Global Economic Prospects: Update Global Recovery in Transition

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1 Global Economic Prospects: Update Global Recovery in Transition April 2015 M. Ayhan Kose 1

2 Global Prospects: Three Questions 1. How have global economic conditions changed since December? Broadly as expected; slow recovery; two transitions; narrowing divergences in high-income countries; forecast downgrades in developing economies 2. What are the major risks to the outlook? Transition related risks dominate; vulnerabilities of commodity exporters and disorderly adjustment to U.S. Fed tightening 3. What are the main policy issues? Multiple but different challenges for exporters and importers; undertaking reforms 2

3 Three Questions 1. How have global economic conditions changed since December? 3

4 Global Recovery: Still Slow Moving 12 GDP Growth (Percent) World High-income countries Developing countries Source: World Bank. 4

5 But Soft Spots Among Developing Countries Contribution to Developing Country Growth Revisions since January 2015 (Percentage Points) Oil Exporters Oil Importers* India Brazil Developing Countries Source: World Bank. Note: *Oil importers exclude Brazil and India

6 Two Major Transitions in Recovery Weak commodity prices: expected to persist Normalization and divergence of monetary policies: large footprint 6

7 Extended Period of Low Commodity Prices Expected Commodity Price Indices (Index=100 in 2010, Nominal in US$) Energy Metals Agriculture Source: World Bank. Note: The last historical observation is for 2014, the last forecast is for The energy index includes oil, natural gas and coal. The agriculture index includes grains, edible oils, oil seeds, and tropical commodities. The metals index includes the six base metals (aluminum, copper, lead, nickel, tin and zinc) and iron ore. Forecast values for energy, metals and agriculture prices in 2017 are, respectively, 39%, 31%, and 21% lower than their 2011 levels. 7

8 U.S. Policy Rate Expectations (Percent) US Monetary Policy: Approaching Liftoff but Slow Tightening Dec-13 Jun-14 Mar Year Government Bond Yields (Percent) Germany Japan U.S Source: World Bank, Bloomberg. Note: Left panel: US policy rate expectations are based on forward swap rates. The last observation is for March 2 nd, Right panel: the last observation is for Feb. 25 th, Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 8

9 ECB s Quantitative Easing: A Game Changer? Central Bank Balance Sheets (Index = 100 in October 2008) Euro Area United States Japan Net Asset Purchases During QE Episodes (Percent of GDP) Announced Realized Euro Area (Mar 15 - Sept 16) United States (Nov-09 - Oct 14) Japan (Apr 13 - Apr 16) Source: World Bank, Haver Analytics. Note: Right panel: Realized represents the increase in assets held by central banks during QE episodes. The last observation is for February

10 Euro Area: Still a Long Way to Go 115 Real GDP (Index=100 in 2007Q1) U.S. GDP Euro Area GDP Source: World Bank, Haver Analytics. The last observation is for December

11 How Are Emerging and Developing Countries Performing? Forecast downgrades: especially for commodity exporters Exchange rate pressures: competitiveness vs. debt concerns 11

12 Commodity Exporters: Struggling 12 Evolution of 2015 Growth Forecasts (Percent) June 2014 January 2015 April Developing Oil Exp. Oil Imp. China India Egypt Brazil Russia Source: World Bank. 12

13 Three Questions 1. How have global economic conditions changed since December? 2. What are the major risks to the outlook? 13

14 2. What Are the Major Risks? Preexisting risks generally more balanced: Euro Area deflation (smaller); Contagion from Greece (limited); geopolitical tensions; disorderly slowdown in China (limited) Transition related risks: commodity exporters vulnerable; disorderly adjustment to U.S. Fed tightening Backdrop: low potential growth in developing countries 14

15 Commodity Exporters Under Pressure 5 0 Rating Trend in 2014 and Year-to-Date (Number of Rating Upgrades Minus Downgrades) BBB- Commodity Prices and EM Ratings (Average Sovereign Rating) Net commodity exporters Net commodity importers Commodity price (RHS) (Index) BB+ -10 BB BB Latin America Emerging Asia Africa E.Europe B Source: World Bank, Bloomberg. Note: Rating changes from S&P, Fitch and Moody s. 15

16 Disorderly Adjustment to U.S. Fed Tightening 5 Markets vs. FOMC Policy Rate Expectations (Percent) Market expectations FOMC-Max FOMC-Median FOMC-Low Source: World Bank, Federal Reserve Board Longer Run 16

17 Backdrop: Lower Potential Growth, Slowing Investment 15 Investment Growth in Developing Countries (gross fixed investment, percent) Source: World Bank. Note: Annual averages. EAP LAC ECA SAS SSA MNA 17

18 A Serious Risk: Weak Medium-term Growth 100 Growth Slowdown in Developing Countries (Fraction of developing countries with slower growth than average) average Source: World Bank Note: For each year, number of countries in which growth is slower than in the preceding year. 18

19 Three Questions 1. How have global economic conditions changed since December? 2. What are the major risks to the outlook? 3. What are the main policy issues? 19

20 3. What Are the Main Policy Issues? Monetary policy Oil importers: temporary drop in inflation, positive effect on demand Oil exporters: balance growth, inflation and currency stabilization Challenge: decoupling monetary policy from the U.S. Fed? Fiscal policy Oil importers: public debt still low but fiscal buffers have been depleted Oil exporters: significant pressure on revenues Challenge: availability and effectiveness of fiscal policy? Structural policy Reforms key to restoring potential growth Momentum picking up as challenges abound; time for differentiation 20

21 Structural Reforms: Some Progress China: Implement comprehensive agenda of November 2013 Fiscal reform: new budget law and rules on local government borrowing Financial sector reform: stricter regulation of trust lending, e-lending, and margin lending; increase in the deposit rate ceiling; deposit insurance to be introduced on May 1 SOE reform and land reform: pilot projects underway India: Implement reforms approved Monetary policy framework: formal adoption of inflation targeting Licensing reform: liberalize coal mining Fiscal reform: planned introduction of GST; removal of diesel subsidies Mexico: Implement reforms approved Energy sector reform: open deep water and shale fields to FDI; liberalize electricity and gas Services reform: increase competition in telecommunications Fiscal reform: widen tax base Anti-corruption: bill passed the Senate Indonesia: Fuel subsidy reform in

22 Structural Reforms: But Much More Needed A Select List of Reforms Reorient growth (away from consumption/investment) Address infrastructure needs Improve education system Undertake labor and product market reforms Facilitate regional/global trade agreements Implement energy subsidy/fuel tax reforms 22

23 Global Prospects: Three Questions 1. How have global economic conditions changed since December? Broadly as expected; slow recovery; two transitions; narrowing divergences in high-income countries; forecast downgrades in developing economies 2. What are the major risks to the outlook? Transition related risks dominate; vulnerabilities of commodity exporters and disorderly adjustment to U.S. Fed tightening 3. What are the main policy issues? Multiple but different challenges for exporters and importers; undertaking reforms 23

24 Questions & Comments Thanks! M. Ayhan Kose DEC-Development Prospects Group 24

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