RECENT TRENDS IN THE GLOBAL ECONOMY

AND THE NEAR TERM OUTLOOK

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AND THE NEAR TERM OUTLOOK

Andris StrazdsAndris StrazdsAndris StrazdsAndris StrazdsInternational Relations and Communication Department

08.03.2016

Inflation remains below central banks’ objectives;

the decline mostly reflects the fall in commodity prices

Source: IMF’s World Economic Outlook, October 2015

Commodity prices have declined significantly; oil prices have

fallen due to strong supply and concerns about future demand

Source: IMF’s World Economic Outlook, October 2015

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

Source: IMF’s World Economic Outlook, October 2015

U.S. oil production has been relatively resilient so far

Forecasting the future oil price: nearly impossible

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

The cost of solar energy has gone down exponentially

Production of major grains and oilseeds

has recently exceeded consumption

Source: IMF’s World Economic Outlook, October 2015

Metal prices are down from post-crisis peaks; the price

of iron ore has collapsed, partly due to supply growth

Source: IMF’s World Economic Outlook, October 2015

2015 was a relatively bad year for global growth, 2016 to be slightly better

Source: IMF’s World Economic Outlook, October 2015, update January 2016

y-o-y percentage change

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 2015

Upward-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 2016,

sustained by lower oil prices, monetary easing, and the euro depreciation

Source: IMF’s World Economic Outlook, October 2015

US raised interest rates for the first time in a decade, while accommodative

monetary policy is expected to continue in euro area and Japan

Source: IMF’s World Economic Outlook, October 2015

Fiscal deficits are far from being eliminated

Source: IMF’s World Economic Outlook, October 2015

As a result, public debt burden in major advanced

economies is at post-WWII levels

Source: IMF’s World Economic Outlook, October 2015

Global current account imbalances have decreased,

but are still persistent

Source: IMF’s World Economic Outlook, October 2015

The decision to increase RMB flexibility was a significant surprise, and it

has spread through commodity and emerging economy currency markets

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

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

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

Meanwhile, in the rest of euro area credit conditions are easing

as QE and banking reform begin to revive credit

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

Key near term risks going forward

• Disruptive asset price shifts and financial market turmoil

• Lower potential output

• Lower growth in China

Lower commodity prices• Lower commodity prices

• A further sizable stregthening of the U.S. Dollar

• Geopolitical risks

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 • 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

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 forecastedmarket 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.

COMPETITION OF STUDENT SCIENTIFIC RESEARCH PAPERS

The papers shall be submitted to:The papers shall be submitted to:The papers shall be submitted to:The papers shall be submitted to:

Latvijas Banka from 16 May to 27 May

2016.

Awards:Awards:Awards:Awards:

EUR 2000 to the first-place winner;

Aim of the CompetitionAim of the CompetitionAim of the CompetitionAim 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.

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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.

Topics: Topics: Topics: Topics: a wide range of macroeconomic

topics to be discussed in the economic

context of Latvia, the Baltic States or the

euro area.

Highlights of the recent developments in the euro

area and the Latvian economy:

www.makroekonomika.lv

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www.makroekonomika.lv

• Key data and analysis

• Experts’ view

•Working papers

• Scientific Research Papers by outstanding students and the

slides of this lecture

THANK YOU!

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Discussion

Questionnaire