Global economic developments · 13 An Roinn Airgeadais | Department of Finance Capital / labour substitution = part of the answer 0 2 4 6 8 10 12 14 2/1991 8/1992 4/1993 2/1993 8/1994

Global economic developments- cyclical or structural headwinds?

John McCarthy

Chief Economist, Department of Finance

Presentation to IGEES Conference

12th June 2019

2 An Roinn Airgeadais | Department of Finance

Global economy: cyclical headwinds picking up

Body Level One

Body Level Two

Body Level Three

Body Level Four

Body Level Five


Deterioration in external environment

49

50

51

52

53

54

55

56

57

0

0.2

0.4

0.6

0.8

1

1.2

20

16

Q1

20

16

Q2

20

16

Q3

20

16

Q4

20

17

Q1

20

17

Q2

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17

Q3

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18

Q1

20

18

Q2

20

18

Q3

20

18

Q4

20

19

Q1

q-o

-q g

row

th

US GDP PMI

48

49

50

51

52

53

54

55

56

57

58

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

20

16

Q1

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Q2

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q-o

-q g

row

th

EA GDP EA PMI

48

49

50

51

52

53

54

55

56

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

20

16

Q1

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16

Q2

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Q1

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Q2

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19

Q1

q-o

-q g

row

th

UK GDP UK PMI

euro areaUKUS


0

1

-3

-2

-1

0

1

2

3

4

197

7

198

0

198

3

198

6

198

9

199

2

199

5

199

8

200

1

200

4

200

7

201

0

201

3

201

6

201

9

Pe

rce

nta

ge

po

ints

US recessions

10Yr-2Yr Yield Spread

US: is the yield curve “near-inversion” an omen?

no “type I” errors

avg. lead-in = c. 5 quarters


UK: business slamming on the brakes

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

16

Q1

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Q2

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Q3

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Q4

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Q1

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Q2

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Q3

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Q4

20

18

Q1

20

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Q2

20

18

Q3

20

18

Q4

20

19

Q1

*

pe

r ce

nt ch

an

ge

investment and ouptut, y/y growth in the UK economy

uncertainty

firms postponing investment

investment

GDP


-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0

1

2

3

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5

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7

8

03

/01/2

010

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/04/2

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018

03

/04/2

018

03

/07/2

018

03

/10/2

018

03

/01/2

019

Italy GDP Q/Q Growth Italy 10 Year Yield

r-g < 0 ?

euro area: re-domination risk emerging?


China: vulnerabilities weighing on output

0

50

100

150

200

250

20

00

20

01

20

02

20

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20

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20

09

20

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20

11

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17

per

cent

of G

DP

private (=household and corporate) debt

0

2

4

6

8

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12

201

0 Q

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201

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8 Q

1

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8 Q

3

201

9 Q

1

year-

on-y

ear

per

cent

change

China: GDP growth [4qma]

higher leverage post-2010

weighing on I, C


Global economy: structural headwinds


‘peak’ globalisation?

0

5

10

15

20

25

30

35

40

45

50

20

25

30

35

40

45

50

55

60

65

197

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197

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198

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201

6completion of WTO “Uruguay round”

global financial crisis

Source: World Bank, OECD, BIS, DoF calculations

China’s accession to WTO

TRADE INTENSITY =

world trade as per cent of GDP

FINANCIAL TRADE INTENSITY =

cross-border banking claims as per cent of GDP

decade-long ‘blip’ or fundamental reversal?


Wide-ranging import tariffs………….with retaliatory measures

$34bn, 25%

$16bn, 25%

$200bn, 10%

$200bn, 25% $300bn, 25%

0%

5%

10%

15%

20%

25%

30%A

pr-

20

18

Ma

y-2

01

8

Ju

n-2

01

8

Ju

l-2

01

8

Au

g-2

01

8

Se

p-2

01

8

Se

p-2

01

8

Oct-

20

18

No

v-2

01

8

De

c-2

01

8

Ja

n-2

01

9

Fe

b-2

019

Ma

r-2

01

9

Ap

r-2

01

9

Ma

y-2

01

9

Ju

n-2

01

9

Ju

l-2

01

9

Au

g-2

01

9

Au

g-2

01

9

tari

ff,

pe

r cent

As it stands, tariffs

will apply to all

$550bn of Chinese

exports to US by

June

Note: size of bubble corresponds to export volume


Secular stagnation (Summers, 2015): decline in neutral interest rate

Source = IMF, macrobond

-30

-20

-10

0

10

20

30

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

BoP current account, per cent of world GDPChina and other emerging Asian economies

advanced economies exc US

US

other (inc disc)

export earnings recycled

into US financial assets-1

1

3

5

7

9

11

13

15

17

02/0

1/1

980

02/0

1/1

982

02/0

1/1

984

02/0

1/1

986

02/0

1/1

988

02/0

1/1

990

02/0

1/1

992

02/0

1/1

994

02/0

1/1

996

02/0

1/1

998

02/0

1/2

000

02/0

1/2

002

02/0

1/2

004

02/0

1/2

006

02/0

1/2

008

02/0

1/2

010

02/0

1/2

012

02/0

1/2

014

02/0

1/2

016

02/0

1/2

018

per

ce

nt

long-term interest rates: advanced economies

US

DE

UK

JP


Where has all the TFP gone?

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

19

90

-19

81

20

00

-19

91

20

10

-20

01

20

15

-20

11

20

20

-20

16

L K tfp Y_pot

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

19

90

-19

81

20

00

-19

91

20

10

-20

01

20

15

-20

11

20

20

-20

16

L K tfp Y_pot

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

19

90

-19

81

20

00

-19

91

20

10

-20

01

20

15

-20

11

20

20

-20

16

L K tfp Y_pot

Source: European Commission

growth accounting: UK growth accounting: DE growth accounting: US


Capital / labour substitution = part of the answer

0

2

4

6

8

10

12

14

01/1

2/1

991

01/0

8/1

992

01/0

4/1

993

01/1

2/1

993

01/0

8/1

994

01/0

4/1

995

01/1

2/1

995

01/0

8/1

996

01/0

4/1

997

01/1

2/1

997

01/0

8/1

998

01/0

4/1

999

01/1

2/1

999

01/0

8/2

000

01/0

4/2

001

01/1

2/2

001

01/0

8/2

002

01/0

4/2

003

01/1

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003

01/0

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004

01/0

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005

01/1

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005

01/0

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006

01/0

4/2

007

01/1

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007

01/0

8/2

008

01/0

4/2

009

01/1

2/2

009

01/0

8/2

010

01/0

4/2

011

01/1

2/2

011

01/0

8/2

012

01/0

4/2

013

01/1

2/2

013

01/0

8/2

014

01/0

4/2

015

01/1

2/2

015

01/0

8/2

016

01/0

4/2

017

01/1

2/2

017

01/0

8/2

018

01/0

4/2

019

unemployment rate

UK US Germany

• Unemployment decline

: 50-year low

• Testing understanding of NAWRU

• Firms substituting L for K

• Implications for productivity

: K per worker


Scope for macroeconomic policy to respond?

45

55

65

75

85

95

105

115

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

per

cent

of G

DP

FISCAL: public debt has risen sharply since crisis

UK

US

Euro Area

c.1/5th of sovereign

debt owned by NCBs

0

1,000

2,000

3,000

4,000

5,000

6,000

01

/01

/20

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01

/06

/20

06

01

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01

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01

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01

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01

/07

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01

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/20

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01

/05

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14

01

/10

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14

01

/03

/20

15

01

/08

/20

15

01

/01

/20

16

01

/06

/20

16

01

/11

/20

16

01

/04

/20

17

01

/09

/20

17

01

/02

/20

18

01

/07

/20

18

01

/12

/20

18

01

/05

/20

19

US

D B

illio

ns

MONETARY: massive expansion of central bank balance sheets

ECB

Bank of Japan

US Federal Reserve

Bank of England


Conclusion


Main take-aways and implications for Ireland

• Cyclical factors at work- momentum has softened

- maturing cycle

• Secular forces may also be at play - “peak globalisation”?

- negative feedback loop between economics and geopolitics?


Disclaimerand other information:

The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the Department of Finance, the Minister

for Finance or the Government of Ireland.

Outturn data are sourced from a varietyof sources

For the latest publication’s followthe Departmentof Financeon socialmedia:

@IRLDeptFinance Department of Finance Ireland

https://twitter.com/IRLDeptFinance https://www.linkedin.com/company/department-of-finance-ireland/

https://twitter.com/IRLDeptFinance

https://www.linkedin.com/company/department-of-finance-ireland/

Documents

Global economic developments · 13 An Roinn Airgeadais | Department of Finance Capital / labour substitution = part of the answer 0 2 4 6 8 10 12 14 2/1991 8/1992 4/1993 2/1993 8/1994