Unlocking Global Growth Min Zhu International Monetary Fund
1
Outline
I. Cyclical recovery slow II. Real and financial sectors diverging III. Macro policy space limited IV. Global structural changes emerge V. Proactive policies needed
2
3
I. Cyclical recovery slow
90100110120130140150160170180190
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
October 2007 Projections Oct 2014 Actual
4
World GDP (Real; 2000 = 100)
-6
-3
0
3
6
9
12
15
2007 2009 2011 2013 2015 2017 2019
World Euro areaJapan United States
5
-6
-3
0
3
6
9
12
15
2007 2009 2011 2013 2015 2017 2019
Brazil China India
GDP Growth (Real; in percent)
0
10
20
30
40
50
60
70
80
Investment/GDP Consumption/GDP Governmentexpenditure/GDP
World demand (in percent of GDP)
2000 2007 2013
6
7
0
1
2
3
4
5
FDI liabilities/GDP FDI assets/GDP
World FDI (in percent of world GDP)
2000 2007 2013
8
0
1
2
3
4
5
6
7
8
1980 - 89 1990 - 99 2000 - 07 2008 - 13
GDP vs Trade (average annual growth in percent)
GDP Trade
-10
90
190
290
390
490
590
690
790
890
990
GR PT IT ES IE FR NL DE JP AU UK US SE
Stressed EA Other EA Other AEs
2014 2/ Maximum since 2006 3/ Historic minimum 4/
Direction of adjustment
0
1
2
3
4
5
6
7
8
9
10
IT IE PT GR ES FR DE NL CA UK US JP AU SE
Stressed EA Other EA Other AEs
2013 Maximum since 2006 Historic minimum 1/
Direction of adjustment
General Government Interest Expense (percent of GDP)
5 Yr Sovereign Credit Default Swap Spreads (annual average; basis points)
Sources: Bloomberg L.P.; and IMF staff calculations; 1/ Calculations based on data from 1990 to 2013. Data for Germany starts in 1991, for Netherlands in 1995 and for the US in 2001. 2/ 2014 data corresponds to the January - August average. 3/ For Greece, the maximum CDS spreads level since 2006 is 1505bps. 4/ Calculation based on data from 2003 to August 2014. Data for Spain and Sweden start in 2004, for Ireland in 2007, for Australia, Netherlands and the UK in 2008, and for the US in 2009.
Deleveraging revisited: government sector
9
Deleveraging revisited: household sector
-10
-5
0
5
10
15
20
25
30
35
GR IE PT ES IT NL FR DE CA AU UK US SE JP
Stressed EA Other EA Other AEs
2012 or latest Maximum since 2006
Direction of adjustment
-10
0
10
20
30
40
50
IE GR PT ES IT NL FR DE AU SE CA JP UK US
Stressed EA Other EA Other AEs
2012 or latest Maximum since 2006 Historic minimum 2/
Direction of adjustment
Household Leverage in AEs 1/ (debt-to-total assets; percent)
Household Debt Service Burden in AEs 1/ (percent of net disposable income)
Sources: OECD; BIS Quarterly Review (2012); Bartiloro et al. (2012); Bank of Ireland; Banco do Portugal; Brissims et al. (2009); and IMF staff estimates: 1/ Household debt data for Sweden includes debt through housing cooperatives. 2/ Calculation based on data from 1995 to 2012 or latest. For Denmark data starts in 2003, for Ireland and Spain in 2002, and for Switzerland in 2000.
10
Deleveraging revisited: corporate sector
-10
0
10
20
30
40
50
60
GR PT IT ES IE NL FR DE CA AU US UK SE JP
Stressed EA Other EA Other AEs
2013 Maximum since 2006 Historic minimum 1/
Direction of adjustment
-10
0
10
20
30
40
50
PT GR ES IT IE DE FR NL US JP CA AU SE UK
Stressed EA Other EA Other AEs
2013 Maximum since 2006 Historic minimum 1/
Direction of adjustment
Corporate Debt-to-Assets Ratio in AEs (percent)
Interest Payments to Cash Flow in AEs (percent)
Sources: Worldscope; and IMF staff calculations. 1/ Calculation based on data from 1995 to 2013. 11
Deleveraging revisited: banks
-10
-8
-6
-4
-2
0
2
4
6
PT GR IE IT ES FR NL DE UK SE US JP CA AU
Stressed EA Other EA Other AEs
2014 Q2 Minimum since 2006 Maximum since 2006
Direction of adjustment
-10
0
10
20
30
40
50
60
70
80
90
100
ES IT PT IE GR FR NL DE CA SE AU JP UK US
Stressed EA Other EA Other AEs
2014 Q2 Maximum since 2006 Minimum since 2006
Leverage Ratio in AEs 1/ (tangible assets-to-tier 1 common capital)
Profitability in AEs (retained earnings-to-adjusted tangible assets
ratio)
Sources: SNL; and IMF staff calculations. 1/ Leverage ratio for Japan is defined as tangible assets-to-tangible common equity. The maximum bank leverage ratio in Germany could be overstated, as the sample does not include small banks, which are important as a group in the total.
Direction of adjustment
12
13
14
A warning from the past: UK after World War I
0
20
40
60
80
100
120
-10
0
10
20
2000 2002 2004 2006 2008 2010 2012 2014
Credit growth to corporates (yoy, 4Q MA) Capital expenditure (% of operating cash flows; rhs) Capex Sample Average
United States
Credit and investment
-20
-10
0
10
20
30
40
50
0
5
10
15
20
25
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Emerging Markets
40
45
50
55
60
65
-5
0
5
10
15
20
2000 2002 2004 2006 2008 2010 2012 2014
Euro Area
Bank Credit Growth from BRICS banks (median); Capex growth is yoy growth for a sample of 12 Ems;
(rhs)
4
Better here Than here…
20
30
40
50
60
70
80
-8
-6
-4
-2
0
2
4
6
2000 2002 2004 2006 2008 2010 2012 2014
Japan
15
-10
-5
0
5
10
15
HH Non-Fin Fin Gov HH Non-Fin Fin Gov
Saving Saving Saving Saving Investment Investment Investment Investment
2000 2007 2013
Saving vs Investment: United States (in percent of GDP)
Sources: Haver Analytics
16
17
Inflation (in percent)
-2
-1
0
1
2
3
4
5
6
7
2007 2009 2011 2013 2015 2017 2019
World Japan Euro area
18
5-year 5-year forward inflation swaps (in percent)
II. Real and financial sectors diverging
19
20
0
50,000
100,000
150,000
200,000
250,000
2002 2007 2013
Emerging Market Economies (in billions of U.S. dollars)
Total Reserves Minus Gold
Equity Markets
Debt Securities
Bank Assets
0
50,000
100,000
150,000
200,000
250,000
2002 2007 2013
Advanced Economies (in billions of U.S. dollars)
Global financial markets
-2
-1
0
1
2
3
4
5
6
EU investment grade
U.S. investment grade U.S. high yield EU high yield
Undervalued
Overvalued
Excess financial risk taking?
Sovereign Bonds (z-scores)
Global Composite Volatility Index
… Record Low Volatility
…Credit Risk Mispricing
Sovereign Yield Compression…
Corporate Spreads (z-scores)
Note: 5y5y sovereign bond yield in local currency terms minus 5y5y survey-based expectation of real GDP growth and inflation across 15 advanced economies and 9 emerging markets. Z-score computed as mean-adjusted return, scaled by the standard deviation: (y-y bar)/σ.
Note: Z-scores relative to the historical distribution of the respective option-adjusted spreads.
-3
-2
-1
0
1
2
3
4
1990 1995 2000 2005 2010
Average
Top declile
Bottom decile
2014
Overvalued
0
10
20
30
40
50
60
70
80
90
100
2004 2006 2008 2010 2012 2014
5
Undervalued
21
Credit intermediation shifting to the shadows
Asset Managers Rising in Systemic Importance in the United States
Largest Holders of Private Bonds
11
Ownership of Corporate and Foreign Bonds (percent)
0
2
4
6
8
10
12
14
16
18
Pension Funds Banks Insurance Asset Managers
Financial Assets
2013 2003 1995
(USD tn)
0
5
10
15
20
25
30
2007 2014
Pension Funds Banks Asset Managers Insurance
0
5
10
15
20
25
30
35
40
45
2007 2008 2009 2010 2012 2013
7-day limit for redemption payments
Brand Risk
Top 10 AMs: $19 tn (30% of all AUM)
Asset managers: a source of contagion?
Liquidity Mismatch
Number of Days for the Full Liquidation of U.S. Credit Mutual Funds and ETFs
(Corporate bonds)
13
0
5
10
15
20
25
30
35
40
45
50
High Yield EM External Debt
Ownership by Single Fund Family of Large Individual Corporate
Issuers (Percent of total debt issuance)
Concentrated Holdings
Asset Manager AUM (Total = $65 tn)
$46 tn
Asset managers spark sovereign crises Large redemptions, portfolio reallocations, market power abused
Debt Owned by a Single Fund Family (percent) Franklin Templeton’s Big Bets
Uganda
Turks & Caicos
French Polynesia
Congo
Fiji
Hungary
Uruguay
Ghana
Ireland
Indonesia
Ukraine
Serbia Sri Lanka
Croatia
Turkey
Armenia
0 10 20 30 40 50 60 70 80
BB
C
Credit rating
Investment grade
High yield
BBB
A
B
CCC
5.6%
10.4%
10.5%
13.6%
14.2%
$22.62
$18.54
$8.78
$14.08
$4.45
SouthKorea
Malaysia
Ukraine
Hungary
Uruguay
Country Percentage of Country's debt held by ...its value, Franklin Templeton Investments and… in billions
24
Liquidity illusion today – Liquidity trap tomorrow?
But Deteriorating Structural Market Liquidity Ample Monetary Liquidity
0
2
4
6
8
10
2007 2008 2009 2010 2011 2012 2013 2014
(USD tn) Central Bank Balance Sheets
FED ECB BOJ
BOE* SNB
* Bank of England data unavailable before 2006 due to defini the BoE’s balance sheet items
12
11.0
11.5
12.0
12.5
13.0
13.5
2007 2008 2009 2010 2011 2012 2013
Size of Trades (> 5mn; 6-month average; investment grade) (USD mn)
-100
0
100
200
300
400
500
Volatility shock US rate shock Total
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Spillovers could be global
Rising Share of EMs in AE Portfolios Leading to Higher Synchronization of Asset Prices
14
Note: Portion of total variation explained by the 1st principal component on levels of AE and EM bonds; 6-month moving window
3
4
5
6
7
8
9
10
01 02 03 04 05 06 07 08 09 10 11 12
Advanced Economy Bond Allocations to EMs
(percent of total)
Synchronization Index AE and EM Estimated Impact of Increase in Vol and U.S. Rates on EM Sovereign Yields
(bps)
And Higher Impact of U.S. Shocks
27
III. Macro policy space limited
28
29
-50
0
50
100
150
200
250
Adva
nced
eco
nom
ies
Japa
n
Italy
Uni
ted
Stat
es
Cana
da
Fran
ce
Ger
man
y
Emer
ging
eco
nom
ies
Indi
a
Braz
il
Chin
a
Russ
ia
Public debt (in percent of GDP)
2008 Change 2008 - 2014
30
60
70
80
90
100
110
Public debt in advanced economies (in percent of GDP)
36
37
38
39
40
41
42
2012 2013 2014 2015
Deb
t Sept. 2012
Oct. 2014
Emerging markets: consolidation postponed
-3
-2
-1
0
2012 2013 2014 2015
Bala
nce Sept. 2012
Oct. 2014
Debt-to-GDP ratio Overall Fiscal Balance
Revisions to Forecasts
(percent of GDP; excluding China)
-75
-50
-25
0
25
50
75
Asia FinancialCrisis
NordicCountries1988-1992
GlobalFinancial
Crisis
AE EM
Output Growth Inflation Nominal Debt Growth Leverage Growth
Contributions to deleveraging (percent of GDP)
Sources: BIS, Penn World Tables, Staff Calculations -125
-75
-25
25
75
125
Hyper Inflation(rhs)
-8
-6
-4
-2
0
2
4
6
Historical episodes Latest crisis
CAPB (percent of potential GDP)
0102030405060708090
100 Government Debt (percent of GDP)
Advanced economies need to reduce debt but conditions are a challenge
-2
-1
0
1
2
3
4
5
6Real GDP Growth (percent)
0
1
2
3
4
5 Deflator (percent)
FAD WEMD Report 9/25/2014
Debt-to-GDP Dynamics after Public Debt Reaches 100 Percent of GDP (Percent of GDP, advanced economies)
34
35
36
2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013
Advanced Economies 72.7 79.7 93.2 99.7 103.7 107.9 106.5 2.9 2.9 2.9 2.9 3.0 3.0 2.9Japan 183.0 191.8 210.2 216.0 229.8 237.3 243.4 1.9 2.0 2.0 2.0 2.1 2.1 2.0United Kingdom 43.7 51.9 67.1 78.5 84.3 89.1 90.6 2.2 2.2 1.9 2.9 3.3 3.0 3.0United States 64.0 72.8 86.1 94.8 99.0 102.5 104.2 3.7 3.5 3.8 3.9 4.0 3.9 3.8Euro area 66.5 70.3 80.2 85.9 88.2 92.9 95.2 3.0 3.0 2.9 2.8 3.0 3.1 2.9
Emerging Market and Middle-Income Economies 37.4 35.5 40.1 39.7 38.7 38.9 40.2 2.4 2.2 2.2 2.2 2.1 2.0 1.9Brazil 65.2 63.5 66.8 65.0 64.7 68.2 66.2 7.5 7.4 6.3 6.8 7.3 7.0 6.5China 34.8 31.7 35.8 36.6 36.5 37.4 39.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5India 74.0 74.5 72.5 67.5 66.8 66.6 61.5 5.2 5.0 4.9 4.5 4.4 4.5 4.8Russia 8.6 8.0 10.6 11.3 11.6 12.7 13.9 0.6 0.5 0.6 0.6 0.6 0.6 0.7
Government debt (in percent of GDP) Government interest expense (in percent of GDP)
Central bank assets /GDP
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US EU Japan UK
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China India Brazil Russia
Sources: Haver Analytics
37
Interest Rates (in percent)
0
1
2
3
4
5
6
7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US Japan
EU UK
0
5
10
15
20
25
30
35
40
45
50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China IndiaBrazil Russia
Sources: Bloomberg 38
39
Policy rate expectations (percent; dashed lines are from April 2014 WEO)
40
US 10-year treasury breakdown (in percent)
Bund breakdown (in percent)
60
70
80
90
100
110
120
130
140
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30U.S. Dollar
Euro Japanese Yen
Sources: IFS
41
IV. Global structural changes emerge
42
Sources: WEO
0
10
20
30
40
50
60
70
2000 2013
GDP based on PPP (share of world GDP)
Advanced economies Emerging market and developing economies
0
20
40
60
80
100
2000 2013
Investment based on PPP (share in total world investment)
Advanced economies
Emerging and developing economies
0
20
40
60
80
100
2000 2013
Consumption based on PPP (share in total world consumption)
Advanced economiesEmerging and developing economies
0
20
40
60
80
100
2000 2013
Exports based on PPP (share in total world exports)
Advanced economiesEmerging and developing economies
0
20
40
60
80
100
120
2000 2013
FDI assets based on PPP (share in total world FDI)
Advanced economiesEmerging and developing economies
0
20
40
60
80
100
2000 2013
FDI liabilities based on PPP (share in total world FDI)
Advanced economiesEmerging and developing economies
43
44
45
62-66 77-81
82-86
87-91
92-96
02-06 07-11
0
1
2
3
4
5
6
7
15% 20% 25% 30%
Source: Penn Table 7.1, WEO, IMF staff calculation.
Strong progress in last decade
EM GDP per capita
EM GDP Per Capita Relative to the U.S. (PPP, 5-yr average)
46
1990 1995 2000 2005 2010 2014
Consumption 75.1 76.1 77.0 78.4 80.1 79.3Advanced Economies Investment 24.9 23.2 23.5 22.5 19.9 20.3
Current account -0.5 0.1 -1.0 -1.1 0.0 0.3
Consumption 74.2 76.1 74.6 69.4 67.2 66.7Emer.& Develop. Eco. Investment 25.4 24.9 23.2 26.3 30.8 31.5
Current account -0.4 -1.6 1.5 3.9 1.5 0.8
(in percent of GDP)
47
Working age population (in millions)
0
200
400
600
800
1000
1200
1400
China India
Brazil Sub-Saharan Africa
0
50
100
150
200
250
Euro area Japan
United States United Kingdom
48
Real income growth (Percent change between 1988 and 2008)
Source: Branko Milanovic (2012)
49
Total factor productivity Growth in percent
Source: Antonin Bergeaud et al (2014)
50
Interconnectivity
51
Interconnectivity
52
Interconnectivity
53
Interconnectivity
54
Interconnectivity
55
Interconnectivity
56
57
58
59
V. Proactive policies needed
60
61
I. Growth enhancing supply side policies a) Structural reform
i. Product market competition ii. Labor market flexibility iii. Increase service sector productivity iv. Pension reform
b) Smart investment
i. Infrastructure investment ii. Knowledge economy
a) Long term R&D b) Innovative SMEs
iii. Measures to move traditional sectors to their frontier iv. Long-term human capital formation
a) Education b) Healthcare c) Childcare
c) Supply-side supporting monetary and fiscal policies
i. Smart/quality fiscal expenditure ii. Monetary policy with targeted transmission channel iii. Monetary and fiscal policies maintain growth speed
62
II. Macroeconomic stability a) Be vigilant in financial market risks
i. Strengthen monetary and credit transmission to the real economy ii. Use macroprudential policies
b) Implement consistent regulatory reform and enhance supervision of the shadow banking system
c) Monitor of global liquidity flows and currency dynamics d) Prepare for Fed’s interest rate hike e) Form medium term fiscal consolidation plans
III. Global cooperation
a) Facilitate globalization (trade, capital flows) b) Enhance global financial safety net c) Implement global regulatory reform d) Put into practice new multilateralism
Thank you
63