Summary of the April Monthly Report
The US economy in the current economic upturn
Aggregate US output grew only sluggishly following the severe recession of 2008-09. Its growth has fallen far short of levels reached, in particular, during the strong upswings in the mid-1970s and early 1980s that likewise followed severe recessions. The moderate growth of the past few years is being interpreted by many as weakness in the business cycle, which the extremely expansionary monetary policy has not been able to rectify, however.
It is indeed possible to identify a series of demand-side factors which have weighed on aggregate growth. Private residential housing construction was unable to maintain its usual role as the engine of economic recovery because the process of adjustment in the real estate markets was still ongoing following the excesses of the preceding cycle. Experience has shown that such corrections take a relatively long time. Only in the past few quarters has a solid upward tendency in residential construction taken hold; however, owing to the low level of activity, it is unable to make itself felt across the entire economy. Moreover, the rapid expansion of fiscal policy, with which general government sought to stem the tide of the plummeting economy in 2008-09, has been scaled back in the past few years. Given the still-rising debt ratio and still-yawning fiscal gaps, further consolidation measures appear necessary in order, among other things, to protect the sustainability of public finances.
Moreover, although household consumption is often perceived as a key weak link in the current upswing owing to efforts by consumers to reduce their debt and offset a loss of wealth, this contrasted with the positive stimulus coming from the extremely loose monetary policy. Since, on balance, saving did not increase any further during the economic recovery, households were able to step up their consumer spending in line with their incomes. To that extent, the moderate increases in consumption in the past few years are probably less of a brake and more of a response to sluggish income and employment growth.
Ultimately, the most detrimental effect is not from the various cyclical factors but from the considerable slowdown in the underlying pace of aggregate growth. It is the weaker growth of production capacity that is the main culprit behind the slowdown in real GDP growth as compared with the recoveries of the 1990s and the beginning of the new millennium. The chief factors here are the corrections of previous excesses in the real estate markets and, in particular, the profound demographic change, which is not only dampening growth of the potential labour force but also indirectly holding back capital formation.
Although the radiation effects of the recession are subsiding and an upswing has now begun in residential construction, the pace of aggregate economic growth will probably pick up only slightly, especially as the necessary fiscal consolidation has not yet been completed.
Macroprudential supervision in Germany: framework, institutions, tools
The Act on Monitoring Financial Stability (Gesetz zur Überwachung der Finanzstabilität), which came into force at the beginning of 2013, established a legal framework for macroprudential supervision in Germany. The newly created Financial Stability Committee, a national macroprudential institution, convened for the first time in mid-March. This has lent a new institutional structure to cooperation between the Federal Government of Germany, the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank in the field of financial stability. The Financial Stability Act (Finanzstabilitätsgesetz) allocates important functions to the Bundesbank. The Bank will be responsible, in particular, for analysing issues that are key to financial stability, identifying threats, proposing warnings and recommendations to the Financial Stability Committee, and assessing their implementation.
The need to create macroprudential institutions with clearly defined mandates and develop a corresponding toolkit are two key lessons learned from the financial crisis. Adverse developments within the financial system were a key reason why the financial crisis was both persistent and severe. This experience has served as a reminder of the importance of systemic risk. The macroprudential dimension of financial supervision and regulation therefore aims to restrict systemic risk and thus help to maintain financial stability.
At present, there are a number of challenges facing macroprudential supervision in Germany. What is needed is a coherent strategy with both an analytical framework for recording and evaluating risks and a system of interim objectives and, where possible, operational sub-objectives. Some important tools are about to pass the European legislative process. Further economic analyses are needed to document as fully as possible how these tools would work – and their side-effects – should they be put to use.
When using macroprudential instruments, it is essential to weigh up the pros and cons of deploying a discretionary versus a rules-based approach.