Global Economic Developments and Global Economic Developments and OutlookOutlook

Jörg DecressinJörg DecressinChief , World Economic Studies DivisionChief , World Economic Studies Division

Research DepartmentResearch DepartmentInternational Monetary FundInternational Monetary Fund

March 17, 2009March 17, 2009

2

OutlineOutline

• What are economic prospects?What are economic prospects?

• What are the policy priorities?What are the policy priorities?

3

Industrial production and merchandise exports have

plummeted

-30

-20

-10

0

10

20

30

-80

-60

-40

-20

0

20

40

60

80

Global Industrial Production and Merchandise Exports

(Annualized three-month percent change)

Merchandise export value(right scale)

Industrial production(left scale)

19971997 9999 0303 Jan. Jan. 20092009

050520012001 0707

4

-4

-2

0

2

4

6

8

10

World economy is expected to contract in 2009 and recover modestly in 2010

Real GDP Growth(Annual percent change)

901970 80 2000

Advancedeconomies

Emerging and Developing economies

109575 85 05

5

Advanced economies to suffer deepest Advanced economies to suffer deepest recession since World War IIrecession since World War II

-6

-4

-2

0

2

4

6

8

10

Growth

January 2009 WEO

Average 1998-2007

Real GDP Growth Rates(percent change)

2007 08 2007 08 09 10 09 10 United StatesUnited States

2007 08 2007 08 09 10 09 10 Euro areaEuro area

2007 08 2007 08 09 10 09 10 JapanJapan

2007 08 2007 08 09 10 09 10 Emerging and Emerging and Developing EconomiesDeveloping Economies

6

Risks to world GDP growth are to the Risks to world GDP growth are to the downsidedownside

-3

-2

-1

0

1

2

3

4

5

6

2006 07 08 09 10

90% Confidence interval70% Confidence intervalWEO projection

Global GDP Growth(percent change, ppp-GDP weighted

average)

7

Key assumptions behind the global recovery in 2010:

• Monetary easingMonetary easing

• Fiscal stimulusFiscal stimulus

• Improving financial conditions Improving financial conditions (most important) & stabilization in (most important) & stabilization in the U.S. housing marketthe U.S. housing market

8

Monetary policy is supportive, Monetary policy is supportive, including through unconventional including through unconventional

measures; room to cut rates in some measures; room to cut rates in some regionsregions

(Policy rates; percent)(Policy rates; percent)

0

2

4

6

8

10

12

14

01 02 03 04 05 06 07 08 090

2

4

6

8

10

12

14

UnitedStates

Euro area

Japan

Emerging markets

9

Fiscal packages are expected to boost economic activity

-10

-8

-6

-4

-2

0

2

General Government Fiscal Balances(Percent of GDP)

042000 02

Advancedeconomies

Emerging and Developing economies

World

1006 08

What more needs to be What more needs to be done?done?

11

Macroeconomic and financial policies Macroeconomic and financial policies need to be mutually reinforcingneed to be mutually reinforcing

Monetary easing, including through Monetary easing, including through unconventional measuresunconventional measures

Expansionary fiscal policies, within Expansionary fiscal policies, within strong medium-run frameworksstrong medium-run frameworks

Healing the financial sector—this is Healing the financial sector—this is the “sine qua non” and would make the “sine qua non” and would make macroeconomic policies more macroeconomic policies more effectiveeffective

12

0

0.2

0.4

0.6

0.8

1

Expansionary policies during financial Expansionary policies during financial crisis episodes help shorten crisis episodes help shorten

recessionsrecessionsSurvivor Functions for Advanced Economies’

Recessions(probability of remaining in a recession beyond a certain number of quarters)

Full sample

Financial crisis episodes

Financial crisis episodes with high monetary

response

Financial crisis episodes with high

fiscal response

00 11 22 33 44 55 66 77 88 99 1010QuartersQuarters

13

A sustained recovery will not be A sustained recovery will not be possible until financial sector health possible until financial sector health

is restored!is restored!

• Three-pronged approach: liquidity, Three-pronged approach: liquidity, solvency, dealing with bad assetssolvency, dealing with bad assets

• Key challenge:Key challenge:

Removing toxic assets from Removing toxic assets from bank balance sheets in a bank balance sheets in a transparent and coordinated transparent and coordinated mannermanner

14

Beyond the short run: Beyond the short run: initial lessons from the crisisinitial lessons from the crisis

• Financial regulation Financial regulation perimeter to be perimeter to be broadened and made more flexible (curtail broadened and made more flexible (curtail regulatory arbitrage!); robust market regulatory arbitrage!); robust market clearing arrangements; more clearing arrangements; more transparency about riskstransparency about risks

• Dealing with Dealing with systemic riskssystemic risks through a through a greater macroeconomic emphasis on greater macroeconomic emphasis on financial supervision and regulation and a financial supervision and regulation and a greater prudential emphasis on monetary greater prudential emphasis on monetary policypolicy

• Coordination, e.g., Coordination, e.g., binding code of binding code of conduct on beggar-thy-neighbor financial conduct on beggar-thy-neighbor financial sector policiessector policies