World overview.

Holland, Dawn ; Delannoy, Aurelie ; Fic, Tatiana 等

Policy actions by the European Central Bank appear to have averted the immediate dangers of a full-blown Euro Area crisis. The ECB injected 530 billion [euro] in 3-year longer-term refinancing operations (LTROs) into the European banking system in February on top of the 490 billion [euro] dispensed last December. Tensions in European financial markets have eased since February. However, fiscal austerity will continue to weigh heavily on growth in the short term--in turn making it harder to reduce budget deficits and restore market confidence--while the medium-term structural issues remain largely unresolved. While short-term global prospects have improved marginally since January, a rise in the oil price has largely offset the gains from the decline in short-term uncertainty. We continue to expect a recession in the Euro Area and the UK in the first half of 2012, and forecast growth of 2.1 per cent in the US and Canada, 1.9 per cent in Japan, 8.2 per cent in China and 6.9 per cent in India for the year as a whole. A summary of our main global forecast figures is reported in table 1. The methodological approach to the forecast and key underlying assumptions are discussed in Appendix A, while detailed projections for 40 countries are reported in Appendix B at the end of this chapter.

Looking beyond the short-term liquidity support, the injection of liquidity into European banks has done little to address the longer-term imbalances that continue to linger both internally within the Euro Area as well as on a global scale. Figure 1 illustrates a measure of global imbalances, (1) and compares our projections for this measure in January 2012 to our current projections. Global imbalances widened over the course of 2011, partially reversing the sharp correction that occurred at the height of the financial crisis. Our forecast points to a further widening in 2012, as domestic demand in the US accelerates relative to that in China. The recent slowdown in GDP growth in China has pushed our indicator up compared to expectations in January. While we do not currently forecast a return to the extreme imbalances observed over the period 2005-7, the degree of global imbalance remains high relative to the average level in the 1980s-90s and a sharp slowdown in domestic demand in China or a return to the average household savings rate in the US of 2000-2006 could push the world back towards the unsustainable heights reached in 2006.

In the next section we review prospects for individual economies, and consider the impact of a tightening of bank lending conditions in China. China is one of the most capital intensive economies in the world, and so a shock to investment has a greater impact on GDP than observed in other major economies. As the world's second biggest importer of goods and services (see figure B3 in Appendix B) a negative shock to China has important consequences on a global scale. The import content of investment goods in China is high, so external spillovers are more pronounced than they would be in response to other types of demand shocks. While it is unlikely that banking strains in China will grow to the scale of that seen in the US and Europe in 2008-9, simulations using the National Institute's model, NiGEM, allow us to assess the global implications of such a development were it allowed to occur. We raise the investment risk premium by 8 percentage points for one year, and allow for a short-term disruption to export finance in China. Our simulation results suggest that this would reduce growth in China by 1.7 percentage points in the first year, and reduce global growth by 0.4 percentage points. Figure 2 illustrates the sensitivity of selected economies to a collapse in investment demand in China.

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Within the Euro Area, current account imbalances have narrowed since the peaks reached in 2007, but this has been achieved by extreme recessions in some countries. Contrary to the US, where the high rate of mortgage foreclosures has forced a decline in household debt, household debt-to-income ratios in most Euro Area countries have continued to rise since 2008. On top of this, government indebtedness has also increased sharply, and the stock of government debt in the Euro Area is expected to exceed 90 per cent of GDP this year, with significantly higher levels of debt in Greece and Italy, in particular. While the easing of immediate financial tensions allowed bond yields to come down in February, public finances and the sustainability of government debt in countries such as Italy and Spain are highly sensitive to changes in the risk premium attached to government debt (see the discussion in Holland and Kirby, 2011). Spanish bond yields have edged up since March, and jumped above 6 per cent following a downgrade of Spanish sovereign debt in April 2012.

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A number of studies have looked at the links between the risk premium on government borrowing (generally measured within the Euro Area as the spread of 10-year government bond yields over those in Germany) and fiscal sustainability, captured by current or expected values of the general government deficit or the stock of government debt. Table 2 reports key results from a sample of these studies. While the severe tightening of fiscal policy across the Euro Area has clearly made a significant contribution to the downturn, these studies generally suggest that improvements in the fiscal position are linked to a decline in government borrowing premia. Of course, fiscal consolidation will only improve the medium-term sustainability of public finances if it is not offset by the contractionary effects of the consolidation, through reduced output and hence tax revenues. While this is highly unlikely in normal circumstances, Delong and Summers (2012) suggest that when multipliers are high (which is likely to be the case when output gaps are high, interest rates low and constrained, and exchange rates fixed--all the case for the countries in question), fiscal austerity may well be self-defeating, in the sense of worsening rather than improving the long-run fiscal position.

Using the parameters specified in table 2, and the fiscal projections reported in table B2 of Appendix B, we can assess the likely decline in government borrowing premia that may be expected through this channel. We temporarily abstract from the endogenous links between the borrowing premium and the deficit itself. Greece, Ireland and Portugal are currently not subjected to market borrowing rates, as they are in bail-out programmes, and so we limit the analysis to the two most vulnerable economies, Italy and Spain. Figures 4 and 5 illustrate the projected profiles for government borrowing premia given our fiscal projections, holding all other factors constant. The studies reported in table 2 include additional variables, such as current account balances, global volatility and real effective exchange rates that have not been included in the analysis. As adjustments of internal and external imbalances tend to evolve simultaneously, this may underestimate the projected declines in risk premia suggested by the full empirical models developed by the authors of each study. Nonetheless, the potential gains in terms of borrowing premia from the severe austerity measures that have been introduced in Italy and Spain are clearly not impressive. For both countries only one of the studies in our sample points to more than a I percentage point improvement in government borrowing premia by 2020. The study by De Grauwe and Ji (2012), which allows for non-linear effects, even points to a short-term rise in borrowing premia in both countries. This suggests that our current forecasts for the fiscal position in Spain and Italy may be overly-optimistic, as they rely on an exogenous decline in government borowing premia of 10 per cent per quarter, starting in 2013. Our analysis offers little support for the fiscal austerity programmes currently underway in Europe. In any case, the political will for further tightening measures is waning in some countries, especially in those with forthcoming elections, such as France.

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At least as important as reducing deficits is putting forward a credible fiscal programme that can be realistically achieved. Disappointing outturns and historical revisions to estimated fiscal positions have clearly been associated with the rising risk premia in countries such as Greece (see eg Gibson, Hallard and Tavlas, 2012). Final outturns for fiscal positions in 2011 for the Euro Area were announced in April. The outturns were significantly worse than planned (according to the 2011 convergence programmes) in Ireland, Greece and Spain. This may be an important factor behind the volatility of Spanish government bond yields of late.

doi: 10.1177/002795011222000104

Table 1. Forecast summary

Percentage change

 Real GDP(a)

 World OECD China EU-27 Euro USA Japan
 Area

2008 2.8 0.1 9.3 0.2 0.3 -0.3 -1.1
2009 -0.7 -3.8 8.9 -4.3 -4.3 -3.5 -5.5
2010 5.1 3.2 10.4 2.0 1.9 3.0 4.5
2011 3.8 1.8 9.3 1.6 1.5 1.7 -0.7
2012 3.7 1.5 8.2 0.0 -0.3 2.1 1.9
2013 4.0 2.2 7.8 1.4 1.1 2.5 1.5
2002-2007 4.4 2.6 10.3 2.3 2.0 2.6 1.6
2014-2018 4.1 2.4 7.2 2.1 1.9 2.6 1.4

 Real GDP(a)
 World
 Germany France Italy UK Canada trade(b)

2008 0.8 -0.2 -1.2 -1.1 0.7 2.9
2009 -5.1 -2.6 -5.5 -4.4 -2.8 -10.7
2010 3.6 1.4 1.8 2.1 3.2 12.4
2011 3.1 1.7 0.5 0.7 2.5 6.3
2012 0.7 0.5 -1.5 0.0 2.1 4.6
2013 1.6 1.3 0.0 2.0 2.5 5.2
2002-2007 1.4 1.8 1.2 2.9 2.7 7.9
2014-2018 1.5 1.8 2.1 2.6 2.5 5.2

 Private consumption deflator

 OECD Euro USA Japan Germany
 Area

2008 2.9 2.6 3.3 0.2 1.7
2009 0.3 -0.4 0.2 -2.4 0.1
2010 1.7 1.7 1.8 -1.7 1.9
2011 2.3 2.6 2.5 -1.1 2.1
2012 2.0 2.4 1.8 -0.4 2.5
2013 1.8 1.8 1.7 0.0 2.2
2002-2007 1.9 2.1 2.4 -0.8 1.3
2014-2018 2.1 1.9 2.4 0.7 2.0

 Private consumption deflator

 France Italy UK

2008 3.0 3.1 3.5
2009 -0.6 -0.1 1.4
2010 1.2 1.5 4.1
2011 2.0 2.7 4.0
2012 2.5 2.6 2.0
2013 1.7 1.5 1.7
2002-2007 1.8 2.5 2.0
2014-2018 1.7 2.1 1.9

 Interest rates (c) Oil
 ($ per
 Canada USA Japan Euro barrel)
 Area (d)

2008 1.6 2.1 0.5 3.9 95.7
2009 0.5 0.3 0.1 1.3 61.8
2010 1.3 0.3 0.1 1.0 78.8
2011 2.0 0.3 0.1 1.2 108.5
2012 2.6 0.3 0.1 1.0 121.8
2013 2.0 0.5 0.1 1.1 120.8
2002-2007 1.6 2.9 0.2 2.7 45.6
2014-2018 2.2 1.8 0.5 2.7 131.9

Notes: Forecast produced using the NiGEM model. (a) GDP growth at
market prices. Regional aggregates are based on PPP shares.
(b) Trade in goods and services. (c) Central bank intervention rate,
period average. (d) Average of Dubai and Brent spot prices.

Table 2. Empirical relationship between government borrowing premia
and fiscal variables

 Spread Debt to
 (t- 1) GDP ratio

Arghyrou and Kontonikas (2011) 0.74
Attinasi et al. (2009) 0.97
Bernoth and Erdogan (2012) 2.2
De Grauvve and Ji (2012) -6.12(t) + 0.08 [(t).sup.2]
Schuknect et al. (2010) 1.25

 Fiscal balance to GDP ratio

 Implied
 long-run

Arghyrou and Kontonikas (2011) -2.0 (t + 1) -7.7
Attinasi et al. (2009) -1.6 (t + 1) -54.9
Bernoth and Erdogan (2012) -16.0 (t+ 1)
De Grauvve and Ji (2012)
Schuknect et al. (2010) -12.64

Note: Spread is defined as the 10/year government bond yield over
that in Germany, expressed in basis points. (t + 1) indicates
expectations I year ahead. [(t).sup.2] indicates the current debt to
GDP ratio squared. An indicative equation was selected from each
study. All variables excluding government debt and deficit are
excluded from the table for simplicity. Parameters indicate the
basis point rise in spreads expected in response to a 1
percentage point rise in the debt/fiscal balance as % of GDP.