Global Economic Outlook Pt 7

So this homework to be done country by country is going to be very important so every single country should keep his house tidy and clean and then international orgranizations, they are important tools but they are not a substitute for the homework to be done in every single country.

A more coordinated action is absolutely necessary in the Euro Zone.  We hope that the fiscal compact, we hope that this works and it is absolutely necessary to implement this in the Euro Zone without any slippages.  And also G20 I think has a big role also.  Probably under utilized but an important role to have a better global coordination of the policies.  And it’s very important today, during this year  for the countries within G20 not to just follow their own national interest but also think about the global outlook, feel the global responsibility because as Christine said at the very beginning, we are living altogether and if there’s a serious collapse anywhere in the world, it’s going to hurt all of use.  Nobody is going to have a better condition because of a collapse, serious collapse elsewhere in the world.

So, specific to Turkey as Martin has asked.  We have been very prudent on fiscal side and in 2009 we announced a very prudent  tight fiscal policy and medium term fiscal program to even further reduce our deficits and many people had picked on us because they told us “look at Europe, look at everyone else, everyone else is increasing spending and you are doing the reverse”.  But it paid off very well.  The confidence was built up, growth rate was 9% in 2010, 8% in 2011.  We have actually been tightening things to contain the growth to prevent overheating.  We have followed quite a different path from the rest of our European neighbours.

Thank you very much and let me turn now last to Asia and start with Japan in Asia and with you Minister Furokawa please.

Thank you very much.  Let me start with the landscape of Japanese economy.  We have had a relatively stable economic growth rate  and low unemployment rate and we are determined to continue  to the final stabilization of the Euro Zone.  The current government debt crisis in Europe inevitably affects the glob al economy.  With this in mind, we expect that Europe makes effort to manage  the challenges and endeavours to salvage the fireball to calm down the market.

Japan has been supporting this effort  as a major purchaser of EFSF Bonds currently holding 16% of the outstanding issues.  Further engagement of the international community is required.  Japan will collaborate closely  with other countries and relevant parties in supporting Europe’s firm actions.  However, I have somewhat of a concern that the crisis may also have a financial effect outside Europe specially on the capital shortage in Asia.  Japan will intensely concentrate its effort to save off the capital outflow and proactively commit to Asia’s sustainable growth

The issues we are currently facing  are not limited to the debt crisis in the Euro Zone.  I would like to point out more common and underlying issues.  This year, social collectiveness and trust will be tested all around the world because of a number of destabilizing factors.  These factors are low economic growth rates, high unemployment rates and continuous debates in election campaigns.  In confronting these challenges, the Japanese government  is now working on composing a new growth model that pursues three elements altogether namely, the economic growth, social inclusiveness, and environmental sustainability.

Japan will closely collaborate with the economies of Asia and the OECD countries in this effort.  We should pursue this dynamic and inclusive growth because mere economic growth will not resolve the dissatisfaction in the current economic system.  As you witnessed, last year occupied Wall Street and a popular uprising in many countries are typical examples.  Following this annual reform, I am looking forward to elaborating for further discussion in the international community.

And lastly, I would like to comment about Japan’s fiscal deficit issue.  It’s important to note that Japan’s fiscal deficit issues is a pressing issue in terms of its volume.  At the same time, it’  also important to note that vast majority of the debt is financed by domestic savings.  We don’t think this structure will cause immediate crisis. However, tapping fiscal consolidation is a pressing challenge we cannot leave behind.

Our government has been working on these issues since fiscal year 2010 aiming to have the primary debt to GDP ratio in five years both raising the consumption  tax rate in a phase manner and promoting economic growth through implementing the strategy for rebirth of Japan are key components.  They are the wheels of the same car.

Thank you very much.  I am very glad that you brought in Japan’s fiscal position since we’ve had some very strong positions on this issue of fiscal austerity which a number of people prefer to.

Davos 2012 – Global Economic Outlook Pt 7
economics expert witness

Global Economic Outlook Pt 6

Thank you very much.  The issues you have raised we will absolutely come back to if it’s all possible.  Pretty all of them I think.  Let me turn you now to Deputy Prime Minister Mr.  Babacan.  Perhaps I very much want you to talk about your own country in the region, lots going on.  What are the economic  significance of that.  It’s obviously a very big issue.  Also, obviously you have a, I don’t know if we can describe this as a privileged position but ring side seat on the Euro Zone, a disaster…sorry, I didn’t mean that, of events and I know you have views on it.  And also, particularly relevant because Turkey, of course , had a financial crisis quite recently in the last decade and it has gone through that and has coped with this crisis from this point of view remarkably well so I know that you have lessons to teach us as well.  So what is your perspective on where we are?

Well, if I may talk about the current  global economic situation and most specifically what is going on  in Europe and the Euro Zone and if we really want to see sustainable growth, job creation, employment and so forth, there is one  very important concept which I think we have to emphasize over and over again and that is confidence.

When we don’t see a medium of confidence, when consumers don’t have trust for the future, they don’t spend.  When corporations don’t have confidence, they don’t invest and when banks have doubts about our future, they don’t lend.  And when these don’t happen, the economy stops, the financing channel stops and we don’t see growth.

How to attain confidence, how to regain confidence should be at the core of the policies in many, many countries.  For those countries where public debt is a source of concern, we don’t think that fiscal stimulus will work.  If  a country already has high debt and if this debt creates a lot of doubts in the markets, simply trying to spend  more has some kind of growth through just government spending and in Euro Zone there has been some unfortunate trials in 2008, 2009, trying to give fiscal stimulus and had a very unfortunate results at the end of the day.

For those countries where public debt is reasonable, and for those who have some physical space, maybe there might be some efforts but what is most important here is about fiscal policies.  There’s an asymmetry.  It is always easy to losen fiscal policies.  So then in 2008 and 2009, many European governments said okay, this is going to solve the problems but then it is time to tighten the policies.  It is very, very difficult.  It has many costs, it costs the fortunes of the leaders, it costs the fortune of the political parties in many countries and thinking about the fact of that sensitivity, the fiscal policies, it is important to be on the prudent side when it comes to budget and public debt and so forth.

Once keeping the fiscal policy at a prudent phase, then for countries it is very important to have a very clear strategy and communicate the strategy very well so that the strategy is owned by the masses because if there is no local ownership of the policies, then probably those policies will not work.  Do people understand?  Do citizens of that country understand?  Do they really understand the necessity of the steps, maybe difficult steps that is needed for the future.

And then having  a medium term vision is also very important.  Now I have attended many, many discussions  in Davos and we have been talking too much about 2012 but if we are going to talk about growth and employment, it is not just the single one year we have in front of us.  We have 2013, 2014 and for some policy  actually, it might be hurting growth in the short term today but it may generate more and sustainable growth  later on so we should probably look at growth and job creation with a medium term approach and the governments announcing these medium term programs is going to be very, very crucial to bring some predictability about what is going to happen.

If the companies or the financial sector doesn’t have any idea about what’s going to happen in this year in the United States, if we all have big doubts about what’s going to turn out in the Euro Zone this year and if all the mass media is broadcasting this, how to expect people to spend more, how to expect companies to continue investment  or hiring people and how to invest…the banks, although they have much liquidity in their hands to do their function of lending.

Davos 2012 – Global Economic Outlook Pt 6
economics expert witness

Global Economic Outlook Pt 5

And a lot of these things have happened over the last 18 months within the Euro Zone and I think we should credit that but I think more needs to be done.  I think the Euro Zone understands that and I think it needs to happen in the next few weeks. Now the two things I would focus on are first of all the creation of this firewall.  It’s been much talked about but I think that is now a key to unlocking further confidence.

The second thing which I am not sure has been mentioned yet is Greece.  I mean we are still, at the beginning of 2012, talking about Greece again.  I think it’s  sign that this problem has not been dealt with, that this is the…the danger here is that the tail wags the dog throughout this crisis.  In other words, the inability to do the specific problems in the periphery causes shock waves across the whole European economy and the world economy and concluding the deal that will  lead to a more sustainable situation  in Greece I think is actually fundamental to stability in the Euro Zone.

But I think those things can be done and I think                 they can be done over the next couple of months.  The second thing I think that needs to happen is, I think, policy makers need to get a greater grip on the deleveraging process.  Now part of that is the deleveraging of public sector debt and obviously, talking my own book, I think we’ve demonstrated in the UK and even if you have a very high budget deficit and we have one of the highest in the world,  a credible plan to deal with it can command market confidence, give you very low rates in the market and provide a platform of stability in an otherwise very volatile time.

I think the other thing that we all need to better understand is the deleveraging happening in the financial system, an inevitable consequence of a financial crisis than a balance sheet recession.  But I think that the point that Martin made is something that I would like to see more tension to from policy makers over the coming weeks which is the vulcanization of European Finance which has happened as a number of institutions  and individuals have taken actions to protect  themselves from the terror risk of things going wrong in the Euro and what the impact it will be on the European economy and how that can be unwound which I think is very important.

Then I think one of the things we can do is also provide a regulatory certainty this year.  Of course it’s inevitable after a big banking crash that you consider how to avoid these things happening again and suddenly in Britain, and maybe we can come on and talk about that, we have done a lot of work in looking at how we can better protect our banking system that Martin himself was involved in.  But we now need to move to a point where we tell everyone what we’re going to do, get clarity on the rules, I would include the United States  in this and again provide some stability  which will provide a platform for investment.

The final point I will make is that I think we need to restore some confidence in the ability of the multilateral  organizations to work effectively.  We can come on and talk about IMF resources and I think  there is a case for increasing IMF resources and that would also be a way of demonstrating that the world wants to help together solve the world’s problems.  But I think that’s also an important task ahead for the FSB and Mark this year.  And on trade, which I continue to think is one of the most disappointing features at the moment of the world, that we have not been able to pick up the Free Trade Agreement that we know would act as a significant economic stimulus, not just for the real benefits it will bring but also because it would demonstrate that we are able to take collective action for the common good.

I think in the absence of that, I think it is actually positive to see more regional trade agreements  in the European context, a deepening of the single market and bilateral agreements in the case of Europe, bilateral agreements between the European Union and for example, India.  Which I think would again demonstrate that we are not retreating into protectionism but actually moving forward and opening up markets.  All those three things  are within the hands of policy makers. They are not things that will require acts of God and guidable  forces of nature  to deliver.  These are all things that people such as the people in this room, can get together this year and deliver.

Davos 2012 – Global Economic Outlook Pt 5

Global Economic Outlook Pt 4

The actual execution of these deals is frightfully low.  Anyone who have seen the most recent results of the major investment banks would know that.  The point is there are things to do  but people are understandably pulling back.  Now, you reference the measures of the ECB in December and upcoming, absolutely taken tail risk out of the financial system which is incredibly important.  There is not going to be a style event in Europe that matters but  that is different than having a well fully functioning banking system in Europe, a banking system that is lending to the real economy.

We see deleveraging effects, perspective deleveraging effects , I don’t think we are really seeing this yet, in a number of key financial markets.  In project finance, in trade finance, in the commodity markets, there is a direct pullback by European Institutions.  I think we should be conscious that the majority of foreign holders in the emerging markets that are European and some of this pull its capital back into Europe has directly affected emerging market capital flow so we’re getting a perverse flight from where we need growth and need capital to where it’s being repaired.

Overall in terms of the where the financial system is and I will conclude with this.  The system is much healthier as a whole than it was in 2008.  Capital has increased in virtually all jurisdictions, although the least in Europe which is one of the fundamental issues.  Liquidity is up substantially in all jurisdictions.  In fact there’s probably too much liquidity being held directly in the financial sector.

Those are the positive and a number of structured markets and other markets that caused problems have diminished  very much in importance.  The other way that financial resilience has increased though is left positive and I will finish on this which is that the contingency measures that institutions are taking for the possibility of a more adverse outcome in Europe and elsewhere are holding back the willingness to provide finance across the range of projects.  So implementing pristine solutions will make a real difference in terms of corporate attitudes, I think, but also in terms of direct supplies capital.

Thank you very much.  One of the issues is I think very much raised which a lot of the banks have complained about is they’re being asked simultaneously, immensely to improve their capital ratios and to increase their lending.  I’m sure you wanted to address that sort of concern and indicate how

Completely coherent and cohesive and together the policy direction is for the world economy.

Let me now turn to you Chancellor.  You are in the slightly strange position of being the nearest we have to somebody who can speak to the Euro Zone.  The irony will not be lost on anybody.  But anyway, you are in the meeting.  I would like you to think a bit about from your perspective where the UK is in this context  and what the options of the UK are and also particularly where you personally think the Euro Zone has got to and what you might want to add to Christine Lagarde’s indication of the priorities and one of the issues that we will touch on now but that we will come to later is what you think the role of the IMF needs to be in that crisis.

Thank you Martin and yeah I am looking forward.  Probably the only time in my life I intend to speak to the Euro Zone.  I think people have commented on the mood of this conference being quite somber but having been here for a couple of days, people have also pointed out that actually people are slightly more optimistic at the end of the week than the beginning even if, as you put it Martin, that’s because they’ve been hanged.  I think, of course, the economic challenges are very self-evident to particularly western economies, particularly European economies and the UK is certainly not immune to that.

But I think, and I will focus on three things which I think rely within the hands of policy makers.  Positive actions that would turn a more optimistic mood at the end of the early week of January into a more optimistic outlook for the world economy at the end of this year.  I would focus on these.  I mean first of all, the Euro Zone.  I think it is important to recognize that for elected politicians to achieve what has already been achieved in the Euro Zone has been a real act of courage to pool your national resources into a common fund to help other countries is very controversial to undertake austerity measures  usually gets you kicked out of office unless you manage that correctly.   To undertake difficult structural reform  of pensions or labor markets is again very controversial.

Davos 2012 – Global Economic Outlook Pt 4

Global Economic Outlook Pt 3

But turning to U.S. and Japan in particular.  Those two countries are running higher deficits than the Euro Zone on a consolidated basis.  They run very high debt.  Completely different structure depending whether on you sit in Japan, the U.S. or the Euro Zone but equally those countries  have to anchor in the medium term what they’re going to do about this constant, regular deficit in the last two years and how they are going to turn around the debt trajectory that is theirs at the moment.

Emerging market economies and particularly those that are in a surplus situation, they have to continue what they have began to do which is actually re-concentrate on the internal markets on the domestic consumption  rather than rely too exclusively on exports and investment.  That could apply equally to advance the economies that are in a surplus situation.

So that’s pretty much what can be done by the Euro Zone in particular, by the rest of the world, I recognize that it’s very sketchy Martin but  in the interest of being brief and to the point I have decided to be a little bit elliptic.  What the IMF can do, because the IMF is one of the tools that I referred to earlier on, is clearly to act as an aggregator of trust, as a propagator of stability and certainly in that process needs to demonstrate the multilateral support of its membership to actually accommodate  and supplement some of the situations, not in the Euro Zone but in any country that is a member of the IMF.

There will be needs in the Euro Zone, no doubt about it but in Central and Eastern Europe there will be needs as well.  And in other countries, including low income countries, including middle income countries, there will be needs.  Short term for some, longer term for others and it’s for that reason Martin that I’m here with my little bag to actually collect a bit of money.  Thank you.

I take it that this is not a plea to the business leaders for a philantrophic gesture but we will certainly come back to the question of IMF resources after the introductory remarks.  I am going to turn now to Governor Mark Carney and how you see the world economy and you are presiding over an economy that seems to be happily immune, presiding the monetary fear obviously and a number of people say, a striking feature of this crisis is all the countries that have recently had crisis in the last three decades have managed to avoid the crisis this time.  I would also like your view on how you see the financial sector more broadly in your present role and its resilience because that has been an enormous concern in the last few months and I think it’s kind of really gone away just because Mario has decided to provide more money than before.  So what’s your perspective on where we are in those to respects.

Thank you Martin.  Just in terms of overall outlook,  I absolutely agree with the IMF.  I mean this is a 3% growth world, roughly a  2% United States, 8% China.  China decelerating but to a still strong pace.  Importantly in that though is  the impact of the Euro Zone crisis.  In our view, the impact of Europe at the level of global GDP is about 1% off the level of global GDP at the end of 2012.  So, we are all going to feel this and that’s in a world where this crisis is contained and containment is different than resolution.  So why is there the impact.  There’s an impact in terms of the order of dexterity.  In Europe, we have Europe down 1%, a little more than the IMF for 2012.

But secondly, through financial channels and I will get to that in a moment.  To go back to where you started at the very beginning though,  we are in a great deleveraging in the advanced economy and it’s very hard to grow economies, it’s very hard to de-lever unless you are increasing leverage somewhere else and there’s only really two options in the world.  The corporate sector and the emerging markets as a whole and we will hear it more directly from colleagues on the latter so I will focus on the corporate sector and the link with finance.

I think part of the mood here in talking directly to the real economy, is there’s a lot to do but there is a great deal of uncertainty we’ve contributed  to that from our respective world in our respective jurisdictions.  I will give you one fact or anecdote, if you will, the M&A backlog at major investment banks  is at an all time high so the number of potential transactions that CEO’s are contemplating, and the equity backlog is also at an all time high.

Davos 2012 – Global Economic Outlook Pt 3

Global Economic Outlook Pt 2

Thank you very much Martin.  Does this work?  Great.  You’ve asked us on the panel to focus on solutions.  I would try to do that but I would first like to start with three comments:  number 1, no one is immune in the current situation.  It’s not just a Euro Zone crisis. It’s a crisis that could have collateral effects, spill over effects around the world and you know, we will hear from others but what I have seen and what we are seeing in numbers and forecasts is that no country  is immune and everybody has an interest in making sure that this crisis is resolved adequately.

Number 2, I would say that now is the time.  There has been a lot of pressure building in order to see a solution come about.  And Number 3, I would like to just to refer to Churchill, if I may, he used to say that we have the tool, we must do the  job.  The IMF is one of the tools  but we need a tool kit to actually address the crisis as it is at the moment unfolding.

And focusing on solution Martin, if I may, I would like to address the European current situation specifically the Euro Zone.  Then what other countries need to do as well, because as I said it’s a took kit and it’s not going to rely exclusively on one single region  and number 3 what the IMF can do.

Turning to Europe and to the Euro Zone in particular, the IMF sees three necessary solutions to the current situation.  The first one is about growth and growth will be critical for many reasons.  To deal with the job issue, to deal with the physical consolidation necessity and we will come to that in a second, and to just encourage value creation in a part of the world whereas you said in the last five years there’s been pretty much zero growth.

And growth in our view is on two components, monetary policy aside which is obviously another one but  I would like to focus on the other two.  The first one is combination of liquidity so that banks in particular have sufficient liquidity and clearly what the head of the ECB has done in the last weeks of December is critical but also, more importantly at the moment, a decent firewall.  There is work underway, there is progress as we see it but it is critical that the Euro Zone members actually develop a clear, simple firewall that can operate both to limit the contagion and number two to provide this sort of act of trust in the Euro Zone so that the financing needs of that zone can actually be met if the finances of the world  are not interested in that zone.

And the second aspect that will actually build growth in the zone is obviously competitiveness and competitiveness is a very important factor that needs to be tailor made, that needs to be customized to the country as is physical consolidation but we are not suggesting that there should be physical consolidation across the board without differentiation and without specific treatment adjusted to the specifics of the country.

Some countries have to go full speed ahead and do that physical consolidation that is so much needed.  I would include in that category certainly those countries  that are under programs and a few others.  But other countries have space, have room and can do something and there are not many of them, I can think of one or two those who suddenly explore what they can do to actually boost growth in their respective quarter in order to help themselves and also in order to help the rest of the zone.

Just like competitiveness has to be tailor-made and adjusted to the weaknesses and strengths of the country to its comparative advantages equally the physical consolidation  that is needed need to be adjusted, need to be customized to the country and cannot be just across the board because otherwise, it will simply strangle the little growth that there is or there could be.

That’s as far as the growth firewall and liquidity.  Third component that we see as a necessity for Europe is clearly more integration.  I said it, I will be happy to repeat it in addition to having a monetary zone, the Euro Zone needs  to develop its physical consolidation compact that is currently in the works  and that we hope will be strengthened and validated on Monday at the Leaders Summit.  I certainly agree that it’s not a sprint, it’s a marathon but one along the way of which there needs to be deliverable.

Turning now to U.S. and Japan because this session cannot be all about Europe, Europe, although the Euro Zone has to do very important things  very quickly.

Davos 2012 – Global Economic Outlook Pt 2

Global Economic Outlook Pt 1

Okay, I think we can start. It’s my great pleasure to moderate this very, very important session which I have done for a number of years and I have always enjoyed enormously.  Whether the panellists have enjoyed as much as I have done is of course an open question. Maybe that’s why I’ve invited them backs.

The issues that are in front of us are of enormous interest and importance.  Before I introduce the panellists, not that I think they need much introduction, I will just say very briefly where I think of what my sense of worth of where we are in this World Economic Forum and the issues we will have to address, thinking about 2012, what might happen to the economy and the big policy questions.  The agenda is very long.  We will do our best to cover it and we will certainly leave some time for questions and answers.

My sense of the mood in Davos is that people are feeling relief in the way that somebody would just be reprieved from hanging fields of relief.  That instead of facing the imminent prospects of catastrophe, there is a sense that things have been done which have eliminated, very substantially, the immediate risk of disaster particularly in Europe, particularly because of the activities of the European Central Bank but not exclusively so and that therefore we can start thinking about the slightly longer term which is at least a few months and perhaps even longer but at the same time as the IMF reminded us this week, the prospects for this year  look pretty bad, they have downgraded global growths and developed country growth in particular very significantly, if I remember correctly down to 3.3 percent and with the Euro Zone now expected to be in recession.

So the long story of difficulty particularly in the developed world,  which is now following a financial crisis but again 4 and a half years ago, remember how long  we have been in this and nobody can say that we are through it so this is..we’re not even clear that we’re through the halfway.  This is an incredibly long process we’ve been in  with the current crisis a now increasing concern of course about sovereign debt quite particularly in the Euro Zone where the crisis have been very, very extreme.

But that’s one part, the downgrading of growth as a result of what I think Madame Legarde  has referred to as  self-inflicted wounds by the developed countries and we all know what she is referring to.  At the same time, I would just like to remind  you one or two statistics, the developments in the rest of the world,  the bubble in the emerging world have been quite  staggering.  If you go back to the Sept or October 2011 World Economic Outlook and you look at the IMF’s forecast of 2012 and converted this  back to a 2007 base,  so that’s when the world economy was just moving  into crisis and what has happened to the economies of the world as the IMF forecast for 2007 and 2012, you will discover that according to the IMF’s forecast, over that period, China’s economy will expand by 60%.  The Asian developing and emerging countries, which is, I would remind you, half of the world’s population, will expand by 50%.  The emerging world well over by 35% and the developed world by essentially 0.

So this five years have seen the most  extraordinary and unprecedented speed of transformation of a relative weight  of countries.  In addition to this great deliveraging, there is this great convergence.  These two processes are shaping our world.  So with that little introduction, let me just introduce you to the panellists starting on the far left is Robert Zoellick, President of the World Bank Group.  The World Bank has been a frequent member of this panel.  Next to him is Governor Mark Carney of the Bank of Canada who is also now Chairman of the Financial Stability Board  responsible for the regulation of financial systems.  Next to him is Deputy Prime Minister Ali Babacan  who is of course responsible for the economic policy in Turkey for a long time.  Next to him is Christine Lagarde  who has been previously on this panel as Finance Minister of France, of course she is now the Managing Director of the International Monetary Fund.  Next to her is Mr. Donald Tsang, Chief Executive of Hongkong.   Next to him George Osborne, Chancellor of the UK and finally Minister Furukawa who is Minister for National Economic Policy  of Japan.

For some reason I cannot even begin to imagine  there is no representative from the Euro Zone government on this panel and I certainly don’t take it personally.  So I am going to start off then with you Christine Lagarde if you could set out how you and the Fund now see the world and how concerned you remain despite some of the things, the improvement in terms about the world economy in 2012 and the issues that confront us.

Davos 2012 – Global Economic Outlook Pt 1