## Economic outlook, mid-2016

•  Filed under International economics, EU, PIIE, fiscal policy and taxation

## G-7 meeting (recap)

Mr. Obama noted the recovery taking place in the U.S. and some progress in the European economy, saying an agreement reached Wednesday on the Greek debt crisis should help. He said G-7 leaders “emphasized the importance of pushing back against either protectionism or competitive currency devaluations or the kind of beggar-thy-neighbor strategies that all too often end up leaving everybody worse off.” “We agreed to continue to focus on making sure that each country, based on its particular needs and capacities, is taking steps to accelerate growth,” Mr. Obama said.

This is the usual "OHIO" rhetoric ("own house in order").

The latest bad news came earlier in the day, when the Japanese government reported that consumer prices, excluding fresh food, fell 0.3% in April, the same rate of decline registered in March. The data showed that the Bank of Japan’s goal of reaching 2% inflation, a key pillar of Abenomics, remains as elusive as when it was set in early 2013. The BOJ last month pushed back the target date for reaching that goal for a fourth time.

... Though the Japanese economy rebounded to expand 1.7% on an annualized basis during the first quarter, it contracted in two of the three previous quarters.

Macro outlook / G-7 / G-20 & Greece

“I have a sense that the recovery is slow but it is not in great danger, at least no more than usual,” Mr Blanchard says. “We can talk about risks, they are always there. But the notion that around the corner there is a catastrophe waiting — that really strikes me as totally off.

“For the last seven years we have been thinking about the legacies of the crisis and all the things that have pulled the economy back. I think they are becoming less important,” Mr Blanchard argues, adding: “And so the question is why is it, that with no fiscal consolidation and banks in decent shape, at least in terms of lending, and zero interest rates, we don’t have an enormous demand boom? That is now the puzzle.”

... Mr Blanchard thinks the biggest risk for the US economy may be that markets are misreading the data [emphasis added] and being too gloomy instead of recognising that the recovery is “one of the most balanced … we have had in a long time”.

To do so, policymakers needed to coordinate fiscal and structural policies – rather than relying on monetary policies such as stimulus packages used by central banks in the U.S., euro zone, U.K. and Japan – to propel economies to the "high-growth path."

"Monetary policy has been the main tool, used alone for too long. In trying to revive economic growth alone, with little help from fiscal or structural policies, the balance of benefits-to-risks is tipping," Mann said.

"Fiscal policy must be deployed more extensively" she said, noting that governments could take advantage of the environment created by monetary policy such as low interest rates, to "effectively open up fiscal space" and spend more on "projects and activities that have high multipliers" such as hard and soft infrastructure: digital, energy and transport and education and innovation. - Yellen says Fed rate hike likely appropriate in coming months | Reuters

Before the second world war, Mr Rudebusch notes, the odds of tipping into recession rose as an expansion got older. Yet since the 1940s age has not withered them: an expansion in its 40th month is just as vulnerable, statistically, as one in its 80th (each has about a 75% chance of surviving the next year).

• Jerome H. Powell: Recent Economic Developments, Productive Potential of the Economy, & Monetary Policy; a speech at the Peterson Institute ; slides

## Commentary

• Justin Wolfers: Remember all that whining about slow Q1 growth of only 0.5%? It was revised up to 0.8%. And the more accurate GDI was 2.2%. Not so bad...

• Jeffrey Frankel: Rediscovering Fiscal Policy at the G7

• Larry Summers: What you need to know about the next recession

• John Plender: ‘Double debt bind’ can only be lifted with growth and inflation: Austerity nations are among the least successful in preventing debt from rising

• Fareed Zakaria: America is still great — but it needs to stay strong: "scholars Stephen Brooks and William Wohlforth point out that China is the closest the United States has to a rising rival but only on one measure, gross domestic product. A better, broader measure of economic power, Brooks and Wohlforth argue, is “inclusive wealth.” This is the sum of a nation’s “manufactured capital (roads, buildings, machines and equipment), human capital (skills, education, health) and natural capital (sub-soil resources, ecosystems, the atmosphere).” The United States’ inclusive wealth totaled almost $144 trillion in 2010 — 4½ times China’s$32 trillion."

## Developments in Greece

Yannis Palaiologos: Greece’s debt deal is not a game-changer

... there was no restructuring in 2010. Instead, Athens signed up for unprecedented austerity, aimed at taking it from a primary deficit in 2009, which was in the double digits as a percentage of gross domestic product, to a 6 per cent primary surplus in 2014.

Then — after the Irish and Portuguese bailouts, weeks of violent street protests in Athens and an aborted referendum — a national unity government oversaw the biggest sovereign default in history. More than €105bn was shaved off the nominal value of Greek debt, and another €130bn was offered as new official financing. Still, Greece’s financing needs were so great that it was committed to reaching a primary surplus of 4.5 per cent of GDP by 2014.

In 2012, after two elections that saw the neo-fascists of Golden Dawn steamroller their way into parliament, and Syriza, a loose coalition of leftists, come within an inch of power, Athens was offered the prospect of debt relief. It was also offered two more years to achieve the 4.5 per cent target. In 2014 it was confirmed that the government had achieved a primary surplus a year ahead of schedule, yet Angela Merkel, German chancellor, proved unwilling to move on the debt.

... There is no end in sight for this sorry tale. ... any real discussion on debt has been put off until after the end of the programme in 2018 and the primary surplus targets remain unchanged. [emhasis added]