CSO IMF/WB forum Fall 2013 Powerpoint- Prakash Loungani

7/27/2019 CSO IMF/WB forum Fall 2013 Powerpoint- Prakash Loungani

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ENSURINGAN EUROPEAN RECOVERY

Prakash LounganiAdvisor, Research Department, IMF

Co-Chair, Jobs & Growth Working Group, IMF

October 12, 2013

VIEWSEXPRESSEDARETHOSEOFTHEPRESENTERANDSHOULDNOTBEASCRIBEDTOTHE IMF .

I thank Ezgi Ozturk for excellent research assistance.


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Outline

1. Recovery is here (fingers crossed)

2. Why did it take so long? Comparison with Asian crisis countries

Comparison with previous global recoveries

3. How to keep it going


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1. Recovery is here

(fingers crossed)


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World U.S.

Euro

Area Japan Brazil Russia India China

2013

(Oct. 2013)2.9 1.6 -0.4 2.0 2.5 1.5 3.8 7.6

2013

(Jul. 2013)3.1 1.7 -0.6 2.0 2.5 2.5 5.6 7.8

2014

(Oct. 2013)3.6 2.6 1.0 1.2 2.5 3.0 5.1 7.3

2014

(Jul. 2013)3.8 2.7 0.9 1.2 3.2 3.3 6.3 7.7

WEO Real GDP Growth Projections(percent change from a year earlier)

Source: IMF, World Economic Outlook. 8

The annual projections

4


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A closer look


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2009 2010 2011 2012 2013 2014 2015

Euro area -4.4 2.0 1.5 -0.6 -0.4 1.0 1.4

Germany -5.1 3.9 3.4 0.9 0.5 1.4 1.4

France -3.1 1.7 2.0 0.0 0.2 1.0 1.5

Italy -5.5 1.7 0.4 -2.4 -1.8 0.7 1.1

Spain -3.8 -0.2 0.1 -1.6 -1.3 0.2 0.5Source: IMF, World Economic Outlook database.

Euro Area and Selected European Countries: GDP Growth

(Percent)


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A dire unemployment situation


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A lost generation?


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Correlation between Change in

Unemployment and Change in GDP

(2012, in percent)

-3

-2

-1

0

1

2

3

4

5

6

7

-8 -6 -4 -2 0 2 4

Chang

einUnemploymentRate

Real GDP Growth

Euro Area


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2. Why did it take so long?


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Europe had worse initial fiscal position

than Asian crisis countries

IDN

KORTHD

GRC

IRE

POR

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

0 20 40 60 80 100 120 140

Fiscalbalance(as%ofG

DP)

General government debt (% of GDP)

Data for Asian and European countries is for respectively 1996 and 2009.


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Asia adjusted more via exchange rates,

Europe via domestic adjustment

IDN

KOR

THD

GRC

IRE

POR

-55

-45

-35

-25

-15

-5

5

-6 -4 -2 0 2 4 6 8 10

REERadjustment

Fiscal adjustment (% of GDP)

REER adjustment measured over 1997-98 for Asian countries and 2010-12 for European countries. Fiscal adjustment measured aschange in fiscal balance between 1996-2000 for Asian countries and 2009-2012 for European countries.


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EUR access higher in % quota

but not in % of financing needs

IDN

KOR

THDGRC1

GRC2

IRE

POR

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

0 500 1000 1500 2000 2500 3000 3500

IMFfinancingas%ofgrossfinancingneeds

IMF financing as % of Quota

Financing needs comprise current account balance and short-term debt (at remaining maturity). For Korea, short-

term debt is on a maturity basis. The first Greek program (GRC1) was not fully disbursed.


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Asia rebounded faster

85

90

95

100

105

110

t-1 t t+1 t+2 t+3 t+4

RealGDPlevel,crisissta

rt=100

Eurozone program countries Asian program countries

Simple group averages of real GDP levels


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A Recovery on Track?

World Real GDP per capita

Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession.

Zero is the time of the global recession year. Each line show the PPP-weighted average of the

countries in the sample.

Figure 1. Real GDP Per Capita

(index, PPP weighted)

80

90

100

110

120

130

-4 -3 -2 -1 0 1 2 3 4

World

Global Recession Year

Average of previous recoveries

Recovery from the Great Recession


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The Divergence in Recovery

between Advanced Countries and Emerging Markets

Figure 2. Real GDP per Capita: Advanced Countries and Emerging Markets

Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession. Zero is the

time of the global recession year. Each line show the PPP-weighted average of the countries in the

respective group.


80

90

100

110

120

130

-4 -3 -2 -1 0 1 2 3 4

Advanced Countries

Global Recession Year


80

90

100

110

120

130

-4 -3 -2 -1 0 1 2 3 4

Emerging Markets



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Divergence in Government Spending

between this Global Recovery and Past Global Recoveries

Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession. Zero is the

time of the global recession year. Each line show the PPP-weighted average of the countries in the

respective group.

Figure 3. Re al Primary Expenditure


60

90

120

150

-4 -3 -2 -1 0 1 2 3 4

Advanced Countries


60

90

120

150

-4 -3 -2 -1 0 1 2 3 4

Emerging Markets



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Divergence in Government Spending

between this Global Recovery and Past Global Recoveries:

US and Euro Area


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Deleveraging


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3. How to keep it going


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The (overloaded) policy agenda

Banking union

Macro policies Fiscal

Monetary

Labor market & structural policies

**

External conditions US monetary policy actions

Emerging market growth


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Banking union

Ongoing reforms should be expedited, including afinal agreement on the Bank Recovery andResolution and Deposit Guarantee Scheme (DGS)Directives by the European Parliament.

European partners should agree on a strongresolution mechanism based on a centralizedauthority, supported by a common fiscal

backstop, with powers to trigger resolution andmake decisions on burden-sharing to ensuretimely and least-cost resolution.


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Fiscal policy

Fiscal consolidation inevitable in high-debt countries, but it also

reduces short-term growth. Getting the pace and composition ofconsolidation right is therefore essential.

The pace and composition of adjustment should be attuned to country

circumstances.

Pace: Where financing allows, adjustment should be conducted at a

gradual pace that balances the need to reduce structural deficits against

that of not undermining the recovery, and automatic stabilizers should

be allowed to operate.

Composition: The expenditure and revenue mix in adjustment plans

should be calibrated to reduce negative short-term effects on economic

activity, while enhancing long-term growth prospects and protecting the

most vulnerable.

Fiscal adjustment should be based on credible medium-term plans.


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Monetary policy

Forward guidance that rates will remain low

But also dependent on US monetary policy

actions


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1.0

1.5

2.0

2.5

3.0

Jan. 2013 Mar. 13 May 13 Jul. 13 Sep. 13

GDP growth in 2013

GDP growth in 2014

10-year government bond yields

Government Bond Yields and GDP Growth FromConsensus Forecast(percent

44

45

46

47

48

49

50

4

5

6

7

8

9

10

2006 07 08 09 10 11 12 13

Unemployment rate

(left scale)

Employment as

percent of population

Unemployment Rate(percent)

Sources: Bloomberg, L.P., Consensus Forecast; and IMF staff estimates.25

May 22, 2013

US conditions


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0

1

2

3

4

5

6

7

2007 08 09 10 11 12

Germany

United States

U.S. average 30-year fixed rate

mortgage

Key Interest Rates 2/(percent)

Sep.

13

0

0.1

0.2

0.3

0.4

0.5

0.6

t t+12 t+24 t+36

United States

Europe

Policy Rate Expectations 1/(percent; months on x-axis; dashed lines are from

the April 2013 WEO)

Source: Bloomberg, L.P.

1/ Expectations are based on the federal funds rate for the United States, the sterling overnight interbank average rate for the United Kingdom, and the euro interbank

offered forward rate for Europe; updated September 24, 2013.2/ Interest rates are 10-year government bond yields unless noted otherwise.

26

Impact on Europe from US

developments


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Global aggregates: Headline Inflation(year-over-year percent change; dashed lines are the six-to-ten-yearinflation expectations)

But inflation pressures are very low. Thus, our WEO assumes that

monetary policy stays very accommodative in advanced economies.

-2

-1

0

1

2

3

4

5

6

2002 04 06 08 10 12

Euro area United States

Sources: Consensus Forecast; and IMF staff estimates.

Inflation and inflation expectations

remain subdued

27

14:

Q4


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Getting macro right will help labor markets

There is sometimes the nave belief thatunemployment must be due to a defect in the

labor market, as if the hole in a flat tire mustalways be at the bottom, because that is wherethe tire is flat (Solow, 2000).

"It takes a heap of Harberger triangles to fill anOkun's gap. (Tobin, 1977)


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Framework

Large increase in unemployment in advanced economies

during the crisis

Cyclical or structural unemployment?

How to achieve the relative price adjustment in

periphery Euro countries?

Can labor market reforms reduce the natural

unemployment rate and raise potential growth?

Staff Discussion Note (Blanchard, Jaumotte, Loungani) looks

at IMF advice in this light

2


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Initial increase cyclical rather than structural

Greater uncertainty about relative proportions now, but

remains largely cyclical in our view

Beveridge curve quite stable; moreover shifts may notbe sign of increase in natural rate (Diamond 2013)

Other measures of mismatch back to normal

Lack of deflation not a sign of small unemployment gap

Stability of Okuns Law (even during the Great Recession)

suggests jobs will return if the growth returns.

Hence focus of IMF policy recommendations remains on getting

growth back

Unemployment during the Great Recession

3


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Labor Market Flexibility:

Moving Beyond Mantras


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Extension of unemployment benefits Iceland, Greece

But reduction in Portugal

Targeted interventions to help some groups Youth; Low-skilled; Long-term unemployed (see chart that follows)

Move away from duality Too late to stop layoff of temporary workers

But reduction in employment protection on permanent contracts couldhelp hiring as recovery takes hold

Recommendations: Labor Market Policies

3


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Recovery differs across groups

33

90.0

95.0

100.0

105.0

110.0

115.0

Youth (aged 15-24) Older workers (aged 55-64)

Low-skilled (aged 25-64) High-skilled (aged 25-64)

Ratio of each group's employment relative to overall employment,a

OECD av erage,b

2008 Q1-2011 Q4, index = 100 at the start of the

crisis


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In some Euro area countries, need reduction in relativewages

Best way to achieve would be through national tripartite

agreement Experience of Latvia, Ireland, Greece

Without such an agreement More flexibility in wage-setting

Reduction in public sector wages Reduction in minimum wage

Fiscal devaluations

Higher inflation in North relative to South

Competitiveness

3


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Higher potential growth and lower natural rate of

unemployment desirable

Product market reforms

essential for medium-run but can hurt in the short-run

Labor market reforms move away from duality

more flexible wage-setting

Reduce tax distortions to raise participation, particularly for females

Raising retirement age and adjusting benefits to raise participation of older

workers

Medium-run Growth

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CSO IMF/WB forum Fall 2013 Powerpoint- Prakash Loungani

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