Putting the-euro-area-on-a-road-to-recovery
4 likes89,865 views
The document discusses policies to promote faster recovery in the euro area. It finds that weak domestic demand, rather than exports, has held back growth. While some structural reforms have helped potential growth, others are needed to address problems like high unemployment, low inflation, and constrained credit in some countries. The document recommends that monetary, fiscal and structural policies be used in a coordinated manner, with more stimulus from the ECB, greater flexibility of fiscal rules, increased public investment, and further structural reforms to boost potential growth.
Putting the-euro-area-on-a-road-to-recovery
- 1. Putting the euro area on a road to recovery Paris, 25th November 2014 11h30 Paris time Catherine L. Mann OECD Chief Economist
- 2. Key messages The euro area continues to hinder global growth, which remains modest Europe is doing poorly above all because of the lack of demand Structural factors braking potential growth are interacting with demand weakness, raising the risk of prolonged stagnation Constrained demand management policies explain part of this weakness Some countries have made good progress on structural reforms to reverse the decline in growth, but others have to make greater efforts Monetary, fiscal and structural policies are complementary tools to promote a faster and more widely shared recovery 2
- 3. The global economy is stuck in low gear World GDP growth1 Per cent, seasonally adjusted annualised rate 1. GDP calculated at PPP exchange rates. 2. Weighted average of the Czech Republic, Hungary and Poland, where weights are moving nominal GDP measured at USD PPP. 3. Weighted average of Denmark, Norway and Sweden, where weights are moving nominal GDP measured at USD PPP. Source: November 2014 Economic Outlook database. -8 -6 -4 -2 0 2 4 6 8 -8 -6 -4 -2 0 2 4 6 8 Average, 1995-2007 GDP Volume, percentage change 3 Column1 2013 2014 2015 2016 World 3.1 3.3 3.7 3.9 United States 2.2 2.2 3.1 3.0 Euro area -0.4 0.8 1.1 1.7 Japan 1.5 0.4 0.8 1.0 BRIICS 5.5 5.1 5.4 5.6 OECD Europe excl. euro area 2.0 2.8 2.7 3.0 Of which: - UK 1.7 3.0 2.7 2.5 - CEE32 1.2 3.1 2.7 3.1 - Scandinavia3 0.8 1.6 2.1 2.6
- 4. Sluggishness is not evenly spread – the euro area is a locus of weakness GDP per capita Volume index, 2008 = 100 Source: November 2014 Economic Outlook database. 4 94 96 98 100 102 104 106 108 110 94 96 98 100 102 104 106 108 110 Euro area Japan OECD Europe excl. euro area United States
- 5. Slow growth in Europe matters for world trade and output Share of world trade (2013) Per cent Source: November 2014 Economic Outlook database. Share of world GDP (2013) Per cent 5 Euro area 22% Non-euro area EU Rest of the 8% world 70% Euro area 25% Non-euro area EU 11% Rest of the world 64%
- 6. The expected follow-through to the initial recovery has been repeatedly delayed Source: November 2010, 2011, 2012, 2013 and 2014 Economic Outlook databases. Past Economic Outlook projections of euro area GDP Volume index, Q1 2008 = 100 6 92 94 96 98 100 102 92 94 96 98 100 102 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
- 7. The realisation of downside risks would leave the euro area in stagnation 1. Downside scenario shown in red. The shocks modelled in the downside scenario are a 50 basis point reduction in inflation expectations, a 10% decline in equity prices and a 100 basis point increase in the corporate bond spread, the equity risk premium and the spread between household borrowing and lending rates. Source: November 2014 Economic Outlook database; and OECD calculations. 7 Growth, inflation and unemployment in a downside scenario1 Inflation Per cent GDP Annual percentage change Unemployment rate Per cent -1 0 1 2 3 -1 0 1 2 3 0 1 2 3 0 1 2 3 Average 1999-2007 ECB's inflation target 8 9 10 11 12 8 9 10 11 12 Average 1999-2007 Average 1999-2007
- 8. Source: November 2014 Economic Outlook database. GDP, exports, consumption and investment Volume indices, Q2 2009 = 100 Post-crisis euro area output weakness: not export performance, but domestic demand 8 90 100 110 120 130 90 100 110 120 130 Real GDP Consumption Fixed investment Exports
- 9. Part of the euro area’s relative demand weakness reflects constrained policies Central bank assets Per cent of broad money (M3) Source: Datastream; National Central Banks; and November 2014 Economic Outlook database. Change in underlying primary balance Per cent of potential GDP 9 0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 35 40 45 United States Euro area Japan United Kingdom -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 United States United Kingdom Japan Euro area 2007-2009 2009-2011 2011-2013
- 10. Macroeconomic policies in the euro area: now becoming less of a drag on demand ECB assets Trillions of euros Source: Datastream; and November 2014 Economic Outlook database. 10 Underlying primary balance Annualised change during period, per cent of potential GDP -1 0 1 2 3 4 5 6 7 8 -1 0 1 2 3 4 5 6 7 8 2012-2013 2014-2016 0 1 2 3 4 0 1 2 3 4 ECB's target
- 11. The overall euro area story masks divergences in performance GDP Volume index, Q1 2008 = 100 Source: November 2014 Economic Outlook database. 11 60 70 80 90 100 110 80 85 90 95 100 105 2008 2009 2010 2011 2012 2013 2014 Germany France Italy Spain Portugal Ireland Greece (RHS)
- 12. Structural reform intensity in recent years has been highest in the euro area periphery Note: The responsiveness rate is calculated as the share of recommendations in Going for Growth 2011 for which 'significant' action has been taken, where each recommendation is weighted by the inverse of average responsiveness to priorities in this area in non-crisis circumstances, in order to reflect the fact that some areas of reform are more difficult than others. Aggregates are unweighted averages. Periphery includes Estonia, Greece, Ireland, Italy, Portugal, the Slovak Republic, Slovenia and Spain. Core is other euro area countries. Non-euro area OECD Europe includes the UK, Switzerland the Czech Republic, Poland, Hungary, Sweden, Norway, Turkey, Iceland, and Denmark. Source: Going for Growth (2015, forthcoming; figures are preliminary); and OECD calculations. Responsiveness to Going for Growth reform priorities Responsiveness rate (per cent) 12 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 Periphery euro area Core euro area Non-euro area OECD Europe 2011-12 2013-14
- 13. 1. Inflation to October 2014, unemployment rate as of September 2014. Source: Eurostat. 13 Inflation1 HICP ,12-month percentage change Unemployment rate1 Per cent Inflation is too low across the euro area, and where it is lowest unemployment is very high 0 5 10 15 20 25 30 0 5 10 15 20 25 30 -2 -1 0 1 2 -2 -1 0 1 2 ECB's target
- 14. Note: Non-euro area countries shown in red. Source: November 2014 Economic Outlook database. Fiscal consolidation in a slow-growth environment: significant employment pain 14 Change in underlying primary balance and unemployment, 2007-14 AUT BEL FIN FRA DEU GRC IRL LUX ITA NLD PRT SVK SVN USA JPN GBR -5 0 5 10 15 20 -5 0 5 10 15 20 Change in underlying primary balance, % potential GDP Change in unemployment rate, percentage points
- 15. Structural flaws like incomplete banking union help explain the persistence of weak demand 1. Nominal interest rate minus latest 12-month inflation (HIPC). Source: ECB. Real interest rates1 on bank lending to enterprises Per cent 15 -2 0 2 4 6 8 10 -2 0 2 4 6 8 10 Germany Spain France Greece Italy
- 16. Credit has failed to revive in the periphery Note: OECD Europe excl. euro area is aggregated in USD at Q1 2010 exchange rates. Euro area periphery is Greece, Italy, Portugal and Spain. Core euro area is Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. Source: BIS. Credit to non-financial corporations Index, 2010 = 100 16 90 95 100 105 110 115 120 125 90 95 100 105 110 115 120 125 Core euro area countries Periphery euro area countries United States Japan OECD Europe excl. euro area
- 17. Existing ECB Measures ECB Policy Options Very low policy rates (incl. negative deposit rates) Open-ended or large-scale asset purchases: Long-Term Refinancing Operations (LTROs) • Increased outright purchases of asset-backed securities and covered bonds Targeted Longer-Term Refinancing Operations (TLTROs) • Outright purchase of sovereign bonds Outright purchases of asset-backed securities and covered bonds • Outright purchase of investment-grade corporate bonds Forward guidance The ECB must act decisively to support growth and head off deflation Monetary policy stimulus – beyond measures already announced – is needed in combination with banking union and structural reforms 17
- 18. Fiscal policy: all available flexibility should be used Flexibility and discretion within the EU fiscal rules should be used to reduce the drag on demand Germany: higher spending (e.g. childcare facilities, infrastructure) would add to euro area demand while addressing structural weaknesses France and Italy: delayed consolidation can be justified in a context of weak growth and new structural reforms Automatic stabilisers should be allowed to play fully 18
- 19. Fiscal policy: a reversal of the compression of public investment would help Government investment Volume index, 2009=100 Source: November 2014 Economic Outlook database. 19 0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140 Germany United Kingdom France Spain Greece Portugal
- 20. Structural policies: making full use of demand management tools is not enough 20 Structural flaws are impeding the effectiveness of demand management tools The longer-term deterioration in potential output growth needs to be addressed by structural policies
- 21. Some structural reforms could boost potential without widening the output gap 21 There is scope to make the composition of government revenues and expenditures more growth-friendly (e.g. in Italy, Spain) Reducing labour tax wedges can boost labour demand (e.g. in France) Liberalising services regulation can stimulate investment (e.g. in Germany) More ambitious action to complete the Single Market would have a major impact (all countries) Credible reform packages can improve confidence, giving an immediate boost to demand
- 22. Deficient demand (especially investment) has in turn sapped potential output Note: The chart shows the level of potential output in 2014 relative to a counter-factual based on pre-crisis trends. For the majority of countries, the crisis has clearly been associated with lower potential output. Nevertheless, for a few countries the difference is positive or only slightly negative, which is explained by a variety of factors: structural reforms (e.g. Germany); and in a number of countries labour force participation has been much stronger than would have been anticipated on the basis of pre-crisis trends. Source: OECD calculations. 22 Level of potential output in 2014 relative to pre-crisis trend Percentage points of pre-crisis trend potential GDP -30 -25 -20 -15 -10 -5 0 5 10 -30 -25 -20 -15 -10 -5 0 5 10
- 23. Key messages The euro area continues to hinder global growth, which remains modest Europe is doing poorly above all because of the lack of demand Structural factors braking potential growth are interacting with demand weakness, raising the risk of prolonged stagnation Constrained demand management policies explain part of this weakness Some countries have made good progress on structural reforms to reverse the decline in potential growth, but others have to make greater efforts Monetary, fiscal and structural policies are complementary tools to promote a faster and more widely shared recovery 23
- 24. 24 More information… data visualization tool OECD Economic Outlook, November 2014 • Website with additional information • Read this publication online • Compare your country with OECD data www.oecd.org/eco/economicoutlook.htm OECD OECD Economics Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.