International Monetary Fund

World EconomicWorld EconomicOutlook

ö iJörg DecressinSenior Advisor

Research Department, IMF

IMF Tokyo PresentationJune 2, 2011

Economic Prospects and Policy Challenges

Related to Commodities

P t d l i d d iProspects: gradual recovery in advanced economies; strong expansion in emerging economies

Risks: fiscal/financial challenges; high commodity prices/ g ; g y p

Medium and long-term policy challenges posed by high commodity prices

1

Equity markets have recovered and volatility is close to “normal” Problems persist in AE banks

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

Implied Volatility(percent)

normal . Problems persist in AE banks.

120

140DJ EURO STOXXS&P 500AsiaLatin America

80

90May 10, 2010

80

10060

70U.S. (VIX)

Emerging Markets (VXY)

60

80

30

40

50

20

40

10

20

30

02000 04 May

1106 0802

0

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 May-11

2

Multispeed recovery: 6½ percent growth in EM2½ percent growth in AE

= 4½ percent global growth= 4½ percent global growth.Real GDP Growth

(percent change from a year earlier)

8

10

12

8

10

12

2

4

6

2

4

6

-4

-2

0

2011-4

-2

0

2011

-10

-8

-6MENADeveloping AsiaLatin AmericaSub-Saharan Africa

4.18.44.75.5

10

-8

-6

4

Advanced economies

Emerging economies

20112.4

6.5

-12

10

2000 02 04 1006 08

3

-12

-10

2000 02 04 1006 08 12 12

Downside risks have diminished but continue to dominate.

Prospects for World GDP Growth(percent change)

6

8

90% Confidence interval

50% Confidence interval

B li f t D tt d li h idth f

Upside risks:

• Buoyant EM activity

• Strong corporate balance sheets

4

6Baseline forecast. Dotted lines show width of fan chart in April 2010

2Downside risks:

i /fi i l i k

0

• Sovereign/financial risks

• Commodities supply concerns

-22008 09 10 11 12

4

Commodity prices have been boosted by structural, cyclical, and special factors.

250500

Real Commodity Prices(i d 1995 100)

200400

Oil prices (left scale) 1/

Metals(right scale)

(index; 1995 = 100)

150300

( g )

100200

Food (right scale)

50100

00

1980 1985 1990 1995 2000 2005 2010 2015

2016

5Source: IMF, Global Assumptions.1/ Simple average of spot prices of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil.

Oil prices have risen appreciably after supply shocks, such as in Libya.

Global Oil Supply Disruptions by Average Gross Supply Losses(million barrels a day)

64

3

4

5

2

3

Gross supply shortfall

Global supply shortfall (percent of global supply; right scale)

1

2

3

1

2

0

war

(1

97

6)

rest

(2

00

3)

rest

(1

97

3)

ion

(1

97

1)

pu

te (

19

66

)

age

(1

97

7)

war

(2

00

3)

s (2

01

1)

1/

age

(1

97

0)

war

(1

96

7)

rest

(2

00

2)

argo

(1

97

3)

War

(1

99

0)

War

(1

98

0)

tio

n (

19

78

)

0

Leb

ano

n c

ivil

w

Nig

eri

a u

nr

Leb

ano

n u

nr

geri

a n

atio

nal

izat

Syri

a fe

e d

isp

Sau

di f

ire

dam

Iraq

w

Lib

ya c

risi

Tap

line

dam

Six

day

w

Ve

ne

zue

la u

nr

Ara

b o

il e

mb

a

Gu

lf W

Iran

-Ira

q W

Iran

ian

re

volu

t

6

Sources: Bank of America Merrill Lynch Global Energy Weekly February 28, BP Statistical Review June 2010, and IMF staff calculations.1/ Shortfall as percent of 2010 global supply. Only 1.2 mbd of Libya’s production is estimated to be shut in, relative to the total 2010 output of 1.6 mbd.

Alg

There is enough spare capacity to absorb loss of production from Libya and some other exporters.

7

/

11

12

OPEC Spare Crude Oil Production Capacity and 2010 Crude Oil Production by Country 1/(million barrels a day)

11

12

9

10

Spare Capacity + Industry Stocks + Government Stocks

9

10

6

7

8Spare Capacity +

Government Stocks

6

7

8

3

4

5

Spare Capacity 1998-2008 Average

Spare Capacity 1978-2008 Average

3

4

5

1

2

3

OPEC Total Spare Capacity 1

2

3

Libya

0

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Sources: International Energy Agency; and IMF staff calculations.1/ Government and industry stocks are calculated by dividing total inventories in OECD countries by 365 days. 7

0

Oil prices are back close to levels assumed in the April 2011 WEO, after touching $120.p , g $

Oil Price, 2011

April 2010$83

Jan. 2011$90

WEO$108

D d S l

Jun. 2011$106

d ll i iDemand Supply U.S. dollar appreciationOil demand uncertainty

8

Risks for prices spikes have diminished.

3-Jan-11 7-Mar-11 23-May-11

Probability of WTI price reaching $150 or above (percent)

y

3-mo forward 0.0 2.3 0.0

6-mo forward 0.8 6.8 0.9

f d9-mo forward 2.3 9.4 3.1

2-yr forward 6.2 12.3 6.6

3-yr forward 8.4 13.2 8.8

9

Price spikes could significantly reduce output but losses need to be kept in perspective.

Scenario: $150 in 2011; $108 in 2012

0.2

Effects of a Temporary Oil Price Shock on Output (2011-12 Cumulative deviation from baseline; in percentage points)

-0.2

-0.1

0.0

0.1

-0.5

-0.4

-0.3

0.2

Advanced Economies Developing Asia Latin America and the Caribbean

Sub-Sahara Africa-0.8

-0.7

-0.6

10

Caribbean

WEO estimates for oil price-related losses are consistent with estimates found in the literature for the United States.

0.8Inflation Output

0.8

(percentage points, effects of a 10-percent increase in oil prices, quarters on x-axis)

0.4

0.6

Inflation Output

0.4

0.6

0 0

0.2

0.0

0.2

Pre-1983Q4 Post-1983Q4

-0.2

0.0

0

-0.2

0.0

-0.6

-0.4

-0.6

-0.4

-0.8

0 1 2 3 4 5 6 7 8 9 10 11

-0.8

0 1 2 3 4 5 6 7 8 9 10 11

11Source: “The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s” by Blanchard and Galí (2007).

Winners and Losers:First round Impact of Commodity Price Changes on Trade Balance 1/First-round Impact of Commodity Price Changes on Trade Balance 1/(April 2011 WEO forecast over October 2010 WEO forecast; 2011 trade balance in percent of 2009 GDP)

U S

Food Fuel Other Total

U.S.

JPN

U.K.

DEU

GIPS

EMA and NIEsEMA and NIEs

CHN

CEE

OIL

AFR 2/

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

12

Source: IMF staff calculations.1/ Country export and import weights by commodities are derived from trade data for 2005–08. 2/ AFR excludes South Africa and oil-exporting African countries: Algeria, Angola, Republic of Congo, Equatorial Guinea, Gabon, Nigeria, and Sudan.

2 1 0 1 2 3 4 5 6 7 8 9

The Medium-Term Challenges:

Many commodities prices have been trending higher since the early 2000s and have recovered unusually

i kl f h G R iquickly from the Great Recession.

High and rising prices are raising concerns about g g p gscarcity. How could it affect global growth? What are the policy challenges?

Focus of this presentation: Oil scarcity1

• Tangible evidence of scarcity since 2005• Oil is a key factor of productionOil is a key factor of production• Oil is the most traded commodity• Changes in oil market conditions have direct and indirect effects on the global economyg y

1Based on Chapter 3 on “Oil Scarcity, Growth, and Global Imbalances” in the April 2011 World Economic Outlook. 13

Global oil markets have entered a period of increased scarcity, as evidenced by the long-term

component of real pricescomponent of real prices.

Crude Oil — I(0)1 Energy Commodities2

1.0

1.5 Price

Filter — 9+ year including super cycles

Filter — 30+ year excluding super cycles

2

3

All energy Crude oil

0.5 1

-0 5

0.0

-1

0

-1.0

-0.5

1875 1900 25 50 75 Oct.-2

-1

1875 1900 25 50 75 Oct.2010 2010

Sources: Global Financial Data; IMF Primary Commodity Price System; and IMF staff calculations.1U.S. dollar–denominated commodity prices are deflated by the U.S. consumer price index in log deviations from the sample mean. Deviation between filtered components and price

is accounted for by noise, business cycle frequencies, and random walk drift where I(1).2First-principal component (standard deviation from mean) normalized to have unit variance.

14

Global energy consumption has recently increased rapidly, particularly in China.

Growth Rate of Primary Energy Share of Primary Energy

6.0 Rest of World China

FSU World

Growth Rate of Primary EnergyConsumption

35

United States Europe

Share of Primary EnergyConsumption(percent)

1

4.0

FSU World

China

A i

25

30FSU China

India & Middle East Japan

1

2.0

Asiacrisis

15

20

0.0

5

10

-2.0

1980 84 88 92 96 2000 04 08

Collapse FSU0

1980 84 88 92 96 2000 04 08

Source: International Energy Agency.1FSU = former Soviet Union.

15

Prospects for Energy Consumption:

Panel Regression

Per capita energy consumption (E) on per capita income (Y)

55 countries during 1980-2008

Nonlinear relationship between E and Y

I l ti it i l t 1 f i iIncome elasticity is close to 1 for emerging economies

Income elasticity is much lower in advanced economies

Korea exemplifies this one-to-one relationship and China’s energy consumption so far closely followed this pattern.

16

Significant demand increases lie ahead.(hundred thousands of 2005 U.S. dollars on x-axis;

billions of British thermal units on y-axis)

Nonlinear relationship between energy consumption and income

High-Income OECD Countries1

0.5Primary Energy Consumption

0.25

Predicted l h

0.4 CanadaNorway

0.15

0.20

Korea

relationship for China

on

sum

pti

on

y co

nsu

mp

tio

n

0.3United States

Sweden

AustraliaNetherlands

0.10Taiwan Province of China

cap

ita

ener

gy c

o

Per

cap

ita

ener

gy

0 1

0.2Germany

Switzerland

United Kingdom

Japan 0 00

0.05

China

Per P

0.1

0.1 0.2 0.3 0.4 0.5

0.00

0 0.1 0.2 0.3 0.4

Sources: IMF, International Financial Statistics; International Energy Agency; World Bank, World Development Indicators; and IMF staff calculations.1OECD = Organization for Economic Cooperation and Development.2PPP = purchasing power parity.

PPP based per capita GDP2 PPP based per capita GDP2

17

Big switch in the power sector has been completed, leaving little room for further reduction in oil consumption

( il d d i l l ti )(oil demand is less elastic now).

0.30The Big Switch: Oil Share in the Electric Power Sector1

0.20

0.25

0.10

0.15

0 00

0.05

0.00

1960 70 80 90 2000 09

Sources: International Energy Agency; and IMF staff calculations.1Electricity generated by oil divided by total electricity production. 18

Oil supply has slowed down

Global crude oil production stagnated in the mid-2000, largely due to maturing oil fields in major producing countries.

90

World Oil Production1

(million barrels a day)40

Oil Production by Major Groups2

(million barrels a day)

70

80

30

Stagnation Previous peak

50

60 20FSU

Non-OPEC excluding FSU

OPEC

(1979)

40

50

10

OPEC

Previous peak(1988)

30

1965 75 85 95 2005

0

1991 96 2001 0609 09

(1988)

Sources: Bakker Hughes; and BP, Statistical Review of World Energy.1Piecewise linear trend.2FSU = former Soviet Union; OPEC = Organization of Petroleum Exporting Countries.

19

Oil Demand-Supply Balance: Tensions are likely!Challenges to raising oil supply capacity include long and variable time-to-build lags, g g pp y p y g g ,technological risks, drag from maturing fields, and restrictions on oil investment.

Result: downshift in oil supply trend growth and precarious demand-supply

balance demand growth could exceed supply growth at unchanged prices.g pp y g g p

6,000

International Rotary Rig Count by Region

Oil Demand – Supply Balance(annual change, in percent)

A 2011 15

4 000

5,000

United States + Canada

East Asia

Middle East

Africa

Avg. 2011-15

DemandWorld 1.3Advanced economies -0.7Emerging and developing economies 3.2

3,000

4,000 Europe

Latin AmericaSupply

World 1.5Non-OPEC 0.4OPEC 3.0

1,000

2,000 MemorandumOil demand growth implied by WEO growth forecast1

Short-term income elasticity 3.0Long-term income elasticity 1.3

0

1975 85 95 2005 10

Sources: Bakker Hughes; BP, Statistical Review of World Energy; and Haver Analytics.1PPI = producer price index; WTI = West Texas Intermediate.

Source: IEA, Medium-term Oil Market Report, updated December 2010; and IMF staff estimates.

1Estimates from Chapter 3 in April 2011 World Economic Outlook, (Table 3.1

20

Benchmark Scenario: up to 0.25% less world growth p.a. Supply grows 0.8 percent instead of 1.8 percent (1981-2005 average) pp y g p p ( g )

percentage point less than average for 25 years.

Source: Global Integrated Monetary and Fiscal Model.1World: Total of all countries accounts for 78.78 percent of world GDP.2Oil Exporters: Algeria, Angola, Azerbaijan, Bahrain, Canada, Republic of Congo, Equatorial Guinea, Iraq, Kuwait, Libya, Mexico, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, United Arab Emirates, and Venezuela.3Emerging Asia: China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand.4Euro area: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovak Republic, Slovenia, and Spain.

21

Alternative 1: Greater substitution—0.15 % less growth p.a.

Price elasticity of demand at 0 3 relative 0 08 in the benchmarkPrice elasticity of demand at 0.3, relative 0.08 in the benchmark

Source: Global Integrated Monetary and Fiscal Model.Note: For the list of economies in each group, see the Benchmark Scenario chart. 22

Alternative 2: Greater Decline—1% less growth p.a.Supply contracts by 2 percent per annumSupply contracts by 2 percent per annum

Source: Global Integrated Monetary and Fiscal Model.Note: For the list of economies in each group, see the Benchmark Scenario chart. 23

Policy implications and Conclusions

Global oil market has entered a period of increased scarcity.scarcity.

Gradual and moderate increases in oil scarcity would have a small impact on medium-term growth.

• benchmark(-1% growth reduction): output impact relatively benign; less than ¼ of a percent in terms of annual growthbenign; less than ¼ of a percent in terms of annual growth.

But, there is a significant potential for more severe impact., g p p

• Important downside risks to oil investment and capacity growth.• Sudden surges in oil prices could trigger large global output losses redistribution and sectoral shiftslosses, redistribution, and sectoral shifts.• Financial sector risks from surge in global capital flows and a widening of current account imbalances.

24

Policy implications and Conclusions

Need to review the current policy frameworks to facilitate adjustment to unexpected changes in oil scarcityadjustment to unexpected changes in oil scarcity.

• Macro policies to ease adjustment in relative prices and resources • Structural policies to strengthen the role of price signals

Consider policies aimed at lowering the risk of oil scarcity.

• Including the development of sustainable alternative energy sources

25

International Monetary Fund

World EconomicOutlookOut oo

IMF Tokyo PresentationJune 2, 2011