What's Really Hurting the Global Economy? Not China, But Russia

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Euro Area’s Russia Problem Outweighs China Export Risk Bloomberg Intelligence Economist David Powell

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The slowdown in the global economy is curtailing export growth in the euro area, unsurprisingly. Still the biggest hit may have come already -- from the downturn in Russia.

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The deceleration in China, by contrast, looks to be a much smaller problem for the monetary union. Growth in the Asian nation would have to slow much more precipitously before it would pose a big threat to the euro-area recovery.

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Real GDP growth outside of the euro area, which is the most important determinant of export growth, slowed to 2.4 percent year over year in the second quarter from 2.6 percent in the second quarter of 2014 and from a recent high of 2.9 percent in the last quarter of 2013, according to Bloomberg Intelligence calculations. That trade-weighted figure includes the countries that receive 79 percent of the euro area’s exports.

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A further deceleration outside of the region would cause euro-area export growth to continue to slow, though the depreciation of the euro would limit the damage. A simple regression model indicates that 83 percent of the variation in real export growth is explained by the trade-weighted measure of real GDP growth.

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Data from the CPB Netherlands Bureau for Economic Policy Analysis signals that the growth in real exports for the euro area slowed to 1.2 percent in May year over year from 4 percent in March.

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However, the more delayed data from Eurostat has yet to reveal the same signal. Real exports rose 4.2 percent year over year in the first quarter compared with 3.5 percent in the first quarter of last year, according to the expenditure breakdown from the GDP report, which is not yet available for the second quarter.

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Growth slowdown bodes poorly for exports

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The biggest threat to the euro-area economy has come from Russia. The country has contributed most to the slowdown in GDP growth outside the monetary union over the last year, knocking 0.23 percentage point off the headline figure. China has chipped away only 0.03 percentage point.

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Russia’s deceleration most damaging to euro area

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The stall in Russia’s economy has trickled down to exports from the euro area. The 12-month sum of the nominal value of exports to Russia had declined by 19.8 billion euros in May from the previous year.

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That has been cushioned by a huge rise in exports to the U.S. over the same period to the tune of 32.2 billion euros. The slide of the euro versus the dollar has probably greased the flow of shipments across the Atlantic.

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U.S. demand cushions decline in exports to Russia

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The annual export figures from the GDP report mask a slowdown that is already in train, judging from quarterly contributions.

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Exports added 1.8 percentage points to euro-area GDP growth on a year-over-year basis in the first quarter -the latest period for which a breakdown by expenditure is available. That figure consists of contributions of 0.3 percentage point to quarter-over-quarter growth for the first period of 2015, 0.4 percentage point in the previous period and 0.6 percentage point in each of the other previous two periods.

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European Central Bank President Mario Draghi has already highlighted the slowdown in growth abroad as a threat to the euro-area recovery. At his press conference in June, he said, “There has been some loss of momentum, modest I would say, mostly due to a weakening of the economies outside the euro area, emerging markets mostly.”

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The slowdown in the contribution from exports has been exacerbated by a rise in the drag from imports as demand for foreign goods has been spurred by the cyclical recovery in the euro area.

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On a year-over-year basis, imports subtracted 2.1 percentage points from GDP growth in the first quarter -that was the largest drag since the first quarter of 2011. The drag from net exports on year-over-year GDP growth in the first quarter -- 0.3 percentage points -- was the greatest it has been since the third quarter of 2009.

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At present, the drag from the external sector on growth appears too small to create any major concerns from the ECB and is unlikely to push the Governing Council to significantly alter monetary policy. However, it does marginally increase the possibility that policy makers will be forced to extend their quantitative easing program beyond September of next year.

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