From oil crisis to national crisis?

Transcription

1 From oil crisis to national crisis? Kjetil Olsen March 2016

2 A massive drop in oil prices

3 Mb/d Too much supply of oil 2,5 2 1, mb/d Surplus production 1.64 mb/d mb/d 0, current 2016 Freeze 3

4 American shale oil the new kid on the block

5 Norway: Growth engine becomes growth brake 5

6 Growth has edged down

7 Oil weakness hits manufacturing

8 Kristin (2019) Johan Sverdrup (2020) Aasgard (2019) Ekofisk (2025) Ekofisk West (2026) Njord (2020) Hod 2025) Valhall (2025) Wisting 2025) Gjoa (2021) Ormen Lange (2023) Johan Castberg (2023) Alta/Gohta (2024) Grane 2022) Edvard Grieg (2024) Snorre (2023) Frigg Gamma/Delta Linnorm (2025) Skarv (2021) Kvitebjorn (2022) Tor (2024) Visund (2024) Heidrun (2020) King Lear (2023) USD per barrel Old breakeven oil price for some new Norwegian oil fields Oil price 20 0 *Expected production year in parentheses Source: Rystad Energy and Nordea Markets 8

9 Direct and indirect employment in the oil sector Employed in oil sector in absolute numbers and share as employment Indirect employment Supply industry export Supply industry home market Employed onshore Employed offshore Total Norway 9 Source: IRIS

10 Unemployment is increasing

11 Unemployment is increasing

12 Unemployment is increasing

13 3 shock-absorbers

14 Shock absorber I: Interest rate cuts 14

15 Shock absorber II: A weaker NOK 15

16 NOK: Oil price or interest rates?

17 Cordon og Neary (1982) «Dutch disease» 1. Resource movement effect 2. Income/spending effect

18 High oil price increased costs in Norway Relative wage costs in common currency Index 2001= «Dutch disease» 1. Resource movement effect 2. Income/spending effect ω = W W f V 105 V= NOK USD,EUR etc

19 Cordon og Neary (1982) «Dutch disease» 1. Resource movement effect 2. Income/spending effect ω = W W f V ω ω ω V= NOK USD,EUR etc

20 Thank you for a flexible exchange rate 135 Relative wage costs in common currency Index 2001=

21 If we were Finland 135 Relative wage costs in common currency Index 2001=

22 Norwegian exporters are happy

23 Why is Norges Bank so calm about high inflation

24 Why is Norges Bank so calm about high inflation

25 NOK will not depreciate forever

26 Wage growth will not accelerate to compensate for inflation

27 We have a nominal anchor

28 Shock absorber III: Fiscal policy The Government Pension Fund currently amounts to NOK 7,000bn (EUR 737bn) which is more than twice the size of the Mainland GDP and equals five annual national budgets. The budgetary rule: 4% of the fund (expected real return of the fund) can be spent over the national budget. The rule is to ensure that the fund itself would not be tapped. Thus the fiscal break even oil price is zero. In response to lower oil price public spending has increased. The fiscal policy stimulus is estimated to be 0.7% of the Mainland GDP in 2016.

29 Strong growth in public spending 29

30 Strong counter acting forces

31 Strong counteracting forces

32 Strong counter acting forces

33 Strong counter acting forces

34 Consumers decide

35 35 They say they are afraid

36 on behalf of the country

37 Has the fear spread? 37-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 2009T2 2009T3 2009T4 2009T5 2009T6 2010T1 2010T2 2010T3 2010T4 2010T5 2010T6 2011T1 2011T2 2011T3 2011T4 2011T5 2011T6 2012T1 2012T2 2012T3 2012T4 2012T5 2012T6 2013T1 2013T2 2013T3 2013T4 2013T5 2013T6 2014T1 2014T2 2014T3 2014T4 2014T5 2014T6 2015T1 2015T2 2015T3 2015T4 2015T5 Retail trade %growth (nominal) Norge Rogaland Oslo Hordaland

38 Has the fear spread?

39 Has the fear spread?

40 Weak outlook, but no crisis 40

41 30 years ago, all went wrong what s the difference now? Increase in unemployment: Late 80 s : persons (+ banking crisis) : persons 41

42 Big policy-institutional differences Now Inflation targeting With a flexible exchange rate Then Fixed exchange rate Inflation expectations anchored at low and stable inflation Inflation expectations (un)anchored at high and variable inflation 42

43 Big policy-institutional differences Now Inflation targeting With a flexible exchange rate Then Fixed exchange rate Inflation expectations anchored at low and stable inflation Oil fund = 2 X GDP Fiscal spending rule Inflation expectations (un)anchored at high and variable inflation No oil fund Expenses followed income 43

44 Big policy-institutional differences Now Mortgage rate: -1½ % poeng Mortgage rate : 2-3 % Real interest rate: 0 % Then ( ) Mortgage rate: + 3 % poeng Mortgage rate : 17 % Real interest rate: 7-8 % 44

45 Big policy-institutional differences Now Mortgage rate: -1½ % poeng Mortgage rate : 2-3 % Real interest rate: 0 % Then ( ) Mortgage rate: + 3 % poeng Mortgage rate : 17 % Real interest rate: 7-8 % Relative wage costs: -25% Relative wage costs: 0% 45

46 Big policy-institutional differences Now Mortgage rate: -1½ % poeng Mortgage rate : 2-3 % Real interest rate: 0 % Then ( ) Mortgage rate: + 3 % poeng Mortgage rate : 17 % Real interest rate: 7-8 % Relative wage costs: -25% Relative wage costs: 0% Fiscal policy impulse: + ½-¾ % of GDP Fiscal policy impulse: - 1½-2% of GDP 46

47 Big policy-institutional differences Now Mortgage rate: -1½ % poeng Mortgage rate : 2-3 % Real interest rate: 0 % Then ( ) Mortgage rate: + 3 % poeng Mortgage rate : 17 % Real interest rate: 7-8 % Relative wage costs: -25% Relative wage costs: 0% Fiscal policy impulse: + ½-¾ % of GDP Fiscal policy impulse: - 1½-2% of GDP Household saving ratio: +6% Household saving ratio: - 5% 47

48 What will Norges Bank do the week after next?

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52 Somewhat lower growth

53 Lower oil price and rates abroad

54 Money market premiums higher

55 Interest rate account Inflation now 0 Wage growth - Norwegian economy now - NOK 0 Oil price - Interest rates abroad - Money market premiums - SUM

56 Nordea forecasts

57 Summing up Status norwegian economy: Oil sector scales down and unemployment increases Two speed economy 3 shock-absorbers: Historic low interest rate Historic weak NOK Public spending 30 years ago we DID NOT HAVE ORDER IN OUR OWN HOUSE! Outlook: Norges Bank key rate will reach 0 Unemployment will increase by another ½ percentage point. No national crisis 57

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59 Theme: Policy divergence US Federal Reserve (Fed) increased rates in December, ending a 7-year period of close to 0 rate Feds main scenario is for further, gradual increases. European Central Bank (ECB) and Bank of Japan (BoJ) are planning to go further into negative territory (as is Sweden. Denmark and Switzerland also has negative rates) 59

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61 US back to start, Euro area still has a way to go

62 US inflation on the rise, Euro area inflation to low

63 Market disagrees with Fed 2,5 2,0 1. jan feb 16 Faktisk fed funds 1,5 1,0 0,5 - jan 13 jan 14 jan 15 jan 16 jan 17 jan 18 63

64 Market turmoil Aksjeindekser 2013 =

65 Bond yield Bond: Sellls at: 100$ Interest rate (coupon): 5% Yield: Interest: 5$ Yields: 5$/100$ = 5% Lets suppose: Price falls to 80$ in the market Interest: 5$ Yields: 5$/80$ = 6,25%

66 Tighter financial conditions 66

67 Possible reasons for market turmoil Uncertainty about China Low oil prices Bank profitability (low oil price, negative rates) Recession fears in US

68 Lower growth in China: Towards a more mature economy

69 USA US: Weak manufacturing, but service sector is doing ok 69

70 Lower gasolin prices: 1 % of disposable income 70

71 Strong growth in private consumption 71

72 Fastest job growth since the 90 s 72

73 Fastest job growth since the 90 s 73

74 Possible reasons for market turmoil Uncertainty about China Low oil prices Bank profitability (low oil price, negative rates) Recession fears in US Are we missing something?

75 % rate USD trln The end of US goodies are the markets ready for this? Target Market implied Target Balance sheet bln (rhs) 75

76 QE: How does it work

77 QE: How does it work Government bonds Asset backed securities Corporate bonds Stocks Expected return Risk 1. Portfolio effect 2. Search for yield

78 QE and stock market 78

79 QE and credit spreads 500 Spread til swap; bp mrd USD Iboxx USD Domestic Corporates IG Feds verdipapirbeholdning (høyre akse)

80 But there is more: China foreign exchange reservers are falling 3,950 3,750 3,550 3,350 3,150 2,950 2,750 2,550 2,350 2,150 1,950 1,750 1,550 1,350 1, Trading range China FX-reserves USDCNY PBOC 2014 policy goal: orderly expansion of trading band

81 From QE to QT? 81

82 Will Fed be able to increase interest rates? 2,5 2,0 1. jan feb 16 Faktisk fed funds 1,5 1,0 0,5 - jan 13 jan 14 jan 15 jan 16 jan 17 jan 18 82