Recent developments and policy responses
17 December 2014
Catherine L. Mann
OECD Chief Economist
Council
Council 17 December 2014
November Economic Outlook main messages
Global growth: Modest, wide differences across countries
Financial risks: Rising, volatility set to increase
Potential growth: Slowed, interacting with weak demand Euro area: Weakness a major concern
Policy: Three legs employed to address risks and support growth
-8 -6 -4 -2 0 2 4 6 8
-8 -6 -4 -2 0 2 4 6 8
Average, 1995-2007
World GDP growth
Per cent, seasonally adjusted annualised rate
3
Significant developments since Outlook presentation
1. Oil price collapse
3. Downbeat economic news in Euro area, and growing risk of political instability
2. Bad economic news in Japan and snap election
4. Good News? The Juncker plan to boost investment
1. The oil price collapse
Mostly a supply phenomenon (OPEC reaction to growing non-OPEC output)
Likely to last – tight oil production may be interrupted, but can be brought back quickly
Brent crude price
Per barrel
4000 6000 8000 10000 12000 14000
40 60 80 100 120 140
In USD In Euro In Yen (RHS)
5
1. The oil price collapse: net positive
On balance positive for the world economy –
Supply shock for producers; Demand shock for consumers
0.00.2 0.40.6 0.81.0 1.21.4 1.61.8
0.00.2 0.40.6 0.81.01.81.21.41.6
Oil import bill reduction resulting from a 30 USD per barrel price decline
In per cent of 2014 GDP
OECD net importers excludes Canada, Denmark, Mexico and Norway, as well as Israel for data availability reasons. Non-OECD net-importers aggregate comprises: Bahrain, Bulgaria, China, Taiwan Province of China, Croatia, India, Indonesia, Jamaica, Lithuania, Morocco, Nicaragua, Papua New Guinea, Peru, Philippines, Romania, Singapore, South Africa, Thailand, Ukraine and Uruguay.
Source: JODI Oil World Database and International Monetary Fund World Economic Outlook Database.
1. The oil price collapse: some downsides
Oil Producers: OPEC, EMEs Economic instability: Russia Disinflation: Depress inflation expectations in the euro area (and Japan)
Inflation expectations
3‐4 year horizon from swap rates, 10‐day moving average, per cent
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
Euro area Japan
7
2. Bad news in Japan:
weaker-than-expected growth
Larger-than-expected impact of the April tax hike
• 2 quarters of negative growth
• Underlying inflation slipping back towards zero
2015 follow-up consumption tax increase to be delayed
More essential than ever to bolster confidence with 3rd arrow
implementation
Inflation and real GDP growth
Headline inflation, year‐on‐year, and quarterly GDP growth (s.a.a.r.), per cent
-8 -6 -4 -2 0 2 4 6 8
-8 -6 -4 -2 0 2 4 6 8
Real GDP growth Headline inflation
3. Downbeat news in the euro area:
inflation edging closer to zero
Core inflation
Year‐on‐year percentage change in HICP excluding energy, food, alcohol and tobacco
-5 -4 -3 -2 -1 0 1 2 3
4 Minimum Maximum
9
3. Downbeat news in the euro area:
output data weaker
Downgraded official growth projections in Germany
Weaker-than-expected industrial production in Italy and France
Manufacturing industrial production
Volume index, 2008 = 100
70 75 80 85 90 95 100 105
70 75 80 85 90 95 100 105
2011 2012 2013 2014
Germany France Italy Spain
2014 2015 2016
Bundesbank (Jun) 1.9 2.0 1.8
Bundesbank (Dec) 1.4 1.0 1.6
Memorandum item:
Economic Outlook (Nov) 1.5 1.1 1.8
Germany: GDP projections
Annual percentage change
3. Downbeat news in the euro area:
political risks
Prospective political instability in Greece
Long‐term sovereign bond yields
Per cent
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8 9
10 Germany Italy Greece
Portugal Spain France
11
4. Good News? The Juncker plan
European Fund for Strategic Investment to boost investment Something for all to agree on:
• acts on supply and demand side
• no direct fiscal cost for national governments
€21 billion in guarantees from EC and EIB for €60 billion in EIB bond issuance to seed the Fund Target of €315 billion of new investment over 3 years
Euro area GDP and fixed investment
Volume indices, 2009 = 100
90 95 100 105 110 115 120
90 95 100 105 110 115 120
2008 2009 2010 2011 2012 2013 2014 GDP Fixed investment
4. The Juncker plan: doubts
Even €315 billion over 3 years would be modest in relation to EU GDP (0.5%), but could have catalytic confidence effect Some of the projects would have happened anyway… or maybe not if climate worsens.
Project selection is likely to be slow… although EIB has been working on staging project list for 6 months
Private investment on the hoped-for scale is unlikely… but accelerator effect could surprise on upside.
13
The positive supply shock and consumer demand benefit from the lower oil price roughly offsets other bad news The risk of remaining in (euro area) or falling back into (Japan) stagnation has not diminished
Juncker plan could provide a positive jolt, a (rare) agreement-point for policymakers.
Double-down on monetary policy; deploy fiscal beyond Juncker; engage structural policies.