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The shift and the shocks: prospects for the world economyMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times
Global Policy Dialogue
23rd January
London School of Economics
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The shift and the shocks
• Shift
• Shocks
• Prospects
4
1. The shift
• In the 19th century, there occurred the “great divergence”
• In the second half of the 20th century, convergence began, notably with Japan and the east Asian “tiger economies”
• In the late 20th and early 21st centuries convergence spread to the Asian giants
• Divergent growth is mirror image of converging incomes
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1. The shift
EMERGING COUNTRIES OUTPERFORM HUGELY
GDP SINCE THE CRISIS
90
100
110
120
130
140
150
160
170
2007 2008 2009 2010 2011 2012
Advanced economies Emerging and developing economies China India
Source: IMF, WEO database
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1. The shift
DEVELOPED COUNTRIES FALL, ASIA RISES
SHARES IN WORLD OUTPUT(at PPP, per cent)
29 25 20 18
2524
20 18
47
14 18
0%10%20%30%40%50%60%70%80%90%
100%
1990 2000 2010 2016
European Union United States Other advanced economies ChinaIndia Other developing Asia Other emerging economies
Source: IMF WEO database, October 2011
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1. The shift
• The “great convergence” has had powerful consequences:
– An ongoing “labour-supply shock”, which lowered relative wages of the relatively unskilled in high-income countries;
– Initially, a dis-inflationary shock, as China lowered world prices for manufactures;
– An increase in the surplus of desired savings and so the rise of the global imbalances;
– Then an inflationary shock, as demand for raw materials soared; and throughout
– Ongoing shift in global economic activity
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2. The shocks
• The economic collapse was large and enduring
• The rescue was also dramatic:
– Liabilities of the core financial system were nationalised;
– Monetary policy is unprecedented; and
– Fiscal policy has been put on a war-time footing.
• This then is a “contained depression”.
• According to Carmen Reinhart and Kenneth Rogoff, This Time is Different, it could take three years, to return to “normality”. Given the scale of affected economies, it could be longer.
• Conventional fiscal and monetary firepower is used up.
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2. The shocks: global
THE LEGACY OF THE DEBT EXPLOSION
HOUSEHOLD DEBT TO INCOME RATIO
60
80
100
120
140
160
180
2000
Q120
00Q3
2001
Q120
01Q3
2002
Q120
02Q3
2003
Q120
03Q3
2004
Q120
04Q3
2005
Q120
05Q3
2006
Q120
06Q3
2007
Q120
07Q3
2008
Q120
08Q3
2009
Q120
09Q3
2010
Q120
10Q3
2011
Q1
United States Euro area United Kingdom Japan
Source: IMF WEO, September 2011
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2. The shocks: global
A LONG DEPRESSIONGDP IN THE GREAT RECESSION
90.0
92.0
94.0
96.0
98.0
100.0
102.0
104.0
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
US UK CANADA JAPAN ITALY FRANCE GERMANY
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2. The shocks: global
THE SOVEREIGN DEBT CRISIS
NET PUBLIC DEBT OVER GDP (per cent)
0
20
40
60
80
100
120
140
160
180
Japan Italy United States France United Kingdom Germany Canada
2006200920122015
Source: IMF WEO, October 2011
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2. The shocks: global
STRUCTURAL FISCAL DEFICIT(as per cent of GDP)
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Canada France Germany Italy Japan United Kingdom United States
2008 2009 2010 2011 2012
THE AGE OF PREMATURE RETRENCHMENT
13 2. The shocks: global
FISC
AL
RO
OM
? YE
S
TE
N-Y
EA
R G
OV
ER
NM
EN
T B
ON
D Y
IEL
DS
0 1 2 3 4 5 6 7 8
30/10/2009
30/11/2009
30/12/2009
30/01/2010
28/02/2010
30/03/2010
30/04/2010
30/05/2010
30/06/2010
30/07/2010
30/08/2010
30/09/2010
30/10/2010
30/11/2010
30/12/2010
30/01/2011
28/02/2011
30/03/2011
30/04/2011
30/05/2011
30/06/2011
30/07/2011
30/08/2011
30/09/2011
30/10/2011
US
UK
JapanG
erman
yF
rance
ItalyC
anada
Sp
ain
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2. The shocks - eurozone
• The eurozone crisis is the world, in miniature
• The core of the eurozone financial crisis is not a fiscal crisis
• It is the interaction of balance of payments with financial crises, though huge debt stocks played a part in creating liquidity problems for sovereigns
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2. The shocks - eurozone
• The difficulty is largely the result of the divergences accumulated in the years of excess
• What made everything seem so good was creating an acute long-term crisis
• The failure of a true union stands revealed: neither financing in a crisis nor workable adjustment mechanisms
• Too little, too confused and too late
• The crisis is potentially terminal for the eurozone
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2. The shocks - eurozone
CURRENT ACCOUNT BALANCES(per cent of GDP)
-12.0-10.0
-8.0-6.0-4.0-2.00.02.04.06.08.0
10.0
Finlan
dNet
herla
nds
Belgium
Germ
any
Austri
a
Franc
e
Italy
Irelan
d
Spain
Greec
e
Portug
al
Estonia
1999-2007 Average 2012
EUROZONE IMBALANCES
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2. The shocks - eurozone
ROAD TO THE EUROZONE FISCAL CRISES
NET PUBLIC DEBT(relative to GDP)
0
20
40
60
80
100
120
140
160
180
Greece Italy Portugal Ireland Spain
200220032004200520062007200820092010201120122015
Source: World Economic Outlook database April 2011
18 2. The shocks -
eurozone
RO
AD
TO
TH
E E
UR
OZ
ON
E F
ISCA
L C
RISE
SS
PR
EA
DS
OV
ER
BU
ND
S
0
100
200
300
400
500
600
01/01/2007
01/03/2007
01/05/2007
01/07/2007
01/09/2007
01/11/2007
01/01/2008
01/03/2008
01/05/2008
01/07/2008
01/09/2008
01/11/2008
01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
01/05/2011
01/07/2011
01/09/2011
01/11/2011
Be
lgiumS
painF
ranceItaly
Netherlands
19 2. The shocks -
eurozone
RO
AD
TO
TH
E E
UR
OZ
ON
E F
ISCA
L C
RISE
SS
PR
EA
DS
OV
ER
BU
ND
S
-500 0
500
1000
1500
2000
2500
3000
3500
4000
01/01/2007
01/03/2007
01/05/2007
01/07/2007
01/09/2007
01/11/2007
01/01/2008
01/03/2008
01/05/2008
01/07/2008
01/09/2008
01/11/2008
01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
01/05/2011
01/07/2011
01/09/2011
01/11/2011
Greece
Ireland
Portu
gal
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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
– “Imbalances” are a vital symptom of economic stress
• So how might it all play out?
• We do not know. There are too many unknowns.
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2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012GROWTH FORECASTS FOR 2012
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
US
UK
Japan
Eurozone
Germany
France
Italy
Spain
Jun-11 Jan-12
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2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012GROWTH FORECASTS FOR 2012
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
China
India
Asia Pacific (withoutJapan)
Russia
Eastern Europe
Brazil
Latin America
World
Jun-11 Jan-12
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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 to enjoy export-led growth, necessary when their private sectors run huge financial surpluses;
– Reducing fiscal deficits in high-income countries, without killing the recovery; and
– Avoiding excesses in emerging countries, despite easy financial and monetary conditions.
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3. Prospects: eurozone
• What is needed now in the eurozone are:
– Financing while adjustment occurs, which will take at least 5 years and possibly 10 years, or more;
– Adjustment via structural reforms and divergent inflation across the eurozone, with higher inflation in core countries and low inflation in vulnerable countries;
– The big risk is a combination of premature fiscal tightening in the periphery and the absence of adjustment in the core;
– That will lead to further deep recessions;
– And a possible break-up.
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3. Prospects
• Some guesses:– Growth in high countries will remain weak for many years,
with a significant chance of a true depression;
– Headline inflation rates will fall;
– Short-term official interest rates will remain low;
– Countries with their own central banks will have low long-term bond rates; many eurozone countries will not;
– Eurozone break-up risk remains;
– The US will be the fastest growing of big economies;
– Emerging countries will grow quickly, but there is some chance of crises there, too.
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