The Long Goodbye: how the crisis casts a long

shadow

Suggested hashtag for Twitter users: #LSEWolf

LSE100 public lecture and prize giving

Martin Wolf

Chief Economics Commentator at the Financial Times, London

Author, The Shifts and The Shocks: what we've learned – and still have to learn – from

the financial crisis

Professor George Gaskell

Chair, LSE

The Long Goodbye: how the crisis

casts a long shadow Martin Wolf, Associate Editor & Chief

Economics Commentator, Financial Times

London School of Economics

9th November 2015

London

3

Long Goodbye

• Shadow

• Policies

• Lessons

1. Shadow

• The crisis was a watershed moment:

– Developed countries are slowly recovering

– But potential growth has collapsed

– Emerging economies are badly hit

– China has entered a difficult transition

4

1. Shadow: high-income economies

5

LOST OUTPUT AND LOST GROWTH

80

85

90

95

100

105

110

115

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

IMF Pre-Crisis Forecasts and Outcomes for GDP of High-Income Economies (Source: IMF, World Economic Outlook April 2015)

Autumn 2007 Autumn 2008 Autumn 2014

1. Shadow: high-income economies

6

DIVERGENCE BETWEEN THE US AND EUROZONE

9092949698

100102104106108110

Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015

GDP AND REAL DOMESTIC DEMAND

US GDP US Domestic Demand

Eurozone GDP European Domestic Demand

1. Shadow: high-income economies

7

85.0

90.0

95.0

100.0

105.0

110.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Per Head (2007 = 100; at purchasing power parity; 2015 is a forecast) (Source: The Conference Board)

France Germany Italy United Kingdom United States Spain

DIVERGENCE IN LIVING STANDARDS

1. Shadow: high-income economies

8

COLLAPSE OF PRODUCTIVITY GROWTH

1.9%

4.0%

2.2%

3.5%

4.5%

2.5%

3.2%

1.1% 0.8% 0.7%

0.6% 0.4%

0.0% 0.0% 0.0%

0.5%

1.0%1.5%

2.0%2.5%

3.0%3.5%

4.0%

4.5%5.0%

Canada Germany US France Japan UK Italy

Annual Rate of Labour Productivity Growth (Source: US Council of Economic Advisers)

1950-2007 2010-2014

1. Shadow: high-income economies

9

0.7% 0.8%

0.6%

0.8% 0.7%

1.3%

0.9%

0.5% 0.4%

0.3% 0.2%

0.1% 0.0%

-0.2% -0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

Italy France Canada UK Germany Japan US

Contribution of Capital Investment to Annual Growth of Labour Productivity (Source: US Council of Economic Advisers)

1948-2007 2010-2014

COLLAPSE OF INVESTMENT

1. Shadow: emerging economies

10

UNEXPECTED GLOBAL SLOW-DOWN

0

1

2

3

4

5

6

7

8

World Advanced economies Emerging market economies

Successive Medium-Term Growth Forecasts (five years ahead) (Source: IMF, World Economic Outlook, April and October 2015)

Fall 2011 Fall 2012 Fall 2013 Fall 2014 Fall 2015

1. Shadow: emerging economies

11

CHINA’S UNBALANCED ECONOMY

34 36 36 40 42 40 40 41 43 46 47 47 46 46 46

47 46 45 43 41 40 38 37 36 37 36 37 37 37 38

17 16 16 15 14 14 14 14 13

13 13 14 14 14 14

2 2 3 2 3 5 8 9 8 4 4 2 3 2 3

0%

20%

40%

60%

80%

100%

2000 2002 2004 2006 2008 2010 2012 2014

Shares of Spending in China’s GDP (Source: Haver Analytics)

Investment Household Consumption Govt Consumption Net exports

1. Shadow: emerging economies

12

CHINA’S SLOWING ECONOMY

6.6 4.1

5.2 3.6 4.4

6.4 5.4 6.5

4.3 5.3 5 6 4.4 3.7 3.7

1.8 5.4 3.5 6.9 6.2

3.6 5.4

6.2

5

8 7 4.3

3.2 4.2 3.6

-5

-3

-1

1

3

5

7

9

11

13

15

2000 2002 2004 2006 2008 2010 2012 2014

Contributions to Chinese Growth (percentage points) (Source: Haver Analytics)

Consumption Gross Investment Net Exports Total

2. Policies: easy money

13

WHAT THE ECB TELLS US ABOUT EASY MONEY

0

1

2

3

4

5

6

7

8

Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Official Policy Rates (Source: Thomson Reuters Datastream)

US Fed funds Europe (Bundesbank repo/ECB repo)

UK (BoE base rate) Japan (BoJ uncollatoralized call money)

2. Policies: easy money

14

WHAT JAPAN TELLS US ABOUT BALANCE SHEETS

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

Q12014

Q12015

Central Bank Balance Sheets (assets over GDP; per cent) (Source: Thomson Reuters Datastream and Bank of England)

US (Federal Reserve) Eurozone (ECB) UK (BoE) Japan (BoJ)

2. Policies: austerity

15

GREAT DEPRESSION AND GREAT RECESSION IN UK

90.0

95.0

100.0

105.0

110.0

115.0

1 2 3 4 5 6 7 8 9

UK Real GDP Per Head in the Great Depression and the Great Recession (1929 and 2007 = 100; at purchasing

power parity; 2015 is a forecast) (Source: Maddison Project and Conference Board)

1929-1937 2007-2015

2. Policies: austerity

16

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2010-112011-122012-132013-142014-152015-162016-172017-182018-192019-20

CYCLICALLY-ADJUSTED NET PUBLIC BORROWING (per cent of GDP)(Source: OBR)

June 2010 Forecast March 2015 Forecast

SHORTFALL IN UK FISCAL TIGHTENING

2. Policies: austerity

17

NO BOND-MARKET VIGILANTES

0

1

2

3

4

5

6

7

8

9

10

Yield on UK Government 10-year Gilts (Source: Thomson Reuters Datastream)

The Long Goodbye: how the crisis casts a long

shadow

Suggested hashtag for Twitter users: #LSEWolf

LSE100 public lecture and prize giving

Martin Wolf

Chief Economics Commentator at the Financial Times, London

Author, The Shifts and The Shocks: what we've learned – and still have to learn – from

the financial crisis

Professor George Gaskell

Chair, LSE