OECD long-term projections for the global economy. David Turner, OECD

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1 OECD long-term projections for the global economy David Turner, OECD CMTEA Workshop, 1 st Feb 2013 Overview of long-term model Coverage: OECD & non-oecd G20 countries to 2060 Potential output projections based on Cobb Douglas production function (labour, human & physical capital, mfp) Provides baseline consistent with OECD Economic Outlook for policy analysis: Structural reforms, product and labour market Fiscal imbalances Global current account imbalances 1

2 Productivity from convergence framework Multi-Factor Productivity driven by: global rate of technological progress: assumed 1.3% pa Competition-friendly Product Market Regulation boosts longrun MFP levels, trade openness speeds up convergence. Assumed policy convergence: PMR OECD average. Convergence in human capital: Average yrs of schooling of olds frontier (Korea), frontier also gradually increasing. Measure of human capital assumes decreasing returns. 3 Convergence of trend productivity 5 Avg trend productivity growth, (% pa) IND CHN IDN BRA RUS JPN UK DEU FRA USA Trend productivity in 2010 (USA =100) 2

3 Convergence depends partly on polices what if no convergence of BRIICs PMR 5 Avg trend productivity growth, (% pa) IND IDN CHN BRA RUS Baseline No convergence in PMR for BRICs Trend productivity in 2010 (USA =100) Convergence depends partly on polices what if PMR converges to best practice 6 Avg trend productivity growth, (% pa) Baseline Best practice PMR Growth boost for median OECD country = 0.4% pa. For some (TUR, POL, GRC, ISR) boost of % pa Trend productivity in 2010 (USA =100) 3

4 Labour input 1) Population projections from UN and Eurostat. 2) Labour force participation rates - Cohort method to account for changing demographics and differences in exit/entry rates across cohorts -Indexation to longevity 3) Trend unemployment returns to pre-crisis level. 7 Participation projections similar to EC Ageing Working Group, participation rate 15+ Germany United Kingdom EC OECD OECD + Active life adj EC OECD OECD + Active life adj

5 Participation projections similar to EC Ageing Working Group participation rate 15+ France Italy 65 EC OECD OECD + Active life adj 65 EC OECD OECD + Active life adj Divergence in participation can outweigh productivity convergence Trend productivity, USA =100 Employment / pop, USA = DEU ESP FRA GBR ITA 90 DEU ESP FRA GBR ITA

6 Fiscal side of model Fiscal balances have a cyclical component Don t include increased ageing/health expenditures Rules to stabilise or target a specific debt-to-gdp ratio Implicit interest rate on debt service moves to a weighted average of R L and R S, speed depending on initial maturity structure of debt Interest rate determination R S Eqbm R S as GAPs close Eqbm R S = pot. growth + global balance premium R L = R S (+10 yrs) + term prem.+ fiscal risk premium Fiscal risk premium = 2 bp per % pt debt ratio> 75%, + 2 bp > 125% ==> Implicit rate on government debt will be rising 6

7 Fiscal consolidation to stabilise debt US primary underlying balance, % GDP most rapid period of consolidation Summary measure used is average consolidation from (2013) to 2030 = 3 % pts of GDP Source: OECD Economic Outlook May 2012 Fiscal consolidation to target 60% debt US primary underlying balance, % GDP peak consolidation Average consolidation, is 5.8% pts of GDP -8.0 Source: OECD Economic Outlook May

8 Consolidation to meet alternative debt targets Average increase in underlying primary balance , % pts of GDP 10 8 Debt stabilisation 6 Debt ratio of 60% JPN USA GBR GRC FIN OECD NZL SVK CZE EST IRL PRT CAN ISR LUX POL SLV NET DNK SWE KOR FRA AUT ISL CHE DEU EA15 AUS BEL HUN ESP ITA -2-4 Source: OECD Economic Outlook May 2012 Ambitious consolidation boosts growth OECD gross debt, % of GDP Potential output growth, OECD average, %pa % of GDP Baseline scenario 20 More ambitious fiscal consolidation Per cent Baseline scenario 0.5 More ambitious fiscal consolidation

9 Saving rates Saving equations based on panel estimation OECD private saving rates depend on old-age & youth dependency ratios, fiscal balances (40% Ricardian offset from public saving) terms of trade, pdy growth, private credit, life expectancy, (+output gap) OECD total saving = public + private saving Non-OECD total saving depends on old-age and youth dependency ratios, social spending, terms of trade, private credit, life expectancy & pdy growth 17 Investment Capital intensity varies with changes in real interest rates. Higher real interest rates => lower capital intensity => temporarily lower growth => permanently lower LEVEL of output Non-housing investment consistent with capital intensity Housing investment returns to average level prior to the crisis 18 9

10 CB = S I Current account determination For other oil exporters, CB = f(iea net oil export volume, oil price) Interest rates ensure consistency of world CB: If CB > CB(-1) => ex ante global savings surplus => Fall in global balancing premium on interest rates => Interest rates in all countries fall, raises I relative to S 19 Current account balances as % of world GDP 4% 3% 2% India China 1% Oil exporters Other deficit 0% Other surplus Germany -1% Japan United States -2% -3%

11 Polices can reduce global imbalances Sum of absolute current balances / % of world GDP Baseline scenario More ambitious fiscal consolidation More ambitious fiscal consolidation and better structural policies Selected References Johansson A., Y. Guillemette, F. Murtin, D. Turner, G. Nicoletti, C. de la Maisonneuve, P. Bagnoli, G. Bousquet, and F. Spinelli (2012), Long-term Scenarios, OECD Economics Department Working Papers, No Turner, D. and F. Spinelli (2011), Explaining the Interest-Rate- Growth Differential Underlying Government Debt Dynamics, OECD Economics Department Working Papers, No Kerdrain, C., I. Koske and I. Wanner (2010), The Impact of Structural Policies on Saving Investment and Current Accounts, OECD Economics Department Working Papers, No OECD(2012), OECD Economic Outlook, June 2012, Chapter 4. 11