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