Recent trends in the global economy

and near term outlook

1

and near term outlook

Juris Kravalis

Head of International Relations and

Communication Department

09.12.2014

Global EconomyGlobal Economy

Where is the growth?

Source: IMF’s World Economic Outlook, October 2014

Global activity and trade in the first half of 2014 were weaker

than expected

Source: IMF’s World Economic Outlook, October 2014

Growth in emerging market economies is slowing down

Source: IMF’s World Economic Outlook, October 2014

The U.S. economy is back on track

Source: IMF’s World Economic Outlook, October 2014

The shale energy boom has played an important role in the U.S.

recovery

Recovery in the euro area is still fragile

GDP growth (annualized quarterly percentage change)

Source: IMF’s World Economic Outlook, October 2014

Sovereign bond spreads in the euro area have come down, but

differences in lending conditions to SMEs are still substantial

Source: IMF’s World Economic Outlook, October 2014

Asset quality review by the ECB a significant step

towards getting lending in the euro zone going again

• The ECB is taking over supervision of the largest euro area banks from the

national regulators on 4 November 2014

• The asset quality review and stress tests carried out earlier this year

identified capital shortfalls totalling EUR 25 billion at 25 euro area banks

• Banks with shortfalls to submit capital plans by 10 November 2014

• Banks with capital shortfalls will have 6 – 9 months to remedy the

situation

• Improved bank capitalization should contribute to recovery of the lending

market in euro area

European CIS countries are close to stagnation

Source: IMF’s World Economic Outlook, October 2014

Growth in Asia is holding up

Source: IMF’s World Economic Outlook, October 2014

Overview of the World Economic Outlook projections by the IMF

Overview of Euro area projections by the European Commission

Inflation in the euro area below that in the U.S. and the

medium term target of close to but below 2%

Source: IMF’s World Economic Outlook, October 2014

Central Bank balance sheet paths to diverge going forward

• The U.S. Fed announced the end

of Quantitative Easing on 29

October 2014

• The ECB announced additional

monetary policy easing in Junemonetary policy easing in June

and September of 2014 and

started purchases of asset backed

securities (ABS) in October 2014

• Bank of Japan is continuing

agressive monetary easing

U.S. Fed expected to start raising rates in 2015

Source: IMF’s World Economic Outlook, October 2014

Key near term risks going forward

• Geopolitical risks

• Risks from a financial market correction

• Volatility resulting from monetary policy normalization in the

United StatesUnited States

• Protracted period of low inflation in the euro area

• Risk of stagnation and lower potential growth in a number of

advanced economies

• Considerably slower growth in China

Policy recommendations

• Both continued support to demand and supply side policies needed

• Increased public investment in most current account surplus countries

(other than China)

• (Continued) structural reforms in the (former) current account deficit• (Continued) structural reforms in the (former) current account deficit

countries

• Macroprudential tools (such as loan-to-value, debt-service-to-income

ratios) to limit credit booms in a number of smaller advanced economies

Policy recommendations: Euro area

• Reestablish confidence in banks and improve financial intermediation in

the euro area

• Cost-effective active labor market policies, measures to lower the

opportunity cost of employment, and better-targeted training programs

• Complete the single market in services, including a single digital market

• Make progress with free trade agreements

• More closely integrate energy platforms and policies

Fiscal OutlookFiscal Outlook

The fiscal outlook

• Immediate fiscal pressures have lowered (due to low interest

rates)

• However, underlying fiscal vulnerabilities persist (as shown

by high debt levels)

However, underlying fiscal vulnerabilities persist (as shown

by high debt levels)

• Moreover, growth is weaker than expected and inflation

remains low

Advanced economies: Proceeding with consolidation

while supporting employment and growth

Emerging market economies: Consolidation postponed;

It is time to rebuild fiscal buffers

Job creation is at the top of political agenda

• Global unemployment exceeds 200

million people

• In AEs: raising concerns about

permanent skills and human capital

erosion associated with long-term erosion associated with long-term

unemployment and inactivity

• In EMEs: informality remains high and

job creation insufficient to absorb the

large number of young people entering

the labor market

Do lower taxes mean higher employment?

Impact of social security contribution (SSC) cuts

Targeted SSC cuts: Successful examples

Targeted SSC cuts: Not so successful examples

Financial StabilityFinancial Stability

Global financial stability assessment

• An increase in risk

appetite has driven the

search for yield and

pushed up market and

liquidity risksliquidity risks

• Credit risks have

declined, reflecting

favorable funding

conditions and

improved asset quality

Accommodative monetary policies have led to

• Increased economic risk taking

– Improving the outlook for capital expenditure

(especially in Japan, the US, and the UK)

• And possibly too much financial risk taking, as reflected in• And possibly too much financial risk taking, as reflected in

– Compressed credit spreads

– Low volatility

– Elevated and highly correlated asset prices

Banks have become stronger

But they also need to adjust business models

• Return-on-equity has fallen to a

historically low level.

• Investors demand high returns from

banks, with the cost of equity having

risen since before the crisis risen since before the crisis

• As a result, banks accounting for 80%

of total assets of the largest

institutions currently have a so-called

“return-on-equity gap”

Transition needs are large

What should banks do?

• Reprice current business lines

• Re-allocate capital away from low-risk assets

• Retrench from some activities

Restructure weak banks• Restructure weak banks

• Resolve unviable banks

• Move away from cross-subsidization

Shadow banking has increased

• Financial intermediaries or

activities involved in credit

intermediation outside

the regular banking the regular banking

system, and thus lacking a

formal safety net

It constitutes about one-fourth of total financial

intermediation worldwide

Benefits and risks of shadow banking

• Can complement traditional banking by expanding access to credit or by

supporting market liquidity, maturity transformation, and risk sharing

• The global financial crisis revealed that, absent adequate regulation,

shadow banking can put the stability of the financial system at riskshadow banking can put the stability of the financial system at risk

• However, assessing risks associated with recent developments in shadow

banking remains difficult, largely because of a lack of detailed data

Role of financial policy

• Support Economic Risk Taking

– Improve flow of credit to the economy

• Facilitate banks’ transition to new business models

• Encourage (safe) non-bank credit

• Address Excessive Financial Risk Taking• Address Excessive Financial Risk Taking

– Macroprudential policies as a first line of defense

– Address rising market liquidity risks in shadow banking

• Prevent market runs

• Prepare contingency measures

THANK YOU!

41

Questions and Answers

Survey

Latvijas Banka

Latvijas Banka:

• līdzdarbojas monetārās politikas

noteikšanā un īstenošanā;

• pārvalda rezerves aktīvus, t.sk. zelta

rezerves;

• veicina maksājumu sistēmu raitu darbību;

To dara:

• ekonomisti un ekonometristi;

• grāmatveži;

• finanšu tirgus analītiķi;

• statistiķi;

• maksājumu sistēmu eksperti;

42

• veicina maksājumu sistēmu raitu darbību;

• nodrošina starpbanku maksājumus;

• nodrošina raitu skaidras naudas apriti

valstī;

• vāc, apkopo un publicē finanšu statistiku;

• pārstāv Latvijas intereses starptautiskās

finanšu institūcijās.

• maksājumu sistēmu eksperti;

• finanšu ieguldījumu portfeļa vadītāji;

• kases operāciju metodikas eksperti;

• maksājumu un finanšu tirgus analītiķi.

Studentu zinātniski pētniecisko darbu konkurss

Darbu iesniegšana:Darbu iesniegšana:Darbu iesniegšana:Darbu iesniegšana:

Bankā no 2015. gada 18. maija līdz 29.

maijam.

Naudas balvas:Naudas balvas:Naudas balvas:Naudas balvas:

I vieta – 2000 eiro;

Konkursa mērķisKonkursa mērķisKonkursa mērķisKonkursa mērķis: veicināt Latvijas

tautsaimniecības makroekonomisko

problēmu apzināšanu un analīzi un

stimulēt augstāko mācību iestāžu studentu

pētnieciskās domas attīstību.

43

I vieta – 2000 eiro;

divas II vietas – 1 250 eiro katram;

trīs III vietas – 700 eiro katram.

Tēmas: Tēmas: Tēmas: Tēmas: piedāvāts plašs makroekonomisko

tēmu loks, kas aplūkojamas Latvijas,

Baltijas valstu vai eiro zonas

tautsaimniecības kontekstā.

Vairāk informācijas:

44

MAKROEKONOMIKA.LV