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economic developments and outlook

economic developments and outlook. Policy Hub “Economic and Budgetary Outlook 2019”, European Parliament, Brussels, 6 February 2019. Nigel Pain OECD Economics Department. Outline. Global economic developments. The economic outlook in Europe. Implications for policy in Europe.

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economic developments and outlook

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  1. economic developments and outlook Policy Hub “Economic and Budgetary Outlook 2019”, European Parliament, Brussels, 6 February 2019 Nigel Pain OECD Economics Department

  2. Outline • Global economic developments. • The economic outlook in Europe. • Implications for policy in Europe.

  3. Global economicdevelopments and outlook

  4. Global GDP growth and global trade growth have both slowed World GDP growth % World Trade Volume growth %, goods plus services

  5. High-frequency activity indicators point to an underlying slowdown in global growth momentum Global industrial production growth % Global retail sales growth % Note: Aggregations using PPP weights. Estimates for 2018Q4 based on data in the three months to November.

  6. Business survey indicators continue to moderate, especially export orders Global PMI 2015-2019 average = 100; 3 month moving average

  7. Financial market conditions have tightened, with risk repricing, but long-term bond yields have eased Equity prices January 2016 =100 10-year government bond yields % Stock market indices are the S&P500, FTSE Eurotop 100, Nikkei 225 and Shanghai Composite.

  8. Mild growth slowdown projected in November 2018 OECD Outlook – but rising downside risks G-20 Advanced G-20 Emerging World GDP growth Note: G-20 advanced economies are Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States. G-20 emerging economies are Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.Source: OECD Economic Outlook database; and OECD calculations.

  9. The economicoutlook in europe

  10. Downside risks are rising, particularly in Europe GDP growth estimates %, year-on-year November 2018 OECD Economic Outlook (EO) and estimates from Continuous Consensus Forecasts of February 4, 2019.

  11. GDP growth has slowed more sharply than expected in the euro area and confidence has dropped Euro area GDP growth % European confidence indicators normalised Notes: Potential output growth (LHS chart) is an OECD estimate for the euro area. Sentiment series (RHS chart) are normalised over the period 2003-2019 and shown as standard deviations from the sample mean.

  12. Trade growth in Europe has slowed sharply, reflecting weaker external and internal demand Euro area export volume growth %, year-on-year, 3-month moving average EA19 bilateral export volume growth %, year-on-year, by partner, in 3 months shown Note: Exports of goods, seasonally and working-day adjusted volume indices.

  13. Improving area-wide labour market conditions & stable credit growth are still supporting demand Euro area unemployment rate and negotiated wage growth Euro area credit growth %, year-on-year

  14. Euro area macroeconomic policies are still supportive, and inflation is low. Change in euro area underlying government budget balance % of potential GDP Central bank balance sheet % of GDP Tighter policy Easier policy Change in underlying general government budget balance (adjusted for economic cycle and one-offs, from the November 2018 OECD Economic Outlook.

  15. Significant medium-term challenges remain Disparities in GDP per capita in NUTS-2 EU regions coefficient of variation, % EA19 potential output per capita growth %, 3 year moving average Potential output estimates from November 2018 OECD Economic Outlook. Regional disparities estimate from 2018 OECD Economic Survey of the European Union.

  16. Risks are to the downside and could interact • Trade restrictions intensify. • Further repricing of financial assets. • Financial vulnerabilities in EMEs and from high debt. • A faster slowdown in China. • Political risks in Europe (Brexit; govt-bank links).

  17. Additional US-China trade shocks would have global effects. Europe exposed if uncertainty increases. Impact of new tariffs imposed on US-China bilateral trade and higher uncertainty % change in level of GDP from baseline in 2021 Trade shock is bilateral tariffs of 25% on all US-China trade by the end of 2019. Additional uncertainty shock based on a 50bp rise in global investment risk premia for three years, slowly fading thereafter. OECD estimates using NiGEM model.

  18. A disruptive Brexit remains possible and could have sizeable short-term costs UK GDP relative to staying in the EU %, difference from baseline Exports to UK if trade on WTO basis %, difference from baseline, medium-term Estimates are simulations using the NiGEM and METRO global models under the assumption of trade on a WTO basis between the UK and the EU27 from 2019-2023. Taken from OECD Economic Policy Paper no.16 (2016) and OECD Economic Surveys of Ireland (2018), the Netherlands (2018) and Denmark (2019) using the NiGEM and METRO global models.

  19. Policy implications

  20. Implications for Policy in Europe • Monetary policy on hold for an extended period? • Budgetary policies focused on underlying structural challenges (infrastructure, skills, regions) and supporting vulnerable workers. • Enhancing structural reforms. • Actions to strengthen EA resilience. • Actions to deepen and complete the EU Single Market. • Planning ahead in case the slowdown deepens. Co-ordinated action could be most effective near-term option.

  21. Policy to offset a sizeable global downturn: co-ordinated fiscal action may be needed; planning should start now. Note: All countries on LHS chart, OECD countries only on RHS chart. The fiscal scenario is a co-ordinated global fiscal easing of 0.5% of GDP sustained for three years, with policy interest rates held fixed for three years. The monetary scenario is one in which policy interest rates are lowered by around 25 basis points in the average economy, and quantitative easing reduces the term premium on long-term government bonds by 50 basis points over a three-year period. Simulations on the NiGEM global macro model, with model-consistent expectations.

  22. Co-ordinated action would allow all euro area countries to benefit from demand spillovers GDP impact of fiscal stimulus in the euro area Difference from baseline, %, constant prices Comparison between the first and second year output effects from single country and area-wide fiscal stimulus. Based on a fiscal easing of 0.5% of GDP sustained for three years, with area-wide policy interest rates held fixed for three years. OECD estimates using the NiGEM global model.

  23. Key messages • Global growth continues to lose momentum. • The economic outlook in Europe may be softer than expected in 2019. • Planning ahead in case need to respond to a sharper downturn. • Underlying structural challenges remain. • Policy choices need to enhance resilience to shocks and strengthen medium growth prospects for all.

  24. Additionalbackground slides

  25. Higher US-China bilateral tariffs are starting to affect trade flows and add to policy uncertainty US merchandise imports in 2017 and tariff announcements We focus on this subset of measures and the response in China Source: BEA; United States International Trade Commission; and OECD calculations.

  26. With adverse effects on trade and output, especially if higher uncertainty deters global investment Impact of new tariffs imposed on US-China bilateral trade and higher risk premia % change from baseline in 2021 Additional uncertainty shock based on a 50bp rise in global investment risk premia for three years, that slowly fades thereafter.

  27. Uncertainty has also risen in China: a slowdown would weigh on growth across the world • GDP growth impact of a negative demand shock in China • First year, difference from baseline Note:Based on a decline of 1 percentage points in the growth rate of GDP in China for two years. Policy interest rates are endogenous in all areas. “Commodity exporters“ include: Australia, Brazil, Indonesia, Russia, South Africa and the other oil producers. All countries and regions weighted together using purchasing power parities. Source: OECD calculations.

  28. A common fiscal capacity would help the euro area to smooth downturns GDP growth stabilisation effect Note: The unemployment benefits re-insurance scheme is a stabilisation mechanism for the euro area. Support from the fund, triggered when the unemployment rate increases to high levels, is proportional to the size of the crisis. A participating country pays 0.1% of GDP per year when the fund issues debt and an additional charge of 0.05% of GDP for every year support was received in the past 10 years. Counterfactual simulations on GDP show that for an average annual contribution of 0.2% of GDP, the fund could achieve significant stabilisationwhile avoiding permanent transfers between countries. Source: OECD 2018 Euro area Economic Survey, Claveres;G. and J. Stráský (2018); and OECD calculations.

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