World Economic Outlook

Hopes, Realities, Risks April 2013

Thomas Helbling
Research Department, International Monetary Fund

Road map
State of the global economy: risks are down but forecasts are not up 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 of financial excesses and concerns about structural bottlenecks

Analytical chapters
The dog that did not bark Breaking through the frontier

Hope: move on after financial crisis Reality: Still grappling with the crisis legacy 3-speed global economy
Growth and Recovery in Advanced Economies
(Real PPP GDP per capita)
120

Advanced Economies with Systemic Banking Crises 1/

Actual and WEO Projection PreCrisis Trend 2/

Output Dynamics after Banking Crises

(Output in percent of pre-crisis trend; years from crisis on x-axis) Current Crisis 2008 1/ Japan 1997 Sweden 1991 Estimated Mean Path of Previous Crises

0
-2 -4 -6 -8 -10 -12

115
110 105

100
95 90

85
80 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -1 0 1 2 3 4 5 6 7

-14
-16

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.

Policy action has reduced tail risks, financial markets have rallied
Equity Markets
140 (2007 = 100; national currency) 120 100 80 4 60 3 40 20 0 00 02 04 06 08 10
Sources: Haver Analytics; EPFR Global; and IMF staff calculations.

Government Bond Yields

June 29, 2012 8 7 6 5

(Percent; Ten-year government bonds)

DJ EURO STOXX PRC S&P 500 Emerging Market Japan - Topixx 12 Apr. 13

2
1 0 2007 Germany Spain Italy France Apr. 13 2008 2009 2010 2011 2012 2013

Source: Bloomberg L.P.; and European Central Bank / Haver Analytics

Bank lending conditions still tight, especially in the euro area

Lending Conditions
100 80 U.S. 60 Euro area

Nonfinancial Firm and Household Credit Growth 1\

(year-over-year percent change)
United States Euro area Spain Italy
15

(Net percentage of domestic respondents tightening standards for loans)

10

5
40 0 20

0
-20 2007 2008 2009 2010 2011 2012 12:Q2 2006 2007 2008 2009 2010 2011 12:Q4 2012

-5

-10

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; Haver Analytics; 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 while debt burden remains high
Household Debt
150 140 130 120 110 100 90 80 70 60 1999 2002 2005 2008 2011 2009 Euro area Spain 4.5 4 3.5 3 2010 2011 2012 2013

(In percent of disposable income1)

Euro Area Lending Rates

(Percent, loans

less than 1 million Euros, 1- 5

7
6.5 6 5.5 5

year maturity)

Portugal
USA

Spain Germany

Italy

Feb. 13

Sources: Haver Analytics. 1 Gross disposable income for euro area economies.

United States: Private demand is stronger but fiscal policy is a drag

Household Sector Leverage Indicators
140 120 100 80 60 40 20 0 2000 Debt Savings Net lending Column1

Fiscal Impulse
50 40 30 20 10 0.5 0 -10 -20 0

(In percent of personal disposable income)

(Change in structural balance as percent of GDP)

Euro area United States
Japan October 2012 WEO 2.5 2 1.5 3

-0.5
-1

Source: IMF staff estimates.

2006

2012

2012

2013

2014
7

The Outlook is still weak and uncertain. The forecast has been revised down
WEO Real GDP Growth Projections
(percent change from a year earlier)

World

U.S.

Euro Area

Japan

Brazil

Russia

India

China

2013 (April 2013)

2013 (Jan. 2013) 2014 (April 2013) 2014 (Jan. 2013)

3.3 3.5

1.9 2.0

-0.3 -0.2

1.6 1.2

3.0 3.5

3.4 3.7

5.7 5.9

8.0 8.2

4.0 4.1

3.0 3.0

1.1 1.0

1.4 0.7

4.0 4.0

3.8 3.8

6.2 6.4

8.2 8.5

Source: IMF, World Economic Outlook.

But the forecast suggests that the transition from three-speed to fullspeed global economy will be slow
Advanced Economies
15

Emerging Economies
(percent change from a year earlier)
Emerging Asia Latin America SSA 10 15

(percent change from a year earlier)

April WEO

2013
10 United States 1.9

2014
3.0

Euro area 5
Japan

-0.3
1.6

1.1
1.4

-5

April WEO 2013 2014 Emerging 7.1 7.3 Asia LAC 3.4 3.9 SSA 5.6 6.1 2000 02 04 06 08 10 12 14: Q4 2000 02 04 06 08 10 12 14: Q4

-5

-10

-10

Source: IMF Staff Estimates.

LAC: Latin America and the Caribbean; SSA: Sub-Saharan Africa; data are interpolated from annual frequency values

Many risks remain, even if the economy is in a better place; market risks indicators do not point to large decrease in risks
Prospects for World GDP Growth
(percent change)
90 percent confidence interval

7
6 5 4

90 percent confidence interval (Oct. 2012 WEO)

Baseline

Downside: 1. ST stress or LT stagnation in euro area 2. US debt ceiling 3. Medium-term risks: high AE debt; lower EM growth 4. Risks related to unconventional monetary policies: side effects; managing exit Upside: 1. Faster than expected U.S. recovery
2010 2011 2012 2013

3
2 1 0 2014

Source: Consensus Forecasts; Bloomberg L.P.; and IMF staff estimates.

The recovery has not been weak in emerging market and developing economies
Global Recoveries: Real GDP
(Per capita, PPP weight; trough in output at t=0)
130

Advanced Economies
1975 1982

Emerging and Developing Economies

1975 1982 1991 Current Recovery Average of Previous Recoveries

130

120

1991 Current Recovery Average of Previous Recoveries

120

110

110

100

100

90 -2 -1 0 1 2 3 4 -2 -1 0 1 2 3 4
Source: IMF staff estimates.

90

The big picture: the great transformation continues

Contribution to Growth in World Real GDP per Capita
(percent)
6
5 4 3 2 1 0 -1 Other Emerging Market and Developing Economies BRICs Advanced Economies 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
12

World growth

-2 -3 -4

Sources: World Economic Outlook database; World Bank World Development Indicators; Penn World Tables 7.0; and IMF staff calculations.

but at a lower speed. Prospects for potential output growth in EMs have been downgraded
10.0

Output Relative to Precrisis Trends in WEO Estimates in 2013

(percent of precrisis trend GDP)

Reductions in Medium-Term Output

(percent; relative to the September 2011 WEO)
2.0 0.0

5.0 -2.0 0.0 -4.0 -6.0 -8.0 -10.0 -12.0 AE EM CEE CIS DA LAC SSA 2012 2013 2014 2015 2016

-5.0
Output Gap Relative to Precrisis Trends in 2013 -10.0 WEO gap in 2013

Brazil China India Emerging and developing economies

-15.0
Source: 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

Capital flows to EMs have accelerated amid rapid credit growth

Net Portfolio Capital Flows
40

Credit to GDP
140 130

(billions of US dollars; quarterly flows)

Others LAC Developing Asia

(percent)

80 70

30

120
20 110 100 90 0 80

60
50 40 30 20

10

Brazil
-10 70 60 -20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2006 Indonesia Colombia 08

India
Turkey China (Left Scale) 10 12: Q3 10 0

Source: EPFR Global; Haver Analytics; IMF, International Financial Statistics; and IMF staff calculations.

Many EM&DC need to rebuild fiscal and monetary policy room for maneuver over the medium term
General Government Structural Balance
(percent of GDP)
6.0 4.0 2.0 0.0 -2.0 -4.0 2007 2012 2007 Average -8.0 -10.0 2013 Average -2.0 -4.0

Real Policy Rates

(percent; deflated by two-year-ahead inflation projections)
April 2008 12.0 10.0 8.0 6.0 4.0 2.0

March 2013
April 2008 Average March 2013 Average

-6.0

0.0

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.

Global imbalances have narrowed but not to low levels.

Global Current Account Imbalances
(percent of world GDP)
4
3 2 1 0

-1
-2 ROW OCADC OIL Discrepancy Trend Adjusted for Deviations from Trend 2000 2002 2004 2006 CHN+EMA DEU+JPN US Adjusted for WEO Output Gaps 2008 2010 2012 2014 2016 -3 -4 -5

1998

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.

What to do? Work on medium-term policies and dont overburden monetary policy!
Accommodative monetary policy (2014 inflation < < 2% !!) and working 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 reform 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 reforms Rebuild policy space Watch for legacies of past credit growth or ongoing expansions Structural reforms: to reaccelerate potential output, absorb inflowing capital productively, rebalance growth

Euro area

U.S and Japan

EMDC

WEO Chapter 3 & 4 Slides

Core inflation has been remarkably stable over the latest cycle
6 5 4 3 2 1 0 2005 -1 -2
Sources: Organization for Economic Cooperation and Development; and IMF staff calculations

Core Inflation in Advanced Economies

(Percent)
25th/75th percentile France Canada United States Germany Japan United Kingdom Italy

10

11

12

Where is the deflation? Inflation and unemployment during recessions

(mean change from beginning of recession, quarterly data)

1 Core inflation 0

-1
-2
1970-79

-3 -4 -1 0 1 2

1980-1994 1995-2006 Great recession

Sources: Organizations for Economic Cooperation and Development; and IMF staff calculations

Unemployment rate

Inflation and expectations have become sticky at low levels in AE

Inflation and Cyclical Unemployment
(percent; average across advanced economies)
14 12 10 197584 198594 1995present

Core Inflation

8 6 4 2 0

-1.5

-1.0

-0.5

0.0 0.5 Cyclical unemployment

1.0

1.5

2.0

Sources: Organizations for Economic Cooperation and Development; and IMF staff calculations

Policy implications
The dog has been muzzled: Temporary overstimulation is likely to have small effects on inflation Inflation fears should not prevent authorities from pursuing highly accommodative monetary policy No worries? Not quite Stable inflation does not imply stable economy Preserving central bank independence is key to anchoring expectations dont take off the muzzle Implications 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 takeoffs

30

Frequency of New and Ongoing Growth Takeoffs

Number of takeoffs (left scale) Percent of LICs (right scale)

50 45 40 35 30

25

20

15

25 20

10

15 10 5

1950
Sources: IMF staff calculations

60

70

80

90

2000

10

Does it matter? Yes, takeoffs result in long term gains in GDP per capita
LICs with strong growth 25th/75th percentile 200 19902011 175 LICs with weak growth 25th/75th percentile 200

(Normalized to 100 at t = 0, the year before the start of a strong growth episode; median economy; years on x-axis) Before 1990

175

150

150

125

125

100

100

75
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

75 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

Both generation takeoffs saw higher investment rates. But more reliance on FDI for the current generation
10 80 70 60 50 40 30 20 0 LICs with strong growth LICs with weak growth Before 1990 Initial During Final 19902011 Real Investment (percent of GDP)

24 20

24 20

16
12 t [4,0] 4 3 t [1,5] t [6,10] t [4,0] Net Foreign Direct Investment Flows (percent of GDP) t [1,5] t [6,10]

16
12

4 3

2
1 0 t [4,0] t [1,5] t [6,10] t [4,0] t [1,5] t [6,10]

2
1 0

...and declines in post-take off debt and inflation levels

80 70 60 50 40 30 20 10 0
100 80 60

Before 1990

Initial

LICs with strong growth

LICs with strong growth1/ External Debt During Final (percent of GDP) ***

19902011

LICs with strong growth

100

80
60 40 20

40
20 t [4,0] 24 20 16 12 8 t [1,5] t [6,10] t [16,20] t [4,0] t [1,5] t [6,10]**

LICs with strong growth

Inflation (percent of GDP) ***

LICs with strong growth

24
20

16
12

***
t [4,0] t [1,5] t [6,10] t [16,20]

8 4

4 t [4,0]*** t [1,5] t [6,10]**

Thank you!