C mann

GIC Central Banking Series: Policies for the Post Crisis Era Tailwinds driving a modest acceleration... but storm clouds on the horizon?

Paris, 23rd March 2015

Catherine L. Mann OECD Chief Economist

Key messages Positive surprises support somewhat better growth prospects • Stronger incoming data • Lower oil prices • Easing by ECB and other central banks

Inconsistent real and financial signals point to risks • Abnormally low inflation and interest rates • Rapid moves in exchange rates and asset prices • Still lagging real investment and employment

Policy implications: Balanced policy packages needed • Implement stable medium-term fiscal path • Reinvigorate structural policies appropriate to each economy • Reduce over-reliance on monetary policy 2

Growth prospects have improved slightly compared to a few months ago GDP growth1 Volume, per cent 5

5 November 2014 Outlook forecasts

4

March Interim Outlook forecasts

4

3

3

2

2

1

1

0

0

1. Economies representing over 70% of global GDP measured at 2013 PPP exchange rates .

Source: November 2014 OECD Economic Outlook database; OECD National Accounts database; and OECD calculations.

3

The oil price drop is positive for global growth Brent crude price USD per barrel 120

Impact of fall in oil price between 2014 and 2015 on trade balance1 Billions of US dollars 120

110

110

600

600

100

100

400

400

90

90

200

200

80

80

70

70

60

$85 per barrel = November 2014 Outlook assumption

60

0

0

-200

-200

50

50

-400

-400

40

40

-600

-600

1. Assumed average oil price (Brent) of $57 per barrel in 2015.

Source: Datastream; ICIC Pricing; OECD November 2014 Economic Outlook database; and OECD calculations 4

Many central banks have eased monetary policy Timeline of easing decisions since December 2014 ← December 2014 Switzerland

Morocco Norway

Uzbekistan Romania Egypt

India

Iceland

Turkey

Peru

Switzerland

Denmark

Canada

Denmark

Euro area Pakistan

January 2015 →

Singapore

China

China Turkey

Denmark

Israel Botswana Indonesia

Sweden

Denmark

Romania

Australia

← February 2015 India Poland

Thailand

Korea

Serbia

March 2015 →

Central banks of countries accounting for about 48% of global GDP have eased over the past 3 months

Note: size of bubbles indicates relative GDP (at PPP). Russia, which raised policy rates sharply in December before cutting twice since, is not included as an easer over this period.

5

The ECB’s action is working through financial markets Nominal effective exchange rate

Yield curves

Index, Jan 2014 = 100

Instantaneous forward rates 4.0

102

102

3.5

3.5

100

100

3.0

98

98

2.5

96

96

94

94

92

92

March 2014

3.0

November 2014

2.5 2.0

2.0

1.5

March 2015

1.0

1.5 1.0

Depreciation

4.0

90

0.5

0.5

0.0

0.0

86

-0.5

84

-0.5

1

2

3

4

5 Years

6

7

8

9

10

88

90

Announcement of expansion of the asset purchase

88 86 84

Source: ECB; Bank of England; Datastream .

6

Interim Outlook – small upward revisions, still only moderate growth Real GDP1 Percentage change

Column2

March 2015 Interim Projections

difference from November Outlook

March 2015 Interim Projections

difference 2from November Outlook

United States Euro area Japan Germany France Italy United Kingdom Canada

2.4 0.9 0.0 1.6 0.4 -0.4 2.6 2.5

3.1 1.4 1.0 1.7 1.1 0.6 2.6 2.2

0.0 0.3 0.2 0.6 0.3 0.4 -0.1 -0.4

3.0 2.0 1.4 2.2 1.7 1.3 2.5 2.1

0.0 0.3 0.4 0.4 0.2 0.3 0.0 -0.3

China India Brazil

7.4 7.3 0.0

7.0 7.7 -0.5

-0.1 1.3 -2.0

6.9 8.0 1.2

0.0 1.4 -0.8

Aggregate2

3.7

4.0

0.1

4.3

0.2

Column1

1.

2.

GDP at market prices adjusted for working days. In the case of Germany, this differs from the “headline” measure, which does not include the working day adjustment. The unadjusted number for Germany would be higher by 0.2 percentage points in 2015 and by 0.1 percentage point in 2016.

Economies representing over 70% of global GDP measured at 2013 PPP exchange rates.

7

A welcome fall in unemployment, but low employment rates suggest that slack remains

Real wage and labour productivity G7 countries, average growth rates, per cent

Employment and unemployment rates G7 countries, per cent 9

Unemployment rate (left scale) Employment rate (right scale)

60

1.6 Real wage growth

8

59

7

58

6

1.6 Labour productivity growth

1.4

1.4

1.2

1.2

1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

57

5

56

4

55 0.0

2000Q2-2009Q4

0.0

2010Q1-2014Q4

Source: OECD National Accounts database; OECD Main Economic Indicators database; and OECD calculations .

8

United States – continued cyclical recovery, despite weather Estimated effect of lower energy prices on share of energy in household spending6 6 Cyclical recovery continues, though one-offs (e.g. severe winter weather) may mask underlying strength Absent brinksmanship, fiscal policy is expected to remain neutral Federal Reserve likely to delay first interest rate increase due to low inflation and dollar appreciation Domestic demand growing faster than output – the United States is adding to demand in the rest of the world

Households save approx. $90/month on energy

5

5

4

4

3

3

2

2

1

1

0

2014

0

2015

Source: Bureau of Economic Analysis; and OECD calculations.

Nominal effective exchange rate Trade weighted, broad currency index 2010 = 100 115

115

110

110

105

105

100

100

95

95

90

90

Source: US Federal Reserve.

9

Euro area – tailwinds offer escape from stagnation Retail trade

PMI

3-month moving average volume index, 2010=100

New Orders/Incoming New Business

101

101

100

100

99

99

98

98

97

97

96

96

60 55

Average

Difference between max. and min.

55 50

45

45

40

40

Share prices Euro Stoxx 50 index, Jan 2011=100

Per cent 4.5

Values above 50 indicate expansion

50

Mortgage rates 5.0

60

5.0 140

140

130

130

120

120

4.5

4.0

4.0

110

110

3.5

3.5 100

100

3.0

3.0

2.5

2.5

2.0

2.0

90

90

80

80

70

70

60

60

10 Source: ECB; Eurostat; Markit; Datastream .

Euro area – fiscal policy needs to complement monetary and structural policies Stable, medium-term fiscal path needed to support demand Change in underlying primary balance % of potential GDP

Ad hoc extensions of deadlines (12 since 2009) create uncertainty, and reduce fiscal multipliers, thus undermining objective of the extension

5

5

4

4

3

3

2

2

1

1

0

0

-1

2007-2009

2009-2011

-2

Complexity of rules may lead to poor policy decisions, and ‘gamesmanship’’

-3

-2 2011-2013

2013-2015

-4 -5

-1

-3 -4 -5

Euro area

Source: OECD November 2014 Economic Outlook database.

11

The Juncker Plan could spur demand and supply, as well as promote structural improvements Electricity prices for industrial users Index EU average = 100; 2012 or latest available 140

The Juncker Plan helps complete the Single Market, especially in network industries

180 160

120

140 100

120

80

100 80

60

Reducing regulatory differences by one fifth could increase crossborder FDI in the EU by up to 25% and trade intensity by up to 15%

40

Public investment 160 140

Spillovers from collective action enhance the growth impact of investment

60

40

Volume index, 2009 = 100 Germany France Greece

United Kingdom Spain Portugal

160 140

120

120

100

100

80

80

60

60

40

40

20

20

Sources: IEA; OECD National Accounts database.

12

Japan – getting growth and inflation back on track, and staying there Labour productivity growth 8

Low oil prices and the latest monetary and fiscal stimulus provide a welcome impetus for near-term growth Implementation of structural policies (the “third arrow”) is critical to raise productivity and growth

The scale of the challenge of reducing the public debt burden remains exceptionally large

Per cent

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

Public debts and deficits Per cent of GDP 20

240

Overall budget deficit (left scale) Government gross liabilities (right scale)

15

180

10

120

5

60

0

0

Source: OECD National Accounts database.

13

China – growth slowing gradually to the official target of around 7% Gap between floor space started and sold Millions of square meters

Lower oil prices and policy stimulus are counterbalancing factors weighing on growth, notably weakness in the real estate and financial sectors

Index 2010=100

80 70 60 50 40 30 20 10 0

105 100 95 90 85 80 75 70 65 60

Slowing domestic demand creates tension between meeting growth targets and rebalancing the economy

Service sector liberalisation would unleash a new growth drive

Real property price

Real total domestic expenditure Year-on-year percentage change, 3-quarter moving average 11 10 9 8 7 6 5 4

Sources: CEIC; and OECD National Accounts database.

11 10 9 8 7 6 5 4

14

India – now leading the growth pack, but facing numerous challenges The improvement partly reflects data revisions. The underlying acceleration is slower, with sluggish investment and exports and emerging obstacles to structural reforms.

GDP, exports and investment Volume, 4-quarter moving average, year-on-year percentage change 30

GDP (new series)

GDP (old series)

Gross fixed capital formation

Exports of goods and services

25

20

30 25

20

15

15

10

10

5

5

0

0

-5

-5

-10

-10

-15

-15

-20

-20

Source: Indian Central Statistics Office; and OECD calculations.

15

Offsetting the positive – commodity economies The fall in commodity prices goes well beyond oil, and is hurting commodity-exporting economies like Brazil Brazil: contribution to GDP

Non-oil commodity prices

Volume , year-on-year percentage change

Index, 2011=100

14 12 10

14 Imports Consumption GDP

Exports Investment

120

12 10

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

110

120 Agricultural raw materials Metals and Minerals Food and Tropical Beverages

110

100

100

90

90

80

80

70

70

60

60

Source: Brazilian Institute of Geography and Statistics (IBGE); Datastream.

16

Structural reform momentum has slowed and should be reinvigorated During the last two years, most advanced countries did less in areas identified as priorities by the OECD than in the previous period

Responsiveness rate1, Going for Growth recommendations 2013-14

2011-12

0.8

0.8

0.7

0.7

0.6

0.6

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0

0.0

1. Share of recommendations in Going for Growth 2011 for which 'significant' action has been taken, with an adjustment to reflect the fact that some areas of reform are more difficult than others.

Source: OECD Going for Growth (2015).

17

Storm Clouds: Disconnect between modest real economy and strong financial signals

18

Deflation risks:

The oil price fall added disinflationary impetus when inflation was already low Number of countries with negative 12month headline inflation rate

Headline inflation in OECD countries Per cent

25

25 30

20

20

25th percentile

Median

75th percentile

30

25

25

20

20

15

15 15

15

10

10 10

10

5

0

5

5

0

0

-5

-5

5

0

Source: OECD Main Economic Indicators database.

Where inflation was already too low, the challenge of getting back to target has increased

Deflation increases the vulnerability of indebted households, firms and governments and aggravates stagnation risks 19

Negative term premium:

Nominal interest rates are extraordinarily low, and in many cases now negative Bond yields are far below historical norms in most countries 10-year government bond yields Per cent 12

Q4-2014

1980-2007 average

Medium-term bonds of several governments are now trading at negative nominal yields 3-year government bond yields Per cent 12

10

10

8

8

6

6

4

4

2

2

0

0

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-1.0

Denmark Japan Switzerland Sweden Germany France Austria Belgium Netherlands

-0.5

-1.0

-1.5

-1.5

Source: Datastream.

20

Suppressed risk premium:

Prolonged ultra-low interest rates are building up vulnerabilities Credit default swap prices

MSCI World equity index

United States high-yield corporate, basis points

January 1990=100 350

350

160

160

300

300

140

140

250

250

200

200

150

150

100

Average, 2005present

120

120

100

100

100

80

80

50

50

60

60

0

0

40 2010

2011

2012

2013

2014

2015

40

US bond and foreign exchange volatility Index, January 2014=100 450 400 350 300 250 200 150 100 50 0

Source: Datastream.

Foreign exchange market volatility (left scale) Treasury note volatility (rightscale)

205 190 175 160 145 130 115 100 85 70

21

Summing up: Improved prospects, but no room for complacency Global economy may be at a turning point • Falling energy prices underpin acceleration in growth • Downward push on inflation gives room to central banks to support demand

Mutually reinforcing fiscal, monetary, structural policies are needed • Maintain monetary stimulus as appropriate • Implement consistent medium-term fiscal policy • Re-invigorate and target structural reforms

Over-reliance on monetary policy is a concern • Evidence of mis-pricing of risks and exchange rate overshooting • Monetary policy alone has not revived real investment 22