___________________________________________________________________________

2019/SOM1/FDM/007 Agenda Item: 3.4

World Economic and Financial Outlook

Purpose: Information Submitted by: IMF

Finance and Central Bank Deputies’ Meeting Santiago, Chile7-8 March 2019

WORLD ECONOMIC AND FINANCIAL OUTLOOK: A WEAKENING GLOBAL EXPANSION

March 7, 2019International Monetary Fund

Overview

• Recent Developments– Momentum has weakened– Increase in financial market volatility in advanced economies– High frequency indicators suggest softer momentum will continue into 2019

• Outlook– Advanced economies: growth still above trend but declining, and expected to fall further into the

medium term– Emerging markets and developing economies: slight weakening of growth in 2019, but with some

growth pick up 2020-onwards. Notable differences in regional prospects

• Balance of Risks – Tilted to the downside in a context of high policy uncertainty 1

The weaker growth momentum is evident in trade and industrial production indicators

2Sources: CPB Netherlands Bureau for Economic Policy Analysis; IMF, Global Data Source database; and IMF staff calculations.

Sources: Haver Analytics; national authorities; and IMF staff calculations.Notes: BRIC = Brazil, Russia, India, and China. Global growth is the weighed average of real GDP growth in the G7 and BRIC economies.

The global expansion weakened in the second half of 2018.

The underlying momentum has weakened further with the end of import front-loading ahead of tariff hikes.

-6

-4

-2

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016 2017 2018

World trade volumes

Industrial production

World Trade and Industrial Production (3-mma; annualized % change)

46

47

48

49

50

51

52

53

54

55

2011 2012 2013 2014 2015 2016 2017 2018 2019

Global PMI: Manufacturing New Export Orders (SA; 50+=expansion)

The purchasing managers’ indices show weakt new export orders.

Sources: J.P. Morgan; IHS Markit; and Haver Analytics.

0

1

2

3

4

5

6

7

2012 2013 2014 2015 2016 2017 2018

United States

BRICs

G7 (excl. USA)

Global

Real GDP Growth(y-o-y % change)

Commodity prices have been volatile in recent months

3

20

40

60

80

100

120

140

160

180

2011 12 13 14 15 16 17 18 19

Food Base Metals Average petroleum spot price

Commodity Prices(Deflated using US consumer price index; index, 2014 =100)

Sources: IMF, Primary Commodity Price System; and IMF staff estimates.

Investors Have a More Dovish Monetary Policy Outlook

4

Investors are now pricing in a more dovish future rate path in the US …

… as well as for the euro area

Expected Number of Months to First ECB HikeExpected Fed Fund Rate versus FOMC Dots(End-of-period, Percent)

5Sources: Haver Analytics; and IMF staff calculations.

Long-term sovereign bond yields have declined in 2019 reflecting a more dovish US monetary policy stance…

…and equity prices have increased following a sharp decline in late 2018 despite expectations of slower global growth.

Sources: Haver Analytics; and IMF staff calculations.

After tightening in 2018, financial conditions in advanced economies have eased somewhat in early 2019

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

U.S. GBR DEU JPN

2018 Jan-19

Ten-year Bond Yields(change in 2018; %)

-30

-25

-20

-15

-10

-5

0

5

10

15

U.S. JPN GBR DEU

2018 Jan-19

Equity Indices, 2018(% change; inflation adjusted)

6Sources: Bloomberg Finance L.P and IMF staff calculations.

Sovereign borrowing costs increased in 2018, albeit to varying degrees across markets…

... with several EM currencies depreciating beyond U.S. dollar effective appreciation...

Sources: Bloomberg Finance L.P ; Haver Analytics; and IMF staff calculations.

… and equity prices declining from historical highs.

Sources: Bloomberg Finance L.P and IMF staff calculations.

Also in EMEs, financial conditions tightened sharply in 2018, but have eased somewhat in 2019

-100

0

100

200

300

400

500

ARG

UKR

TUR

MEX IND

ZAF

HUN RU

S

IDN

CHN

POL

BRA

2018 Jan-19

Spreads of EM Bond Indices(bps change in EMBIG indices)

-60

-50

-40

-30

-20

-10

0

10

20

30

MEX

UKR

CHN

IDN

ZAF

HUN PO

LIN

DBR

ARU

STU

RAR

G US

2018 Jan-19

Exchange Rates Against the U.S. Dollar(% change; – = depreciation)

Effective rate

-30

-20

-10

0

10

20

30

40

BRA

IND

HUN ID

N

RUS

POL

ZAF

MEX

TUR

ARG

CHN

2018 Jan-19

Equity Indices(% change; inflation adjusted)

Capital flows to EMs weakened in 2018 and resurged in 2019

7

Capital Inflows to Emerging Market Economies(percent of GDP)

Sources: Haver Analytics, and IMF staff estimates.

-10

-5

0

5

10

15

FDI inflows Portfolio inflowsFinancial derivatives Other investment inflows

-10000

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

12000

Jan

4 20

17Fe

b 1

2017

Mar

1 2

017

Mar

29

2017

Apr 2

6 20

17M

ay 2

4 20

17Ju

n 21

201

7Ju

l 19

2017

Aug

16 2

017

Sep

13 2

017

Oct

11

2017

Nov

8 2

017

Dec

6 20

17Ja

n 3

2018

Jan

31 2

018

Feb

28 2

018

Mar

28

2018

Apr 2

5 20

18M

ay 2

3 20

18Ju

n 20

201

8Ju

l 18

2018

Aug

15 2

018

Sep

12 2

018

Oct

10

2018

Nov

7 2

018

Dec

5 20

18Ja

n 2

2019

Jan

30 2

019

Equity Debt Total

EPFR flows to Emerging Market Economies(US$ Millions)

Sources: Haver Analytics.Emerging Portfolio Fund Research (EPFR) database

8Source: IMF staff calculations.

Investors are differentiating across EMs: spreads widened more in economies with higher external financing needs…

EM: Current Account Balance and Change in EMBI Spreads

-100

0

100

200

300

400

-12 -10 -8 -6 -4 -2 0 2 4Current account 2017 (percent of GDP)

Chan

ge in

EM

BI sp

read

(bas

is po

ints

, 16

April

, 201

8 –

4 Ja

nuar

y, 2

019)

ARG

TUR

TUNEGY

BRA

ROU

MAR

COL

ZAF

PHLPER

CHL POLCHN

RUS

MYSHUN

IND

MEX

IDN

9Sources: IMF, World Economic Outlook database; Thomson Reuters Datastream; and IMF staff calculations.

ARG

ECU

TUR

NGA

UKR

0

50

100

150

200

250

300

350

400

0 10 20 30 40 50 60

Chan

ge in

EM

BIG

spre

ads,

Dec-

17 to

Dec

-18

(bps

)

Total reserve assets, 2017 (% GDP)

Total Reserve Assets vs. Change in EMBIG

… and lower reserves

Forces shaping the outlook

Advanced economies

• Discussions on trade barriers, policy uncertainty• Financial market volatility• Global effects of US fiscal policy changes• Generally accommodative monetary policy

• Lower growth, reflecting– Demographic headwinds– Lackluster productivity growth

Emerging market and developing economies

• Discussions on trade barriers, policy uncertainty• Volatile oil prices: diverging prospects for fuel exporters vs importers• Localized financial market pressures• Idiosyncratic factors – political uncertainty, conflict

• Group aggregate: pickup in growth after 2019 (stressed economies recovering); heterogeneity in regional prospects

• 45 EMDEs, accounting for 10 percent of global GDP (PPP), falling further behind AE income levels over projection horizon

10

near term…

…medium term

WorldAdvancedEconomies U.S. U.K. Japan Euro Area Germany Canada

Other Advanced

Asia

2018 3.7 2.3 2.9 1.4 0.9 1.8 1.5 2.1 3.1

2019 3.5 2.0 2.5 1.5 1.1 1.6 1.3 1.9 2.6

Revision from Oct.

2018–0.2 –0.1 0.0 0.0 0.2 -0.3 –0.6 -0.1 0.0

2020 3.6 1.7 1.8 1.6 0.5 1.7 1.6 1.9 2.6

Revision from Oct.

2018–0.1 0.0 0.0 0.1 0.2 0.0 0.0 0.1 0.0

Growth projections: Advanced economies(percent change from a year earlier)

Sources: IMF, World Economic Outlook Update January 2019; and IMF, World Economic Outlook October 2018. 11

EmergingMarket andDevelopingEconomies China India Brazil Russia ASEAN-5

Fuel ExportingEconomies

Low IncomeDeveloping Economies LAC APEC

Emerging &

Developing Asia

2018 4.6 6.6 7.3 1.3 1.7 5.2 1.1 4.6 1.1 4.1 6.5

2019 4.5 6.2 7.5 2.5 1.6 5.1 1.6 5.1 2.0 3.9 6.3

Revision fromOct. 2018 –0.2 0.0 0.1 0.1 -0.2 -0.1 –0.3 –0.1 -0.2 0.0 0.0

2020 4.9 6.2 7.7 2.2 1.7 5.2 2.1 5.1 2.5 3.8 6.4Revision from

Oct. 2018 0.0 0.0 0.0 –0.1 -0.1 0.0 -0.1 –0.2 -0.2 0.0 0.0

Growth projections: Emerging markets and LIDCs(percent change from a year earlier)

12Sources: IMF, World Economic Outlook Update January 2019; and IMF, World Economic Outlook October 2018.

Risks: tilted to the downside

• Potential for upside surprises has receded, downside risks have become more pronounced • Trade tensions

– Escalation could severely dent business confidence, harm financial market sentiment and increase volatility, slow investment and trade

• Financial conditions– Could tighten sharply (range of triggers: trade actions, hard Brexit, higher political and policy

uncertainty, faster-than-envisaged China slowdown….) – Sudden tightening would expose financial vulnerabilities accumulated over years of very low interest

rates

• Other factors– Geopolitical strains – Declining trust in mainstream political parties, regional and national institutions– Climate shocks

13

Trade tensions

Failure to resolve differences and a resulting increase in tariff barriers would lead to • higher costs of imported intermediate and capital goods • higher consumer prices

Beyond these direct impacts, higher trade policy uncertainty and concerns over escalation and retaliation would • lower business investment• disrupt supply chains• slow productivity growth

The resulting depressed outlook for corporate profitability could dent financial market sentiment and further dampen growth (Scenario Box 1, October 2018 WEO). 14

Sudden tightening of financial conditions could expose vulnerabilities related to higher debt in EMDEs

15

20

25

30

35

40

45

50

55

60

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Emerging Market Economies Low Income Developing Countries

Median general government debt / GDP ratio by group of economies

Source: IMF WEO Database

Markets seem to be increasingly complacent about rising corporate debt

16

50

55

60

65

70

75

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Credit to GDP(Median, RHS)

Probabilityof default (LHS)

Corporate Credit Growth and Default Risk in G-20 Economies(Percent)

Source: October 2017 GFSR

Lower Profitability Could Worsen Debt Vulnerabilities

17

Corporate debt levels have increased globally …

Weak Tail of US Companies by Interest Coverage Ratio*(Share of US companies with ICR<2, Percent of total debt)

… this may strain corporate debt repayment capacity should profits decline

Corporate Debt Trends, by Region(Percent of GDP)

*ICR = Ratio of Earnings Before Interest and Taxes to Interest Expense

0

10

20

30

40

1996 1999 2002 2005 2008 2011 2014 2017

ICR <1 1< ICR <2 Recessions

80

100

120

140

160

180

50

60

70

80

90

100

110

120

2000 2002 2005 2008 2011 2013 2016US Euro Area UK China (RHS)

What Does a Flatter US Yield Curve Tell Us?

18

A tightening of term spreads tends to occur later in the cycle …

Note: Shaded areas depict recessionary periods Source: October 2018 GFSR

2 Year – 10 Year US Treasury Term Spread (Basis points)

Commodity prices expected to settle at levels well below past averages

19

20

40

60

80

100

120

140

15 16 17 18 19 20

Food Base Metals Average petroleum spot price

Commodity Prices(Deflated using US consumer price index; index, 2014 =100)

Horizontal lines: 2011-2014 averages

Sources: IMF, Primary Commodity Price System; and IMF staff estimates.

Political uncertainty looms ahead.

MarchMicronesia

ThailandTuvalu

AprilIndonesiaMaldives

Solomon Islands

MayAustralia

IndiaPanama

Philippines

JulyGuatemala

JapanNauru

OctoberArgentina

BoliviaCanada

HaitiNew Zealand

Uruguay

NovemberHong Kong

Marshall Islands

DecemberDominica

Kiribati

Upcoming Elections in 2019 in Asia and WH

Policy priorities: implement reforms to lift potential growth, contain vulnerabilities

Shared priorities

• Monetary policy: support closing of output gaps where needed; gradually normalize where inflation is rising toward target; ensure inflation expectations remain anchored

• Orient fiscal policy more toward medium-term goalso Start rebuilding buffers where neededo Shift budget composition to lifting

potential growth and enhancing inclusiveness (infrastructure, workforce skills, participation rates)

• Structural reform policies

Emerging market and developing economies• Priorities differ based on diverse cyclical positions and

economy-specific vulnerabilities• Bolster financial resilience, including via strengthening

macroprudential frameworks• Strengthen fiscal positions where needed (particularly

LIDCs, commodity-dependent economies), focusing on revenue mobilization, limiting recurrent expenditure, and curbing poorly-targeted subsidies

• Promote economic diversification (commodity exporters, countries particularly vulnerable to climate events) –judicious macro management, improving access to credit, investing in infrastructure and workforce skills

21

o Resolve cooperatively and quickly trade disagreements and the resulting policy uncertainty o Adopt measures to boost potential output growth while enhancing inclusivenesso Strengthen fiscal and financial buffers in an environment of high debt burdens and risk of tighter financial conditions

Advanced economies