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Mega Trends in the Global Economic System. Prof. Jacob A. Frenkel Chairman, JPMorgan Chase International Chairman of the Board of Trustees, Group of Thirty (G30). S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L. Hezeliya Conference June 9, 2014. Global Economic Trends.
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Mega Trends in the Global Economic System Prof. Jacob A. Frenkel Chairman, JPMorgan Chase International Chairman of the Board of Trustees, Group of Thirty (G30) S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Hezeliya Conference June 9, 2014
Global Economic Trends • Growth in the Global Economy • International Trade • Global Monetary Policies • The Euro-System: Turning the Corner • US and Euro Area Labor Markets • Long-Term Considerations: I. Demographic Challenges II. Fiscal Challenges
Economic Growth • Global Growth Projections • The Rise of Developing Countries
Global Trade, Reserves and Savings • The Volume of World Trade • China and the Trading System • International Reserves
U.S. & EU People’s Republic of China Asia China’s Role in Global Trade (bill. Usd) Exports Exports Imports Imports
Global Monetary Policies • Global Policy Rates • Central Bank Balance Sheets • Forward Guidance
The Euro-System: Turning the Corner • GDP Growth: Gradual Recovery • Structural Challenges: -- Unemployment -- Productivity • Declining Bond Spreads
US and Euro Area Labor Markets • Unemployment • Labor Force Participation • Cyclical or Structural? - the Role of Education - the Duration of Unemployment
Long-Term Considerations • Demographic Challenges • Fiscal Challenges
Population and GDP by region Population Nominal GDP
US Demographic Challenge Age group share of total population: • Age of Medicare eligibility: 65 • Age of Social Security eligibility, reduced benefits: 62; full benefits: 67 (for those born after 1960)
Expenditures on healthcare and social security as a share of primary spending
Composition of US Federal Expenditures Share of government spending (ex interest payments): • Aging accounts for 2/3 of projected rise in expenditures on social security and healthcare (CBO) • Healthcare includes Medicare (17% of noninterest spending in 2012, 25% in 2035) and Medicaid, CHIP, and exchange subsidies (combined for 8% of noninterest spending in 2012, 14% in 2035)
FEDERAL RESERVE’s Forward Guidance “the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”January 29, 2014 “In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation…The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” April 30, 2014
Bank of England’s Forward Guidance “Looking beyond the immediate decision, the Committee discussed how to set policy to achieve the 2% inflation target, while supporting the recovery, once the 7% unemployment threshold had been reached. Despite the sharp fall in unemployment, the Committee judged that there remained scope to absorb spare capacity further before raising Bank Rate. When Bank Rate did begin to rise, it expected that the appropriate path, so as to eliminate slack over the next two or three years and keep inflation close to target, would be gradual.” -Minutes of the MPC meeting 5 and 6 February 2014, released February 19, 2014 “The LFS unemployment rate had fallen below the Committee’s 7% threshold in the data for the three months to February. The policy guidance the Committee had provided in August 2013 had therefore ceased to apply. The Committee reaffirmed the subsequent guidance set out in its February Inflation Report on how it would seek to achieve the inflation target over the policy horizon. A key feature of the guidance was that, given the likely persistence of headwinds weighing on the economy, when Bank Rate did begin to rise, it was expected to do so only gradually.” -Minutes of the MPC meeting 8 May 2014, released May 21, 2014
ECB’s and BoJ’s Forward Guidance ECB “Concerning our forward guidance, the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation. This expectation is further underpinned by our decisions today. Moreover, if req uired, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation.” -ECB President Mario Draghi, Introductory statement, June 5, 2014 -------------------- BOJ “Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” -Statement of Monetary Policy, May 21, 2014
