Esmond Birnie presentation at NICVA


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Esmond Birnie presentation at NICVA

  1. 1. caused thefinancial crisis? Wheredo we go from here? NICVA CEE Masterclass 21 October 2011 Dr Esmond Birnie, Chief Economist, PwC
  2. 2. Global growthTrends and prospectsWorld GDP growth(Although doubts over 2011 – 2013+ divergence “East” and “West”) 7 Long-run average = 3.5% 6 GDP Growth (% Y-on-Y) 5 4 3 2 1 0 -1 -2 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012Source: IMF, (exchange rate weighted).PwC CEE Masterclass 21 October 20112
  3. 3. Greedy, wicked bankers?• 9 February 2009 Vince Cable MP said the guillotine should berestored for bankers• Rage against bankers may make us feel better in the short term, but long term solution require a reasoned consideration of the fullcauses of the downturn• Responsibility may be more widespreadCEE Masterclass 21 October 2011PwC 3
  4. 4. Banking crisis- too much debt across the board• By 2008 UK banks debts had risen to twice level of GDP (increases insome other economies but UK, and RoI (421%) and especially Iceland(580%), unusually high)• Importantly, other debt/GDP also rose during the 2000s (in theUK from 150% in 1987 to about 300% in 2009)• A moderately rapid increase until 2003 and then acceleration 2003-8• But, in terms of banks, PwC analysis (2010) suggests spike in grossdebts/income in UK 2008-09CEE Masterclass 21 October 2011PwC 4
  5. 5. Banking crisis- complexity of derivatives• Various financial instruments (CDOs) obscured , because made lessdirect, the connection between creditors and lenders• Note, also, how far system internationalised-US sub-prime becomes our problemEnglish/Scottish banks linked to RoIFrench/German banks tied to Greece etc.CEE Masterclass 21 October 2011PwC 5
  6. 6. Banking crisis of 2007-8 begins- sub-primeproblems• A long boom in US (and UK, RoI) house prices came to an end (1997-2006 US house prices up 124%, UK 97%)• Interest rate rises provoking sub-prime mortgage defaults in US• Transmission from sub-prime problems through to US banks, towider (and international) capital markets• February 2008 Northern Rock nationalised• Bear Stearns rescued by Fed Reserve loan• BUT when the next crippled bank came along, no appetite for bail outCEE Masterclass 21 October 2011PwC 6
  7. 7. The banking crisis of 2007-8, continued…• Lehmans failed 15 September 2008• 18 September 2008 money draining out (half Trillion$ in hours)• Bail outs- AIG, 10 largest US banks, Chrysler, GM, RBS and HBOS• Plus in US guarantees to Fannie Mae + Freddie MacRBS- thro. Acquisition of ABN Amro had acquired a lot of US“trailerparks”.A.m. of 7 October 2008 shares plunged 30%“This was once the conservative Scottish bank where I had opened myfirst account as a teenager. It was now on its knees. And what, itschairman asked were we going to do about it”, Alistair DarlingCEE Masterclass 21 October 2011PwC 7
  8. 8. Role of regulators- too little (or too much, or tooineffective)?“We have been in a casino where the government was handing out freechips and the regulators were buying drinks and telling us whichnumbers to bet on”, Eamon Butler.• Some critics say “not enough” regulation• The regulation we had “missed” a lot– failing banks got throughvarious stress tests/not allowing for sovereign default• Unintended consequences- work to the limit, making banks moresimilar hence intensifying risk• For sure, the regulators did not see 2007-8 comingCEE Masterclass 21 October 2011PwC 8
  9. 9. Central banks- Greenspan’s (Chairman US FederalReserve) folly?• Were US interest rates kept too low for too long in the 2000s?OR, a reasonable response to a “glut” in global savings?• The role of a central banker like the person at a party who has to takeaway the punch bowl before anyone too drunk?!• Also criticism of Bank of England’s role• For sure plenty of “hubris” about– assertions by Gordon Brown andothers that the business cycle had more or less gone for goodCEE Masterclass 21 October 2011PwC 9
  10. 10. Governments’ response- support the banks at allcosts• Avoid repeat of 1930-32 (in the US thousands of high street banksfail, spending power collapses, output and jobs slump by 20%)• Too big to fail?CEE Materclass 21 October 2011PwC 10
  11. 11. The triumph, or the limits of KeynesianismRichard Lucas 2009 “I guess everyone is a Keynesian in the fox hole.”• Government deficits and borrowing rose to wartime levels (without aworld war)• Does the experience of the US and UK represent “antibioticresistance” given previous doses of the Keynesian “medicine”?CEE Masterclass 21 October 2011PwC 11
  12. 12. The nightmare continues• The global financial crisis of 2007+ did not really end in 2009-10• In fact, mutated• The issue has become not just the solvency of banks but the solvencyof states and governments tooCEE Masterclass 21 October 2011PwC 12
  13. 13. Euro crisis- a flawed project?• Two bail outs of Greece (even now its debt/GDP ratio almostcertainly unsustainable)• The bail outs of RoI and Portugal• Spain and Italy may be waiting in the wings (“too big” for current EUrescue funds)• When the euro started in the early 2000s many economistsquestioned its wisdom as constituted– was continental Europe really a“natural currency area”?• Design flaws:- When “PIIGS” competitiveness moved out of line with Germany- noready adjustment- monetary union without fiscal unionCEE Masterclass 21 October 2011PwC Slide 13
  14. 14. Fixing the euro?- unpalatable alternatives• PIGS try to work (i.e. grow) their way out of debt--- is thisfeasible/austerity very painful and maybe counterproductive?• Some/all of the weaker economies leave (be pushed out) of the euro -they could then achieve a devaluation (at huge cost ,default… Argentinain Europe, although is the Latin American precedent actuallyfavourable [NEXT SLIDE]?)• A debt write off---- may well be “necessary” but burden on Germany• Share the defence of “sovereign debt” e.g. through eurobonds----might restore some market confidence but, again, a heavy demand onGermanyCEE Masterclass 21 October 2011PwC Slide 14
  15. 15. Don’t cry for me Argentina: after default, abounce? Argentina and Greece 4 3 GDP, growth rate compared to 2 previous quarter, seasonally 1 adjusted. 0 Period beginning: 2 3 4 5 6 7 8 9 10 11 12 13 Q3 1993, Argentina -1 Q2 2003, Greece -2 -3 -4 -5 -6 Years since Argentinian currency board and Greece joining the euro Source: World Bank, National accounts:PwC
  16. 16. Economic outlook still brightest in BRICs, stormiest in Europe (forecast GDP growth for 2011) Russia 2.7 UKCanada Germany 4.2 1.2 Ireland 3.0 1.0 GreeceUS France -3.8 1.6 1.8 Japan Spain Italy Mexico -0.5 0.6 0.9 China 4.3 9.5 India* 8.0 Brazil Australia South Africa 4.4 3.2 2.8 * CEE Masterclass 21 October 2011 Source: PwC main scenario for GDP growth in 2011 PwC 16
  17. 17. Global economic outlook- what next?• Double dip- not inevitable, but possible. Vulnerable becauseweaknesses in each of the US, Japan + eurozone• Confidence (or lack of) is the key– like the 1930s but this need notimply that the same solution would work this time• “Balance sheet and de-leveraging issues”, Ben Bernanke• Hence, real danger of lost decades scenario- like Japan in 1990s• Over the long run 2010-2030 rapid growth in emerging economiesshould continue (subject to Russia is problematic, India and China mayhave their own credit bubble + supply side difficulties)CEE Masterclass 21 October 2011PwC 17
  18. 18. Where this “rebalancing” could take us- TheWorld Economy by 2050 Total E7 GDP (PPP) as % of total G7Compare the total size 2007 c. 60of the seven biggestemerging economies 2010 c. 75to the seven largest 2020 100“Western” economies(the G7)* 2050 200 GDP per capita in Shanghai in 2010 already similar to that in some northern English countiesSource: PwC forecasts.* BRICs+Indonesia+Turkey+Mexico,compared to US+Japan+Germany+UK+France+Italy+Canada.PwC
  19. 19. A sign of changeFalling behind China GDP per capita in Shanghai in 2010 already similar to that in most of NI (allowing for cost of living– purchasing power parity)PwC 19
  20. 20. If we can think about growthUK Growth Review (Cable+Osborne) Preliminary to the NI ExecutiveNovember 2010+... Economic Strategy – identified strategic aims for Executive...• Planning • Innovation• De-regulation • Employability• Competition • Competitiveness• Skills • Business growth• Infrastructure • Infrastructure• SMEs THIS FRAMEWORK GOOD BUT• Rural economy THREATS:• Open data - Too much focus on short term (employment vs productivity)? - When will we get the Economic Strategy, PfG, decisions on Corp. Tax and SFA?PwC CEE Masterclass 21 October 2011
  21. 21. Corporation Tax reduction?Headline observations• Need to re-balance NI economy• Long term (25 yr) project• To extent CT reductions lead to greater competitiveness and hence more investment, jobs and growth– hence welcome UK wide reductions• But what about lower NI specific rate?• Experience of ROI suggests slow burn and/or one of a number of factors• The powers to vary tax more widely (in addition to Corporation Tax) are of particular interest• The cost of cutting Corporation Tax must be borne by the ExecutiveIN SHORT, CT REDUCTION WOULD WORK BEST AS PART OF A PACKAGE OF FISCAL INCENTIVES (e.g. TAX CREDITS, APD, AVOID THE ENGLISH SYSTEM OF ELECTRICITY PRICING, ALCOHOL EXCISE)PwC CEE Masterclass 21 October 201121
  22. 22. Going for growth(continued)Goals identified for UK economy by McKinsey (2010), these apply also to NI• Improve productivity (not just in manufacturing but services too)• Become an excellent location for FDI• Get transport and energy infrastructure right• Maximise opportunities to earn export revenues from health and educational sectors• Innovate through clustering• Devolution below the regional government level (i.e. to dynamic cities and local government)• Minimise the economic negatives of an ageing population and take the economic opportunitiesPwC
  23. 23. Banking reform proposals in the UK- the Vickers’Commission plan• Not total separation of high street from investment banks, butfirewalls and extra safety cushions• Goes against grain of international banking development over severaldecades (but reminiscent of US Glass-Steagall Act of 1930s)• “The proposals will damage London’s competitive position”, MartinJacomb FT• OR “…old fashioned principles- better capitalised, less leveragedand focused on the needs of customers..”, Sarah Brooks ConsumerFocus Head of Financial Services• Higher capital requirements• Cost to banks £5-10 bn p.a., social cost of £1-3 bn but p.a. cost of abail out/downswing c £ 40bnCEE Masterclass 21 October 2011PwC 23
  24. 24. This time really is different or back to the HungryThirties? “Now”, 2007+ “Then”, Great Depression 1929-30s Decline in output UK GDP down UK GDP down 7.1% RoI GDP 5.7% down c. 15% most “RoI” GDP flat of Western c.5-6% US, Germany decline c.20% decline Decline in US down 5.3% US down 20.5% employment Absolute living UK,US real GDP standards per head about 4- 5 times higher World trade By 2011 back to By 1932 30% 2007 peak down in volumeCEE Masterclass 21 October 2011PwC 24
  25. 25. This time is different or back to the HungryThirties? “Now” 2007+ “Then”, Great Depression 1929-30s Inflation > B of England’s 2% UK deflation target but still Other countries, e.g. US, “moderate” Germany severe deflation Bank failures c. 100 worldwide 1000s (espec. US including high street) Exchange rates Extent of $, £, euro, Yen Great volatility/beggar volatility limited my neighbour Most of EU locked in UK advantage of early euro exit from gold standard Undervalued Yuan Global econ leader US being passed by 30 year hiatus UK to US ChinaCEE Masterclass 21 October 2011PwC 25
  26. 26. Some lessons from 2007-11 global crisis• General failure of markets or of a particular market (finance)?• Governments also failed (e.g. regulation, lax monetary policy)?• The failure to see the crisis coming was pretty widespread (naïvebelief business cycle had been banished)• We now criticise financial innovation but, sometimes, it contributesto growth• Globalisation may have reduced the frequency of “minor”downswings but also ensured when we get a crisis it is a big one!CEE Masterclass 21 October 2011PwC 26
  27. 27. Be “G-local”: the impact of the world crisis onyour sector• Less (private) cash about• Less public funding (and less EU too)• NI has hitherto had a very large community and voluntary sectorwith many individual organisations• Moving into a world of retrenchment, consolidation with a premiumon capacity building and managementCEE Masterclass 27 October 2011PwC 27
  28. 28. Thank you, any questions?Esmond BirniePwC | Chief EconomistDirect: +44 (0)2890415808 |Mobile: +44 (0)7850907892Email: publication has been prepared for general guidance on matters of interest only, and doesnot constitute professional advice. You should not act upon the information contained in thispublication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, itsmembers, employees and agents do not accept or assume any liability, responsibility or duty ofcare for any consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.© 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is amember firm of PricewaterhouseCoopers International Limited, each member firm of which is aseparate legal entity.