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Paris, 16 September 2015
11h00
Catherine L. Mann
OECD Chief Economist
OECD INTERIM
ECONOMIC OUTLOOK
Puzzles and uncertainties
http://www.oecd.org/economy/economicoutlook.htm
Key messages
2
Recent indications of activity
• Recovery progressing slowly in advanced economies
• Slowdown for many EMEs, especially those exporting commodities
and/or trading intensively with China
Looking forward
• 2015: Global growth will remain sub-par
• 2016: Some strengthening expected; doubts about potential growth
Puzzles and uncertainties
• Sharper slowdown in China
• Intensification of centrifugal forces in Europe
• Multiple EME vulnerabilities
• Steeper path of rising US interest rates
Interim Outlook: global growth still sub-par
3
Real GDP1
Percentage change
2014
Column2 Column3
September
2015 Interim
Projections
difference from
June Economic
Outlook
(percentage
points)
September
2015 Interim
Projections2
difference from
June Economic
Outlook
(percentage
points) 2
United States 2.4 2.4 0.4 2.6 -0.2
Euro area 0.9 1.6 0.1 1.9 -0.2
Japan -0.1 0.6 -0.1 1.2 -0.2
Germany 1.6 1.6 0.0 2.0 -0.4
France 0.2 1.0 -0.1 1.4 -0.3
Italy -0.4 0.7 0.1 1.3 -0.2
United Kingdom 3.0 2.4 0.0 2.3 0.0
Canada 2.4 1.1 -0.4 2.1 -0.2
China 7.4 6.7 -0.1 6.5 -0.2
India2
7.2 7.2 -0.1 7.3 -0.1
Brazil 0.2 -2.8 -2.0 -0.7 -1.8
Rest of the world3
2.8 2.3 -0.2 3.3 -0.3
World 3.3 3.0 -0.1 3.6 -0.2
2015 2016
1. GDP at market prices adjusted for working days. In the case of Germany, this differs from the “headline” measure, which does not include the
working day adjustment. The unadjusted number for Germany would be higher by 0.2 percentage points in 2015 and no different in 2016.
2. Data refer to fiscal years starting in April.
3. Estimated based on revisions to the June 2015 Economic Outlook projections on the basis of changes to external forecasts since June.
Growth remains solid in the United States
4
Steady job growth has
brought down
unemployment
This underpins steady
consumption
growth… but
investment continues
to disappoint
Job gains and unemployment
Source: U.S. Bureau of Labor Statistics
Source: OECD National Accounts Database
Contributions to quarterly GDP growth
Growth in the euro area is improving,
but not as fast as might be expected
5
Given tailwinds, euro
area growth should be
increasing faster
Projected change in GDP growth rate in 2015 compared
to estimated impact of favourable factors
Note: Estimated impact of favourable factors calculated using the NiGEM model.
Source: OECD National Accounts Database; OECD calculations
A still-impaired credit channel is one factor
impeding a faster euro area recovery
6
Euro area credit
growth has finally
turned positive, but
remains anaemic
Deleveraging
proceeded faster and
further in the United
States than in the euro
area
Combined debt of households and non-financial corporations
Source: ECB; Datastream
Source: Eurostat; OECD Main Statistical Database; OECD National Accounts
Database
Bank credit to non-financial corporations
Year-on-year percentage change
Euro area domestic demand has failed
to rebound strongly
7
The recent
improvement in euro
area investment has
been minimal relative
to the fall since 2008
Consumption has held
up better, with a
smaller gap vis-à-vis
the United States
US and euro area fixed investment
Volume indices
Source: OECD National Accounts Database
US and euro area consumption
Volume indices
Japanese growth, though erratic,
is on an improving path
8
Tightening labour
markets should feed
through into higher
wages and
consumption… but
haven’t yet
Yen depreciation was
delivering stronger
exports, at least until
Q2 2015
Vacancy-to-applicant ratio and nominal wages
Real effective exchange rate and export volumes
Source: Japan Ministry of Health, Labour and Welfare
Source: OECD National Accounts Database; Datastream
The main puzzle concerning global
growth centres on China
9
Recorded GDP growth has
held up well, but some
indicators point to a
marked slowdown
Note: The CPI is used as a deflator.
Source: China National Bureau of Statistics
Purchasing Managers Index (PMI)
Source: Markit
Real property prices index
China’s import growth has faltered
10
Weakening Chinese
import growth helps to
explain the global trade
slowdown and the fall in
commodity prices
US dollar value of merchandise imports
Real GDP and import volumes
Note: 2015 is year-on-year change in the first half.
Source: OECD National Accounts Database
Financial turmoil in China has caused
waves elsewhere
11
Chinese share prices have
fallen sharply since June
This has been reflected in
a spike in equity market
volatility worldwide
Share prices in major markets
Source: Datastream
Chicago Board Options Exchange SPX
Volatility Index (VIX)
A sharp slowdown in China combined with
financial turmoil would hit global growth
12
A simulation of weaker
Chinese demand growth
and financial turmoil is
illustrative of risks for
the world economy
GDP growth impact of a domestic demand shock in China
Two percentage point decline in the growth rate for two years
Note: Also assumes a reduction of 10% in global equity prices and a 20 basis point
increase in the equity risk premium in all countries.
Source: OECD Economic Outlook database; OECD calculations
Growth has slowed in most major EMEs
13
The slowdown has
been sharpest in
countries with close
trade links to China
and/or dependent on
commodities
Source: Datastream
Change in GDP growth
Year-on-year growth in latest quarter minus year-on-year
growth one year previously
Note: Purple indicates both intensive trade with China and
commodity intensive exports; Red indicates just intensive trade
with China; Blue indicates just commodity intensive exports; and
Green indicates neither.
Source: OECD National Accounts Database
Commodity prices
Financial conditions in EMEs
have deteriorated
14
Further asset price falls
combined with exchange
rate swings would create
financial distress for
many EME corporates
EMEs sovereign bond spreads and equity prices
Source: Datastream
Nominal effective exchange rates
A rise in world interest rates would pose
additional challenges
15
A number of
EMEs have had
a rapid increase
in corporate
debt
Non-financial corporate debt exposures in EMEs
Per cent of GDP
Source: BIS; OECD National Accounts Database
The timing of the first US rate rise is less
important than the pace
16
Estimated impact on US GDP in 2017
Simulation of rapid vs gradual rate rises
and immediate vs delayed first increase
US Federal Funds rate, top of target band
Note: “Rapid” rise scenario roughly corresponds to the most recent ‘dot plot’ forecasts published by FOMC members,
while the “Gradual” rise scenario approximates to current market expectations for the US Federal Funds rate.
“Immediate” scenario has the first interest rate rise in September 2015, while in the “Delayed” scenario the first increase is
in January 2016.
Source: OECD Main Statistical Database; OECD National Accounts Database; Datastream; OECD calculations
The potential growth slowdown in advanced
countries is an ongoing concern
17
Decomposition of the growth rate of OECD potential output per capita
Contribution to potential per capita growth
Source: OECD National Accounts Database; OECD calculations
Near-term policy recommendations
18
In the United States, shrinking slack warrants an upward interest rate
path, but a very gradual one
The euro area needs to repair credit channels through improved
financial structures
China’s authorities should provide policy stimulus to avoid a sharp
slowdown. Beyond fiscal and monetary policy, a range of other
measures would help, including expanded social expenditures.
Emerging economies should prepare for volatile capital markets

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OECD Chief Economist Outlines Risks to Global Growth From China Slowdown and Rising Interest Rates

  • 1. Paris, 16 September 2015 11h00 Catherine L. Mann OECD Chief Economist OECD INTERIM ECONOMIC OUTLOOK Puzzles and uncertainties http://www.oecd.org/economy/economicoutlook.htm
  • 2. Key messages 2 Recent indications of activity • Recovery progressing slowly in advanced economies • Slowdown for many EMEs, especially those exporting commodities and/or trading intensively with China Looking forward • 2015: Global growth will remain sub-par • 2016: Some strengthening expected; doubts about potential growth Puzzles and uncertainties • Sharper slowdown in China • Intensification of centrifugal forces in Europe • Multiple EME vulnerabilities • Steeper path of rising US interest rates
  • 3. Interim Outlook: global growth still sub-par 3 Real GDP1 Percentage change 2014 Column2 Column3 September 2015 Interim Projections difference from June Economic Outlook (percentage points) September 2015 Interim Projections2 difference from June Economic Outlook (percentage points) 2 United States 2.4 2.4 0.4 2.6 -0.2 Euro area 0.9 1.6 0.1 1.9 -0.2 Japan -0.1 0.6 -0.1 1.2 -0.2 Germany 1.6 1.6 0.0 2.0 -0.4 France 0.2 1.0 -0.1 1.4 -0.3 Italy -0.4 0.7 0.1 1.3 -0.2 United Kingdom 3.0 2.4 0.0 2.3 0.0 Canada 2.4 1.1 -0.4 2.1 -0.2 China 7.4 6.7 -0.1 6.5 -0.2 India2 7.2 7.2 -0.1 7.3 -0.1 Brazil 0.2 -2.8 -2.0 -0.7 -1.8 Rest of the world3 2.8 2.3 -0.2 3.3 -0.3 World 3.3 3.0 -0.1 3.6 -0.2 2015 2016 1. GDP at market prices adjusted for working days. In the case of Germany, this differs from the “headline” measure, which does not include the working day adjustment. The unadjusted number for Germany would be higher by 0.2 percentage points in 2015 and no different in 2016. 2. Data refer to fiscal years starting in April. 3. Estimated based on revisions to the June 2015 Economic Outlook projections on the basis of changes to external forecasts since June.
  • 4. Growth remains solid in the United States 4 Steady job growth has brought down unemployment This underpins steady consumption growth… but investment continues to disappoint Job gains and unemployment Source: U.S. Bureau of Labor Statistics Source: OECD National Accounts Database Contributions to quarterly GDP growth
  • 5. Growth in the euro area is improving, but not as fast as might be expected 5 Given tailwinds, euro area growth should be increasing faster Projected change in GDP growth rate in 2015 compared to estimated impact of favourable factors Note: Estimated impact of favourable factors calculated using the NiGEM model. Source: OECD National Accounts Database; OECD calculations
  • 6. A still-impaired credit channel is one factor impeding a faster euro area recovery 6 Euro area credit growth has finally turned positive, but remains anaemic Deleveraging proceeded faster and further in the United States than in the euro area Combined debt of households and non-financial corporations Source: ECB; Datastream Source: Eurostat; OECD Main Statistical Database; OECD National Accounts Database Bank credit to non-financial corporations Year-on-year percentage change
  • 7. Euro area domestic demand has failed to rebound strongly 7 The recent improvement in euro area investment has been minimal relative to the fall since 2008 Consumption has held up better, with a smaller gap vis-à-vis the United States US and euro area fixed investment Volume indices Source: OECD National Accounts Database US and euro area consumption Volume indices
  • 8. Japanese growth, though erratic, is on an improving path 8 Tightening labour markets should feed through into higher wages and consumption… but haven’t yet Yen depreciation was delivering stronger exports, at least until Q2 2015 Vacancy-to-applicant ratio and nominal wages Real effective exchange rate and export volumes Source: Japan Ministry of Health, Labour and Welfare Source: OECD National Accounts Database; Datastream
  • 9. The main puzzle concerning global growth centres on China 9 Recorded GDP growth has held up well, but some indicators point to a marked slowdown Note: The CPI is used as a deflator. Source: China National Bureau of Statistics Purchasing Managers Index (PMI) Source: Markit Real property prices index
  • 10. China’s import growth has faltered 10 Weakening Chinese import growth helps to explain the global trade slowdown and the fall in commodity prices US dollar value of merchandise imports Real GDP and import volumes Note: 2015 is year-on-year change in the first half. Source: OECD National Accounts Database
  • 11. Financial turmoil in China has caused waves elsewhere 11 Chinese share prices have fallen sharply since June This has been reflected in a spike in equity market volatility worldwide Share prices in major markets Source: Datastream Chicago Board Options Exchange SPX Volatility Index (VIX)
  • 12. A sharp slowdown in China combined with financial turmoil would hit global growth 12 A simulation of weaker Chinese demand growth and financial turmoil is illustrative of risks for the world economy GDP growth impact of a domestic demand shock in China Two percentage point decline in the growth rate for two years Note: Also assumes a reduction of 10% in global equity prices and a 20 basis point increase in the equity risk premium in all countries. Source: OECD Economic Outlook database; OECD calculations
  • 13. Growth has slowed in most major EMEs 13 The slowdown has been sharpest in countries with close trade links to China and/or dependent on commodities Source: Datastream Change in GDP growth Year-on-year growth in latest quarter minus year-on-year growth one year previously Note: Purple indicates both intensive trade with China and commodity intensive exports; Red indicates just intensive trade with China; Blue indicates just commodity intensive exports; and Green indicates neither. Source: OECD National Accounts Database Commodity prices
  • 14. Financial conditions in EMEs have deteriorated 14 Further asset price falls combined with exchange rate swings would create financial distress for many EME corporates EMEs sovereign bond spreads and equity prices Source: Datastream Nominal effective exchange rates
  • 15. A rise in world interest rates would pose additional challenges 15 A number of EMEs have had a rapid increase in corporate debt Non-financial corporate debt exposures in EMEs Per cent of GDP Source: BIS; OECD National Accounts Database
  • 16. The timing of the first US rate rise is less important than the pace 16 Estimated impact on US GDP in 2017 Simulation of rapid vs gradual rate rises and immediate vs delayed first increase US Federal Funds rate, top of target band Note: “Rapid” rise scenario roughly corresponds to the most recent ‘dot plot’ forecasts published by FOMC members, while the “Gradual” rise scenario approximates to current market expectations for the US Federal Funds rate. “Immediate” scenario has the first interest rate rise in September 2015, while in the “Delayed” scenario the first increase is in January 2016. Source: OECD Main Statistical Database; OECD National Accounts Database; Datastream; OECD calculations
  • 17. The potential growth slowdown in advanced countries is an ongoing concern 17 Decomposition of the growth rate of OECD potential output per capita Contribution to potential per capita growth Source: OECD National Accounts Database; OECD calculations
  • 18. Near-term policy recommendations 18 In the United States, shrinking slack warrants an upward interest rate path, but a very gradual one The euro area needs to repair credit channels through improved financial structures China’s authorities should provide policy stimulus to avoid a sharp slowdown. Beyond fiscal and monetary policy, a range of other measures would help, including expanded social expenditures. Emerging economies should prepare for volatile capital markets