Paul van den noord 2010 11 08 growth drivers com


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  • Paul van den noord 2010 11 08 growth drivers com

    1. 1. How to hit three birds with one stone: growth, fiscal sustainability and global rebalancing Paul van den Noord OECD
    2. 2. Objectives <ul><li>Many OECD countries start from a situation of severe macroeconomic imbalance: </li></ul><ul><li>Large output gaps </li></ul><ul><li>Severe fiscal imbalances: already increased debt + budget balances well below levels consistent with stabilising debt </li></ul><ul><li>World current account balances rising again </li></ul><ul><li>How should policies respond? </li></ul>
    3. 3. Tools <ul><li>Economic Outlook 87 projections to 2011 + stylised “ Baseline scenario ” to 2025 generated with “mechanical” MTB model ( OECD WP 482 ) </li></ul><ul><li>Simulations of alternative scenarios with the OECD Global model ( OECD WP No 768 ) considering different combination of policies </li></ul><ul><ul><li>Faster fiscal consolidation </li></ul></ul><ul><ul><li>Faster consolidation + structural reform </li></ul></ul>
    4. 4. OECD potential output reduced after crisis
    5. 5. Key fiscal & x-rate assumptions <ul><li>Fiscal consolidation +½% GDP pa in the underlying primary balance for as long as it takes to stabilise debt. </li></ul><ul><li>When gross government debt > 75% of GDP then long-term interest rates increase by 4 bp per % point increase in the government debt-to-GDP ratio (Japan an exception) </li></ul><ul><li>Exchange rates unchanged in real terms for OECD countries, for other countries based on Balassa-Samuelson effect </li></ul>
    6. 6. Large increase in government debt <ul><ul><li>Consolidation over entire period for US, Japan, UK, Ireland, but still .. </li></ul></ul><ul><ul><li>OECD government gross debt stabilises at level +44% pt relative to pre-crisis. 10 countries gross debt > 100% of GDP (only 3 before the crisis) </li></ul></ul><ul><ul><li>Upward pressure on long-term interest rates due to higher debt. </li></ul></ul>
    7. 7. Global current account imbalances still large
    8. 8. Faster consolidation scenario <ul><li>Sufficient fiscal consolidation across OECD countries to reduce government debt to the pre-crisis levels by 2025 (except Japan where only ½ of the increase in debt is reversed) </li></ul><ul><li>Fall in long-term interest rates due to lower government indebtedness occurs immediately as fiscal consolidation plans are assumed to be credible for financial markets </li></ul><ul><li>Consolidation hurts in short-term , multipliers of order ½ to 1 (bigger if no support from monetary policy), but longer term benefits through lower interest rates and cost of capital. </li></ul>
    9. 9. Main results <ul><li>Consolidation reduces short-term growth (multipliers ½ to 1, bigger if mopo constrained). But faster pace of consolidation than baseline possible after 2011/12 still consistent with closing of GAP. </li></ul><ul><li>Growth and output higher in the medium term </li></ul><ul><li>Important cross country differences coming from size of fiscal consolidation + level of interest rates (Japan) </li></ul><ul><li>Limited exchange rate adjustment helps reduce the deficit in the US and surplus in non OECD Asia but this is compensated by wider imbalances elsewhere </li></ul><ul><li>=> Fiscal consolidation is necessary but not sufficient to get balanced long-term growth </li></ul>
    10. 10. Fiscal consolidation scenario
    11. 11. Additional structural reform <ul><ul><li>Non-OECD Asia : Lower net saving (3% of GDP)+ rebalancing of demand </li></ul></ul><ul><ul><ul><li>Higher social spending in Asia </li></ul></ul></ul><ul><ul><ul><li>Deepening of financial markets & improving business environment </li></ul></ul></ul><ul><ul><ul><li>Looser fiscal stance in non Asia OECD where possible </li></ul></ul></ul><ul><ul><ul><li>Additional RMB appreciation (20%) </li></ul></ul></ul><ul><ul><li>US : Higher private saving (1% of GDP)+rebalancing of demand </li></ul></ul><ul><ul><ul><li>Improved financial regulation </li></ul></ul></ul><ul><ul><ul><li>Tax reform </li></ul></ul></ul><ul><ul><ul><li>Additional $ depreciation (10%) </li></ul></ul></ul><ul><ul><li>Euro area : higher potential growth (mainly thru NAIRU) </li></ul></ul><ul><ul><ul><li>Lower product and labour market regulation </li></ul></ul></ul><ul><ul><li>Japan : lower net private saving (2% of GDP) </li></ul></ul><ul><ul><ul><li>Lower product market regulation </li></ul></ul></ul><ul><ul><ul><li>Corporate sector reform </li></ul></ul></ul><ul><ul><ul><li>Deepening of financial markets </li></ul></ul></ul>
    12. 12. Main results <ul><ul><li>Japan : exit deflation more durably, higher nominal output growth and a further reduction in debt ratio </li></ul></ul><ul><ul><li>China : Short-term inflation pressures better contained. Lower surplus </li></ul></ul><ul><ul><li>Euro area : stronger growth </li></ul></ul><ul><ul><li>United States : lower current account deficit </li></ul></ul><ul><ul><li>Global imbalances lower and put on a declining path. </li></ul></ul><ul><ul><li>Higher medium-term level of output (by 2-3% in 2025) and growth rate in the OECD </li></ul></ul>
    13. 13. A more balanced scenario
    14. 14. A more balanced scenario
    15. 15. A more balanced scenario
    16. 16. A more balanced scenario
    17. 17. Conclusions <ul><li>Fiscal consolidation , necessary but not sufficient. It could delay recovery, but shouldn’t derail it. </li></ul><ul><li>Structural reform & exchange rate adjustment also necessary for balanced medium-term growth. </li></ul><ul><li>More on timing, instruments of fiscal consolidation in the 18 November OECD Economic Outlook . </li></ul>