World Economic OutlookHopes, Realities, RisksApril 2013Thomas HelblingResearch Department, International Monetary Fund
Road map• State of the global economy: risks are down but forecasts are notup• The three-speed global economy– Euro area: stuck in low gear– US, other advanced economies (AE): shift from public to private demand in train– Emerging market and developing countries (EMDE): resilient growth but risks offinancial excesses and concerns about structural bottlenecks• Analytical chapters– The dog that did not bark– Breaking through the frontier
80859095100105110115120199719981999200020012002200320042005200620072008200920102011201220132014201520162017Actual and WEOProjectionPreCrisis Trend 2/-16-14-12-10-8-6-4-20-1 0 1 2 3 4 5 6 7Current Crisis 2008 1/Japan 1997Sweden 1991Estimated Mean Path of Previous CrisesAdvanced Economies with SystemicBanking Crises 1/1/ Crisis Countries include Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain, Sweden,Switzerland, United Kingdom, United States.2/ The precrisis trend is estimated based on the window from 10 to 3 years before the crisis.Sources: World Bank; and IMF staff estimates. 3Output Dynamics after Banking Crises(Output in percent of pre-crisis trend; years from crisis on x-axis)Growth and Recovery in Advanced Economies(Real PPP GDP per capita)Hope: move on after financial crisisReality: Still grappling with the crisis legacy —3-speed global economy
Policy action has reduced tail risks, financial markets have ralliedSources: Haver Analytics; EPFR Global; and IMF staff calculations.02040608010012014000 02 04 06 08 10 12DJ EURO STOXX PRCS&P 500Emerging MarketJapan - TopixxJune 29, 2012Equity Markets(2007 = 100; national currency)Apr.13Source: Bloomberg L.P.; and European Central Bank / Haver Analytics0123456782007 2008 2009 2010 2011 2012 2013Germany ItalySpain FranceApr. 13Government Bond Yields(Percent; Ten-year government bonds)
-10-50510152006 2007 2008 2009 2010 2011 2012United StatesEuro areaSpainItalyBank lending conditions still tight, especially in the euro areaNonfinancial Firm and Household Credit Growth 1(year-over-year percent change)12:Q4-200204060801002007 2008 2009 2010 2011 2012U.S. Euro area12:Q2Lending Conditions(Net percentage of domestic respondentstightening standards for loans)Sources: Lending surveys by the Bank of England, European Central Bank, Bank of Japan, and the U.S. Federal Reserve for house holds and corporations; HaverAnalytics; and IMF staff estimates.1 Flow of funds data are used for the euro area, Spain and the United States. Italian bank loans to Italian residents are corrected for securitizations.
In the euro area periphery, financial conditions are tight whiledebt burden remains highHousehold Debt(In percent of disposable income1)Euro Area Lending Rates(Percent, loans less than 1 million Euros, 1- 5year maturity)Sources: Haver Analytics.1 Gross disposable income for euro area economies.607080901001101201301401501999 2002 2005 2008 2011Euro areaSpainPortugalUSA33,544,555,566,572009 2010 2011 2012 2013SpainGermanyItalyFeb. 13
7United States: Private demand is stronger but fiscal policy is a dragHousehold Sector Leverage Indicators(In percent of personal disposable income)Source: IMF staff estimates.-1-0,500,511,522,532012 2013 2014Euro areaUnited StatesJapanOctober 2012 WEOFiscal Impulse(Change in structural balance as percent of GDP)-20-10010203040500204060801001201402000 2006 2012DebtSavingsNet lendingColumn1
World U.S. Euro Area Japan Brazil Russia India China2013(April 2013) 3.3 1.9 -0.3 1.6 3.0 3.4 5.7 8.02013(Jan. 2013) 3.5 2.0 -0.2 1.2 3.5 3.7 5.9 8.22014(April 2013) 4.0 3.0 1.1 1.4 4.0 3.8 6.2 8.22014(Jan. 2013) 4.1 3.0 1.0 0.7 4.0 3.8 6.4 8.5WEO Real GDP Growth Projections(percent change from a year earlier)Source: IMF, World Economic Outlook.The Outlook is still weak and uncertain.The forecast has been revised down8
-10-50510152000 02 04 06 08 10 12 14:Q4Emerging AsiaLatin AmericaSSA-10-50510152000 02 04 06 08 10 12 14:Q4United StatesEuro areaJapanBut the forecast suggests that the transition from three-speed to full-speed global economy will be slowAdvanced Economies(percent change from a year earlier)Emerging Economies(percent change from a year earlier)April WEO2013 2014EmergingAsia7.1 7.3LAC 3.4 3.9SSA 5.6 6.1April WEO2013 20141.9 3.0-0.3 1.11.6 1.4LAC: Latin America and the Caribbean;SSA: Sub-Saharan Africa; data are interpolated from annual frequency valuesSource: IMF Staff Estimates.
012345672010 2011 2012 2013 201490 percent confidence interval90 percent confidence interval (Oct. 2012 WEO)BaselineMany risks remain, even if the economy is in a better place; marketrisks indicators do not point to large decrease in risksProspects for World GDP Growth(percent change)Downside:1. ST stress or LT stagnation in euro area2. US debt ceiling3. Medium-term risks: high AE debt; lower EM growth4. Risks related to unconventional monetary policies:side effects; managing exitUpside:1. Faster than expected U.S. recoverySource: Consensus Forecasts; Bloomberg L.P.; and IMF staff estimates.
90100110120130-2 -1 0 1 2 3 4197519821991Current RecoveryAverage of Previous Recoveries90100110120130-2 -1 0 1 2 3 4197519821991Current RecoveryAverage of Previous RecoveriesThe recovery has not been weak in emerging market and developingeconomiesEmerging and Developing EconomiesAdvanced EconomiesGlobal Recoveries: Real GDP(Per capita, PPP weight; trough in output at t=0)Source: IMF staff estimates.
-4-3-2-101234561990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012Other Emerging Market and Developing EconomiesBRICsAdvanced EconomiesThe big picture: the great transformation continues…Sources: World Economic Outlook database; World Bank World Development Indicators; Penn World Tables 7.0; and IMF staff calculations. 12Contribution to Growth in World Real GDP per Capita(percent)World growth
…but at a lower speed. Prospects for potential output growth in EMshave been downgradedOutput Relative to Precrisis Trends in WEOEstimates in 2013(percent of precrisis trend GDP)Reductions in Medium-Term Output(percent; relative to the September 2011 WEO)-15,0-10,0-5,00,05,010,0AE EM CEE CIS DA LAC SSAOutput Gap Relative toPrecrisis Trends in 2013WEO gap in 2013-12,0-10,0-8,0-6,0-4,0-2,00,02,02012 2013 2014 2015 2016BrazilChinaIndiaEmerging and developing economiesSource: IMF staff estimates.Note: AE= advanced economies; EM = emerging market and developing economies; CEE = central and eastern Europe; CIS = Commonwealth of Independent States;DA = developing Asia; LAC = Latin America and the Carribean; SSA = sub-Saharan Africa
60708090100110120130140010203040506070802006 08 10 12:Q3Brazil IndiaIndonesia TurkeyColombia China (Left Scale)Credit to GDP(percent)Capital flows to EMs have accelerated amid rapid credit growth-20-100102030402005 2006 2007 2008 2009 2010 2011 2012 2013OthersLACDeveloping AsiaNet Portfolio Capital Flows(billions of US dollars; quarterly flows)Source: EPFR Global; Haver Analytics; IMF, International Financial Statistics; and IMF staff calculations.
Many EM&DC need to rebuild fiscal and monetary policy room formaneuver over the medium termGeneral Government Structural Balance(percent of GDP)Real Policy Rates(percent; deflated by two-year-ahead inflationprojections)-10,0-8,0-6,0-4,0-2,00,02,04,06,0BR CL CN CO ID IN KR MY PE PL RU TH TR ZA200720122007 Average2013 Average-4,0-2,00,02,04,06,08,010,012,0BR CL CN CO ID IN KR MY PE PL RU TH TR ZAApril 2008March 2013April 2008 AverageMarch 2013 AverageBR: 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.
Global imbalances have narrowed but not to low levels.Source: IMF Staff Calculations.Note: CHN+EMA = China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, Thailand; DEU+JPN = Germany and Japan; OCADC =Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Turkey, United Kingdom;OIL = oil exporters; Sur. = surplus EM economies. ROW = rest of the world; US = United States.-5-4-3-2-1012341998 2000 2002 2004 2006 2008 2010 2012 2014 2016ROW CHN+EMAOCADC DEU+JPNOIL USDiscrepancy Adjusted for WEO Output GapsTrend Adjusted for Deviations from TrendGlobal Current Account Imbalances(percent of world GDP)
Euro area• Accommodative monetary policy (2014 inflation < < 2% !!) andworking on better pass through• Restructuring weak banks, with help of ESM if needed• Stronger EMU: banking union and capital market integration• More entitlement reform and more structural reformWhat to do? Work on medium-term policiesand don’t overburden monetary policy!U.S and Japan• Medium-term fiscal plans and entitlement reform• U.S. needs to durably address debt ceiling• Japan needs a strong medium-term growth strategy• Accommodative monetary policy, including BoJ reformsEMDC• Rebuild policy space• Watch for legacies of past credit growth or ongoing expansions• Structural reforms: to reaccelerate potential output, absorbinflowing capital productively, rebalance growth
-2-101234562005 6 7 8 9 10 11 1225th/75th percentile United States United KingdomFrance Germany ItalyCanada JapanCore inflation has been remarkably stable over the latest cycleCore Inflation in Advanced Economies(Percent)Sources: Organization for Economic Cooperation and Development; and IMF staff calculations
Where is the deflation?Inflation and unemployment during recessions-4-3-2-101-1 0 1 2 3 4Core inflationUnemployment rate(mean change from beginning of recession, quarterly data)1970-791980-19941995-2006Great recessionSources: Organizations for Economic Cooperation and Development; and IMF staff calculations
Inflation and expectations have become sticky at low levels in AE02468101214-1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0CoreInflationCyclical unemployment1975–841985–941995–presentInflation and Cyclical Unemployment(percent; average across advanced economies)Sources: Organizations for Economic Cooperation and Development; and IMF staff calculations
Policy implicationsThe dog has been muzzled:• Temporary overstimulation is likely to have small effects on inflation• Inflation fears should not prevent authorities from pursuing highlyaccommodative monetary policyNo worries? Not quite• Stable inflation does not imply stable economy• Preserving central bank independence is key to anchoring expectations – don’ttake off the muzzleImplications for inflation targeting• With a flatter Phillips curve, cyclical fluctuations have limited impact on inflation.Stabilizing inflation may no longer ensure a quick closing of the output gap• Various options (e.g., prolonged deviations from targets, dual mandate)
Low income countries are in a second wave of growth takeoffs051015202530354045500510152025301950 60 70 80 90 2000 10Number of takeoffs (left scale) Percent of LICs (right scale)Frequency of New and Ongoing Growth TakeoffsSources: IMF staff calculations
(Normalized to 100 at t = 0, the year before the start of a strong growth episode;median economy; years on x-axis)75100125150175200-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 1075100125150175200-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10Does it matter? Yes, takeoffs result in long term gains in GDPper capitaLICs with strong growth25th/75th percentileLICs with weak growth25th/75th percentileBefore 19901990–2011
Both generation takeoffs saw higher investment rates. But more relianceon FDI for the current generation…01234t [–4,0] t [1,5] t [6,10]Before 1990 1990–2011Net Foreign Direct Investment Flows(percent of GDP)01234t [–4,0] t [1,5] t [6,10]01020304050607080 LICs with strong growth LICs with weak growthReal Investment(percent of GDP)12162024t [–4,0] t [1,5] t [6,10]12162024t [–4,0] t [1,5] t [6,10]
...and declines in post-take off debt and inflation levels4812162024t [–4,0]*** t [1,5] t [6,10]**LICs with strong growthBefore 1990 1990–2011Inflation(percent of GDP)4812162024t [–4,0] t [1,5] t [6,10] t [16,20]LICs with strong growth01020304050607080 LICs with strong growth1/External Debt(percent of GDP)20406080100t [–4,0] t [1,5] t [6,10] t [16,20]LICs with strong growth20406080100t [–4,0] t [1,5] t [6,10]**LICs with strong growth*********