world economic and financial outlook
TRANSCRIPT
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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