Economic Outlook Peter Bakvis Director, ITUC/Global Unions - Washington Office with Carolin Vollmann, Research Officer ITUC GENERAL COUNCIL, OCTOBER 2015, SÃO PAULO

End of “two-speed recovery”  Since 2012, institutions such as IMF, OECD, World Bank have revised downwards their global economic growth forecasts several times  Last week, the IMF reduced its biannual growth forecast for the current year for the 7 th time in a row since October 2012  Revisions in 2012 and 2013 due to recessions in several European countries  More recent downward corrections explained by slowdown in large emerging-market economies which, contrary to advanced economies, experienced rapid recovery after global crisis

Real growth has stalled since 2010

Brisbane Action Plan in reverse  IMF has put aside its “two-speed recovery” scenario, whereby high-growth emerging economies would pull along the rest of the global economy  G20 countries’ economic growth would have to double in order to meet their 2014 “Brisbane Action Plan” commitment to boost growth rate by 2.1 per cent by 2018; instead growth has decreased  G20 models, developed by IMF and OECD, have ignored lack of sufficient aggregate demand for higher growth, including stagnating jobs and wages and lingering impact of austerity policies

Economic slowdown and reversal of capital flows in emerging economies  Emerging-economy growth has been slowing since peak reached in 2010 but has been accentuated since 2014 by sharp drop in price of oil and many other commodities  Possible interest rate rises in United States, which could be followed by rises elsewhere, have also affected growth  These factors have led to an outflow of capital from emerging economies since 2014, reversing five years of inflows ( )

Price development of crude oil ($US per barrel)

Emerging Market capital flows and exchange rate movements

Slowdown of the Chinese economy (i)  Three decades of rapid growth have made China into world’s largest or second-largest economy (depending on calculation method)  IMF’s two-speed recovery model largely hinged on China, whose GDP is larger than the other four BRICS economies combined  Slowdown in China has a major global impact and is one factor explaining decline of commodity prices  Slowdown is also affecting asset prices in China and elsewhere, which could contribute to further financial instability

Quarterly real GDP growth rate for China (year-on-year, seasonally adjusted)

Slowdown of the Chinese economy (ii)  As a manufacturing exporter, China is not negatively affected by commodity price decline and less affected by US interest rate policy  China’s slower economic growth due to unsustainably high level of invest- ment, particularly in real estate; bubble may have begun to burst in 2015  Investment/GDP in China (2014): 46.9 per cent  Investment/GDP in other BRICS (2014): 19.1 to 31.5 per cent  Chinese trade surplus remains high despite substantial appreciation of renminbi

Change in private and public debt ( ) (as a share of GDP; percentage points)

Lending to Real Estate Sector in China (in trillions of yuan, unless otherwise noted)

Current-account balances (% of global GDP)

Exchange-rate indices

Unresolved crisis in Europe (i)  Most euro-zone countries experienced positive GDP growth in 2014 and 2015 after double-dip recession, i.e. negative growth in 2009 and again in  Recovery has been slow, uneven and insufficient to substantially reduce massive unemployment: euro-area unemployment receded from high of 12 per cent in 2013 to 11 per cent in mid-2015  In Spain, presented by IMF as a positive model, unemployment has declined from peak of 27 per cent in early 2014 to 22 per cent currently

Unresolved crisis in Europe (ii)  Return to growth in most euro-area crisis countries since 2014 is mainly due to improved credit conditions, i.e. banks are lending again to SMEs and consumers  Contrary to claims of IMF, return to growth is not due to supposed success of austerity and “internal devaluation” policies that are making economies more competitive vis-à-vis their neighbours  No evidence that internal devaluation, i.e. wage reductions, has corrected euro-area trade imbalances  Intra-EU trade surpluses decreased or deficits increased in Spain, Italy and Portugal between 2014 and 2015 (first six months); negligible change in Greece  Substantial increase in Germany’s trade surplus

Trade balance TotalIntra-EUExtra-EU Jan-Jun 14 Jan-Jun 15Jan-Jun 14Jan-Jun 15Jan-Jun 14Jan-Jun 15 Germany Ireland Greece Spain France Italy Netherlands Portugal United Kingdom

Only slight decline of unemployment rate since global recession  ILO data show only slight improvement in global unemployment rate since 2009  Some decline in advanced economies, mainly US, and in Eastern Europe partially due to emigration  Unemployment in Middle East-North Africa increased and has remained high; recent increases in Latin America and East Asia  These data do not reflect the high levels of under-employment – involuntary part-time jobs, precarious work, subsistence activities – especially in developing regions

Unemployment rate by region

Unemployment rates EA-19 (dark blue) EU-28 (yellow) Japan (light blue) and US (red) seasonally adjusted, January 2000 to June 2015

Global jobs gap remains  ILO’s employment-to-population ratio shows that jobs gap created during global crisis has not diminished  Slightly lower unemployment rate masks lower labour force participation  Overall employment-to-population ratio was at exactly the same level in 2014, 59.7 per cent, as during global recession year 2009, and is substantially higher than in 2007  Same phenomenon is true in most countries that have experienced post-2009 decline in “headline” unemployment rate, e.g. US

The US labour market

Growth of inequality  In past two decades, income and wealth inequality has grown in almost all advanced economies and also in several developing-emerging economies, including three of the five BRICS  Stagnant or declining real wages and precarious work on one hand, and the rise of the super-rich on the other, are major causes of increased inequality  In countries that experienced declines of inequality, particularly in Latin America, increased minimum wages and other improvements in labour regulations or institutions are usually the main cause

Inequality across the globe changes between 1990 and 2010

Labour markets and inequality  Even at institutions like IMF, OECD and World Bank, analysis of causes of inequality has shifted from a main focus on distributional fiscal policy to what is happening in labour markets, although IFI policies have not changed  Two IMF reports in 2015: low minimum wages, declining collective bargaining coverage and reduced union membership are key drivers of increased inequality  Lower bargaining coverage has reduced real wages of less skilled workers and weaker union power allows “tops earners to manipulate the economic and political system”  Other IMF reports associate increased inequality with less stable and lower economic growth overall

Concluding remarks  Economic slowdown in China and other emerging-developing economies countries is having a global impact that can intensify in months to come  Possible interest rate rise in the US could add accelerate capital outflow from emerging economies and increase financial volatility  IFI and G20 focus on structural and competitiveness issues needs to be challenged with emphasis on real causes of slowing global economy: lack of sufficient demand, lack of adequate financial regulation, growing inequality  Risks for a renewed global recession need to be countered by a growth strategy consisting of public investment stimulus – including for transition to a low-carbon economy – and coordinated wage increases