CHALLENGES FOR THE EUROPEAN ECONOMY - DANMARKS NATIONALBANK Governor Per Callesen, 20 March 2014
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DANMARKS NATIONALBANK CHALLENGES FOR THE EUROPEAN ECONOMY Governor Per Callesen, 20 March 2014
Overview and conclusions:
1. Openness of DK and the EA
• Slack in Europe comes from the inside
2. Progress in adjustment and reform
• Substantial progress, some political risks
3. Risk of deflation?
• Deflation unlikely, very low inflation likely for some time
4. Financial conditions
• Substantial improvements and impetus
5. Banking union
• Issues of Single Market, standards of supervision, bail-in and
insurance. Legacy to be managed.Key figures on international relations and the global economy
Denmark has strong international relations
(and a large surplus on all components)
2012
Per cent of GDP Per cent of GDP
90 9
80 8
70 7
3%
60 28% 6
50 5% 5
40 4
30 3
20 2
10 1
0 0
Export Import FDI out FDI in Interest Interest
earnings expendit ure
(right-hand (right-hand
axis) axis)
Source: Source: Reuters EcoWin, IMF og Eurostat.…and so has the euro area
2012
Per cent of GDP Per cent of GDP
70 7
60 6
16%
50 0.4% 5
3%
40 4
30 3
20 2
10 1
0 0
Export Import FDI out FDI in Interest Interest
earnings expendit ure
(right-hand (right-hand
axis) axis)
Source: Reuters EcoWin, IMF og Eurostat.Shares of the global economy
2012
1% GDP ( 35/ 65) Imports ( 38/ 62) 3% 13%
22% 22%
22%
12% 31%
13%
23%
20% 18%
Source: IMF.Imbalances and reforms
Balances of payments in the euro area have
improved
Balance of payments, current account
Per cent of GDP
8
6
4
2
0
-2
-4
-6
-8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
North Centre Sout h
Note: North = Austria, Finland, Germany, the Netherlands. Centre = Belgium, France. South = Greece, Italy, Portugal, Spain. Weighted by GDP.
Source: Reuters EcoWin.The euro area public balance has improved
Per cent of GDP
2
1
0
-1
-2
-3
-4
-5
-6
-7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Actual balance, public sect or overall Structural balance
Note: Structural balance is per cent of potential GDP. Source: Ameco and Reuters EcoWin.Higher debt level in the euro area but flat
interest expenditure
Per cent of GDP
120 6
100 5
80 4
60 3
40 2
20 1
0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Public debt Interest expenditure (right-hand axis)
Source: Reuters EcoWin.Europe has come closer to ensure long-term
fiscal sustainability
Consolidation requirements to reduce government debt to 60 per cent
Chang e in und erlying p rimary b alance, p ercentag e p o ints o f GDP
10
9
8
7
6
5
4
3
2
1
0
Euro area OECD USA
2010-14 Averag e to 2030
Note: Over the projection period, countries with gross government debt ratios in excess of 60% of GDP are
assumed to gradually reduce debt to this level, whereas other countries stabilize debt ratios at their current levels.
Average consolidation requirements from 2014 to achieve these objectives are measured as the difference between
the underlying primary balance in 2014 and its average over the period to 2030 (or until the debt ratio stabilizes). Source: OECD, Economic Outlook, May 2013.Structural reforms have contributed to
increased labour-force participation
Change in labour-force participation rate 2000 Q1-2013 Q3
Note: Change since 2003 Q1 for France, and change since 2005 Q1 for Germany and the euro area. Source: OECD.Conclusions regarding adjustment
• Labour market reforms and increased labour force
participation rates have improved the growth potential
• Fiscal consolidation and reforms have improved long-term
fiscal sustainability
• Institutional reforms have enhanced the EU economic
governance (Fiscal Compact, Macroeconomic Imbalance Procedure,
stronger national fiscal frameworks)
But medium/long-term growth will be low, and lower
than in the past, due to demographics
Political risks?Risk of deflation or very low
inflation?Low inflation in the euro area
HICP
Per cent, year-on-year
5
4
3
2
1
0
-1
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Headline inflation Core inflation
Source: Reuters EcoWin.Deflation – was does it take?
• Technically (Draghi)
• A broad-based fall in prices across various sub-categories of the
HICP index
• Fall in prices happening in a variety of countries
• Fall in prices feeding onto inflation expectations
• Economically
• A protracted period of low wage growth
• A protracted period of currency appreciation
• Downward-drifting inflation expectationsLow wage growth in the euro area
Nominal compensation rate, total economy Per cent, year-on-year
4
Per cent, year-on-year
4
3 3
2 2
1 1
0 0
2011 2012 2013
USA Euro area
Note: GIPS is a GDP-weighted average of the growth rates in Greece, Ireland, Portugal, and Spain.
Small chart shows hourly wages in industry (euro area) and manufacturing (USA). Source: OECD, Economic Outlook, November 2013.Euro appreciation since Summer 2012
Nominal Effective Exchange Rate Index
Index
120
116
112
108
104
100
96
2007 2008 2009 2010 2011 2012 2013
Note: ECB, EER-12. Source: Reuters EcoWin.Conclusion regarding risk of deflation • Risk of deflation very limited – but very low inflation likely for some years • The issue is at what level of wage developments the correction between South and North will take place
Market developments
Yields have come down in the euro area
Yield on 10-year government bonds
Per cent
9
8
7
6
5
4
3
2
1
0
2010 2011 2012 2013 2014
Germany Spain
Source: Reuters EcoWin.Mixed picture of housing markets
Real house prices
Index, 2000 = 100
200
180
160
140
120
100
80
00 01 02 03 04 05 06 07 08 09 10 11 12 13
USA Germany France Spain
Source: OECD Housing Prices database.Banking Union issues • Single currency issue was the trigger • What is really at stake are single market issues • Quality and credibility of supervision (external eyes added) • Level playing field: supervisory standards, resolution practices, cross-border banks • Insurance component, after bail-in • Legacy issues: • Note the incentives of the ECB to do the AQR right • Note that legacy is not an in/out issue, but a North/South issue
ECB’s Asset Quality Review increasingly in
market focus
Daily market comments
Note: Daily market commentary posts including either of the words ‘Asset Quality Review’, ‘AQR’ and ‘Comprehensive Assessment’. Source: BloombergYou can also read
