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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.
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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:
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