economic outlook: is this the new normal? freddy van den spiegel economic advisor. world economic...
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Economic outlook: is this the new normal?
Freddy Van den SpiegelEconomic Advisor.
WORLD ECONOMIC OUTLOOK
LOW GROWTH AND HIGH RISK: FOR HOW LONG?
ICTF, Berlin, October 2015
Freddy Van den SpiegelEconomic advisorProfessor VUB and Vlerick Business School
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2
The view of IMF
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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
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4Groupe BNP ParibasBNP Paribas Group| 4
US: HOUSES PRICES ( in USD)Department of Commerce and National Association of Retailors figures
20.00030.00040.00050.00060.00070.00080.00090.000
100.000110.000120.000130.000140.000150.000160.000170.000180.000190.000200.000210.000220.000230.000240.000250.000260.000
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
20.00030.00040.00050.00060.00070.00080.00090.000100.000110.000120.000130.000140.000150.000160.000170.000180.000190.000200.000210.000220.000230.000240.000250.000260.000
New housesExisting houses
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5
EUROSTOXX FINANCIALS
5
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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
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7
EUROSTOXX FINANCIALS
7
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8Groupe BNP ParibasBNP Paribas Group
| 8
Bank InterventionHSBC Holdings 12,5bn GBP private capital injection
Crédit Agricole Group 3bn EUR capital injection (subordinate debt)
Royal Bank of Scotland 58% nationalised
Santander 2bn EUR capital raised from private investors
BNP Paribas 5,1bn capital injection (preferred shares)
Barclays Bank £7bn private capital injection, use of credit guarantees
HBOS taken over by Lloyds TSB, 44% nationalised
UniCredit seeking 4bn EUR from Italian and Austrian governments
Rabobank Group no capital injection
ING Bank 10bn EUR capital Injection, 80% government guarantee on 27,7bn Alt-A
UBS 5,3bn USD capital injection, 60bn USD bad assets removed
Deutsche Bank no capital injection
ABN AMRO Bank nationalised
Crédit Mutuel 1,2bn EUR capital injection (subordinate debt)
Société Générale 3,4bn EUR capital injection (subordinate debt + preferred shares)
Credit Suisse group private capital injection of 10bn CHF
BBVA no capital injection
Lloyds TSB 50% nationalised
Groupe Caisse d'Epargne 1,1bn EUR capital injection (subordinate debt)
Groupe Banques Populaires 0,95bn EUR capital injection (subordinate debt)
How fared the most solid banks in Western Europe?
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9Groupe BNP ParibasBNP Paribas Group
| 9
Bank InterventionBank of America expanding (Merrill Lynch, Countrywide), 45bn USD capital injection
Citigroup 50bn USD capital injection + 306bn USD bad asset guarantee, breaking up
JP Morgan Chase expanding (Bear Stearns, WaMu), 25bn USD capital injection
Wachovia Corporation failure
Wells Fargo expanding (Wachovia), 25bn USD capital injection
Washington Mutual failure
U.S. Bancorp 6,6bn USD capital injection
Countrywide Financial Corp. sold
SunTrust Banks 4,9bn USD capital injection (preference shares)
Capital One Fin. Corp. 3,6bn USD capital injection
National City Corp. sold
Regions Financials Group 3,5bn USD capital injection
PNC Financial Services Group expanding (National City), 7,6bn capital injection (preference shares)
Fifth Third bancorp 3,4bn USD capital injection
KeyCorp 2,5bn USD capital injection
BB & T Corp 3,1bn USD capital injection
State Street Corp 2bn USD capital injection
Bank of New York 3bn USD capital injection
Comerica 2,3bn USD capital injection
Merril Lynch Bank USA sold
How fared the most solid banks in the USA?
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1010
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
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1111
WORLD GDP GROWTH
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1313
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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1515
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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1717
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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1919
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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2020
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2222
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2323
1. The crisis, starting in 2007
2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?
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2424
WORLD ECONOMIC OUTLOOK
GDP GROWTH2013 2014 2015 2016
WORLD 3,4 3,4 3,5 3,8US 2,2 2,4 3,1 3,1EURO -0,5 0,9 1,5 1,6JAPAN 1,6 -0,1 1 1,2EMERGING 5,0 4,6 4,3 4,7IMF world economic outlook april 2015
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2525
1. The crisis, starting in 2007
2. The world economic outlook: the developed world recovers, the emerging economies suffer, but nothing spectacular at first sight?
BUT DETERIORATING CONFIDENCE!
WHY?
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2626
McKinsey survey
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2727
1. The crisis, starting in 2007
2. 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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3333
1. The crisis, starting in 2007
2. 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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3535
1. The crisis, starting in 2007
2. 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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3636
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3838
1. The crisis, starting in 2007
2. 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?
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3939
1. The crisis, starting in 2007
2. 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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4444
EUROSTOXX 50
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4545
1. The crisis, starting in 2007
2. 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
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4646
1. The crisis, starting in 2007
2. 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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4747
BRICS
GDP GROWTH (%)2013 2014 2015 2016
CHINA 7,8 7,4 6,8 6,3BRAZIL 2,7 0,1 -1,0 1,0INDIA 6,9 7,2 7,5 7,5RUSSIA 1,3 0,6 -3,8 -1,1IMF World economic outlook april 2015
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48
Investment and Consumption, % of GDP
20
25
30
35
40
45
50
55
1980 1985 1990 1995 2000 2005 2010
Consumer Spending Share
Investment Share
china
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5050
1. The crisis, starting in 2007
2. 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?
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5151
The origin of the actual situation: an extra-ordinary environment since 1990
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5252
TechnologicalRevolution
WorldwideDeregulation
+
The extra ordinary environment since 1990.
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5353
TechnologicalRevolution
WorldwideDeregulation
EconomicGlobalisation+
The extra ordinary environment since 1990.
![Page 54: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/54.jpg)
5454
TechnologicalRevolution
WorldwideDeregulation
Asiansavings glut
Asiandeflationary
pressure
EconomicGlobalisation+
1. The extra ordinary environment since 1990.
![Page 55: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/55.jpg)
5555
TechnologicalRevolution
WorldwideDeregulation
Easy money to finance global
imbalances
Stable, lowinterest rates
Asiansavings glut
Asiandeflationary
pressure
EconomicGlobalisation+
The extra ordinary environment since 1990.
![Page 56: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/56.jpg)
5656
SAVINGS QUOTE CHINA
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5757
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5858
TechnologicalRevolution
WorldwideDeregulation
Easy money to finance global
imbalances
Stable, lowinterest rates
Asiansavings glut
Asiandeflationary
pressure
EconomicGlobalisation
FinancialTechnology+ +
The extra ordinary environment since 1990.
![Page 59: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/59.jpg)
5959
TechnologicalRevolution
WorldwideDeregulation
Easy money to finance global
imbalances
Stable, lowinterest rates
Asiansavings glut
Asiandeflationary
pressure
EconomicGlobalisation
FinancialTechnology
Happydays
GlobalEconomic
Growth+ +
The extra ordinary environment since 1990.
![Page 60: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/60.jpg)
6060
The virtuous circle
GROWTH
RISK PREMIUM
EASY LOANS
LEVERAGE & BUBBLES
![Page 61: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/61.jpg)
6161
But underneath unsustainable bottle necks developed.
• Imbalances of the US.
The extra ordinary environment since 1990.
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6262
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6363
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6464
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6565
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6666
But underneath unsustainable bottle necks developed.
• Imbalances of the US.
• Savings glut of Asia.
The extra ordinary environment since 1990.
![Page 67: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/67.jpg)
6767
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6868
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6969
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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7070
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7171
House Price Evolution (rebased Q1 2000 = 100)
100
120
140
160
180
200
220
240
260
Q12000
Q12001
Q12002
Q12003
Q12004
Q12005
Q12006
Q12007
Q12008
Q12009
Q12010
Q12011
Q12012
Q12013
Spain
UK
Ireland
![Page 72: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/72.jpg)
7272
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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7373
0
10.000
20.000
30.000
40.000
50.000
60.000
70.000
80.000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Advanced economies
Emerging market anddeveloping economies
![Page 74: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/74.jpg)
7474
CLEARLY NOT A CRISIS BUT A REGIME SWITCH
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7575
1. The crisis, starting in 2007
2. 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
![Page 76: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/76.jpg)
7676Source: ICMB
![Page 77: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/77.jpg)
7777
GLOBAL DEBT
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7878
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7979
1. The crisis, starting in 2007
2. 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
![Page 80: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/80.jpg)
8080
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8181
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8282
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8383
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8484
1. The crisis, starting in 2007
2. 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
![Page 85: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/85.jpg)
8585
GLOBAL CONFLICT TRACKER
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8686
1. The crisis, starting in 2007
2. 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
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8787
QE: impact and exit?The US experience
Start in 2009-LT yield down-Funding government deficit-Currency down-Overheating in Latin America and Asia-Supporting growth
Exit in 2014-2015-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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8888
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8989
THE ROAD TO QE FOR EUROPE
•Excessive debt, growing after the crisis
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9090
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9191
THE ROAD TO QE
•Excessive debt, growing after the crisis
•An almost fatal second political crisis: the eurocrisis
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9292
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9393
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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9494
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9595
Balace sheet total ECB
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9696
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
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9797
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
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9898
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
![Page 99: 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,](https://reader036.vdocuments.mx/reader036/viewer/2022062322/5697bf7c1a28abf838c83df3/html5/thumbnails/99.jpg)
9999
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100100
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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101101
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102102
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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103103
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104104
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105105
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,…)
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106106
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?
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107107
1. The crisis, starting in 2007
2. 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
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108108
1. The crisis, starting in 2007
2. 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
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• In the short run, everything seems under control
• But the worldwide system has not stabilised (yet)
• Politics are back.
CONCLUSIONS.
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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.
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• Living in an interconnected world economy
• Politics are back.
• From west to east: a story that will continue, but probably less spectacular
CONCLUSIONS.
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CONCLUSIONS.
G7 vs Developing Asia: Real GDP Growth (% YoY)
-6
-4
-2
0
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015
G7 Developing Asia
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0
10.000
20.000
30.000
40.000
50.000
60.000
70.000
80.000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Advanced economies
Emerging market anddeveloping economies
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• 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.
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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.
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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
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Thank you