Some good advices hRead history hRead economic & financial history hRead history on economic theory (development)
Monetary policy & unemployment Econ 4325 - Monetary policy and business fluctuations Guest lecture UiO, February 26 2007
hDon’t trust old truths nor old people, and even less new truths – and not mine
Harald Magnus Andreassen
[email protected] 2
First Securities ASA
The real proof of the pudding:
h Brokerage/investment bank/merchant bank
1,600
− Equities, corporate − Merchant bank – with Swedbank, trading all sorts of int. rate/fixed income instruments − 160 employees − 22 analysts (the best &…) − 7- 8% + af revenues on Oslo Stock Exchange
First portfolios 1,400 Weekly Port.
This should not have been possible!
1,200 1,000 Buy 800 600 400
Monthly port.
200
h We are better bean counters, than dreamers
OSEBX Sell
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Firsts anbefalinger
h We give goods advices
Oslo Børs (OSEBX) 1999 2000 2001 2002 2003 2004 2005 2006
h Our clients appreciates us h We hire business economists all the time, and economists from time to time. Our trainee-program works!
Samlet siden 99
Siden 2001
3
4
18% -2% -15% -31% 49% 35% 42% 31% 156%
121%
Mndport. 26% 6% -1% -23% 43% 36% 52% 37%
Kjøp
Salg
46% 40% 6% -9% 54% 47% 105% 44%
-1% -9% -51% -52% 26% 21% 8% 8%
307% 1223%
-62%
205% 543% -58%
Ukeport.
30% 1% 32% 88% 103% 59%
949%
Long term: Real fundamentals decide
The business cycle & markets h The stock market h The bond market
A Tobins q, calculated from the balance sheet 5
6
But wait a bit: OSE is even more dependent on aluminium or India??
The Oslo Stock exchange is volatile, it must be oil…
OSEBX and Aluminum
OSEBX and the oil price
400
70
350
60 Brent
50
Index
300 250
40
200
30
150
20
400
OSEBX and Bombay SE Index
200
10 0 96
97
98
99
00
01
02
03
04
05
06
07 08
12500 400 Bombay SE Index
350
OSEBX/Synthetic Index
10000
300
Industrials/Other
OSEBX
7500
250
Cons Disc
50
450
S&P 500
IT
15000
Index
OSEBX
500
S&P 500 and OSEBX Sector Distribution, July 2006 Financials
100
Aluminium
Index
80
USD/tonne
450
Index
90
USD/Barrel
500
100
Healthcare
1200 97
98
99
00
01
02
03
04
05
06
07 08
200
5000
Energy Source: Reuters EcoWin
Source: Reuters EcoWin
150
Cons Staples
2500
Utilities
100
Telecom
50
Materials
0 97
0%
10 %
20 %
30 %
40 %
98
99
00
01
02
03
04
05
06
07 08
50 % Source: Reuters EcoWin
7
8
In the end: The OSE is dependent on the cycle abroad!
A big swinger
Oslo Børs Pris/Bok India (China)
Global growth
108
2.75
106
2.50 2.25
104
2.00
102
Oil
Raw. Mat alum.
1.75
Shipping
100
1.50
98
1.25
96
OSE
1.00
94
0.75 86
88
90
92
94
96
98
00
02
04
06 Source: EcoWin, First Securities
9
10
A quite close connection
The stock market vs. actual earnings Oslo Børs: Indeks vs. inntjening pr aksje 320
EPS
11.2
160
Indeks 5.6
80
2.8
40
1.4
20
0.7
10 84
86
88
90
92
94
96
98
00
02
04
06 Source: EcoWin, First Sec.
Source: EcoWin, First Securities
Not only a long term connection!! 11
OSEBX
Recurring EPS
22.4
12
Interest rates vs the cycle. Not that difficult??
13
For investors: The long end vs. the short end
14
Asset allocation: The cycle is important!
What am I looking at? h Demand cycles (”Keynes”) − C, I, G-T, X-M
h Supply cycles (Real business cycle) h What’s most important? − Markets are mostly “Keynesian” (animal spirit, risk appetite, financial condition, monetary/fiscal policy impulses/responses) − Late followers of fashion? Or realistic, what works? FIRST
Source: EcoWin, First Securities
15
16
What’s driving the cycle
G-T, quite important – with the ‘right’ sign!
Household, corporate net financial investment (cash flow) 10.0 In % of GDP
10.0
7.5
7.5
'Savings'
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5
-5.0 -7.5 65
70
75
-5.0
Output gap
Recessions shaded
1 Bad times 2 Soft landing 3 ’Happy’ days
-7.5 80
85
90
95
00
05
Recessions shaded
Source: EcoWin, First Securities
Source: EcoWin, First Securities
h Keynes is of course dead, but… 17
Not only in the US
18
Not only in the US… Finland Private sector net financial investments
Sweden Private sector net financial investments
vs. GDP output gap
vs. GDP output gap
12.5 In pct of GDP 12.5 Net fin. investment 10.0 10.0 7.5 7.5 5.0 5.0 2.5 2.5 0.0 0.0 -2.5 -2.5 -5.0 -5.0 -7.5 -7.5 -10.0 -10.0 Output gap Source: OECD/First -12.5 -12.5 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Source: EcoWin, First Securities
19
20
12.5 10.0
In pct of GDP
12.5
Net fin. investment
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5
-5.0
-5.0
Output gap
-7.5 Source: OECD/First 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
-7.5
Source: EcoWin, First Securities
When does the cycle turn down?
The supply side
1) Shortage of labour – wage inflation, price inflation − Central banks are forced to hike (too much) − Corporate profits squeezed 2) Private or public sector spending cuts (also without higher rates) − Corporate over investments, on borrowed funds Inventory cycles
− Too low household savings − Public deficits
Source: EcoWin, First Securities
3) Bad luck (wars, terror, plague or cholera, or an oil chock)
Short term cycles: Capacity utilisation Long term cycels: Technology ++ 21
22
A global fall in the unemployment rate
The world is new!
12 Per cent of the labour force
12
10
10
World GDP Developed vs. emerging markets
7.0
Contribution from rich countries and poor,of which China
6.0 8
8
6
6
4.0
4
4
3.0
2
2
2.0
0
FIRST
5.0
1.0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: EcoWin, First Securities
0.0 -1.0 65
h Growht has beem well above trend everywhere 23
24
70
75
80
85
90
95
00
05
10
A new world? The short term Phillips curve
But how new is the world??
25
26
A new world? ¾Normal/low productivity growth ¾High wage inflation ¾High growth in unit labour cost ¾High GDP inflation ¾.. and core CPI inflation well above normal
Still not any disaster!! USA Productivity, nonfarm business sector 12.5
12.5
q/q, annual rate
10.0
USA KPI Energipriser vs. andre priser
10.0
7.5
15.0
7.5
y/y
5.0
50
KPI samlet
5.0
2.5 0.0
0.0
-2.5
-2.5
-5.0
-5.0
-7.5
-7.5
40
12.5
2.5
KPI eks energi
Energi
10.0
20 7.5
10
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Source: EcoWin, First Securities
5.0
0
2.5
-10
USA Unit labor cost vs. GDP price deflator 6
Change y/y
6
Unit labour cost, non farm bus.
5
5
4
4
3
3
2
2
1
1
0
0
-1
0.0 65
-2 83
85
87
89
91
93
95
97
99
01
03
05
Source: EcoWin, First Securities
27
-20 70
75
80
85
90
95
00
05 Source: EcoWin, First Securities
-1
GDP price deflator (core)
-2
30
28
.. And the Fed is not that preoccupied with the CPI
… it’s the economy, stupid!
Fed easing shaded
FIRST
Source: EcoWin, First Securities
29
30
The cycle, business surveys are more important
By the way: What drives earnings expectations?
US - ISM vs. Fed funds When does the Fed start cutting? 65.0
65.0
ISM
62.5
62.5
60.0
60.0
57.5
57.5
55.0
55.0
52.5
52.5
50.0
o
47.5
o
45.0
50.0
o
47.5 45.0
o
42.5
42.5
40.0 37.5
40.0 Fed cutting shaded
FIRST
37.5
7
7
Fed funds - 5y CPI
4
4
1
FIRST
1
-2
Recessions shaded
-2 85
87
89
91
93
95
97
99
01
03
05
07 Source: EcoWin, First Securities
Source: EcoWin, First Securities
31
32
EMU: Falling unemployment but still low wage inflation
EMU: Low wage inflation, low cost inflation, low inflation
Source: EcoWin, First Securities
33
34
Inntjeningsforventingene ikke så utsatt i EMU?
Interest rates are on their way up but still low?
FIRST
Source: EcoWin, First Securities
35
36
More liquidity in the system
37
What if?
Some asset inflation
38
Somewhat interconnected?
US recessioins shaded
Source: EcoWin, First Securities
h However: Inflation is not a common problem, not imbalances h China, India much more important than before 39
40
Some others are still saving!
A special case? BNP OECD vs. Fastlands-Norge
Household net financial investment Husholdningens finansinvesteringer, anslag Estimates based on saving ratios, housing investments
5
4
4
12.5
3
3
10.0
2
2
7.5
1
1
15.0
12.5
Japan Germany
7.5
6
Vekst år/år
5
15.0 10.0
6
5.0
0
0
2.5
2.5
-1
-1
0.0
0.0
5.0
-2.5 -5.0
-3
-2.5
USA
First
-2
-2 FIRST
-3
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
-5.0
Source: EcoWin, First Securities
80 82 84 86 88 90 92 94 96 98 00 02 04 h Hvilken strek er et snitt av 30 OECD-land
Source: EcoWin, First Securities
h Hvilken strek er en liten åpen, oljeavhengig…. økonomi? 41
42
The economy is firing on all cylinders
A special case? BNP OECD vs. Fastlands-Norge 6
Private demand 6
Vekst år/år Fastlands-Norge
5
5
4
4
3
3
2 0
0 -1
-2
-2
-3 FIRST 80 82
-3 84
86
88
90
92
94
96
4% Households 2%
1
-1
98
00
02
04
Deviation from trend, % of Mainland GDP Mainland business
2
OECD
1
6%
0% -2%
06
Petroleum inv.
-4%
Source: EcoWin, First Securities
-6% 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 43
44
Fiscal policy: Slightly expansionary
7.0
Structural budget deficit ex. oil vs spedning rule
’G’ not that important vs. the private sector
Privat og offentlig etterspørsel
And will remain so
In per cent of GDP
6.0 Actual deficit
4.0
10%
Forbruk + investeringer, inkl olje
8%
3.0
8%
6%
2.0
Oil revenue spending rule
1.0 0.0 1995
Avvik fra trend, % av Fastlands-BNP
10%
5.0
1997
1999
2001
2003
2005
2007
6%
4% 2%
2009
4%
Offentlig etterspørsel
2%
Sources: Ministry of Finance, First
4
Norway - Fiscal policy vs. GDP (Mainland)
Per cent
Change in deficit in per cent of GDP *)
2
0%
0%
-2%
-2%
-4%
-4%
-6%
0
-6% First
-2
-8% 1980
-4 Output gap (OECD/FIRST)
-6 1980
1985
1990
1995
2000
2005
1984
-8% 1988
1992
1996
2000
2004
2008
2010
*) Change in ex. oil structural deficit Sources: Ministry of Finance, OECD
45
46
Savings: The flip side of spendings
Strong credit growth, house price boom
Fuelled by historically low interest rates!
House prices vs. Norges Bank's forecasts 20
20
yoy growth % 15
15
10
10
OECD/First 5
5
NB's forecasts 0
0
Source: Reuters EcoWin
-5
The credit market important? Liberalised credit in the 80’ies, ultra low rates now? 47
-5 01
02
03
04
05
06
07
08
09 Source: EcoWin, First Securities
48
Seen it before?
It might be a new world. But it might bee too low rates too.
Household debt, Norges Bank's f'casts Debt in % of disp. income ex. insurance int. income Forecasts from Financial Stability Reports FS 06/2 240 260
220
FS 06/1
200
FS 05/2 FS 04/2
180
FS 03/2 - high
FS 03/2
160 140 120 First/Norges Bank
100 1980
49
Some asset inflation
1985
1990
1995
2000
2005
2010
50
Housing starts at 23 year high Housing starts vs. order book 175
37.5
Real orders: Adjusted for cost of building
35.0
150
32.5 30.0
125
27.5
Orders, volume 100
25.0 22.5
75
20.0 17.5
50
15.0
Housing starts 25
12.5 88
90
92
94
96
98
00
02
04
06 Source: EcoWin, First Securities
51
52
Capacity utilisation is record high!
Remarkable improvement in the labour market
Norway Resource shortages in manufacturing 55 45
45
40
40
35
35
30
30
25
25
4 2
20
20
0
0
15
15
-2 -4
-2 -4
SSB/First
84
86
10 88
90
92
94
96
98
00
02
04
Deviation between actual and potential production
Ministry of Finance 00
05
4 2
Change % y/y
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
06
Norway - Labour market
Source: EcoWin, First Securities
9
1.1
In %
Unemployment, incl. measures
8
4 3 2 1 0 -1 -2 -3 -4 -5 -6
Norges Bank
95
Labour market is tight, despite dynamic labour immigration
Source: EcoWin, First Securities
OECD
90
2.39 2.32 2.25 2.18 2.11 2.04 1.97
50
Output gap
85
2.39 In millions 2.32 2.25 2.18 2.11 2.04 1.97
50
10
4 % of potential GDP 3 2 1 0 -1 -2 -3 -4 -5 -6 70 75 80
Norway Employment 55
Indicator & trend, seas. adj
0.9
7
Open unemployment rate at 18 year low
1.0 0.8
6
0.7
5
0.6
4
0.5 0.4
3
0.3
2
0.2
Vacancies
1
0.1 84
86
88
90
92
94
96
98
00
02
04
06
10 Source: EcoWin, First Securities
Source: EcoWin, First Securities
53
54
Productivity might be slowing down, unit labour cost no doubt increasing
Consequently: Wage growth is definitely picking up Norway: Wages vs. the labour market
Norway Mainland GDP, productivity
Vacancies/unemployed vs. wage growth
Quarterly statistics, National accounts & tax payments indicates wage growth on the rise
12 11 10 9 8 7 6 5 4 3 2 no\v-u-lonn 80 82
0.8 0.7 0.6 0.5
V/U ratio
Wages "TRC"
0.4 0.3 0.2 Est.
0.1 0.0
84
86
88
90
92
94
96
98
00
02
04
06
8 y/y, smoothed 7 6 5 4 3 2 1 0 -1 -2 -3 80 82 84 86 88
Mainland GDP, business ex energy
Productivity (GDP/hours worked) 90
92
94
96
98
00
02
08
9
9
Wage cost per hour (Nat. acc)
8 7
8 7
Annual wage (TRC)
6
6
5
5
Est
4
4
Wage index, average
3
3
2
2 98
99
00
01
02
03
04
05
06
07
08
6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0
Less reason to woory about ’too low’ inflation
First est t
2007 2006 Norges Bank est (incl. pensions).
2.0
2005
3.0 4.0 Unemployment (Aetat)
12.5 10.0
CPI/CPI-ATE
Growth y/y
5.0
6.0
15.0 12.5 10.0
Unit lab. cost business x energy
7.5
7.5
5.0
5.0
2.5
2.5 0.0
-2.5 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
-2.5
Source: EcoWin, First Securities
Source: EcoWin, First Securities
55
Norway - Unit labour cost vs. CPI
0.0 1994
1.0
08
15.0
Norway Unemployment vs. wage inflation 1994 - 2007
10
Change y/y
Wage inflation (TBU)
10
06
Source: EcoWin, First Securities
Source: EcoWin, First Securities
Norway - Wage inflation, private sector
04
8 7 6 5 4 3 2 1 0 -1 -2 -3
56
We know Norges Bank’s reaction function
The monetary policy dilemma h High GDP growth, the supply side has turned out to be more flexible than assumed h Strong growht in credit and house prices h … but inflation has been low, and well below target h An now, pressure on capacity is no doubt strengthening
Norges Bank rate vs. unemployment
4.5
− Lower unemployment, increasing wage growth
1
Norges Bank deposit rate, scale inverted
h … but inflation remains far below target
2
4.0
3 3.5
Norges Bank behind the curve?
4
Mind the gap!
5 3.0
What should Norges Bank then do?
6 7
2.5
8
Unemployment, NAV %
2.0 97
98
99
00
01
02
03
04
05
06
9 07
08
Source: EcoWin, First Securities
57
58
”The problem”: Inflation is too low
Bom, falleri, falleri, bom, bom
Norway Inflation measures
Norges Bank CPI-ATE estimates
Change y/y
3.0
Mainland GDP deflator ex energy Headline CPI
5
5
Is inflation too low?
4
4
Really?
3
3
2
2
1
1
0
0
CPI-AT
-1 -2
97
98
99
01
02
03
04
05
06
IR 1/04
IR 2/04 IR 1/05 IR 3/05
IR 1/03
2.0
IR 2/05
IR 2/03
1.5
IR 1/06
IR 2/06
1.0 IR 3/06
0.5
-2 00
IR 3/02 IR 3/03
-1
Sources: SSB, First 96
IR 2/02
2.5
Outcome
IR 3/04 IR = Inflation Report
07
Source: EcoWin, First Securities
-0.5
jan.02
59
60
jan.03
jan.04
jan.05
jan.06
jan.07
jan.08
Norges Bank is trying!
Inflation expectations on the rise Expected inflation 2 - 5 years ahead
Norwegian interest rate(s)
3.00
16
Average economists, businesses and employer's org
Average
2.75
12 2.50
8 Kilde: tns Gallup/Norges Bank
2.25
Companies pricing plans
1 kv 02
1 kv 03
1 kv 04
1 kv 05
4
1 kv 06
35
Kilde: Norges Bank/First
30
0
Net share of companies that report prices will rise faster
25
High capacity utilisation, higher inflation
20 15
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
10 5 0 -5 Source: tns Gallup/Norges Bank
-10
1 kv 02
1 kv 03
1 kv 04
1 kv 05
1 kv 06
61
62
Even so, Norge Bank is speeding up
… but the bank is way behind the curve?
Norges Banks rate projections
Interest rates and growth
Inflation reports in 2006 5.50
IR 3 2006
5.00
5.00
IR 2 2006
4.50
11 10 9 8 7 6 5 4 3 2 1
5.50 4.50
4.00
4.00
IR 1 2006
3.50
3.50
3.00
3.00
2.50
2.50
2.00
2.00
1.50
1.50 04
05
06
07
08
09
Nov 06
Mar 06 3 m. money market rate
Norges B's paths
11 10 9 8 7 6 5 4 3 2 1
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: EcoWin, First Securities
63
Nominal GDP-growth (Mainland)
Source: EcoWin, First Securities
64
Norges Bank policy rate at relatively low levels
A stable connection?
Central bank rates 8
Low relative to other countries…
7
6
UK EMU Sweden
7.0 Neutral rate estimat
6.0
03
04
05
06
100
07
0.0
Source: EcoWin, First Securities
5.0
4.0
4.0
3.0
3.0
2.0
101
…and relative to “normal” levels
102
2 y swap vs. trading partners
-0.2
6.0
5.0
1.0
02
99
0.2
0 01
98
1
0 8.0
97 0.4
2
00
96
3
2 1
95
NOK TWI
0.6
4
USA
3
7.0
0.8
5
4
8.0
94
6
AUS
5
Norges Bank policy rate
NOK TWI vs. interest rate diff.
8
New Zealand
Norway
7
-0.4 Jan
Apr
Jul 05
Oct
Jan
Apr
Jul 06
103 Oct
104 Jan 07 Source: EcoWin, First Securities
2.0 NB projection IR 3/2006
FIRST
95
96
97
98
99
00
01
02
03
04
05 06
07
08
1.0
09
Source: EcoWin, First Securities
65
66
But what about the exchange rate?
In December 2002: Norway at the top Pengemarkedsrente 12 11 10 9 8 7 6 5 4 3 2 1 0
h We don’t need 4 pp more than the others this time h The NOK is not strong; the world, the corp sector & the stock market is
SVE
h The oil prce is higher, we ‘need’ a stronger currency 67
12 11 10 9 8 7 6 5 4 3 2 1 0
Desember 2002
NOR
EMU
CAN
UK
USA
AUST NEW Z ISL Source: EcoWin, First Securities
68
Now: Norway is close to the bottom
What is important for the NOK exchange rate now? NOK vs. oil, interest rates
Pengemarkedsrente 12 11 10 9 8 7 6 5 4 3 2 1 0
12 11 10 9 8 7 6 5 4 3 2 1 0 SVE
NOR EMU CAN
UK
90.0 95.0
95.0
100.0
100.0
105.0
105.0
110.0
NOK actual (TWI)
FIRST
-15.0
110.0 -15.0
Oil price contribution
-10.0
-10.0
-5.0
-5.0
0.0
0.0
Interest rate contribution
5.0 02
03
04
05
06
5.0
07
Source: EcoWin, First Securities
USA AUST NEW Z ISL
2 år swap rate differanse: 1pp diff + 2% on NOK
Source: EcoWin, First Securities
69
90.0
Model, est from 2005
70
Conclusions – monetary policy h The Norwegian economy is over stimulated by the strongest world ec. growth in 40 years and the lowest interest rate in 200/60 years + an oil boom
h The labour market is tightening rapidly, wage inflation in the rise − Even if immigration is record high
h Unusual rapid increase in credit & house prices show that borrowing cost is low h A substantial fall in private sector savings h Inflation is low, and might remain low (we expect it up) h But is low inflation enought to keep rates well below a neutral rate? NO! Risk analysis is important! 71
72
