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TRANSCRIPT
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
1973-95 avg.: 0.6 percent
1995-2007 avg.: 1.5 percent
2007-17 avg.: 0.5 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
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
Share of metro area employment variation explained by global, national and residual MSA-specific shocks
0
20
40
60
80
100Global shock, avg = 19.2 National shocks, avg = 12.8
Percent
Share of metro area employment variation explained by global, national and residual MSA-specific shocks
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
lege
Sta
tion-
Brya
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Wac
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Kill
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Tem
ple
San
Ang
elo
Bro
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Lub
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Cor
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-Den
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Abi
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McA
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Wic
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El P
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Lar
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Vic
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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
Col
lege
Sta
tion-
Brya
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Wac
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Kill
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Tem
ple
San
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Bro
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Hou
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Lan
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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
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
December 2017
PercentTarget federal funds rate at year-end
Median FOMC participants’ fund-rate projections
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
PercentTarget federal funds rate at year-end
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
Central tendency of projections
Actual
Range of projections
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
Central tendency of projections
Actual
Range of projections
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?