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The Global and Regional The Global and Regional OutlookOutlook
Olaf Unteroberdoerster Olaf Unteroberdoerster Resident Representative, Hong Kong Resident Representative, Hong Kong SAR, International Monetary FundSAR, International Monetary Fund
Task Force on Economic Challenges’ Meeting
8 December 2008
22
The global economy is set for a The global economy is set for a major downturnmajor downturn
-1
0
1
2
3
4
5
6
7
8
9
1970
1975
1980
1985
1990
1995
2000
2005
2010
WorldAdvanced economiesEmerging and developing economies
Global Real GDP Growth (Annual percent change)
Source: IMF, WEO database.
33
Despite aggressive policies Despite aggressive policies to stabilize markets…to stabilize markets…
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
UnitedStates
UnitedKingdom
Euro Area Japan
Changes in Policy Rates Since August 2007(In percent)
Source: Haver Analytics.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
Dec
-07
Jan-
08
Feb-
08
Mar
-08
Apr
-08
May
-08
Jun-
08
Jul-08
Aug
-08
Sep-
08
Oct
-08
Nov
-08
OtherABCP Credit FacilityEstimated forex swap linesAIG loanPDCFTAF
Total Assets on Federal Reserve's Balance Sheet (In billions of U.S. dollars)
Source: U.S. Federal Reserve.
44
... credit is rapidly decelerating... credit is rapidly decelerating
0
2
4
6
8
10
12
14
16United StatesUnited KingdomEuro area
Private Sector Credit Growth(12-month percent change)
Sources: Haver Analytics; and IMF staff estimates.
55
History suggests that banking History suggests that banking stress brings severe and long stress brings severe and long
recessionsrecessions
0
1
2
3
4
5
6
7
8
9Recession not preceded by financial stress 1/Recession preceded by bank-related financial stress 1/
Duration (In quarters)
Source: IMF staff calculations. 1 See Table 4.2 of Chapter 4 of October 2008 World Economic Outlook.
-1.8
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
Recession not preceded by financial stress 1/Recession preceded by bank-related financial stress 1/
Average Output Loss per Quarter(In percent of GDP)
Source: IMF staff calculations. 1 See Table 4.2 of Chapter 4 of October 2008 World Economic Outlook.
66
A significant slowdown is expected A significant slowdown is expected in the U.S. economy, raising the in the U.S. economy, raising the
specter of deflationspecter of deflation
-4
-2
0
2
4
6
8
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
Private consumption Private fixed investmentChange in private inventoriesGovt consumption & investmentNet exportsReal GDP growth
Source: IMF, WEO database; and staff estimates.
United States: Contributions to GDP Growth(Percentage points, annual rate)
Projections
-1
0
1
2
3
4
5
6
Jan-
05
Apr
-05
Jul-05
Oct
-05
Jan-
06
Apr
-06
Jul-06
Oct
-06
Jan-
07
Apr
-07
Jul-07
Oct
-07
Jan-
08
Apr
-08
Jul-08
Oct
-08
All Items (monthly)
All Items (year over year)
Core (year over year)
United States: CPI Inflation(percent changes)
Source: Haver Analytics.
77
The U.S. recession is going to be The U.S. recession is going to be more more
severe than in 1991severe than in 1991
2.0
12.5
3.8
0.1
8.0
-2.7
-7.0
-1.8-0.4
-3.1
-10
-5
0
5
10
15
1980 1982 1991 2001 2008
Cumulative output loss relative to potentialMaximal output gap
United States: Recession Comparisons (In percent of potential GDP)
Source: IMF staff estimates.
88
However, large risks to the However, large risks to the forecast…forecast…
-3
-2
-1
0
1
2
3
4
2005 2006 2007 2008 2009
-3
-2
-1
0
1
2
3
4
50 percent confidence interval
90 percent confidence interval
U.S. Growth Forecast: Balance of Risks(GDP growth; yr/yr percent change)
Source: IMF staff calculations.
Growth Forecast
2008 2009
Annual average 1.4 -0.7
Q4/Q4 0.4 -0.5
99
……because the housing downturn because the housing downturn could be sharper than expected…could be sharper than expected…
-10
-5
0
5
10
15
20
25
30
35
Irel
and
Uni
ted
Kin
gdom
Aus
tral
ia
Fran
ce
Spai
n
Japa
n
U.S
.
Can
ada
Kor
ea
Ger
man
y
MedianMaximumMinimum
House Price Gaps1
(In percent)
Source: IMF staff calculations. 1 The house price gap is the percent increase in house prices during the period 1997 to end-2007 that is not accounted for by fundamentals. The range refers to the range of gap estimates generated by small perturbations of the estimated models and is an indicator of the robustness of the results.
400
800
1200
1600
2000
2400
Jan-
03
Jul-03
Jan-
04
Jul-04
Jan-
05
Jul-05
Jan-
06
Jul-06
Jan-
07
Jul-07
Jan-
08
Jul-08
2
4
6
8
10
12
Housing starts (left scale)New home inventories (months' supply, right scale)
United States: Housing Starts and New Home Inventories
Source: Haver Analytics.
Thousands of units Ratio
1010
...and credit growth could be ...and credit growth could be even lower than expectedeven lower than expected
0
2
4
6
8
10
12
14
16
18
2001 2002 2003 2004 2005 2006 2007 2008
0
200
400
600
800
1000
1200
1400
1600
1800
High yield default rate (left scale)
High yield spread (right scale)
U.S. Corporate Default Rates
Source: Moody's.
Percent of issuers Basis points
-40
-20
0
20
40
60
80
100
120
140
2005 2006 2007 2008
U.S.: C&I loan standards
U.S.: Mortgage lending standards
ECB: Lending standards to largecompaniesECB: Lending standards tohouseholds (house purchase)
Changes in Credit Standards(Percent of respondents1)
Source: Haver Analytics. 1Change in balance of respondents between "tightened considerably and tightened somewhat" and "eased somewhat and eased considerably."
1111
The corporate sector may already The corporate sector may already be coming under severe stressbe coming under severe stress
-9
-6
-3
0
3
6
9
12
Jan-
05
Apr
-05
Jul-05
Oct
-05
Jan-
06
Apr
-06
Jul-06
Oct
-06
Jan-
07
Apr
-07
Jul-07
Oct
-07
Jan-
08
Apr
-08
Jul-08
Oct
-08
-30
-20
-10
0
10
20
30
40
Retail sales (left scale)Car sales (right scale)
United States: Retail Sales and Car Sales(12-month percent change)
Source: Haver Analytics.
40
45
50
55
60
65
Jan-
05
Apr
-05
Jul-05
Oct
-05
Jan-
06
Apr
-06
Jul-06
Oct
-06
Jan-
07
Apr
-07
Jul-07
Oct
-07
Jan-
08
Apr
-08
Jul-08
Oct
-08
OutputEmployment
Global PMI: Total Economy(50+=expansion)
Source: Haver Analytics.
1212
What does this mean for Asia? What does this mean for Asia? Growth to slow sharply next year…Growth to slow sharply next year…
Asia: Real GDP Growth(Year-on-year percent change)
2007 2008 2009
Latest projections
J apan 2.2 0.5 -0.2
China 11.9 9.7 8.5Korea 5.0 4.1 2.0Indonesia 6.3 6.0 4.5Thailand 4.9 4.5 4.0Hong Kong SAR 6.4 3.7 2.0Malaysia 6.3 5.7 3.8Singapore 7.7 2.7 2.0Philippines 7.2 4.4 3.5Vietnam 8.5 6.3 5.0Brunei Darussalam 0.6 -0.5 2.8Cambodia 10.2 7.0 6.0Lao P.D.R. 7.9 7.5 6.8
ASEAN+3 7.6 5.9 4.9Asia 7.6 6.0 4.9
1 From fourth quarter of preceding year.
Sources: CEIC Data Company Ltd; and IMF, WEO database.
1313
……and coming exclusively from and coming exclusively from domestic demanddomestic demand
-2
0
2
4
6
8
10
12
14
16
2005
2006
2007
2008
2009
Private consumptionGross fixed investmentNet exportsOtherReal GDP growth
Emerging Asia: Contributions to GDP Growth(Year-on-year change in percent of previous year's GDP)
Sources: CEIC Data Company Ltd; and IMF staff calculations.
1414
However, downside risks aboundHowever, downside risks abound
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2001 2002 2003 2004 2005 2006 2007 2008 2009
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
90 percent confidence interval
50 percent confidence interval
Source: IMF staff's assessment of the balance of risks.
Asia GDP Growth(Central forecast (line) and 50, 70, and 90 percent confidence intervals (areas); in percent)
1515
The forecasts assume smaller export The forecasts assume smaller export and domestic demand slowdowns and domestic demand slowdowns
than in previous crises… than in previous crises…
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2001 2009Forecast
Exports
Private consumption andgross fixed investment
Emerging Asia: Exports and Domestic Demand (Change in growth rate from previous year; in percent)
Sources: IMF, WEO database; and staff calculations.
1616
...and recent data show a sharp ...and recent data show a sharp contraction in demand for Asian contraction in demand for Asian
exportsexports
35
40
45
50
55
60
65
70
Jan-
05
Apr-
05
Jul-05
Oct
-05
Jan-
06
Apr-
06
Jul-06
Oct
-06
Jan-
07
Apr-
07
Jul-07
Oct
-07
Jan-
08
Apr-
08
Jul-08
Oct
-08
United States: ISM Imports Index(50+=expansion)
Source: Haver Analytics.
0
5
10
15
20
25
30
Jan-
06
Apr
-06
Jul-06
Oct
-06
Jan-
07
Apr
-07
Jul-07
Oct
-07
Jan-
08
Apr
-08
Jul-08
Oct
-08
Source: CEIC Data Company Ltd.
China Real Import Growth(3-mma of 12-month percent change)
1717
……as well as rapidly as well as rapidly softening domestic softening domestic
demand...demand...
42
46
50
54
58
62
Jan-
05
Apr
-05
Jul-05
Oct
-05
Jan-
06
Apr
-06
Jul-06
Oct
-06
Jan-
07
Apr
-07
Jul-07
Oct
-07
Jan-
08
Apr
-08
Jul-08
Oct
-08
OverallNew ordersNew export orders
China: Manufacturing PMI(50+=expansion, 50-=contraction)
Source: Haver Analytics.
1818
Slower growth and tighter funding Slower growth and tighter funding conditions may put pressures on conditions may put pressures on
corporate Asiacorporate Asia
0
10
20
30
40
50
60
70
80
90
100
2007
-Q1
2007
-Q2
2007
-Q3
2007
-Q4
2008
-Q1
2008
-Q2
2008
-Q3
BondEquityLoan
Asian Corporate Sector: External Financing (bonds, equity and loans; in billions of U.S. dollars)
Source: Data provided by the Bond, Equity and Loan database of the IMF sourced from Dealogic.
800
850
900
950
1000
1050
1100
1150
Dec
-06
Feb-
07
Apr
-07
Jun-
07
Aug
-07
Oct
-07
Dec
-07
Feb-
08
Apr
-08
Jun-
08
Aug
-08
Oct
-08
Japan: Number of Corporate Bankruptcies(3-month moving average)
Source: CEIC Data Company Ltd.
1919
Some countries may be more Some countries may be more vulnerable than othersvulnerable than others
Vulnerability factors differ across Vulnerability factors differ across countries and include:countries and include:
Current account deficitsCurrent account deficits Reliance on wholesale funding, including by Reliance on wholesale funding, including by
banksbanks Significant foreign participation in domestic Significant foreign participation in domestic
equity and bond marketsequity and bond markets Corporate stress from sudden stops in financingCorporate stress from sudden stops in financing Domestic macro imbalancesDomestic macro imbalances Property sector boomsProperty sector booms Lower commodity pricesLower commodity prices
2020
Policies needed to support Policies needed to support corporate sector and aggregate corporate sector and aggregate
demand...demand...In many cases, room to ease monetary and In many cases, room to ease monetary and fiscal policy further to address downside fiscal policy further to address downside risks to growthrisks to growth
Need for public recapitalization of banks Need for public recapitalization of banks cannot be excluded.cannot be excluded.
Action is needed to guarantee trade financingAction is needed to guarantee trade financing
Direct support to corporates may be required Direct support to corporates may be required if banks do not resume lendingif banks do not resume lending Aim to minimize distortionsAim to minimize distortions Formulate exit strategiesFormulate exit strategies
2121
Longer term challenge: a new Longer term challenge: a new financial architecture...financial architecture...
TheThe G-20 Summit on Financial Markets and G-20 Summit on Financial Markets and the World Economythe World Economy focused on reforms focused on reforms needed to address the weaknesses exposed needed to address the weaknesses exposed by the financial crisisby the financial crisis
Priorities for reform include:Priorities for reform include:strengthening transparency and accountabilitystrengthening transparency and accountabilityenhancing sound regulation enhancing sound regulation promoting integrity in financial marketspromoting integrity in financial marketsreinforcing international cooperation, and reinforcing international cooperation, and reforming international financial institutions reforming international financial institutions
2222
...and a new role for the IMF...and a new role for the IMF
Enhancing the resources of the Fund in line Enhancing the resources of the Fund in line with increasing private sector flowswith increasing private sector flows
G-20 summit agreed to review the adequacy of G-20 summit agreed to review the adequacy of resourcesresources
Resources could be increased by large Fund Resources could be increased by large Fund quota increase, in tandem with increasing quota increase, in tandem with increasing voice of emerging markets and developing voice of emerging markets and developing countries countries
The Fund, along with an expanded FSF, The Fund, along with an expanded FSF, should identify vulnerabilities and provide should identify vulnerabilities and provide early warnings, and develop early warnings, and develop recommendations to mitigate pro-cyclicalityrecommendations to mitigate pro-cyclicality
All G20 members to undertake FSAPsAll G20 members to undertake FSAPs
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