1. Recent trends in the global economy
and near term outlook
1
Juris Kravalis
Head of International Relations and
Communication Department
09.12.2014

2. GGlloobbaall EEccoonnoommyy

3. Where is the growth?
Source: IMF’s World Economic Outlook, October 2014

4. Global activity and trade in the first half of 2014 were weaker
than expected
Source: IMF’s World Economic Outlook, October 2014

5. Growth in emerging market economies is slowing down
Source: IMF’s World Economic Outlook, October 2014

6. The U.S. economy is back on track
Source: IMF’s World Economic Outlook, October 2014

7. The shale energy boom has played an important role in the U.S.
recovery

8. Recovery in the euro area is still fragile
GDP growth (annualized quarterly percentage change)
Source: IMF’s World Economic Outlook, October 2014

9. Sovereign bond spreads in the euro area have come down, but
differences in lending conditions to SMEs are still substantial
Source: IMF’s World Economic Outlook, October 2014

10. Asset quality review by the ECB a significant step
towards getting lending in the euro zone going again
• The ECB is taking over supervision of the largest euro area banks from the
national regulators on 4 November 2014
• The asset quality review and stress tests carried out earlier this year
identified capital shortfalls totalling EUR 25 billion at 25 euro area banks
• Banks with shortfalls to submit capital plans by 10 November 2014
• Banks with capital shortfalls will have 6 – 9 months to remedy the
situation
• Improved bank capitalization should contribute to recovery of the lending
market in euro area

11. European CIS countries are close to stagnation
Source: IMF’s World Economic Outlook, October 2014

12. Growth in Asia is holding up
Source: IMF’s World Economic Outlook, October 2014

13. Overview of the World Economic Outlook projections by the IMF

14. Overview of Euro area projections by the European Commission

15. Inflation in the euro area below that in the U.S. and the
medium term target of close to but below 2%
Source: IMF’s World Economic Outlook, October 2014

16. Central Bank balance sheet paths to diverge going forward
• The U.S. Fed announced the end
of Quantitative Easing on 29
October 2014
• The ECB announced additional
monetary ppoolliiccyy eeaassiinngg iinn JJuunnee
and September of 2014 and
started purchases of asset backed
securities (ABS) in October 2014
• Bank of Japan is continuing
agressive monetary easing

17. U.S. Fed expected to start raising rates in 2015
Source: IMF’s World Economic Outlook, October 2014

18. Key near term risks going forward
• Geopolitical risks
• Risks from a financial market correction
• Volatility resulting from monetary policy normalization in the
UUnniitteedd SSttaatteess
• Protracted period of low inflation in the euro area
• Risk of stagnation and lower potential growth in a number of
advanced economies
• Considerably slower growth in China

19. Policy recommendations
• Both continued support to demand and supply side policies needed
• Increased public investment in most current account surplus countries
(other than China)
• (Continued) structural reforms in the (former) current aaccccoouunntt ddeeffiicciitt
countries
• Macroprudential tools (such as loan-to-value, debt-service-to-income
ratios) to limit credit booms in a number of smaller advanced economies

20. Policy recommendations: Euro area
• Reestablish confidence in banks and improve financial intermediation in
the euro area
• Cost-effective active labor market policies, measures to lower the
opportunity cost of employment, and better-targeted training programs
• Complete the single market in services, including a single digital market
• Make progress with free trade agreements
• More closely integrate energy platforms and policies

21. FFiissccaall OOuuttllooookk

22. The fiscal outlook
• Immediate fiscal pressures have lowered (due to low interest
rates)
• However, underlying fiscal vulnerabilities persist (as shown
by high debt levels)
• Moreover, growth is weaker than expected and inflation
remains low

23. Advanced economies: Proceeding with consolidation
while supporting employment and growth

24. Emerging market economies: Consolidation postponed;
It is time to rebuild fiscal buffers

25. Job creation is at the top of political agenda
• Global unemployment exceeds 200
million people
• In AEs: raising concerns about
permanent skills and human capital
erosion associated wwiitthh lloonngg--tteerrmm
unemployment and inactivity
• In EMEs: informality remains high and
job creation insufficient to absorb the
large number of young people entering
the labor market

26. Do lower taxes mean higher employment?

27. Impact of social security contribution (SSC) cuts

28. Targeted SSC cuts: Successful examples

29. Targeted SSC cuts: Not so successful examples

30. FFiinnaanncciiaall SSttaabbiilliittyy

31. Global financial stability assessment
• An increase in risk
appetite has driven the
search for yield and
pushed up market and
lliiqquuiiddiittyy rriisskkss
• Credit risks have
declined, reflecting
favorable funding
conditions and
improved asset quality

32. Accommodative monetary policies have led to
• Increased economic risk taking
– Improving the outlook for capital expenditure
(especially in Japan, the US, and the UK)
• And possibly too much financial risk taking, aass rreefflleecctteedd iinn
– Compressed credit spreads
– Low volatility
– Elevated and highly correlated asset prices

33. Banks have become stronger

34. But they also need to adjust business models
• Return-on-equity has fallen to a
historically low level.
• Investors demand high returns from
banks, with the cost of equity having
risen since bbeeffoorree tthhee ccrriissiiss
• As a result, banks accounting for 80%
of total assets of the largest
institutions currently have a so-called
“return-on-equity gap”

35. Transition needs are large

36. What should banks do?
• Reprice current business lines
• Re-allocate capital away from low-risk assets
• Retrench from some activities
• RReessttrruuccttuurree wweeaakk bbaannkkss
• Resolve unviable banks
• Move away from cross-subsidization

37. Shadow banking has increased
• Financial intermediaries or
activities involved in credit
intermediation outside
tthhee rreegguullaarr bbaannkkiinngg
system, and thus lacking a
formal safety net

38. It constitutes about one-fourth of total financial
intermediation worldwide

39. Benefits and risks of shadow banking
• Can complement traditional banking by expanding access to credit or by
supporting market liquidity, maturity transformation, and risk sharing
• The global financial crisis revealed that, absent adequate regulation,
shadow banking can put the stability of the financial ssyysstteemm aatt rriisskk
• However, assessing risks associated with recent developments in shadow
banking remains difficult, largely because of a lack of detailed data

40. Role of financial policy
• Support Economic Risk Taking
– Improve flow of credit to the economy
• Facilitate banks’ transition to new business models
• Encourage (safe) non-bank credit
• Address Excessive FFiinnaanncciiaall RRiisskk TTaakkiinngg
– Macroprudential policies as a first line of defense
– Address rising market liquidity risks in shadow banking
• Prevent market runs
• Prepare contingency measures

41. THANK YOU!
41
Questions and Answers
Survey

42. Latvijas Banka
Latvijas Banka:
• līdzdarbojas monetārās politikas
noteikšanā un īstenošanā;
• pārvalda rezerves aktīvus, t.sk. zelta
rezerves;
• veicina maksājumu sistēmu raitu darbību;
To dara:
• ekonomisti un ekonometristi;
• grāmatveži;
• finanšu tirgus analītiķi;
• statistiķi;
• maksājumu sistēmu eksperti;
42
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valstī;
• vāc, apkopo un publicē finanšu statistiku;
• pārstāv Latvijas intereses starptautiskās
finanšu institūcijās.
• finanšu ieguldījumu portfeļa vadītāji;
• kases operāciju metodikas eksperti;
• maksājumu un finanšu tirgus analītiķi.

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pētnieciskās domas attīstību.
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