The World Economy: How Did We Get Here and Where Are We ... · 10/26/2011  · Projected adjustment...

Presentation at the London School of Economics!October 26, 2011!

The World Economy: How Did We Get Here and Where Are We Going?!

Minouche Shafik, Deputy Managing Director!International Monetary Fund!

World

U.S. Euro Area Japan Brazil Russia India China

2011 (Sep 2011) 4.0 1.5 1.6 -0.5 3.8 4.3 7.8 9.5

2011 (Apr 2011) 4.4 2.8 1.6 1.4 4.5 4.8 8.2 9.6

2012 (Sep 2011) 4.0 1.8 1.1 2.3 3.6 4.1 7.5 9.0

2012 (Apr 2011) 4.5 2.9 1.8 2.1 4.1 4.5 7.8 9.5

WEO Real GDP Growth Projections (percent change from a year earlier)

Source: IMF, World Economic Outlook.

A Sharp Decrease in Growth

1

27!

Slower Underlying

Growth:

A Crisis of Confidence:

Balance sheet repairs.

Political uncertainty, and fiscal/financial interactions.

The Confluence of Two Factors

Interacting in Bad Ways:

This is where the risks are.

2

Why the Slowdown?

Risks

Crisis of Confidence

Policies

Why the Slow Down?

Failure of internal rebalancing: Balance sheet repairs at work.

•  Fiscal consolidation. •  Weak domestic private demand.

External rebalancing has stalled.

3

-2 0 2 4 6 8 10 12 14 16

Italy

Spain

Portugal

Ireland

Greece

Total required adjustment by 2020 1/

Change in Cyclically-Adjusted Primary Balances (percent of GDP)

-2 0 2 4 6 8 10 12 14 16

Germany

Canada

France

U.K.

U.S.

Japan

Source: IMF staff estimates. 1/ Total required adjustment to reduce the gross debt ratio to 60 percent by 2030 (net debt target of 80 percent for Japan). After 2020, the primary balance must be maintained constant at the prevailing level until 2030.

Fiscal Consolidation: Proceeding, But a Long Way to Go

4

-2 0 2 4 6 8 10 12 14 16

Italy

Spain

Portugal

Ireland

Greece

Projected adjustment (2010-15) Remaining adjustment until 2020 to achieve illustrative debt targets 1/

Change in Cyclically-Adjusted Primary Balances (percent of GDP)

6

-2 0 2 4 6 8 10 12 14 16

Germany

Canada

France

U.K.

U.S.

Japan

Fiscal Consolidation: Proceeding, But a Long Way to Go

Source: IMF staff estimates. 1/ Total required adjustment to reduce the gross debt ratio to 60 percent by 2030 (net debt target of 80 percent for Japan). After 2020, the primary balance must be maintained constant at the prevailing level until 2030. 4

-2 0 2 4 6 8 10 12 14 16

Italy

Spain

Portugal

Ireland

Greece

Projected adjustment (2010-11)

Change in Cyclically-Adjusted Primary Balances (percent of GDP)

7

-2 0 2 4 6 8 10 12 14 16

Germany

Canada

France

U.K.

U.S.

Japan

Fiscal Consolidation: Proceeding, But a Long Way to Go

Source: IMF staff estimates. 1/ Total required adjustment to reduce the gross debt ratio to 60 percent by 2030 (net debt target of 80 percent for Japan). After 2020, the primary balance must be maintained constant at the prevailing level until 2030. 4

0

2

4

6

8

10

12

14

16

18

06 07 08 09 10 11

Delinquencies and Foreclosures

Actual Inventories

Underwater Mortgages 1/

Sources: University of Michigan, Survey of Consumers; New York Federal Reserve-ALP Panel; and IMF staff estimates. 1/ Data from Zillow.com (single-family homes with mortgages in negative equity). 2/ Shaded bars indicate NBER-dated recessions. 3/ Median of point forecasts for year-ahead wage growth.

2011Q2

U.S. Housing Inventories and Foreclosures (millions of units)

Low Private Domestic Demand: Mechanical Brakes or Animal Spirits?

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

95 97 99 01 03 05 07 09 11

U.S. Expected Change in Income and Wages 2/ 3/ (percent; median; 3-month moving average)

Jul. 11

Family income growth

Wage growth

5

-3

-2

-1

0

1

2

3

4

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

U.K. CEE GIPS ROW U.S. JPN EMA DEU CHN OIL Discrepancy

Global Imbalances 1/ (current account; percent of world GDP)

Sources: IMF, World Economic Outlook; and IMF staff estimates. 1/ CEE = Central European Economies; GIPS = Greece, Italy, Portugal, and Spain; ROW = Rest of World; EMA = Emerging Asia; OIL = Oil-exporting countries.

External Rebalancing Has Stalled ��

6

Why the Slowdown?

Risks

Crisis of Confidence

Policies

0

1

2

3

4

5

6

7

8

9

10

06 07 08 09 10

Decreasing

Source: IMF staff estimates.

Global Financial Stability Is Worsening

0

1

2

3

4

5

6

7

8

9

10

06 07 08 09 10

Worsening

Risk Appetite

Lehman Lehman

Credit Strain and Market & Liquidity Strain Indicators

Apr. 11

Sep. 11

Apr. 11

Sep. 11

7

Prompting a Flight to Safe Assets Asset Price Performance since April GFSR (percent)

5!

-80

-60

-40

-20

0

20

Italia

n

Gree

k

WE

sove

reig

n

Span

ish

Irish

Gree

k

Italia

n

Fren

ch

Span

ish

US

Oil

Com

mod

ities

Vix

(inve

rted

)

Euro

first

300

EM E

quiti

es

S&P

500

Swis

s fr

anc

10-y

ear

bund

10-y

ear

trea

sury

Gold

Sovereign CDS Bank equities Commodities Risk assets Safe-haven assets

-158

8

Cumulative Spillovers from High-Spread Euro Area Sovereigns, 2010 Till Now (billions of euros)

Spillovers from . . . Greek sovereign

Sovereign Spillovers to the EU Banking System

€60 €80 €200 €300

Irish & Portuguese sovereign Belgian, Spanish & Italian sovereign High-spread euro area banking sector

9

0

5

10

15

20

25

30

35

40

Sources: European Banking Authority; and IMF staff estimates. Note: Includes core Tier 1 capital at end-2010, actual equity raising from January to April 2011, and commitments made by April 2011 for equity raisings and government support.

Core Tier 1 Ratios (percent of risk-weighted assets)

Individual Banks

6%

0% of banks 0% of total assets

10

EU Bank Capital: Current Situation

0

5

10

15

20

25

30

35

40

Sources: European Banking Authority; and IMF staff estimates. Note: Includes core Tier 1 capital at end-2010, actual equity raising from January to April 2011, and commitments made by April 2011 for equity raisings and government support.

Core Tier 1 Ratios (percent of risk-weighted assets)

Individual Banks

6%

0% of banks 0% of total assets

8%

18% of banks 19% of total assets

10

EU Bank Capital: Current Situation

0

5

10

15

20

25

30

35

40

Sources: European Banking Authority; and IMF staff estimates. Note: Includes core Tier 1 capital at end-2010, actual equity raising from January to April 2011, and commitments made by April 2011 for equity raisings and government support.

Core Tier 1 Ratios (percent of risk-weighted assets)

10% 8%

63% of banks 70% of total assets

6%

0% of banks 0% of total assets

Individual Banks

18% of banks 19% of total assets

10

EU Bank Capital: Current Situation

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Jan-10 Apr-10 Jul-10 Oct-10 Feb-11 May-11 Aug-11

EMEA

LatAm

Asia excl. Japan 9/21

QE2 (Nov. 3) S&P downgrade (Aug. 5)

-10

-8

-6

-4

-2

0

2

4

6

8

Jan-10 Apr-10 Jul-10 Oct-10 Feb-11 May-11 Aug-11

EMEA LatAm Asia excl. Japan Global Total

QE2 (Nov. 3) S&P downgrade (Aug. 5)

9/21

Bond Funds Equity Funds

Source: EPFR Global. 11

Capital Flows to EMs: Volatility Dominates (billions of U.S. dollars; weekly flows)

0

50

100

150

200

250

300

0 50 100 150 200 250 300

Cred

it g

row

th

Nominal GDP growth

Brazil

0

2

4

6

8

10

12

Emerging Asia EMEA Latin America

2010 (Actual) 2011 2012

Sources: IMF, Global Data Source; IMF, International Financial Statistics; and IMF staff estimates.

Rapid Credit Growth Can Lead to Rising Nonperforming Loans in EMs Credit and GDP Growth

(cumulative percent change; 2005 – 2010) Predicted NPL Ratios in 2011 and 2012 (percent, no shock)

Argentina

Russia

Turkey

Poland

Philippines

Thailand

Hungary Malaysia

Morocco Mexico

Colombia Peru

India China

Indonesia

South Africa Chile

12

Why the Slowdown?

Risks

Crisis of Confidence

Policies

Risks － Adverse Feedback Loops

Financial

Worsen fiscal

balance

Lower bank asset quality

Less bank lending

Automatic stabilizers held back

Sovereign risks

increase

Lower growth

Higher guarantees

13

Fiscal

Risks － Adverse Feedback Loops

Financial Fiscal

Worsen fiscal

balance

Lower bank asset quality

Less bank lending

Automatic stabilizers held back

Sovereign risks

increase

Lower growth

Higher guarantees

Too Tight Too Loose

13

World Economy Facing Severe Downside Risks

A Global “Paradox of Thrift” • Households, firms, and governments reduce demand, with many advanced economies unable to lower policy rates further.

Household and Public Debt Sustainability in the U.S.

• Continued low growth without fiscal consolidation could raise risk premia and U.S. bond yields, with adverse effects on public debt sustainability.

Sovereign Debt and Funding Pressures in Euro area • Funding costs and low growth risk undermining fiscal sustainability and raise already high pressure on banks. Wholesale funding markets and deleveraging could trigger further large spillovers to real economy.

14

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

03 04 05 06 07 08 09 10 11

World Advanced Emerging

Aug-11

Source: IMF, Global Data Source.!15

High unemployment with Limited Policy Space Unemployment  Rate  

(percent;  weighted  by  labor  force)  

16

55

60

65

70

75

80

85

1980 1985 1990 1995 2000 2005

Mean

75th Percentile

25th Percentile

Declining Share of Labor in Income likely to Persist

Source: OECD. Note: Left-hand panel reports mean and inter-quartile range for all advanced economies. Right-hand panel shows country-specific data for seven selected economies.

55

60

65

70

75

80

85

1980 1985 1990 1995 2000 2005

Canada France Germany Italy Japan United Kingdom United States

Against a Backdrop of High Income Inequality in Many Countries

GINI Coefficient1,2

(Percent)

Source: World Bank, World Development Indicators, 2011. 1GINI coefficient is a measure of income inequality, with a lower value associated with higher income equality. 2Most recent data available.

17

0

10

20

30

40

50

60

Ukraine

Croatia

Armen

ia

Roman

ia

Pakist

an

Algeria

Lithuan

ia

Latvia

Indonesi

a

Vietnam

Maurita

nia

Djibou

ti

Morocco

China

Venez

uela

Philip

pines

Argentin

a Per

u Chile

South Afric

a

Risks Policies

Why the Slowdown? Crisis of Confidence

Restoring Confidence

• Global economy entering a danger zone • Decisive action needed to safeguard stability and prevent a crisis from deepening

To Preserve Stability and Sustainable Global Growth

18

Need for Collective Action

Sustainable and

Balanced Growth

• Path to recovery has narrowed but still within reach • Medium-term consolidation, structural reform, and rebalancing are necessary complements to short-term action

Urgent and Collaborative Action Required

Sovereign Balance Sheet

Repair Achieving Credibility

Principles

Concretely

• Entitlement reforms necessary, not sufficient • Well-designed rules and institutions key • But no substitute for political will

• Credible medium-term plans and frameworks • No one-size-fits-all: size and speed of adjustment varies

• For most, plans and frameworks help afford greater flexibility through more “back-loaded” timing • For most, let automatic stabilizers operate

19

Restore Sound Public Finances

Emerging Market

Economies

Advanced Economies

• Deal with undesirable side effects through macro-prudential policies

• Keep policy rates low (or lower if room allows and risks warrant)

• Be ready to use unconventional measures (e.g., QE, SMP)

• Complement with macro-prudential/capital flow measures where needed

• Tighten if needed, but be ready to shift

20

Monetary Policy

Advanced Economies

Private Sector Balance

Sheet Repair

U.S. Households

European Banks

• Mortgage debt

• Adequate capital buffers; sources: private/national/EFSF • Restructure/resolve where necessary

Better Target Financial and Structural Policies

21

Advanced Economies

Better target structural

reforms for growth

• Tackle high unemployment • Better align reform plans with OECD’s priorities for growth • Enhance supply potential

U.S. and Europe

Emerging Market

Economies

Contain Vulnerabiliti

es and Enhance

Resilience

Beyond Fiscal and Monetary Policies

• Prudential (macro and micro)

• Structural financial reform

Better Target Financial and Structural Policies

22

Low-Income

Countries

Remain resilient and supportive

of sustainable

growth

• Continue advancing structural reforms, medium-term public investment frameworks

• Rebuild policy buffers mostly exhausted in previous crisis

Macro and structural policies

27!

External Rebalancing

• In U.S., more external demand to sustain growth • In EM Asia, shift towards internal demand, assisted by structural adjustments, large gaps in social safety net, financial restrictions, and undervalued exchange rates. These take time, movement is essential •  Beneficial from domestic and multilateral perspective

Global Growth and Stability

Tackling Global Imbalances

23

Thank You