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NIESR Economists’ Briefing – NIESR May 2017
National Institute of Economic and Social Research
Wednesday 10th May 2017 5-6pm
Chair: Jagjit Chadha, NIESR Director
17.05 Oriol Carreras - The macroeconomic implications of increasing tariffs on US imports
17.15
17.20 Amit Kara – UK Economy since 2010
17.35 Q&A
18.00 Drinks
Simon Kirby - Prospects for the UK Economy
Jagjit Chadha – The Economic Landscape of the UK 17.00
National Institute of Economic and Social Research
The Economic Landscape of the UK
National Institute Economic Review
Issue 240, May 2017
Commentary Jagjit S. Chadha
National Institute of Economic and Social Research
Deeper and Long Recessions
National Institute of Economic and Social Research
Low investment and stagnant real wages
National Institute of Economic and Social Research
R&D Regional Productivity
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
198119851989199319972001200520092013
G7 Average ex UK United Kingdom
National Institute of Economic and Social Research
Policy at Limits
National Institute of Economic and Social Research
The Economic Landscape of the UK
“The major fluctuations in the rate of growth of demand and output in the years after 1952 were thus chiefly due to government policy. This was not the intended effect; in each phase, it must be supposed, policy went further than intended, as in turn did the correction of those effects. As far as internal conditions are concerned then, budgetary and monetary policy failed to be stabilising, and must on the contrary be regarded as having been positively destabilising.” J. C. R. Dow, The Management of the British Economy 1945-1960, (1964).
We may, once again, be in danger of letting the urgent drive out the important.
National Institute of Economic and Social Research
The macroeconomic implications of increasing tariffs on US imports
National Institute Economic Review
Issue 240, May 2017
Oriol Carreras, Graham Hacche, Iana Liadze and Matteo Ramina
National Institute of Economic and Social Research
Forecast summary for GDP growth
Change in projected annual GDP growth since February 2017 forecast (percentage points)
World
economyUS Euro Area Japan China India
2017 3.3 2.1 1.6 0.8 6.7 7.3
2018 3.6 2.3 1.7 0.7 6.2 7.8
World
economyUS Euro Area Japan China India
2017 0.2 0.0 0.1 0.1 0.3 1.3
2018 0.1 0.1 0.2 -0.1 0.3 -0.1
National Institute of Economic and Social Research
Recent trends in trade protectionism
• Classical view: governments adopt trade restricting policies when a country experiences a recession and/or a loss of competitiveness induced by an appreciation of the currency.
• That did not seem to hold in the aftermath of the financial crisis.
• However, there has been a rise in ‘murky’ protectionism with measures such as health and safety regulations or buy-local clauses in stimulus and bail-out packages.
• Recourse to more standard trade restrictive policy is becoming popular again.
National Institute of Economic and Social Research
Counterfactual analysis: a tariff increase
• The president of the United States has indicated that he is considering measures to introduce or increase tariffs on imports.
• We use an experimental version of the National Institute’s Global Econometric Model (NiGEM) to run stylised scenarios to investigate the impact of increases in tariffs on US imports.
National Institute of Economic and Social Research
Assumptions • Shocks:
– We increase the prices of non-commodity goods and services to the US from China, Canada and Mexico by 20 per cent permanently to mimic the introduction of a 20 per cent tariff on imports from those countries.
– Similarly, we model retaliation by China, Canada and Mexico by increasing the prices of imports of non-commodity goods and services from the US to these countries permanently by 20 per cent.
• Model:
– We assume that exchange rates and financial markets are forward-looking and respond to expected changes in interest rates.
– Investment is forward-looking and responds to changes in the long-run real rate.
2016 China Mexico Canada Total
Share of US imports 23.6 15 14.2 52.8
Source: U.S. Department of Commerce.
National Institute of Economic and Social Research
Impact on annual US real GDP (level)
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
2017 2018 2019 2020 2021
US
GD
P, p
erce
nt
dif
fere
nce
fro
m b
ase
Import tariffs on China
Import tariffs on China and Mexico
Import tariffs on China, Canada and Mexico
Import tariffs on China with China retaliating
Import tariffs on China and Mexico with both retaliating
Import tariffs on China, Canada and Mexico with retaliation
Source: NiGEM simulations.
National Institute of Economic and Social Research
Impact on selected US macroeconomic variables of tariff increases by the US and its three main trading partners
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
GDP Inflation Current accountbalance (% GDP)
Short term interestrate
Real effectiveexchange rate
Dif
fere
nce
fro
m b
ase
2017 2018 2019 2020
Source: NiGEM simulations. Note: GDP (level) and real effective exchange rate are reported as per cent differences from base; inflation rate, short term interest rate and current account balance (%GDP) are reported as percentage point differences from base.
National Institute of Economic and Social Research
Effects on US domestic demand and its components
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2017 2018 2019 2020 2021
Dif
fere
nce
fro
m b
ase
Consumption Gov. expenditure Private investment Domestic demand
Source: NiGEM simulations. Note: impact on domestic demand is given as per cent difference from base; components of domestic demand are shown as a percentage point contribution to the per cent change in domestic demand.
National Institute of Economic and Social Research
Caveats • Our analysis does not incorporate possible positive effects
from the tariff increase on government revenue.
• NiGEM is a “representative agent” model. Hence, it does not cover distributional effects that can arise when tariffs are introduced.
• Labour supply in NiGEM is exogenous, i.e. neither the participation rate nor the population is affected by the shocks applied.
• Last, but not least, our simulations do not take into account any other changes in policy that may be implemented.
National Institute of Economic and Social Research
Conclusions • The classical relationship whereby governments
enact trade-restrictive policies in recession times appears to hold even after the financial crisis.
• A counterfactual scenario of an increase in tariffs on US imports from China, Mexico and Canada with retaliation from the aforementioned countries shows:
– Real US GDP declines (and world GDP).
– US current account balance experiences a marginal deterioration.
National Institute of Economic and Social Research
References
• Bown, C. (Ed.) (2011), ‘Introduction’, In: ‘The Great Recession and Import Protection: The Role of Temporary Trade Barriers’, CEPR and World Bank, Chapter 1, pp. 1-51.
• Georgiadis, G., & Gräb, J. (2013), ‘Growth, real exchange rates and trade protectionism since the financial crisis’, ECB Working Paper No. 1618.
• Rodrik, D. (2009), ‘The Myth of Rising Protectionism’, Project Syndicate Blog. Available at: https://www.project-syndicate.org/commentary/the-myth-of-rising-protectionism
National Institute of Economic and Social Research
Prospects for the UK Economy
National Institute Economic Review
Issue 240, May 2017
Simon Kirby, with Oriol Carreras, Amit Kara, Rebecca Piggott and James Warren
National Institute of Economic and Social Research
GDP outlook broadly unchanged GDP growth fan chart (per cent per annum)
Source: NiGEM database, NIESR forecast and NiGEM stochastic simulations. Notes: Each bound represents a cumulative decile of the probability distribution around the May 2017 forecast.
National Institute of Economic and Social Research
Consumer spending contributions to GDP growth to ease sharply
-3
-2
-1
0
1
2
3
4
5
2015 2016 2017 2018P
erc
enta
ge p
oin
ts
Exports Imports
Private Consumption GCF
Government Consumption GDP growth
Forecast
Consumer spending and real consumer wages
Source: NiGEM database and NIESR forecast. Source: NiGEM database and NIESR forecast. Note: GCF is gross capital formation.
National Institute of Economic and Social Research
Volatile conditioning assumptions Effective exchange rate, trade–weighted
Source: NiGEM databases and NIESR forecasts.
National Institute of Economic and Social Research
CPI inflation to peak 3.4%, end 2017 CPI inflation rate fan chart (per cent per annum)
Source: NiGEM database, NIESR forecast and NiGEM stochastic simulations. Notes: Each bound represents a cumulative decile of the probability distribution around the May 2017 forecast. The Bank of England’s inflation target is 2 per cent per annum.
National Institute of Economic and Social Research
Fiscal policy in the next Parliament • Objective for fiscal policy • In order to provide for sustainable public finances, ensure confidence in the economy, and support
the effectiveness of monetary policy, the Treasury’s objective for fiscal policy is to: – Return the public finances to balance at the earliest possible date in the next Parliament
• Mandate for fiscal policy • The Treasury is required by the Budget Responsibility and National Audit Act 2011 to set out the
means by which its objective in relation to fiscal policy will be attained (“the fiscal mandate”). This act also requires the OBR to assess the government’s performance against the fiscal mandate.
• In order to achieve the above objective, the Treasury’s mandate for fiscal policy in this Parliament is: – a target to reduce cyclically-adjusted public sector net borrowing to below 2% of GDP by 2020-21
• The Treasury’s mandate for fiscal policy is supplemented by: – a target for public sector net debt as a percentage of GDP to be falling in 2020-21
• To ensure that expenditure on welfare remains sustainable, the Treasury’s mandate for fiscal policy is further supplemented by: – a target to ensure that expenditure on welfare in 2021-22 is contained within a predetermined cap and
margin set by the Treasury at Autumn Statement 2016
• In the event of a significant negative shock to the UK economy, the Treasury will review the appropriateness of the fiscal mandate and supplementary targets as a means of returning the public finances to balance as early as possible in the next Parliament.
Source: HM Treasury (2016) Charter for Budget Responsibility: autumn 2016 update
National Institute of Economic and Social Research
Forecast summary
National Institute of Economic and Social Research
UK economy since 2010
National Institute Economic Review
Issue 240, May 2017
Simon Kirby, Oriol Carreras, Rebecca Piggot, James Warren and Amit Kara
National Institute of Economic and Social Research
UK economy since 2010 Why 2010? - General election and start of Parliament - First full year of economic recovery Political backdrop (there is a pattern) - Referendum, Scottish (2014)
- General election (2015) - Referendum, EU (2016) - General Election (2017)
- Referendum (2018)???
National Institute of Economic and Social Research
UK economy since 2010 Economic growth: average 2.0 per cent Inflation: average 2.2 per cent Employment: Close to full employment levels and unemployment at levels near pre-crisis trough BUT:
Economic recovery since 2009: worst of any in the last 100 years, including the Great Slump of the 1920s.
National Institute of Economic and Social Research
The profile of recession and recovery
Source: NIESR monthly GDP estimates
National Institute of Economic and Social Research
UK economy since 2010 The corollary to high employment and weak GDP growth is weak productivity growth.
Had UK productivity performance from 2008 to 2015 matched its pre-downturn trend, labour productivity would have been nearly 20 per cent higher (productivity puzzle)
G7 economies workers are on average producing some 15 per cent more output than UK workers.
National Institute of Economic and Social Research
International comparison of productivity
Source: NIESR
94
96
98
100
102
104
106
108
110
2005 2007 2009 2011 2013 2015
Canada France Germany Italy
Japan UK USA
2008Q1 = 100
National Institute of Economic and Social Research
Productivity puzzle
Source: NIESR
3.5
3.7
3.9
4.1
4.3
4.5
4.7
4.9
1971 1980 1989 1998 2007 2016
Counterfactual based on productivity growth from 1998-2004
Actual
National Institute of Economic and Social Research
UK economy since 2010 Real consumer wage growth performance is dismal (wages and productivity tend to move together): Average CPI inflation: 2.2 per cent
Average nominal wage growth: (Total compensation per hour = 1.5 per cent)
Consumer spending was the main contributor to GDP growth from 2012 to 2016 in spite of the squeeze in real wages.
Why? Saving ratio has fallen from 11 per cent in 2010 to 7 per cent in 2014 to 3.5 per cent in 2016
National Institute of Economic and Social Research
Lost decade of consumer spending Real consumer wages and per capita consumer spending
Source: NiGEM database and NIESR forecast
80
85
90
95
100
105
2002 2005 2008 2011 2014 2017 2020
2007
Q4=
100
Per capita consumption Real consumer wage
Forecast
National Institute of Economic and Social Research
UK economy since 2010
Policy backdrop: Monetary Policy: was required to do all the heavy lifting at a time when fiscal policy tightened. BoE holds some 30 per cent of outstanding government debt. The BoE swiftly discarded its experiment with forward guidance Fiscal policy: HM Treasury repeatedly slipped on its fiscal targets and also breached its own fiscal rules – response was to change the fiscal rules. Politics: Commitment to fixed term parliaments (Cameron + May)