International Monetary Fund

World Economic Outlook

Jörg Decressin

Senior Advisor Research Department, IMF

IMF Presentation April 13, 2011

The recovery is solidifying but it will take some time before it significantly lowers unemployment.

Old policy challenges remain unaddressed:

insufficient fiscal adjustment and financial repair in advanced economies;

insufficient rebalancing of demand in key Asian surplus economies.

New policy challenges are arising:

overheating in EM;

high commodity prices.

1

Equity markets have recovered to a large extent and volatility is close to “normal”.

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

0

20

40

60

80

100

120

140 DJ EURO STOXX S&P 500 Asia Latin America

2000 04 Mar. 11

06 08 02 0

10

20

30

40

50

60

70

80

90

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

U.S. (VIX)

Emerging Markets (VXY)

Implied Volatility (percent)

Mar-11

May 10, 2010

2

Still, credit growth is low in advanced economies. But, credit is buoyant in many EM!

Real Private Credit Growth (yoy percent change)

-20

-10

0

10

20

30

40

50

United States Euro Area Japan

2000 04 Jan. 11

06 08

Source: Bank of Japan, European Central Bank, and the Federal Reserve Board. 1 Spike in late 2010 due to securitized credit card assets that banks owned and that were brought onto their balance sheets in 2010.

02 -20

-10

0

10

20

30

40

50

Hong Kong Brazil China India Turkey

2006 07 Dec. 10

08

3

1

09

Emerging Bond Funds (billions of U.S. dollars, weekly flows)

Emerging Equity Funds (billions of U.S. dollars, weekly flows)

Source: EPFR Global.

Capital flows to EM recovered quickly after the crisis. But they have slowed since fall 2010.

4

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Jan-10 Mar-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 3/9/2011

QE2 (Nov. 3)

Greece crisis

Ireland crisis

-8

-6

-4

-2

0

2

4

6

8

Jan-10 Mar-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11

EMEA

LatAm

Asia excl. Japan

Global

Total

Ireland crisis

Greece crisis

QE2 (Nov. 3)

3/9/2011

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

60

100

140

180

220

260

0

100

200

300

400

500

Oil prices (left scale)1

Food (right scale)

2000 1980 90 10

Real Commodity Prices (index; 1995=100)

16

1Simple average of spot prices of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil.

-4

-2

0

2

4

6

8

2008Q4 09Q2 09Q4 10Q2 10Q4

U.S. Other Industrial Countries China Emerging and Developing Economies World GDP

Contribution to Global Annual Growth of Oil Demand (percent)

Total demand

Low inventories and bad harvests have caused large food price increases. Prices are expected to recede amid better harvests but pose social challenges.

10

15

20

25

30

35

60

80

100

120

140

160

Grain inventories (percent, left scale)

Food price index (2005=100, right scale)

1991 11

Global Food Commodity Markets Stocks and Prices1

96 2001 06

1Global end-year inventories as percent of consumption with USDA projections for 2011. 6

After an inventory acceleration-slowdown cycle, activity seems poised to reaccelerate in 2011.

-30

-20

-10

0

10

20

30

Advanced economies

Emerging economies

08 2005 07 Dec. 10

09

Industrial Production (annualized percent change of 3mma over previous 3mma)

06 30

35

40

45

50

55

60

Advanced economies

Emerging economies

06 2000 04 Feb. 11

08

Manufacturing PMI (index)

02

7

Multispeed recovery: 6½ percent growth in EM 2½ percent growth in AE

= 4½ percent global growth.

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

MENA Developing Asia Latin America Sub-Saharan Africa CIS CEE

2011 4.1 8.4

4.7 5.5 5.0 3.7

Real GDP Growth

(percent change from a year earlier)

2000 02 04 10 06 08

8

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

Advanced economies Emerging economies

2011 2.4

6.5

2000 02 04 10 06 08 12 12

Downside risks have diminished but continue to dominate.

Prospects for World GDP Growth (percent change)

-2

0

2

4

6

8

2008 09 10 11 12

90% Confidence interval

50% Confidence interval

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

9

Upside risks:

• Buoyant EM activity

• Strong corporate balance sheets

Downside risks:

• Sovereign/financial risks

• Oil supply concerns

EM in Asia and Latin America are operating above strong pre-crisis trends. In AE, CEE, CIS activity is lagging.

World AE EM Asia LATAM MENA SSA CEE CIS 80

85

90

95

100

105

110

115

120 Real GDP in 2010 in percent of 1997–2006 trend

Source: IMF staff calculations. Pre-crisis trend obtained by extrapolating 1996–2006 real GDP growth. AE: Advanced economies, EM: Emerging economies, CEE: Central and eastern Europe, CIS: Commonwealth of Independent States, Asia: Developing Asia, LATAM: Latin America and the Caribbean, MENA: Middle East and North Africa, SSA: Sub-Saharan Africa.

1

1

10

Inflation has picked up. However, in AE this is mostly due to commodities. In EM, inflation pressures are broadening amid strong activity.

Headline Inflation (Twelve-month change)

06 2002 04 Jan. 11

08 -2

0

2

4

6

8

10

Advanced economies

Emerging economies

Core Inflation (Twelve-month change)

06 2002 04 Jan. 11

08 0

1

2

3

4

5

Advanced economies

Emerging economies

11

In many EM, real policy rates and fiscal balances are well below pre-crisis levels, although output is above pre-crisis trends and inflation broadening.

Real Policy Rates (relative to core inflation)

06 2003 04 Jan. 11

08 0

2

4

6

8

10

12

14

Latin America Emerging Asia

07 05 09 12

10 25

30

35

40

45

50

55

-5

-4

-3

-2

-1

0

1

Public Debt (left scale)

Fiscal Balance (right scale)

2000 02 10

Fiscal Balance and Public Debt (percent of GDP)

16 04 06 08 12 14

In various EM, credit over the past 5 years has been booming. Macroeconomic and prudential tightening appear essential to avoid boom-bust cycles.

0

20

40

60

80

100

120

140

CN BR TR PE CO IN ID CL HK JO ZA

Current (2005-2010) Previous (label indicates year of prior peak)

Per Capita Real Credit

(percent change over 5 years)

BR: Brazil, CL: Chile, CN: China, CO: Colombia, HK: Hong Kong SAR, IN: India, ID: Indonesia, JO: Jordan, PE: Peru, ZA: South Africa, TR: Turkey.

99 95

76

97

07

97 08

98

07

07

98

13

100%

229

In many AE, policy rates can stay low because activity and inflation are still subdued. Key policy challenge: fiscal consolidation.

Real Policy Rates (relative to core inflation)

06 2000 02 Jan. 11

08 -2

-1

0

1

2

3

4

5

Europe Japan US

04 Feb. 12 14

20

40

60

80

100

120

-10

-8

-6

-4

-2

0

1980 1990 2000 2010

Public Debt (left scale)

Fiscal Balance (right scale)

Fiscal Balance and Public Debt (percent of GDP)

16

For 2011, withdrawal of fiscal stimulus will be limited. In many advanced economies, much more adjustment is needed to achieve sound public finances.

JP US GB ES FR CA IT DE 0

2

4

6

8

10

12

14

Planned Adjustment 2010–15

Fiscal Impulse

(percent of GDP)

Sources: IMF, Fiscal Monitor; and IMF staff calculations. CA: Canada, FR: France, DE: Germany, IT: Italy, JP: Japan, ES: Spain, GB: United Kingdom, US: United States. Cyclically adjusted primary balance adjustment needed to the debt ratio to 60 percent in 2030, except for Japan.

1,2

1 2

Required Adjustment

(percent of GDP)

2009 2010 2011 -3

-2

-1

0

1

2 Advanced economies

Emerging economies

October 2010 WEO

15

Global demand rebalancing is incomplete and has mostly been driven by “negative” structural forces.

-3

-2

-1

0

1

2

3

4 ROW CHN+EMA OCADC DEU+JPN Oil exporters U.S.

Discrepancy

1996 2000 04 08 12

Global Imbalances1

(percent of world GDP)

1 CHN+EMA: China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, and Thailand; DEU+JPN: Germany and Japan; OCADC: Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Turkey, and United Kingdom; ROW: rest of the world; US: United States.

16

16

Total Domestic Demand

(percent)

Excessive external

surpluses

Excessive external deficits

Aligned 0

3

6

9

12 Average Growth 2003-2007 Average Growth 2011-2016 October 2010 WEO

1,2 1,3

1,4

Sources: Federal Reserve Board; and IMF staff calculations. 1Based on the IMF staff’s Consultative Group on Exchange Rate Issues (CGER). CGER countries include Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Czech Republic, euro area, Hungary, India, Indonesia, Israel, Japan, Korea, Malaysia, Mexico, Pakistan, Poland, Russia, South Africa, Sweden, Switzerland, Thailand, Turkey, United Kingdom, and United States. For a detailed discussion of the methodology for the calculation of exchange rates’ over- or undervaluation, see Lee and others (2008). 2These economies account for 18.5 percent of global GDP. 3These economies account for 27.4 percent of global GDP. 4These economies account for 39.2 percent of global GDP.

Youth Unemployment in Major Regions

(percent)

Growth and policies are not strong enough to significantly lower high unemployment, especially of the young.

Mid

dle

East

Nor

th A

fric

a

CEE

& C

IS

Adva

nced

Eco

n.

LAC

Sout

h Ea

st A

sia

& P

acifi

c SSA

Sout

h As

ia

East

Asi

a

0

5

10

15

20

25

30

35

2010 2000

Projected Unemployment Rate by Regions, 2011

(percent)

Sources: Haver Analytics; International Labor Organization; and IMF staff calculations. CEE&CIS: Central and South-Eastern Europe (non-EU) and Commonwealth of Independent States, LAC: Latin America and the Caribbean, SSA: Sub-Saharan Africa.

Adva

nced

Eco

n.

Mid

dle

East

Nor

th A

fric

a

CEE

& C

IS

SSA

LAC

Sout

h Ea

st A

sia

& P

acifi

c

Oth

er A

sia

0

2

4

6

8

10

12

1 1

1

10%

10%

17

International Monetary Fund

World Economic Outlook

Jörg Decressin Assistant Director

Research Department, IMF

IMF Internal Presentation March 17, 2011

0

3

6

9

12

15

18

-200

0

200

400

600

800

1000

1200

1400

1600

Change in reserves

-200

0

200

400

600

800

1000

1200

1400

1600 Current account Private financial flows

Net Financial Flows, 2008–10

(billions of U.S. dollars)

Domestic demand in EM Asia is not projected to accelerate much—reserve buildup fuels inflation & credit, hampers RER appreciation & rebalancing.

1Asia: Developing Asia, MENA: Middle East and North Africa, LAC: Latin America and the Caribbean.

1

Asia MENA LAC

19

REER Change in EM

(percent change from June 2007 to January 2011; GDP weighted)

Excessive external

surpluses

Excessive external deficits

Aligned