International Monetary Fund

World EconomicWorld EconomicOutlook

Slowing Growth Rising RisksSlowing Growth, Rising RisksSeptember 2011

Activity is under threat as demand rebalancing is not advancing.Policy priorities are:

Rebalancing I

From public to private demand in AEs, need: ○ fiscal repair and support for recovery;

b k it l h i k t○ bank capital, housing markets; ○ vision for euro area

From C/A surplus to C/A deficit countries, need: medium term fiscal adjustment in key AE;Rebalancing II ○medium-term fiscal adjustment in key AE;

○ structural reforms and exchange rate flexibility in key EMs

ReformsStronger global financial system, need:○ financial regulation & macroprudential tools;○ reform of global trade and financial system;

2

Global activity has slowed noticeably and financial volatility has increased dramatically, especially in the euro area.

World Trade(annualized percent change of three-month moving average over previous three-month moving average)

60 400S i

Government Bond Spreads(two-year yield spreads over German bunds; basis points)

July 21 2011

20

40

300

350

SpainItalyBelgiumFrance

July 21, 2011

-20

0

150

200

250

-60

-40Trade value

CPB trade volume index

0

50

100

-80

60

2000 04 Jun.11

06 0802

3

-50

0

Jan-10 Jul-10 Jan-11 Jul-11

May 10, 2010

Sep.11

Equity markets have fallen sharply and volatility has increased drastically.

Equity Markets(index; 2007=100; national currency)

140 90

Implied Volatility(percent)

100

120

DJ EURO STOXXS&P 500AsiaLatin America 70

80U.S. (VIX)

Emerging Markets (VXY)

May 10, 2010

60

80

40

50

60

20

4020

30

0

20

2000 04 Sep.11

06 08020

10

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Sep.11 4

10

Oil prices have retreated but are still above January 2011 levels.y

Food and Oil Prices140 120

130 110

Food(index, 2010m1 = 100; left scale)

Jun. 11 WEO [for 2012]

110

120

90

100

[ ]

Aug. 11 WEO [for 2012]

100

110

80

90Jan. 11 WEO [for 2012]

5

90 70

Oil(US dollars a barrel; right scale)

Jan.2010

Aug.11

Jul.2010

Jan.2011

WEO FORECAST AND RISKSWEO FORECAST AND RISKS

Key assumption underlying the baseline: financial recovery delayed but not derailed.

1. Euro area crisis does not run out of control.

2. Global financial volatility does not escalate.

3. No major tightening of bank lending conditions.

6

The baseline forecast is for more uneven recovery:> 6 percent growth in EM, < 2 percent growth in AE

4 percent global growth

1212

= 4 percent global growth.Real GDP Growth

(percent change from a year earlier)Advanced Economies Emerging Economies

6

8

10

12

Emerging Asia

MENA6

8

10

12

0

2

4Latin America

0

2

4

-8

-6

-4

-2

MENAD A i

2011 20124.0 3.68.2 8.0

Current WEO

-8

-6

-4

-2

United StatesEuro areaJ

2011 20121.5 1.81.6 1.1

Current WEO

-12

-10

8Dev. AsiaLAC

8.2 8.04.5 4.0

-12

-10

8 Japan -0.5 2.3

2000 02 04 1006 087

2000 02 04 1006 08 12 12

Downside risks have increased sharply.Risk for global growth < 2 percent are > 10 percent!

8U id i k h d t di i

Prospects for World GDP Growth(percent change)

6

790% Confidence interval

90% confidence interval from April 2011 WEO

Upside risks: hard to discern, given still relatively strong WEO forecast

3

4

5Baseline forecast

1

2Downside risks:

• Euro area crisis

• Higher household savings rates

-1

0• Non euro-area sovereign risks

• Oil supply concerns

82008 09 10 11 12

Downside scenarios point to potentially large output losses.Downside Scenario

(Deviation from control; years on x-axis)

1

2

3

4

Corporate spread

Euro Area

1

2

3

4

Corporate spread

United States(Deviation from control; years on x-axis)

-3

-2

-1

0

Real GDP

-3

-2

-1

0

Real GDP

-40 1 2 3 4 5

2

3

4

Corporate

Emerging Asia

-40 1 2 3 4 5

20

30

2

3

4 Latin America

N il dit i

-2

-1

0

1

2

Real GDP

spread

-10

0

10

-2

-1

0

1

2

Real GDP(left scale)

Non-oil commodity price (in US dollars; right scale)

-4

-3

-2

0 1 2 3 4 5

Real GDP

-30

-20

-4

-3

-2

0 1 2 3 4 5

(left scale)Crude oil price (in US dollars; right scale)

9

There remains a path to recovery but time is running out

Advanced economies: supportive monetary policy; credible medium-term fiscal consolidation and short-term support; strengthened euro area crisis management framework; bank capital buffers (incl from EFSF)management framework; bank capital buffers (incl. from EFSF).

Emerging and developing economies: structural reforms and currencyEmerging and developing economies: structural reforms and currency appreciation in key surplus economies; policies to avert build-up of financial vulnerabilities; social safety nets.

Other (regulatory, IMS, etc): strengthen global financial safety net; reform global financial system; trade; enhance IMF surveillance.g y ; ;

10

Fiscal withdrawal has been larger than expected in 2011.AE: MT consolidation → room for ST support.

EM: continue to consolidate, room for support if growth slows.EM: continue to consolidate, room for support if growth slows.

16

Fiscal Impulse(percent of GDP)

1,2Required Adjustment(percent of GDP)

2d d i

10

12

14

CurrentApril2011WEO

Projected adjustment 1

Advanced economies

Emerging economiesJune 2011 WEO

6

8

10

-1

0

0

2

4

-3

-2

JP US GB ES FR CA IT DE

Sources: IMF, Fiscal Monitor; and IMF staff calculations.CA: Canada, FR: France, DE: Germany, IT: Italy, JP: Japan, ES: Spain, GB: United Kingdom, US: United States.Cyclically adjusted primary balance adjustment needed to the debt ratio to 60 percent in 2030, except for Japan.

1

2

2009 10 11 12

11

AE monetary policy must stay very accommodative.EMDE requirements vary: some can pause tightening.q y p g g

Policy Rate Expectations(percent; months on x-axis; dashed lines are from the April 2011 World Economic Outlook.)

12

Policy Rates(percent)

2.0

10Latin America

GPM projection

1.5

United States

Europe

United Kingdom

6

8

Emerging Asia

1.0

2

4

Emerging Asia

0.5

12t = 0 t + 3 t + 6 t + 9 t + 12

02005 07 090806 10 11 12

0.0

Real credit growth is still high in a number of EM—need to continue to watch for prudential risks.p

Real Credit Growth(year-over-year percent change)

50

I d i

50Brazil

30

40

Indonesia

Turkey

Colombia

30

40China

Argentina

India

20

30

20

30

0

10

0

10

13

-102006 Jun.

1107 100908

-102006 Jun.

1107 100908

Better balanced exchange rate adjustment and medium-term structural adjustment are needed for more sustained and inclusive growth.

18EME: Real Effective Exchange Rate Change(percent change from June 2007 to August 2011; GDP i ht d)

5

6

World GDP gro th2

Country Contributions to Global Consumption Growth1 (percent)

12

15From June 2007 to Feb. 2011

GDP weighted)

3

4

World GDP growth2

6

9

0

1

2

0

3

-2

-1IndiaChinaOther emerging and developing economiesAdvanced economies

14

Excessive external

surpluses

Excessive external deficits

Aligned-3

1 Based on GDP at 2007 market exchange rates.2 Based on 2007 PPP weights.