ECONOMIC DEVELOPMENTS

AND OUTLOOK

Policy Hub “Economic and Budgetary Outlook 2019”, European Parliament, Brussels, 6 February 2019

Nigel Pain

OECD Economics Department

• Global economic developments.

• The economic outlook in Europe.

• Implications for policy in Europe.

2

Outline

GLOBAL ECONOMICDEVELOPMENTS AND

OUTLOOK

3

4

Global GDP growth and global trade growth have both slowed

World GDP growth%

World Trade Volume growth%, goods plus services

2.0

2.5

3.0

3.5

4.0

4.5

15Q

1

15Q

2

15Q

3

15Q

4

16Q

1

16Q

2

16Q

3

16Q

4

17Q

1

17Q

2

17Q

3

17Q

4

18Q

1

18Q

2

18Q

3

Quarterly Year-on-Year

-2.0

0.0

2.0

4.0

6.0

8.0

15

Q1

15

Q2

15

Q3

15

Q4

16

Q1

16

Q2

16

Q3

16

Q4

17

Q1

17

Q2

17

Q3

17

Q4

18

Q1

18

Q2

18

Q3

Quarterly Year-on-Year

5

High-frequency activity indicators point to an underlying slowdown in global growth momentum

Global retail sales growth %

Global industrial production growth %

Note: Aggregations using PPP weights. Estimates for 2018Q4 based on data in the three months to November.

0

1

2

3

4

5

6

16Q

1

16Q

2

16Q

3

16Q

4

17Q

1

17Q

2

17Q

3

17Q

4

18Q

1

18Q

2

18Q

3

18Q

4

Quarterly Year-on-Year

0

1

2

3

4

5

6

16

Q1

16

Q2

16

Q3

16

Q4

17

Q1

17

Q2

17

Q3

17

Q4

18

Q1

18

Q2

18

Q3

18

Q4

Quarterly Year-on-Year

6

Business survey indicators continue to moderate, especially export orders

Global PMI 2015-2019 average = 100; 3 month moving average

94

96

98

100

102

104

106

94

96

98

100

102

104

106

New manufacturing export orders New orders all business

7

Financial market conditions have tightened, with risk repricing, but long-term bond yields have eased

Equity pricesJanuary 2016 =100

10-year government bond yields%

Stock market indices are the S&P500, FTSE Eurotop 100, Nikkei 225 and Shanghai Composite.

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

USA DEU UK EA19

80

90

100

110

120

130

140

150

160

Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

USA Euro Area China

8

Mild growth slowdown projected in November 2018 OECD Outlook – but rising downside risks

World GDP growth

Note: G-20 advanced economies are Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States.

G-20 emerging economies are Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

Source: OECD Economic Outlook database; and OECD calculations.

G-20 Advanced G-20 Emerging

3,3

3,4

3,5

3,6

3,7

3,8

3,9

4,0

2017 2018 2019 2020

May projections

% y-o-y

1,7

1,8

1,9

2,0

2,1

2,2

2,3

2,4

2017 2018 2019 2020

September projections

% y-o-y

4,9

5,0

5,1

5,2

5,3

5,4

5,5

5,6

2017 2018 2019 2020

November projections

% y-o-y

THE ECONOMIC OUTLOOKIN EUROPE

9

10

Downside risks are rising, particularly in Europe

GDP growth estimates %, year-on-year

November 2018 OECD Economic Outlook (EO) and estimates from Continuous Consensus Forecasts of February 4, 2019.

2018 2019 2020

World Nov 18 EO 3.7 3.5 3.5

Consensus 3.4 3.5

USA Nov 18 EO 2.9 2.7 2.1

Consensus 2.5 1.9

Euro area Nov 18 EO 1.9 1.8 1.6

Consensus 1.8 1.4 1.4

Japan Nov 18 EO 0.9 1.0 0.7

Consensus 1.0 0.4

China Nov 18 EO 6.6 6.3 6.0

Consensus 6.2 6.1

India Nov 18 EO 7.5 7.3 7.4

Consensus 7.3 7.3

11

GDP growth has slowed more sharply than expected in the euro area and confidence has dropped

European confidence indicators normalised

Euro area GDP growth %

Notes: Potential output growth (LHS chart) is an OECD estimate for the euro area. Sentiment series (RHS chart) are normalised over the

period 2003-2019 and shown as standard deviations from the sample mean.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

16Q

2

16Q

3

16Q

4

17Q

1

17Q

2

17Q

3

17Q

4

18Q

1

18Q

2

18Q

3

18Q

4

Quarterly Year-on-Year

Potential Output

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Jan

-18

Jan

-19

EU ESI

EA Composite PMI

12

Trade growth in Europe has slowed sharply, reflecting weaker external and internal demand

EA19 bilateral export volume growth %, year-on-year, by partner, in 3 months shown

Euro area export volume growth %, year-on-year, 3-month moving average

Note: Exports of goods, seasonally and working-day adjusted volume indices.

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Aug-Oct 2018 2017Q4

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2016M04 2016M10 2017M04 2017M10 2018M04 2018M10

Intra-EA Extra-EA

13

Improving area-wide labour market conditions & stable credit growth are still supporting demand

Euro area unemployment rate and negotiated wage growth

Euro area credit growth%, year-on-year

0

0.5

1

1.5

2

2.5

3

3.5

4

6

7

8

9

10

11

12

13

Neg

oti

ate

d w

age

gro

wth

(%

)

Un

emp

loym

ent

rate

(%

pts

)

Unemployment rate (LHS)

Wage growth (RHS)-4

-3

-2

-1

0

1

2

3

4

5

-4

-3

-2

-1

0

1

2

3

4

5

2011 2012 2013 2014 2015 2016 2017 2018

Loans to non-financial corporations

Loans to households for house purchase

14

Euro area macroeconomic policies are still supportive, and inflation is low.

Central bank balance sheet% of GDP

Change in euro area underlying government budget balance

% of potential GDP

Change in underlying general government budget balance (adjusted for economic cycle and one-offs, from the November 2018 OECD Economic Outlook.

-1.5

-1

-0.5

0

0.5

1

1.5

2

2007 2009 2011 2013 2015 2017 2019

Tighter policy

Easier policy0

5

10

15

20

25

30

35

40

45

50

2013 2014 2015 2016 2017 2018

United States Euro area

15

Significant medium-term challenges remain

EA19 potential output per capita growth%, 3 year moving average

Disparities in GDP per capita in NUTS-2 EU regions

coefficient of variation, %

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1997 2000 2003 2006 2009 2012 2015 2018

Potential output estimates from November 2018 OECD Economic Outlook. Regional disparities estimate from 2018 OECD Economic Survey of the European Union.

38

39

40

41

42

43

44

45

46

47

2000 2002 2004 2006 2008 2010 2012 2014 2016

• Trade restrictions intensify.

• Further repricing of financial assets.

• Financial vulnerabilities in EMEs and from high

debt.

• A faster slowdown in China.

• Political risks in Europe (Brexit; govt-bank links).

16

Risks are to the downside and could interact

17

Additional US-China trade shocks would have global effects. Europe exposed if uncertainty increases.

Impact of new tariffs imposed on US-China bilateral trade and higher uncertainty % change in level of GDP from baseline in 2021

-1.5

-1.25

-1

-0.75

-0.5

-0.25

0

CHN USA World MEX East Asia CAN ROW JPN Euro

Trade shocks only Trade shocks plus uncertainty

Trade shock is bilateral tariffs of 25% on all US-China trade by the end of 2019. Additional uncertainty shock based on a 50bp rise in global investment risk premia for three years, slowly fading thereafter. OECD estimates using NiGEM model.

18

A disruptive Brexit remains possible and could have sizeable short-term costs

UK GDP relative to staying in the EU%, difference from baseline

Exports to UK if trade on WTO basis%, difference from baseline, medium-term

Estimates are simulations using the NiGEM and METRO global models under the assumption of trade on a WTO basis between the UK and the EU27 from 2019-2023. Taken from OECD Economic Policy Paper no.16 (2016) and OECD Economic Surveys of Ireland (2018), the Netherlands (2018) and Denmark (2019) using the NiGEM and METRO global models.

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

2018 2020 2022

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

DNK NLD IRL

POLICY IMPLICATIONS

19

• Monetary policy on hold for an extended period?

• Budgetary policies focused on underlying structural challenges

(infrastructure, skills, regions) and supporting vulnerable workers.

• Enhancing structural reforms.

• Actions to strengthen EA resilience.

• Actions to deepen and complete the EU Single Market.

• Planning ahead in case the slowdown deepens. Co-ordinated

action could be most effective near-term option.

20

Implications for Policy in Europe

21

Policy to offset a sizeable global downturn: co-ordinatedfiscal action may be needed; planning should start now.

Note: All countries on LHS chart, OECD countries only on RHS chart. The fiscal scenario is a co-ordinated global fiscal easing of 0.5% of GDP sustained for three years, with policy interest rates held fixed for three years. The monetary scenario is one inwhich policy interest rates are lowered by around 25 basis points in the average economy, and quantitative easing reduces the term premium on long-term government bonds by 50 basis points over a three-year period. Simulations on the NiGEM global macro model, with model-consistent expectations.

22

Co-ordinated action would allow all euro area countries to benefit from demand spillovers

GDP impact of fiscal stimulus in the euro area Difference from baseline, %, constant prices

Comparison between the first and second year output effects from single country and area-wide fiscal stimulus. Based on a fiscal easing of 0.5% of GDP sustained for three years, with area-wide policy interest rates held fixed for three years. OECD estimates using the NiGEMglobal model.

• Global growth continues to lose momentum.

• The economic outlook in Europe may be softer than expected in 2019.

• Planning ahead in case need to respond to a sharper downturn.

• Underlying structural challenges remain.

• Policy choices need to enhance resilience to shocks and

strengthen medium growth prospects for all.

23

Key messages

ADDITIONALBACKGROUND SLIDES

24

Higher US-China bilateral tariffs are starting to affect trade flows and add to policy uncertainty

25

US merchandise imports in 2017 and tariff announcements

Source: BEA; United States International Trade Commission; and OECD calculations.

We focus on this subset of measures and the response in China

26

With adverse effects on trade and output, especially if higher uncertainty deters global investment

Impact of new tariffs imposed on US-China bilateral trade and higher risk premia% change from baseline in 2021

Additional uncertainty shock based on a 50bp rise in global investment risk premia for three years, that slowly fades thereafter.

-2.0

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

USA GDP CHN GDP World GDP World Trade Trade ex USCHN

Current US-China tariffs

Tariffs on all US-CHN trade in 2019

Tariffs plus higher uncertainty

-0,4

-0,3

-0,2

-0,1

0,0

-0,4

-0,3

-0,2

-0,1

0,0

United States Euro area Germany Japan East Asia Commodityexporters

% pts % pts

Uncertainty has also risen in China: a slowdown would weigh on growth across the world

27

Note: Based on a decline of 1 percentage points in the growth rate of GDP in China for two years. Policy interest rates are endogenous in

all areas. “Commodity exporters“ include: Australia, Brazil, Indonesia, Russia, South Africa and the other oil producers. All countries and

regions weighted together using purchasing power parities.

Source: OECD calculations.

GDP growth impact of a negative demand shock in ChinaFirst year, difference from baseline

28

Note: The unemployment benefits re-insurance scheme is a stabilisation mechanism for the euro area. Support from the fund, triggered

when the unemployment rate increases to high levels, is proportional to the size of the crisis. A participating country pays 0.1% of GDP per

year when the fund issues debt and an additional charge of 0.05% of GDP for every year support was received in the past 10 years.

Counterfactual simulations on GDP show that for an average annual contribution of 0.2% of GDP, the fund could achieve significant

stabilisation while avoiding permanent transfers between countries.

Source: OECD 2018 Euro area Economic Survey, Claveres; G. and J. Stráský (2018); and OECD calculations.

A common fiscal capacity would help

the euro area to smooth downturns

GDP growth stabilisation effect

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

2002 2004 2006 2008 2010 2012 2014 2016

Difference in annual growth for the euro area achieved by the fund% %Global Financial crisis Euro area crisis

Higher growth