The Global Economy: The New “New-Normal” by SEBASTIAN EDWARDS Henry Ford II Distinguished Professor of International Economics, UCLA Círculo de Economía, Sitges, May 2014

The end of four cycles n China’s super growth cycle n The U.S. super borrowing cycle n The monetary expansion cycle n The Euro Zone crisis cycle

1. The end of China’s Super Growth Cycle

China’s spectacular trip

Reduced external surplus in China…

China’s NIIP

Currency appreciation will slow down significantly, and maybe reverse (except for Balassa-Samuelson effect)

Commodity Prices and China

SoybeansCopper GoldWheat Brent oil Natural gas

Also will affect China’s foreign investment strategy n More selective, more parsimonious. n Demand for Treasuries will decline; this will contribute to steeper yield curve in US n Will concentrate on two areas: –Selected companies in key industries in advanced countries, such as the pork meat provider (Smithfileld) in Virginia. –Natural resources (mostly metals) in Africa and some LATAM countries.

2. The end of the U.S. Super Borrowing Cycle

Current account deficit

USD RER

NIIP in USA

USD RER

Public sector deficit in US

Debt to GDP in US

Implications n Stronger USD. n A higher and flatter yield curve. n Faster growth in United States. n An open question is what will happen to property prices. New bubble? –Market specific; location will matter

3. The end of the Super Expansive Monetary Cycle: Will it Happen? Should it Happen?

The players

The problem is this: n Bringing the cycle to an end makes (some) sense in U.S. Is it happening? n But it is clearly premature in Euro Zone (in spite of whatever the German’s may say) n And it is very premature in Japan (in spite of whatever Abe opponents may say) n And yet, we are likely to see (some) synchronicity across these three key players. n In Japan the money slowdown plus the new consumption tax could be very negative.

Liquidity in the United States

Yield Curve in the U.S.

US Inflation Rate

Inflationary expectations in U.S.

A Taylor Rule for the New New-Normal? n

Euro Zone Monetary Conditions

Euro Zone Monetary Base

Deflation in the Euro Zone?

Abenomics and Japan 10year bond yield

4. The end of the Crisis Cycle in the Euro Zone

Euro Zone Interest Rates: Germany, Ireland and Spain

The fear of massive default and restructuring has disappeared

The problem is this: n The reforms have stalled and are unlikely to move forward at the required pace; moreover, they will not be as deep as they are needed n This is true both for the Euro Zone – and the EU, for that matter -- as a whole, and for individual countries. n Unfinished business: unified fiscal policy, unified banking supervision, labor mobility and flexibility, European Constitution, among others.

Spain I

Spain II

Unemployment: A tale of two countries

Spain III

Spain IV

The reforms and competitiveness n Doing Business Ratings –Spain 2007 = 39 –Spain 2014 = 52 –Germany 2007 = 21 –Germany 2014= 21

Euro Zone inherent instability n The Euro Zone will continue to be structurally unstable n Germany will have the advantage of a undervalued currency (“currency manipulator”?) n The periphery will face the disadvantage of a permanently “overvalued currency”

The Euro RER

Some implications of the “End of Four Cycles”

This picture will have a negative effect on: n Countries with high current account deficits n Nations with high public sector debts n Countries with high foreign currency indebtness n Countries with large GEFR n Countries with overextended construction sectors

They will have higher rates, larger primary deficits, and more depreciated currencies:

Currency questions in advanced nations Yen Euro

The good and the bad… n Negative watch list: –Brazil, –Japan, –EU Mediterranean periphery, –Indonesia –Colombia –Turkey –Egypt –Malaysia –South Africa n Positive watch list: –USA –Germany –Switzerland –Mexico –China –Indonesia –Ireland –Australia –New Zealand

A final word on political risks

Crimea as a warning sign?

Is Piketty the new Marx?