Unlocking Global Growth. Min Zhu International Monetary Fund

Unlocking Global Growth Min Zhu International Monetary Fund 1

Outline I. Cyclical recovery slow II. Real and financial sectors diverging III. Macro policy space limited IV. Global structural changes emerge V. Proactive policies needed 2

I. Cyclical recovery slow 3

19 18 17 16 15 14 13 12 11 1 9 World GDP (Real; 2 = 1) 2 21 22 23 24 25 26 27 28 29 21 211 212 213 October 27 Projections Oct 214 Actual 4

15 12 9 6 3 GDP Growth (Real; in percent) 15 12 9 6 3-3 27 29 211 213 215 217 219-3 27 29 211 213 215 217 219-6 -6 World Euro area Brazil China India Japan United States 5

8 7 World demand (in percent of GDP) 2 27 213 6 5 4 3 2 1 Investment/GDP Consumption/GDP Government expenditure/gdp 6

5 World FDI (in percent of world GDP) 2 27 213 4 3 2 1 FDI liabilities/gdp FDI assets/gdp 7

8 7 6 5 4 3 2 1 GDP vs Trade (average annual growth in percent) 198-89 199-99 2-7 28-13 GDP Trade 8

Deleveraging revisited: government sector General Government Interest Expense (percent of GDP) 5 Yr Sovereign Credit Default Swap Spreads (annual average; basis points) 1 213 Maximum since 26 Historic minimum 1/ 99 214 2/ Maximum since 26 3/ Historic minimum 4/ 9 8 Direction of adjustment 89 79 Direction of adjustment 7 69 6 59 5 49 4 39 3 29 2 19 1 9 IT IE PT GR ES FR DE NL CA UK US JP AU SE -1 GR PT IT ES IE FR NL DE JP AU UK US SE Stressed EA Other EA Other AEs Stressed EA Other EA Other AEs Sources: Bloomberg L.P.; and IMF staff calculations; 1/ Calculations based on data from 199 to 213. Data for Germany starts in 1991, for Netherlands in 1995 and for the US in 21. 2/ 214 data corresponds to the January - August average. 3/ For Greece, the maximum CDS spreads level since 26 is 155bps. 4/ Calculation 9 based on data from 23 to August 214. Data for Spain and Sweden start in 24, for Ireland in 27, for Australia, Netherlands and the UK in 28, and for the US in 29.

Deleveraging revisited: household sector Household Leverage in AEs 1/ (debt-to-total assets; percent) Household Debt Service Burden in AEs 1/ (percent of net disposable income) 5 212 or latest Maximum since 26 Historic minimum 2/ 35 212 or latest Maximum since 26 4 Direction of adjustment 3 25 Direction of adjustment 3 2 2 15 1 1 5-5 -1 IE GR PT ES IT NL FR DE AU SE CA JP UK US -1 GR IE PT ES IT NL FR DE CA AU UK US SE JP Stressed EA Other EA Other AEs Stressed EA Other EA Other AEs Sources: OECD; BIS Quarterly Review (212); Bartiloro et al. (212); Bank of Ireland; Banco do Portugal; Brissims et al. (29); and IMF staff estimates: 1/ Household debt data for Sweden includes debt through housing cooperatives. 2/ Calculation based on data from 1995 to 212 or latest. For Denmark data starts in 23, for Ireland and Spain in 22, and 1 for Switzerland in 2.

Deleveraging revisited: corporate sector Corporate Debt-to-Assets Ratio in AEs (percent) Interest Payments to Cash Flow in AEs (percent) 5 213 Maximum since 26 Historic minimum 1/ 6 213 Maximum since 26 Historic minimum 1/ 4 Direction of adjustment 5 Direction of adjustment 4 3 3 2 2 1 1-1 PT GR ES IT IE DE FR NL US JP CA AU SE UK -1 GR PT IT ES IE NL FR DE CA AU US UK SE JP Stressed EA Other EA Other AEs Stressed EA Other EA Other AEs Sources: Worldscope; and IMF staff calculations. 1/ Calculation based on data from 1995 to 213. 11

Deleveraging revisited: banks 1 9 8 7 6 Leverage Ratio in AEs 1/ (tangible assets-to-tier 1 common capital) 214 Q2 Maximum since 26 Minimum since 26 Direction of adjustment 6 4 2 Profitability in AEs (retained earnings-to-adjusted tangible assets ratio) 214 Q2 Minimum since 26 Maximum since 26 5 4 3-2 -4 Direction of adjustment 2-6 1-8 -1 ES IT PT IE GR FR NL DE CA SE AU JP UK US -1 PT GR IE IT ES FR NL DE UK SE US JP CA AU Stressed EA Other EA Other AEs Stressed EA Other EA Other AEs Sources: SNL; and IMF staff calculations. 1/ Leverage ratio for Japan is defined as tangible assets-to-tangible common equity. The maximum bank leverage ratio in Germany could be overstated, as the sample does not include small banks, which are important as a group in the total. 12

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A warning from the past: UK after World War I 14

Credit and investment Better here Than here Credit growth to corporates (yoy, 4Q MA) Capital expenditure (% of operating cash flows; rhs) Capex Sample Average(rhs) 2 United States 12 1 2 15 Euro Area 65 6 1 8 6 1 55 4 5 5 2 45-1 2 22 24 26 28 21 212 214 6 Japan 8 4 2 7 6-2 5-4 4-6 3-8 2 2 22 24 26 28 21 212 214-5 2 22 24 26 28 21 212 214 25 Emerging Markets 5 2 15 1 5 4 4 3 2 1-1 -2 24 25 26 27 28 29 21 211 212 213 4 Bank Credit Growth from BRICS banks (median); Capex growth 15 is yoy growth for a sample of 12 Ems;

Saving vs Investment: United States (in percent of GDP) 15 2 27 213 1 5-5 -1 HH Non-Fin Fin Gov HH Non-Fin Fin Gov Saving Saving Saving Saving Investment Investment Investment Investment Sources: Haver Analytics 16

7 Inflation (in percent) 6 5 4 3 2 1-1 -2 27 29 211 213 215 217 219 World Japan Euro area 17

5-year 5-year forward inflation swaps (in percent) 18

II. Real and financial sectors diverging 19

Global financial markets Advanced Economies (in billions of U.S. dollars) Emerging Market Economies (in billions of U.S. dollars) 25, 25, 2, 2, Total Reserves Minus Gold Equity Markets Debt Securities 15, 15, Bank Assets 1, 1, 5, 5, 22 27 213 22 27 213 2

Excess financial risk taking? Sovereign Yield Compression Credit Risk Mispricing Record Low Volatility 4 3 2 1-1 -2-3 Average Sovereign Bonds (z-scores) Undervalued Top declile Overvalued Bottom decile 199 1995 2 25 21 Note: 5y5y sovereign bond yield in local currency terms minus 5y5y survey-based expectation of real GDP growth and inflation across 15 advanced economies and 9 emerging markets. Z- score computed as mean-adjusted return, scaled by the standard deviation: (y-y bar)/σ. 6 5 4 3 2 1-1 -2 214 Corporate Spreads (z-scores) EU investment grade U.S. investment grade U.S. high yield EU high yield Undervalued Overvalued Note: Z-scores relative to the historical distribution of the respective option-adjusted spreads. Global Composite Volatility Index 1 9 8 7 6 5 4 3 2 1 24 26 28 21 212 214 21 5

Credit intermediation shifting to the shadows Asset Managers Rising in Systemic Importance in the United States Largest Holders of Private Bonds 18 Financial Assets (USD tn) 3 Ownership of Corporate and Foreign Bonds (percent) 16 14 25 12 2 1 8 15 6 1 4 2 5 Pension Funds Banks Insurance Asset Managers 27 214 213 23 1995 Pension Funds Banks Asset Managers Insurance 11

Asset managers: a source of contagion? Brand Risk Concentrated Holdings Liquidity Mismatch Asset Manager AUM (Total = $65 tn) 5 45 Ownership by Single Fund Family of Large Individual Corporate Issuers (Percent of total debt issuance) Number of Days for the Full Liquidation of U.S. Credit Mutual Funds and ETFs (Corporate bonds) Top 1 AMs: $19 tn (3% of all AUM) 4 35 3 45 4 35 25 3 $46 tn 2 15 1 5 25 2 15 1 5 7-day limit for redemption payments High Yield EM External Debt 27 28 29 21 212 213 13

Asset managers spark sovereign crises Large redemptions, portfolio reallocations, market power abused Debt Owned by a Single Fund Family (percent) Franklin Templeton s Big Bets Credit rating C High yield Country Percentage of Country's debt held by...its value, Franklin Templeton Investments and in billions CCC Ukraine Uruguay 14.2% $4.45 B Sri Lanka Ghana Serbia Fiji Congo Uganda Hungary 13.6% $14.8 BB Armenia Croatia Indonesia Hungary French Polynesia Investment grade Ukraine 1.5% $8.78 BBB Turkey Uruguay Malaysia 1.4% $18.54 Turks & Caicos A Ireland South Korea 5.6% $22.62 1 2 3 4 5 6 7 8 24

Liquidity illusion today Liquidity trap tomorrow? Ample Monetary Liquidity But Deteriorating Structural Market Liquidity (USD tn) 1 Central Bank Balance Sheets FED ECB BOJ (USD mn) 13.5 Size of Trades (> 5mn; 6-month average; investment grade) BOE* SNB 8 13. 6 12.5 4 12. 2 11.5 27 28 29 21 211 212 213 214 11. 27 28 29 21 211 212 213 * Bank of England data unavailable before 26 due to defini the BoE s balance sheet items 12

Spillovers could be global Rising Share of EMs in AE Portfolios Advanced Economy Bond Allocations to EMs (percent of total) 1 Leading to Higher Synchronization of Asset Prices Synchronization Index AE and EM 5 And Higher Impact of U.S. Shocks Estimated Impact of Increase in Vol and U.S. Rates on EM Sovereign Yields (bps) 9 8 1..9 4 7.8 3 6.7 2 5 4.6.5 1 3 1 2 3 4 5 6 7 8 9 1 11 12.4-1 Note: Portion of total variation explained by the 1 st principal component on levels of AE and EM bonds; 6-month moving window Volatility shock US rate shock Total 27 14

III. Macro policy space limited 28

25 Public debt (in percent of GDP) 2 15 1 5-5 Advanced economies Japan Italy United States Canada France Germany Emerging economies India Brazil China Russia 28 Change 28-214 29

11 Public debt in advanced economies (in percent of GDP) 1 9 8 7 6 3

Emerging markets: consolidation postponed Revisions to Forecasts (percent of GDP; excluding China) Overall Fiscal Balance Debt-to-GDP ratio 42 41 Oct. 214-1 4 Balance Sept. 212 Debt 39-2 38 Sept. 212 Oct. 214 37-3 212 213 214 215 36 212 213 214 215

75 5 Contributions to deleveraging (percent of GDP) Output Growth Inflation Nominal Debt Growth Leverage Growth 125 75 25 25-25 -25-5 -75 Asia Financial Crisis Nordic Countries 1988-1992 Global Financial Crisis Sources: BIS, Penn World Tables, Staff Calculations AE EM Hyper Inflation (rhs) -75-125

Advanced economies need to reduce debt but conditions are a challenge 6 4 2-2 -4-6 -8 CAPB (percent of potential GDP) 1 Government Debt (percent of GDP) 9 8 7 6 5 4 3 2 1 6 5 Real GDP Growth (percent) 5 Deflator (percent) 4 4 3 2 3 1-1 2 1-2 FAD WEMD Report 9/25/214 Historical episodes Latest crisis

Debt-to-GDP Dynamics after Public Debt Reaches 1 Percent of GDP (Percent of GDP, advanced economies) 34

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Government debt (in percent of GDP) Government interest expense (in percent of GDP) 27 28 29 21 211 212 213 27 28 29 21 211 212 213 Advanced Economies 72.7 79.7 93.2 99.7 13.7 17.9 16.5 2.9 2.9 2.9 2.9 3. 3. 2.9 Japan 183. 191.8 21.2 216. 229.8 237.3 243.4 1.9 2. 2. 2. 2.1 2.1 2. United Kingdom 43.7 51.9 67.1 78.5 84.3 89.1 9.6 2.2 2.2 1.9 2.9 3.3 3. 3. United States 64. 72.8 86.1 94.8 99. 12.5 14.2 3.7 3.5 3.8 3.9 4. 3.9 3.8 Euro area 66.5 7.3 8.2 85.9 88.2 92.9 95.2 3. 3. 2.9 2.8 3. 3.1 2.9 Emerging Market and Middle-Income Economies 37.4 35.5 4.1 39.7 38.7 38.9 4.2 2.4 2.2 2.2 2.2 2.1 2. 1.9 Brazil 65.2 63.5 66.8 65. 64.7 68.2 66.2 7.5 7.4 6.3 6.8 7.3 7. 6.5 China 34.8 31.7 35.8 36.6 36.5 37.4 39.4.4.4.4.5.5.5.5 India 74. 74.5 72.5 67.5 66.8 66.6 61.5 5.2 5. 4.9 4.5 4.4 4.5 4.8 Russia 8.6 8. 1.6 11.3 11.6 12.7 13.9.6.5.6.6.6.6.7 36

Central bank assets /GDP.7 US EU Japan UK.8 China India Brazil Russia.6.7.5.6.4.5.4.3.3.2.2.1.1 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Sources: Haver Analytics 37

Interest Rates (in percent) 1 2 3 4 5 6 7 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 US Japan EU UK 5 1 15 2 25 3 35 4 45 5 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 China India Brazil Russia Sources: Bloomberg 38

Policy rate expectations (percent; dashed lines are from April 214 WEO) 39

US 1-year treasury breakdown (in percent) Bund breakdown (in percent) 4

1.3 U.S. Dollar Euro Japanese Yen 14 1.2 13 1.1 1. 12 11 1.9.8 9 8.7 7.6 6 Sources: IFS 41

IV. Global structural changes emerge 42

7 GDP based on PPP (share of world GDP) 1 Investment based on PPP (share in total world investment) 6 5 Advanced economies Emerging market and developing economies 8 Advanced economies Emerging and developing economies 4 6 3 4 2 1 2 2 213 2 213 1 Consumption based on PPP (share in total world consumption) 1 Exports based on PPP (share in total world exports) 8 Advanced economies Emerging and developing economies 8 Advanced economies Emerging and developing economies 6 6 4 4 2 2 2 213 2 213 12 1 FDI assets based on PPP (share in total world FDI) Advanced economies Emerging and developing economies 1 8 FDI liabilities based on PPP (share in total world FDI) Advanced economies Emerging and developing economies 8 6 6 4 4 2 2 Sources: WEO 2 213 2 213 43

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7 EM GDP per capita 6 2-6 7-11 5 4 92-96 Strong progress in last decade 3 2 62-66 82-86 77-81 1 87-91 15% 2% 25% 3% EM GDP Per Capita Relative to the U.S. (PPP, 5-yr average) Source: Penn Table 7.1, WEO, IMF staff calculation. 45

199 1995 2 25 21 214 (in percent of GDP) Consumption 75.1 76.1 77. 78.4 8.1 79.3 Advanced Economies Investment 24.9 23.2 23.5 22.5 19.9 2.3 Current account -.5.1-1. -1.1..3 Consumption 74.2 76.1 74.6 69.4 67.2 66.7 Emer.& Develop. Eco. Investment 25.4 24.9 23.2 26.3 3.8 31.5 Current account -.4-1.6 1.5 3.9 1.5.8 46

25 2 15 1 5 Working age population (in millions) 14 12 1 8 6 4 2 Euro area Japan China India United States United Kingdom Brazil Sub-Saharan Africa 47

Real income growth (Percent change between 1988 and 28) Source: Branko Milanovic (212) 48

Total factor productivity Growth in percent Source: Antonin Bergeaud et al (214) 49

Interconnectivity 5

Interconnectivity 51

Interconnectivity 52

Interconnectivity 53

Interconnectivity 54

Interconnectivity 55

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V. Proactive policies needed 6

I. Growth enhancing supply side policies a) Structural reform i. Product market competition ii. Labor market flexibility iii. Increase service sector productivity iv. Pension reform b) Smart investment i. Infrastructure investment ii. Knowledge economy a) Long term R&D b) Innovative SMEs iii. Measures to move traditional sectors to their frontier iv. Long-term human capital formation a) Education b) Healthcare c) Childcare c) Supply-side supporting monetary and fiscal policies i. Smart/quality fiscal expenditure ii. Monetary policy with targeted transmission channel iii. Monetary and fiscal policies maintain growth speed 61

II. Macroeconomic stability a) Be vigilant in financial market risks i. Strengthen monetary and credit transmission to the real economy ii. Use macroprudential policies b) Implement consistent regulatory reform and enhance supervision of the shadow banking system c) Monitor of global liquidity flows and currency dynamics d) Prepare for Fed s interest rate hike e) Form medium term fiscal consolidation plans III. Global cooperation a) Facilitate globalization (trade, capital flows) b) Enhance global financial safety net c) Implement global regulatory reform d) Put into practice new multilateralism 62

Thank you 63