presentation: unlocking global growth - piie · 2015-01-16 · outline i. cyclical recovery slow...

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


2013 Maximum since 2006 Historic minimum 1/


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


2012 or latest Maximum since 2006


-10

0

10

20

30

40

50

IE GR PT ES IT NL FR DE AU SE CA JP UK US


2012 or latest Maximum since 2006 Historic minimum 2/


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




-10

0

10

20

30

40

50

PT GR ES IT IE DE FR NL US JP CA AU SE UK




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


2014 Q2 Minimum since 2006 Maximum since 2006


-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


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.


12

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

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)


0

20

40

60

80

100

120

2000 2013

FDI assets based on PPP (share in total world FDI)


0

20

40

60

80

100

2000 2013

FDI liabilities based on PPP (share in total world FDI)


43

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

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

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presentation: unlocking global growth - piie · 2015-01-16 · outline i. cyclical recovery slow...

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