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8/2/2019 20120123 Martin Wolf
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The shift and the shocks:prospects for the world economyMartin Wolf, Associate Editor & ChiefEconomics Commentator, Financial Times
Global Policy Dialogue
23rd January
London School of Economics
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The shift and the shocks
Shift
Shocks
Prospects
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1. The shift
In the 19th century, there occurred the greatdivergence
In the second half of the 20th century, convergencebegan, notably with Japan and the east Asian tigereconomies
In the late 20th and early 21st centuries convergencespread to the Asian giants
Divergent growth is mirror image of convergingincomes
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1. The shift
EMERGING COUNTRIES OUTPERFORM HUGELY
GDP SINCE THE CRISIS
90
100
110
120
130
140
150
160
170
2007 2008 2009 2010 2011 2012
Advanced economies Emerging and developing economies China India
Source: IMF, WEO database
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1. The shift
DEVELOPED COUNTRIES FALL, ASIA RISES
SHARES IN WORLD OUTPUT
(at PPP, per cent)
29 25 20 18
2524
2018
4
7 1418
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 2000 2010 2016
European Union United States Other advanced economies China
India Other developing Asia Other emerging economies
Source: IMF WEO database, October 2011
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1. The shift
The great convergence has had powerfulconsequences:
An ongoing labour-supply shock, which lowered relativewages of the relatively unskilled in high-income countries;
Initially, a dis-inflationary shock, as China lowered world
prices for manufactures;
An increase in the surplus of desired savings and so the riseof the global imbalances;
Then an inflationary shock, as demand for raw materialssoared; and throughout
Ongoing shift in global economic activity
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2. The shocks
The economic collapse was large and enduring
The rescue was also dramatic:
Liabilities of the core financial system were nationalised;
Monetary policy is unprecedented; and
Fiscal policy has been put on a war-time footing.
This then is a contained depression.
According to Carmen Reinhart and Kenneth Rogoff, This Timeis Different, it could take three years, to return to normality.
Given the scale of affected economies, it could be longer. Conventional fiscal and monetary firepower is used up.
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2. The shocks: global
THE LEGACY OF THE DEBT EXPLOSION
HOUSEHOLD DEBT TO INCOME RATIO
60
80
100
120
140
160
180
2000
Q1
2000Q3
2001
Q1
2001Q3
2002Q1
2002
Q3
2003Q1
2003
Q3
2004
Q1
2004Q3
2005
Q1
2005Q3
2006
Q1
2006Q3
2007Q1
2007
Q3
2008Q1
2008
Q3
2009
Q1
2009Q3
2010
Q1
2010Q3
2011Q1
United States Euro area United Kingdom Japan
Source: IMF WEO, September 2011
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2. The shocks: global
A LONG DEPRESSION
GDP IN THE GREAT RECESSION
90.0
92.0
94.0
96.0
98.0
100.0
102.0
104.0
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
US UK CANADA JAPAN ITALY FRANCE GERMANY
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2. The shocks: global
THE SOVEREIGN DEBT CRISIS
NET PUBLIC DEBT OVER GDP (per cent)
0
20
40
60
80
100
120
140
160
180
Japan Italy United States France United Kingdom Germany Canada
2006
2009
2012
2015
Source: IMF WEO, October 2011
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2. The shocks: global
STRUCTURAL FISCAL DEFICIT(as per cent of GDP)
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Canada France Germany Italy Japan United Kingdom United States
2008 2009 2010 2011 2012
THE AGE OF PREMATURE RETRENCHMENT
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2.The
shocks:
global
FISCA
LROOM
?YES
TEN-YEA
RGOVERN
MENTBON
DYIELDS
0 1 2 3 4 5 6 7 8
30/10/2009
30/11/2009
30/12/2009
30/01/2010
28/02/2010
30/03/2010
30/04/2010
30/05/2010
30/06/2010
30/07/2010
30/08/2010
30/09/2010
30/10/2010
30/11/2010
30/12/2010
30/01/2011
28/02/2011
30/03/2011
30/04/2011
30/05/2011
30/06/2011
US
UK
Japa
n
Germany
France
Italy
Canad
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2. The shocks - eurozone
The eurozone crisis is the world, in miniature
The core of the eurozone financial crisis is not afiscal crisis
It is the interaction of balance of payments with
financial crises, though huge debt stocks played apart in creating liquidity problems for sovereigns
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2. The shocks - eurozone
The difficulty is largely the result of the divergencesaccumulated in the years of excess
What made everything seem so good was creatingan acute long-term crisis
The failure of a true union stands revealed: neitherfinancing in a crisis nor workable adjustmentmechanisms
Too little, too confused and too late
The crisis is potentially terminal for the eurozone
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2. The shocks - eurozone
CURRENT ACCOUNT BALANCES
(per cent of GDP)
-12.0
-10.0
-8.0
-6.0
-4.0-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Finla
nd
Netherl
ands
Belgium
Germ
any
Austria
Fra
nce
Italy
Irelan
d
Spain
Greece
Portugal
Estonia
1999-2007 Average 2012
EUROZONE IMBALANCES
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2. The shocks - eurozone
ROAD TO THE EUROZONE FISCAL CRISES
NET PUBLIC DEBT
(relative to GDP)
0
20
40
60
80
100
120
140
160
180
Greece Italy Portugal Ireland Spain
2002
2003
2004
2005
20062007
2008
2009
2010
2011
20122015
Source: World Economic Outlook database April 2011
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2.The
shocks
-eurozon
e
ROAD
TOTHEEUROZONEFISCA
LCRISE
SPREADSO
VER
BUNDS
0
100
200
300
400
500
600
01/01/2007
01/03/2007
01/05/2007
01/07/2007
01/09/2007
01/11/2007
01/01/2008
01/03/2008
01/05/2008
01/07/2008
01/09/2008
01/11/2008
01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
Belgium
Spain
Fr
ance
Italy
Nether
lands
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2.The
shocks
-eurozon
e
ROAD
TOTHEEUROZONEFISCA
LCRISE
SPREADS
O
VER
BUNDS
-500 0
500
1000
1500
2000
2500
3000
3500
4000
01/01/2007
01/03/2007
01/05/2007
01/07/2007
01/09/2007
01/11/2007
01/01/2008
01/03/2008
01/05/2008
01/07/2008
01/09/2008
01/11/2008
01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010
01/01/2011
01/03/2011
Greece
Ireland
Portugal
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3. Prospects
At the broadest level, we are watching theinteraction of two huge events:
A secular shift in the location of economic activity; and
The collapse of a generational expansion in private and, toa lesser extent, public sector leverage in high-incomecountries
The eurozone crisis falls at the intersection of theseprocesses
Imbalances are a vital symptom of economic stress
So how might it all play out?
We do not know. There are too many unknowns.
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2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012GROWTH FORECASTS FOR 2012
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
US
UK
Japan
Eurozone
Germany
France
Italy
Spain
Jun-11 Jan-12
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2. The prospects: global
GROWTH PROSPECTS DWINDLE FOR 2012GROWTH FORECASTS FOR 2012
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
China
India
Asia Pacific (without
Japan)
Russia
Eastern Europe
Brazil
Latin America
World
Jun-11 Jan-12
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3. Prospects: global
Here are salient elements of global challenges:
Accelerating de-leveraging in the private sectors ofoverleveraged countries;
Rebalancing the world economy, to give over-leveragedeconomies to enjoy export-led growth, necessary when
their private sectors run huge financial surpluses; Reducing fiscal deficits in high-income countries, without
killing the recovery; and
Avoiding excesses in emerging countries, despite easy
financial and monetary conditions.
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3. Prospects: eurozone
What is needed now in the eurozone are:
Financing while adjustment occurs, which will take at least 5years and possibly 10 years, or more;
Adjustment via structural reforms and divergent inflationacross the eurozone, with higher inflation in core countries
and low inflation in vulnerable countries; The big risk is a combination of premature fiscal tightening in
the periphery and the absence of adjustment in the core;
That will lead to further deep recessions;
And a possible break-up.
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3. Prospects
Some guesses:
Growth in high countries will remain weak for many years,
with a significant chance of a true depression;
Headline inflation rates will fall;
Short-term official interest rates will remain low;
Countries with their own central banks will have low long-term bond rates; many eurozone countries will not;
Eurozone break-up risk remains;
The US will be the fastest growing of big economies;
Emerging countries will grow quickly, but there is somechance of crises there, too.
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