The world economy.
Armstrong, Angus ; Delannoy, Aurelie ; Fic, Tatiana 等
World Outlook
The stop-start nature of the world economy continues to be
disappointing. Five years since the crisis began, and four years since
the Lehman failure, the world economy is yet to show signs of a broad
self-sustaining expansion. In the advanced economies unemployment is at
its highest rate for thirty years and the fast growing emerging
economies have also slowed. Some European countries have depression-era
unemployment rates with no sign of improvement. If there are any bright
spots, they are that the world's largest economy is no longer at
the centre of the crisis and the global inventory cycle is likely to
provide some short-term support to world demand. Bold monetary policies
by the US Federal Reserve Board (Fed) and the European Central Bank
(ECB) have reduced the tail-risk on future growth prospects but central
(median) forecasts for world growth next year have been revised lower.
For example, the IMF's forecasts for growth in the world and
advanced economies next year have been lowered by 0.3 percentage points
to 3.6 per cent and 1.5 per cent respectively, very similar to our
forecast.
In this issue of the Review we have added our forecasts for 2014.
Over the long run, our National Institute Global Econometric Model
(NiGEM) converges to a steady state which influences medium-term
projections. However, the short-term dynamics provide important forecast
information for the next two years. Our forecast for OECD growth in 2014
is well below the average growth rate in the ten years prior to the
crisis and unemployment is predicted to be still over 8 per cent by the
end of 2014. Perhaps most tellingly, for all the fiscal consolidation we
expect the ratios of government debt to GDP to be higher in all external
deficit countries in 2014 than at the end of this year. This outlook
implies that the stop-start nature of the world economy will persist and
that the economy will be vulnerable to shocks. This overview looks at
three such vulnerabilities to our forecasts.
Multiple or single equilibrium?
Since the crisis began it has become fashionable to see the world
economy through the lens of multiple equilibria. IMF Chief Economist,
Prof Olivier Blanchard, believes that "the world economy is
pregnant with multiple equilibria--self-fulfilling outcomes of pessimism
or optimism with major macroeconomic implications." (1) Were it not
for unrelated and unforeseeable shocks, the world economy would be in an
altogether stronger position. Since Diamond and Dybvig's (1983)
seminal work on bank runs, the paradigm of multiple equilibria has
dominated interpretations of financial crises. All is well until, for an
unspecified reason, there is a sudden loss of confidence or depositor
run which becomes self-fulfilling. For example, had confidence suddenly
not eroded or speculators attacked European capital markets without
cause, then presumably we would not be facing the crisis in Europe.
Another interpretation is that recent events are connected and this
is a single unfolding equilibrium from the subprime crisis in the US to
the crisis in European periphery economies. So far the crisis has
followed a depressingly familiar path from the non-bank financial sector
(asset backed securities conduits) to the banking sector (sponsors of
the conduits) then to the real economy (through tighter lending
conditions) creating a negative feedback on asset values. No matter how
distasteful, the well-trodden path is for impaired private sector debt
to become public sector debt and increased sovereign credit risk. Credit
risk in one country impairs the cross-border asset holdings in the
banking system of another country. (2) The optimal private response is
for risk officers to respond by selling the debt of the next country
with similar characteristics (deleveraging through particular asset
sales). (3) Because the crisis has involved the largest financial
institutions and countries in the world, this limits the capacity of
unaffected institutions or regions to provide a much needed offsetting
stimulus. And the event which started the process is rarely an
irrational loss of confidence; like banks that are run, the subprime
securitisations turned out to have more risk than reported. (4)
This is not just about economic semantics. The current macroeconomy
policy debate is cast in terms of those who favour austerity as a means
to normalise government debt ratios, and those who believe this will be
largely self-defeating (see the Commentary by Holland and Portes in this
issue). Put another way, the debate is between those who believe that
the fiscal multiplier is between 0.5 and 1.0 and that those who expect
that multiplier is significantly more than 1.0 and the lower output will
reduce fiscal revenue and hence prove self-defeating. When judging how
an economy will respond to substantial change in government spending the
context is decisive. Prof. Robert Solow gave an eloquent explanation of
this point in a speech to the IMF at the start of 2011. (5) One view is
that the world economy is suffering from a series of bad (unrelated)
multiple equilibria, otherwise at, or moving back towards, a steady
state. The alternative view is that the world financial system
deleveraging which began in 2007 (shedding assets with similar
characteristics) continues to affect a wider circle of marginal
borrowers. In the latter view, capital markets are very far from perfect
so Ricardian Equivalence cannot hold. The multiplier for fiscal
tightening is likely to be larger than in normal times as private agents
cannot smooth expenditure patterns. If all countries rspond in the same
way the multiplier is also likely to be larger.
The economic and financial context is important for policy
judgements. The Bank of England Governor's description of the
current government's fiscal policy as a "textbook
response" was correct for a hypothetical textbook world, but not
necessarily the world economy which currently exists. The IMF's
latest World Economic Outlook contains a well designed reassessment
(given the inevitable limits of such work) of the size of multipliers to
show that in the period 2010-11 the multiplier is more likely to be 0.9
to 1.7 than the previously understood 0.5. (6) This is an appropriate
range and a welcomed reappraisal.
The National Institute has argued many times that the UK
government's aggressive fiscal tightening will compound the private
sector adjustment and worsen the economic outlook. Yet as critics of
this policy it does not follow that we are unconcerned about government
debt or in favour of an aggressive fiscal expansion. Some public
investment makes good sense at current interest rates, but the fiscal
deficit and debt ratios must be lowered. The critical point is how. The
first step is to quickly address the underlying financial problem which
will create the conditions, including where near zero interest rates
provide a stimulus, whereby the multiplier will be less than 1.0. The
second step is to carry out the fiscal retrenchment. This sequence is an
efficient approach to consolidation. (7) A series of articles in this
publication over the past year have been critical of the UK's
financial reforms (especially the Vickers Report) and have presented
alternative proposals (see Armstrong, 2012a; 2012b). The economic
expansion in the world economy in 2010 was a missed opportunity for
substantive financial reform.
[FIGURE 1 OMITTED]
The vulnerability of the global financial system can be summarised
by the vast accumulation of cross-border gross exposures in assets
classes which are opaque and poorly understood. In 2009 the UK
Treasury's Risk, Reward and Responsibility publication pointed out
that between 2002 and 2007 gross cross-border flows in the US, UK, Euro
Area and Japan had increased from 6.8 per cent to 21.3 per cent of
combined GDP. Figure 1 shows a similar rate of increase for a wider set
of countries. This is an enormous increase in cross-border flow in a
region which had only a modest aggregate current account deficit. Even
countries with current account surpluses such as Switzerland, Germany
and the Netherlands experienced very large increases in gross
cross-border flows.
[FIGURE 2 OMITTED]
It is very difficult to justify an increase in flow at this
magnitude as necessary to hedge increased idiosyncratic risk. Shin
(2011) describes how European banks created conduits which purchased
foreign assets funded by issuing asset backed commercial paper to
investors in that country. The net financial flow is zero (consistent
with zero current account balance) but there are two gross flows and
transformation risk. Obstfeld (2012) makes a similar point looking at
the average stock rather than flow of gross international exposures, see
figure 2. The stocks are very poorly reported and understood. For
example, FDI is no longer a slow moving real investment but can simply
be a hedge position of a moderate-sized leveraged investor. Annual
revaluations to assets and liabilities can dwarf current accounts even
in unbalanced economies. These exposures connect the gains and losses in
one region with changes in flows to another. Where the information is
opaque investors often resort to quantity rather than price rationing.
Euro Area
The first risk to the forecast, and one which has been discussed in
past issues of the Review, is the possibility and consequences of a
Eurozone break-up. The fall in demand and sudden stop in cross-border
flows (figure 1) exposed those countries which had relied on capital
inflows. Where the counterparts of the inflows had persistent current
account deficits, this raised concerns about the condition of bank
assets and property markets. Since systemic bank losses are almost
always socialised, without the option of currency depreciation this led
to higher sovereign credit risk. This has triggered capital flight and
fragmentation of the Eurozone.
Our forecast is for the periphery or deficit Euro Area economies
(Greece, Ireland, Italy, Portugal and Spain) to suffer another year of
recession in 2013 with only a meagre expansion in 2014. The most likely
scenario is that the Euro Area survives intact. In the last issue of the
Review we discussed lower probability outcomes (but which would have
major impacts) of either a Greek and/or German exit. An important reason
for this view was that the ECB would become the outright buyer of last
resort for Sovereign bonds. While this violates the EU's Maastricht
Treaty Article 125 (the no bail-out clause) we know of no central bank
where the board chose to destroy itself. ECB President Draghi confirmed
this view by announcing that he would do whatever it takes to preserve
the euro. The Outright Monetary Transactions (OMT) scheme has reduced
the probability of a nation being unable to rollover its sovereign debts
and led to an improvement in the spread of periphery versus core
sovereign bond yields. The success of the scheme ultimately depends on
the conditionality attached to new support and whether any discipline
can be imposed on a larger country. This would be the ultimate test for
northern ECB board members, in particular the head of the Bundesbank.
[FIGURE 3 OMITTED]
The transition of private sector Eurozone exposures in periphery
countries to the public sector is illustrated in figure 3 below. As
banks have reduced cross-border exposures, withdrawn loans and received
inflows from the periphery and current account balances, the Eurozone
payments system (Target 2) shows large credits (around 330 billion
euros) to the Bundesbank as holder of German banks' reserves and
corresponding debits of the periphery central banks as holders of their
banks' reserves. The ECB has purchased bonds through the Securities
Markets Programme (SMP) and European Financial Stability Facility (EFSF)
and European Financial Stabilisation Mechanism (EFSM). There is a heated
discussion on what happens to these exposures if the Euro Area breaks
apart. The most likely outcome is that actual losses would be limited to
the paid-up capital of the ECB on the basis that the euro remains the
currency in circulation without necessary fiscal transfers for the
Target 2 balances.
According to the IMF, capital flight in the year to June was 27 per
cent of GDP in Spain and 15 per cent of GDP in Italy. (8) This increases
credit tightening and the reliance of banks on wholesale funding.
Consequently we expect Spain and Italy eventually to require further
funding support which will be the test of the OMT. Other countries which
have indirectly benefited from the OMT are Germany and France, which
have the largest bank exposures to Spain and Italy. French banks have a
particularly high reliance on wholesale funding and so the outlook for
France is very much connected to conditions in these two countries. The
largest revisions to our 2013 growth forecasts have been for France and
Germany, which are lowered by 0.5 and 0.6 percentage points
respectively. The good news for the Euro Area is the commitment to a
banking union. Assuming that it is appropriately designed, this would be
an important step towards resolving the crisis. There are major hurdles
to overcome, such as primacy of European bank regulations over national
laws and agreed burden sharing for losses which will inevitably occur.
If the banking union can be achieved, this would be a fundamental break
between sovereign risk and national banking systems and a key part of
creating a coherent union.
Large, fast growing emerging economies
The second risk to the forecast is around the outlook for the fast
growing emerging market economies of Brazil, Russia, India and China
(BRICs) which provided essential support to the world economy in the
worst of the global financial crisis. While they are a diverse set of
nations, they are, to an extent, integrated together. For example, China
is the largest trading partner for Brazil and India. They also share
somewhat similar cyclical paths: each country followed expansionary
policies in 2008-9 followed by a steady tightening in 2010-11 and
subsequently easier monetary and fiscal conditions this year. The
economy in all four countries has slowed noticeably this year to rates
below long-term potential. A critical issue for the world economy
forecast is whether this marks the start of a more protracted downturn
which would make recoveries in the West even more problematic.
Since the start of the crisis there has been a significant change
in competitiveness. Figure 4 shows the average (PPP weighted) real
effective exchange rate for Brazil, Russia, India and China versus the
US, Euro Area and UK. There is a very substantial appreciation relative
to the advanced economies in the West. This poses a challenge to the
BRIC economies which must rely less on external and more on internal
demand to generate future growth. Monetary policy in each country has
been eased, significantly so in the case of Brazil and China. Yet there
are challenges. In Brazil the value of credit extended by private
domestic and foreign banks has required the state banks to expand loans
to avoid a significantly worse credit tightening. In China the
authorities have reverted to supporting investment spending despite the
acknowledged over-reliance on investment and desire to increase
consumption. Capital flight which has occurred throughout the year
appears to be easing, which will lead to a further currency
appreciation. In India capital inflows have weakened and the slowdown
has revealed the persistence of the twin deficits which may lead to a
downgrade of sovereign debt to below investment grade.
[FIGURE 4 OMITTED]
In our forecasts we have attached only a small probability to a
hard landing for the BRIC economies. However, we expect growth rates in
all countries, with the possible exception of China, to be below rates
considered to be the long-term potential growth rate. This is likely to
weigh on world growth, although there will be a substitution effect
towards the advanced economies from the exchange rate movement.
Monetary policy risks
The third risk to our forecast is more balanced. Central banks have
resorted to further unconventional measures to support their economies.
The Fed announced so-called QE3, which is a commitment to buy $40
billion of mortgage backed securities each month, without sterilisation,
until there is a 'substantial' improvement in the labour
market. They also pre-committed to keeping the current low level of
interest rates until mid 2015. Tying policy to the real economy appears
to have scotched any early perceptions of inflation targeting. The
ECB's OMT discussed above allows the outright purchase (without
resale agreement) of sovereign bonds where the central bank ranks pari
pasu with private investors. The Bank of Japan has announced its
intention to increase asset purchases further over the coming year.
Figure 5 shows the extent to which selected central banks have
increased the size of their balance sheets since the start of the
crisis. These are bold measures but there is some uncertainty about
their efficacy. First, it does not necessarily follow that monetary
policy is accommodative. Money supply in most countries is either
declining or weak, which monetarists would typically regard as a sign of
tight policy. Second, the transmission mechanism appears to be via a
wealth effect from higher asset prices. It is not clear that private
agents will suffer from this illusion on a repeated basis. Third, this
is another example of the shift in risk assets from the private to the
public sector. While this is not necessarily problematic, the clear
demarcation between fiscal and monetary policy has been removed.
[FIGURE 5 OMITTED]
The most important risk to the forecast is over the medium term.
What happens when economies recover to the large central bank balance
sheets? While central bankers are confident that they have enough
options to reverse the process, this is based on an untested
proposition. If inflation is driven by the output gap, there will be a
convergence between a full recovery and a very gradual increase in
inflation to allow central banks time to reduce balance sheets, if
necessary, without damaging the real economy. However, this is only one
possibility. If, when the recovery arrives, there is a jump in
inflationary expectations caused by central banks' balance sheets
then the task of controlling inflation will prove much more challenging.
In our forecast we have assumed that central banks are right and
inflation will be driven by output gaps, hence the very accommodative
monetary policies over the forecast horizon. However, the risks will be
revisited in future Reviews.
Prospects for individual economies
United States
Policymaking in the US is pulling the economy in different
directions. On the monetary side, the FOMC surprised markets on 13
September, by announcing a more aggressive expansionary stance than
anticipated. On the fiscal side, uncertainty regarding policy following
the Presidential election held one week after our publication date, is
acting as a restraint on investment, hiring and confidence. There are
two further policy questions facing the US economy. How will the latest
round of monetary easing affect growth prospects? What effect will the
election outturn have on the probability of avoiding the so-called
'fiscal cliff'?--i.e. a political deadlock that could lead to
a breach of the government debt ceiling and a dramatic tightening of the
fiscal stance.
Our forecast assumes that the aggressively loose monetary stance
will be sufficient to offset pressures on bond yields that may arise
from a political stalemate on fiscal policy amendments. However, it is
unlikely to provide sufficient stimulus to bring GDP growth towards
levels currently projected by the Federal Reserve. We forecast GDP
growth of 2 per cent per annum in 2012 and 2013, rising to just 2.4 per
cent in 2014. This compares to the central tendencies of forecasts by
the Federal Reserve of 1.7-2.0 for 2012, 2.5-3.0 for 2013 and 3.0-3.8
for 2014.
Given the subdued external environment, it is difficult to see how
such rates of growth can be achieved, unless driven by a significant
expansion, rather than consolidation, of fiscal policy and a boom in
investment that goes well beyond our current forecast. NiGEM model
simulations suggest that if the Federal Reserve were to provide
sufficient monetary stimulus to achieve these rates of growth, we would
need to see close to a further $3.5 trillion in QE in 2013-14. This
would be expected to push inflation well above rates that are considered
consistent with the Federal Reserve target--reaching above 5 per cent in
2014.
The actions of the FOMC in September 2012 were beyond what was
expected by financial markets. In the absence of scope for cuts in
interest rates, the FOMC has engaged three alternative channels to ease
monetary conditions. They used rhetoric to flatten the yield curve, by
extending the period over which they expect to maintain an exceptionally
low interest rate from late-2014 to at least mid-2015. They continued
the programme of extending the average maturity of its holdings
(Maturity Extension Program or 'Operation Twist'). They
announced a third round of quantitative easing, purchasing agency
mortgage-backed securities at a pace of $40 billion per month. Most
importantly, they made an open-ended commitment to extend and increase
policy accommodation for as long and by as much as it takes to see a
substantial improvement in the labour market. The monetary stance will
remain highly accommodative for a considerable period after economic
recovery strengthens.
Supported by the highly accommodative monetary stance, markets
remain broadly confident that policy makers will avoid the 'fiscal
cliff' and amend the debt ceiling in time to avoid a default,
regardless of the election outcome. Current legislation mandates an
extreme fiscal tightening amounting to about 3.7 per cent of GDP in
2013. Roughly two-thirds of this is related to expiring tax provision,
while the remainder reflects spending caps and agreed automatic spending
cuts mandated by the 2011 Budget Control Act. Both presidential
candidates intend to extend most of the 'temporary' (9) tax
cuts due to expire in 2013, at least for the next financial year, and to
delay at least a third of the legislated spending cuts. While we expect
the necessary policy agreements to be delayed until the very last
minute, with considerable market volatility expected at the turn of the
year, our forecast assumes that these policy amendments are achieved. As
such, fiscal consolidation measures are expected to amount to just 1 per
cent of GDP next year.
Our fiscal assumptions going forward are broadly in line with the
proposals made by President Obama in February 2012. With a Republican
president in the White House, the composition of fiscal consolidation
would be biased more towards spending cuts, with tax rates expected to
remain stable or decline. This would change the composition of GDP
growth underlying our forecast, with somewhat higher growth in consumer
spending and weaker growth in government spending, and may slightly
dampen the outlook for near-term growth, as the fiscal multiplier
associated with spending cuts tends to be higher than that for tax
rises. We may also see a somewhat tighter monetary stance, as Governor
Romney has criticised the inflation risks associated with the
FOMC's expansionary policy.
Canada
Canada has weathered the crisis relatively well, partly because of
a relatively sound financial system and well sequenced fiscal response.
The fiscal stimulus resulted in a budget deficit of 5.5 and 4.4 per cent
of GDP in 2010 and 2011, respectively. The government has now decided to
withdraw this stimulus, as proposed in the 2012 budget plan, targeting a
return to surplus by 2015. Total spending cuts planned for 2011-14
amount to 1.2 per cent of GDP, and about 70 per cent of these savings
are planned to be generated by 'operating efficiency' gains.
However, efficiency savings are always difficult, and our forecast
allows for more spending cuts to pass through to the real economy. We
forecast GDP growth of 1.7 per cent in 2013 and 2 per cent in 2014.
Domestic demand has been supported by low interest rates and
expansive credit growth. Easy access to mortgages has resulted in rising
house prices, with apparent signs of overheating in Toronto and
Vancouver, and the government has enforced tighter mortgage regulation
to contain this. However, a substantial or persistent fall in house
prices could put a severe strain on the indebted household sector. Due
to inexpensive credit, household debt has risen sharply and now stands
above the US level, at around 160 per cent of GDE As we expect efforts
to deleverage households in future, this will curb domestic demand.
Export revenue remains strong, supported by rising oil prices. The
US is the current destination of over 70 per cent of exports, which
makes Canada heavily reliant on the US. Efforts to diversify trade
towards the emerging markets will offer better prospects of growth
potential.
[FIGURE 6 OMITTED]
Brazil
GDP growth rate remains well below the average annual rate of
around 5 per cent achieved during the pre-crisis period of 2004-7. We
expect the slowdown to persist in the short-to-medium run due to deep
rooted problems in the Brazilian economy. Despite ten consecutive rounds
of cuts in the central bank interest rates, currently down to a historic
low of 7.25 per cent, which has allowed a substantial decline in real
interest rates, there is no evident sign of improvement in key economic
indicators.
Domestic demand has remained weak. This is due to the fact that
Brazil's fast growth in private consumption was largely based on
substantial household borrowing. The private household credit to
disposable income ratio currently stands above 43 per cent. Although
this ratio does not appear unreasonable when compared to other
countries, it is the pace of increase which is a cause for concern.
Since 2006, the household debt ratio has nearly doubled. As households
use a larger portion of their disposable income to pay off debt, this
indicates that the credit finance model of consumer spending is coming
to a halt. Declining real interest rates are expected to have only a
modest impact on future credit growth.
In August 2012 the government introduced a privatisation programme
that it hopes will stimulate investment in the outdated and
underdeveloped infrastructure. Infrastructure investment will have a
positive effect on productivity in the longer run, and may provide a
mild stimulus to the economy over the next five years.
Interest rate cuts have resulted in a depreciation of the real
exchange rate. Despite this, exports have been disappointing and dropped
sharply in the first half of 2012. This can be attributed to softer
growth in Brazil's main export partners as well as relatively
uncompetitive export prices, which reflect high unit labour costs.
Measures aimed at improving competitiveness may involve a reduction in
shipping and electricity costs, lowering the tax burden and increasing
the base of skilled workers. However, these structural measures will
need time to take effect, and are unlikely to have a substantial impact
in the short run. Growth is expected to remain below the potential
growth rate for the next two years.
Japan
Japanese government indebtedness is the highest among the major
developed nations (figure 7). While domestic ownership of government
debt makes a debt crisis similar to that of Europe unlikely in the near
term, unclear domestic politics raise concerns about the
government's ability to put public finances on a more sustainable
trajectory. The debt to GDP ratio currently stands at around 205 per
cent and is expected to exceed 210 per cent by the end of 2012. (10) A
current account surplus enabled net inflows of money to be invested in
domestic government bonds. However, the surplus is likely to evaporate.
A declining current account surplus threatens to lead to gradually
higher interest rates on government borrowing, raising concerns over
debt levels over time.
Japan has had a high savings rate, which has allowed the government
to sell a large proportion of its bonds to the public. However, an
ageing population alters household saving and spending patterns. Older
people tend to spend rather than build their savings. This reduces
demand for government bonds. In addition, the increase in social and
health care spending will further widen the gap between government
revenue and spending. Even before the 2011 earthquake, the budget
deficit exceeded 8 per cent of GDP.
There has been additional funding pressures on the government since
the earthquake. They stem from the reconstruction needs and the
necessity to import extra fuel required to plug the gap in electricity
generation after the shutdown of the nuclear plants. Both the high
volume of energy imports and record high prices have caused the trade
balance to deteriorate. Pressure on the current account is not expected
to ease soon as there is no quick solution for power generation
problems.
[FIGURE 7 OMITTED]
Japan's competitive advantage in a number of key industries
has been declining. Current budgetary pressures restrict the long-term
R&D investment that once helped the country to become a global
leader in manufacturing. In addition, an appreciation of the Yen
vis-a-vis both the dollar and the euro makes exports less competitive.
The external environment has also become less favourable. A dispute with
China (Japan's largest export market with a 20 per cent share) over
the ownership of a chain of islands, and the ongoing debt crisis in
Europe (Japan's third largest export market with around a 12 per
cent share), are negatively affecting export demand and the trade
balance. In addition, both factors have a damaging effect on a stream of
income from Japanese foreign assets, thus further complicating funding
of a budget deficit. If nothing is done to address these issues, over
time Japan will end up seeking international investors to fund its
deficit. Once investors realise that the status quo has changed, rates
on government bonds will gradually rise.
In an attempt to solve the deficit and debt problem the government
has approved an increase in consumption tax, scheduled for April 2014
and October 2015. Our forecast shows that it will shift consumption
towards the end of 2013 and the beginning of 2014. On the assumption
that about half of consumed goods attract a consumption tax, we
simulated the effect of the increase in the consumption tax on inflation
and the budget deficit, using NiGEM. Based on the simulation results, an
increase in consumption tax will increase inflation by an average of 0.3
percentage points over 2015 and 2016, and decrease the budget deficit to
GDP ratio only marginally by about 0.2 percentage points in the medium
terra.
Japan's strong economic performance at the beginning of this
year has come almost to a standstill. A deteriorating external
environment also weighs on growth. Annual GDP growth this year is
expected to be about 2 1/4 per cent due to strong output in the first
half of the year. We anticipate that the external environment will
hinder activity and we project growth of just under 1 per cent in 2013.
China
China's growth outlook has weakened. As both external and
domestic factors are expected to continue to dampen activity, the
critical issue is whether China is heading towards a 'hard'
rather than a 'soft' lending.
GDP grew by 7.6 per cent in the second quarter of this year. This
is the lowest reading for the past three years. The last time China
experienced a similar pace of growth deceleration was in 2009, during
the global financial crisis. Yet the current slowdown is mostly
engineered by the government, who aim to reduce the economy's
reliance on investment and steer it further towards consumption. The
slowdown of output growth in itself is not necessarily of great concern.
Weaker activity initiated by the government has coincided with a
worsening external environment, although there are counterbalancing
factors. First, infrastructure investment projects by the government
have been speeded up, and this seems to have stabilised growth in fixed
asset investment. Second, the labour market and retail sales have been
holding up quite well.
Heavy reliance on investment to generate growth has led to a high
investment to output ratio, which according to the latest data is around
46 per cent. In comparison the ratios for the US and Japan are 15 and 20
per cent respectively. In general, when rapid economic growth is
generated by fast growing investment, funded by a financially repressed
banking system, debt structures become risky. Companies and governments
tend to overuse capital as an input when the cost of capital is
artificially low.
The latest figure for the government debt to GDP ratio is around 26
per cent. (11) However, this excludes contingent liabilities, hidden
banking debt, regional government balances and the effects of a slowing
economy on the balance sheet. Nonetheless, given the low government debt
ratio and the high reserve requirement ratios for the banks, there is
still room for fiscal and monetary stimulus. The government has already
planned a number of infrastructure schemes. In order to avoid excessive
debt accumulation, it is vital to invest in those projects where an
increase in productivity supersedes the cost of the investment. If the
government continues its cautious approach towards internal rebalancing,
our forecast envisages output growth of about 7 1/2 per cent per annum
this year and next, with a further moderation to about 7 per cent per
annum in the medium term.
South Korea and Taiwan
The outlook for growth in both of these North East Asian economies
has weakened. Performance in both countries is considered to be a
leading indicator for the direction of the world economy. How much
should we be reading into their current weakening growth and worry about
a future global downshift?
South Korea and Taiwan are small and very open economies with a
share of total trade to GDP of 96 and 130 per cent respectively. Their
economies are highly cyclical and geared towards the electronics sector.
A decline in new orders in these countries may be driven by problems
specific to this sector. Given generally weaker consumer demand in
Europe and the US, it is not surprising to see a lack of demand for
electronic products. Capital spending by companies, including
expenditure on technology, has also fallen. Both economies are an
important part of a global supply chain. A reduction in orders could
point to an impending fall in production in other countries using
components from South Korea and Taiwan. For example, as China has export
shares in total trade of around 26 and 41 per cent in South Korea and
Taiwan respectively, the effects of a decline in export growth can
permeate the entire supply chain.
While the bias towards the electronics sector is of wider interest,
the slowdown in both countries must not be ignored. We project about 2
1/2 and 1 per cent growth for South Korea and Taiwan respectively this
year.
[FIGURE 8 OMITTED]
Australia and New Zealand
Unlike many other advanced economies, economic growth has been and
remains strong. Yet this performance is uneven across sectors, with the
raw materials and mining sector the key driver. Australia's
challenge is to extend growth beyond the mining boom, although in the
medium term we expect this to remain a strong pillar for growth. GDP is
forecast to grow by 2.4 and 3.3 per cent in 2013 and 2014, respectively.
Although non-oil commodity prices have fallen, they are expected to
remain firm over the medium term, supported by the industrial
transformation in emerging Asia, which takes over 40 per cent of
Australia's merchandise exports. The current construction of large
natural gas and iron ore projects will add a further boost to private
sector investment and exports.
While the commodity and related services sectors have experienced
strong growth, this may have had a cost to other sectors of the economy,
a modern version of the so-called 'Dutch disease'. The
vigorous export performance of the mining sector has resulted in a
strong Australian dollar, damaging other industries in the country, such
as tourism and manufacturing. The government needs to develop a strategy
to ensure more diversified growth in the long run, beyond the mining
boom. Notably, the government has commissioned a white paper on how the
country can benefit from the Asian boom more broadly, rather than solely
as a commodity supplier.
New Zealand's medium-term growth will largely rely on the
speed and delivery of the rebuilding of the Canterbury region after the
earthquake in 2011. We expect growth to accelerate, after having been
restrained in recent years by the withdrawal of fiscal stimulus, a
strong currency and a decline in commodity prices. We forecast GDP
growth of 2 per cent this year and 2.7 per cent in 2013.
Canterbury was hit by an earthquake with several aftershocks which
destroyed large parts of Christchurch, the capital of the Canterbury
region and the third largest urban area in the country. So far, the
reconstruction has been delayed due to continuing aftershocks. Repair
work is ongoing and, as the seismic activity is finally calming down,
rebuilding is predicted to pick up in the medium term. While this is
expected to add a substantial boost to the economy, households have high
levels of debt which will limit the growth momemtum.
India
The outlook for growth has weakened significantly. Although the
government has recently introduced measures aimed at revitalising the
economy, it remains to be seen if it will be enough to have an effect on
slowing activity.
Growth in the second quarter of this year eased to 4.0 per cent,
the slowest for three years, creating a risk that India's sovereign
credit rating is downgraded to below investment grade. A downgrade
itself is not expected to cause a significant problem; solvency rules
force local banks and insurance companies to buy government bonds, which
they will continue to do irrespective of the rating. India is not
heavily dependent on external borrowing- its total external debt in
2011-12 was 20 per cent of GDP, with short-term debt less than a quarter
of the total. However, with the current account in deficit, having an
investment grade rating is important to minimise the cost of capital.
The government needs foreign investment to fund infrastructure projects
to support medium-term growth.
The government has increased the price of diesel by 14 per cent in
an effort to decrease the energy subsidy. The fiscal effect of this will
be small, but it shows a readiness to adopt difficult reforms. It has
followed this by liberalising FDI restrictions in retail, insurance and
pension industries. Although this is a step in the right direction, more
serious reforms will take time and there is always a risk of slippage.
We do not expect growth to recover quickly and forecast it to be around
5 1/4 per cent this year, with a mid-term projection of just under 7 per
cent per annum.
[FIGURE 9 OMITTED]
Russia
Growth started slowing down in the middle of last year from 1.7 per
cent in the third quarter to only 0.1 per cent in the second quarter of
this year. Traditional growth drivers--domestic demand, supported by
nominal wage growth and rising commodity prices and government spending,
which increased from 16 per cent of GDP before the crisis to 25 per cent
at its peak, have exhausted their potential. If the government does not
embark on a course of structural reforms to improve the business
environment and the investment climate, growth will moderate to around 3
per cent per year, which is well below Russia's potential of 4-5
per cent.
A rising labour share of income has been the main driving force
behind growth in recent years. The share of earnings in GDP increased
from 44 per cent in 2005 to 53 per cent in 2009, levelling off at just
below 50 per cent in 2010-11. Real wages have been eroded this year by
increasing inflation, which breached the 6 per cent upper limit set by
the Bank of Russia which led to an increase in the refinancing rate by
25 basis points to 8.25 per cent.
The oil price has partly recovered from a drop in the second
quarter. However, it is unlikely that we will see the record-breaking
oil price growth observed over the past decade which provided a windfall
for the Russian economy. Increased production of oil is also improbable.
In a situation of weak global demand and the high costs of developing
alternative supply sources, the impact of oil revenue on growth will be
at best neutral and potentially negative over the next several years.
The Federal Budget proposal for 2013-15 sets the target for a
balanced budget by 2015 and introduces a new budget rule. The government
budget will have to be calculated based on an average price of oil for
the past five years, increasing gradually to ten years. Excess revenues
(if any) will be stored in the Reserve fund. This is a wise decision
considering the volatility of commodity prices and the substantial
growth of the non-oil and gas deficit in recent years--from below 5 per
cent of GDP in 2008 to above 10 per cent now. However, this puts
significant pressure on government spending, especially taking into
account the President's pre-election promises. As a result, the
Ministry of Finance included less than half of these pledges into the
Federal budget, moving the rest into the regional budgets, which raises
doubts about their implementation.
European Union
The Euro Area economy continues to contract. The link between
fragile banking systems and weak fiscal positions has raised concerns
over sovereign credit risk. International capital flows have created a
fractured Eurozone, with northern and southern European countries facing
very different prospects. Policy measures aimed at restoring confidence
and growth and increasing integration within the Euro Area are a step in
the right direction. The banking union is an important complement to the
financial safety net for the Euro Area. Although the plans will not
solve the current crisis, it is the first sign of a coherent strategy
for addressing the underlying issues.
Under the OMT bond-buying programme, the ECB can buy an unlimited
amount of bonds of indebted Euro Area members, on condition that these
countries make a formal request for bail-out. Conditions will be
attached to the support and the critical test will be the terms and
enforcement mechanisms. Steps have been taken to improve the resilience
of banks in Europe; but they remain weak and vulnerable to shocks. The
main objectives of the banking union are to guarantee effective
supervision and crisis management and to preserve a single market for
financial services. It will imply Euro Area wide banking supervision by
the ECB, common rules for bank resolution and a common deposit guarantee
scheme. Euro Area banks can be recapitalised directly by the ESM if
recapitalisation by national governments is insufficient (the details of
the process of injecting cash from the ESM directly into European banks
are still under discussion). However, the terms of a common bail-out are
very far from agreed and involve a difficult process of balancing
realism without encouraging moral hazard.
Table 2 lists the largest banks in Europe. In 2011 ten banks each
had total assets exceeding 1 trillion [euro], with the largest, Deutsche
Bank, exceeding 2 trillion [euro]. In relation to domestic GDP, eight
banks had total assets exceeding 100 per cent of national GDP, with
assets of the largest, Nordea, exceeding 197 per cent and those of
Danske Bank amounting to 194 per cent. Clearly many banks are still far
too big to fail. Given the limited capacities of the ESM (about 500
billion [euro]) and the size of systemically important banks, either a
fail-safe resolution system is required or the business model of very
large banks is inconsistent with system stability.
The Liikanen Report published in October suggests that proprietary
trading of securities and derivatives, and deposit taking within the
banking group, should be separated. Separation would in theory make
banking groups simpler and more transparent, and it would facilitate
market discipline and supervision. Whether such rules can be designed in
practice has yet to be demonstrated. The Liikanen Group also emphasises
the importance of bank recovery and resolution systems, as well as
stronger capital requirements. Again the key issue will be the politics
of burden sharing and not the concepts.
Compliant with the EBA recommendation as of end of June 2011 to
increase the ratio of core capital to risk-weighted assets, the majority
of banks have increased the level of their capital above the 9 per cent
target after accounting for the sovereign buffer. In the case of four
banks (Banca Monte Dei Paschi Di Siena S.p.A, Cyprus Popular Bank Public
Co Ltd, Bank of Cyprus Public Co Ltd and Nova Kreditna Banka Maribor
d.d.) backstops have been undertaken, with support of the corresponding
national governments. The capital strengthening exercise resulted in an
injection of 200 billion [euro] in the European banking system between
December 2011 and June 2012, the bulk of it through direct capital
measures. Figure 10 shows the ratio of core tier 1 capital to
risk-weighted assets ratio after sovereign capital buffer in the largest
European banks.
Although the situation in the banking sector has improved,
macroeconomic prospects for the Euro Area remain bleak. We forecast that
the Euro Area economy will contract this year by 0.5 per cent. Next year
will see nearly flat growth at 0.3 per cent and a modest recovery in
2014. The wide divergences between individual member states persist and
make managing the crisis difficult. The worst performers next year are
likely to be Greece, Portugal, Spain and Italy, while Finland, Austria
and Germany are expected to be on the other end of the growth spectrum.
The Southern European economies are constrained by tight fiscal
policies, very unfavourable financial conditions and large capital
flight. The core economies will see low, but positive, growth supported
by low interest rates. However, we have revised our forecasts for growth
in 2013 lower in both France and Germany.
The difficult domestic situation in the Euro Area is exacerbated by
slowing external demand. Given the level of openness, the smaller
members of the EU, Estonia, Slovakia and Slovenia, as well as Belgium
and Ireland, are expected to be affected by the global slowdown to a
larger extent through the trade volume channel than the economies of
southern Europe. At the same time, the less open countries of southern
Europe, such as Greece, Italy or Spain, face competitiveness issues
which may feel more acute during the slowdown.
[FIGURE 10 OMITTED]
Germany
The fiscal crisis and tight financial conditions in a number of
Euro Area countries and the global economic slowdown are weighing on the
outlook for Germany. The domestic situation remains relatively robust.
Favourable conditions for domestic demand are supported by a relatively
sound banking sector.
The uncertainty triggered by the debt crisis is weighing on
domestic demand and households' purchasing decisions. However, the
situation in the labour market remains favourable. Low unemployment and
strong wage growth are supporting consumer spending. The unemployment
rate remains at historically low levels (see previous Reviews) and
recently the social partners have negotiated significant wage rises
throughout various sectors of the economy. While it was agreed that in
the service sector wage increases would be spread over a longer period
of time, wage increases in industry would be introduced in the short
term. On top of the agreements for core staff, wage bargainers in the
metal-working and electrical engineering sector and the chemical
industry agreed on wage add-ons for agency-hired temporary workers.
Figure 11 shows wage growth in Germany and selected European countries.
The acceleration in wage growth in Germany, especially in the context of
declining wages in some Southern European countries, has been
contributing to internal Euro Area rebalancing.
Despite the unfavourable external situation, Germany's exports
increased in the first half of 2012. While export growth to the non-Euro
Area countries continued unabated, exports to Euro Area countries
stagnated. The demand for German exports from the individual Euro Area
members reflects their macroeconomic situation; exports to Spain and
Italy declined, while exports to the Netherlands and Austria remained on
an upward course, and the value of goods exported to France stagnated.
The growth in exports was driven by exports of information and
communication technology products, electrical equipment, motor vehicles,
and chemical industry products. Manufacturers of metals and metal
products suffered a setback in the international market and it is
expected that this tendency will deepen, as the economic growth in
international markets and in particular China is forecast to slow down.
[FIGURE 11 OMITTED]
The situation in public finances is sound by international
standards. The budget deficit fell to 1 per cent of GDP last year, and
is expected to fall further this year and next as a result of the
favourable growth structure for government revenue, relatively moderate
spending on pensions and unemployment benefits, and very good financing
conditions. Unfortunately, the debt to GDP ratio is likely to rise
again, after the impact of liquidation of the regional bank WestLB and
the European Stability Mechanism contributions. In line with the
recommendation of the European Banking Authority regarding banks'
recapitalisation, German banks have increased their levels of capital.
After deduction of the sovereign capital buffer, all 12 German
institutions achieved the minimum core tier 1 capital ratio of 9 per
cent. The average ratio at 10.7 per cent implies that the minimum
requirement was exceeded by 15.5 billion [euro]. Table 3 shows results
by individual bank. The overall resilience of the banking sector in
Germany has improved.
France
The economy has been at a standstill for four consecutive quarters
and shows little sign of an early return to growth. Recent developments
in European monetary policy have eased tensions on financial markets,
but further austerity measures in the Euro Area and relatively weak
trade prospects will hinder growth. Overall, our forecast has been
revised downward, with the economy expected to remain essentially flat
this year and next, while recovering only slowly in 2014. This
stagnation mainly reflects a lack of domestic demand. Rising
unemployment and falling real disposable income are holding back
household consumption and residential investment. Deteriorating business
sentiment also points to weak investment (figure 12). Exports should
continue to grow in 2013, but very weak conditions in the Euro Area will
limit any upturn.
The 2013 budget brings further risks to the economy. An announced
30 billion [euro] in additional tightening measures, mainly in tax rises
for high earners and large businesses, aim to reduce the fiscal deficit
from 4.5 to 3 per cent of GDP. The optimistic growth assumption
underlying this budget (0.8 per cent) raises risks of fiscal slippage
and/or further austerity measures. (Lending to the private sector
remains weak.) The ECB's OMT policy has improved financial market
sentiment. However lending to the private sector remains weak. French
banks are exposed to Spanish and Italian creditors and so prospects will
depend on how events unfold in the neighbouring economies.
[FIGURE 12 OMITTED]
Italy
The economic outlook is poor, as the recession will deepen this
year and extend into 2013. The introduction of the ECB's OMT
programme has reduced insolvency risk but the longer-term challenges
remain. The government has avoided a bailout despite rescuing its third
largest bank. Nevertheless, the recent EBA stress test showed that
Italian banks have lower capital ratios compared to the European
average. Under these circumstances, the likelihood of Italy requesting a
bailout is increasing.
In this recession, in contrast to 2008-9, consumer confidence is
falling at the same pace as business confidence due to a rapid increase
in the unemployment rate (figure 13). This will weaken domestic demand.
The weak external environment also takes its toll on the economy, with
Europe 'muddling through' the sovereign debt crisis and the
emerging markets slowing down. Consequently output is expected to
contract by 2.3 per cent this year and 0.7 per cent next year.
The government plans to meet its fiscal target despite the
deepening recession. Tight austerity measures raise concerns from both
parties, and the coming elections could moderate fiscal consolidation
plans. Fiscal slippage may also emerge if further bank rescues are
required. Falling household income may erode bank balance sheets,
forcing them to tighten lending conditions.
[FIGURE 13 OMITTED]
Spain
Spain's economic prospects remain poor. The economy is
expected to be in recession this year and next. The banking sector was
bailed out in the summer, a severe fiscal austerity programme has been
put in place, house prices continue to fall and unemployment continues
to rise. Nevertheless, the recent programme of intervention by the ECB
in the secondary bond markets has alleviated conditions in the short
terra, hence reducing sovereign bond yields. However, it has not
eliminated the risk of Spain needing further international support.
Output is expected to contract by 1.8 and 1.3 per cent respectively
this year and next, owing to a decline in domestic demand, tight
austerity measures and the deterioration of the external environment.
Business and consumer confidence collapsed as a result of ongoing
sovereign issues in the Euro Area and the weakening global economy,
particularly as Europe is the biggest export market for Spanish goods
and services.
The labour market crisis is expected to worsen, with over one in
four workers being unemployed next year. It will be further exacerbated
by government plans to reduce public sector employees as part of its
austerity measures. A reduction in public sector workers could be
politically sensitive, with trade unions battling against cuts and
weakening public support for the current government. According to a poll
reported in the media, government popularity has fallen by a third.
[FIGURE 14 OMITTED]
Furthermore, the government has also introduced labour market
reforms to ease hiring and firing, reformed the unemployment benefit
system, increased the retirement age, and linked wages to productivity
rather than inflation. As unemployment continues to rise, wages are
expected to decline further and intensify the internal devaluation. In
consequence, household income will be depressed and consumer spending is
expected to continue to decline through 2014.
The probability of missing this year's fiscal target has
increased. Additional consolidation measures were introduced in
September but, given the severe impairment of the banking system, the
negative impact on growth will offset much of the budgetary improvement.
The bulk of the fiscal adjustment falls on autonomous regions. Local and
regional elections are due in the next few weeks, making regional
expenditure more inelastic. However, the recent OMT programme announced
by the ECB has alleviated the situation in the short terra and reduced
sovereign bond yields allowing the government to raise money at a lower
cost.
Non-performing loans continue to rise as house prices adjust. This
will put further pressure on banks' balance sheets. M2, a measure
of private sector deposits in the banking sector, continues to decline
with large capital flight out of the banking system. This is despite the
recent recapitalisation and falling credit risk in the banking sector.
As a result, there is less money available to lend to the real economy,
leading to a contraction in private investment and consumption. Figure
14 shows lending to both businesses and households in nominal terms is
contracting at an increasing rate.
Further capital flight is a major risk as international investors
continue to reduce their exposure to Spanish assets. The feedback loop
between falling asset prices leading to capital flight, which reduces
credit availability even further, must be halted. We expect the
government to seek a further bailout sooner rather than later.
Greece
As the economy continues to contract, soaring unemployment and
repeated breaches of the conditions set by the Troika make it harder for
the new government to start a process of renegotiation. A voluntary
withdrawal from EMU is unlikely given the preference of the populus,
confirmed in the recent election. However, more achievable conditions
set by the Troika, including for instance the official sector's
involvement in writing off part of their debt and extending the time
given to implement the programme, are likely to be necessary if Greece
is to prevent the rising tide of discontent becoming even more serious.
We expect a deep contraction in output in 2012-14, with an
increasing likelihood of recession continuing into 2015. This makes it
almost impossible for the government to achieve the Troika's
targets. Greece requires cash within a month to meet its obligations
towards public sector employees and pensioners, or face bankruptcy. All
components of domestic demand are contracting, whilst the external
sector continues to contribute to growth despite slowing global demand
(see figure 15). We expect the current account to be in balance in the
next two years, which will provide some support to domestic capital
markets. Unemployment is expected to be around 24 per cent this year and
about 26 per cent next year, with more than hall of 15-24 year-olds out
of work.
[FIGURE 15 OMITTED]
New Member States
Economic growth in Central and Eastern Europe is expected to
decelerate following the major weakening of the global economy. The
scale of the slowdown will vary across individual economies, reflecting
their idiosyncratic structural features. The cross-border integration
trend in the banking sector has reversed; risks of withdrawal of capital
from Central and Eastern European banking systems remain.
This year will see a dip in economic activity in Central Europe.
Three countries--Slovenia, Hungary and the Czech Republic--are forecast
to record recessions. The highest growth rates are expected to
materialise in the Baltic countries, however, the pace of growth will
remain well below its potential. A moderate recovery is expected to
materialise throughout the region next year. The scale of the slowdown
and the speed of the successive adjustment process in individual
economies will depend on the level of their openness, the sensitivity of
their labour markets and the scale of resilience of their banking
systems.
Recent quarters have seen a reversal of cross-border integration
trends in banking across Europe. While the large European banks had
significantly increased their EU and global operations before the
crisis, increasing the integration of the European banking market, this
trend reversed after the crisis. Initiatives such as the II Vienna
Initiative (see the July Review) have been designed to prevent an abrupt
withdrawal of capital by Western European banks from banking systems in
Central and Eastern Europe. However, risks of further national
fragmentation of banking markets remain. Some banks may pull out from
foreign markets and aim to achieve a greater matching of assets and
liabilities on a country-by-country basis. This process may have
negative repercussions for Central and Eastern European economies. The
loan to deposit ratio of many cross-border groups present in the region
is high, which reflects the use of wholesale funding raised by the
parent entity to finance business in host countries. The degree of
cross-border bank penetration differs across countries--see table 4. The
share of assets of non-domestic banks is much larger in the Central and
Eastern European countries as compared to the larger economies of
Western Europe. In some cases the share of non-domestic banks is about
80-90 per cent of total bank sector assets. This applies to the Baltic
countries, Estonia and Lithuania, as well as the Czech Republic,
Slovakia and Romania. On the other hand, the large share of foreign
assets in the banking sectors implies that potential losses are absorbed
abroad and not in the corresponding governments' balance sheets
(unlike, for example, in Ireland).
Appendix A: Summary of key forecast assumptions
The forecasts for the world and the UK economy reported in this
Review are produced using NIESR's model, NiGEM. The NiGEM model has
been in use at the National Institute for forecasting and policy
analysis since 1987, and is also used by a group of about 50 model
subscribers, mainly in the policy community. Most countries in the OECD
are modelled separately, and there are also separate models of China,
India, Russia, Hong Kong, Taiwan, Brazil, South Africa, Estonia, Latvia,
Lithuania, Slovenia, Romania and Bulgaria. The rest of the world is
modelled through regional blocks so that the model is global in scope.
Ali models contain the determinants of domestic demand, export and
import volumes, prices, current accounts and net assets. Output is tied
down in the long run by factor inputs and technical progress interacting
through production functions, but is driven by demand in the short to
medium term. Economies are linked through trade, competitiveness and
financial markets and are fully simultaneous. Further details on the
NiGEM model are available on http://nimodel.niesr.ac.uk/.
There are a number of key assumptions underlying our current
forecast. The interest rates and exchange rate assumptions are shown in
tables A1-A2. Our short-term interest rate assumptions are generally
based on current financial market expectations, as implied by the rates
of return on treasury bills of different maturities. Long-term interest
rate assumptions are consistent with forward estimates of short-term
interest rates, allowing for a country-specific terra premium in the
Euro Area.
In this context, we note the latest ECB Governing Council's
decision to maintain key interest rates at the record low of 0.75 per
cent. This decision comes in response to weak growth expectations and
high uncertainty in financial markets, whilst medium-term inflation
expectations for the Euro Area remain in line with the 2 per cent
target. Meanwhile, the Bank of England maintains its interest rate at
its record low 0.5 per cent and expanded its programme of asset purchase
by a further 50 billion [pounds sterling] in July. Asset purchases have
reached a total of 375 billion [pounds sterling] to date. The Bank of
Japan also maintained its current essentially 0 rate unchanged in the
short term in order to support economic growth. In the US, the Federal
Reserve aggressively eased monetary policy in September 2012, announcing
that interest rates will remain exceptionally low until at least
mid-2015, extended the Maturity Extension Programme (MEP) to the end of
the year, and introduced a third, and open-ended, round of quantitative
easing (QE3), purchasing agency mortgage-backed securities at a rate of
$40 billion per month. The US will maintain a highly accommodative
stance for a considerable period after economic recovery strengthens.
Canada maintained the target for the overnight rate at 1 per cent,
anticipating sluggish global growth in the medium terra, whilst
inflationary pressures have softened.
Monetary policy in many emerging economies has softened recently,
as global inflationary pressures appear to ease and activity is slowing
down. The People's Bank of China lowered benchmark rates by a
further 31 basis points to 6 per cent in July, whilst the main policy
rates in Korea were recently reduced by 25 basis points to 2.75 per
cent. The South African Reserve Bank cut interest rates for the first
time since September 2010 by 50 basis points, down to 5 per cent. In
Brazil, the central bank continues to loosen its monetary policy as a
response to lower growth expectations with 10 consecutive interest rate
cuts since August 2011, which now stands at a record low of 7.25 per
cent.
[FIGURE A1 OMITTED]
Figure A1 illustrates our projections for real long-term interest
rates in the US, Euro Area, Japan and Canada. Long real rates have
followed nominal rates in a sharp drop since the second quarter of 2011.
Announced policies indicate that the monetary stance should remain
highly expansionary until the end of 2014. Real interest tares in North
America are expected to stabilise close to historical levels by 2017-18,
while they are expected to 'normalise' earlier in the Euro
Area, due to the high risk premium on borrowing in some Euro Area
economies. We see real interest rates in Japan stabilising around a
level rather below international rates of return.
Figure A2 depicts the spread between 10-year government bond yields
of Spain, Italy, Portugal and Greece over German yields, regarded as a
safe haven in the Euro Area. Sovereign risks in the Euro Area have been
a major macroeconomic issue for the global economy and financial markets
over the past two years. The final agreement on the Private Sector
Involvement in the Greek default in January 2012, and more recently the
Outright Money Transactions (OMT) introduced by the ECB in September
2012, have brought some relief to bond yields in the vulnerable
economies. In our forecast, we have assumed spreads remain at current
levels until the end of 2014, and start to recede in 2015.
[FIGURE A2 OMITTED]
Nominal exchange rates against the US dollar are assumed to remain
constant at the prevailing rate in the first week of October 2012 until
March 2014. After that, they follow a backward-looking
uncovered-interest parity condition, based on interest rate
differentials relative to the US. Figure A3 illustrates the effective
exchange rate projections for the US, Euro Area, Japan, Canada and the
UK. The Euro Area effective exchange rate depreciated steadily from
early 2011 to mid-2012, amid growing concerns about growth and financial
markets, but has seen a modest recovery in the final quarter of the
year. This may be more of a reflection of the ultra-loose monetary
stance in the US than a decline in the Euro Area risk premium.
Meanwhile, Japanese interventions to bring their currency down against
the dollar brought some relief in the first half of the year. However,
the Yen effective exchange rate started to appreciate again in the
second half of the year, and stands roughly 40 per cent above its level
at the beginning of 2008. Sterling lost nearly 20 per cent of its value
between the end of 2007 and the end of 2009, but has strengthened by 6
1/2 per cent in effective terms since mid-2011.
Our oil price assumptions for the short term are based on those of
the US Energy Information Administration, who use information from
forward markets as well as an evaluation of supply conditions. In the
longer term, we assume that real oil prices will rise in line with the
real interest rate. The oil price assumptions underlying our current
forecast are reported in figure A4 and in table 1 at the beginning of
this chapter. Annual average oil prices, based on the average of Brent
and Dubai spot prices, rose by almost 40 per cent between 2010 and 2011.
Tight demand and supply balances and the Libyan crisis triggered this
rise. Prices increased by about 9 per cent in the first quarter of this
year in response to the stand-off over Iran's nuclear plans, but
have reverted back since April amid growing concerns about global
economic activity. In our forecast, we assume that oil prices will
average $110.7 per barrel this year, up by about $4.6 per barrel
compared to our July 2012 baseline assumptions.
[FIGURE A3 OMITTED]
Our equity price assumptions for the US reflect the return on
capital. Other equity markets are assumed to move in line with the US
market, but are adjusted for different exchange rate movements and
shifts in country-specific equity risk premia. Figure A5 illustrates the
key equity price assumptions underlying our current forecast. Global
share prices dropped sharply in mid-2011 in response to the deepening of
the Euro Area debt crisis and the downgrade of US government debt.
However, we have seen a rebound in most of the largest economies over
the past year. Within Europe, share price developments have diverged
sharply, with a rise in prices in Germany, the UK and a few others, such
as Ireland, while share prices have continued to deteriorate in Greece,
Spain, Portugal and others. In Japan, share prices have recovered none
of the losses suffered at the height of the financial crisis, and stand
55 per cent below their average level in 2007.
[FIGURE A4 OMITTED]
Fiscal policy assumptions for 2012-14 follow announced policies.
Average personal sector tax rates and effective corporate tax rate
assumptions underlying the projections are reported in table A3.
Government revenue as a share of GDP reported in the table reflects
these tax rate assumptions and our forecast projections for income and
profits, as well as our projections for consumption tax revenue.
Government spending is expected to decline as a share of GDP in most
countries reported in the table, with the exceptions of Germany and
Finland. We expect little relief in the burden of government interest
payments in the vulnerable Euro Area economies of Ireland, Spain,
Greece, Portugal and Italy.
[FIGURE A5 OMITTED]
Table A1. Interest rates
Per cent per annum
Central bank intervention rates
US Canada Japan Euro Area UK
2010 0.25 0.59 0.10 1.00 0.50
2011 0.25 1.00 0.10 1.25 0.50
2012 0.25 1.00 0.10 0.88 0.50
2013 0.25 1.00 0.10 0.75 0.50
2014 0.62 1.18 0.10 0.75 0.50
2015 1.17 1.41 0.10 1.04 0.84
2016-2020 1.96 2.07 0.52 2.17 1.71
2012 Q1 0.25 1.00 0.10 1.00 0.50
2012 Q2 0.25 1.00 0.10 1.00 0.50
2012 Q3 0.25 1.00 0.10 0.78 0.50
2012 Q4 0.25 1.00 0.10 0.75 0.50
2013 Q1 0.25 1.00 0.10 0.75 0.50
2013 Q2 0.25 1.00 0.10 0.75 0.50
2013 Q3 0.25 1.00 0.10 0.75 0.50
2013 Q4 0.25 1.00 0.10 0.75 0.50
2014 Q1 0.49 1.00 0.10 0.75 0.50
2014 Q2 0.50 1.23 0.10 0.75 0.50
2014 Q3 0.70 1.25 0.10 0.75 0.50
2014 Q4 0.80 1.25 0.10 0.75 0.50
2015 Q1 1.00 1.25 0.10 0.98 0.61
2015 Q2 1.10 1.41 0.10 1.00 0.80
2015 Q3 1.25 1.50 0.10 1.00 0.90
2015 Q4 1.35 1.50 0.10 1.18 1.05
10-year government bond yields
US Canada Japan Euro Area UK
2010 3.2 3.2 1.2 3.3 3.6
2011 2.8 2.8 I.I 3.9 3.1
2012 1.8 1.9 0.9 3.3 1.8
2013 1.8 1.9 0.8 3.2 1.7
2014 2.1 2.2 0.9 3.6 1.9
2015 2.4 2.4 I.0 3.7 2.2
2016-2020 3.1 3.1 1.4 3.9 2.9
2012 Q1 2.0 2.0 1.0 3.5 2.1
2012 Q2 1.8 1.9 0.9 3.4 1.8
2012 Q3 1.6 1.8 0.8 3.2 1.5
2012 Q4 1.6 1.7 0.8 3.0 1.5
2013 Q1 1.7 1.8 0.8 3.1 1.6
2013 Q2 1.8 1.9 0.8 3.2 1.6
2013 Q3 1.9 1.9 0.8 3.3 1.7
2013 Q4 1.9 2.0 0.8 3.4 1.8
2014 Q1 2.0 2.1 0.8 3.5 1.8
2014 Q2 2.1 2.1 0.8 3.6 1.9
2014 Q3 2.2 2.2 0.9 3.7 1.9
2014 Q4 2.2 2.3 0.9 3.8 2.0
2015 Q1 2.3 2.3 0.9 3.8 2.1
2015 Q2 2.3 2.4 0.9 3.7 2.1
2015 Q3 2.4 2.5 I.0 3.7 2.2
2015 Q4 2.5 2.5 I.0 3.7 2.3
Table A2. Nominal exchange rates
Percentage change in effective rate
US Canada Japan Euro Germany France
Area
2010 -3.1 9.5 4.6 -6.1 -3.6 -2.8
2011 -3.0 2.1 7.2 2.3 0.7 I.I
2012 3.5 0.7 3.4 -3.5 -1.9 -1.9
2013 -0.8 1.4 0.2 0.2 0.0 0.2
2014 0.6 -0.5 -0.6 0.3 0.1 0.2
2015 0.5 -0.3 -0.2 0.6 0.2 0.3
2012 Q1 -0.4 3.2 -2.4 -2.8 -1.5 -1.2
2012 Q2 2.1 -2.8 0.1 -I.I -0.5 -0.5
2012 Q3 -0.1 3.4 2.6 -1.7 -0.9 -0.8
2012 Q4 -1.7 0.7 -0.9 1.9 0.9 0.9
2013 Q1 -0.1 0.0 -0.1 -0.1 0.0 0.0
2013 Q2 -0.1 0.0 -0.1 -0.1 0.0 0.0
2013 Q3 0.2 -0.1 -0.2 0.1 0.0 0.0
2013 Q4 0.2 -0.1 -0.2 0.1 0.0 0.0
2014 Q1 0.2 -0.1 -0.2 0.1 0.0 0.0
2014 Q2 0.1 -0.1 -0.1 0.1 0.0 0.1
2014 Q3 0.2 -0.1 -0.1 0.1 0.0 0.1
2014 Q4 0.1 -0.1 -0.1 0.1 0.1 0.1
2015 Q1 0.1 -0.1 -0.1 0.2 0.1 0.1
2015 Q2 0.1 0.0 0.0 0.1 0.1 0.1
2015 Q3 0.1 0.0 0.0 0.2 0.1 0.1
2015 Q4 0.1 0.0 0.0 0.2 0.1 0.1
Percentage Bilateral rate per US $
change in
effective rate
Italy UK Canadian Yen Euro Sterling
$
2010 -3.3 -0.2 1.026 87.8 0.755 0.647
2011 1.4 0.0 0.995 79.8 0.719 0.624
2012 -1.7 4.6 1.000 79.1 0.779 0.630
2013 0.3 1.2 0.984 78.5 0.773 0.620
2014 0.3 0.4 0.991 79.2 0.776 0.620
2015 0.5 0.6 0.995 79.5 0.776 0.619
2012 -1.4 1.3 0.994 79.3 0.763 0.636
2012 -0.5 2.6 1.027 80.1 0.780 0.632
2012 -0.6 1.2 0.996 78.6 0.800 0.633
2012 I.0 -0.1 0.983 78.3 0.772 0.619
2013 0.0 0.0 0.983 78.3 0.772 0.619
2013 0.0 0.0 0.983 78.3 0.772 0.619
2013 0.1 0.1 0.985 78.5 0.773 0.620
2013 0.1 0.1 0.987 78.7 0.774 0.620
2014 0.1 0.1 0.988 78.9 0.775 0.621
2014 0.1 0.1 0.990 79.1 0.776 0.621
2014 0.1 0.1 0.992 79.3 0.776 0.621
2014 0.1 0.1 0.993 79.4 0.776 0.620
2015 0.1 0.2 0.994 79.5 0.776 0.620
2015 0.1 0.2 0.995 79.5 0.776 0.619
2015 0.1 0.1 0.995 79.6 0.776 0.619
2015 0.1 0.1 0.996 79.6 0.775 0.618
Table A3. Government revenue assumptions
Average income Effective corporate
tax rate tax rate
(per cent) (a) (per cent)
2012 2013 2014 2012 2013 2014
Australia 14.5 14.6 14.5 25.7 25.7 25.7
Austria 31.7 31.7 31.4 19.9 19.9 19.9
Belgium 33.0 33.2 33.3 16.7 16.7 16.7
Canada 21.9 22.0 22.0 20.0 20.6 21.4
Denmark 38.0 38.0 38.1 18.1 18.1 18.1
Finland 31.5 31.6 31.6 22.8 23.3 23.3
France 28.9 29.2 29.2 17.6 22.8 22.8
Germany 27.8 27.8 27.8 16.8 16.8 16.8
Greece 17.6 17.6 17.5 13.5 13.5 13.5
Ireland 22.5 22.5 22.8 8.0 8.0 8.0
Italy 29.5 29.4 28.9 28.6 28.6 28.6
Japan 22.8 22.8 23.0 29.3 29.6 29.8
Netherlands 34.0 34.0 34.0 8.0 8.0 8.0
Portugal 21.0 21.3 20.7 18.6 18.6 18.6
Spain 24.9 24.8 24.9 25.2 25.2 25.2
Sweden 29.8 29.8 29.4 30.4 30.4 30.4
UK 23.4 23.8 24.2 17.6 16.3 15.3
US 17.3 17.7 18.2 28.5 28.6 28.9
Gov't revenue
(% of GDP) (b)
2012 2013 2014
Australia 32.6 33.6 33.7
Austria 38.5 37.5 37.1
Belgium 44.2 43.3 43.1
Canada 35.8 35.9 36.2
Denmark 45.9 45.9 45.7
Finland 45.9 46.0 45.7
France 45.9 46.6 46.7
Germany 45.2 45.4 45.7
Greece 43.7 44.8 45.6
Ireland 29.5 28.5 27.4
Italy 45.6 46.7 46.4
Japan 31.6 31.6 32.1
Netherlands 41.5 40.9 40.2
Portugal 37.9 38.0 37.3
Spain 35.8 36.9 37.4
Sweden 44.5 43.7 42.9
UK 37.3 37.3 37.7
US 27.8 28.0 28.4
Notes: (a) The average income tax rate is calculated as
total income tax plus both employee and employer social
security contributions as a share of personal income. (b)
Revenue shares reflect NiGEM aggregates, which may differ
from official government figures.
Table A4. Government spending assumptions(a)
Deficit
Gov't spending Gov't interest projected
excluding payments to fall
interest payments (% of GDP) below
3%
2012 2013 2014 2012 2013 2014 of GDP(b)
Australia 33.8 33.3 32.5 1.8 1.7 1.5 2013
Austria 38.8 37.6 36.9 2.5 2.3 2.2 2011
Belgium 43.5 42.6 42.2 3.5 3.2 2.9 2012
Canada 35.7 35.8 35.5 3.5 3.2 3.0 2014
Denmark 48.1 47.4 46.6 1.7 1.6 1.5 2014
Finland 45.0 45.2 45.0 1.4 1.2 1.1 --
France 47.7 47.5 47.1 2.7 2.7 2.5 2015
Germany 44.1 44.4 44.8 2.1 1.8 1.5 2011
Greece 44.4 44.6 43.9 6.7 6.5 6.7 2017
Ireland 33.5 32.0 30.6 4.1 4.3 4.5 2019
Italy 43.0 42.8 41.8 5.3 5.6 5.6 2012
Japan 39.6 39.4 38.5 2.1 1.9 1.7 --
Netherlands 43.3 42.0 40.9 1.9 1.8 1.7 2013
Portugal 39.0 38.2 36.0 4.2 4.4 4.4 2015
Spain 39.6 38.7 37.8 3.2 3.9 4.2 2016
Sweden 43.7 43.1 42.1 1.1 0.9 0.8 --
UK 40.2 39.4 38.5 3.1 3.3 3.2 2017
US 33.5 32.9 32.3 2.9 2.7 2.6 2019
Notes: (a) Expenditure shares reflect NiGEM aggregates,
which may differ from official government figures. (b) The
deficit in Denmark, Finland and Sweden has not exceeded 3
per cent of GDP in recent history. In Japan and the US,
deficits are not expected to fall below 3 per cent of GDP
within our forecast horizon.
Appendix B: Forecast detail
[FIGURE B1 OMITTED]
[FIGURE B2 OMITTED]
[FIGURE B3 OMITTED]
[FIGURE B4 OMITTED]
Appendix B: Forecast detail
Table B1. Real GDP growth and inflation
Real GDP growth (per cent)
2010 2011 2012 2013 2014 2015-19
Australia 2.5 2.1 3.3 2.4 3.3 3.4
Austria (a) 2.2 2.7 0.7 1.4 1.8 2.0
Belgium (a) 2.4 1.8 -0.2 0.5 1.1 1.8
Bulgaria (a) 0.5 1.8 0.8 1.8 3.0 2.8
Brazil 7.5 2.7 1.3 3.2 3.5 4.2
China 10.4 9.3 7.6 7.6 7.5 7.1
Canada 3.2 2.4 2.1 1.7 2.0 2.3
Czech Rep. 2.6 1.7 -0.3 1.1 2.0 1.6
Denmark (a) 1.3 0.8 0.4 1.5 1.3 1.8
Estonia (a) 3.3 8.3 2.5 3.7 2.9 2.0
Finland (a) 3.3 2.7 1 1.7 1.9 2.1
France (a) 1.6 1.7 0.2 0.2 1.1 1.6
Germany (a) 4.0 3.1 0.7 1.1 1.5 1.2
Greece (a) -3.4 -7.0 -6.1 -3.2 -0.4 2.0
Hong Kong 6.8 4.9 1.4 3.9 4.3 3.3
Hungary (a) 1.2 1.7 -0.6 0.7 1.7 3.8
India 10.3 7.0 5.2 5.4 6.6 6.9
Ireland (a) -0.8 1.4 0.2 0.9 2.6 2.8
Italy (a) 1.8 0.5 -2.3 -0.7 0.7 1.7
Japan 4.6 -0.7 2.2 0.9 1.4 1.4
Lithuania (a) 1.4 6.0 2.5 2.8 4.3 3.8
Latvia (a) -1.4 5.2 4.3 3.3 3.2 2.5
Mexico 5.5 3.9 4.0 3.3 3.7 3.5
Netherlands (a) 1.6 1.1 -0.2 1.0 1.2 1.5
New Zealand 0.9 0.5 2.0 2.7 2.2 2.1
Norway 0.6 1.5 3.3 2.1 2.9 2.5
Poland (-) 3.9 4.3 2.1 2.8 3.9 3.0
Portugal (a) 1.4 -1.7 -3.0 -1.6 0.7 2.7
Romania (a) -1.7 2.5 1 3.1 2.8 3.5
Russia 4.3 4.4 3.5 3.1 3.5 3.3
South Africa 2.9 3.1 2.8 3.6 4.5 3.1
S. Korea 6.3 3.6 2.6 2.9 3.4 3.6
Slovakia (a) 4.2 3.3 2.7 2.9 3.4 3.0
Slovenia (a) 1.1 1 -1.3 0.6 1.3 3.2
Spain (a) -0.3 0.4 -1.8 -1.3 1.2 2.1
Sweden (a) 6.3 3.9 1.3 1.7 2.3 2.5
Switzerland 3.0 1.9 0.9 1.2 1.2 1.7
Taiwan 10.7 4.0 1 3.1 3.3 3.3
UK (a) 1.8 0.9 -0.1 1.1 1.7 2.3
US 2.4 1.8 2.0 2.0 2.4 2.8
Euro Area (a) 1.9 1.5 -0.5 0.2 1.2 1.6
EU-27 (a) 2.0 1.6 -0.2 0.6 1.5 1.9
OECD 3.0 1.8 1.3 1.4 2.1 2.4
World 5.3 3.9 3.1 3.4 3.9 4.1
Annual inflation (a) (per cent)
2010 2011 2012 2013 2014 2015-19
Australia 2.8 2.6 1.6 2.5 3.0 3.3
Austria (a) 1.7 3.6 2.4 1.7 1.9 2.4
Belgium (a) 2.3 3.5 2.5 1.5 2.2 2.2
Bulgaria (a) 3.0 3.4 2.4 2.7 3.2 1.9
Brazil 5.1 6.6 5.1 6.7 2.7 5.2
China 3.3 5.4 2.5 2.3 2.7 1.6
Canada 1.3 2.0 1.4 1.3 1.8 2.3
Czech Rep. 1.2 2.1 3.5 2.3 2.4 1.9
Denmark (a) 2.2 2.7 2.4 2.0 2.7 2.2
Estonia (a) 2.7 5.1 4.5 2.6 3.8 3.8
Finland (a) 1.7 3.3 3.1 2.1 1.9 1.3
France (a) 1.7 2.3 2.3 1.8 2.1 1.7
Germany (a) 1.2 2.5 2.1 1.8 1.9 1.3
Greece (a) 4.7 3.1 1.1 1.5 2.5 3.6
Hong Kong 1.4 4.0 3.0 2.9 3.6 2.8
Hungary (a) 4.7 3.9 5.6 4.2 3.4 2.5
India 12.0 8.8 9.2 7.1 6.1 4.1
Ireland (a) -1.6 1.2 2.2 2.0 1.8 1.8
Italy (a) 1.6 2.9 3.1 1.3 2.0 2.3
Japan -1.7 -1.1 -0.7 -1.1 0.3 0.6
Lithuania (a) 1.2 4.1 3.2 2.9 2.9 4.1
Latvia (a) -1.2 4.2 2.6 4.0 3.5 2.5
Mexico 4.2 3.4 4.1 3.6 3.6 2.3
Netherlands (a) 0.9 2.5 3.0 3.0 2.4 2.3
New Zealand 1.7 3.4 1.4 1.2 2.5 2.9
Norway 2.2 1.3 1.0 1.2 2.2 2.4
Poland (-) 2.7 3.9 3.8 2.6 2.6 2.1
Portugal (a) 1.4 3.6 2.8 1.0 1.7 2.5
Romania (a) 6.1 5.8 3.0 2.9 2.6 2.8
Russia 6.9 8.4 5.6 6.4 4.6 4.2
South Africa 4.0 5.0 5.3 4.6 6.2 5.5
S. Korea 2.9 4.0 2.2 1.9 2.7 2.6
Slovakia (a) 0.7 4.1 3.7 2.8 1.9 3.7
Slovenia (a) 2.1 2.1 2.2 2.3 3.2 2.0
Spain (a) 2.0 3.1 2.3 2.0 2.3 2.3
Sweden (a) 1.9 1.4 1.1 1.2 1.7 1.8
Switzerland 0.9 0.1 0.2 0.9 1.7 2.3
Taiwan 0.6 0.8 1.6 2.0 2.0 2.2
UK (a) 3.3 4.5 2.7 2.0 1.6 1.8
US 1.9 2.4 1.6 1.8 1.9 2.4
Euro Area (a) 1.6 2.7 2.5 1.8 2.1 2.0
EU-27 (a) 2.1 3.1 2.6 1.9 2.1 2.0
OECD 1.7 2.3 1.8 1.7 1.9 2.1
World 4.1 5.2 4.3 3.8 3.2 2.9
Notes: (a) Harmonised consumer price inflation in the EU economies
and inflation measured by the consumer expenditure deflator in the
rest of the world.
Table B2. Fiscal balance and government debt
Fiscal balance (per cent of GDP)(a)
2010 2011 2012 2013 2014 2019
Australia -4.7 -3.9 -3.0 -1.4 -0.3 -0.9
Austria (a) -4.5 -2.6 -2.8 -2.4 -2.0 -1.5
Belgium (a) -3.9 -3.9 -2.8 -2.5 -2.1 -1.6
Bulgaria -3.1 -2.1 -1.5 -0.5 -0.4 -0.9
Canada -5.5 -4.4 -3.4 -3.1 -2.3 -1.6
Czech Rep. -4.8 -3.1 -3.2 -3.6 -3.2 -2.6
Denmark (a) -2.5 -1.8 -3.9 -3.2 -2.4 -1.6
Estonia 0.2 1.0 -2.1 -1.2 -0.2 -1.2
Finland (a) -2.9 -0.9 -0.5 -0.3 -0.4 -1.1
France (a) -7.1 -5.2 -4.5 -3.6 -3.0 -2.2
Germany (a) -4.3 -1.0 -1.0 -0.8 -0.7 -1.3
Greece (a) -10.5 -9.1 -7.5 -6.3 -5.0 -1.6
Hungary -4.3 4.2 -3.2 -2.7 -2.1 -1.2
Ireland (a) -31.2 -13.0 -8.1 -7.8 -7.7 -2.6
Italy (a) -4.6 -3.9 -2.7 -1.7 -1.0 -0.8
Japan -8.4 -9.5 -10.1 -9.6 -8.0 -5.5
Lithuania -7.2 -5.5 -4.0 -3.4 -2.6 -1.5
Latvia -8.2 -3.5 -2.3 -2.4 -2.3 -1.1
Netherlands (a) -5.0 -4.6 -3.7 -2.9 -2.3 -1.9
Poland -7.8 -5.1 -3.5 -3.0 -2.3 -1.7
Portugal (a) -9.8 -4.2 -5.2 -4.6 -3.0 -1.5
Romania -6.8 -5.2 -3.3 -2.4 -2.0 -1.7
Slovakia -7.7 -4.8 -3.4 -2.4 -1.5 0.0
Slovenia -6.0 -6.4 -5.6 -4.6 -3.7 -0.7
Spain (a) -9.4 -8.6 -7.0 -5.7 -4.6 -1.1
Sweden (a) 0.3 0.3 -0.3 -0.3 -0.1 -0.7
U K (a) -10.2 -7.8 -7.0 -8.1 -6.6 -1.1
US -11.4 -10.2 -8.6 -7.7 -6.4 -2.9
Government debt (per cent of GDP, end year)(b)
2010 2011 2012 2013 2014 2019
Australia 27.9 30.6 32.4 32.0 30.5 23.5
Austria (a) 71.8 72.2 73.5 72.0 70.0 61.4
Belgium (a) 96.0 98.1 102.4 99.3 96.4 86.4
Bulgaria -- -- -- -- -- --
Canada 82.1 82.1 82.8 82.8 81.6 71.0
Czech Rep. 38.1 41.2 46.4 48.6 49.8 54.3
Denmark (a) 42.9 46.5 47.4 48.8 48.8 50.0
Estonia -- -- -- -- -- --
Finland (a) 48.4 48.6 49.3 49.9 50.5 55.9
France (a) 82.7 86.2 91.3 92.3 92.4 89.3
Germany (a) 83.0 81.2 81.1 79.6 78.4 76.9
Greece (a) 145.0 165.4 132.3 142.0 144.0 120.7
Hungary 81.4 80.6 73.4 68.5 65.9 49.1
Ireland (a) 92.5 108.2 113.6 117.6 118.4 114.1
Italy (a) 118.7 120.0 126.8 126.2 122.9 101.9
Japan 193.0 205.0 213.8 221.4 223.4 229.7
Lithuania -- -- -- -- -- --
Latvia -- -- -- -- -- --
Netherlands (a) 62.9 65.1 69.8 69.2 68.4 65.1
Poland 54.8 56.3 55.8 54.3 54.2 51.0
Portugal (a) 93.4 107.8 118.1 121.8 121.3 102.8
Romania -- -- -- -- -- --
Slovakia -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Spain (a) 61.2 68.5 83.0 88.8 90.7 82.1
Sweden (a) 39.4 38.4 37.0 36.2 34.8 29.9
U K (a) 79.4 85.0 89.8 94.3 97.5 90.7
US 96.9 101.2 108.0 110.7 112.4 103.4
Notes: (a) General government financial balance; Maastricht
definition for EU countries. (b) Maastricht definition for
EU countries. (c) The deficit for Ireland in 2010 includes
outlay on bank recapitalisation amounting to 20 per cent of
GDP. The outlays are in the form of promissory notes and do
not require upfront financing.
Table B3. Unemployment and current account balance
Standardised unemployment rate
2010 2011 2012 2013 2014 2015-19
Australia 5.2 5.1 5.3 5.3 4.8 4.2
Austria 4.4 4.2 4.3 3.8 3.3 3.4
Belgium 8.3 7.2 7.5 7.0 6.7 7.1
Bulgaria 10.2 11.3 12.4 12.2 10.1 7.1
Canada 8.0 7.5 7.3 7.0 7.2 6.3
China -- -- -- -- -- --
Czech Rep. 7.3 6.7 6.9 7.2 7.4 6.6
Denmark 7.4 7.6 7.9 7.8 6.7 6.7
Estonia 16.9 12.4 10.3 9.7 9.7 9.6
Finland 8.4 7.8 7.7 7.6 7.4 7.5
France 9.8 9.7 10.4 1 1.0 10.4 10.0
Germany 7.1 5.9 5.5 5.5 5.5 5.8
Greece 12.6 17.7 23.6 25.9 25.3 21.9
Hungary 11.2 10.9 11.0 11.0 9.9 6.8
Ireland 13.7 14.5 14.9 15.2 14.5 12.9
Italy 8.4 8.4 10.6 11.4 10.7 9.9
Japan 5.1 4.6 4.4 4.9 4.7 4.5
Lithuania 17.8 15.4 13.2 14.2 14.3 14.0
Latvia 19.8 16.3 15.5 14.3 13.7 12.4
Netherlands 4.5 4.4 5.2 4.9 4.1 4.8
Poland 9.6 9.7 10.1 9.6 8.8 7.7
Portugal 12.1 12.9 15.7 15.8 11.2 7.7
Romania 7.3 7.4 7.2 6.7 6.4 6.2
Slovakia 14.5 13.6 13.7 12.5 11.7 10.6
Slovenia 7.3 8.2 8.3 8.0 7.7 7.5
Spain 20.1 21.7 24.9 26.7 25.6 19.9
Sweden 8.4 7.5 7.6 7.3 6.6 6.7
UK 7.9 8.1 8.1 8.2 8.0 6.8
US 9.6 8.9 8.1 7.7 7.1 5.9
Current account balance (per cent of GDP)
2010 2011 2012 2013 2014 2015-19
Australia -2.9 -2.3 -4.5 -5.1 -4.6 -4.4
Austria 3.1 1.9 2.1 3.7 5.1 7.0
Belgium 1.4 -1.0 -1.4 1.7 3.2 4.4
Bulgaria -1.1 1.2 -7.8 -10.1 -8.9 -5.6
Canada -3.1 -2.8 -2.8 -2.0 -1.6 -2.0
China 4.4 3.1 3.4 5.5 4.6 2.0
Czech Rep. -3.9 -2.9 1.8 -1.6 -2.9 -2.6
Denmark 5.5 6.5 4.3 1.2 0.9 -0.6
Estonia 3.0 2.2 -2.4 -3.0 -3.3 -3.2
Finland 1.4 -0.7 -2.1 -1.9 -1.8 -1.1
France -1.6 -2.0 -3.2 -2.9 -2.5 -2.2
Germany 5.9 5.7 6.7 7.3 7.1 5.1
Greece -10.1 -9.8 -4.8 -1.1 0.0 -0.4
Hungary 1.2 1.4 -2.0 0.4 0.0 -0.7
Ireland 0.5 0.1 2.3 3.8 1.4 1.3
Italy -3.5 -3.3 -2.1 -1.0 -0.9 0.3
Japan 3.7 2.0 0.7 0.4 0.5 0.7
Lithuania 1.5 -1.5 -3.6 -3.8 0.0 2.9
Latvia 3.3 -2.6 -4.1 -5.4 -7.1 -8.8
Netherlands 7.0 8.5 12.4 12.0 12.1 13.4
Poland -4.7 -4.3 -4.2 -0.6 0.4 -2.4
Portugal -10.0 -6.5 -2.0 0.1 1.2 1.0
Romania -6.3 -6.4 -5.5 -4.9 -4.5 -6.4
Slovakia -3.1 0.0 2.7 -0.5 -1.4 -1.8
Slovenia -0.6 0.0 1.2 3.6 4.2 -0.2
Spain -4.5 -3.6 -1.9 -1.0 -0.9 -1.4
Sweden 6.6 6.9 6.7 6.2 6.5 7.8
UK -2.5 -1.9 -3.4 -1.2 -0.9 -1.0
US -3.0 -3.1 -3.2 -3.1 -2.8 -2.3
Table B4. United States
Percentage change
2009 2010 2011 2012
GDP -3.1 2.4 1.8 2.0
Consumption -1.9 1.8 2.5 1.8
Investment : housing -22.4 -3.7 -1.4 9.7
business -18.1 0.7 8.6 8.0
Government: consumption 4.3 0.9 -2.3 -1.2
investment 0.6 -0.6 -7.2 -3.7
Stockbuilding (a) -0.8 1.5 -0.2 0.0
Total domestic demand -4.2 2.8 1.8 2.0
Export volumes -9.1 1.1 6.7 3.8
Import volumes -13.5 12.5 4.8 2.9
Average earnings 2.6 2.0 2.3 1.8
Private consumption
deflator 0.1 1.9 2.4 1.6
RPDI -2.6 2.2 1.6 1.6
Unemployment, % 9.3 9.6 8.9 8.1
General Govt.
balance as % of GDP -11.9 -11.4 -10.2 -8.6
General Govt. debt
as % of GDP (b) 88.4 96.9 101.2 108.0
Current account
as % of GDP -2.7 -3.0 -3.1 -3.2
Percentage change
Average
2013 2014 2015-19
GDP 2.0 2.4 2.8
Consumption 1.7 1.6 1.8
Investment : housing 4.9 6.9 9.4
business 5.0 6.4 6.9
Government: consumption 0.4 0.8 1.8
investment 0.9 1.2 2.1
Stockbuilding (a) 0.1 0.0 0.0
Total domestic demand 2.0 2.1 2.6
Export volumes 3.6 6.6 5.1
Import volumes 3.2 4.2 4.2
Average earnings 2.0 1.7 3.3
Private consumption
deflator 1.8 1.9 2.4
RPDI 1.4 1.1 1.8
Unemployment, % 7.7 7.1 5.9
General Govt.
balance as % of GDP -7.7 -6.4 -4.1
General Govt. debt
as % of GDP (b) 110.7 112.4 108.7
Current account
as % of GDP -3.1 -2.8 -2.3
Note: (a) Change as a percentage of GDP.
(b) End-of-year basis.
Table B5. Canada Percentage change
2009 2010 2011 2012
GDP -2.8 3.2 2.4 2.1
Consumption 0.4 3.3 2.4 1.6
Investment : housing -8.0 10.2 2.3 5.9
business -20.5 8.5 12.9 4.9
Government: consumption 3.6 2.4 0.8 -0.5
: investment 8.8 17.9 -3.1 -7.9
Stockbuilding (a) -0.8 0.7 0.3 0.0
Total domestic demand -2.9 5.3 3.4 1.5
Export volumes -13.8 6.4 4.6 5.5
Import volumes -13.4 13.1 7.0 4.2
Average earnings 2.1 2.6 2.9 2.1
Private consumption
deflator 0.5 1.3 2.0 1.4
RPDI 0.9 3.5 1.2 1.8
Unemployment, % 8.3 8.0 7.5 7.3
General Govt.
balance as % of GDP -4.9 -5.5 -4.4 -3.4
General Govt. debt
as % of GDP (b) 80.5 82.1 82.1 82.8
Current account
as % of GDP -3.0 -3.1 -2.8 -2.8
Average
2013 2014 2015-19
GDP 1.7 2.0 2.3
Consumption 2.2 2.7 2.7
Investment : housing 3.9 5.3 6.7
business 3.8 3.8 3.8
Government: consumption -0.8 -0.8 1.6
: investment 0.0 0.5 2.0
Stockbuilding (a) 0.1 0.0 0.0
Total domestic demand 1.9 2.3 2.9
Export volumes 3.1 4.2 3.3
Import volumes 3.4 4.2 4.3
Average earnings 2.3 3.3 4.4
Private consumption
deflator 1.3 1.8 2.3
RPDI 2.8 2.4 3.0
Unemployment, % 7.0 7.2 6.3
General Govt.
balance as % of GDP -3.1 -2.3 -1.5
General Govt. debt
as % of GDP (b) 82.8 81.6 75.0
Current account
as % of GDP -2.0 -1.6 -2.0
Note: (a) Change as a percentage of GDP.
(b) End-of-year basis.
Table B6. Japan Percentage change
2009 2010 2011 2012
GDP -5.5 4.6 -0.7 2.2
Consumption -0.7 2.6 0.1 1.6
Investment : housing -16.3 -4.5 5.7 1.3
: business -14.3 1.1 1.2 4.0
Government : consumption 2.3 2.2 2.0 2.0
: investment 7.8 0.4 -2.8 6.0
Stockbuilding (a) -1.5 0.7 -0.4 0.4
Total domestic demand -3.8 2.8 0.2 2.7
Export volumes -24.4 24.5 -0.1 4.0
Import volumes -15.8 11.2 6.3 6.8
Average earnings -0.4 -1.2 0.5 -2.3
Private consumption
deflator -2.4 -1.7 -1.1 -0.7
RPD1 1.4 2.1 0.8 0.7
Unemployment, % 5.1 5.1 4.6 4.4
Govt. balance
as % of GDP -8.8 -8.4 -9.5 -10.1
Govt. debt
as % of GDP(b) 187.4 193.0 205.0 213.8
Current account
as % of GDP 2.9 3.7 2.0 0.7
Average
2013 2014 2015-19
GDP 0.9 1.4 1.4
Consumption 0.7 0.9 0.3
Investment : housing 3.5 4.0 3.5
: business 5.1 6.7 4.1
Government : consumption 0.1 -0.3 0.6
: investment -5.9 -3.0 0.7
Stockbuilding (a) 0.4 0.0 0.0
Total domestic demand 1.3 1.4 1.0
Export volumes 2.4 5.6 5.6
Import volumes 5.9 6.0 4.2
Average earnings -0.9 -0.5 1.2
Private consumption
deflator -1.1 0.3 0.6
RPD1 0.2 -0.3 0.1
Unemployment, % 4.9 4.7 4.5
Govt. balance
as % of GDP -9.6 -8.0 -6.1
Govt. debt
as % of GDP(b) 221.4 223.4 227.8
Current account
as % of GDP 0.4 0.5 0.7
Note: (a) Change as a percentage of GDP. (b) End-of-year basis.
Table B7. Euro Area Percentage change
2009 2010 2011 2012
GDP -4.3 1.9 1.5 -0.5
Consumption -0.9 0.9 0.1 -0.9
Private investment -14.6 0.3 2.2 -3.5
Government: consumption 2.6 0.7 -0.1 -0.6
investment 0.8 -3.9 -2.7 -4.4
Stockbuilding (a) -0.8 0.7 0.1 -0.5
Total domestic demand -3.6 1.3 0.5 -1.8
Export volumes -12.4 1.0 6.4 3.0
Import volumes -11.0 9.4 4.2 -0.1
Average earnings 3.1 0.9 1.8 1.6
Harmonised consumer prices 0.3 1.6 2.7 2.5
RPDI 0.5 0.1 -0.7 -1.3
Unemployment, % 9.6 10.1 10.1 11.3
Govt. balance as % of GDP -6.4 -6.2 -4.1 -3.4
Govt. debt as % of GDP (b) 79.9 85.3 87.2 91.7
Current account as % of GDP -0.2 -0.1 0.0 0.9
Average
2013 2014 2015-19
GDP 0.2 1.2 1.6
Consumption 0.0 0.5 1.0
Private investment 0.0 2.5 4.0
Government: consumption -1.5 0.4 1.2
investment -1.4 2.6 2.1
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand -0.4 0.9 1.6
Export volumes 3.4 3.9 4.0
Import volumes 2.3 3.6 4.3
Average earnings 1.3 1.4 2.5
Harmonised consumer prices 1.8 2.1 2.0
RPDI -0.5 0.4 1.3
Unemployment, % 11.9 11.2 10.1
Govt. balance as % of GDP -2.7 -2.1 -1.7
Govt. debt as % of GDP (b) 91.4 90.6 86.8
Current account as % of GDP 2.1 2.3 2.0
Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.
Table B8. Germany Percentage change
2009 2010 2011 2012
GDP -5.1 4.0 3.1 0.7
Consumption 0.3 0.8 1.7 0.9
Investment : housing -2.5 4.4 6.5 2.8
: business -17.1 7.1 7.4 -0.6
Government : consumption 3.0 1.7 1.0 1.0
: investment 4.7 -0.9 -1.5 -5.1
Stockbuilding(a) -0.9 0.7 0.3 -0.5
Total domestic demand -2.4 2.6 2.7 0.3
Export volumes -12.8 13.4 7.9 4.9
Import volumes -8.0 10.9 7.5 4.6
Average earnings 2.9 0.8 2.9 2.3
Harmonised consumer prices 0.2 1.2 2.5 2.1
RPDI -0.5 0.9 1.2 1.6
Unemployment, % 7.8 7.1 5.9 5.5
Govt. balance as % of GDP -3.2 -4.3 -1 -1
Govt. debt as % of GDP (b) 74.4 83.0 81.2 81.1
Current account as % of GDP 5.9 5.9 5.7 6.7
Average
2013 2014 2015-19
GDP 1.1 1.5 1.2
Consumption 1.5 1.4 1.7
Investment : housing 3.9 1.9 2.7
: business 1.6 2.4 1.7
Government : consumption 1.5 1.8 1.1
: investment 4.0 2.6 1.9
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand 1.6 1.7 1.6
Export volumes 4.8 3.8 4.1
Import volumes 6.3 4.3 5.3
Average earnings 2.6 2.3 2.3
Harmonised consumer prices 1.8 1.9 1.3
RPDI 1.0 0.8 1.3
Unemployment, % 5.5 5.5 5.8
Govt. balance as % of GDP -0.8 -0.7 -1
Govt. debt as % of GDP (b) 79.6 78.4 77.3
Current account as % of GDP 7.3 7.1 5.1
Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.
Table B9. France Percentage change
2009 2010 2011 2012
GDP -3.1 1.6 1.7 0.2
Consumption 0.2 1.4 0.2 0.2
Investment : housing -12.1 -0.3 3.2 1.0
: business -12.9 4.4 5.1 0.3
Government : consumption 2.6 1.7 0.2 0.9
: investment 2.5 -8.2 -1.8 1.4
Stockbuilding (a) -1.2 0.5 0.9 -0.5
Total domestic demand -2.6 1.9 1.7 0.0
Export volumes -11.8 9.2 5.5 2.1
Import volumes -9.5 8.4 5.2 1.0
Average earnings 2.9 1.6 3.0 1.8
Harmonised consumer prices 0.1 1.7 2.3 2.3
RPDI 1.8 1.3 -0.3 -0.1
Unemployment, % 9.5 9.8 9.7 10.4
Govt. balance as % of GDP -7.5 -7.1 -5.2 -4.5
Govt. debt as % of GDP (b) 79.3 82.7 86.2 91.3
Current account as % of GDP -1.3 -1.6 -2.0 -3.2
Average
2013 2014 2015-19
GDP 0.2 1.1 1.6
Consumption 0.6 0.9 0.9
Investment : housing 0.1 0.9 4.5
: business 0.7 1 2.2
Government : consumption -1.9 0.2 1.5
: investment -2.3 0.7 1.9
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand -0.1 0.7 1.4
Export volumes 2.0 5.3 4.7
Import volumes 1.0 3.7 4.0
Average earnings 1.9 2.1 2.7
Harmonised consumer prices 1.8 2.1 1.7
RPDI -0.1 0.8 1.1
Unemployment, % 11.0 10.4 10.0
Govt. balance as % of GDP -3.6 -3.0 -2.5
Govt. debt as % of GDP (b) 92.3 92.4 90.8
Current account as % of GDP -2.9 -2.5 -2.2
Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.
Table B10. Italy Percentage change
2009 2010 2011 2012
GDP -5.5 1.8 0.5 -2.3
Consumption -1.6 1.2 0.2 -3.4
Investment : housing -8.4 -2.1 -2.3 -7.2
: business -15.3 5.1 -0.6 -10.5
Government : consumption 0.8 -0.6 -0.9 -1.0
: investment -3.3 -5.9 -5.1 -14.0
Stockbuilding (a) -1.3 1.3 -0.6 -1.1
Total domestic demand -4.4 2.2 -0.8 -5.1
Export volumes -17.7 11.4 6.3 1.6
Import volumes -13.6 12.4 1.0 -7.8
Average earnings 1.7 1.8 1.2 1.1
Harmonised consumer prices 0.8 1.6 2.9 3.1
RPDI -3.0 -0.8 -0.5 -3.8
Unemployment, % 7.8 8.4 8.4 10.6
Govt. balance as % of GDP -5.4 -4.6 -3.9 -2.7
Govt. debt as % of GDP (b) 116.0 118.7 120.0 126.8
Current account as % of GDP -2.0 -3.5 -3.3 -2.1
Average
2013 2014 2015-19
GDP -0.7 0.7 1.7
Consumption -1.7 -0.1 0.6
Investment : housing -4.6 -1.0 3.5
: business -0.4 4.9 6.1
Government : consumption -1.0 -0.3 0.7
: investment -4.6 14.4 3.9
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand -1.8 0.6 1.5
Export volumes 3.7 3.7 3.8
Import volumes -0.1 3.9 3.5
Average earnings -0.4 -0.4 2.0
Harmonised consumer prices 1.3 2.0 2.3
RPDI -1.7 -0.2 1.1
Unemployment, % 11.4 10.7 9.9
Govt. balance as % of GDP -1.7 -1.0 -1.1
Govt. debt as % of GDP (b) 126.2 122.9 111.1
Current account as % of GDP -1.0 -0.9 0.3
Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.
Table B11. Spain Percentage change
2009 2010 2011 2012
GDP -3.7 -0.3 0.4 -1.8
Consumption -3.8 0.7 -1.0 -1.5
Investment : housing -23.1 -10.1 -6.7 -9.3
: business -16.7 -3.7 -5.7 -14.8
Government : consumption 3.7 1.5 -0.5 -6.8
: investment 0.3 0.0 0.0 -0.2
Stockbuilding (a) 0.0 0.1 -0.1 -0.1
Total domestic demand -6.3 -0.7 -1.9 -4.5
Export volumes -10.0 11.3 7.6 1.5
Import volumes -17.2 9.2 -0.9 -7.2
Average earnings 4.2 -0.1 0.1 0.5
Harmonised consumer prices -0.2 2.0 3.1 2.3
RPDI 3.8 -1.0 -3.1 -6.1
Unemployment, % 18.0 20.1 21.7 24.9
Govt. balance as % of GDP -11.2 -9.4 -8.6 -7.0
Govt. debt as % of GDP (b) 53.9 61.2 68.5 83.0
Current account as % of GDP -4.8 -4.5 -3.6 -1.9
Average
2013 2014 2015-19
GDP -1.3 1.2 2.1
Consumption -0.8 -0.9 0.5
Investment : housing -9.5 3.7 5.9
: business -4.1 7.9 9.4
Government : consumption -7.6 0.1 2.9
: investment -1.2 -0.9 2.6
Stockbuilding (a) -0.1 0.0 0.0
Total domestic demand -3.3 0.4 2.4
Export volumes 4.5 7.0 3.5
Import volumes -2.0 5.0 4.5
Average earnings 0.1 -0.3 1.9
Harmonised consumer prices 2.0 2.3 2.3
RPDI -2.8 -1.0 1.8
Unemployment, % 26.7 25.6 19.9
Govt. balance as % of GDP -5.7 -4.6 -2.3
Govt. debt as % of GDP (b) 88.8 90.7 87.4
Current account as % of GDP -1.0 -0.9 -1.4
Note: (a) Change as a percentage of GDP. (b) End-of-year
basis; Maastricht definition.
ACKNOWLEDGEMENTS
We would like to thank E. Philip Davis, Simon Kirby and Jonathan
Portes for helpful comments.
This forecast was completed on 25 October, 2012.
Exchange rate, interest rates and equity price assumptions are
based on information available to 10 October 2012. Unless otherwise
specified, the source of all data reported in tables and figures is the
NiGEM database and NIESR forecast baseline.
REFERENCES
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Blanchard, O. (2011), 'Blanchard on 2011's four hard
truths', www. voxeu.org.
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'German banks successfully complete EU-wide recapitalisation
exercise', Press release.
Diamond, D. and Dybvig, P. (1983), 'Bank runs, deposit
insurance and liquidity', Journal of Political Economy, 91 (3).
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following the EBA's 2011 Recommendation on the creation of
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HM Treasury (2009), Risk Reward and Perfomance, HMSO.
Holland, D. and Portes, J. (2012), 'Self-defeating
austerity', National Institute Economic Review, 222, October,
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International Monetary Fund, (2012a), World Economic Outlook, IMF.
--(2012b), Global Financiai Stability Report, IMF.
Liikanen Report, The (2012), High Level Export Group on Reforming
the Structure of the EU Banking Sector.
Obstfeld, M. (2012), 'Does the current account still
matter?', American Economic Review, 102(3).
Schinasi, G.J. and Todd Smith, R. (2000), 'Portfolio
diversification, leverage, and financial contagion', IMF Staff
Papers, Vol. 47.
Shin, H. (2011), 'Global banking glut and loan risk
premium', Mundell-Fleming Lecture, presented at the IMF Annual
Research Conference.
Solow, R. (2011), 'IMF talk', presented at Macro anal
Growth Policies in the Wake of the Crisis, IMF Conference.
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Monetary Economics, Cambridge, Cambridge University Press.
NOTES
(1) Blanchard (2011).
(2) This is very similar to the flow of losses from finance
companies (non-banks) to the banks in Asia to the balance sheets of
international banks. VAR models required banks to reduce their exposure
to the next largest emerging market creditor which was Brazil.
(3) For example, a credit loss on an asset in simple bank VAR model
triggers an income and substitution effect away from similar assets. See
Schinasi and Todd (2000).
(4) This has been the case for banks in emerging market countries
and advanced economies such as Continental Illinois Bank. In the
immediate aftermath of Northern Rock commentators all stressed that the
bank's assets were sound only to later discover a portfolio of very
high loan to value mortgages.
(5) Solow (2011).
(6) Why the multiplier is likely to be larger during this
exceptional period was explained by Prof. Robert Solow at an IMF
conference at the start of last year.
(7) See Stiglitz and Greenwald (2003) part II.
(8) IMF(2012b),p27.
(9) Some of these policies, such as what are know as the Bush Tax
cuts, have been in place since 2001, and so to describe them as
temporary may be misleading.
(10) As of the first quarter of 2012.
(11) World Economic Outlook, October 2012, IMF.
Table 1. Forecast summary Percentage change
Real GDP (a)
World OECD China EU-27 Euro USA Japan
Area
2009 -0.6 -3.6 9.0 -4.3 -4.3 -3.1 -5.5
2010 5.3 3.0 10.4 2.0 1.9 2.4 4.6
2011 3.9 1.8 9.3 1.6 1.5 1.8 -0.7
2012 3.1 1.3 7.6 -0.2 -0.5 2.0 2.2
2013 3.4 1.4 7.6 0.6 0.2 2.0 0.9
2014 3.9 2.1 7.5 1.5 1.2 2.4 1.4
2003-2008 4.4 2.3 11.0 2.1 1.9 2.2 1.4
2015-2019 4.1 2.4 7.1 1.9 1.6 2.8 1.4
Real GDP (a) World
trade (b)
Germany France Italy UK Canada
2009 -5.1 -3.1 -5.5 -4.0 -2.8 -10.4
2010 4.0 1.6 1.8 1.8 3.2 12.5
2011 3.1 1.7 0.5 0.9 2.4 5.7
2012 0.7 0.2 -2.3 -0.1 2.1 3.7
2013 1.1 0.2 -0.7 1.1 1.7 4.9
2014 1.5 1.1 0.7 1.7 2.0 6.0
2003-2008 1.5 1.6 0.9 2.5 2.3 7.7
2015-2019 1.2 1.6 1.7 2.3 2.3 5.5
Private consumption deflator Interest rates (c) Oil
Euro
OECD Area USA Japan Germany France Italy
2009 0.2 -0.5 0.1 -2.4 0.0 -0.7 -0.1
2010 1.7 1.7 1.9 -1.7 2.0 1.1 1.5
2011 2.3 2.5 2.4 -1.1 2.0 2.1 2.7
2012 1.8 2.2 1.6 -0.7 1.8 2.1 2.7
2013 1.7 2.1 1.8 -1.1 2.1 2.2 2.0
2014 1.9 2.1 1.9 0.3 1.9 2.1 2.0
2003-2008 2.2 2.2 2.7 -0.5 1.4 2.1 2.6
2015-2019 2.1 2.0 2.4 0.6 1.3 1.7 2.3
Private consumption deflator
Interest rates (c) Oil
($ ner
Euro barrel)
UK Canada USA Japan Area (d)
2009 1.4 0.5 0.3 0.1 1.3 61.8
2010 3.7 1.3 0.3 0.1 1.0 78.8
2011 4.7 2.0 0.3 0.1 1.2 108.5
2012 2.6 1.4 0.3 0.1 0.9 110.7
2013 1.8 1.3 0.3 0.1 0.8 105.7
2014 1.6 1.8 0.6 0.1 0.8 107.5
2003-2008 2.5 1.6 3.0 0.3 2.8 57.5
2015-2019 1.8 2.3 1.7 0.4 1.8 119.1
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. The largest banks in Europe
Bank Country Total Total Total
assets assets/ assets/
national EU GDP
(bn [euro]) GDP (%) (%)
Deutsche Bank Germany 2164 84.8 17.4
HSBC UK 1967 119.8 15.8
BNP Paribas France 1965 99.8 15.8
Credit Agricole Group France 1879 95.4 15.1
Barclays UK 1871 113.9 15.0
RBS UK 1803 109.8 14.5
Santander Spain 1251 118.2 10.1
Societe Generale France 1181 60.0 9.5
Lloyds Banking Group UK 1161 70.7 9.3
Groupe BPCE France 1138 57.8 9.1
ING Netherlands 961 161.5 7.7
Unicredit Italy 926 59.4 7.4
Rabobank Group Netherlands 731 122.9 5.9
Nordea Sweden 716 197.4 5.8
Commerzbank Germany 661 25.9 5.3
Intesa Italy 639 41.0 5.1
BBVA Spain 597 56.5 4.8
Standard Chartered UK 461 28.1 3.7
Danske Bank Denmark 460 193.7 3.7
Source: Liikanen Report, 2012
Table 3. Recapitalisation exercise results
Bank Core Tier I Ratio Core Tier I Ratio
30.09.2011 30.06.2012
Bayerische Landesbank 10.0 10.3
Commerzbank AG 8.8 12.2
DekaBank Deutsche
Girozentrale 9.6 11.7
Deutsche Bank AG 8.3 10.2
DZ Bank AG 9.2 11.6
HSH Nordbank AG 9.6 10.0
Hypo Real Estate Holding AG 27.9 21.6
Landesbank
Baden-Wurttemberg 9.1 9.9
Landesbank Berlin AG 13.8 12.7
Landesbank Hessen-Thuringen 6.3 9.8
Norddeutsche Landesbank 6.0 9.5
WGZ Bank AG 10.2 10.4
Source: BaFin, 2012.
Table 4. Total assets of domestic credit institutions vs
foreign subsidiaries in Western and Central and Eastern
Europe
Total assets % domestic % foreign
(bn [euro])
Western Europe
Austria 1166 74.9 25.1
Belgium 1147 48.5 51.5
Germany 7996 94.8 5.2
Denmark 920 87.7 12.3
Spain 3915 92.1 7.9
Finland 634 22.1 77.9
France 6674 96.7 3.3
Greece 425 80.8 19.2
Ireland 1193 32.0 68.0
Italy 2794 91.5 8.5
Netherlands 2832 88.8 11.2
Portugal 513 77.8 22.2
Sweden 1618 99.6 0.4
UK 11143 69.0 31.0
Central Eastern Europe
Bulgaria 39 23.5 76.5
Czech Republic 168 5.1 94.9
Estonia 20 5.7 94.3
Hungary 110 39.1 60.9
Lithuania 24 9.9 90.1
Latvia 26 37.7 62.3
Poland 297 36.2 63.8
Romania 84 16.7 83.3
Slovenia 53 72.6 27.4
Slovakia 55 11.0 89.0
Total EU 44818 80.1 19.9
Source: The Liikanen Report, 2012.
