Upload
vandang
View
230
Download
1
Embed Size (px)
Citation preview
Past, Present and Future: TensePast, Present and Future: Tense
From crisis and recovery to long-term economic challenges
From crisis and recovery to long-term economic challengeslong term economic challengeslong term economic challenges
Christopher Ragan
McGill Universityand
C D H I tit tC. D. Howe Institute
January 27, 2011Lake Louise
1
Lake Louise
1 Fi i l i i d i1 Fi i l i i d i1. Financial crisis and recession1. Financial crisis and recession
2. Current recovery2. Current recovery
3. Looming challenges3. Looming challenges
2
1 Fi i l i i d i1 Fi i l i i d i1. Financial crisis and recession1. Financial crisis and recession
2. Current recovery2. Current recovery
3. Looming challenges3. Looming challenges
3
It began in the housing market ...
U.S. Housing Starts and Overhang of Existing HomesU.S. Housing Starts and Overhang of Existing Homes U.S. Home Price Index U.S. Home Price Index
20
per cent, year over year
2,400 12
thousands,at annual rates
level, months supply atcurrent sales rate
5
10
15
1 600
2,000
9
10
11
-5
0
5
1,200
1,600
6
7
8Housing Starts (left scale)
Months supply of existing homes (right scale)
-20
-15
-10
2001 2002 2003 2004 2005 2006 2007 2008400
800
J J J J J J J J J3
4
5
4
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
Jan2001
Jan2002
Jan2003
Jan2004
Jan2005
Jan2006
Jan2007
Jan2008
Jan2009
... and led to huge financial losses.
U.S. Write-downs and LossesU.S. Write-downs and Losses Global Write-downs and Losses Exceed $1 trillionGlobal Write-downs and Losses Exceed $1 trillion
90100110
Billions, USD
1200
1400Billions, USD
405060708090
800
1000
1200
010203040
p a e s y s 400
600
800
Citi
grou
p
nk o
f Am
eric
a
orga
n C
hase
ldm
an S
achs
orga
n St
anle
y
Mer
rill L
ynch
man
Bro
ther
s
0
200
5
Ban
JP M Go Mo
Lehm
Source: Bloomberg. April 17, 2009
World Canada U.S. Europe Asia
The shock in credit markets …
basis points
360
400Credit Spreads
240
280
320
360
Canada (CDOR - OIS)
U.S. (LIBOR - OIS)
Euro area (LIBOR - OIS)
160
200
240 Euro area (LIBOR OIS)
40
80
120
-40
0
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09
6
Notes: These spreads are a measure of banks’ funding costs relative to a risk-free rate and are a gauge of financial market stress and banks’ financing pressures. The rate on the overnight-indexed swap (OIS) is used as a proxy for expected overnight rates. LIBOR is the London Interbank Offered Rate. CDOR is the Canadian Dealer Offered Rate. Daily data up to and including April 24, 2009. Source: Bloomberg.
… and the collapse of confidence …
Consumer Confidence Business Confidence
160
120
140
55
60
65
120
140
160Canada
U.S.
80
100
45
50
55
80
100
120
40
60
35
40
45
Canada (left)
U.S. (right)40
60
Index 2002=100
2098Q1 00Q1 02Q1 04Q1 06Q1 08Q1
30201978Q1 1984Q1 1990Q1 1996Q1 2002Q1 2008Q1
Index 2002=100 for Canada 1985=100 for U S
7
Index, 2002=100Index, 2002=100 for Canada, 1985=100 for U.S.
Sources: The Conference Board of Canada.
… caused industrial production to f ll ff liff
Year-over-year percentage change
fall off a cliff …
0
10
-10United States
-30
-20 Germany
Japan
-402005 2006 2007 2008 2009
8Source: Bank of Canada.
… and the first synchronized l b l i i 60 global recession in over 60 years.
World Economic GrowthWorld Economic Growth
6
7
Annual growth, per cent
IMF threshold for a global recession
3
4
5
1
2
3
-2
-1
0
9
1970 1975 1980 1985 1990 1995 2000 2005
Note: World real GDP growth on a purchasing-power parity basis.Source: International Monetary Fund World Economic Outlook, April 2009.
1 Fi i l i i d i1 Fi i l i i d i1. Financial crisis and recession1. Financial crisis and recession
2. Current recovery2. Current recovery
3. Looming challenges3. Looming challenges
10
A massive policy response …
1 Monetary policies1. Monetary policies- sometimes “unconventional”
2. Financial-market policiescertainl “ nfamiliar”- certainly “unfamiliar”
3 Fi l li i3. Fiscal policies- generally “timely, targeted, and temporary”
… helped to ensure our recovery …
115Components of Canadian GDP, 2008-2010
G t
105
110
Govt
Cons
95
100
Housing
GDP
90
95
Exports
80
85
Bus Inv
12
75-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
Source: Bank of Canada.
2008Q3
… but it will be a while before things are back to “normal”things are back to “normal”.
Current output gap = 1.8%
Potential GDP
Actual GDP
The key risks to the recovery?
13
2008-Q3 2012-Q4Now
1 Fi i l i i d i1 Fi i l i i d i1. Financial crisis and recession1. Financial crisis and recession
2. Current recovery2. Current recovery
3. Looming challenges3. Looming challenges
14
1 Debt and Demographics1 Debt and Demographics1. Debt and Demographics 1. Debt and Demographics
2 Enhancing Productivity2 Enhancing Productivity2. Enhancing Productivity2. Enhancing Productivity
3 Cli t Ch3 Cli t Ch3. Climate Change3. Climate Change
15
Debt and DemographicsDebt and Demographics
16
Canada’s looming demographic “fiscalCanada’s looming demographic “fiscalCanada s looming demographic fiscal squeeze” :
Canada s looming demographic fiscal squeeze” :
- faster growth of expenditures- faster growth of expenditures- faster growth of expenditures- health care- elderly benefits
- faster growth of expenditures- health care- elderly benefitselderly benefitselderly benefits
- slower growth of tax base- slower growth of tax base
17
Declining fertility has been slowing population growth for decades growth for decades …
3 5Per cent
Historical Projection
2 5
3.0
3.5 Historical Projection
1 5
2.0
2.5
Current fertility rate is ~ 1.6.
0 5
1.0
1.5 rate is ~ 1.6.
0.0
0.5
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
18
Source: Statistics Canada and Office of the Chief Actuary’s 23rd Actuarial Report on the Canada Pension Plan.
... which inevitably leads to aging of the population ...population ...
Share of age 15-64 in total population per centper cent
75Historical Projected
Entry of the baby boom generation into the labour market
Baby boomers gradually reaching retirement age
65
70into the labour market. retirement age.
60
65
55
66 72 78 84 90 96 02 08 4 20 26 32 38 44 50
19Source: Department of Finance Calculations based on Statistics Canada and Chief Actuary data
196
197
197
198
199
199
200
200
201
202
202
203
203
204
205
… and an increase in “age-related” spending.
Health spending and elderly benefits Health spending per capita
15Elderly Benefits
Health
25Thousands, Per capita % of GDP
9
12 Health
15
20
3
6
5
10
020
08
2010
2015
2020
2025
2030
2035
2040
2045
2050
0
0-14
15-2
4
25-3
4
35-4
4
45-5
4
55-6
4
65-7
4
75-8
4
85+
20
Source: Department of Finance Calculations
2 2 2 2 2 2 2 2 2 21 2 3 4 5 6 7
How to address this fiscal squeeze?How to address this fiscal squeeze?
1 Improve efficiency in health-care delivery?1 Improve efficiency in health-care delivery?1. Improve efficiency in health-care delivery?
2. Reduce growth of “other” spending?
1. Improve efficiency in health-care delivery?
2. Reduce growth of “other” spending?2. Reduce growth of other spending?
3. Increase taxes?
2. Reduce growth of other spending?
3. Increase taxes?
4. Increase borrowing? more debt4. Increase borrowing? more debt
21
H bi i thi bl ?H bi i thi bl ?How big is this problem?How big is this problem?
Suppose we hold constant:“ th ” di h f GDP
Suppose we hold constant:“ th ” di h f GDP- “other” spending as share of GDP
t h f GDP
- “other” spending as share of GDP
t h f GDPWe need to avoid a return to the “debt - taxes as share of GDP- taxes as share of GDPWe need to avoid a return to the debt wall” of the mid 1990s!
Total public debt rises by ~ 50-60 t b t 2020 d 2050
Total public debt rises by ~ 50-60 t b t 2020 d 2050
22
ppts between 2020 and 2050.ppts between 2020 and 2050.
Enhancing ProductivityEnhancing ProductivityEnhancing ProductivityEnhancing Productivity
23
What drives “material” living standards?g
GDP/POP = (GDP/E) x (E/LF) x (LF/POP)
Per capita GDP = (labour productivity) x (employment rate) x (LF part. rate)
Past 40 years:
Next 30 years:
2424
Sources of growth, past and future:
Decomposition of per capita Real GDP Growth
2.0
2.5 GDP/POP of which: GDP/E E/LF LF/POP(percent)
Historical Projected
1.0
1.5
Historical Projected
0.0
0.5
-1.0
-0.5
Drag on future growth!
25Source: Finance Canada calculations consistent with January 2009 average private sector forecast
25
1971-2008 2009-2040
Small differences in growth rates matter a lot over the long term!over the long term!
Chained $2002 ThousandsReal GDP Per Capita (Dollars)
100
Chained $2002, Thousands
Assumes average productivity
Historic Projected
80growth of 2%
32%
40
60
A 1997 2007
20
71 77 83 89 95 01 07 13 19 25 31 37 43 49
Assumes 1997-2007 average productivity growth of 1.3%
We need to raise our productivity growth rate!
26
197
197
198
198
199
200
200
201
201
202
203
203
204
204
Source: Department of Finance Calculations
We need to raise our productivity growth rate!
But we have a worrying trend:
Canada’s Average Annual Productivity Growth (GDP per hour)Per cent
3.0
4
1 82
3
1.11.3
1.8
1
2
0
27
62-71 72-80 81-96 97-08
Notes: Total economy labour productivity measured using hours. Source: Center for the Study of Living Standards
Where does productivity growth come from?
ProductivityProductivity
Capital Investment Capital Investment and Technologyand Technology
R&D andR&D andR&D and R&D and InnovationInnovation
Education and Education and
28
TrainingTraining
Climate ChangeClimate Change
29
Projected Global GHG Emissions, 1990-2030
45Billions Mt of CO2
40 BAU projection
30
35
25
30 550ppmv CO2 stabilization*
201990 1995 2000 2005 2010 2015 2020 2025 2030
30
* 550 ppmv (parts per million volumes) of CO2e is the greenhouse gas concentration that is targeted to keep global temperatures from rising beyond 2C of preindustrial levels. Source: Department of Energy, Energy Information Agency, International Energy Outlook 2009 and IPCC
Predicted impacts from global warming:
1. Melting Greenland and Antarctic ice caps
2. Rising sea levels low island states
3. Creeping desertification
4. Falling agricultural productivity
31
Reducing GHG emissions is difficult!
f
g
1. Stock vs. flow.
2. Link between GHG emissions, energy use, , gy ,and GDP.
Challenge: Challenge:
How to reduce GHG emissions without d i li i d d ?reducing living standards?
A huge technological challenge.
32
g g g
World energy consumption and energy related CO emissions
170Index 1980 = 100
World energy consumption and energy-related CO2 emissions
150
160 World energy consumption
World CO2 emissions
120
130
140
100
110
120
80
90
1980 1985 1990 1995 2000 2005
33
1980 1985 1990 1995 2000 2005
Reducing GHG emissions will have Reducing GHG emissions will have significant economic effects:
1. Increase the costs of using carbon-based fuels.
2. Labour and capital will move between 2. Labour and capital will move between sectors and regions winners and losers.
3. Modest decline in growth rate of GDP.
34
A huge challenge of political will
Plenty of thorny policy issues:Plenty of thorny policy issues:Plenty of thorny policy issues:Plenty of thorny policy issues:
1. Carbon tax vs. “cap and trade”?
2. Regional and sectoral reallocations?
3 Public support for new technologies?3. Public support for new technologies?
4. The scope for international trading?4. The scope for international trading?
5. Tense international negotiations.
35
Canada’s Looming Economic Challenges
Debt and Debt and DemographicsDemographicsgg
Climate Climate ChangeChange
Enhancing Enhancing ProductivityProductivity
36
Thank you.Thank you.yy
37