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The Global Economy No. 6 - September 22, 2011
1. The Global Economy
Monthly letter from Swedbank’s Economic Research Department
by Cecilia Hermansson No. 6 • 22 September 2011
A weaker economic outlook makes it even more important
to use the right tools from a shrinking toolbox
Renewed economic pessimism and increased debt worries are jeopardising
financial and political stability, especially in Europe and the US. Although the risk
of a new recession has increased, it still is not part of our main scenario.
Trying to create inflation or raising tariffs are not the right measures to address the
crisis, although such ideas are being suggested and in some cases implemented.
What are needed instead are more, and more extensive, structural reforms, and
for countries that are able, additional stimulus.
Gloominess dominates When it comes to the debt crisis drama, the
financial market flares up every time the troika of
The downturn in global stock markets during the
the ECB, EU Commission and IMF starts looking at
summer months primarily relates to two
the Greek support program to see if reforms are
phenomena: renewed economic pessimism and
being implemented. Since the Greek economy is
growing debt concerns.
developing weaker than expected and the
Despite exaggerated claims and possibly some government has been slow to execute reforms,
overly negative analyses, the hard economic data lenders are hesitating whether to approve the next
indicate that a slowdown has already begun after payment, this time of 8 billion euro.
the positive rebound in growth following the
Make note that sentiment about Ireland is much
financial crisis. These data include purchasing
more positive and its programme is progressing as
managers indexes, which have dropped down to a
planned, which is evident in the differential between
reading of 50 in a number of countries, along with
German and Irish government bonds, which has
declining exports, weaker labour and housing
declined recently, in contrast with the corresponding
markets, and consumption data from the US and
German-Greek bonds.
Europe. Moreover, GDP growth had already slowed
during the second quarter in the US and Germany. Interest rate differential against the German 10-year
government bond, percentage points
Export trends, index 100 = 2000m01
22,5
340
320 20,0
Global
300
USA 17,5
280
260 Japan 15,0
Percentage points
240 Euro Zone
220 12,5
Emerging Markets
200
Asia 10,0
180 Greece
160 7,5
140
120 5,0 Ireland
Spain
100 Portugal
80 2,5 Italy
0,0
UK France Belgium Sweden
-2,5
07 08 09 10 11
Source: Reuters EcoWin
Ekonomiska sekretariatet, Swedbank AB (publ), 105 34 Stockholm, tfn 08-5859 1000
E-mail: ek.sekr@swedbank.se www.swedbank.se Ansvarig utgivare: Cecilia Hermansson, 08-5859 7720.
Magnus Alvesson, 08-5859 3341, Jörgen Kennemar, 08-5859 7730
2. The Global Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 6 • 22 September 2011
Comments by euro politicians that Greece may consumption had held up better than confidence
have to drop out of the currency union are doing surveys suggest. This is especially true of retail
little to help the parties involved. Statements by the sales, which have surprised on the upside. In other
Greek government that euro politicians are using words, there is a gap between what households say
Greece as an experiment certainly don’t help, they will do and what they actually do, although
either, but can be seen as part of the negotiations there is still a possibility that confidence, which is a
now under way between lenders and borrowers. leading indicator, is signalling significantly weaker
consumption going forward.
If forecasters go by what has happened and try to
average out the negative and positive events, their Considering the gloominess hanging over the US
future projections naturally will also be negative. economy, our GDP forecasts this year and next are
probably too high at around 2%. Even if the US
The problem is that this isn’t especially constructive,
since these events, if anything, are binary in the avoids a new recession, it will be hard to create the
sense that they can either happen (e.g., the euro growth needed to reach 2%, especially when the
labour market, 45 months after employment
collapses) or not.
peaked, still has a long way back and open
It makes more sense to build scenarios on unemployment exceeds 9%.
assumptions how the debt crises in the US, Japan
and especially Europe will be handled going
forward. If it is assumed that they can in fact be Toolbox: Neither higher inflation nor
handled – even at the last minute – the global protectionism will resolve the crisis
economy should be able to avoid a new recession. When the financial crisis and global recession
If the crisis cannot be managed, if political and occurred in 2008, the world's politicians and central
financial instability grows at the same time that bank governors worked together to try to fight the
future confidence declines even further among negative effects. Rate cuts, quantitative easing,
investors, companies and households, there is a banking support and fiscal stimulus were among the
risk of another recession, and this time it will be tools they used.
harder to fight off, and therefore more protracted, At this point interest rates are already as low as
since the toolbox at our disposal no longer has as they can be in the US, the UK and Japan, and
many effective tools. relatively low in the euro zone. The time for fiscal
stimulus has passed for the euro countries in crisis,
US consumer confidence (index) and
private consumption (annual % change) but could still work in the US and Germany, if the
140 7
political will can be mustered.
130 6 When the toolbox shrinks, people get nervous,
considering that the challenges haven’t gotten any
120 5
smaller. For growth countries, and even some
110 4 developed countries such as Switzerland, there is a
100 3 risk that their currencies could rise enough to hurt
them competitively. For Switzerland, this led to the
Percent
90 2
Index
dramatic decision to set a limit on the franc versus
80 1 the euro, which is now being defended with the help
70 0 of stronger confidence and the printing presses.
60 -1 For Brazil, it is more a question of capital controls,
but recently of higher customs duties on auto
50 -2
imports as well. There is a risk that other countries
40 -3 will be a little less hesitant to resort to protectionist
30 -4 measures such as higher tariffs when others have
80 85 90 95 00 05 10 already done so, which makes it unfortunate that
Source: Reuters EcoWin Brazil has chosen this route.
Among developed and highly indebted countries,
At the same time it is hard to make projections right
there have been suggestions that higher inflation
now based on confidence indicators. For example,
could stimulate demand and reduce the debt
US households and businesses were extremely
burden in real terms. Professor Kenneth Rogoff
worried this past summer when negotiations on the
recently said that it was time to “think outside the
US debt ceiling spooked the markets and S&P
box”, i.e., that we should no longer be afraid of
downgraded the US’s credit rating. Still, household
slightly higher inflation of 4-6% a year.
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3. The Global Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 6 • 22 September 2011
The problem is that you can’t always decide what Structural budget deficit as a share
of GDP 2009 and 2012
inflation is going to be. For one thing, it could be
4
considerably higher, since the previous anchors
have already been dropped. For another, it can be 2
harder to pinpoint inflation when the job market is 0
weak and so many people are out of work. It’s wage ‐2
inflation, if anything, that could have a positive ‐4
effect, rather than inflation from higher commodity ‐6
prices. 2009
‐8
Furthermore, it is likely that higher inflation would ‐10
2012
be followed by higher nominal interest rates, which
‐12
reduces the positive impact of such a measure. Nor
‐14
would the effect on the debt burden be so positive.
The IMF has calculated that if inflation is 5% ‐16
annually for five years, the total debt burden would
shrink by 8-9%. So inflation would probably have to
be in the double digits to have much of an impact
on debt. Some of the structural reforms require spending,
Questions of income inequality also have to be while others are possible anyway. More efficient
considered. Wouldn't it be better to raise taxes on government is largely a question of changing
those with relatively high incomes than to raise attitudes. Southern Europe has no other alternative
inflation, which usually hits those with low incomes than to try to improve growth by implementing
the hardest. reforms that make it more competitive, e.g. in
education, labour markets, pensions, infrastructure
including IT, and public/tax administration.
Toolbox (cont.): Structural reforms are vital The time when countries could devaluate their own
It makes more sense to focus on structural reforms currencies has passed, as has the time when the
and more expansive fiscal policy if possible. interest differentials relative to Germany were
Monetary policy is less effective at this juncture, minimal and pricing was inaccurate. If the currency
since many households and businesses are less union is to survive, member-countries have to adopt
interested in borrowing when they are busy trying to more effective economic policies, fiscal coordination
clean up their balance sheets. has to improve, a single bank regulator has to be
created, and the ECB, as a central bank, has to
Structural reforms are the most important measure
eliminate uncertainty about its role as lender of last
for the PIIGS countries, which have lost competitive
resort. Then the currency union would work better,
ground in recent years due to their high cost levels
even in a crisis. This will take time, but the sooner
and often wasteful administration of public
the road is staked out, the better.
resources. Politicians in Greece, Italy, Spain and
Portugal have to convince citizens that it is worth Cecilia Hermansson
their while to pay taxes, that the money will be used
effectively and that certain (often wealthy) groups
won’t receive unfair tax breaks and exemptions.
Swedbanks Ekonomiska sekretariat
105 34 Stockholm Swedbanks Månadsbrev om den Globala Ekonomin ges ut som en service till våra kunder.
tfn 08-5859 7740 Vi tror oss ha använt tillforlitliga källor and bearbetningsrutiner vid utarbetandet av
ek.sekr@swedbank.se analyser, som redovisas in publikationen. Vi kan dock inte garantera analysernas riktighet
www.swedbank.se or fullständighet and kan inte ansvara for eventuell felaktighet or brist in grundmaterialet or
bearbetningen därav. Läsarna uppmanas att basera eventuella (investerings-)beslut även
Ansvarig utgivare på annat underlag. Varken Swedbank or dess anställda or andra medarbetare skall kunna
Cecilia Hermansson, 08-5859 7720. göras ansvariga for forlust or skada, direkt or indirekt, på grund av eventuella fel or brister
Magnus Alvesson, 08-5859 3341 som redovisas in Swedbanks Månadsbrev.
Jörgen Kennemar, 08-5859 7730
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