Gic banque de france march 2016 mann, catherine

Global Prospects and the Global Trade Downshift 21 MARCH 2016, GIC Meeting at Banque de France

Catherine L. Mann OECD Chief Economist ECOSCOPE blog: oecdecoscope.wordpress.com/

Themes

Stronger global growth remains elusive

Global trade downshift Collective policy action to create virtuous cycle

2

Global Growth Projections GDP projections: Interim Economic Outlook, Feb 18, 2016

3

Source: OECD Economic Outlook databases; and OECD calculations.

Projections Downgraded Projections downgrades Feb 2016 vs. November 2015 Outlooks

5

Source: OECD Economic Outlook databases; and OECD calculations.

Sluggish Real Investment mixed projected improvement Real fixed investment

Projected improvement assumes favourable structural and demand policy settings 1. OECD commodity exporters includes Australia, Canada, Chile, Mexico and Norway.

Source: OECD November 2015 Economic Outlook database.

6

Low inflation and weak wage growth Core inflation

Compensation per employee

Note: Latest month available. Core inflation is for consumer prices excluding food and energy. The private consumption deflator is used for the United States.

Source: OECD Economic Outlook databases.

7

Global Trade Downshift Dramatic in EMEs and drags down global growth Import volumes 8 Y o Y % change 7 6 5 4 3 2 1 0 -1 -2 -3 Dec-12 Jun-13 Dec-13

15 % 10

non OECD OECD

World

Jun-14

Dec-14

Jun-15

Dec-15

Global trade volumes and GDP, USD Market exchange rates

5 0 -5 World trade growth

-10 -15

Source: Economic Outlook database.

8

Global Trade Downshift: Temporary or Permanent?

Demand (austerity) factors (Europe) China slowdown, knock-on to Asia and commodities (EMEs) Sluggish investment and GVCs China rebalancing, on-shoring more permanent?

9

Austerity and Weak Intra-EU trade: Important post crisis but less so lately Ratio of Global import volume to global GDP volume, index 2007=100

Excluding Intra-EU trade, trade/GDP ratio remains closer to its long-term trend, but 2015 slowdown still apparent even excluding intra-EU trade

10

East Asia at the centre of 2015 trade slowdown Trade goods and services, volume % change

% change

10

10

9

9

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

EA15

EU27

USA

JPN

Avg. 2011-2014

Source: OECD Economic Outlook Database

CHN 2015

DAE

WLD

Weaker import growth in China key factor in overall trade slowdown Commodity price changes and China’s share of global consumption

China: Real GDP and import volumes 20 18

20

Y-o-y % change

18

16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

Real GDP

Import volumes

Sources: OECD Economic Outlook database.

Note: Commodities shown are aluminium, coal, copper, iron ore, lead, natural gas, nickel, oil, uranium and zinc.

Sources: IMF; BP Statistical Review of World Energy; 12 World Bureau of Metal Statistics.

Falling commodity prices; Mfg downshift Commodity prices

World trade prices 210 190 170 150 130 110 90 70

Dec-15

Dec-14

Dec-13

Dec-12

Dec-11

Dec-10

Dec-09

Dec-08

Dec-07

Dec-06

Dec-05

Dec-04

Dec-03

Dec-02

Dec-01

Dec-00

50

Manufactures Primary commodities excluing fuels 13

Source: Thomson Reuters Datastream

China knock-on effects slowdowns among other EMEs Change in GDP growth Y-o-y growth in 2015 Q2 compared to y-o-y growth in 2014 Q2

Sharpest slowdowns in countries with close trade links to China and/or dependent on commodities

Note: For Korea, 2015 Q3 compared to 2014 Q3. Intensive trade with China is where merchandise exports to China were above 2% of GDP in 2014.

Sources: OECD National Accounts database; IMF; UNCTAD.

14

Rebalancing in China Permanent effect on trade growth?

Composition of growth in China

Note: Manufacturing (secondary) includes construction.

Source: Chinese National Bureau of Statistics; People’s Bank of China; and Thomson Reuters.

15

China on-shoring value chain Permanent effect on trade growth?

China is doing less assembling, with the share of ordinary trade (i.e. domestic demand driven) picking up % of goods exports

% of goods imports

Export by custom regime

70

70

Processing and Assembling Processing with Imported Material Ordinary Trade

60

50

40

40

30

30

20

20

10

10

0

0

1993

1997

2001

2005

2009

Processing and Assembling Processing with Imported Material Ordinary Trade

60

50

2013

Import by custom regime

1993

1997

2001

2005

2009

2013

16

Sluggish Investment, GVCs, and Trade Slowdown Length of GVCs by Industry, 2008

17

Emerging Markets and GVC Intensity EME poor performance accentuates slowdown Value added share in GVCs of manufactured goods, 1995-2011 (%) 90 80 70 60

USA JPN

50

CHN 40

EU28 OECD

30

NONOECD

20 10 0 1995

2000

2005

2008

2009

2010

2011

Source: OECD/WTO Statistics on Trade in Value Added 18

Technology: permanent downshift?

Global Internet Traffic

Source: OECD (2015) Digital Economy Outlook 19

Services trade: No general downshift

Trade volume growth 12

%

10 8 6 4 2 0 -2

‌ USA

JPN

DEU

Goods avg 2010-2014

Goods 2015

FRA

GBR

Services avg 2010-2014

CHN Services 2015 20

Temporary vs. permanent downshift: openness, investment and productivity

21

Trade helps explain productivity spillovers % difference in MFP productivity spill-over between max and min value of each variable across countries

Trade with the frontier measures the intensity of trade with the productivity leader by industry (Minimum Austria, Maximum : Canada)

22

Trade, Investment, GVCs, Productivity downshift vs virtuous circle Productivity

Openness 105

90 85 80 75

Trade Elas. Low (2015) (1.1)

104.5

Trade Elas. Med (2008-14) (1.4)

103.5

Trade Elas. High (1988-2007) (2.1)

104

Level

Exports+Imports/GDP

95

103 102.5

102

MFP Low Trade Elasticity MFP Med Trade Elasticity MFP High

101.5

70

101

65

100.5

60

100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year

A drop in the elasticity of trade to GDP growth from the historical average of 2.1 to 1.1 (observed in 2015) would result in productivity 4 percentage points lower after 20 years, all else equal.

Note: Calibrated with 2% real GDP growth and assuming a 4 percentage point increase in openness (imports+exports/GDP) increases productivity (MFP) by 0.8% after 5 years based on current work in the Economics Department

23

WHAT CAN BE DONE?

24

Roll back protectionist measures Number of discriminatory trade related measures 600

500

400

300

200

100

0 2009

2010

2011

2012

2013

2014

2015

Source: Global Trade Alert 25

Set the stage for more robust investment Estimated impact of shocks on investment Percentage change after 5 years 1.2 1.0 0.8 0.6

0.4 0.2 0.0

Product market liberalisation

Two-standard-deviation reduction in global uncertainty

1% increase in foreign demand

1% increase in domestic demand

1. 16% reduction in OECD index of regulation in energy, transport and communications (ETCR) over 5 years, equivalent to the average pace of reduction among 15 OECD countries during the period 1993-2013.

2. Two-standard-deviation reduction in index corresponds 2 to a 26% reduction.

Source: OECD calculations.

Structural issues, sluggish demand (local and global), and credit in the Euro area hold back investment

Focus on Regulatory Barriers in Services Product Market Regulation , 2013

Services increasing are traded, are intermediates for goods trade, and are elements of trade facilitation Source: Going for Growth Interim Report Economic Policy Reforms, 2016

27

European Union Example: Regulatory reforms, Investment, and Trade Juncker investment plan slow off the starting blocks %

14

Regulatory Reform and increase in Trade intensity within the EU

12 10 8 6 4 2 0

Cut in regulatory heterogeneity by 20%

Juncker is less about the money and more about regulatory harmonization; limited projects reflects lack of progress on both Source: European Commission; Eurostat; and Fournier et al.

(2015).

Cut in regulatory stringency to align to the average of the top half best performers “Source: Fournier, J.-M. (2015), “The Negative Effect of Regulatory Divergence on Foreign Direct Investment”, OECD Economics Department Working Paper No. 1268 (forthcoming), OECD Publishing, Paris.

28

European Union Example Reform finance and credit channel Deleveraging needed for financial health Household and non-financial corporate debt

Source: Eurostat; OECD National Accounts Database.

And to promote new credit creation Bank credit to non-financial corporations Year-on-year percentage change

1. Gross non-performing debt instruments as a percentage of total debt instruments.

Source: European Central Bank.

29

Robust Global Demand Needed Role for Collective Fiscal Action 1st year effects of a ½ per cent of GDP public investment stimulus by all OECD economies Change from baseline

Collective action, quality projects, structural policy efforts required to realise gains to GDP and to improve debt/GDP ratios Note: Simulation using the NiGEM model, based on a two-year increase in the level of government investment equivalent to ½ per cent of GDP per annum in all OECD countries. The euro area figures are a weighted average of Germany, France and Italy.

Source: OECD calculations.

30

Robust Global Demand Needed External rebalancing temporary or permanent?

31

Messages Stronger global growth requires collective action • Rollback protectionism; revive pace of structural policies • Monetary, financial policies to promote new credit/equity • Focus fiscal policies on investment-led spending

Global trade downshift—temporary or permanent?

• China rebalancing changes GVCs • Trade dematerialization puts premium on services reforms • Sluggish investment is demand related

External rebalancing—temporary or not?

• Will US return to being the global buyer?

• Will China become like the US or like Germany?

• Implications for development prospects around the world

32

Sources

1. IEO 2. GfG 3. Future of productivity

33