Risk mitigation strategies: Deeper role for
policy as globalization amplifies impact of
world cycles?"
Vanessa Rossi
International Economics, Chatham House
Tokyo
November 2009
World growth rates become more divergent and more volatile?
10
Emerging and
developing economies
6
World
4
2
Advanced economies
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0
1980
Annual real GDP growth (%)
8
-2
-4
•
•
Great moderation ends in unexpectedly massive recession
Turbulence may continue as recovery unlikely to be smooth
and cycles will recur
Source: IMF
2
The unexpected depth of recession - revisions
in IMF forecasts
Emerging Economies
Advanced Economies
4
8
IMF Apr 08
IMF Oct 08
1
IMF Apr 09
0
-1
2008
-2
-3
-4
-5
IMF Oct 09
2009
2010
2011
% GDP growth
% GDP growth
2
IMF Apr 08
7
3
6
IMF Oct 08
5
IMF Oct 09
4
IMF Apr 09
3
2
1
0
2008
2009
2010
2011
3
World trade still weak – upturn mainly in Asia
4
Recession bigger than GDP loss
suggests:
• $1 trillion drop in global GDP a poor measure
of crisis
• Goods trade still down by around 20%
• $3-4 trillion loss in world trade in 2009
• $10-20 trillion in lost business world wide?
• Peak to trough as much as $50 trillion n
wealth lost - partially recouped as markets
have rallied
5
Recovery also under par for developed world
Emerging Economies
Advanced Economies
7
5
4
3
2
1
0
-1
-2
-3
-4
2001
Recession
1991
Recession
2008
2009
1982
Recession
2010
2011
2001
Recession
6
% GDP growth
% GDP growth
6
5
4
1982
Recession
3
IMF Oct 09
2
1991
Recession
1
IMF Oct 09
0
2008
2009
2010
2011
Source: IMF
6
Average growth rates in BRICs
1980s
1990s
2000-07
2008-10
2011-14
12.0
10.1
9.8 10.0
10.0
8.0
average annual % change
9.7
8.8
7.8
7.2
7.1
6.4
5.4 5.6
6.0
4.0
2.0
4.0
3.6
3.5
3.0
2.6
1.7
0.0
Brazil
-0.1
Russia
India
China
-2.0
-4.0
-3.8
-6.0
•
•
•
Emergers’ growth largely on the back of China
Brazil growth steady (above 80s and 90s rates) but not spectacular
Russia hardest hit country among BRICs
Source: IMF
7
Performance since Q3-2008
8
Average (unweighted) GDP growth (y-on-y)
Standard Deviation
5.8
6
4.7
% change Q3-08 to Q2-09
4
1.7
2
0.2
0
Latin America (excl. Mexico)
Asia (excl. China & India)
Emerging Europe
-2
-2.3
-4
-6
-6.2
-8
Source:
8
Asia crisis vs. pre-crisis
9.5
10
6.3
5.9
6.0
Average (unweighted) GDP growth (%)
5.0
5
0
0.3
-0.8
Asia
China & India
Four Tigers
New Tigers (incl.
Vietnam)
-5
-5.6
-10
Pre-Crisis (2003-08)
Crisis (Q4-08 to Q2-09)
-15
•
•
“Old” Tigers hit hard by slump in cyclical manufactures trade
New Tigers doing relatively well particularly Indonesia and
Vietnam (both over 4% growth on average during last 3 quarters)
Source:
9
Emerging Europe crisis vs. pre-crisis
10
8.8
7.8
6.2
Average (unweighted) GDP growth (%)
5.3
5
0
Emerging Europe
Eastern Europe
Baltics
CIS
-3.1
-5
-6.2
-6.3
-10
Pre-Crisis (2003-08)
Crisis (Q4-08 to Q2-09)
-15
•
•
•
-13.7
Worst performing region in the world: only Poland growing (1.5)
Baltics suffering from double-digit contraction
CIS: Ukraine collapsed, Russia doing poorly, Belarus only mild
recession
Source:
10
Why bigger losses in some countries than
others?
1980s
1990s
2000-07
2008-10
2011-14
5.0
4.4
4.0
average annual % change
3.1
3.0
2.5
2.3
2.0
2.8
2.8
2.1
1.9
1.7
1.5
1.5
3.2
2.6
2.5
2.2
1.7
1.0
0.0
Germany
Japan
-1.0
UK
US
-0.3
-0.9
-1.3
-1.5
-2.0
Source: IMF
11
France and Germany show varying impacts of
crisis
3.0
3.0
France
2.0
2.0
0.3
0.5
0.0
-0.5
-1.0
-3.0
-4.0
-0.2
-1.4
Private consumption
Gov't consumption
Gross investment
Inventories
Net trade
GDP
-1.3
Q2-08
Q4-08
Q1-09
Q2-09
0.3
-0.6
-1.0
-2.0
-4.0
Q3-08
1.6
0.0
-3.0
-5.0
Q1-08
1.0
% contribution to GDP
% contribution to GDP
1.0
-2.0
Germany
-0.3
Private consumption
Gov't consumption
Gross investment
Inventories
Net trade
GDP
-2.4
-3.5
-5.0
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
12
Services quickly recover - even expand
13
Effect of cyclical trade in Germany and Japan
3.0
3.0
Germany
2.0
2.0
1.6
0.3
-0.3
0.0
-0.6
-1.0
-2.0
-3.0
-4.0
-1.4
-2.1
Private consumption
Gov't consumption
Gross investment
Inventories
Net trade
GDP
-2.6
-2.4
1.0
% contribution to GDP
% contribution to GDP
1.0
Japan
1.0
-1.5
-1.0
-1.1
-1.0
-2.5
-2.0
-3.0
-3.5
0.9
0.0
-4.0
Private consumption
Gov't consumption
Gross investment
Inventories
Net trade
GDP
-3.1
-3.5
-5.0
-5.0
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
14
US exits recession in Q3 – more convincingly
than Germany and France in Q2
15
US wealth effects large, savings up, debt decreasing
16
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
200
1984
1982
1980
New housing per 1,000 people
Property losses: housing markets level off
250
US
UK
Spain
Ireland
France
150
100
50
0
17
US signs of improvement
18
Euro area indicators also remain weak
19
World trade loss worth $3-4 trillion in 2009
20
China grows robustly – imports picking up
21
Japan benefits from Asian growth
22
LONG-TERM FORECASTS AND RISKS FROM
PREMATURE EXIT STRATEGIES
23
Deflation in US, EU will end
6
US CPI (Headline)
US CPI (Core)
Euro area HICP (Headline)
Euro area HICP (Core)
5
3
2
1
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
-1
Jul-00
0
Jan-00
Inflation rate (annual)
4
-2
Source: St. Louis Fed, ECB
24
US yield curve
6-m onth
1-year
2-year
5-year
10-year
6.0
US Treasuries (rate)
5.0
4.0
3.0
2.0
Federal funds (effective)
1.0
0.0
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Source: US Federal Reserve
25
Impacts on long run growth potential?
• Effect of deep recessions on investment and
productivity – short and medium-term damage
to growth
• Long-tailed costs from governments bailing
out the economy in the short term – a “spend
now and let tax payers to pay later” approach
to curbing recession
• More costly environment for business and
finance – “ the age of the regulator” - more
restrictions ahead to “insure” against
instability
26
GDP 10-year rolling averages: US, Euro area, Japan
•
•
Rolling averages roughly corresponding with long-run potential
output growth: pre-crisis roughly 3% for US, 2% for Europe
Post-crisis drop to around 1% in Europe, Japanese level, and 2%
for US
Source: IMF
27
3 Scenarios for potential output
5
16
A
3
12
-2
-3
-4
a)
b)
c)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
11
-5
Crisis losses recovered
Crisis losses not recovered, potential output growth maintained
Crisis losses not recovered, potential output growth permanently downgraded
28
2020
2019
2018
2017
2016
2015
2014
2013
2012
v
2011
C
2010
2009
2008
2007
2006
-1
2005
C
2004
13
0
2003
A
Output
gap
1
2002
14
B
2
2001
Euro area GDP Growth (%)
B
2000
15
2005
Euro area GDP (constant 2007 $ tn)
4
Effect on policy tightening
15
5
4
14
2
1
C
-2
-3
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0
2007
13
12
C
11
80% of GDP
10
9
8
60% of GDP
-4
a)
b)
c)
Crisis losses recovered
Crisis losses not recovered, potential output growth maintained
Crisis losses not recovered, potential output growth permanently downgraded
29
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
-5
2008
7
2007
Euro area GDP growth (%)
B
Euro area debt (current $ tn)
A
3
-1
B
a)
b)
c)
14
11
2015
2014
2013
2012
2011
2010
2009
2008
130
2007
135
2006
C
2005
140
2004
145
2003
B
2002
A
2001
155
Euro area unemployment rate (%)
160
2000
150
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Euro area employment level (m)
Effect on unemployment
15
13
C
12
B
10
9
8
7
6
A
5
High growth, high productivity
Normal growth, normal productivity
Low growth, normal productivity
30
GLOBALIZATION AMPLIFIES IMPACT OF
WORLD CYCLES
– raises question mark over scale and form of
risk mitigation strategies
31
Losses in cyclical goods hurt Germany and Japan
45
39.4
40
% annual decline
35
33 .0
30
2 6.2
25
G erm a ny
J apan
19 .8
20
15
10
5.2
5
2 .5
0
Inves tm ent go ods
D urab le go ods
N on-D urable goo ds
32
Domestic dependence on cyclical industry
100
39.1
90
25.7
40
80
% of GDP
70
3.8
14.5
17.3
17.3
6.2
6.3
5.1
23.0
35
30
6.1
25
60
50
21.5
18.4
20
40
15
Agriculture
Industry
Construction
Wholesale and retail trade
Financial and real estate
Other services
Exports of Goods (rhs)
14.1
30
10
20
7.9
10
5
0
0
Germany
Japan
France
UK
US
33
Foreign dependence on cyclical industry
80
24.1
78.0
25
70
62.6
60.1
% of exports
53.8
55.5
50
15
40
11.6
30
11.3
10
10.1
% of GDP
60
20
Plastics
Iron and steel
Ships, Aircraft, Rail
Precision tools
Vehicles
Electronics
Machinery
Durable goods/GDP (rhs)
20
5
4.7
10
0
0
Germany
Japan
France
UK
US
34
Effect of cyclical trade in Germany and Japan
3.0
3.0
Germany
2.0
2.0
1.6
0.3
-0.3
0.0
-0.6
-1.0
-2.0
-3.0
-4.0
-1.4
-2.1
Private consumption
Gov't consumption
Gross investment
Inventories
Net trade
GDP
-2.6
-2.4
1.0
% contribution to GDP
% contribution to GDP
1.0
Japan
1.0
-1.1
-1.0
-2.5
-2.0
-4.0
-5.0
-1.5
-1.0
-3.0
-3.5
0.9
0.0
Private consumption
Gov't consumption
Gross investment
Inventories
Net trade
GDP
-3.1
-3.5
-5.0
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
35
German trade dependency
1,300
56.5%
1,200
47.2%
constant 2000 € billions
1,100
Private consumption
Gross investment
Gov't consumption
Exports
Imports
1,000
900
800
41.0%
Shares of 2008
GDP
700
600
500
19.2%
400
18.1%
300
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
36
Risk mitigation strategies?
• More financial provisioning to allow for cost
of failures and cyclical disasters
• More fiscal and monetary policy flexibility?
• Avoid high risk growth strategies - such as
heavy external debt financing
• New industrial policies: cannot afford banks
too big to fail …
• ... and cannot afford global scale industries
too big to bail?
37