The shift and the shocks
Martin Wolf, Associate Editor & Chief
Economics Commentator, Financial
Times
Leverhulme Globalisation Lecture Series
28th March 2012
Nottingham
The shift and the shocks
2
The shift and the shocks
• Shift
• Shocks
• Prospects
3
1. The shift
• The 19th century saw the “great divergence”
• The second half of the 20th century saw the
beginning of convergence, with Japan and the east
Asian “tiger economies”
• The late 20th and early 21st centuries saw
convergence spread to the Asian giants
• Divergent growth is a mirror image of converging
incomes
4
1. The shift
EMERGING COUNTRIES OUTPERFORM HUGELY
GDP GROWTH RATES IN THE WORLD ECONOMY
(10-year moving average, end year)
Source: IMF WEO, September 2011
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
8
7
6
5
4
3
2
1
0
World
5
Advanced economies
Emerging and developing economies
1. The shift
EMERGING COUNTRIES OUTPERFORM HUGELY
Source: IMF, WEO database
GDP SINCE THE CRISIS
170
160
150
140
130
120
110
100
90
2007
2008
Advanced economies
Sub-Saharan Africa
India
Developing Asia
6
2009
2010
2011
2012
Latin America and the Caribbean
China
Central and eastern Europe
1. The shift
• The shift helped cause the shocks, via:
– A “labour-supply shock”, which lowered relative wages of the
relatively unskilled in high-income countries and encouraged
household borrowing;
– A “dis-inflationary shock”, as China lowered world prices for
manufactures, which encouraged loose monetary policy;
– Finally, an “inflationary shock”, as demand for raw materials
soared, which made it more difficult to manage the crisis;
– Above all, a “savings shock”, which lowered the real rate of
interest and caused a huge rise in global imbalances.
7
2. The shift
THE SAVINGS GLUT?
REAL INTEREST RATES
6
Asian financial crisis
5
4
Western financial crisis
3
2
1
0
-1
Jan-1985 Jan-1987 Jan-1989 Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011
UK INDEX-LINKED
8
US TIPS
1. The shift
RISE OF IMBALANCES
GLOBAL CURRENT ACCOUNT IMBALANCES
(as per cent of world GDP)
Source: WEO, October 2011
3
2
1
0
-1
-2
-3
1996
1997
1998
1999
Germany and Japan
9
2000
2001
2002
2003
2004
2005
China and emerging Asia
2006
2007
2008
2009
Peripheral Europe
2010
2011
2012
Rest of World
2013
2014
2015
Oil Exporters
2016
US
1. The shift
RISE OF FOREIGN CURRENCY RESERVES
GLOBAL FOREIGN CURRENCY RESERVES ($bn)
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
China
10
Rest of developing Asia
Rest of developing countries
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
$0
Industrial countries
2. The shocks
• The economic collapse was large and enduring
• The rescue was also dramatic:
– Liabilities of core financial system were nationalised;
– Fiscal policy put on a war-time footing; and
– Monetary policy extraordinarily aggressive;
• We are now living in a “contained depression”. There are big
risks with this, but it is better than the alternative
• According to Carmen Reinhart and Kenneth Rogoff, This Time
is Different, it could take another three years, to return to
“normality”. Given the scale of affected economies, it could be
far longer.
11
2. The shocks: global
THE LONG SLUMP
GDP IN THE "GREAT RECESSION"
102
100
98
96
94
92
90
Q1
08
Q2
08
Q3
08
Q4
08
Q1
09
US
12
Q2
09
Japan
Q3
09
Q4
09
Germany
Q1
10
Q2
10
France
Q3
10
Q4
10
Italy
Q1
11
UK
Q2
11
Q3
11
Q4
11
2. The shocks: global
THE LEVERAGE CYCLE
DEBT OVER GDP
(per cent, Q2 2011)
600
Source: McKinsey Global Institute 2012
500
400
300
200
100
Households
Financial Institutions
13
y
Au
st
ra
lia
C
an
ad
a
er
m
an
S
U
G
Ita
So
ly
ut
h
Ko
re
a
Sp
ai
n
Fr
an
ce
K
U
Ja
pa
n
0
Non-financial Corporations
Government
2. The shocks: global
THE US LEVERAGE CYCLE
TOTAL DOMESTIC BORROWING
(as per cent of GDP)
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
Households
Total Government
14
Non-financial Business
Total Domestic
III
11
I
20
11
20
09
20
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
19
75
-20.0%
Domestic Financial Sectors
2. The shocks: global
THE US LEVERAGE CYCLE
SECTORAL RATIOS OF US DEBT TO GDP
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
Households
15
Non-financial Business
All Government
Financial Sectors
10
20
08
20
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
19
74
0.0%
16
US FEDERAL FUNDS
UK BANK RATE
ECB SHORT TERM REPO
JAPAN TARGET RATE
31/12/2011
31/08/2011
30/04/2011
31/12/2010
31/08/2010
30/04/2010
31/12/2009
31/08/2009
30/04/2009
31/12/2008
31/08/2008
30/04/2008
31/12/2007
31/08/2007
30/04/2007
31/12/2006
31/08/2006
30/04/2006
31/12/2005
31/08/2005
30/04/2005
31/12/2004
2. The shocks: global
MONETARY EXPANSION
CENTRAL BANK INTERVENTION RATES
7
6
5
4
3
2
1
0
17
Oct-06
Oct-93
Oct-80
Oct-67
Oct-54
Oct-41
Oct-28
Oct-15
Oct-02
Oct-89
Oct-76
Oct-63
Oct-50
Oct-37
Oct-24
Oct-11
Oct-98
Oct-85
Oct-72
Oct-59
Oct-46
Oct-33
Oct-20
Oct-07
Oct-94
2. The shocks: global
THE ARRIVAL OF ULTRA-CHEAP MONEY
UK BASE RATE SINCE THE 19TH CENTURY
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2. The shocks: global
THE SOVEREIGN DEBT IMPACT
NET PUBLIC DEBT OVER GDP (per cent)
180
160
Source: IMF WEO, October 2011
140
120
2006
2009
2012
2015
100
80
60
40
20
0
Japan
18
Italy
United States
France
United Kingdom
Germany
Canada
19
Germany
France
US
Japan
UK
05/01/2012
05/10/2011
05/07/2011
05/04/2011
05/01/2011
05/10/2010
05/07/2010
05/04/2010
05/01/2010
05/10/2009
05/07/2009
05/04/2009
05/01/2009
05/10/2008
05/07/2008
05/04/2008
05/01/2008
05/10/2007
05/07/2007
05/04/2007
05/01/2007
2. The shocks: global
FISCAL ROOM? YES - FOR SOME
10-YEAR GOVERNMENT BOND YIELDS
(per cent)
6
5
4
3
2
1
0
2. The shocks - eurozone
• The core of the eurozone financial crisis is not fiscal
• The fiscal crisis is more a symptom of the financial
crisis than a cause of that crisis
• The crisis is largely the result of divergences
accumulated in the years of excess: what made
everything seem so good was in fact creating an
acute long-term crisis
• External imbalances played a bigger role than fiscal
imbalances: it mattered less whether the private or
public sectors were being financed than how big the
external finance was
20
2. The shocks - eurozone
THE GOOD, THE BAD AND THE UGLY
CURRENT ACCOUNT IMBALANCES IN THE EUROZONE
(as a share of eurozone GDP)
Source: IMF WEO Database October 2011
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
France
21
Germany
Greece & Portugal
Italy
Netherlands
Spain
Rest
Total
2. The shocks - eurozone
LOST COMPETITIVENESS
UNIT LABOUR COSTS IN MANUFACTURING
RELATIVE TO GERMANY
Source: OECD
200
180
160
140
120
100
80
60
Q11999
Q12000
Q12001
Q12002
Q12003
Portugal
22
Q12004
Q12005
Italy
Ireland
Q12006
Q12007
Greece
Q12008
Spain
Q12009
Q12010
Q12011
2. The shocks - eurozone
ROAD TO THE EUROZONE FISCAL CRISES
NET PUBLIC DEBT
(relative to GDP)
Source: World Economic Outlook database April 2011
180
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2015
160
140
120
100
80
60
40
20
0
Greece
23
Italy
Portugal
Ireland
Spain
24
Portugal
Ireland
Greece
01/01/2012
01/10/2011
01/07/2011
01/04/2011
01/01/2011
01/10/2010
01/07/2010
01/04/2010
01/01/2010
01/10/2009
01/07/2009
01/04/2009
01/01/2009
01/10/2008
01/07/2008
01/04/2008
01/01/2008
01/10/2007
01/07/2007
01/04/2007
01/01/2007
2. The shocks - eurozone
ROAD TO THE EUROZONE FISCAL CRISES
10-YEAR SPREAD OVER BUNDS
(percentage points)
50
40
30
20
10
0
-10
25
Italy
Spain
Belgium
France
01/01/2012
01/10/2011
01/07/2011
01/04/2011
01/01/2011
01/10/2010
01/07/2010
01/04/2010
01/01/2010
01/10/2009
01/07/2009
01/04/2009
01/01/2009
01/10/2008
01/07/2008
01/04/2008
01/01/2008
01/10/2007
01/07/2007
01/04/2007
01/01/2007
2. The shocks - eurozone
TRIUMPH OF THE EUROPEAN CENTRAL BANK
10-YEAR SPREAD OVER BUNDS
(percentage points)
6
5
4
3
2
1
0
26
Spain
Santander
BBVA
01/02/2012
01/12/2011
01/10/2011
01/08/2011
01/06/2011
01/04/2011
01/02/2011
01/12/2010
01/10/2010
01/08/2010
01/06/2010
01/04/2010
01/02/2010
01/12/2009
01/10/2009
01/08/2009
01/06/2009
01/04/2009
01/02/2009
01/12/2008
01/10/2008
01/08/2008
2. The shocks - eurozone
TRIUMPH OF THE EUROPEAN CENTRAL BANK
SPANISH BANK AND SOVEREIGN CDS SPREADS
600
500
400
300
200
100
0
27
Italy
Unicredit
Intesa Sanpaolo
Monte dei Paschi
01/02/2012
01/12/2011
01/10/2011
01/08/2011
01/06/2011
01/04/2011
01/02/2011
01/12/2010
01/10/2010
01/08/2010
01/06/2010
01/04/2010
01/02/2010
01/12/2009
01/10/2009
01/08/2009
01/06/2009
01/04/2009
01/02/2009
01/12/2008
01/10/2008
01/08/2008
2. The shocks - eurozone
TRIUMPH OF THE EUROPEAN CENTRAL BANK
ITALIAN BANK AND SOVEREIGN CDS SPREADS
800
700
600
500
400
300
200
100
0
3. Prospects
•
At the broadest level, we are watching the
interaction of two huge events:
– A secular shift in the location of economic activity; and
– The collapse of a generational expansion in private and, to
a lesser extent, public sector leverage in high-income
countries
– The eurozone crisis falls at the intersection of these
processes
•
So how might it all play out?
28
2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012
CONSENSUS FORECASTS FOR 2012
Spain
Italy
France
Germany
Eurozone
Japan
UK
US
-2.0
-1.0
0.0
1.0
Jun-11
29
2.0
Feb-12
3.0
4.0
2. The prospects: global
GROWTH PROSPECTS POOR FOR 2013
CONSENSUS FORECASTS FOR 2013
(February 2012)
Spain
Italy
France
Germany
Eurozone
Japan
UK
US
0.0
30
0.5
1.0
1.5
2.0
2.5
3.0
2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012
CONSENSUS FORECASTS FOR 2012
World
Latin America
Brazil
Eastern Europe
Russia
Asia Pacific (NB excluding Japan)
India
China
0.0
2.0
4.0
Jun-11
31
6.0
Feb-12
8.0
10.0
2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012
CONSENSUS FORECASTS FOR 2013
(February 2012)
World
Latin America
Brazil
Eastern Europe
Russia
Asia Pacific (NB excluding Japan)
India
China
0.0
32
2.0
4.0
6.0
8.0
10.0
3. Prospects: global
•
Here are salient elements of global challenges :
– Accelerating de-leveraging in the private sectors of
overleveraged countries;
– Rebalancing the world economy, to give over-leveraged
economies export-led growth;
– Reducing fiscal deficits in high-income countries, without
killing the recovery; and
– Avoiding excesses in emerging countries, despite the easy
financial and monetary conditions.
33
3. Prospects: eurozone
• Here are salient elements of eurozone challenges :
– Financing with adjustment, which will take at least 5 years
and possibly 10 years;
– By “adjustment”, I mean structural reforms and divergent
inflation across the eurozone, with high inflation in core
countries;
– The big danger is premature fiscal tightening in the
periphery together with absence of adjustment in the core,
which would generate prolonged recessions;
– And risks a collapse in political support for the project.
34
3. Prospects
• Some guesses about the future:
– The US will be much the most dynamic of big economies;
– Growth in high-income countries will remain weak;
– Inflation will remain contained;
– Short-term official interest rates will remain low;
– Countries with their own central banks will have low longterm bond rates; many eurozone countries will not;
– Eurozone break-up risk is significant;
– Emerging countries should continue to grow quickly, but
there is a chance of crises there, too, now that finance is
flowing towards them.
35