NIESR Economists’ Briefing NIESR May 2017 Economists’ Briefing – NIESR May 2017 ... GDP...

NIESR Economists’ Briefing – NIESR May 2017

National Institute of Economic and Social Research

Wednesday 10th May 2017 5-6pm

Chair: Jagjit Chadha, NIESR Director

17.05 Oriol Carreras - The macroeconomic implications of increasing tariffs on US imports

17.15

17.20 Amit Kara – UK Economy since 2010

17.35 Q&A

18.00 Drinks

Simon Kirby - Prospects for the UK Economy

Jagjit Chadha – The Economic Landscape of the UK 17.00


The Economic Landscape of the UK

National Institute Economic Review

Issue 240, May 2017

Commentary Jagjit S. Chadha


Deeper and Long Recessions


Low investment and stagnant real wages


R&D Regional Productivity

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

198119851989199319972001200520092013

G7 Average ex UK United Kingdom


Policy at Limits


The Economic Landscape of the UK

“The major fluctuations in the rate of growth of demand and output in the years after 1952 were thus chiefly due to government policy. This was not the intended effect; in each phase, it must be supposed, policy went further than intended, as in turn did the correction of those effects. As far as internal conditions are concerned then, budgetary and monetary policy failed to be stabilising, and must on the contrary be regarded as having been positively destabilising.” J. C. R. Dow, The Management of the British Economy 1945-1960, (1964).

We may, once again, be in danger of letting the urgent drive out the important.


The macroeconomic implications of increasing tariffs on US imports


Issue 240, May 2017

Oriol Carreras, Graham Hacche, Iana Liadze and Matteo Ramina


Forecast summary for GDP growth

Change in projected annual GDP growth since February 2017 forecast (percentage points)

World

economyUS Euro Area Japan China India

2017 3.3 2.1 1.6 0.8 6.7 7.3

2018 3.6 2.3 1.7 0.7 6.2 7.8

World

economyUS Euro Area Japan China India

2017 0.2 0.0 0.1 0.1 0.3 1.3

2018 0.1 0.1 0.2 -0.1 0.3 -0.1


Recent trends in trade protectionism

• Classical view: governments adopt trade restricting policies when a country experiences a recession and/or a loss of competitiveness induced by an appreciation of the currency.

• That did not seem to hold in the aftermath of the financial crisis.

• However, there has been a rise in ‘murky’ protectionism with measures such as health and safety regulations or buy-local clauses in stimulus and bail-out packages.

• Recourse to more standard trade restrictive policy is becoming popular again.


Counterfactual analysis: a tariff increase

• The president of the United States has indicated that he is considering measures to introduce or increase tariffs on imports.

• We use an experimental version of the National Institute’s Global Econometric Model (NiGEM) to run stylised scenarios to investigate the impact of increases in tariffs on US imports.


Assumptions • Shocks:

– We increase the prices of non-commodity goods and services to the US from China, Canada and Mexico by 20 per cent permanently to mimic the introduction of a 20 per cent tariff on imports from those countries.

– Similarly, we model retaliation by China, Canada and Mexico by increasing the prices of imports of non-commodity goods and services from the US to these countries permanently by 20 per cent.

• Model:

– We assume that exchange rates and financial markets are forward-looking and respond to expected changes in interest rates.

– Investment is forward-looking and responds to changes in the long-run real rate.

2016 China Mexico Canada Total

Share of US imports 23.6 15 14.2 52.8

Source: U.S. Department of Commerce.


Impact on annual US real GDP (level)

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

2017 2018 2019 2020 2021

US

GD

P, p

erce

nt

dif

fere

nce

fro

m b

ase

Import tariffs on China

Import tariffs on China and Mexico

Import tariffs on China, Canada and Mexico

Import tariffs on China with China retaliating

Import tariffs on China and Mexico with both retaliating

Import tariffs on China, Canada and Mexico with retaliation

Source: NiGEM simulations.


Impact on selected US macroeconomic variables of tariff increases by the US and its three main trading partners

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

GDP Inflation Current accountbalance (% GDP)

Short term interestrate

Real effectiveexchange rate

Dif

fere

nce

fro

m b

ase

2017 2018 2019 2020

Source: NiGEM simulations. Note: GDP (level) and real effective exchange rate are reported as per cent differences from base; inflation rate, short term interest rate and current account balance (%GDP) are reported as percentage point differences from base.


Effects on US domestic demand and its components

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2017 2018 2019 2020 2021

Dif

fere

nce

fro

m b

ase

Consumption Gov. expenditure Private investment Domestic demand

Source: NiGEM simulations. Note: impact on domestic demand is given as per cent difference from base; components of domestic demand are shown as a percentage point contribution to the per cent change in domestic demand.


Caveats • Our analysis does not incorporate possible positive effects

from the tariff increase on government revenue.

• NiGEM is a “representative agent” model. Hence, it does not cover distributional effects that can arise when tariffs are introduced.

• Labour supply in NiGEM is exogenous, i.e. neither the participation rate nor the population is affected by the shocks applied.

• Last, but not least, our simulations do not take into account any other changes in policy that may be implemented.


Conclusions • The classical relationship whereby governments

enact trade-restrictive policies in recession times appears to hold even after the financial crisis.

• A counterfactual scenario of an increase in tariffs on US imports from China, Mexico and Canada with retaliation from the aforementioned countries shows:

– Real US GDP declines (and world GDP).

– US current account balance experiences a marginal deterioration.


References

• Bown, C. (Ed.) (2011), ‘Introduction’, In: ‘The Great Recession and Import Protection: The Role of Temporary Trade Barriers’, CEPR and World Bank, Chapter 1, pp. 1-51.

• Georgiadis, G., & Gräb, J. (2013), ‘Growth, real exchange rates and trade protectionism since the financial crisis’, ECB Working Paper No. 1618.

• Rodrik, D. (2009), ‘The Myth of Rising Protectionism’, Project Syndicate Blog. Available at: https://www.project-syndicate.org/commentary/the-myth-of-rising-protectionism

https://www.project-syndicate.org/commentary/the-myth-of-rising-protectionism












Prospects for the UK Economy


Issue 240, May 2017

Simon Kirby, with Oriol Carreras, Amit Kara, Rebecca Piggott and James Warren


GDP outlook broadly unchanged GDP growth fan chart (per cent per annum)

Source: NiGEM database, NIESR forecast and NiGEM stochastic simulations. Notes: Each bound represents a cumulative decile of the probability distribution around the May 2017 forecast.


Consumer spending contributions to GDP growth to ease sharply

-3

-2

-1

0

1

2

3

4

5

2015 2016 2017 2018P

erc

enta

ge p

oin

ts

Exports Imports

Private Consumption GCF

Government Consumption GDP growth

Forecast

Consumer spending and real consumer wages

Source: NiGEM database and NIESR forecast. Source: NiGEM database and NIESR forecast. Note: GCF is gross capital formation.


Volatile conditioning assumptions Effective exchange rate, trade–weighted

Source: NiGEM databases and NIESR forecasts.


CPI inflation to peak 3.4%, end 2017 CPI inflation rate fan chart (per cent per annum)

Source: NiGEM database, NIESR forecast and NiGEM stochastic simulations. Notes: Each bound represents a cumulative decile of the probability distribution around the May 2017 forecast. The Bank of England’s inflation target is 2 per cent per annum.


Fiscal policy in the next Parliament • Objective for fiscal policy • In order to provide for sustainable public finances, ensure confidence in the economy, and support

the effectiveness of monetary policy, the Treasury’s objective for fiscal policy is to: – Return the public finances to balance at the earliest possible date in the next Parliament

• Mandate for fiscal policy • The Treasury is required by the Budget Responsibility and National Audit Act 2011 to set out the

means by which its objective in relation to fiscal policy will be attained (“the fiscal mandate”). This act also requires the OBR to assess the government’s performance against the fiscal mandate.

• In order to achieve the above objective, the Treasury’s mandate for fiscal policy in this Parliament is: – a target to reduce cyclically-adjusted public sector net borrowing to below 2% of GDP by 2020-21

• The Treasury’s mandate for fiscal policy is supplemented by: – a target for public sector net debt as a percentage of GDP to be falling in 2020-21

• To ensure that expenditure on welfare remains sustainable, the Treasury’s mandate for fiscal policy is further supplemented by: – a target to ensure that expenditure on welfare in 2021-22 is contained within a predetermined cap and

margin set by the Treasury at Autumn Statement 2016

• In the event of a significant negative shock to the UK economy, the Treasury will review the appropriateness of the fiscal mandate and supplementary targets as a means of returning the public finances to balance as early as possible in the next Parliament.

Source: HM Treasury (2016) Charter for Budget Responsibility: autumn 2016 update


Forecast summary


UK economy since 2010


Issue 240, May 2017

Simon Kirby, Oriol Carreras, Rebecca Piggot, James Warren and Amit Kara


UK economy since 2010 Why 2010? - General election and start of Parliament - First full year of economic recovery Political backdrop (there is a pattern) - Referendum, Scottish (2014)

- General election (2015) - Referendum, EU (2016) - General Election (2017)

- Referendum (2018)???


UK economy since 2010 Economic growth: average 2.0 per cent Inflation: average 2.2 per cent Employment: Close to full employment levels and unemployment at levels near pre-crisis trough BUT:

Economic recovery since 2009: worst of any in the last 100 years, including the Great Slump of the 1920s.


The profile of recession and recovery

Source: NIESR monthly GDP estimates


UK economy since 2010 The corollary to high employment and weak GDP growth is weak productivity growth.

Had UK productivity performance from 2008 to 2015 matched its pre-downturn trend, labour productivity would have been nearly 20 per cent higher (productivity puzzle)

G7 economies workers are on average producing some 15 per cent more output than UK workers.


International comparison of productivity

Source: NIESR

94

96

98

100

102

104

106

108

110

2005 2007 2009 2011 2013 2015

Canada France Germany Italy

Japan UK USA

2008Q1 = 100


Productivity puzzle

Source: NIESR

3.5

3.7

3.9

4.1

4.3

4.5

4.7

4.9

1971 1980 1989 1998 2007 2016

Counterfactual based on productivity growth from 1998-2004

Actual


UK economy since 2010 Real consumer wage growth performance is dismal (wages and productivity tend to move together): Average CPI inflation: 2.2 per cent

Average nominal wage growth: (Total compensation per hour = 1.5 per cent)

Consumer spending was the main contributor to GDP growth from 2012 to 2016 in spite of the squeeze in real wages.

Why? Saving ratio has fallen from 11 per cent in 2010 to 7 per cent in 2014 to 3.5 per cent in 2016


Lost decade of consumer spending Real consumer wages and per capita consumer spending

Source: NiGEM database and NIESR forecast

80

85

90

95

100

105

2002 2005 2008 2011 2014 2017 2020

2007

Q4=

100

Per capita consumption Real consumer wage

Forecast


UK economy since 2010

Policy backdrop: Monetary Policy: was required to do all the heavy lifting at a time when fiscal policy tightened. BoE holds some 30 per cent of outstanding government debt. The BoE swiftly discarded its experiment with forward guidance Fiscal policy: HM Treasury repeatedly slipped on its fiscal targets and also breached its own fiscal rules – response was to change the fiscal rules. Politics: Commitment to fixed term parliaments (Cameron + May)

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