Macroeconomic Dynamics 12

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Prof. dr. Gheorghe OPRESCU


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1. INTRODUCTION

2. WORLD ECONOMIC OUTLOOK: GROWTHRESUMING, DANGERS REMAIN

3. ECONOMIC DYNAMICS IN ROMANIA

4. ROMANIA: PROJECTIONS

5. MEASURES IN CRISIS

6. FALL 2012 DYNAMICS IN GLOBAL ECONOMY


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Crisis? Sorry Ma'amwe haventseen it coming


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PRIVATE AND CONFIDENTIALSTRICTLY EMBARGOED UNTIL SUNDAY 26 JULY 2009 AT 00:01 HRSHer Majesty The QueenBuckingham PalaceLondon

SW1A 1AA 22 July 2009

MADAM,

When Your Majesty visited the London School of Economics last November, you quiterightly asked:why had nobody noticed that the credit crunch was on its way? TheBritish Academy convened a forum on 17 June 2009 to debate your question, withcontributions from a range of experts from business, the City, its regulators, academia, andgovernment. This letter summarises the views of the participants and the factors that theycited in our discussion, and we hope that it offers an answer to your question.

Many people did foresee the crisis. However, the exact form that it would take andthe timing of its onset and ferocity were foreseen by nobody. What matters in suchcircumstances is not just to predict the nature of the problem but also its timing[]


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So in summary, Your Majesty, the failure to foresee the timing, extent and severity of thecrisis and to head it off, while it had many causes,was principally a failure of thecollective imagination of many bright people, both in this country andinternationally, to understand the risks to the system as a whole.

Given the forecasting failure at the heart of your enquiry, the British Academy is givingsome thought to how your Crown servants in the Treasury, the Cabinet Office and theDepartment for Business, Innovation & Skills, as well as the Bank of England and theFinancial Services Authority might develop a new, shared horizon-scanning capability so

that you never need to ask your question again. The Academy will be hosting anotherseminar to examine the never again question more widely. We will report the findings toYour Majesty. The events of the past year have delivered a salutary shock. Whether it willturn out to have been a beneficial one will depend on the candour with which we dissectthe lessons and apply them in future.

We have the honour to remain, Madam,Your Majestys most humble and obedient servants

Professor Tim Besley,Professor Peter Hennessy,


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Sorry Ma'am - we just didn't see

it coming

http://www.guardian.co.uk/uk/2009/jul/26/mon

archy-credit-crunch(Luis Garicano at LSEshows Queen Elizabeth II a chart explaininghow the credit crunch was caused.)

http://royalcello.websitetoolbox.com/post?id=3591232
http://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunchhttp://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunchhttp://royalcello.websitetoolbox.com/post?id=3591232http://royalcello.websitetoolbox.com/post?id=3591232http://royalcello.websitetoolbox.com/post?id=3591232http://royalcello.websitetoolbox.com/post?id=3591232http://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunchhttp://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunchhttp://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunchhttp://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunchhttp://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunchhttp://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunch


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1. INTRODUCTION







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Opinions from one year ago The toughest global recession since 1930.

The global recovery remains fragile - strong policies tofoster:

internal rebalancingof demand from public to private

sources and external rebalancing from deficit to surplus

economies

are not yet in place.


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Weak recoveryAfter suffering a major setback during 2011, global

prospects are gradually strengthening again, butdownside risks remain elevated.

Improved activity in the United States during thesecond half of 2011 and better policies in the euro area- have reduced the threat of a sharp globalslowdown.

Weak recovery will likely resume in the majoradvanced economies, and activity is expected toremain relatively solid in most emerging and

developing economies.


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Weak recovery Global growth - projected to drop from about 4% in

2011 to about 3.5% in 2012.

Reacceleration of activity during the course of 2012 isexpected to return global growth to about 4% in 2013.

The euro area is still projected to go into a mildrecession in 2012 as a result of the sovereign debt crisisand a general loss of confidence.


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Weak recovery Because of the problems in Europe, activity will

continue to disappoint for the advanced economiesas a group, expanding by only about 1.5% in 2012 andby 2% in 2013.

Real GDP growth in the emerging and developing

economies is projected to slow from 6% in 2011 to5.75% in 2012 but then to reaccelerate to 6% in 2013,helped by easier macroeconomic policies andstrengthening foreign demand.


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Weak recovery

The spillovers from the euro areacrisis will severely

affect the rest of Europe; other economies will likelyexperience further financial volatility but no majorimpact on activity unless the euro area crisis intensifiesonce again.


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Fall 2010 - Policies needed Policies need to become more proactive to achieve the

required internal and external rebalancing.

Most advanced economies major adjustments:stabilize and subsequently reduce high public debt,

and repair and reform their financial sectors.


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Fall 2010 - Monetary policy Should stay highly supportive in most of the

advanced economies and should be the first line ofdefense against any larger-than-projected weakening

of activity as fiscal support diminishes.

With monetary policy rates already near zero in thelarge advanced economies (Euro area 1%, US Fed funds

rate 0.25%), monetary policymakers may have toresort to further unconventional measures ifprivate demand weakens unexpectedly as fiscalsupport wanes.


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Fall 2010 - Fiscal policy Fiscal adjustment needs to start in 2011. If global

growth threatens to slow appreciably more thanexpected, countries with fiscal room could postponesome of the planned consolidation.

Fiscal policy tightening will likely prove

contractionary in most economies, although theextent is difficult to gauge.


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Two years later: policies have

helped Policy has played an important role in lowering

systemic risk, but there can be no pause.

The European Central Banks three-year longer-termrefinancing operations (LTROs), ambitious fiscaladjustment programs, and labor market reforms

helped stabilize conditions in the euro area, relievingpressure on banks and sovereign debts.


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helped The February 2012 extension of U.S. payroll tax relief

and unemployment benefits - has forestalled abruptfiscal tightening that would have harmed the U.S.economy. To be discussed again after Novemberelection

Many advanced economies - good progress indesigning and implementing strong medium termfiscal consolidation programs.


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helped Emerging and developing economies continue to

benefit from past policy improvements.

However - if no further action, problems could easilyappear again in the euro area and fiscal policy couldtighten very abruptly in the United States in 2013.


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RisksA further escalation of the euro area crisis will trigger a

much more generalized flight from risk.

Geopolitical uncertainty could trigger a sharp increasein oil prices: an increase in these prices by about 50%would lower global output by 1.25%.

Renewed significant financial volatility and losses in

confidence. Excessively tight macroeconomic policies.


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To-be-done: More efforts to address the euro area crisis,

A temperate approach to fiscal restraint in responseto weaker activity,

A continuation of very accommodative monetarypolicies, and ample liquidity to the financial sector.


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Policies in emerging economiesAlthough many emerging economies are seeing high

growth again, they continue to rely significantly ondemand from advanced economies.

However, demand for imports from the part of theadvanced economieswill continue to be belowpre-

crisis trends.

Therefore need to rebalance growth further towarddomestic demand.


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1. INTRODUCTION







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Romanias GDP growth

-8

-6

-4

-2

0

2

4

6

8

20052006

20072008

20092010

2011

4.2

7.9

6.2 7.3

-6.6

-1.6

2.5

GDP Growth


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Positive factors before crisis Positive evolution of theworld economy.

EU accession(end of negotiations in December 2004,but no certitude on the exact accession date) andNATO membership.

Successful finalization of the IMF-supportedprogram (for the first time; none of the previous 5,

during 1991-99, remained on track). Only partial liberalization of the capital account

(avoidance of massive inflows/outflows of capital).

Favourable election cycle (elections only in 2000

and 2004).


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However Strong element of overheating and build-up of

unsustainable imbalances, due to FDI and capitalinflows which fueled high investment and

consumption growth: domestic demand grew much faster than exports (2006-

07);

disinflation became difficult to sustain (NBR missed thetargets under its inflation targeting regime August 05);

real exchange rate appreciated by around 50% (2004-07);

build-up of vulnerabilities in the banking sector.


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Howeverhigh current

account deficit (% of GDP)

-15

-13

-11

-9

-7

-5

-3

-12000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-3.7

-5.5

-3.3

-5.8

-8.4 -8.6

-10.4

-13.4

-11.6

-4.2-4.5

-4.2


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Main reason: the trade balance


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Economics shows that (M1)... Current account deficit should be financed by:

- Foreign investments- Foreign loans

- Decrease in the international reserves


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However the budget deficit

(% of GDP)... (M7)

-8

-7

-6

-5

-4

-3

-2

-1

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-4

-3.1-2.9

-1.9

-1.3

-0.7

-1.4

-3.1

-4.8

-7.3

-6.4

-4.1


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Long-term effects on the budget Loose and pro-cyclical fiscal and budgetary policy:

spending doubled in nominal terms between 2005 and 2008 only;

public employment rose by 24% (2004-08);

2005 2008 increases in both wages and the number ofemployees in the public sector public wages increased from 8 toclose to 10% of GDP (supplimentary deficit of 2% of GDP). Wages inthe public sector higher than in the private sector.

before parliamentary elections in 2008 20% increase in pensions,replacement rate from 31% la 45% (but without financing sources).Supplimentary structural deficit of 2% of GDP (plus negativedemographic dynamics in the future).


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Wages and pensions

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 H1

Sursa: Ministery of Public Finance, Eurostat

wages

pensions

Percent of GDP

Note:ESA95 methodology


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Inflation


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However: loans rapid growth...


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However: loans in foreign currencies...


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However: loans in foreign currencies...


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Public debt (% of GDP)

6.99.9 8.8

6.1 5.3 4.72.6

45.4

12.115.6 16.9

15.7

16.116.2

15.4

13.5

11.1

9.8 8.7

8

11.4

14.9

16.4

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Domestic Foreign


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Public debt (% of GDP)

0

20

40

60

80

100

120

140

160

33.3


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the lowest after: Estonia (6.1%),

Bulgaria (15.0%) and

Luxembourg (18.5%)


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Foreign debt (, bill.)69% of

GDP

1.2 2 3.26.3

12.519.8 20.6

15.3 18.422.8

15 15.918.3

24.6

28.6

38.7

51.4 65.7

72.5

76.4

0

20

40

60

80

100

120

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Long-term

Short-term


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Favouring factors Relaxation of macroeconomic policies after decision

on EU accession date.

Worsening of the world economy.

Full liberalization of the capital account (Sept. 2006).

Busy election cycle (2007 European Parliament, 2008 local and Parliament - and 2009 EuropeanParliament and Presidency...).


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1. INTRODUCTION





6.FALL 2012 DYNAMICS IN GLOBAL ECONOMY


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About economic forecasts, some

people say...

Q: Why has God created economists?

A: To make weather forecasters to seem professional...


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or...We have two types of specialists in projections: those

who dont know and those who dont know that theydont know.

John Kenneth Galbraith


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Romanias GDP - projections

-8

-6

-4

-2

0

2

4

6

8

2008 2009 2010 2011 2012 2013 2014 2015

7.3

-6.6

-1.6

2 2.1

3.13.6

3.9


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UnemploymentILO unemployed ths. Unemployment rate - % -

2008 575 5.8

2009 681 6.9

2010 725 7.3

2011 730 7.2

2012 703 7.1

2013 690 6.9

2014 670 6.7

2015 655 6.5


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Measures in crisis Domestic policies: massive response in Western

Europe and maturein Central and Eastern Europe.

Strong and coordinated international support: IMF resources increased 3 times, from $250 to $750

billions.

EBRD investments increased by more than 50% in 2009.

EU balance of payments support increased 4 times, from

12.5 to 50 billion. Up to half-2010, EC approved state aid schemes of more

than 4000 billion.


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But, sooner or later...

Measures to cut the fiscal stimulus, based onprinciples like:

When choosing the exit moment, take into accountthe health of financial system.

Fiscal consolidation (decreasing the budget deficits)

should be a priority.


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Strategies of fiscal exit should be transparent,comprehensive, communicated in advance, and targetedtowards reducing the public debt during periods known

by everybody.

Coordination between countries, but not necessarilysynchronization.

(http://www.imf.org/external/np/g20/110709.htm)


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Total State aid as % of GDP; 2009

0 2 4 6 8 10 12

Belgium

United Kingdom

Ireland

Greece

LatviaGermany

Denmark

Austria

EU-15

Sweden

EU-27

Luxembourg

Cyprus

France

BulgariaNetherlands

Malta

Hungary

Slovenia

Spain

Finland

EU-12

Portugal

Poland

LithuaniaCzech Republic

Romania

Italy

Slovakia

Estonia

Industry and services as % of GDPAgriculture, fisheries and transport as % of GDP


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Romania: measures in crisis

At the beginning of 2009, Romania had no room formanoeuvre; after a budget deficit of 4.8% of GDP in 2008,there was no room for supplementary stimulus.

Measures:

Support package from IMF (13 bill.), EU (5 bill.), WB(1 bill) i EBRD and EIB (1 bill.). Successfully

completed in April 2011. Disbursements from the financing program: MPF (EUR

8.2 billion, from IMF, EC and WB) for deficit financing,NBR (EUR 9.8 billion, from IMF), last tranche (EUR 1.0billion) not disbursed, as treated as precautionary.


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Romania: measures in crisis- On March 25, 2011 a new 24-month precautionaryStand-By Arrangement SBA - (about 3.5 billion) tosupport the economic program to boost growth,

continue fiscal adjustment, and cushion the effects offuture shocks, should they materialize.

- Six reviews were completed since then (the last one inAugust 2012) around 3 billion are available and can be

disbursed to NBR on demand.- SBA is in conjunction with the precautionary EU

support of 1.4 billion (Council Decision on May 12,2011), as well as WB commitments of 400 million.


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Romania: measures in crisis program firsthouse

scrappage program (extended subsequently to agriculturalequipment)

Eximbank guarantees deminimis state aid of up to 500000 Euro/firm, approved

by EC in autumn 2009 (but not implemented).

Foreign banks have maintained their exposure in Romania. Cooperation platform Vienna initiative (support for the

financial system).

State aid for young (


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Vienna commitment of 9 major foreign banksmaintain their exposure in Romania for the

period of the IMF, EU and EBRD support package, at least at the March 2009 level. Largely

respected during its two years of operation

September

2008

December

2008

March

2009

September

2009

Own funds level I 14980 17628 17032 17423

Total own funds 19775 23265 22694 23368

Net assets 244983 259633 264890 256496

Net average assets 225815 232479 265805 260780

RON bill.

Source: NBR


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Romania: measures in crisis Ensure sustenability:

Wage Law2015 - 7% share of public wages in GDP (seenext chart), freezing of high wages,level 1 decoupled

from the minimum wage in order to avoid cascadeeffects.

Pension Lawdecoupling the increase in pensions from

the increase in wages (link with inflation). Retirementage 65, n 2030.


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Romania: measures in crisis Ensurepredictibility:

Fiscal responsibility Law:

multiyear budgeting;

limits on intrayear budget revisions;

fiscal rules on expenditures, public debt and the primarydeficit;

staffing ceilings for ministries and agencies;

an independent Fiscal Council.


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1. INTRODUCTION







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A. Much slower recoveryWhat was going on was the stalling of the two

rebalancing acts.

Internal rebalancing= a shift from fiscal stimulus toprivate demand:

Fiscal consolidation is indeed taking place in mostadvanced economies (although not in Japan).

But private demand is not taking the relay. Reasons:

- Tight bank lending (legacy of mortgage boom)

- High indebtness of households


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A. Much slower recovery External rebalancing= a shift from deficit to surplus

economies:

Advanced economies would need to compensate for low

domestic demand through an increase in foreigndemand.

This would imply a symmetric shift away from foreigndemand toward domestic demand in emerging market

economies with current account surpluses, most notablyChina.

This is not happening; forecast for an increase ratherthan a decrease in imbalances.


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B. Fiscal and financial uncertainty Markets - more skeptical about the ability of many

countries to stabilizetheir public debt.

Their worries have extended to many Europeancountries and to countries beyond Europe- from Japanto the United States.

Worries about sovereigns - translated into worriesabout the banks holding these sovereign bonds,mainly in Europe.

Result - a partial freeze of financial flows - bankskeeping high levels of liquidity and tightening lending.


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B. Fiscal and financial uncertainty

Other results:

Fear of the unknown is high.

Stock prices have fallen.

Decrease in spending in the months to come.


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A and B may feed back on each other!

Low growth makes it more difficult to achieve debtsustainability and leads markets to worry even more

about fiscal stability.

Low growth also leads to more nonperforming loans

and weakens banks.


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A and B may feed back on each other!

Front-loaded fiscal consolidation in turn may lead toeven lower growth.

Weak banks and tight bank lending may have thesame effect lower growth.

Weak banks and the potential need for more capitallead to more worry about fiscal stability.


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What can be done?1. Fiscal policy.

Fiscal consolidation cannot be too fast or it will killgrowth.

It cannot be too slowor it will kill credibility.

The speed must depend on individual countrycircumstances, but the key continues to be crediblemedium-term consolidation.


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What can be done? Some countries need substantial outside help to

succeed.

Plus, measures to prop up domestic demand(continued low interest rates, increased bank lending,

resolution programs for housing).


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What can be done?2. Financial measures.

Banks have to be made stronger to increase banklending.

A number of banks, especially in Europe - likely to

require additional capital buffers, either from privateor from public sources.


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What can be done?3. External rebalancing.

Difficult to see how.

Exports from the US and crisis-hit economies mustincrease, and net exports from the rest of the worldmust decrease.

A number of Asian economies (China) - large current

account surpluses. Plans to rebalance from foreign to domestic demand

(currency appreciation, decrease the gap between Sand I). Not possible overnight, but as fast as possible.


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The world economic crisis could take 10 years to run itscourse, the IMF's chief economist Olivier

Blanchard told Hungarian business news sitePortfolio.hu in an interview published on Wednesday,October 4th, 2012.

Macroeconomic Dynamics 12

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