THE GLOBAL ECONOMY: SECULAR STAGNATION OR RECOVERY AT LAST? Adair Turner Chairman Institute for New Economic Thinking Institutional Money Kongress Frankfurt, 21 February 2017 300 Park Avenue South - 5 th Floor, New York, NY 10010 USA 22 Park Street, W1J 2JB London, UK
IMF Medium term growth projections Oct 2011 Oct 2012 Oct 2013 Oct 2014 Oct 2015 Apr 2016 6 4 2 0 Advanced Economies Emerging Market & developing countries World Source: Data for 2011-2013 from the IMF World Economic Outlook, April 2014, Figure3.1. Data from 2014-2016 are the furthest year out forecast annual growth from relevant IMF WEO 1
Successive market forecasts of BofE interest rates May 08 - Aug 16 6% 5% 4% 3% Feb-10 Feb-11 Feb-14 2% 1% Feb-09 Feb-15 Feb-16 Aug-16 Feb-13 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Resolution Foundation and Bank of England Inflation Report, August 2016 2
Sterling 10 year index-linked gilt: YTM 1985 2016 5 4 3.85 3.59 3 2.54 2 1 1.95 1.22 0-1 -0.62-1.5-2 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Jun-16 Source: Bank of England Statistics 3
WORLD ECONOMIC OUTLOOK (WEO) UPDATE Subdued Demand, Diminished Prospects January 2016 4
World Economic and Financial Surveys WORLD ECONOMIC OUTLOOK (WEO) Subdued Demand, Symptoms and Remedies October 2016 5
What has changed? The view from the Bank of England Long-term interest rates have risen globally (Chart 1.1) Survey indicators of global growth have picked up (Chart 1.2) Inflation in advanced economies has picked up (Table 1.B) Market-implied paths for short-term interest rates have risen internationally (Chart 1.3) Equity prices in advanced economies have risen (Chart 1.5) Long-term implied future inflation rates have picked up in the United States and Germany (Chart 1.7) Measures of confidence have increased sharply in the euro area and United States (Chart 1.8) Source: Bank of England Inflation Report February 2017, Section 1, Financial Markets and Global Economic Developments 6
Successive market forecasts of BofE interest rates May 08 Feb 17 6% 5% 4% 3% Feb-10 Feb-11 Feb-14 2% 1% Feb-09 Feb-15 Feb-16 Feb-17 Aug-16 Feb-13 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Resolution Foundation and Bank of England Inflation Report, August 2016 7
What has not changed : Sterling 10 year index-linked gilt: YTM 1985 2016 5 4 3.85 3.59 3 2 1 2.54 1.95 1.22 0-0.62-1 -2-1.5 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Jun-16 Dec-16-2.0 Source: Bank of England Statistics 8
Debt overhang Secular Stagnation What will happen now? 9
Private domestic credit as a % of GDP: Advanced economies 1950 2011 Source: Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten, C. Reinhart & K. Rogoff, 2013 10
Japanese government and corporate debt: 1990 2010 250 200 Bank lending to non-financial corporates General Government debt % GDP 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: BoJ Flow of Funds Accounts, IMF WEO database (April 2011), FSA calculations 11
Global debt excluding financials 280 260 Emerging Markets Developed Markets World 240 220 % of GDP 200 180 160 140 120 100 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014 12
Global debt excluding financials % of GDP Emerging Markets Developed Markets World 280 260 240 220 200 180 160 140 120 100 01 02 03 04 05 06 07 08 09 10 11 12 13 2013 2015 Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014 for years 2001 to 2013 Source: BIS for years 2013 and 2015 13
Traditional policy levers blocked Debt-financed fiscal deficits First round stimulative effect But concerns about long-term debt sustainability Ultra loose monetary policy Interest rate at zero bound QE Imperfect transmission to real economy investment and consumption Asset prices inequality Currency devaluation channel is zero sum game Only works by re-stimulating growth of private credit 14
Debt overhang : the unavoidable choice? Sustained low growth and low inflation debt burdens never decline Debt erosion via ultra low interest rates Debt write-off, default and restructuring But leads to new debt creation But has disruptive / depressive effect 15
Debt overhang Secular Stagnation What will happen now? 16
Sterling 10 year index-linked gilt: YTM 1985 2016 5 4 3.85 3.59 3 2.54 2 1 1.95 1.22 0-1 -0.62-1.5-2 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Jun-16 Source: Bank of England Statistics 17
Why did real rates fall so much even before the crisis? Ex-ante savings Global imbalances? Inequality? Demographic effects? Ex-ante investment Reduced investment needs? In plant and machinery? In advanced economy property and infrastructure? 18
Global saving rates: 1990 2015 35 30 25 20 15 19 2014 2015 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % GDP 2013 World Advanced economies Emerging economies Source: International Monetary Fund, World Economic Outlook Database, April 2016
Global imbalances: current account surpluses/deficit as % of GDP Advanced Economies 2007 2016 Germany +6.7 +8.6 Japan +4.9 +3.7 Korea +1.1 +7.2 Netherlands +6.0 +9.1 Switzerland +10.1 +9.2 Taiwan +8.6 +15.0 UK -2.5-5.9 US -5.0-2.5 Developing Economies 2007 2016 China +9.9 +2.4 Brazil +0.3-0.8 Egypt 0.0-5.8 India -1.3-1.4 Indonesia -1.4-2.3 Mexico -1.4-2.7 South Africa -5.4-3.3 Turkey -5.9-4.4 Source: IMF World Economic Outlook Database, October 2016 20
Current account balances of Eurozone countries 15 Germany Greece Italy Netherlands Portugal Spain 10 5 GDP Percentage 0-5 -10-15 -20 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E Source: International Monetary Fund, World Economic Outlook Database, October 2016 21
Eurozone current account as % GDP : 2005-15 4% 3% 2% 1% 0% -1% -2% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: International Monetary Fund, World Economic Outlook Database, October 2016 22
10 9 8 7 6 5 4 3 2 1 0 China current account surplus As % China GDP As % Global GDP ex China 0,75 0,65 0,55 0,45 0,35 0,25 0,15 0,05 2015 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: IMF World Economic Outlook Database, October 2016 Source: IMF World Economic Outlook Database, October 2016 23
Advanced economy investment as % of GDP: 1986 2015 five-year averages 25.1 25 23.6 23.5 23 22.3 21.8 21 20.7 19 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Source: IMF World Economic Outlook Database, April 2016 24
Wealth and employment in ICT businesses Market Value ($bn) Employees (000s) 447 (Sep 2016) 114,000 555 67,000 374 14,500 (Sep 2010) We have over 1 million users per engineer and this number has been steadily increasing 1* 12 19* 55 * Paid by Facebook With only 32 engineers, one WhatsApp developer supports 14 million active users 25
Average income increases US (1980=100) bottom 20% top 5% top 1% 350 300 250 200 150 100 50 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: US Census Bureau; World Top Incomes Database 26
Drivers of a falling neutral real rate? Developed economies Likely reversal 1990 4% Lower future growth Demographic effects -0.9% Higher inequality -0.45% Asian savings glut -0.25% Cheaper capital goods -0.5% Less public investment -0.2% Rising spread -0.7% -1.0% X X X X X?? Unexplained -0.5% Today -0.5% Source: Lukasz Rachel and Thomas Smith, Secular Drivers of the Global Real Interest Rate, Bank of England Working Paper No. 571, December 2015 27
Debt overhang Secular Stagnation What will happen now? 28
What has changed? China Trump The projections in this Economic Outlook offer the prospect that fiscal initiatives could catalyse private economic activity and push the global economy to the modestly higher growth rate of around 3½ per cent by 2018 (OECD Global Economic Outlook, November 2016) 29
OECD scenario for increased global growth World real GDP growth Source: OECD November 2016 Global Economic Outlook 30
China Debt to GDP Ratio Government Non-financial Corporate Households Financial Institutions China By country, 2015 290 51 China 51 132 39 68 290 121 23 83 8 2000 7 158 132 42 72 39 20 68 24 2007 Q2/15 $2 $7 $32 Australia USA Canada Germany 35 75 78 97 76 70 54 70 53 120 95 78 69 59 41 45 254 290 286 286 Total debt in US$ trillion Source: Group of Thirty Report, Shadow Banking and Capital Markets: Risks and Opportunities, November 2016 31
China in 2016 Expectation Credit discipline imposed Controlled growth slowdown Shift to more sustainable model Reality Continued rapid credit growth Rising potential bad debts Quasi-fiscal stimulus via banks, policy banks and PBOC direct lending Dramatic growth of shadow banking Rising deposits and other bank liabilities as % GDP Result Investment and growth maintained Increasing vulnerability to capital outflow 32
The Trump effect Fiscal stimulus and financial deregulation Demand no longer subdued short term boost but long term risks Tax cuts, ACA repeal and labour market deregulation Will boost inequality Protectionism via tariffs or corporate tax reform Cannot offset technological change Major global risks 33
What will happen De facto monetisation should we care? Slowdown and restructure continually delayed but must happen sometime Still playing with social and political fire OK for now but unbalanced Trump sugar rush but big medium term risks 34