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Olivier Blanchard (Professor of Economics, MIT; Chief Economist, IMF) Keynote Speech at the NES 20th Anniversary Conference (Dec 13-16, 2012)
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International Monetary Fund December, 2012
Where We Are in the Global Crisis
Olivier Blanchard
World
U.S. Euro Area Japan Russia EMs LICs
2012
(October 2012) 3.3 2.2 -0.4 2.2 3.7 5.0 5.3
2012
(Revision from Jul 2012) -0.2 0.1 -0.1 -0.2 -0.3 -0.3 -0.2
2012
(Revision from Sep 2011) -0.7 0.4 -1.5 -0.1 -0.4 -0.9 -0.5
2013
(October 2012) 3.6 2.1 0.2 1.2 3.8 5.4 6.0
2013
(Revision from Jul 2012) -0.3 -0.1 -0.5 -0.3 -0.1 -0.3 0.1
2013
(Revision from Sep 2011) -0.8 -0.4 -1.4 -0.8 -0.2 -0.9 0.0
GDP Forecasts (percent change from a year earlier)
Note: EMs = emerging market economies; LICs = low income countries, as defined in World Economic Outlook (Chapter 4).
Source: IMF, World Economic Outlook.
EMs LICs
1
-3
-2
-1
0
1
2
3
Apr. 2010 Oct. 2010 Apr. 2011 Sep. 2011 Apr. 2012 Oct. 2012
France Italy Spain Germany
0
1
2
3
4
5
6
7
8
9
10
Apr. 2010 Oct. 2010 Apr. 2011 Sep. 2011 Apr. 2012 Oct. 2012
Brazil India China Russia
Looking More Closely: Euro Area and Major EMs (GDP growth in 2012: WEO forecasts, percent)
Source: IMF, World Economic Outlook.
Major EMs
2
Euro Area
The Challenge:
Achieving Fiscal Consolidation while Sustaining Growth in
Advanced Economies
-30
-20
-10
0
10
1915 1920 1925 1930
A Warning from the Past: UK after World War I
0
40
80
120
160
200
1915 1920 1925 1930
Government Debt (percent of GDP)
70
80
90
100
1915 1920 1925 1930
Real GDP (index; 1918 = 100)
Sources: Abbas and others (2010); Feinstein (1972); Mitchell (1998); and IMF, World Economic Outlook (Chapter 3).
Primary Budget Balance (percent of GDP)
3
Slow Growth in Advanced Economies
5
-30
-20
-10
0
10
20
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Employment during Financial Crises 1/ (percent change from pre-crisis peak; years from peak on x-axis)
Sources: SNL Financial; and IMF staff estimates.
1/ 1977 (Spain), 1991 (Finland , Norway, and Sweden), and 1997 (Japan).
Average of 5 most recent
advanced economy financial crises 1/
United States,
Great Depression
United States,
2008-09 financial crisis
6
Financial Crises Have Long Employment Tails
EM Slowdown
Three Brakes
Policies
One Accelerator
0
1
2
3
4
5
6
07 08 09 10 11 12
Federal Reserve Bank of Japan European Central Bank Bank of England
Sep.
2012
10/4
0
5
10
15
20
25
30
35
07 08 09 10 11 12
Accelerator: Monetary Policies
Sources: Bloomberg, L.P.; Haver Analytics; and IMF staff calculations.
Central Bank Balance Sheet Expansion (percent of 2008 GDP)
Fed QE1 Fed QE2
Operation
Twist
Central Bank Policy Rates (basis points)
Fed QE1 Fed QE2
Operation
Twist
LTRO 1
LTRO 2
LTRO 1
LTRO 2
4
EM Slowdown
Three Brakes
Policies
One Accelerator
10
Brake 1. Fiscal Consolidation: A Long Road Change in Cyclically-Adjusted Primary Balances (percentage points of potential GDP)
Source: October 2012 Fiscal Monitor, and IMF staff estimates.
Note: Total required adjustment to reduce the gross debt ratio to 60 percent by 2030 (net debt target of 80 percent for Japan).
After 2020, primary balance constant until 2030. Assumed real interest rate-growth gap is model-based.
-2 0 2 4 6 8 10 12 14 16 18 20 22
Germany
Canada
Italy
France
Portugal
United Kingdom
United States
Spain
Ireland
Japan
Greece
Actual and Projected Adjustment (2010 - 2012) Remaining adjustment until 2020 to achieve illustrative debt targets
5
-8
-6
-4
-2
0
2
4
6
8
-4 -3 -2 -1 0 1 2 3 4 5 6
Large Multipliers
Growth Forecast Error vs. Fiscal Consolidation Forecast 1/
Source: IMF staff calculations.
1/ On vertical axis, figure reports cumulative growth of real GDP during 2010 and 2011, in percent, minus spring 2010 WEO forecast. On
horizontal axis, figure reports spring 2010 WEO forecast of the cumulative change in the structural fiscal balance in 2010 and 2011 in
percentage points of potential GDP.
Fiscal Consolidation Forecast
Gro
wth
Fo
reca
st
Err
or
Growth Forecast Error = 0.7 – 1.2 Fiscal Consolidation Forecast; R 2 = 0.51
(0.4) (0.2)
6
-40
-20
0
20
40
60
80
100
04 05 06 07 08 09 10 11 12
United Kingdom
Euro area
United States
12Q3
Bank Lending Conditions (net percentage of respondents tightening loan standards)
Tighter
lending
conditions
Sources: Lending surveys by the Bank of England, European Central Bank, and the U.S. Federal Reserve for households and corporates; and IMF staff estimates.
Brake 2. Financial Intermediation
12
0
1
2
3
4
5
6
7
8
2008 2009 2010 2011 2012
ECB France Germany Spain Greece Portugal Italy
Sources: Haver Analytics; and IMF staff calculations.
Aug. 12
Lending Rates
Euro Area Official and Bank Corporate Lending Rates (percent; three-month moving average)
7
0.5
1.0
1.5
2.0
2.5
2008 2009 2010 2011 2012
Policy Uncertainty
Implied Volatility 1/
Sep. 12
Brake 3. Uncertainty ?
Sources: Bloomberg, L.P.; Economic Policy Uncertainty; and IMF staff calculations.
1/ VIX for the United States and VSTOXX for the euro area.
United States (index; January 2008 = 1)
Lehman
Debt Ceiling
Fiscal Cliff
Euro Area (index; January 2008 = 1)
0.5
1.0
1.5
2.0
2.5
2008 2009 2010 2011 2012
Sep. 12
Lehman
Greek IMF program
request, rating cuts
Papandreou call
for referendum
8
EM Slowdown
Three Brakes
Policies
One Accelerator
-4
-3
-2
-1
0
1
2
3
-1.6 -1.4 -1.2 -1 -0.8 -0.6 -0.4 -0.2 0 0.2
Un
exp
ec
ted
Gro
wth
(p
erc
en
t)
Unexpected AE Partner Growth (percent)
The EM Slowdown: Spillovers from AEs and More
Note: Unexpected growth denotes real GDP growth in 2012 (October 2012 WEO) minus the forecast (September 2011 WEO). Unexpected AE
partner growth denotes export-weighted average of growth of advanced-economy trading partners in 2012 minus the forecast for the same
period, multiplied by the economy’s 2011 share of exports in real GDP. Each data point indicates an economy in the WEO group of EMDEs.
Sources: IMF, World Economic Outlook; and IMF staff calculations.
Unexpected Growth = 0.1 + 1.8 AE Partner Unexpected Growth; R 2 = 0.25
(0.2) (0.3)
9
-300
-200
-100
0
100
200
-1000
-500
0
500
1000
2010 2011 2012
Equity Flows Bond Flows (RHS)
12/10
Russia
Source: EPFR Global.
Capital Flows to EMs: Volatility Dominates (millions of U.S. dollars; weekly flows)
10
-600
-400
-200
0
200
400
-400
-300
-200
-100
0
100
200
300
400
2010 2011 2012 12/10
Central and Eastern Europe
-1200-1000-800-600-400-2000200400600800
-6000
-4000
-2000
0
2000
4000
2010 2011 2012
Equity Flows Bond Flows (RHS)
12/10 -1500
-1000
-500
0
500
1000
1500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
2010 2011 2012
Equity Flows Bond Flows (RHS)
12/10
Emerging Asia Latin America
Risks: Feedback loops
Fiscal consolidation, Weak banks, Weak growth
18
Weaker banks Fiscal consolidation
Lower fiscal
balance
Lower bank
asset quality
Less bank
lending
Automatic
stabilizers
held back
Perceived
sovereign
risks increase
Lower growth
Higher
implicit
guarantees
Doubts
Rollover risks
Doubts
Rollover risks
19
EM Slowdown
Three Brakes
Policies
One Accelerator
Accelerator: Accommodative monetary policy; manage risks from low rates.
Advanced Economies: How to Maintain Growth?
Policies
12
Brake 1. Continue medium term, credible, fiscal consolidation. Structural targets.
Be ready…. Lame, but circumstances vary, both domestically and externally
Emerging Market and Developing Economies
Brake 2. Continue to repair the financial system.
Brake 3. Decrease policy uncertainty, US, Europe, Japan.
Diagnosis
Adverse asymmetric shocks can
be large.
Architecture Plans Being Laid (“Fiscal/Banking Union”)
Prescription
Policies. Focus on the Euro Area I
Banks amplify.
Limit shocks ex ante. Consider
transfer mechanisms ex post.
Bank regulation/ supervision/
resolution/recap. to euro level.
Lower sovereign default probability
and sovereign/bank links.
Sovereign/bank interactions
amplify further.
13
Adjustment Plans: Underway.
Countries Under Market Pressure
Direct recapitalization of banks: Soon ready to go (ESM) (?).
Ready to go (ECB OMT), if:
Policies. Focus on the Euro Area II
Focusing on the Short Run
Euro Area Level
“Reasonable” borrowing rates:
? Formal programs:
14
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