of producing goods: the Integration of Production. The multinational corporation, often seen as a primary agent of globalization, is taking on a new form, one that is promising for both business and society. From a business perspective, this new kind of enterprise is best understood as "global" rather than "multinational. [ ] Simply put, the emerging globally integrated enterprise is a company that fashions its strategy, its management, and its operations in pursuit of a new goal: the integration of production and value delivery worldwide. State borders define less and less the boundaries of corporate thinking or practice. (Sam Palmisano, The Globally Integrated Enterprise May-June 2006, Foreign Affairs) 22

23 2.1 Structural Changes: International Fragmentation of Production The Integration of Production has changed the international division of labor. As recently as 30 years ago, products were assembled in one country, using inputs from that same country. Measuring trade was thus easy is very different. Manufacturing is driven by global supply chains, while most imports should be stamped made globally, not made in China, or similar. This is not an academic distinction. (...) It isn t just phones. Automobiles, aircraft, electronics even clothing are increasingly made in many countries. No car or commercial jet could now be built with inputs from just one country. Business leaders also know that new trade frictions are especially damaging in an era of global supply chains. (Pascal Lamy, Made in China tells us little about global trade January , Financial Times) 23

24 2.1 Structural Changes: International Fragmentation of Production Freer trade due to falling protectionist pressures Falling transport costs Falling coordination costs BOTH Mode 1: Global Resource Seeking Globally integrated enterprise AND Mode 2: Global Market Seeking High growth of per capita income in emerging countries Slow growth and deindustrialization in high per capita income countries 24

25 2.1 Structural Changes: International Fragmentation of Production Consider the production process as a process which could be segmented into several stages, each of which characterized by a different capital-labor ratio. It could be represented as: A B C D E F G A: Concept B: Design C: Prototipe D: Mass Production E: Marketing F: Administration G: Management and coordination, etc. 25

26 2.1 Structural Changes: International Fragmentation of Production Focused on Resource Seeking D EU B mass production design High relative labor (skilled and unskilled) dotation economies F administration ITALY A concept prototype C G coordination EXPORT MARKET E marketing High disposable income economies FINAL PRODUCT Focused on Market Seeking 26

27 2.2 Why Internationalization? Market Seeking Gross domestic product (current USD) of selected country groups in 1999 (left graph) and in 2013 (right graph) 7% 2% 6% 3% 1% 3% 8% 5% 2% 18% 61% 81% Advanced economies Emerging and developing Asia Emerging and developing Europe Latin America and the Caribbean Middle East North Africa Afghanistan and Pakistan Sub-Saharan Africa Advanced economies Emerging and developing Asia Emerging and developing Europe Latin America and the Caribbean Middle East North Africa Afghanistan and Pakistan Sub-Saharan Africa Source: IMF World Economic Outlook, April

28 2.2 Why Internationalization? Resource Seeking Labor productivity in manufacturing (output per hour, 2002=100) Year United States France Germany Italy Japan Korea Spain Taiwan United Kingdom NA NA NA NA Source: US Government, Bureau of Labor Statistics, May

29 2.2 Why Internationalization? Resource Seeking Hourly labour cost in industry, construction and services (except public administration, defense, compulsory social security) in Wages and salaries Employers' social contributions and other labour costs paid by employer Source: Eurostat, March 2014; for Greece total labour cost is reported 29

30 Gross value added per person employed ( variation) 2.2 Why Internationalization? Resource Seeking There is a Positive Correlation between Labor Productivity and Index of Offshoring 100% 80% 60% 40% 20% 0% -20% -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Deviations of the National Offshoring Index Relative to European Average Source: Eurostat. Correlation coefficient: Number of observations: 111 Countries selected: Austria, Belgium, Denmark, Germany, Finland, France, Italy, Netherlands, Spain, Sweden 30

31 2.3 Effects of International Fragmentation of Production Percentage of intermediate inputs imports and exports of manufactured goods by country (2011) Singapore Malaysia Philippines Indonesia Korea Japan Hong Kong Netherlands United States Ireland Thailand Czech Republic India Poland Italy Slovak Republic United Kingdom Germany France Mexico China Import Export 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: OECD.Stat, May

32 2.3 Effects of International Fragmentation of Production Share of imports of intermediate inputs as a percentage of gross output of Italian manufacturing 40% 35% 30% 25% 20% 15% 10% % 0% Food products, Beverages and Tobacco Textiles, Textile Chemical, Products, Leather Rubber, Plastics and Footwear and Fuel Products Basic Metals and Fabricated Metal Products Machinery and Equipment Transport Equipment Source: OECD.Stat, April

33 2.3 Effects of International Fragmentation of Production Composition of Italian GDP by Industry, % 80% 70% 60% 50% 40% 30% Services Industry Construction Agricolture 20% 10% 0% Source: Istat for period; Eurostat for period, May

34 2.3 Effects of International Fragmentation of Production Change in Manufacturing share of value added (%), Sweden -60% -50% -40% -30% -20% -10% 0% Netherlands Japan Germany Norway United States Italy France United Kingdom* Spain Source: Eurostat, 2013; * For UK, change is calculate over the period

35 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan Purchasing Manager Index ISM US Purchasing Manger Index, monthly data, Jan Mar Source: Federal Reserve Bank of St. Louis, May

36 2.5 Purchasing Manager Index Markit Eurozone Purchasing Manger Index, monthly data, and GDP change, quarterly data Source: Markit; Eurostat, May

37 3. In the Way of a Conclusion 1. The Crisis of 2007, began as a financial crisis in the US real estate market, hit mainly high per-capita income economies, in particular United States and Euro Area countries; although the aggregate demand of these is increasing sluggishly or it is decreasing, gross domestic product of emerging market economies is still growing; although it may seem that the crisis is over, a prolonged stagnation is a risk; 2. Since the mid-seventies, production processes have been increasingly separated internationally, thus increasing the international trade in intermediate inputs among both emerging market economies and high per-capita income countries; 3. International fragmentation of production, by reducing costs of procurement and production process, raise firms profits, that have been falling since mid eighties; 4. The rise of this pattern of international trade seems to be positively correlated with labor productivity; moreover, internationalization helps firms improve their performance in terms of capital intensity, in terms of revenues and number of employees; 5. Therefore, internationalization is the only way to increase both firm productivity and demand for its products. 37

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