Global Economic Outlook The Institute of Strategic and International Studies Kuala Lumpur, November 2012 Mangal Goswami Mangal Goswami Deputy Director IMF Singapore Regional Training Institute
Action Needed to Put Recovery Back on Track The global economy has suffered new setbacks The forecasts have been revised downward Risks are up and confidence is fragile AE: policies have progressed but much stronger actions are needed EM: complex setting rebuilding policy room for maneuver p g g p y versus supporting growth
Confidence has Faltered and Risks have Increased October GFSR April GFSR RISKS Emerging marketrisksrisks Credit risks Macroeconomic risks Market and liquidity risks Away from center signifies Monetary and Riskappetite higher risks, easier monetary and financial conditions, financial conditions or higher risk appetite 3
What Went Wrong? Increasing strains in the euro area End of the emerging markets boom Large growth impact of fiscal adjustment amid tight financial conditions
General Government Deficit and Debt Source: IMF staff estimates. 5
Tight financial conditions and fiscal policies in AE 100 80 60 Lending Conditions (Net percentage of domestic respondents tightening standards for loans) U.S. Euro area Japan Fiscal Consolidation (Change in structural balance as percent of GDP) 1.5 1 0.5 0 40 U.K. 0.5 20 Advanced economies 11 0 Emerging and developing economies 1.5 2 20 2.5 40 12:Q2 3 2007 2008 2009 2010 2011 2012 2009 10 11 12 13 Sources: Lending surveys by the Bank of England, European Central Bank, Bank of Japan, and the U.S. Federal Reserve for households and corporations; and IMF staff estimates.
Emerging Markets: End of a boom 250 225 200 175 Real Credit Growth Real Credit Growth (January 2007 = 100) (percent change from one year ago) 40 Turkey Brazil 35 Turkey Brazil India China 30 India 25 China Real GDP Growth (percent change from one year ago) Turkey Brazil India China 16 14 12 10 20 8 150 15 6 125 10 4 100 5 2 75 June 12 07 08 09 10 11 12 2010 2011 2012 June 12 0 12:Q2 2010 2011 2012 0 Sources: Haver Analytics; IMF, World Economic Outlook; and IMF staff calculations.
Outlook: Weak and Uncertain Key Assumptions Strong euro area policies improve financial conditions in 2013H2 US policymakers avoid fiscal cliff, raise debt ceiling Outlook Recovery gradually strengthens but is weaker than in July 2012 World Economic Outlook and there are large downside risks
Growth prospects are projected to be weaker now for most major economies relative to before WEO Real GDP Growth Projections (percent change froma year earlier) 2012 (Oct 2012) World U.S. Euro Area Japan Brazil Russia India China 3.3 2.2 0.4 2.2 1.5 3.7 4.9 7.8 (Jul 2012) 3.5 2.0 0.3 2.4 2.5 4.0 6.1 8.0 (April 2012) 3.5 2.1 0.3 2.0 3.0 4.0 6.9 8.2 2013 (Oct 2012) 3.6 2.1 0.2 1.2 4.0 3.8 6.0 8.2 (Jul 2012) 39 3.9 23 2.3 07 0.7 15 1.5 46 4.6 39 3.9 65 6.5 85 8.5 (April 2012) 4.1 2.4 0.9 1.7 4.1 3.9 7.3 8.8 Source: IMF, World Economic Outlook.
Downside risks are large: 1 in 6 chance of serious global slowdown (global growth < 2 percent) 90 percent confidence interval 90 percent confidence interval (April 2012 WEO) 90 percent confidence interval (Sept 2011 WEO) Baseline 7 6 5 4 Prospects for World GDP Growth (percent change) g) Downside: 1. More stress in euro area 2. US fiscal cliff, debt ceiling 3. Higher oil prices 4. Medium term risks: high AE debt; lower EM growth 3 2 1 0 1 2009 2010 2011 2012 2013
What Is To Be Done? Removing immediate risks Euro Area: Restoring confidence United States: Avoiding the fiscal cliff, raise debt ceiling
Advanced Economies: Managing fiscal consolidation Fiscal Gradual and sustained fiscal consolidation anchored by detailed medium term plan key for U.S and Japan Growth contingency: cyclically adjusted targets to let automatic stabilizers operate where room, smooth medium term adjustment Monetary Maintain an accommodative stance
Many EM&DC need to rebuild fiscal and monetary policy room for maneuver over the medium term 6.0 4.0 2.0 0.0 General Government Structural Balance (percent of GDP) April 2008 April 2012 2008 Average 2012 Average Real Policy Rates (percent of GDP) 12.0 10.0 8.0 2.0 6.0 4.0 4.0 6.0 8.0 2007 10.0 12.0 0 2012 2007 Average 2012 Average 2.0 20 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. 2.0 0.0
EM & DC: Complex setting need to calibrate macro stance given potential for real and financial vulnerabilities Baseline scenario Pause monetary policy tightening or modestly ease Continue to rebuild fiscal position Downside risks Ease monetary policy further, strengthen macro prudential measures Allow fiscal stabilizers to work If needed and consistent with stronger medium term growth, deploy fiscal stimulus (e.g. China)
Key Messages Assessment Policy Euro Area Financial deintegration forces leading to higher costs Reintegration requires a leap to complete policies (euro area + national) U.S./Japan Waiting for market signalscould lead to unintended financial risks and harsher economic outcomes Avoid complacency and tackle medium term fiscal adjustment without delay Emerging Markets Rising domestic and external vulnerabilities Keep guard up and use policy space wisely 19
Additional Slides
In the 2000s, EMDEs spent more time in expansion and had smaller downturns than AEs Time Spent in Expansion Median Downturn (Peak to Trough Amplitude) 100 1950 69 1970 89 1990s 2000s 5 Perce ent 80 60 40 0 5 10 15 Perce ent 20 20 0 25 Advanced Economies Source: IMF staff calculations. Emerging Market and Developing Economies Advanced Economies Emerging Market and Developing Economies 17
Further Action Needed for Global Rebalancing External Deficit Economies Fiscal Consolidation Structural reforms to boost productivity and saving External Surplus Economies Boost consumption Reduce accumulation of foreign exchange reserves Adopt more market determined exchange systems
Fiscal Adjustment: Progress but a long way to go in key economies Japan United States Ireland Spain Greece United Kingdom Portugal France Italy Canada Germany Change in Cyclically Adjusted Primary Balances (percent of potential GDP) 0 2 4 6 8 10 12 14 16 18 20 22 Projected Adjustment (2012 2013) Remaining adjustment until 2020 to achieve illustrative debt targets Source: IMF staff estimates. Note: Total required adjustment to reduce the gross debt ratio to 60 percent by 2030 (net debt target of 80 percent for Japan). After 2020, the primary balance must 19 be maintained constant at the prevailing level until 2030.
8 Portfolio and Other Investment Capital Flows Excluding Central Banks (Cumulative from December 2009, in percent of GDP) 3,000 Euro Area Exposures to Greece, Ireland, Italy, Portugal, and Spain (In billions of euros) 6 4 2 0 Core 2,500 2,000 EFSF/EFSM SMP -2 Periphery -4 1,500 ECB borrowing ECB borrowing -6-8 -10 1,000 500 Borrowing from private banks Borrowing from private banks -12 10 10 10 10-11 11 11 11 12 12 Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- 0 Dec-09 Current Source: IMF staff calculations. 20
Credit Cycle Challenges EXPANSION Mid-Cycle Indonesia, Singapore RECOVERY CREDIT CYCLE Late Expansion Hong Kong, Korea, Mexico, Malaysia, South Africa, Very Late Expansion Brazil, China, India MODERATION/ DOWNTURN CONSOLIDATION/ REPAIR Source: IMF staff estimates. 21
100 90 80 70 Cumulative Portfolio Flows to Emerging Market Mutual Funds (In billions of U.S. dollars) Equities 130 120 110 Cumulative Flows to Emerging Market Local Currency Bond Mutual lfunds (month t=100) Peak euro area stress 60 100 50 Bonds 40 30 20 10 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: IMF staff calculations. 90 80 70 60 50 40 Lehman t-7 t-6 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 22