International Monetary Fund World Economic Outlook Jörg Decressin Deputy Director Research Department, IMF April 212
Towards Lasting Stability Global Economy Pulled Back from the Brink Policies Stepped Up, Made a Difference Recovery Fragile, Risks Still High, For All Bought Time Must Fix the Underlying Problems in AEs Need to Sustain Global Demand Rebalancing
Global Economy Pulled Back from the Brink
Euro area liquidity crisis avoided, but significant concerns linger 6 1-Year Government Bond Spreads over German Bunds (basis points) Euribor vs. OIS Spread (3m; basis points) 12 5 Italy 1 4 8 3 6 Spain 1 st LTRO 2 nd LTRO 1 st LTRO 2 nd LTRO 2 4 1 2 France Jan-11 May-11 Sep-11 Jan-12 Apr. 12 Jan-11 Jul-11 Jan-12 Apr. 12 Sources: Bloomberg L.P., and IMF staff calculations.
Volatile capital flows recently returned to emerging markets 9 8 7 U.S. VIX (index) Net Capital Flows to Emerging Markets 1/ (billions of U.S. dollars; weekly flows) QE2 (Nov. 3) S&P downgrade (Aug. 5) 1 st LTRO (Dec. 21) 1 8 6 6 4 5 2 4 3-2 -4 2-6 1 2 4 8 Apr. 12 Source: Bloomberg financial markets and EPFR Global. 1/ Bond and Equity ETFs and Mutual Funds. 2 nd LTRO (Feb. 29) Jan-1 Jun-1 Dec-1 May-11 Nov-11 Apr. 12-8 -1
Policies Stepped Up, Made a Difference
Euro Area Policy Response ECB LTRO Fiscal Adjustment, Structural Reforms (Italy, Spain) Greek Restructuring Fiscal Compact
Recovery Fragile, Risks Still High, For All
A strong policy response has eased financial conditions, but bank credit in the euro area is expected to remain low Source: European Central Bank, Federal Reserve Board. NFC and Household Credit Growth (level change in amounts outstanding in billions of LCU) 6 5 4 United States 3 2 Euro area 1-1 -2-3 26 8 1 11:Q4
More euro-area deleveraging in the offing: how much? Reduction in Assets under Different Scenarios: Factor Contributions, 212 13 (trillion U.S. dollars) Structural Cyclical funding pressures 4 3 2 1 Sources: IMF staff calculations. Current policies Weak policies
Except in Europe, spillovers from euro area on activity are likely to be limited 14 Average Exports of Goods to Euro Area by Region, 29-1 (share of region s GDP, percent) European Bank Claims on Various Regions, September 211 (percent of region s GDP) 45 12 4 1 35 3 8 25 6 2 4 15 1 2 5 EE AE CIS MENA SSA DA LAC AA USA + CAN EE: Emerging Europe; AE: advanced Europe; CIS: Commonwealth of Independent States; MENA: Middle East and North Africa; SSA: sub-saharan Africa; DA: Developing Asia; LAC: Latin America and the Caribbean; AA Advanced Asia. USA + CAN AA DA LAC EE
Forecasts are still similar to January 212 expect modest upward revisions in some regions 15 1 5 Advanced Economies (percent change from a year earlier) United States Euro area Japan April WEO 212 213 2.1 2.4 -.3.9 2. 1.7 Jan. 212 WEO Update 212 213 1.8 2.2 -.5.8 1.7 1.6 Emerging Economies (percent change from a year earlier) Emerging Asia 15 1 5 Latin America SSA -5-1 2 2 4 6 8 1 12 April WEO 212 213 Emerging 7.3 7.9 Asia LAC 3.7 4. SSA 5.4 5.3 Jan. 212 WEO Update 212 213 7.3 7.8 3.6 3.9 5.5 5.3 2 2 4 6 8 1 12 LAC: Latin America and the Caribbean; SSA: Sub-Saharan Africa; data are interpolated from annual frequency values -5-1
16 Inflation is falling and domestic price pressures are low in the major advanced economies Headline Inflation (annualized quarterly percent change) 6 14 12 SSA United States 5 4 1 3 8 Latin America Euro area 2 1 6 4 2 G24 + China Emerging Asia Japan -1-2 26 27 28 29 21 211 212 213 26 27 28 29 21 211 212 213-3 SSA: Sub-Saharan Africa; forecasted values are interpolated from annual frequency values
9 percent confidence interval 9 percent confidence itnerval (April 211 WEO) Baseline Risks around the WEO projections remain tilted to the downside but are less pronounced than end-211 Prospects for World GDP Growth (percent change) Upside: 1. Stronger investment in AE 2. Dropping oil risk premium 3. Stronger EU policies 7 6 5 4 Downside: 1. More stress in euro area 2. Higher oil prices 3. Lower EM output 4. Disruptions to global bond markets 3 2 1-1 29 1 11 12 13
. Euro Area Weak Policies Deleveraging Scenario: Increased bank and sovereign stress, all affected GDP Loss after Two Years (percent deviation from WEO baseline) Inflation after One Year (percent deviation from WEO baseline). -.5-1. -.5-1.5-2. -2.5-1. -1.5-3. -3.5-2. -4. United Euro area Japan Latin States America Sources: IMF staff calculations (Global Economy Model). Emerging Asia United States Euro area Japan Latin America Emerging Asia -2.5
Disruption in Global Oil Supply Scenario. GDP Loss after Two Years (percent deviation from WEO baseline) Inflation after One Year (percent deviation from WEO baseline).8 -.2.7 -.4.6 -.6.5 -.8-1. -1.2.4.3-1.4.2-1.6.1-1.8 United Euro area Japan Latin States America Sources: IMF staff calculations (Global Economy Model). Emerging Asia United States Euro area Japan Latin America Emerging Asia.
Bought Time Must Fix the Underlying Problems in AEs
Policy Challenges in Advanced Economies Short Run Stability: Euro Area Firewall, Global Firewall Growth: Easy monetary policy Automatic stabilizers Fiscal space + low rates = ease pace Medium Run Goldilocks fiscal consolidation (MT plans, entitlement reforms) Financial reforms Structural reforms Euro area governance, institutions
1..9 Monetary policy should stay easy in advanced economies, while fiscal policy tightens further Policy Rate Expectations (percent; months on x-axis; dashed lines are from the September 211 WEO) Fiscal Impulse (percent of GDP) 2. 1.5.8.7.6.5.4.3.2 Europe United States United Kingdom Advanced economies Emerging economies 1..5. -.5-1. -1.5.1 September 211 WEO -2.. t = t + 12 t + 24 t + 36 29 1 11 12 13-2.5
Only in the United States is the balance sheet expansion of the central bank associated with more money growth, recently 14 Broad Money Growth (percent change from previous year) Central Bank Total Assets (percent of 28 GDP) 35 12 1 8 6 Euro area United States Bank of Japan ECB Lehman Brothers Collapse 3 25 2 4 2 Japan Federal Reserve 15 1 5-2 24 6 8 1 Feb. 12 27 8 9 1 11 Mar. 12
On fiscal consolidation, much progress is being made Fiscal Consolidation (change in structural balance; percent of GDP) 5 213 212 211 4 3 2 1-1 -2 Source: IMF staff estimates. U.K. Italy U.S. France Germany Japan
However, on fiscal consolidation there still is a long way to go Change in Cyclically-Adjusted Primary Balances (percent of GDP) Projected adjustment (211-15) Remaining adjustment until 22 to achieve illustrative debt targets 1/ Germany Italy Canada France U.K. U.S. Japan -2 2 4 6 8 1 12 14 16 18 2 Source: IMF staff estimates. 1/ Total required adjustment to reduce gross debt ratio to 6 percent by 23 (net debt target of 8 percent for Japan). After 22, primary balance must be maintained constant at the prevailing level until 23.
115 Many emerging economies are operating above pre-crisis trends, with still high credit growth Real GDP in 212 in Percent of Pre-crisis Trend Real Credit Growth (percent change from a year earlier) 5 11 15 Brazil China Turkey 4 3 1 95 2 9 Indonesia 1 85 Colombia Argentina 8 AE CEE CIS DA LAC MENA SSA 27 8 9 1 Dec. 11 AE: Advanced Economies CEE: Central and Eastern Europe; CIS: Commonwealth of Independent States; DA: Developing Asia; MENA: Middle East and North Africa; SSA: sub-saharan Africa; LAC: Latin America and the Caribbean. -1
The macroeconomic priority is to rebuild fiscal and monetary policy room for maneuver 6. 4. 2. General Government Structural Balance (percent of GDP) Real Policy Rates (percent of GDP) April 28 April 212 28 Average 212 Average 11. 9.. 7. -2. 5. -4. -6. -8. -1. 27 212 27 Average 212 Average BR CL CN CO ID IN KR MY PE PL RU TH TR ZA BR CL CN CO ID IN KR MY PE PL RU TH TR ZA BR: Brazil; CL: Chile; CN: China; CO: Colombia; ID: Indonesia; IN: India; KR: Korea; MX: Mexico; MY: Malaysia; PE: Peru; PH: Philippines; PL: Poland; RU: Russia; TH: Thailand; TR: Turkey; ZA: South Africa. 3. 1. -1.
Need to Sustain Global Demand Rebalancing
Global Imbalances: no longer projected to widen, despite larger EM Asia contribution Global Imbalances 1/ (percent of world GDP) US OIL GER+JPN OCADC CHN+EMA ROW 3 2 1-1 -2 1996 2 24 28 212 216 Sources: IMF, International Financial Statistics, and IMF staff calculations. 1/ CHN+EMA: China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, and Thailand; GER+JPN: Germany and Japan; LAC: Latin America and the Caribbean; OCADC: Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Turkey, and United Kingdom; OIL: oil exporters; ROW: rest of the world; US: United States. -3
EM&DC: Sustaining Global Demand Rebalancing Strong DD in EM&DC has helped global economy Avoid over stimulating and rebuild policy room Latin America and others: coping with large capital inflows China: rebalancing from investment toward consumption
1. Key prerequisite for stronger growth is lasting stability 2. Relative calm in markets offers a golden opportunity to get ahead of the crisis by building stronger firewalls
International Monetary Fund World Economic Outlook Jörg Decressin Deputy Director Research Department, IMF April212