GLOBAL ECONOMIC GROWTH: TRANSITORy DECELERATION OR THE NEW NORM?
1.3 Deleveraging and balance sheet cleaning
This thread of the debate relates to the role of financial variables. In the foregoing the relation of savings, investments and interest rates closely followed the usual textbook and generally mainstream real economy explanation. By contrast – as was convincingly presented by Borio and Disyatat, and Borio17 –interest rates are essentially shaped by monetary factors, which cannot be deduced from the real economic analysis and the development of the savings and investments in the real sense, which characterise the debates described above. To put it briefly, these monetary attributes are shaped by banks’ lending activity, as well as by the central banks’ and the economic policy’s supervisory and macroeconomic stabilisation policy. insufficiently prudent lending practices of banks and the lax macroeconomic and supervisory policy may easily lead to financial and real economic overheating both at the domestic and international level, as the lending capacity of the banking system is not restricted by the (“real”) savings available in advance. In this approach, the present crisis developed due to the credit boom and the debt overhang, and the protracted nature of the crisis is the consequence of the previously accumulated debt. Indebted agents are striving to adjust their balance sheets: a precondition for this is to save a higher portion Table 1-1 Comparison of balance sheet recession and secular stagnation balance sheet recession
Secular stagnation
Cyclical, non-durable
Structural, durable (began before the crisis)
Financial variables: – excessive lending – indebtedness – balance sheet adjusment – sectoral reallocation
Real variables: – demography – technology – innovation – investment behaviour
Source: MNB
of their income than before, which can be used for repaying their debts, while refraining from new borrowing. Since within each country several sectors – households, the government, banks – and in the global economy several indebted geographic regions are simultaneously trying to deleverage, the result is weak domestic and foreign aggregate demand. Poor aggregate demand also has a dampening influence on output, which results in a close to stagnation situation (Table 1-1). Richard koo – whose name is linked with the term of “balance sheet recession” – states that in times of balance sheet recession agents strive to minimise their losses rather than to maximise profit.18 He believes that this is the reason why the real economy is responding poorly to the stimulus applied by the central banks. When a company plans investments, and contemplates whether it is worth responding to the anticipated demand growth by capacity expansion, investment activity can be influenced by the level of interest rates, as an important cost component. In such cases, the central bank’s interest rate policy can have an impact on the cyclical situation of the economy via investments and other interestsensitive expenditures. However, when companies or even households are concerned about repaying their previous loans, they will not contemplate new borrowing and as such the low interest rates have no influence on their expenditures. According to koo, in the crisis fiscal policy should act as the last resort provider of aggregate demand, which would help reduce the outstanding debt of the private sector. In the period of balance sheet recession, the efforts of private agents are aimed at increasing their savings. The growth decelerating impact of the synchronised deleveraging complicates the implementation of this effort, as one can save less from the decreasing or slowly increasing incomes, and the debt-to-income ratio decreases more slowly. In such a situation, income growth may be accelerated by the continued indebtedness of the budgets, under low capacity
Borio and Disyatat (2011) and Borio (2015), and Tily (2012). See more details in the first chapter of the MNB Growth Report of 2014 (MNB 2014) and in Szalai (2014) 18 koo (2014) in: Teulings and Baldwin (2014). 17
GROWTH REPORT • 2015
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