AprilApril 30, 200930, 2009

Where Are We In the Global Crisis?Where Are We In the Global Crisis?

Olivier BlanchardOlivier BlanchardEconomic Counsellor and DirectorEconomic Counsellor and Director

Research DepartmentResearch DepartmentInternational Monetary FundInternational Monetary Fund

Two Cross CurrentsTwo Cross Currents

�� One pulling down. Dynamic multipliers. One pulling down. Dynamic multipliers.

�� One pulling up. Natural stabilizers? Demand policies.One pulling up. Natural stabilizers? Demand policies.

�� Balance. Balance. Today, the first strongly dominates.Today, the first strongly dominates.

�� With right policies, balance should shift later this year.With right policies, balance should shift later this year.

�� Growth should turn positive at the end of 2009.Growth should turn positive at the end of 2009.

�� Unemployment should crest at the end of 2010.Unemployment should crest at the end of 2010.

�� Central: Health of financial system. To avoid vicious cycles, Central: Health of financial system. To avoid vicious cycles, and determine the strength of recovery.and determine the strength of recovery.

1

-8

-6

-4

-2

0

2

4

6

8

10

12

2006 2007 2008 2009 2010

Real GDP GrowthReal GDP Growth(in percent; (in percent; QoQQoQ; saar); saar)

WorldWorld

Emerging and Emerging and

Developing economiesDeveloping economies

Advanced Advanced

economieseconomies

Growth ProjectionsGrowth Projections

22

Unemployment Rate ProjectionsUnemployment Rate Projections

2

4

6

8

10

12

2006 2007 2008 2009 2010

U.K.U.K.

U.S.U.S.

JapanJapan

Euro areaEuro area

Unemployment RateUnemployment Rate((in percent)in percent)

33

-10

-8

-6

-4

-2

0

2

4

6

Mar-07 Mar-08 Mar-09 Mar-10

Advanced: Real GDP GrowthAdvanced: Real GDP Growth(in percent; (in percent; QoQQoQ; saar); saar)

Apr. 09Apr. 09

Growth Revisions, and 2008 Q4 Growth Revisions, and 2008 Q4

Jan. 09Jan. 09

-6

-4

-2

0

2

4

6

8

10

12

Mar-07 Mar-08 Mar-09 Mar-10

Apr. 09Apr. 09

Jan. 09Jan. 09

Emerging: Real GDP GrowthEmerging: Real GDP Growth(in percent; (in percent; QoQQoQ; saar); saar)

--7.57.5

--5.65.6

--4.54.5

1.51.5

08Q408Q4 08Q408Q4

44

Natural Stabilizers? Natural Stabilizers?

0

1

2

3

4

5

6

05 06 07 08 09

Housing IndicatorsHousing Indicators(in millions of units)(in millions of units)

Mar. 09Mar. 09

1/ 1/ NAHBNAHB index; a reading over 50 suggests index; a reading over 50 suggests ““GoodGood”” conditions for current and prospective home sales.conditions for current and prospective home sales.

Total InventoriesTotal Inventories

PermitsPermits

0.6

0.8

1.0

1.2

1.4

1.6

Jan-06 Jan-07 Jan-08 Jan-09

0.6

0.8

1.0

1.2

1.4

1.6

U.S. Vehicle SalesU.S. Vehicle Sales(in millions; (in millions; sasa))

U.S. Auto SalesU.S. Auto Sales

((RHSRHS))

U.S. InventoriesU.S. Inventories

(LHS)(LHS)

Mar. 09Mar. 09

55

-2

0

2

4

6

8

10

G-20 1/

U.S.

U.K.

FranceGerm

anyJapan

China

Overall Deficit: Contributions from Automatic Stabilizers Overall Deficit: Contributions from Automatic Stabilizers

and Discretionary Measuresand Discretionary Measures((fiscal deficit in percent of GDP; change from 2007)fiscal deficit in percent of GDP; change from 2007)

20092009 20102010

Fiscal Policies in 2009 and 2010Fiscal Policies in 2009 and 2010

-2

0

2

4

6

8

10

G-20 1/U.S.

U.K.

FranceGerm

anyJapanChina

1/ 1/ PPP GDPPPP GDP--weighted average.weighted average.66

60

80

100

120

140

160

07 08 09 10 11 12 13 14

Sustainability Concerns and Fiscal ProjectionsSustainability Concerns and Fiscal Projections

-14

-12

-10

-8

-6

-4

-2

0

07 08 09 10 11 12 13 14

60

80

100

120

140

160

Fiscal BalanceFiscal Balance

(LHS; inverse)(LHS; inverse)

Public debt Public debt

((RHSRHS))

GG--20 Advanced Countries20 Advanced Countries

Fiscal Balance and Public DebtFiscal Balance and Public Debt(in percent of GDP; PPP GDP weighted)(in percent of GDP; PPP GDP weighted)

GG--20 Advanced Countries 20 Advanced Countries

Public DebtPublic Debt(in percent of GDP; PPP GDP weighted)(in percent of GDP; PPP GDP weighted)

BaselineBaseline

Low growthLow growth

Contingent Contingent

LiabilitiesLiabilities

77

0

50

100

150

200

250

300

350

400

Jun-08 Sep-08 Dec-08 Mar-09

U.S.

U.K.

Germany

France

Ireland

Italy

Austria

Greece

Sovereign CDS SpreadsSovereign CDS Spreads((5yr; in basis points)5yr; in basis points)

4/234/23

Fiscal Sustainability and Financial StrainsFiscal Sustainability and Financial Strains

0

100

200

300

400

500

600

700

Jun-08 Sep-08 Dec-08 Mar-09

Bank of IrelandBank of Ireland

SovereignSovereign

Allied Irish Allied Irish

BankBank

GovernmentGovernment

guaranteesguarantees

Ireland CDS Ireland CDS SpreadsSpreads(5(5--year CDS Spreads; in basis points)year CDS Spreads; in basis points)

4/234/23

88

80

120

160

200

240

280

320

360

07 08 09

0

1

2

3

4

5

6

7

07 08 09

Central Bank Policy Rates and Balance SheetsCentral Bank Policy Rates and Balance Sheets

Policy RatesPolicy Rates((in percent)in percent)

Central Banks Total AssetsCentral Banks Total Assets((index, 1/5/2007=100)index, 1/5/2007=100)

Euro areaEuro area

U.K.U.K.

JapanJapan

CanadaCanada

U.S.U.S.

U.K.U.K.

CanadaCanada

JapanJapan

Euro areaEuro area

U.S.U.S.

Lehman Lehman

BrothersBrothers

4/174/174/234/23

99

-1

0

1

2

3

4

5

Jan-08 May-08 Sep-08 Jan-09

0

500

1000

1500

2000

Credit and Quantitative EasingCredit and Quantitative Easing

9090--day U.S. Commercial Paperday U.S. Commercial Paper((n percent unless otherwise noted)n percent unless otherwise noted)

4/174/17

10yr Government Bond Yield10yr Government Bond Yield(in percent)(in percent)

Financial Financial

(AA; LHS)(AA; LHS)

CPFFCPFF

1

2

3

4

5

Nov-08 Dec-08 Jan-09 Mar-09 Apr-09

U.S.U.S.

4/234/23

U.K.U.K.

Net HoldingsNet Holdings

((RHSRHS;$ ;$ bilbil.).) CPFFCPFF

NonNon--Financial Financial

(AA; LHS)(AA; LHS)

1010

QEQE

-10

-8

-6

-4

-2

0

2

06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1

Changes in Credit StandardsChanges in Credit Standards(index of tightening; bank lending standards)(index of tightening; bank lending standards)

-40

-20

0

20

40

60

80

100

06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1

U.S. Output GapU.S. Output Gap(in percent of potential; based on GPM)(in percent of potential; based on GPM)

Apr. 2009 Apr. 2009 WEOWEO BaselineBaseline Bank lending tightens furtherBank lending tightens furtherCredit conditions improveCredit conditions improve

1/ Simulations using the Global Projection Model (GPM).1/ Simulations using the Global Projection Model (GPM).

TighteningTightening

LooseningLoosening

Bank Lending and Economic Recovery 1/Bank Lending and Economic Recovery 1/

2010Q12010Q1

2010Q42010Q4

1111

International Credit ProvisionInternational Credit Provision

-240

-180

-120

-60

0

60

120

04Q1 05Q1 06Q1 07Q1 08Q1

Net derivatives

Direct investment

Other investment

Portfolio investment

Total

Emerging Economies: Net Capital Flows Emerging Economies: Net Capital Flows ((US$ billions)US$ billions)

08Q408Q4

1212

In SummaryIn Summary

�� Need for strong policies still acute. Need for strong policies still acute.

�� With those policies (especially financial): With those policies (especially financial):

�� Turnaround in growth (advanced) at the end of 2009. Turnaround in growth (advanced) at the end of 2009.

�� Turnaround in unemployment at the end of 2010. Turnaround in unemployment at the end of 2010.

�� Emerging and developing countries: higher but in sync.Emerging and developing countries: higher but in sync.

�� Need to start thinking now about exit policies. Debt, Need to start thinking now about exit policies. Debt, money, regulation, external imbalances. money, regulation, external imbalances.

1313