World Economic Outlook October 13 Jörg Decressin Deputy Director Research Department, IMF 1
Outline Prospects for Advanced Economies Recent Developments and Implications for Emerging Economies Medium-term prospects for EM and LICs Risks Policy implications
Prospects for Advanced Economies in 1 Somewhat ttighter monetary conditions Much easier fiscal policy Higher growth in 1 3
U.S. monetary conditions have tightened and this spilt over into the euro area and, to a lesser extent, Japan..5 Policy Rate Expectations 1/ (percent; months on x-axis; dashed lines are from the April 13 WEO). United States.3 Europe Key Interest Rates / (percent) U.S. average 3- year fixed rate mortgage Germany Japan United States 7 5. 3.1 1. t t+1 t+ t+3 7 8 9 1 11 1 Oct. Source: Bloomberg, L.P. 13 1/ Expectations are based on the federal funds rate for the United States, the sterling overnight interbank average rate for the United Kingdom, and the euro interbank offered forward rate for Europe; updated October, 13. / Interest rates are 1-year government bond yields.
Inflation pressures are very low and there is still ample slack. Monetary policy is assumed to stay very accommodative. Headline Inflation (year-over-year percent change; dashed lines are the six-to-ten-year inflation expectations) 1 U.S. Unemployment Rate (percent) 5 5 9 9 3 1 8 7 Unemployment rate (left scale) Employment as percent of population -1 Euro area 5 - Japan United dstatest -3 8 1 1 1: 7 8 9 1 11 1 13 Q Sources: Consensus Forecast; and IMF staff estimates. 5 8 7 5
AE fiscal policy will be less tight in 1 (except in Japan). Fiscal Impulse (Change in structural balance as percent of GDP).5 Euro area United States 1.5 1.5 1 11 1 13 1 Source: IMF staff estimates. -.5
GDP growth forecasts for advanced economies are little changed: growth is moving up in U.S. and euro area. 1 1. United States (annualized quarterly percent change). Euro Area (annualized quarterly percent change) 8 9 3-3 - - - -9 United States Euro area - -1 1 11 1 13 1 Sources: IMF staff estimates. 1 11 1 13 1 7-8
Recent Developments and Implications for Emerging Economies Tighter external funding conditions Lower potential growth More demand from the advanced economies in 1 A modest cyclical uptick in 1 8
Tighter U.S. monetary conditions interacted with EM domestic weaknesses and led to tighter EM funding conditions. 15 1 5 Net Capital Flows to Emerging Markets Breakdown (billions of U.S. dollars; monthly flows) VXY 1/ Interest Rate Spreads (basis points) Sovereign / United States BB Corporate 3/ May, 13 175 15 15 1-5 -1-15 - -5 Greek crisis Irish crisis Equity Bond 1 st ECB LTROs June 9, 1 May, 13-3 1:H1 1:H 11:H1 11:H 1:H1 1:H Oct. 13 Source: Bloomberg, L.P.; EPFR Global/Haver Analytics; and IMF staff calculations. Note: ECB = European Central Bank; LTROs = longer-term refinancing operations. 8 1 1 Oct. 13 1/ JPMorgan emerging market volatility index. / JPMorgan EMBI Global Index spread. 9 3/ JPMorgan CEMBI Broad Index spread. 75 5 5
EM growth has declined for cyclical and structural reasons. 1..5. -.5-1. Decomposing the 11-13 Slowdown 1/ Long-term Expectations: Up and Down / (percentage points) (medium-term growth forecast; change from April 3 WEO) 1-1.5 -. -.5-3. -3.5 Potential Cyclical Change in real growth Brazil India China South Africa Russia Brazil South Africa China Russia India 5 7 8 9 1 11 1 13-1 - Source: IMF, World Economic Outlook. 1/ Cyclical component of growth calculated as the difference between real and potential growth. Potential growth estimated using multivariate filter (see Box 1. of the October 13 WEO for details). 1 / 5-year ahead growth forecasts used as a proxy for longer term growth expectations. India s figures for the July 13 update are in fiscal year terms.
EM fiscal policies are staying broadly neutral; for some this is fine; others need fiscal adjustment. Fiscal Impulse (Change in structural balance as percent of GDP) 1 Emerging market and developing economies.8... -. Source: IMF staff estimates. 1 11 1 13 1 11 -. 11
Key EMs are under pressure but exchange rates have acted as a buffer and reduced or reversed previous overvaluations. Real Effective Exchange Rates (percent change from April 13 to September13) - - - -8 Sur. Def. Aln. Sources: Haver Analytics; IMF, World Economic Outlook, April 13 and IMF staff calculations. Note: Aln. = aligned emerging market economies, including India, Mexico, Poland, Russia, Saudi Arabia; Def. = deficit emerging market economies, including Brazil, Indonesia, South Africa, Turkey; Sur. = surplus emerging market economies, including China, Malaysia, Thailand. 1-1
EM growth forecasts have been marked down. But growth is still expected to move up modestly in 1. 3. Developing Asia (half-over-half annualized percent change; bars. Latin America and South Africa (half-over-half annualized percent change; 1 are differences between the current WEO and 3 9 bars are differences between the current 1 July 13 WEO) WEO and July 13 WEO) 1 8 - - Developing Asia (RHS) - China (RHS) India (RHS) -8 Developing Asia -1 China -1 India -1 1:H1 11:H1 1:H1 13:H1 1:H1 Sources: IMF staff estimates. 1-1 - -3 3-3 Latin America (RHS) Brazil (RHS) Mexico (RHS) Latin America - Brazil Mexico South Africa -9 1:H1 11:H1 1:H1 13:H1 1:H1 13 3 1-1 - -3
Overall, the WEO forecast has been revised down because of lower growth in emerging economies. In South Africa, activity has been in line with earlier projections: no revision. WEO Real GDP Growth Projections (percent change from a year earlier) 13 (Oct. 13) 13 (Jul. 13) World U.S. Euro Area Japan Brazil China India South Africa.9 1. -...5 7. 3.8. 3.1 1.7 -...5 7.8 5.. 1 (Oct. 13) 1 (Jul. 13) 3.. 1. 1..5 7.3 5.1.9 3.8.7.9 1. 3. 7.7.3.9 1 Source: IMF, World Economic Outlook. 8
Five-Year-Ahead EM Forecasts: Less growth than during pre-crisis period but not far from historical averages, except China, Russia. Five-Year-Ahead Forecast Growth and Average Growth from 1998-13 in the BRICS (percentage points) Economy Average Growth (1998 13) Average Growth ( 8) Five-Year-Ahead Forecast Growth Brazil.9.8 3.5 China 9. 11. 7. India.9 8..7 Russia. 7.1 3.5 South Africa 3..9 3.5 Low Income Countries. 81 8.1 57 5.7 Source: IMF staff calculations. Note: Five-year-ahead forecast growth is from the October 13 WEO (estimate for 18 growth; for India, shown on a fiscal year basis). 15 8
Illustrative impact of Chinese demand slowdown on commodity exporters: South Africa s GDP would be about 1% lower in 5. Illustrative Impact of Chinese Demand Slowdown on Commodity Exports (Percent of GDP) Cotton Zinc Aluminum Copper Tin Lead Nickel Iron Coal Natural gas Crude oil 8 7 5 3 1 Mongol Austral ia ia Kuwait Iraq Azerbaijan UAE Saudi Arab ia Qatar Kazakhstan Chi Niger Venezue Indones Russ le ia la ia ia South Africa Brazil Colomb ia Ecuador Iran Vietnam Canada Mexico Peru Ind ia Source: IMF staff calculations. Note: UAE = United Arab Emirates. 1
There are many near-term risks. Over the medium term, a plausible downside scenario is one of several, limited disappointments and much lower global growth. Tighter external funding conditions for EM Less potential growth in EM, notably China Lower commodities prices Euro area investment stalls, notably in periphery, as reforms stall Japan policy implementation is incomplete US monetary conditions tighten more than assumed in the WEO forecast US potential growth disappoints 17 17
Risks from higher interest rates in advanced economies for emerging economies Reason for policy change matters for impact on growth: Higher-than-expected growth good for the world Tighter policy stance not good dfor the world Higher-than-expected inflation bad for the world Worse fiscal positions ugly for the world Other depends 18
The WEO forecast assumptions are for benign monetary conditions and thus subject to downside risks. AE monetary policy: U.S. tapers gradually, keeps rates on hold until 1 Euro area and Japan stay very accommodative EM: tightening of external conditions is largely a one off 19 19
Gross capital Inflows to emerging markets have been high but not extraordinarily high. Gross Capital Inflows to Emerging Markets (percent of GDP) 1 1993 199 1995 1998 1999 3 5 1 13 Q1 13 Q 9 8 7 5 3 1 Source: IMF staff calculations. Note: 13 Q is based on only a subset of the countries due to non-availability of data.
But the U.S. 1-year term premium is very low and could surprise on the upside. U.S. Term Premium on 1-year Zero Coupon Bond 3 1-1 - 9 9 9 9 98 8 1 1 Oct. 13 Sources: Kim and Wright (5); and IMF staff calculations. 1
EM growth and capital flows do not necessarily fall much when U.S. policy rates rise because of stronger U.S. growth. Februrary 199 June 1999 June Latin America and the Caribbean: GDP Growth 1 (year-over-year percent change, SA; deviations from t=) 1 8 - - - -8 5 3 1 1 3 5 9-3 3 - -9-1 -15-18 Latin America and the Caribbean: Gross Capital Inflows (percent of GDP; deviations from t=) - -5 - -3 - -1 1 3 5 Source: IMF staff estimates. Emerging Asia: GDP Growth (year-over-year percent change, SA; deviations from t=) 5 3 1 1 3 5 8 1 1 - - - -8 Emerging Asia: Gross Capital Inflows (percent of GDP; deviations from t=) 9 3-3 - -9-1 -15-18 - -5 - -3 - -1 1 3 5
This also holds for South Africa. - - - -8-1 -1-1 -1-18 February 199 June 1999 June South Africa: GDP Growth (year-over-year percent change, SA; deviations from t=, t is South Africa: Gross Capital Inflows (year-over-year percent change, SA; deviations from t=, t is measured in quarters) measured in quarters) 5 3 1 1 3 5 - -5 - -3 - -1 1 3 5 - - - -8-1 -1-1 -1-18 Source: IMF staff calculations.
EMs are now more resilient than in 1997. Some vulnerabilities have built up. (initial conditions) Key EMs Under Pressure Today vs. 1997 Asian Financial Crisis EMs (percent) 1 9 8 7 5 3 1 1997 Crisis EMs / Right Scale Selected large EMs with capital outflows 1/ Short-term external debt (% of GDP) Short-term term external debt (% of GDP) Fixed ER regime (% of total) t External ldebt (% of fgdp) Reserves (% of short-term t external debt) 8 7 5 3 1 Source: IMF, World Economic Outlook, April 13. 1/ Brazil, Indonesia, India, Turkey, and South Africa. Data shown for 1. / Indonesia, Korea, Thailand, Malaysia, and Philippines. Data shown for 199.
Policies Euro area: banking union; structural reforms; gradual fiscal adjustment Japan: work on all ll3 arrows of fab Abenomics US: address ST fiscal challenges; easy monetary policy; MT fiscal adjustment & entitlement reforms China: advance rebalancing and reform shadow banking India: improve fiscal policy and remove structural bottlenecks Brazil: raise domestic saving and foster private investment Russia: rebuild fiscal buffers and improve the investment climate EMDC: (i) exchange rate buffer; (ii) monetary policy to keep inflation well anchored; cut rates if room exists; (iii) fiscal policy to be geared to MT objectives; stimulate only if major slowdown threatens; (iv) preserve financial stability; (v) structural reforms 5 5