Economic outlook: is this the new normal? Freddy Van den Spiegel Economic Advisor. WORLD ECONOMIC...

Economic outlook: is this the new normal?

Freddy Van den SpiegelEconomic Advisor.

WORLD ECONOMIC OUTLOOK

LOW GROWTH AND HIGH RISK: FOR HOW LONG?

ICTF, Berlin, October 2015

Freddy Van den SpiegelEconomic advisorProfessor VUB and Vlerick Business School

2

The view of IMF

2

33

1. The crisis, started in 2007

2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector

4Groupe BNP ParibasBNP Paribas Group| 4

US: HOUSES PRICES ( in USD)Department of Commerce and National Association of Retailors figures

20.00030.00040.00050.00060.00070.00080.00090.000

100.000110.000120.000130.000140.000150.000160.000170.000180.000190.000200.000210.000220.000230.000240.000250.000260.000

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

20.00030.00040.00050.00060.00070.00080.00090.000100.000110.000120.000130.000140.000150.000160.000170.000180.000190.000200.000210.000220.000230.000240.000250.000260.000

New housesExisting houses

5

EUROSTOXX FINANCIALS

5

66

1. The crisis, starting in 2007


2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers

7

EUROSTOXX FINANCIALS

7

8Groupe BNP ParibasBNP Paribas Group

| 8

Bank InterventionHSBC Holdings 12,5bn GBP private capital injection

Crédit Agricole Group 3bn EUR capital injection (subordinate debt)

Royal Bank of Scotland 58% nationalised

Santander 2bn EUR capital raised from private investors

BNP Paribas 5,1bn capital injection (preferred shares)

Barclays Bank £7bn private capital injection, use of credit guarantees

HBOS taken over by Lloyds TSB, 44% nationalised

UniCredit seeking 4bn EUR from Italian and Austrian governments

Rabobank Group no capital injection

ING Bank 10bn EUR capital Injection, 80% government guarantee on 27,7bn Alt-A

UBS 5,3bn USD capital injection, 60bn USD bad assets removed

Deutsche Bank no capital injection

ABN AMRO Bank nationalised

Crédit Mutuel 1,2bn EUR capital injection (subordinate debt)

Société Générale 3,4bn EUR capital injection (subordinate debt + preferred shares)

Credit Suisse group private capital injection of 10bn CHF

BBVA no capital injection

Lloyds TSB 50% nationalised

Groupe Caisse d'Epargne 1,1bn EUR capital injection (subordinate debt)

Groupe Banques Populaires 0,95bn EUR capital injection (subordinate debt)

How fared the most solid banks in Western Europe?

9Groupe BNP ParibasBNP Paribas Group

| 9

Bank InterventionBank of America expanding (Merrill Lynch, Countrywide), 45bn USD capital injection

Citigroup 50bn USD capital injection + 306bn USD bad asset guarantee, breaking up

JP Morgan Chase expanding (Bear Stearns, WaMu), 25bn USD capital injection

Wachovia Corporation failure

Wells Fargo expanding (Wachovia), 25bn USD capital injection

Washington Mutual failure

U.S. Bancorp 6,6bn USD capital injection

Countrywide Financial Corp. sold

SunTrust Banks 4,9bn USD capital injection (preference shares)

Capital One Fin. Corp. 3,6bn USD capital injection

National City Corp. sold

Regions Financials Group 3,5bn USD capital injection

PNC Financial Services Group expanding (National City), 7,6bn capital injection (preference shares)

Fifth Third bancorp 3,4bn USD capital injection

KeyCorp 2,5bn USD capital injection

BB & T Corp 3,1bn USD capital injection

State Street Corp 2bn USD capital injection

Bank of New York 3bn USD capital injection

Comerica 2,3bn USD capital injection

Merril Lynch Bank USA sold

How fared the most solid banks in the USA?

1010




2009: Worldwide recession and housing crashes in Europe

1111

WORLD GDP GROWTH

1313




2009: Worldwide recession and housing crashes in Europe 2010: Increasing government debt

1515




2009: Worldwide recession and housing crashes in Europe 2010: Increasing government debt, collapse of European

economies 2011: the EURO sovereign crisis starts

1717





economies 2011: the EURO sovereign crisis starts 2012: EUROZONE back in recession

1919





economies 2011: the EURO sovereign crisis starts 2012: EUROZONE back in recession 2013: EUROZONE problems remain 2014: EUROZONE towards QE, the ultimate weapon 2015: collapse of the emerging economies

2323


2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?

2424

WORLD ECONOMIC OUTLOOK

GDP GROWTH2013 2014 2015 2016

WORLD 3,4 3,4 3,5 3,8US 2,2 2,4 3,1 3,1EURO -0,5 0,9 1,5 1,6JAPAN 1,6 -0,1 1 1,2EMERGING 5,0 4,6 4,3 4,7IMF world economic outlook april 2015

2525



BUT DETERIORATING CONFIDENCE!

WHY?

2626

McKinsey survey

2727


2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth

3333



but the appreciation of the USD could become problematic

3535



but the appreciation of the USD could become problematic And low oil prices kill shale oil

3838



but the appreciation of the USD could become problematic And low oil prices kill shale oil End of QE soon?

3939


2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth Europe seems to be slowly recovering

4444

EUROSTOXX 50

4545


2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth Europe seems to be slowly recovering

– Supported by a lower Euro

– And by a QE programme

– But internal political uncertainty remains with Grexit and Brexit

– And external political uncertainty about the Middle East, Northern Africa and Ukraine

4646


2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? The US is back to solid growth Europe seems to be slowly recovering The emerging economies are no longer a club of winners

4747

BRICS

GDP GROWTH (%)2013 2014 2015 2016

CHINA 7,8 7,4 6,8 6,3BRAZIL 2,7 0,1 -1,0 1,0INDIA 6,9 7,2 7,5 7,5RUSSIA 1,3 0,6 -3,8 -1,1IMF World economic outlook april 2015

48

Investment and Consumption, % of GDP

20

25

30

35

40

45

50

55

1980 1985 1990 1995 2000 2005 2010

Consumer Spending Share

Investment Share

china

5050



3. How did we arrive where we are?

5151

The origin of the actual situation: an extra-ordinary environment since 1990

5252

TechnologicalRevolution

WorldwideDeregulation

+

The extra ordinary environment since 1990.

5353



EconomicGlobalisation+


5454



Asiansavings glut

Asiandeflationary

pressure


1. The extra ordinary environment since 1990.

5555



Easy money to finance global

imbalances

Stable, lowinterest rates

Asiansavings glut

Asiandeflationary

pressure



5656

SAVINGS QUOTE CHINA

5858




imbalances


Asiansavings glut

Asiandeflationary

pressure

EconomicGlobalisation

FinancialTechnology+ +


5959




imbalances


Asiansavings glut

Asiandeflationary

pressure

EconomicGlobalisation

FinancialTechnology

Happydays

GlobalEconomic

Growth+ +


6060

The virtuous circle

GROWTH

RISK PREMIUM

EASY LOANS

LEVERAGE & BUBBLES

6161

But underneath unsustainable bottle necks developed.

• Imbalances of the US.


6666



• Savings glut of Asia.


6969



• Savings glut of Asia.

• Unsustainable financial leverage in US and Europe.


7171

House Price Evolution (rebased Q1 2000 = 100)

100

120

140

160

180

200

220

240

260

Q12000

Q12001

Q12002

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

Spain

UK

Ireland

7272

The situation of the Western world

• Over indebted (governments and/or private households)

• Depending on foreign savings

• Loosing economic power

• Loosing geopolitical influence

The situation of the rest of the world

• Waking up after the dream

• Stuck in the middle

• Need to adapt , but to what?

• THE GOLDEN YEARS OF EASY GLOBALIZATION SEEM TE BE OVER

“BACK TO NORMAL” SEEMS UNLIKELY


7373

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Advanced economies

Emerging market anddeveloping economies

7474

CLEARLY NOT A CRISIS BUT A REGIME SWITCH

7575




4. What are the major risks and bottlenecks?

Low growth combined with a wall of debt: a dangerous combination

7676Source: ICMB

7777

GLOBAL DEBT

7979





Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West

8484





Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges

8585

GLOBAL CONFLICT TRACKER

8686





Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges QE

8787

QE: impact and exit?The US experience

Start in 2009-LT yield down-Funding government deficit-Currency down-Overheating in Latin America and Asia-Supporting growth

Exit in 2014-2015-Reaction of LT yield-Capital outflows in overheated and imbalanced economies: problem for the emerging world-Dollar appreciation: potential problem for US growth

- RATHER REASSURING

8989

THE ROAD TO QE FOR EUROPE

•Excessive debt, growing after the crisis

9191

THE ROAD TO QE


•An almost fatal second political crisis: the eurocrisis

9393

THE ROAD TO QE



• Short term rescue operations but no solutions

• Normal monetary policy does not function anymore• The transmission mechanism through banks does not function• Lower interest rate is not effective• More liquidity does not help

9595

Balace sheet total ECB

9696

THE ROAD TO QE




• Normal monetary policy does not function anymore• The transmission mechanism through banks does not function• Lower interest rate is not effective• More liquidity does not help• All debt is potentially “bad” if no growth

• BUT GROWTH NEEDS LOANS AND WE HAVE ALREADY TOO MUCH: A DILEMMA

9797

THE ROAD TO QE




• Normal monetary policy does not function anymore

• The new paradigms:• Saving is irresponsible• Generalized austerity creates depression

9898

THE ROAD TO QE




• Normal monetary policy does not function anymore

• The new paradigms

• QE and financial repression as the only way out

100100

QE: impact until now

SO FAR SO GOOD

- fast depreciation euro on announcement

- recovery of stock market

- decline in spreads (except Greece)

101101

102102


SO FAR SO GOOD




BUT ALSO UNKNOWN TERRITORY

- jump into negative yields

- and increasing volatility

103103

104104

105105


SO FAR SO GOOD




BUT ALSO UNKNOWN TERRITORY

- jump into negative yields

- and increasing volatility

- or is the effect already over? (stock market, forex, interest rates,…)

106106


And what after QE

-Scenario where QE is successful and ends: difficult for periphery

-Scenario where QE does not deliver: dangerous for periphery

UNLESS PERIPHERY GOES TO FAST AND SUCCESSFUL STRUCTURAL REFORM

BUT NO REASON TO PANIC YET: THANKS TO QE?

107107





Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges QE The political future of Europe

108108





Low growth combined with a wall of debt: a dangerous combination Unsustainable and unresolvable worldwide imbalances Political ambitions of emerging economies and opposition from West Other geopolitical challenges QE The political future of Europe A recovery without jobs? The digital disruption of society

109109

• In the short run, everything seems under control

• But the worldwide system has not stabilised (yet)

• Politics are back.

CONCLUSIONS.

110110

Politics will dominate the agenda: a challenging balancing act.

• Normalise banking system.

• Deleverage the economy.

• Normalise central bank policy and balance sheets.

• Stabilise public debt levels.

• Develop new regulatory framework for the financial industry.

• Revive international trade (or switch to protectionism?)

• Solve global environmental issues.

• Towards a new financial, economic and political world order.

• WITHOUT KILLING THE RECOVERY.

CONCLUSIONS.

111111

• Living in an interconnected world economy


• From west to east: a story that will continue, but probably less spectacular

CONCLUSIONS.

112112

CONCLUSIONS.

G7 vs Developing Asia: Real GDP Growth (% YoY)

-6

-4

-2

0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015

G7 Developing Asia

113113

114114

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Advanced economies

Emerging market anddeveloping economies

115115

• Living in an interconnected world economy


• From west to east: a story that will continue, but probably less spectacular

• Fortunately, the process of globalisation is not broken

CONCLUSIONS.

116116

Challenges for everybody: adapt to the “new normal”.

• The road to adapt to the new global economic reality will be long and bumpy.

• But this does not mean necessarily that the economy will be weak all the time.

• But it does mean that uncertainty has replaced risk; models will not help and the recent past not relevant

• Nobody can imagine how the world will look like in 10 years but it will definitely be different. Frightening or challenging?

CONCLUSIONS.

117117

Return to Keynes

“If we consistently act on the optimistic hypothesis, this hypothesis will tend to be realised; whilst by acting on the pessimistic hypothesis we can keep ourselves for ever in the pit of want.”

8 November 1931

118118

Thank you

Economic outlook: is this the new normal? Freddy Van den Spiegel Economic Advisor. WORLD ECONOMIC...

Documents

Transcript of Economic outlook: is this the new normal? Freddy Van den Spiegel Economic Advisor. WORLD ECONOMIC...