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Seven Lean Years—Explaining Persistent Global Economic Weakness 9 June 2015 Bank of Canada and European Central Bank Conference Tim Lane Deputy Governor Bank of Canada
Seven Lean Years—Explaining Persistent Global Economic Weakness 9 June 2015 Bank of Canada and European Central Bank Conference
Tim Lane Deputy Governor Bank of Canada
The global economy remains weak and divergent
Global growth rates below previous trend, with series of downside surprises
Major groups of economies are on divergent paths
Inflation persistently low in many economies
Rival—or complementary--explanations – Prolonged fallout from the crisis – Procyclical policy responses and other events – Structural decline in potential growth rates
These explanations have very different policy implications
2
Serial disappointment
-1
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013 2014 2015
%
Realised
Forecast
World GDP growth - Realised vs IMF forecasts
Last observation: October 2014 Source : IMF WEO
(%, Annual world GDP growth)
3
Inflation has been persistently slow in many advanced economies
4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-3
-2
0
2
3
5
6%
Canada United States Euro area Japan United Kingdom
CPI inflation, Year-over-year percentage change
Last observation: April 2015 Note: Starting in April 2014 and ending in March 2015, Japanese inflation has been adjusted downward by 2 percentage points, based on Bank of Japan estimates of the effect of the increase in the value-added tax Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Japan Ministry of Internal Affairs and Communications, Bank of Japan, U.K. Office for National Statistics
Nominal long-term interest rates
5
0
2
4
6
8
2000 2005 2010 2015
%
10-year government yields, monthly averages, %
UK Germany US Canada
Investment has been on a lower track
6
14
16
18
20
22
24
26
28
30
14
16
18
20
22
24
26
28
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
% %
Canada United States Euro area Japan
Investment as a share of GDP
Last observation: 2014 Q4 Note: Investment calculated as gross fixed capital formation Source : StatCan, BEA, EUROSTAT, CAO
Global trade has weakened post-crisis
7
40
45
50
55
60
170
190
210
230
250
2000 2003 2006 2009 2012
% %
World trade/ investment (LHS) World trade/GDP (RHS)
Last observation: 2013 Note: World gross capital formation is used to represent investment. Sources: WDI, IMF IFS, IMF DoT
World merchandise trade as a share of GDP and investment Shares calculated from real values in 2005 USD. Annual data.
Commodity prices
8
150
200
250
300
350
400
450
500
10
30
50
70
90
110
130
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Index $US
WTI crude oil (left axis) Brent crude oil (left axis) Non-energy commodity price index (right axis)
Last observation 1/6/2015 Source: Bloomberg and Bank of Canada
Fallout from the crisis
It is well-known that recessions following financial crises have persistent effects—Reinhart and Rogoff – Balance-sheet repair deleveraging – Many initial forecasts did not take this experience to heart
Deleveraging process has been protracted, with varying results – In the US, private sector debt has been brought down while public
sector debt continues to mount – In the EU, compressed spending did not prevent a further increase in
household indebtedness
Prolonged uncertainty
9
Deleveraging
-20
0
20
40
60
80
100
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Domestic debt remains elevated in the euro area (Cumulative debt increase since 2001, as a share of GDP)
US euro area
10
Procyclical policy
During the crisis, coordinated fiscal expansion—key to preventing another Great Depression
Starting in 2010, fiscal authorities in many countries started return to balance—in some cases by choice – Left monetary policy as “only game in town”
Another perspective: asymmetric global rebalancing – The deficit countries do most of the adjustment
Financial reforms reinforced financial institutions’ ongoing post-crisis balance sheet adjustment
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Fiscal consolidation
12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-10
-8
-6
-4
-2
0
2
-10
-8
-6
-4
-2
0
2
% of GDP
Advanced economies aggregate United States Japan Canada Euro Area
Structural balance as a per cent of GDP in advanced economies
Source: IMF WEO Notes: 2015 and 2016 are projected values by the IMF. The chart uses an aggregate series weighted by the IMF PPP weights. The advanced economies in the aggregate include: US, Japan, Germany, France, Italy, Spain, Australia, Canada, Denmark, Ireland, Korea, Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, United Kingdom
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Fiscal consolidation has delayed the recovery
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
2011 2012 2013 2014 2011 2012 2013 2014
% Output gap
Output gap without consolidation
Estimated effects of fiscal consolidation on the output gap
Last observation: 2014 Source : Staff calculation
United States Euro area
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Consequences of asymmetric adjustment
Euro area crisis and adjustment
Three dimensions to crisis – Asymmetric balance-of-payments adjustment – Fiscal crisis – Financial crisis
Fragile confidence—limited room to maneuver
15
Euro area rebalancing
16
-20
-10
0
10
20
30
40
50
60
Euro area Germany Periphery
$US billions
2005-2007
2010-2013
Current account balances pre and post crisis average
Source: IMF
Labour costs
17
90
100
110
120
130
140
150
90
100
110
120
130
140
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Euro area France Germany Italy Spain
Nominal Unit Labor Costs Index: 2000=100
Last observation: 20014Q4 Source : Eurostat
accumulation of imbalances
only Spain has improved
Financial fragmentation in euro area
18
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20151.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
% %
Italy Spain Euro Area Germany
Interest rates have diverged in the euro area New loans, quarterly, %
Last observation: 2015 Q1 Source: ECB
Loan growth in the euro area has been anemic since the financial crisis
19
90
92
94
96
98
100
102
104
2008 2009 2010 2011 2012 2013 2014 2015
Business loans in the euro area remain at a depressed level (Index: 2010=100)
Business loans Housing loans
The unemployment rate remains elevated
20
4
5
6
7
8
9
10
11
12
13
2004 2006 2008 2010 2012 2014
%
Unemployment rates (%, annual data)
United States Euro area
Last observation: 2014 Source: OECD
“Events, dear boy, events…”
Fiscal cliff Russia/Ukraine Arab Spring, Libya, Egypt, ISIS, Gaza South China Sea Japanese tsunami, floods in Thailand North Korea The Occupy movement Polar Vortex etc., etc.
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Structural factors
Meanwhile, potential growth also slowing—for reasons largely independent of) the post-crisis adjustment – Demographics – Income inequality – Increasing share of world GCP in EMEs with high savings rates
– Maturation of Chinese economy
“Secular stagnation” arguments take these factors to an extreme
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Long-run growth prospects have been revised down across advanced economies
23
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Canada Euro area UK US Japan
%
Average of GDP growth forecast 6-10 years out
2005 2015Source: Concensus Economics
Demographics: aging populations
Source: United N population statistics
0
5
10
15
20
25
30
35
1995 1900 2005 2010 2015 2020 2025 2030
%
Share of population aged 65+
Euro area US Japan China
Forecast
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1995 2000 2005 2010 2015 2020 2025 2030
%
Labour force growth
Euro area US Japan China
Forecast
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Savings glut?
25
15
20
25
30
35
1980 1985 1990 1995 2000 2005 2010
%
World Advanced economies Emerging markets
Global, Advanced Economies and Emerging Market Savings Per cent of GDP
Last observation: 2013 Sources: IMF, World Economic Outlook, April 2014
Slowing Chinese growth
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Real GDP Growth in China (Y/Y, % GDP growth)
Sources: Haver and Consensus Forecasts (May 11, 2015)
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Conclusion
Appears to be some truth to all of competing explanations
Implies that we need policy action across several fronts – Structural reforms may help address longer-term growth potential
– But deficient demand, reflecting post-crisis adjustments, also needs to be addressed
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