presentation to austin financial planning association austin,...

Global Economic OutlookMark A. Wynne

Vice President & Associate Director of Research

Director, Globalization & Monetary Policy Institute

Federal Reserve Bank of Dallas

Presentation to Austin Financial Planning Association

Austin, May 2018The views expressed are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System

Outline

• Secular trends reshaping the world• Demographics• Globalization• Debt• Disruptive innovation

• The global outlook:• Synchronized growth looking more likely• Few signs of inflation

• Risks• Europe (BREXIT, Italy, …)• China • Trade• Monetary policy divergence

• Implications for the United States

Secular trends

• Demographics• Aging populations in many countries, shrinking populations in some

• Globalization• More economic activity now takes place in the so-called emerging market economies

than in the advanced economies

• Debt• Public sector debt levels have grown in most advanced economies• The largest emerging market economy (China) remains very dependent on debt

fueled growth

• Disruptive innovation• IT and AI related innovation accounts for more of what ails the middle class than

globalization?

Demographics

• Aging populations in almost all advanced economies• Declining working age population• Declining total population

• Strains on public finances• Increased dependency ratio

• Implications for innovation and productivity growth• Implications for the neutral real interest rate, 𝑟𝑟∗

A tipping point…Working age population (15-64) as share of total (world)

0.50

0.55

0.60

0.65

0.70

0.75

0.80

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Global peak: 2012 (0.66)

Share

Tipping points in the major economies…Working age population (15-64) as share of total

0.50

0.55

0.60

0.65

0.70

0.75

0.80

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Country/Region peaksEuro area: 1990 (0.68)Japan: 1992 (0.70)U.S.: 2008 (0.68)China: 2011 (0.74)

Global peak: 2012 (0.66)

Share

Tipping points by regionWorking age population (15-64) as share of total

0.50

0.55

0.60

0.65

0.70

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Europe North America Africa Asia Latin America OceaniaShare

Immigrants key to U.S. labor force growth

0

20

40

60

80

100

120

140

160

180

200

1965 1975 1985 1995 2005 2015 2025 2035

Millions

Working age population (25-64)

With projected 2015-35immigration

Without projected 2015-35immigration

Projections for foreign-born working-age adults are based on current rates of immigration, combining lawful and unauthorized. They assume that two-thirds of immigrants arriving through 2035 will be ages 25 to 64, as is true of today’s new immigrants.

Immigrants key to U.S. labor force growth

-10

-5

0

5

10

15

20

25

30

1965-75 1975-85 1985-95 1995-05 2005-15 2015-25 2025-35

Immigrants U.S. born with immigrant parents U.S. born with U.S. born parents

MillionsProjections

Globalization in reverse?(Exports of goods and services as a share of GDP)

10

15

20

25

30

35

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Percent Berlin Wall comes down

Great trade collapse

Globalization in reverse?(Merchandise trade as a share of GDP)

10

15

20

25

30

35

40

45

50

55

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

PercentBerlin Wall comes down

Great trade collapse

Globalization in reverse?

• Recent votes in U.K, France, Italy, U.S. and elsewhere have heightened awareness of the scale of discontent with open borders

• Western democracies appear to have done a poor job at facilitating movement from declining sectors into emerging sectors

• Lingering after effects of the global financial crisis may also be playing into this

• Support for liberal international economic order more fragile than it has been in a long time

• But…to date, despite strong rhetoric, (relatively) few policy actions have been taken to undo globalization

• Although…

Disruption

• UBS: electric vehicles “….the most disruptive car category since the Model T”

• Truer of driverless cars?

• Service sector: Amazon, AirBnB, Uber, Lyft,….• But…why no surge in productivity growth?• Innovation in older “physical” businesses (which still make up a sizable

share of the economy) held back by regulation?• Why are profit margins (in the U.S.) at historic highs?

Stagnating productivity growth(Utilization adjusted TFP growth)

-3

-2

-1

0

1

2

3

4

5

6

1948 1958 1968 1978 1988 1998 2008

Percent

1948-73 avg.: 2.1 percent


1995-2007 avg.: 1.5 percent


Debt

• Debt fueled growth has historically proven difficult to sustain• Busts that follow debt fueled booms often more painful and protracted• Reinhart & Rogoff (2011) This Time Is Different: Eight Centuries of Financial

Folly

• Diminished capacity for fiscal stimulus in response to future crises

A tale of four credit bubbles?...(Credit to the private nonfinancial sector)

50

100

150

200

250

300

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Canada

China

Japan

U.S.

Percent of GDP

Limited fiscal space across the OECD(General government gross financial liabilities)

0

20

40

60

80

100

120

1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

Percent of GDP

Global GDP growth: persistently weaker since the global financial crisis

-4-3-2-101234567

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

World (ex. U.S.) (Q/Q )

World (ex. U.S.) (Y/Y)

Percent

Evolution of Consensus Forecasts for 2018 GDP growth

0.0

1.0

2.0

3.0

4.0

5.0

Jan/2017 Apr/2017 Jul/2017 Oct/2017 Jan/2018 Apr/2018

EmergingWorld (ex. U.S.)Advanced (ex. U.S.)U.S.

Percent change, year/year

Real GDP growth expected to move sideways

-6

-4

-2

0

2

4

6

8

10

2004 2006 2008 2010 2012 2014 2016 2018

EmergingWorld (ex. U.S.)U.S.Advanced (ex. U.S.)

Percent, year/year

Consensus Forecasts (as of April 2018)

CPI inflation dominated by swings in energy prices

-4

-2

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Emerging (ex. VN)World (ex. U.S.,VN)Advanced (ex. U.S.)U.S.

Percent, year/year

Consensus Forecasts(as of April 2018)

Deflation at the producer price level has morphed into inflation

-9

-6

-3

0

3

6

9

12

15

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EmergingWorld (ex. U.S.)Advanced (ex. U.S.)U.S.

Percent, year/year

Central bank policy rates no longer stuck at zero

-1

0

1

2

3

4

5

6

7

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Federal ReserveBank of EnglandECBBank of Japan

At its policy meeting at the end of January 2016the BoJ adopted a negative interest rate of -0.10 percent on reserves

Percent

Central bank balance sheets: Still growing in euro area & Japan

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bank of JapanECBBank of EnglandFederal Reserve

Percent of GDP

10-year government bond yields no longer flirting with negative territory

-1.0-0.50.00.51.01.52.02.53.03.54.0

2012 2013 2014 2015 2016 2017 2018

U.S.U.K.GermanyJapan

Percent

U.S. election

BREXIT vote

Headwinds, tailwinds and CAT

• Tailwinds• Lower oil prices• Monetary policy still quite accommodative in many countries

• Headwinds• Europe

• How disruptive will BREXIT be?• Slowdown in China

• How manageable?

• Clear air turbulence?• Monetary policy normalization in the United States

• Liftoff from zero occurred at end 2015; is the rest of the world prepared for higher U.S. rates?

• Known unknowns• Geopolitical risks

The world has changed! GDP based on PPP, share of world total

30

35

40

45

50

55

60

65

1992 1997 2002 2007 2012 2017 2022

Advanced Emerging

Percent

On the eve of the Global Financial Crisis there was about as much economic activity taking place in the emerging market economies as in the advanced economies of North America, Europe and Japan

The world has really changed!GDP based on PPP, share of world total

0

5

10

15

20

25

1992 1997 2002 2007 2012 2017 2022

U.S. China

Percent

By some measures China becamethe world’s largest economy in 2014

Impact of China slowdown on U.S. in 2000….

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0 1 2 3 4 5 6 7 8

10% - 90% confidence bounds China U.S.

Percent, deviation from baseline

Quarters after initial shock

…and today

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0 1 2 3 4 5 6 7 8

10% - 90% confidence bounds China U.S.

Percent, deviation from baseline

Quarters after initial shock

IMF growth outlookApril 2018

2017 2018(f) 2019(f)

Change from January2017 WEO forecast

2018

Change from January 2017 WEO forecast

2019

World output 3.8 3.9 3.9 0.0 0.0

Advanced economies 2.3 2.5 2.2 0.2 0.4

United States 2.3 2.9 2.7 0.2 0.2

Euro area 2.3 2.4 2.0 0.2 0.0

Japan 1.7 1.2 0.9 0.0 0.0

UK 1.8 1.6 1.5 0.1 0.0

Canada 3.0 2.1 2.0 -0.2 0.0

Emerging Market & Developing Economies 4.8 4.9 5.1 0.0 0.1

China 6.9 6.6 6.4 0.0 0.0

India 6.7 7.4 7.8 0.0 0.0

Brazil 1.0 1.9 2.1 0.4 0.1

Russia 1.5 1.7 1.5 0.0 0.0

Share of metro area employment variation explained by global, national and residual MSA-specific shocks

0

20

40

60

80

100Global shock, avg = 19.2Percent


0

20

40

60

80

100Global shock, avg = 19.2 National shocks, avg = 12.8

Percent


0

20

40

60

80

100Global shock, avg = 19.2 National shocks, avg = 12.8 Residual shocks, avg = 68.0

Percent

Cumulative one year effect of a 0.5% negative global foreign output shock on MSAs’ employment growth

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Col

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Average = -0.66Percentage points = 80% confidence interval

Cumulative one year effect of a 1% negative national U.S. output shock on MSAs’ employment growth

-1.5-1.0-0.50.00.51.01.52.0

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Average = -0.26Percentage points = 80% confidence interval

Median FOMC participants’ fund-rate projections

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2017 2018 2019 2020 Longer Run

September 2017

PercentTarget federal funds rate at year-end


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2017 2018 2019 2020 Longer Run

September 2017

December 2017



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2017 2018 2019 2020 Longer Run

September 2017

December 2017

March 2018


SEP – Change in real GDP

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2012 2013 2014 2015 2016 2017 2018 2019 2020 Longerrun

Central tendency of projections

Actual

Range of projections

Median

Change in real GDP, percent

SEP – Unemployment rate

0

2

4

6

8

10

2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run


Actual


Median

Unemployment rate, percent

SEP – PCE inflation

0.0

0.5

1.0

1.5

2.0

2.5

2012 2013 2014 2015 2016 2017 2018 2019 2020 Longerrun


Actual


Median

PCE inflation, percent

Conclusions

• Modal outlook is for synchronized expansion in 2018 & 2019• U.S. likely to continue to be one of the stronger performers among the advanced economies• Expansion gathering momentum in Europe, Japan• Almost all emerging markets now growing

• Monetary policies of major central banks diverging• Fed: normalization began December 2015; BoE also normalizing• ECB, BoJ: still easing; but ECB may taper soon• PBOC: shift to concerns about financial stability

• Risks:• Overshooting in the U.S.• Europe: BREXIT• China slowdown• Trade conflicts?

presentation to austin financial planning association austin,...

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