Recent trends in the global ecenomy and the near term outlook

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RECENT TRENDS IN THE GLOBAL ECONOMY AND THE NEAR TERM OUTLOOK

Ieva SkrīvereSenior economist

International Relations and Communication Department02.12.2015

ABOUT US• I represent the team of Latvijas Banka and the Eurosystem comprising economists,

experts in payments, statistics, banknotes and coins, etc.• The economic developments and the financial system of Latvia and the euro area are

analysed at Latvijas Banka …• .. and growth of Latvia's gross domestic product (GDP), price dynamics and labour market

development are forecasted• The Governor of Latvijas Banka uses the above information for the decision-making of

the Governing Council of the European Central Bank..• .. as well as for advising the Saeima (Parliament) and the government on macroeconomic

issues• Thus, the performance of my day-to-day tasks also contributes to the price stability in

the euro area and macroeconomic stability in Latvia.

Where is the growth?

Source: IMF’s World Economic Outlook, April 2015

Growth projections have been downgraded for many countries (2014 vs 2015)

Source: IMF’s World Economic Outlook, October 2015 and October 2014Year-over-year, percentage change

Global growth moderated in the first half of 2015 and is expected to gather pace in 2016

Source: IMF’s World Economic Outlook, October 2015

Upside risks to the global growth outlook have recently decreased; downside risks broadly unchanged


The recovery is expected to continue in the US, supported by lower energy prices, reduced fiscal drag, strengthened balance sheets, and an improving housing market

Source: IMF’s World Economic Outlook, October 2015 and April 2015Upward-pressure countries are those with a residential real estate vulnerability index above the median for advanced economies (AEs)

The moderate euro area recovery is projected to continue in 2015–16, sustained by lower oil prices, monetary easing, and the euro depreciation


US and UK are approaching a policy rate liftoff, while accommodative monetary policy is expected to continue in euro area and Japan


However, inflation remains below central banks’ objectives; the decline mostly reflects the fall in commodity prices


Commodity prices have declined significantly; oil prices have fallen due to strong supply and concerns about future demand


Production of major grains and oilseeds has recently exceeded consumption


Oil price decline is limiting U.S. shale oil production


Future contract implied oil prices have declined significantly during 2015


Forecasting the future oil price: nearly impossible

Source: IMF’s World Economic Outlook and Fiscal Monitor, October 2015

Metal prices are down from post-crisis peaks; the price of iron ore has collapsed, partly due to supply growth


China accounts for about half of the global metals consumption (2014)


Fiscal deficits are far from being eliminated


As a result, public debt burden in major advanced economies is at post-WWII levels


Global current account imbalances have decreased, but are still persistent


Financial stability risks continue to rotate from advanced countries to emerging market economies

Source: IMF’s Global Financial Stability Report, October 2015

Emerging market equity markets and currencies lately have been under significant pressure


The decision to increase RMB flexibility was a significant surprise, and it has spread through commodity and emerging economy currency markets


The inclusion of China’s yuan in the SDR has wider economic and geopolitical implications

SDR basket from 01.01.2011 to 30.09.2016 (including)

SDR basket from 01.10.2016

Private exposures to Greece have been absorbed by the official sector, mitigating volatility and limiting negative spillovers to other countries


Meanwhile, in the rest of euro area credit conditions are easing as QE and banking reform begin to revive credit


Key near term risks going forward

• Disruptive asset price shifts and financial market turmoil• Lower potential output• Risks to growth in China• Lower commodity prices• A further sizable strengthening of the U.S. Dollar• Geopolitical risks• Secular stagnation and hysteresis

Policy recommendations

•Implement growth-enhancing structural reforms•Pursue fiscal consolidation to bring down debt levels•Invest in infrastructure•Stregthen supervision and macroprudential frameworks

All countries•Deal with crisis legacies (address NPLs, improve insolvency and foreclosure

procedures)•Continue with monetary accommodation where output gaps are negative and

inflation too low (Euro area, Japan); ensure smooth normalization (US)

Advanced economies

•Be ready for global realignment triggering broad volatility (for currencies, stocks, commodities, capital flows)

•Lower oil prices offer an opportunity to reform energy subsidies and energy taxation

Emerging market and developing economies

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COMPETITION OF STUDENT SCIENTIFIC RESEARCH PAPERS

The papers shall be submitted to:Latvijas Banka from 16 May to 27 May 2016.

Awards:EUR 2000 to the first-place winner;EUR 1 250 to the two second-place winners each;EUR 700 to the three third-place winners each.

Aim of the Competition: to promote the research and analysis of the macroeconomic issues of Latvia’s economy as well as to facilitate students’ scientific thinking.

Topics: a wide range of macroeconomic topics to be discussed in the economic context of Latvia, the Baltic States or the euro area.

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Highlights of the recent developments in the euro area and the Latvian economy:

www.makroekonomika.lv

• Key data and analysis• Experts’ view• Working papers• Scientific Research Papers by outstanding students and the

slides of this lecture

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THANK YOU!

DiscussionQuestionnaire

Economy & Finance

Recent trends in the global ecenomy and the near term outlook