2 December 2016

Catherine L. Mann OECD Chief Economist

MEDEF Économie La France peut-elle retrouver le

chemin d'une croissance forte ?

Global Prospects and Secular Stagnation:

Policies to Escape the Low-Growth Trap

www.oecd.org/economy/economicoutlook.htm

ECOSCOPE blog: oecdecoscope.wordpress.com/

Key messages

2

Weak demand growth and slow growth in potential output means secular stagnation

… and broken promises

Exceptionally low interest rates generate financial distortions and risks

… but also a window of opportunity

Stronger policy ambition needed to escape the low-growth trap including structural polices woven with

… fiscal initiatives, undertaken collectively

Escaping the low-growth trap depends on

fiscal initiatives…but no blank check!

3

Note: Based on macro-model simulations of an assumed fiscal stimulus in the US worth ¾ per cent of GDP in 2017 and 1¾ per cent of GDP in 2018; estimated fiscal stimulus in China of 1½ per cent of GDP in 2016 and 1 per cent of GDP in both 2017 and 2018; and estimated fiscal stimulus in the euro area of 0.4 per cent of GDP in 2016, 0.2 per cent of GDP in 2017 and 0.3 per cent of GDP in 2018. The stimulus in China and the euro area is assumed to be implemented through government final expenditure on consumption. Source: OECD November 2016 Economic Outlook database; and OECD calculations.

World real GDP growth

Evidence of the low-growth trap:

Consumption and investment in advanced

economies remain sluggish next to past recoveries

4

Consumption Investment

Note: OECD shown. Current recovery shows since 2008Q1 including the forecasts in the dotted line. Previous 3 recoveries pre-recession peak in 1973Q4, 1980Q1 and 1990Q3. Source: OECD November 2016 Economic Outlook database.

Consequence of the low-growth trap:

Weak labour productivity means

weak wage growth in advanced economies

5

Labour productivity Real wage

Note: OECD shown. Current recovery shows since 2008Q1 including the forecasts in the dotted line. Previous 3 recoveries pre-recession peak in 1973Q4, 1980Q1 and 1990Q3. Source: OECD November 2016 Economic Outlook database.

Long-run consequences of low-growth trap:

Falling productivity growth

undermines long-term potential output

6

Measures of labour productivity growth

Note: Labour productivity growth is output per hour worked at annualised rate. Source: OECD June 2016 Economic Outlook database; OECD National Accounts database; OECD Productivity database; OECD calculations.

Source: OECD preliminary results based on Andrews, D., C. Criscuolo and P. Gal (2016), “Mind the Gap: Productivity Divergence between the Global Frontier and Laggard Firms”, OECD Productivity Working Papers, forthcoming; Orbis data of Bureau van Dijk.

Widening diffusion gap Dramatic drop in growth

Failure to get out of the low-growth trap

means broken promises to the youth

7 Note: For LHS, OECD is the unweighted average of 34 OECD countries. 2013 for Chile and the United States. Youth aged 15-24 for Japan. Source: OECD calculations based on national labour force surveys; OECD Short-Term Labour Market Statistics database.

Inactive and unemployed youth Share of all youth (15-29 years old)

Change in OECD employment rate From Q4 2007 to Q4 2015, % pts

Keeping promises to older people is more

difficult with low growth and low returns

8

Note: The chart shows the impact of falling interest rates on real incomes in retirement for a defined contribution scheme. Annuity payments calculated for the same hypothetical individual contributing 10% of wages over a 40 year period. The assets are invested in a portfolio comprising 60% of variable income (fixed return of 4.5%) and 40% of fixed income (historical 10 year government bonds yields, kept to maturity) and used at retirement to buy an annuity with a life expectancy of 20 years at age 65 using actual government bond yields for calculating the annuity premium. Constant annual inflation of 2 per cent and productivity growth of 1.5 per cent are assumed. Source: OECD Business and Finance Outlook 2015.

Falling retirement income for a given contribution

Productivity differences are correlated

with wage inequality

9

Note: Data are for 2013. OECD is the unweighted average of the countries for which data are available. The P90/P50 ratio is labour income or labour productivity of the firm at the 90th percentile divided by the corresponding value of the firm at the median. Labour income is total compensation including taxes and the employer’s and employee’s social security contributions. Source: OECD estimations based on Saia and Schwellnus (2016), “Decoupling of Productivity and Median Wage Growth: Micro-Level Evidence”, OECD Economics Department Working Papers, forthcoming; Orbis.

Wage inequality and productivity dispersion across firms

Hig

he

r w

age

ine

qu

alit

y

Greater productivity dispersion

Inequality in income is rising in the OECD Real household disposable income, total population

Note: OECD is the unweighted average of the countries for which data are available. Source: OECD estimations based on Kappeler et al. (2016), “Decoupling of Productivity and Median Wage Growth: Macro-Level Evidence”, OECD Economics Department Working Papers, forthcoming; OECD National Accounts database; OECD Earnings database; OECD Income Distribution database; OECD calculations.

10

Exceptionally low interest rates

distort financial markets and

raise risks…

but create window of opportunity

-1

0

1

2

3

4

5

0 3 6 9 12 15 18 21 24 27 30

7 October 2016

Average October 2010

%

years ahead

Exceptionally low and negative interest rates

on long-term sovereign bonds

11 Source: Bloomberg; and ECB.

Yield curves for government bonds

Euro area United States Japan

-1

0

1

2

3

4

5

0 3 6 9 12 15 18 21 24 27 30

7 October 2016

Average October 2010

%

years ahead

-1

0

1

2

3

4

5

0 3 6 9 12 15 18 21 24 27 30

7 October 2016

Average October 2010

%

years ahead

Lower long-term growth prospects

contrast with asset price inflation

12

Equity prices Long-term GDP growth expectations Change in the past five years

Note: Difference between April 2011 projections of average annual GDP growth over 2012-2021 and April 2016 projections of average annual GDP growth over 2017-2026. OECD and World estimates based on weighted average of countries shown, using 2015 PPP shares. Source: Consensus Forecasts; Thomson Reuters; and OECD calculations.

13

To escape the low-growth trap:

Targeted structural policy

Avoid trade policy pitfalls,

Deploy fiscal initiatives

Estimated frontier spillover (% pa) associated with a 2% point increase in MFP

growth at the global productivity frontier

Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier:

Industry Level Evidence”, OECD Economics Department Working Papers, No, 1238.

France

0.0

0.1

0.2

0.3

0.4

0.5

Barriers to

Entrepreneurship

Cost of

Bankruptcy

Legislation for

Entrepreneurs

Basic Research University-Industry

Collaboration

Trade with the

Frontier

Participation in

GVCs

Managerial quality

Globalisation Entry and Exit Innovation policies Management

Structural policies to exit the low-growth trap

Structural policies shape productivity diffusion

Structural policies reduce skill mismatch to exit the low-growth trap

Reallocate resources to most productive firms

and support worker transition

15

The probability of skill mismatch and public policies

Entry and Exit Labour mobility

Source: OECD Future of Productivity.

Avoid trade policy pitfalls

Trade intensity boosts productivity growth

16

Note: Scenario in which world and OECD trade intensity (exports plus imports as a share of GDP) increases by 1.3 percentage points per annum (the average from 1986-2007) from 2017. The effect of this increase on OECD total factor productivity growth is shown. For further detail see OECD Economic Policy Paper “Cardiac Arrest or Dizzy Spell: Why is World Trade So Weak and What Can Policy Do About It?”. Source: OECD June 2016 Economic Outlook database; Égert and Gal (2016); and OECD calculations.

World trade intensity

Raising trade intensity

0.2% pts

gain

OECD annual productivity growth

Average 1986-2007

Avoid trade policy pitfalls

Trade restrictions would hurt output and risk jobs

Reducing trade costs promote growth

17

Medium-term GDP impact of different trade scenarios

Note: The implementing trade facilitation measures scenario shows the impact of a trade cost reduction by 1.3% across all sectors in all countries, an estimate of the global average derived from the OECD’s Trade Facilitation Indicators. The imposing trade restrictions in major economies scenario shows the impact of a goods trade cost increase of 10 percentage points for China, Europe and the United States against all trading partners, equivalent to an average increase in tariffs to 2001 levels, the year when trade negotiations under the Doha Development Round started. Source: OECD METRO model; and OECD calculations, OECD TiVa database

Share of total employment embodied in foreign demand

Deploy fiscal initiatives

Low interest rates have created a window of

opportunity for multi-year fiscal initiative

18

Fall in government interest payments Estimated budget gains over 2015-17 due to lower interest rates

Note: Budget gains calculated based on general government debt at the end of 2014, assuming that 25% of this initial debt stock matures each year, comparing the interest rate on 10-year government bonds in 2014 with the interest rate for 2015 and the 2016 average to August for 2016 and 2017. Source: OECD June 2016 Economic Outlook database; and OECD calculations.

Number of years a permanent investment increase of 0.5% of GDP can be funded

with temporary deficits

Deploy fiscal initiatives

Fiscal initiatives mix spending, tax, structural

policies for growth and equity focus

19

Impact of spending reform Growth Income of the poor

Countries with most room for gains

Improving education CHL, GRC, MEX,

PRT, TUR

Increasing public investment and R&D

DEU, GBR, IRL,

ITA, MEX, TUR

Increasing government effectiveness

FRA, GRC, HUN,

ITA, SVN

Pension reform DEU, FIN, FRA,

JPN, POL

Increasing family benefits CHE, ESP,

GRC, PRT

Decreasing public subsidies BEL, CHE

Source: Fournier and Johansson (2016), “The Effect of the Size and the Mix of Public Spending on Growth and Inequality”, OECD Economics Department Working Papers, No. 1344, OECD Publishing, Paris.

positive impact uncertain or no impact

Deploy fiscal initiatives

Fiscal initiatives would strengthen growth

both in the short- and long-term

20

Long-term GDP gain

From a 0.5% of GDP increase in public investment

First-year growth gain

Note: Structural reforms shows the impact of a 10% reduction of product market regulations. Source: Mourougane A. et al. (2016), “Can an increase in public investment sustainability lift economic growth?” OECD Economics Department Working Papers, No. 1351, OECD Publishing, Paris; and OECD calculations.

Contractionary Mildly contractionary Broadly neutral Mildly expansionary Expansionary

Contractionary

Mildly contractionaryARG, BRA, COL, CRI,

GRC, SVKBEL

AUS, GBR, IDN,

KOR

Broadly neutral

CHL, CZE, DNK, ESP,

IND, IRL, ISR, JPN,

LTU, MEX, NZL,

PRT,TUR, SWE, ZAF

FRA, RUS, AUT,

FIN, NLDCHE

Mildly expansionary HUN SVNCAN, ITA, NOR,

POL

DEU, EST,

LVA

Expansionary ISL CHN USA, LUX

OECD recommends less expansionary policy than projected

Recommended fiscal stance for 2017

Projected

fiscal stance

for 2017

OECD recommends more expansionary policy than projected

Deploy more robust fiscal initiatives:

Most countries are moving toward the right

fiscal stance, but many could do more

21 Source: OECD November 2016 Economic Outlook database; and OECD November 2016 Economic Outlook Special Chapter, “Using fiscal levers to escape the low growth trap”.

Stronger collective action is needed on

fiscal and structural policies

22

Use window of opportunity of low interest rates for fiscal initiatives

• Focus on quality investment to boost human capital and infrastructure

• Combine with structural policies to raise demand, long-term potential output and equality

• Collective action yields more gains

Implement policy packages to boost growth and inclusiveness

• Increase the pace of structural reforms and supporting actions

• Many policies boost inclusive growth, productivity and employment

Maintain open markets for trade and investment

• Support by domestic policies to help worker transition, strengthen social protection and ensure gains are shared

THANK YOU!

The Future of

Productivity

www.oecd.org/economy/economicoutlook.htm www.oecd.org/global-forum-productivity www.oecd.org/eco/growth/goingforgrowth.htm ECOSCOPE blog: oecdecoscope.wordpress.com/