Economic outlook: is this the new normal? Freddy Van den Spiegel Economic Advisor. WORLD ECONOMIC OUTLOOK LOW GROWTH AND HIGH RISK: FOR HOW LONG? ICTF, Berlin, October 2015 Freddy Van den Spiegel Economic advisor Professor VUB and Vlerick Business School

2 The view of IMF 2

33 1.The crisis, started in 2007  2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector

4Groupe BNP ParibasBNP Paribas Group | 4

5 EUROSTOXX FINANCIALS 5

66 1.The crisis, starting in 2007  2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector  2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers

7 EUROSTOXX FINANCIALS 7

8Groupe BNP ParibasBNP Paribas Group | 8

9Groupe BNP ParibasBNP Paribas Group | 9

10 1.The crisis, starting in 2007  2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector  2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers  2009: Worldwide recession and housing crashes in Europe

11 WORLD GDP GROWTH

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13 1.The crisis, starting in 2007  2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector  2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers  2009: Worldwide recession and housing crashes in Europe  2010: Increasing government debt

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15 1.The crisis, starting in 2007  2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector  2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers  2009: Worldwide recession and housing crashes in Europe  2010: Increasing government debt, collapse of European economies  2011: the EURO sovereign crisis starts

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17 1.The crisis, starting in 2007  2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector  2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers  2009: Worldwide recession and housing crashes in Europe  2010: Increasing government debt, collapse of European economies  2011: the EURO sovereign crisis starts  2012: EUROZONE back in recession

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19 1.The crisis, starting in 2007  2007: complex financial (mortgage) products start to collapse as the US housing market cools down. Investors get worried about the banking sector  2008: The banking crisis starts in October with the bankruptcy of Lehman Brothers  2009: Worldwide recession and housing crashes in Europe  2010: Increasing government debt, collapse of European economies  2011: the EURO sovereign crisis starts  2012: EUROZONE back in recession  2013: EUROZONE problems remain  2014: EUROZONE towards QE, the ultimate weapon  2015: collapse of the emerging economies

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23 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?

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25 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? BUT DETERIORATING CONFIDENCE! WHY?

26 McKinsey survey

27 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?  The US is back to solid growth

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33 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?  The US is back to solid growth  but the appreciation of the USD could become problematic

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35 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?  The US is back to solid growth  but the appreciation of the USD could become problematic  And low oil prices kill shale oil

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38 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?  The US is back to solid growth  but the appreciation of the USD could become problematic  And low oil prices kill shale oil  End of QE soon?

39 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?  The US is back to solid growth  Europe seems to be slowly recovering

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45 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?  The US is back to solid growth  Europe seems to be slowly recovering –Supported by a lower Euro –And by a QE programme –But internal political uncertainty remains with Grexit and Brexit –And external political uncertainty about the Middle East, Northern Africa and Ukraine

46 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?  The US is back to solid growth  Europe seems to be slowly recovering  The emerging economies are no longer a club of winners

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48 china

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50 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3.How did we arrive where we are?

51 The origin of the actual situation: an extra-ordinary environment since 1990

52 Technological Revolution Worldwide Deregulation + The extra ordinary environment since 1990.

53 Technological Revolution Worldwide Deregulation Economic Globalisation + The extra ordinary environment since 1990.

54 Technological Revolution Worldwide Deregulation Asian savings glut Asian deflationary pressure Economic Globalisation + 1. The extra ordinary environment since 1990.

55 Technological Revolution Worldwide Deregulation Easy money to finance global imbalances Stable, low interest rates Asian savings glut Asian deflationary pressure Economic Globalisation + The extra ordinary environment since 1990.

56 SAVINGS QUOTE CHINA

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58 Technological Revolution Worldwide Deregulation Easy money to finance global imbalances Stable, low interest rates Asian savings glut Asian deflationary pressure Economic Globalisation Financial Technology + + The extra ordinary environment since 1990.

59 Technological Revolution Worldwide Deregulation Easy money to finance global imbalances Stable, low interest rates Asian savings glut Asian deflationary pressure Economic Globalisation Financial Technology Happy days Global Economic Growth + + The extra ordinary environment since 1990.

60 The virtuous circle GROWTH RISK PREMIUM EASY LOANS LEVERAGE & BUBBLES

61 But underneath unsustainable bottle necks developed. Imbalances of the US. The extra ordinary environment since 1990.

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66 But underneath unsustainable bottle necks developed. Imbalances of the US. Savings glut of Asia. The extra ordinary environment since 1990.

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69 But underneath unsustainable bottle necks developed. Imbalances of the US. Savings glut of Asia. Unsustainable financial leverage in US and Europe. The extra ordinary environment since 1990.

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72 The situation of the Western world Over indebted (governments and/or private households) Depending on foreign savings Loosing economic power Loosing geopolitical influence The situation of the rest of the world Waking up after the dream Stuck in the middle Need to adapt, but to what? THE GOLDEN YEARS OF EASY GLOBALIZATION SEEM TE BE OVER “BACK TO NORMAL” SEEMS UNLIKELY The extra ordinary environment since 1990.

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74 CLEARLY NOT A CRISIS BUT A REGIME SWITCH

75 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3.How did we arrive where we are? 4.What are the major risks and bottlenecks?  Low growth combined with a wall of debt: a dangerous combination

76 Source: ICMB

77 GLOBAL DEBT

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79 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3.How did we arrive where we are? 4.What are the major risks and bottlenecks?  Low growth combined with a wall of debt: a dangerous combination  Unsustainable and unresolvable worldwide imbalances  Political ambitions of emerging economies and opposition from West

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84 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3.How did we arrive where we are? 4.What are the major risks and bottlenecks?  Low growth combined with a wall of debt: a dangerous combination  Unsustainable and unresolvable worldwide imbalances  Political ambitions of emerging economies and opposition from West  Other geopolitical challenges

85 GLOBAL CONFLICT TRACKER

86 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3.How did we arrive where we are? 4.What are the major risks and bottlenecks?  Low growth combined with a wall of debt: a dangerous combination  Unsustainable and unresolvable worldwide imbalances  Political ambitions of emerging economies and opposition from West  Other geopolitical challenges  QE

87 QE: impact and exit? The US experience Start in LT yield down -Funding government deficit -Currency down -Overheating in Latin America and Asia -Supporting growth Exit in Reaction of LT yield -Capital outflows in overheated and imbalanced economies: problem for the emerging world -Dollar appreciation: potential problem for US growth -RATHER REASSURING

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89 THE ROAD TO QE FOR EUROPE Excessive debt, growing after the crisis

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91 THE ROAD TO QE Excessive debt, growing after the crisis An almost fatal second political crisis: the eurocrisis

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93 THE ROAD TO QE Excessive debt, growing after the crisis An almost fatal second political crisis: the eurocrisis Short term rescue operations but no solutions Normal monetary policy does not function anymore The transmission mechanism through banks does not function Lower interest rate is not effective More liquidity does not help

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95 Balace sheet total ECB

96 THE ROAD TO QE Excessive debt, growing after the crisis An almost fatal second political crisis: the eurocrisis Short term rescue operations but no solutions Normal monetary policy does not function anymore The transmission mechanism through banks does not function Lower interest rate is not effective More liquidity does not help All debt is potentially “bad” if no growth BUT GROWTH NEEDS LOANS AND WE HAVE ALREADY TOO MUCH: A DILEMMA

97 THE ROAD TO QE Excessive debt, growing after the crisis An almost fatal second political crisis: the eurocrisis Short term rescue operations but no solutions Normal monetary policy does not function anymore The new paradigms: Saving is irresponsible Generalized austerity creates depression

98 THE ROAD TO QE Excessive debt, growing after the crisis An almost fatal second political crisis: the eurocrisis Short term rescue operations but no solutions Normal monetary policy does not function anymore The new paradigms QE and financial repression as the only way out

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100 QE: impact until now SO FAR SO GOOD - fast depreciation euro on announcement - recovery of stock market - decline in spreads (except Greece)

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102 QE: impact until now SO FAR SO GOOD - fast depreciation euro on announcement - recovery of stock market - decline in spreads (except Greece) BUT ALSO UNKNOWN TERRITORY - jump into negative yields - and increasing volatility

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105 QE: impact until now SO FAR SO GOOD - fast depreciation euro on announcement - recovery of stock market - decline in spreads (except Greece) BUT ALSO UNKNOWN TERRITORY - jump into negative yields - and increasing volatility - or is the effect already over? (stock market, forex, interest rates,…)

106 QE: impact until now And what after QE -Scenario where QE is successful and ends: difficult for periphery -Scenario where QE does not deliver: dangerous for periphery UNLESS PERIPHERY GOES TO FAST AND SUCCESSFUL STRUCTURAL REFORM BUT NO REASON TO PANIC YET: THANKS TO QE?

107 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3.How did we arrive where we are? 4.What are the major risks and bottlenecks?  Low growth combined with a wall of debt: a dangerous combination  Unsustainable and unresolvable worldwide imbalances  Political ambitions of emerging economies and opposition from West  Other geopolitical challenges  QE  The political future of Europe

108 1.The crisis, starting in The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight? 3.How did we arrive where we are? 4.What are the major risks and bottlenecks?  Low growth combined with a wall of debt: a dangerous combination  Unsustainable and unresolvable worldwide imbalances  Political ambitions of emerging economies and opposition from West  Other geopolitical challenges  QE  The political future of Europe  A recovery without jobs? The digital disruption of society

109 In the short run, everything seems under control But the worldwide system has not stabilised (yet) Politics are back. CONCLUSIONS.

110 Politics will dominate the agenda: a challenging balancing act. Normalise banking system. Deleverage the economy. Normalise central bank policy and balance sheets. Stabilise public debt levels. Develop new regulatory framework for the financial industry. Revive international trade (or switch to protectionism?) Solve global environmental issues. Towards a new financial, economic and political world order. WITHOUT KILLING THE RECOVERY. CONCLUSIONS.

111 Living in an interconnected world economy Politics are back. From west to east: a story that will continue, but probably less spectacular CONCLUSIONS.

112 CONCLUSIONS.

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115 Living in an interconnected world economy Politics are back. From west to east: a story that will continue, but probably less spectacular Fortunately, the process of globalisation is not broken CONCLUSIONS.

116 Challenges for everybody: adapt to the “new normal”. The road to adapt to the new global economic reality will be long and bumpy. But this does not mean necessarily that the economy will be weak all the time. But it does mean that uncertainty has replaced risk; models will not help and the recent past not relevant Nobody can imagine how the world will look like in 10 years but it will definitely be different. Frightening or challenging? CONCLUSIONS.

117 Return to Keynes “If we consistently act on the optimistic hypothesis, this hypothesis will tend to be realised; whilst by acting on the pessimistic hypothesis we can keep ourselves for ever in the pit of want.” 8 November 1931

118 Thank you