WorldWorld EconomicEconomic OutlookOutlook

Rupa Duttagupta

Deputy Division Chief

Research Department

International Monetary Fund

United Nations, October 22, 2012

Main Message: Action Needed to Put Recovery Back on Track

• The global economy has suffered new setbacks

• The forecasts are down

• Risks are up sharply

• AE: policies have progressed but much stronger actions are needed

• EM: complex setting—rebuilding policy room for maneuver versus supporting growth

New Setbacks to the Global Recovery

Global Manufacturing PMI

(Index; > 50 = expansion; SA)

Source: IMF, Global Data Source. 3

Merchandise Exports

(Percent; 3mma annualized)

Aug. 12 Jul. 12

Increasing strains in the euro areaIncreasing strains in the Increasing strains in the euroeuro areaarea

What Went Wrong?

Large growth impact of fiscal adjustment amid tight financial conditions

Large growth impact of fiscal adjustment amid tight financial Large growth impact of fiscal adjustment amid tight financial conditionsconditions

End of the emerging markets boomEnd of the emerging markets boomEnd of the emerging markets boom

4

Euro Area: Growing fragmentation, despite policy responses

5

Portfolio and Other Investment Capital

Flows,

Excluding Central Banks(Cumulative from December 2009, in percent of GDP)

Sources: Haver Analytics; and IMF staff estimates.

Source: Bloomberg, L.P. and IMF staff estimates.

10-Year Government Bond Spreads over

German Bunds

(basis points)1st LTRO

6

Real GDP Growth(percent change from one year ago)

Emerging Markets: End of a boom

Sources: Haver Analytics; IMF, World Economic Outlook; and IMF staff calculations.

Real Credit Growth(January 2007 = 100)

Real Credit Growth(percent change from one year ago)

June 12June 1212:Q2

7

Tight financial conditions and fiscal policies in advanced economies

Lending Conditions(Net percentage of domestic respondents

tightening standards for loans)

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.

Fiscal Consolidation(Change in structural balance as percent of GDP)

Key Assumptions

Key Key AssumptionAssumptionss

• Strong euro-area policies improve financial conditi ons in 2013H2

• US policymakers avoid fiscal cliff, raise debt ceil ing

•• Strong Strong euroeuro --area policies improve financial conditions in area policies improve financial conditions in 2013H22013H2

•• US policymakers avoid fiscal cliff, raise debt ceil ingUS policymakers avoid fiscal cliff, raise debt ceil ing

Outlook: Weak and Uncertain

OutlookOutlookOutlook • Recovery gradually strengthens but is weaker than i n July 2012 WEO and there are large downside risks

•• Recovery gradually strengthens but is weaker than i n July Recovery gradually strengthens but is weaker than i n July 2012 WEO and there are large downside risks2012 WEO and there are large downside risks

7

Advanced Economies(percent change from a year earlier)

Emerging Economies(percent change from a year earlier)

July WEO

2012 2013

2.0 2.3

-0.3 0.7

2.4 1.5

Emerging Asia

Latin America

September

WEO

2012 2013

Emerging

Asia

6.7 7.2

LAC 3.2 3.9

SSA 5.0 5.7

September WEO

2012 2013

2.2 2.1

-0.4 0.2

2.2 1.2

July WEO

2012 2013

7.1 7.5

3.4 4.2

5.4 5.3

LAC: Latin America and the Caribbean;

SSA: Sub-Saharan Africa; data are interpolated from annual frequency valuesSource: IMF Staff Estimates.

World U.S. Euro Area Japan Brazil Russia India China

20123.3 2.2 -0.4 2.2 1.5 3.7 4.9 7.8(Oct 2012)

(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

20133.6 2.1 0.2 1.2 4.0 3.8 6.0 8.2(Oct 2012)

(Jul 2012) 3.9 2.3 0.7 1.5 4.6 3.9 6.5 8.5

(April 2012) 4.1 2.4 0.9 1.7 4.1 3.9 7.3 8.8

WEO Real GDP Growth Projections (percent change from a year earlier)

Source: IMF, World Economic Outlook.

Growth prospects are projected to be weaker now for most major

economies relative to before

8

Headline Inflation(percent change from a year earlier)

Inflation is falling and expected to continue to do so

Source: IMF Staff Estimates.

1\ Latin America Countries: Brazil, Chile, Colombia, Mexico and Peru.

2\ Emerging Asia Countries: China, India, Indonesia, Malaysia, Philippines and Thailand.

Downside risks are large: 1 in 6 chance of serious global slowdown

(global growth < 2 percent)

Prospects for World GDP Growth(percent change)

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

Key Risks: Escalating euro crisis and U.S. fiscal cliff

Source: IMF staff estimates

Euro Area Downside Scenario(Output loss, percent deviation from baseline in 2013)

U.S. Fiscal Cliff(Output loss, percent deviation from baseline in 2013)

Note: Estimated output losses from fiscal consolidation, with confidence effects and without monetary adjustment.

Note: This scenario assumes that sovereign and corporate spreads rise, credit contracts, and periphery governments are forced to front-load fiscal consolidation.

• Removing immediate risks

•• Removing Removing immediate immediate risksrisks

• Euro Area: Restoring confidence• United States: Avoiding the fiscal cliff, raise deb t ceiling•• Euro Area: Restoring confidenceEuro Area: Restoring confidence•• United States: Avoiding the fiscal cliff, raise deb t ceilingUnited States: Avoiding the fiscal cliff, raise deb t ceiling

What Is To Be Done?

FiscalFiscalFiscal

• 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 stabi lizers operate– where room, smooth medium-term adjustment

•• Gradual and sustained fiscal consolidation anchored by Gradual and sustained fiscal consolidation anchored by detailed mediumdetailed medium --term planterm plan ——key for U.S and Japan key for U.S and Japan

•• Growth contingency:Growth contingency:–– cyclicallycyclically --adjusted targets to let automatic stabilizers adjusted targets to let automatic stabilizers operateoperate–– where room, smooth mediumwhere room, smooth medium --term adjustmentterm adjustment

Advanced Economies: Managing fiscal consolidation

MonetaryMonetaryMonetary • Maintain an accommodative stance•• Maintain an accommodative stanceMaintain an accommodative stance

13

Reducing public debt is a marathon, not a sprint

Median 10th/90th percentile 25th/75th percentile

Years

Source: IMF staff calculations.

In the 2000s, EMDEs spent more time in expansion—and had smaller

downturns—than AEs

17

1950–69 1970–89 1990s 2000s

Source: IMF staff calculations.

Time Spent in Expansion Median Downturn (Peak-to-Trough Amplitude)

Many EM&DC need to rebuild fiscal and monetary policy room for

maneuver over the medium term

General Government Structural Balance(percent of GDP)

Real Policy Rates

(percent of GDP)

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.

Downside risksDownside Downside risksrisks

• Ease monetary policy further, strengthen macro-pru dential measures

• Allow fiscal stabilizers to work• If needed and consistent with stronger medium-term growth, deploy fiscal stimulus (e.g. China)

•• Ease monetary policy further, strengthen macroEase monetary policy further, strengthen macro --prudential prudential measures measures

•• Allow fiscal stabilizers to workAllow fiscal stabilizers to work•• If needed and consistent with stronger mediumIf needed and consistent with stronger medium --term growth, term growth, deploy fiscal stimulus (e.g. China)deploy fiscal stimulus (e.g. China)

EM & DC: Complex setting—need to calibrate macro stance given

potential for real and financial vulnerabilities

BaselinescenarioBaselineBaselinescenarioscenario

• Pause monetary policy tightening or modestly ease

• Continue to rebuild fiscal position, especially In dia, Russia and Turkey

•• Pause monetary policy tightening or modestly easePause monetary policy tightening or modestly ease

•• Continue to rebuild fiscal position, especially In dia, Russia aContinue to rebuild fiscal position, especially In dia, Russia a nd nd TurkeyTurkey

15

•Food: problems not as bad as in 2008

•Support poor through transfers, not subsidies

•Tighten monetary policy only if second-round effects arise

•Avoid export bans

••Food: problems not as bad Food: problems not as bad as in 2008as in 2008

••Support poor through Support poor through transfers, not subsidiestransfers, not subsidies

••Tighten monetary policy only Tighten monetary policy only if secondif second --round effects ariseround effects arise

••Avoid export bansAvoid export bans

Developing Countries: Dealing with High Food Prices

17

Commodities Indices(2005 = 100)

1/ Food Index derived from average price of corn, wheat, rice and soybeans.

Source: IMF, Primary Commodity Price System; IMF staff calculations

2013 Forecast

Aug. 2012

•Food: problems not as bad as in 2008

•Support poor through transfers, not subsidies

•Tighten monetary policy only if second-round effects arise

•Avoid export bans

••Food: problems not as bad Food: problems not as bad as in 2008as in 2008

••Support poor through Support poor through transfers, not subsidiestransfers, not subsidies

••Tighten monetary policy only Tighten monetary policy only if secondif second --round effects ariseround effects arise

••Avoid export bansAvoid export bans

Developing Countries: Dealing with High Food Prices

17

Spot Prices of Major Crops(1/3/2005 = 100)

1/ Food Index derived from average price of corn, wheat, rice and soybeans.

Source: IMF, Primary Commodity Price System; IMF staff calculations

Oct.

2012

WorldWorld EconomicEconomic OutlookOutlook

October 2012

Research Department, IMF

Sources: IMF staff calculations (Global Economy Model).

Disruption in the Global Oil Supply Scenario

Inflation after One Year

(percent deviation from WEO baseline)

GDP Loss after Two Years

(percent deviation from WEO baseline)

Risk: Lower medium-term output

Source: IMF staff estimates

Reduction in Medium-Term Output(Percent; 2016 GDP level relative to September 2011 WEO)

Lower Global Growth Scenario (GDP Growth; percentage point deviation from

baseline)

Risk: Unstable government debt dynamics

Average Real Interest Rate after Allowing

Government Debt to Go Higher(Percent)

Sources: Bloomberg; and IMF Staff Calculations

1/ Derived from prices of futures options on September 5, 2012. 25

2025 Average = 6.1%

End of

WEO

Horizon

Debt Probability Dynamics in Periods

(Percent)

External Deficit Economies

External External Deficit Deficit EconomiesEconomies

• Fiscal Consolidation• Structural reforms to boost productivity and saving•• Fiscal ConsolidationFiscal Consolidation•• Structural reforms to boost productivity and savingStructural reforms to boost productivity and saving

Further Action Needed for Global Rebalancing

External Surplus Economies

External External Surplus Surplus EconomiesEconomies

• Boost consumption• Reduce accumulation of foreign exchange reserves• Adopt more market-determined exchange systems

•• Boost consumptionBoost consumption•• Reduce accumulation of foreign exchange reservesReduce accumulation of foreign exchange reserves•• Adopt more marketAdopt more market --determined exchange systemsdetermined exchange systems

16

Further Action Needed for Global Rebalancing

Estimated Impact of Cyclical Factors and Policies on Current Accounts(Percent of surplus or deficit countries’ GDP, based on mid-points of staff estimates)

Source: IMF staff estimates. 15