The European Economy in 2015:

The European Economy in 2015:

Prospects and Policy Challenges against a Global Background

Peter Mooslechner

Oesterreichische Nationalbank Executive Director

90. Kieler Konjunkturgespräche

www.oenb.at [email protected] ²

The European Economy in 2015:

Prospects and Policy Challenges against a Global Background

Peter Mooslechner

Oesterreichische Nationalbank Executive Director

90. Kieler Konjunkturgespräche Berlin, September 15, 2014

weaker tougher

2

Outline

I. The global and European economy in 2015

Special focus: CESEE and convergence

II. Nine controversial policy challenges to be addressed

III. Some exogenous risks present on top

Special focus: Impact of sanctions on European economies

IV. Any conclusions?

www.oenb.at [email protected] ⁴

I. THE GLOBAL AND EUROPEAN

ECONOMY IN 2015

Growth perspectives 2014/2015: Once again, Europe lags behind – why is Europe different (compared to US)?

• Monetary policy (QE vs.

Liquidity provision)?

• Fiscal policy stance?

• Is it structural?

• Labour markets?

• Banking repair?

• Too slow deleveraging (D. Gros)?

• Country heterogeneity across EU?

100 105 110 115 120 125 130

2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1

EA UK US JP

GDP 2000Q1 - 2014Q2

Index, 2000 = 100

www.oenb.at [email protected] ⁶

Recovery expected to continue clearly below (historical) average…

-8 -6 -4 -2 0 2 4 6 8 10 12

2008 2009 2010 2011 2012 2013 2014 2015

USA Japan World

China Euro Area

GDP growth of big economies

in %

Source: OECD, EC.

Forecast

-6 -5 -4 -3 -2 -1 0 1 2

2008 2009 2010 2011 2012 2013 2014 2015

Change in Structural Balance (pp GDP) Change in Output Gap (pp pot. GDP)

Cyclically Adjusted Variables

Difference to previous observation

Source: EC.

Forecast

Fiscal situation improving – debt levels flatten

-14 -12 -10 -8 -6 -4 -2 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Euro Area UK USA Japan

Budget Deficit

in %

Source: EC.

Forecast

0 50 100 150 200 250

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Euro Area UK USA Japan

Debt Ratio

in % of GDP

Source: EC.

Forecast

www.oenb.at [email protected] ⁸

Low global inflation – very low in Europe

-4 -2 0 2 4 6

2007 2008 2009 2010 2011 2012 2013 2014

Japan US Euro area UK

Inflation in Selected Economies

CPI inflation in % (yoy)

Source: Thomson Reuters.

-2 -1 0 1 2 3 4

2007 2008 2009 2010 2011 2012 2013 2014

Japan US Euro area UK

Core Inflation in Selected Economies

Core inflation in % (yoy)

Source: Thomson Reuters.

Is the Eurosystem′s monetary policy “different”?

0 1 2 3 4 5 6

2007 2008 2009 2010 2011 2012 2013 2014

Japan Sweden UK

US Euro Area Switzerland

Main Refinancing Rates

in %

Source: Thomson Reuters.

0 100 200 300 400 500 600

2007 2008 2009 2010 2011 2012 2013 2014

Eurosystem Federal Reserve Bank of England

Central Bank Balance Sheets

Index, January 2007 = 100

Source: Thomson Reuters.

www.oenb.at [email protected] ¹⁰

…but becoming increasingly “similar” now?

1. Key interest rate cut by 20 bp to 0.05% (main refinancing operations, MRO) & to -20%

(negative deposit facility) in June & August.

2. Start purchasing non-financial private sector assets: Asset-backed securities purchase programme (ABSPP) + new covered bond purchase programme (CBPP3) in October 2014.

3. Targeted longer-term refinancing operations (TLTROs). 4 years. 7% of the total credit to non- financial private sector, excl. housing. (~ €400 billion). Interest rate fixed at MROs + 10 bp. After 2 years option to repayments. If not supporting real economy pay back.

4. Continue forward guidance (maintain high accommodation). MROs and three-month

LTROs as fixed rate tender procedures with full allotment for as long as necessary (at least until end 2016).

5. Suspended sterilizing SMP (Securities Markets Programme).

-50 50 150 250 350 450 550 650 750

-0,5 0,0 0,5 1,0 1,5 2,0 2,5

2010 2011 2012 2013 2014

Excess Liquidity (RHS) EONIA

Deposit Facility Marginal Lendig Rate Main Refinancing Rate

Excess Liquidity and the EONIA

in %

Source: Thomson Reuters.

in € Mn.

Market confidence is back – is it justified?

What do financial markets tell us?

0 20 40 60 80 100 120 140 160

2007 2008 2009 2010 2011 2012 2013 2014

S&P 500 TOPX DJ EURO STOXX

Stock Markets in USA, Euro Area & Japan

Index, January 2007 = 100

Source: Thomson Reuters, own Calculations.

0 1 2 3 4 5 6 7 8

2008 2009 2010 2011 2012 2013 2014

DE ES FR IT UK US

Gov. Bond Yields (10y) for Selected Major Economies

in %

Source: Thomson Reuters.

www.oenb.at - 12 - [email protected]

Persistent higher unemployment in Euro area – because of…..?

0 2 4 6 8 10 12 14

2007 2008 2009 2010 2011 2012 2013 2014 2015

EA18 GBR USA

Unemployment Rates in Selected Regions

in %

Source: EC.

Forecast

12

Country heterogeneity (divergence?) in the euro area

Growth disparity Unemployment legacy

0 10 20 30 40 50 60

EE EL LV AT DE MT LU NL BE FI SI FR EA18 IE IT SK PT CY ES

Unemployment Rate Youth Unemployment Rate (< 25 Years)

Unemplyment Rates in Selected Economies

in %, latest observation

Source: Eurostat.

70 75 80 85 90 95 100 105 110

EL SI CY IT PT ES LV IE FI NL EA FR LU EE BE AT DE SK MT

GDP Growth: 2013 vs. 2008

Real GDP, 2008 = 100

Source: EC.

www.oenb.at [email protected] ¹⁴

I. SPECIAL FOCUS: CESEE AND

CONVERGENCE

CESEE: similar hit by crisis - slower convergence process since then

-4 -3 -2 -1 0 1 2 3 4 5 6

2000 2003 2006 2009 2012 2015

Difference CESEE to EU28 Difference CESEE to EA18

Growth Differential CESEE* vis-a-vis EU and Euro Area

in %

Forecast

www.oenb.at [email protected] ¹⁶

Crisis impact still very much felt in 2013

(Ball: Long-term costs of financial crisis: 8.4% (OECD-23))

Capital inflows slowed down

www.oenb.at [email protected] ¹⁸

In the long-run: Overall impressive catch-up of CEE, Russia and China

II. NINE CONTROVERSIAL

POLICY CHALLENGES TO BE

ADDRESSED

www.oenb.at [email protected] ²⁰

As a (surprising) starting point: In fact, many supporting factors present for a (modest) recovery

● Global economic recovery

● Exchange rate depreciation

● Accommodative monetary policy stance

● Return to broadly neutral fiscal stance

● Improved financing conditions

● Improving credit supply conditions

● Low commodity prices

● Gradual labour market improvement

Why don‘t they lead to a more significant recovery???

1. What would an immediate monetary policy exit mean?

(“The crash is the solution”?)

Would a strong immediate hike in interest rates (200 bp+) be a solution?

• Asset price channel:

correction (bubbles burst?)

• Balance sheet channel:

banks need more (of deteriorating) collateral

• Credit channel: banks ration loans (apart from hiking rates)

• Interest channel: works asymmetric and non-linear (zero lower bound)

• Exchange rate channel:

reversal of downward trend

 Depressing demand

 Triple-dip recession (+ deflation)

 Vicious circle on balance sheets



www.oenb.at [email protected] ²²

2. Inflation persistently far away from “target”

Broad-based: also core items Not only crisis countries

-1 0 1 2 3 4 5

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

HICP Core HICP

EA: HICP and Core HICP

yoy

Source: Eurostat.

-1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0

Jan-11 Jan-12 Jan-13 Jan-14

Other Euroarea Countries Crisis Countries (EL, ES, IT, PT, CY, IE and SI)

Contributions to HICP (const. Taxes)

yoy

Source: Eurostat.

Deflation risks still low – inflation expectations declining

0%

10%

20%

30%

40%

50%

60%

1999 2002 2005 2008 2011 2014 under 1% under 0%

EA - HICP weighted COICOP groups

Share of groups with rate below benchmark

www.oenb.at [email protected] ²⁴

3. Risk of secular stagnation?

Gradually declining growth rates in advanced economies

Gradually declining inflation and interest rates

0 2 4 6 8 10 12 14

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Long-Term Interest Rates Inflation Rate

Long-Term Interest Rates and Inflation Rates

in %, Average FR, DE, GB, US

Source: Thomson Reuters, IMF.

4. Decoupling of trade and growth?

Reason: Extra-EU imports stagnate despite recovery

Real annual growth of GDP and trade volumes (in %)

2,1% 4,7

%

Source: WTO

www.oenb.at [email protected] ²⁶

5. Rebalancing in the euro area is ongoing but asymmetric – contributing to reemerging global imbalances

95 100 105 110 115 120 125 130 135 140

2000 2002 2004 2006 2008 2010 2012 2014

Core Countries (AT, DE, NL) Euro Periphery (IE, EL, ES, PT) Intermediate Group (FR, IT, FI, BE)

Unit Labor Costs Rebalancing

Index, 2000 = 100

Source: EC.

Forecast

-15 -10 -5 0 5 10

2000 2002 2004 2006 2008 2010 2012 2014

Core Countries (AT, DE, NL) Euro Periphery (IE, EL, ES, PT) Intermediate Group (FR, IT, FI, BE)

Current Account Rebalancing

% of GDP

Source: EC.

Forecast

6. Competitiveness: If China gains (or continues to gain) market shares someone has to lose

www.oenb.at [email protected] ²⁸

7. To what extent is productivity a structural issue?

Structural reforms yield significant gains in the medium and long run (Varga et al, 2013).

Excessive focus on structure?

“Compared to the US, Europe has structural strengths and

weaknesses.” (De Grauwe)

EU28

BEL BGR

CZE

DNK DEU

EST

IRL GRC

ESP ITA FRA CYP

LTULVA

LUX HUN

MLT NLD

AUT POL

PRT ROM

SVN SVK

FIN SWE

GBR USA

JPN

-4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0

0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0

Hourly Productivity Growth (2000-2013)

Hourly Productivity (€ per Hour worked)

Productivity Developments 2000-2013

Source: AMECO.

8. Is the Investment gap real?

Strong decline since the crisis (from low levels)

Stressed countries most affected Innovation especially hit

15,0 17,0 19,0 21,0 23,0 25,0 27,0

1999 2001 2003 2005 2007 2009 2011 2013 2015

EA18 Stressed Countries* USA

Real Gross Fixed Capital Formation to GDP

in %

Source: EC, OECD. * EL, IE, PT, SI, IT, ES, CY.

Forecast

www.oenb.at [email protected] ³⁰

9. To what extent is rising inequality contributing?

(within and between countries)

III. SOME EXOGENOUS RISKS

PRESENT ON TOP

www.oenb.at [email protected] ³²

Despite disappointing growth performance - risk balance clearly tilted to the downside: Some important factors

• Fed-Tapering/exit more rapid than expected

• But this would require faster US recovery

• Rise in longer-term interest rates

• Reversal in risk premium compression

• If EM now better prepared, euro area periphery more effected?

• Emerging Markets slow down more widespread

• Fragile Five, China, Asia & Latin America

• Partly depending on US performance

• Ukraine - Russia Crisis: Increasing uncertainty - lower foreign demand

• Higher oil prices (Middle East geopolitics)

III. SPECIAL FOCUS: IMPACT OF

SANCTIONS ON EUROPEAN

ECONOMIES

www.oenb.at [email protected] ³⁴

Russian value added more important for EU demand than direct imports suggest – but even more for Russia

Gas-Stop Channel: heterogeneous gas dependency

www.oenb.at [email protected] ³⁶

Strong downward revision of GDP forecasts for Russia and Ukraine

-1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0

Jän.13 Feb.13 Mär.13 Apr.13 Mai.13 Jun.13 Jul.13 Aug.13 Sep.13 Okt.13 Nov.13 Dez.13 Jän.14 Feb.14 Mär.14 Apr.14 Mai.14 Jun.14 Jul.14

EC IMF Consensus BMPE / MPE wiiw WB EBRD

Russia: Development of GDP Growth Forecasts for 2014 over Time

Real GDP growth in %

Source: EC, IMF, EBRD, Consensus Economics, ECB, wiiw, WB.

-6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0

Jän.13 Feb.13 Mär.13 Apr.13 Mai.13 Jun.13 Jul.13 Aug.13 Sep.13 Okt.13 Nov.13 Dez.13 Jän.14 Feb.14 Mär.14 Apr.14 Mai.14 Jun.14 Jul.14

IMF Consensus wiiw WB EBRD

Ukraine: Development of GDP Growth Forecasts for 2014 over Time

Real GDP growth in %

Source: IMF, EBRD, Consensus Economics, wiiw, WB.

-1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0

Okt.13 Nov.13 Dez.13 Jän.14 Feb.14 Mär.14 Apr.14 Mai.14 Jun.14 Jul.14

EC IMF Consensus BMPE / MPE wiiw WB EBRD

Real GDP growth in %

Source: EC, IMF, EBRD, Consensus Economics, ECB, wiiw, WB.

Russia: Development of GDP growth forecasts for 2015 over time

-1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0

Okt.13 Nov.13 Dez.13 Jän.14 Feb.14 Mär.14 Apr.14 Mai.14 Jun.14 Jul.14

IMF Consensus wiiw WB EBRD

Real GDP growth in %

Source: IMF, EBRD, Consensus Economics, wiiw, WB.

Ukraine: Development of GDP Growth Forecasts for 2015 over Time

Possible macroeconomic impact on the euro area

Shock Russia Ukraine Euro area U.S.A.

A: -1% of Russian real output -1.29 -1.45 -0.15 -0.07 B: +20% increase in the oil price 1.23 0.13 -0.26 -0.18 Response of real output to different shocks after 3 years

... And a worst case scenario (over 3 years)

• Increase of energy prices,

• stop of gas supply

Euro-Area -2.3%

Germany -3.6%

Austria -4.3%

www.oenb.at [email protected] ³⁸

Why don‘t energy prices react on geopolitical crises (yet)?

IV. ANY CONCLUSIONS?

www.oenb.at [email protected] ⁴⁰

Diagnosis:

1. Slow growth & low inflation (risk of secular stagnation?) 2. Risks to the downside

dominate (geopolitics) 3. Euro area growth crisis

temporary or permanent?

Elements of therapy:

1. Investment is key

2. Completion of “Genuine EMU” an important

contribution at least

GEMU

Banking Union Fisca l Unio n Eco nomic Uni on P oli tic al Unio n

SSM (plus CA) allows for consistent supervision – and intensifies coordination needs

SSM EBA Non-EU

Challenges

Different regimes challenge supervisory coordination

Euro area:

• SSM requires strong coordination among ECB and national competent authorities (NCAs)

• SRM only applicable to SSM banks

Non-euro area EU:

• Some countries may opt into SSM

• All others continue to report to the European Banking Authority

Non-EU:

• Partial MoUs with NCAs but heterogeneous regulations

www.oenb.at [email protected] ⁴²

Euro area output will reach pre-crisis level in 2015 – unemployment rates stay above pre-crisis levels

The European Economy in 2015:

Prospects and Policy Challenges against a Global Background

Peter Mooslechner

Oesterreichische Nationalbank Executive Director

90. Kieler Konjunkturgespräche