George Gelauff, Debby Lanser, Albert van der Horst, Adam … · CPB Netherlands Bureau for Economic Policy Analysis Austerity may harm growth -2 0 2 4 6 8 10 EST NLD DNK AUS LUX BEL

CPB Netherlands Bureau for Economic Policy Analysis

Roads to recovery George Gelauff, Debby Lanser, Albert van der Horst, Adam Elbourne

October 29, 2014 1

OECD - STEP


The Great Recession 2008-2013

• Financial crisis:

– Global imbalances

– Risk perception

– Complex and risky financial innovations

• Euro crisis:

– International risks and national supervision

– Banks and sovereigns: suffocating embrace

– Consolidation

• 2014, where are we now?

• 2014-2023, what are the roads to recovery?

October 29, 2014 2

OECD - STEP


Europe in the aftermath of the Great Recession

• A permanent loss ...

– reduction in the level of potential GDP

• ... but a resilient economy

– no reduction in the growth rate of potential GDP (in coming decade)

• Gradual recovery ...

– closing of the output gap may take a decade

• ... with risks on the demand side

– deleveraging & austerity, investment & credit

October 29, 2014 3

OECD - STEP


Significant damage to GDP ...

October 29, 2014 4

OECD - STEP


... and investment

October 29, 2014 5

OECD - STEP


Investment (% GDP) falls after crisis ...

October 29, 2014 6

OECD - STEP


... but investment excl. dwellings fall much less

October 29, 2014 7

OECD - STEP


... and even less in real terms

15

16

17

18

19

20

21

22

1990 1995 2000 2005 2010

Netherlands NFM Core-EU NFM

% of Gross Value Added

October 29, 2014 8

OECD - STEP


Physical capital

• Relatively large drop in investment largely explained by housing

• Decline in other investment not really related to the crisis

– Investment-GDP ratio same in 2012 as 2004/5

• No obvious damage

– Puzzle: where is credit rationing?

• Banks relatively weakly capitalised

– May limit credit supply in a recovery

– AQR and stress test may support confidence

October 29, 2014 9

OECD - STEP


Labour productivity in Europe and USA

0.8

0.9

1

1.1

1990 1995 2000 2005 2010

NLD EURO USA

Index, USA 1997 = 1

October 29, 2014 10

OECD - STEP


Productivity will resume growth (after a permanent loss)

• Banking crisis are associated with large, permanent declines in productivity relative to the previous trend.

• Reproduction of Serra-Cexana in Chapter 4 of Roads to Recovery

• No evidence that banking crises have a long-run effect on the growth rate of productivity

October 29, 2014 11

OECD - STEP


What might explain losses in productivity?

• Mechanisms

– low price of risk before crisis -> bubble

– change in investment

– loss of skills during unemployment

– less R&D (lower expectations)

– more R&D (lower opportunity costs)

– fiscal austerity

• Much unknown

– Just as Great Depression, 1930s

October 29, 2014 12

OECD - STEP


Yet, there is room for improvement

October 29, 2014

OECD - STEP

13

0

1

2

3

4

5

6

PMR (pooled) Barriers in services

Product market regulation, 2013 Barriers in services


Rising unemployment (% labour force)

October 29, 2014 14

OECD - STEP


Unemployment in the Netherlands

0

1

2

3

4

5

6

7

8

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Axis Titlerealisations fit Okun-Gordon model forecasts Okun-Gordon model

phase 1: labourhoarding

phase 2: excessive supply %

I II

I: labour hoarding II: excessive supply

October 29, 2014 15

OECD - STEP


Unemployment, actual and NAIRU

• Large heterogeneity

• Structural reform may benefit southern European countries

• Literature provides limited evidence for hysteresis ...

• ... but productivity of long-term unemployed may decline (scarring)

0

5

10

15

20

25

30

DEU NLD DNK GBR FIN FRA ITA IRL PRT ESP GRC

NAIRU 1999-08 NAIRU 2013 Actual 2013

%

October 29, 2014 16

OECD - STEP


Labour market will return to equilibrium

• When aggregate demand recovers,

– employment follows suit

– unemployment returns to the natural rate

– discouraged workers return

• Hysteresis: no evidence

• Scarring (loss of skills): some evidence

• The Great Recession does not permanently affect labour supply, but may have affected the human capital of the long-term unemployed

October 29, 2014 17

OECD - STEP


Falling domestic demand: consumption

October 29, 2014 18

OECD - STEP


Households face high debts

October 29, 2014

OECD - STEP

19

0

20

40

60

80

100

120

140

2000 2000 - 2012

Household debt 2000, 2012, % GDP


Indicators pointing at deleveraging

-60

-40

-20

0

20

40

60

DEU AUT CHE BEL SVN ITA FRA SVK CZE LUX GBR HUN POL NOR PRT FIN EST SWE ESP NLD DNK GRC IRL

debt net housing wealth under water

% gdp

October 29, 2014 20

OECD - STEP


Austerity may harm growth

-2

0

2

4

6

8

10

EST NLD DNK AUS LUX BEL DEU SWE CZE SVN FIN SVK ITA GRC HUN IRL PRT POL FRA ESP GBR

OECD 60% EC sustainability

% gdp Consolidation required to reduce government debt to 60% of GDP or to a sustainable level

October 29, 2014 21

OECD - STEP


Deleveraging <=> economic growth

• Economic growth may limit need to deleverage

– limited decline of households wealth

– assets still higher than liabilities

– nominal growth may inflate debt problem

– doesn’t harm recovery

• But, deleveraging may harm growth

– indicators point at deleveraging

– households and government (and firms) may all decide to save

– weakening demand and nominal growth

– aggravating deleveraging challenge

October 29, 2014 22

OECD - STEP


On the brink of deflation?

October 29, 2014

OECD - STEP

23

-4

-3

-2

-1

0

1

2

3

4

5

6

Euro area Germany Greece

Spain France Italy

HCIP monthly data, annual rate of change


Three roads to recovery

October 29, 2014 24

OECD - STEP


Scenarios Output

gap Demand

Structural supply

Economic

growth

Strong

Strong

Sufficient Closed Accelerating

Recovery

Limited Negative

Weak

Strong

Weak Closed Moderate Recovery

Limited Negative Delayed Recovery

October 29, 2014 25

OECD - STEP


Three roads to recovery

• The economy is resilient, but the recovery of aggregate demand will take time.

• Depending on strong or weak supply, over the next decade the European economy may grow by 1½% (Moderate Recovery) to 2¼% (Accelerated Recovery) per year.

• When substantial demand risks materialise the economy will not recover in the coming decade and government debt deteriorates (Delayed Recovery).

October 29, 2014 26

OECD - STEP


Three scenarios, 2014-2023

accelerating recovery

moderate recovery

delayed recovery

Gross domestic product, Euro area 2¼ 1½ 1

Gross domestic product, USA 3¼ 3 3

World trade, weighted (for Nld) 6¾ 5 3

Inflation, euro area (ultimo) 2¼ 1¾ 1

Interest rate, euro area (ultimo) 4¾ 4 2¼

October 29, 2014 27

OECD - STEP


2014, the facts

• Low GDP growth, but at least the economy grows

• Low inflation, but still positive

• High unemployment, with first signs of decline

• High government debt

• Low interest rates, low CDS-spreads

• ...

October 29, 2014 28

OECD - STEP


2014-2023, our assessment

• The economy is resilient, but demand remains fragile

– in Europe and the Netherlands

• Resilient

– productivity growth will resume

– labour markets will return to equilibrium

– recovery of the economy will weaken the deleveraging challenge

• Fragile

– deleveraging may delay growth

– consolidation may harm growth

– credit supply may limit investment and consumption

October 29, 2014 29

OECD - STEP


Europe in the aftermath of the Great Recession

• A permanent loss ...

– reduction in the level of potential GDP

• ... but a resilient economy

– no reduction in the growth rate of potential GDP (in coming decade)

• Gradual recovery ...

– closing of the output gap may take a decade

• ... with risks on the demand side

– deleveraging, credit, austerity

October 29, 2014 30

OECD - STEP


• Stellingen ??

October 29, 2014 31

OECD - STEP


WWW.CPB.NL www.cpb.nl/en/publication/roads-to-recovery

October 29, 2014 32

OECD - STEP

http://www.cpb.nl/

http://www.cpb.nl/en/publication/roads-to-recovery









Documents

George Gelauff, Debby Lanser, Albert van der Horst, Adam … · CPB Netherlands Bureau for Economic Policy Analysis Austerity may harm growth -2 0 2 4 6 8 10 EST NLD DNK AUS LUX BEL