International Monetary FundInternational Monetary FundBeijing, Beijing, JanuaryJanuary 20, 201520, 2015

World Economic andWorld Economic andWorld Economic andWorld Economic andMarket DevelopmentsMarket Developments

Olivier BlanchardOlivier BlanchardOlivier Blanchard Olivier Blanchard Economic Economic CounsellorCounsellor

Gian Gian Maria MilesiMaria Milesi--Ferretti Ferretti Deputy Deputy Director, Research DepartmentDirector, Research Department

Complex Cross CurrentsComplex Cross Currents

The good, but complex, news:The good, but complex, news:

Th d li i th i f ilTh d li i th i f il

The good, but complex, news:The good, but complex, news:

Th d li i th i f ilTh d li i th i f il•• The decline in the price of oilThe decline in the price of oil

•• Exchange rate adjustments Exchange rate adjustments

•• The decline in the price of oilThe decline in the price of oil

•• Exchange rate adjustments Exchange rate adjustments

The bad news:The bad news:

•• Hard numbers about 2014: slightly worse, except U.S.Hard numbers about 2014: slightly worse, except U.S.

The bad news:The bad news:

•• Hard numbers about 2014: slightly worse, except U.S.Hard numbers about 2014: slightly worse, except U.S.

•• Further downward revisions to potential growthFurther downward revisions to potential growth

On net: Global growth down. But heterogeneity: On net: Global growth down. But heterogeneity:

•• Further downward revisions to potential growthFurther downward revisions to potential growth

On net: Global growth down. But heterogeneity: On net: Global growth down. But heterogeneity:

Oil importers/exporters. Commodity importers/exporters. Legacies/no Oil importers/exporters. Commodity importers/exporters. Legacies/no legacies. Dollar linked/eurolegacies. Dollar linked/euro--yen linked. Potential growth decline/not: yen linked. Potential growth decline/not: 2^5 ( 32)2^5 ( 32)

Oil importers/exporters. Commodity importers/exporters. Legacies/no Oil importers/exporters. Commodity importers/exporters. Legacies/no legacies. Dollar linked/eurolegacies. Dollar linked/euro--yen linked. Potential growth decline/not: yen linked. Potential growth decline/not: 2^5 ( 32)2^5 ( 32)2^5 (=32)2^5 (=32)2^5 (=32)2^5 (=32)

1

Developments in the U.S., Euro Area, ChinaDevelopments in the U.S., Euro Area, China

U.S.: A Solid Recovery, Closer to Full CapacityU.S.: A Solid Recovery, Closer to Full Capacity

Capacity Utilization and Unemployment Capacity Utilization and Unemployment RateRate(percent)(percent)

Housing Starts and House Builder Housing Starts and House Builder ConfidenceConfidence(index; 2000 Q1=100, NAHB diffusion index)(index; 2000 Q1=100, NAHB diffusion index)

70

80

125

150 Housing starts (lagged 4Q) NAHB index (RHS)

10

11

12

80

85 Capacity utilization Unemployment rate (RHS)(p )(p )

Capacity utilization at2005-06 levels

50

60

100

8

9

10

75

20

30

40

50

75

6

770

0

10

20

0

25

3

4

5

60

65

Dec. 14 14Q40

00 01 02 03 04 05 06 07 08 09 10 11 12 13 140360

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

Source: Source: HaverHaver Analytics.Analytics.

2

Euro Area: Low Growth, Low InflationEuro Area: Low Growth, Low Inflation

85y5y inflation linked swap rate Harmonized CPI

Manufacturing PMIManufacturing PMI(index; above 50=expansion)(index; above 50=expansion)

Inflation and Inflation Expectations 1/Inflation and Inflation Expectations 1/(percent change from a year earlier)(percent change from a year earlier)

65Germany Spain Italy France

655

60

2

4 Min/max bands

45

50

0

30

35

40

-4

-2Inflation target

Dec. 1420

25

30

Dec. 14

08 09 10 11 12 13 14

Sources: Sources: HaverHaver Analytics; and IMF staff estimates.Analytics; and IMF staff estimates.1/ Figure reports euro area aggregate, and maximum and minimum of euro area economies. Data for the maximum and minimum is on1/ Figure reports euro area aggregate, and maximum and minimum of euro area economies. Data for the maximum and minimum is only ly available through available through November 2014.November 2014.

08 09 10 11 12 13 14

3

Contribution to GDP Growth 1/Contribution to GDP Growth 1/ Share of Gross Value Added 1/Share of Gross Value Added 1/

China: Internal Rebalancing China: Internal Rebalancing

50Industry (including construction)Industry (excluding construction)

10Consumption Gross capital formation

Contribution to GDP Growth 1/Contribution to GDP Growth 1/(percentage points)(percentage points)

Share of Gross Value Added 1/Share of Gross Value Added 1/(percent of GDP)(percent of GDP)

46

48

Services

8

44

46

6

40

42

2

4

36

38

07 08 09 10 11 12 13 140

2

09 10 11 12 13 14 07 08 09 10 11 12 13 1409 10 11 12 13 14

Sources: Haver Analytics; and National Bureau of Statistics of China.Sources: Haver Analytics; and National Bureau of Statistics of China.1/ 2014 observations represent the 2014Q3 data. 1/ 2014 observations represent the 2014Q3 data.

4

The Decline in the Price of OilThe Decline in the Price of Oil

Drivers of Oil PricesDrivers of Oil Prices

Fall in Oil Prices: Supply or Demand?Fall in Oil Prices: Supply or Demand?

Demand (80%) Supply (20%) Oil price Demand (40%) Supply (60%) Oil price

Drivers of Oil Prices Drivers of Oil Prices (cumulative change of log oil price)(cumulative change of log oil price)

July 2014 July 2014 –– Oct 2014 Oct 2014 Oct 2014 Oct 2014 –– Jan 2015 Jan 2015

0

5( ) pp y ( ) p

0

10( %) pp y ( %) p

-10

-5

-20

-10

-20

-15

-40

-30

-30

-25

10/14/14 -60

-50

1/4/15

Jul-14 Aug-14 Sep-14 Oct-14 Oct-14 Nov-14 Dec-14

Source: IMF staff calculations.Source: IMF staff calculations.

5

Global GDPGlobal GDP Global CPI Inflation 1/Global CPI Inflation 1/

Simulation Results from Two ScenariosSimulation Results from Two Scenarios

0.9 Scenario 1 Scenario 20.2

Global GDPGlobal GDP(percent difference)(percent difference)

Global CPI Inflation 1/Global CPI Inflation 1/(percentage point difference)(percentage point difference)

0 6

0.7

0.8

0 2

0.0

0.4

0.5

0.6

-0.4

-0.2

0.2

0.3

0 8

-0.6

0.0

0.1

13 14 15 16 17 18 19-1.0

-0.8

13 14 15 16 17 18 19

Source: IMF staff projections.Source: IMF staff projections.Note: Scenario 1: persistent supply shift, accounting for 60% of the observed decline in futures prices.Note: Scenario 1: persistent supply shift, accounting for 60% of the observed decline in futures prices.Scenario 2: supply shift, accounting for 60% of the decline in prices initially, but gradually unwound over time.Scenario 2: supply shift, accounting for 60% of the decline in prices initially, but gradually unwound over time.1/ Dotted line corresponds to core CPI inflation and the solid line to headline inflation. 1/ Dotted line corresponds to core CPI inflation and the solid line to headline inflation. 6

EM Corporates: Bond SpreadsEM Corporates: Bond Spreads Oil Exporting Sovereigns: CDSOil Exporting Sovereigns: CDS

Financial RisksFinancial Risks

6000700

Ecuador Nigeria Russia Venezuela (RHS)

550CEMBI composite CEMBI oil & gas

EM Corporates: Bond SpreadsEM Corporates: Bond Spreads(basis points)(basis points)

Oil Exporting Sovereigns: CDSOil Exporting Sovereigns: CDS(basis points)(basis points)

5000

6000

600

700

500

550

3000

4000

400

500

400

450

2000200

300

300

350

0

1000

0

100

Jan 14 May 14 Sep 14 Jan 15200

250

Jan 14 May 14 Sep 14 Jan 15

1/6/15 1/6/15

Jan-14 May-14 Sep-14 Jan-15Jan-14 May-14 Sep-14 Jan-15

Source: Bloomberg L.P. Source: Bloomberg L.P.

9

Impact on RussiaImpact on Russia

Oil Price 1/ (USD/barrel) Exchange Rate (USD/Ruble)

Oil Price and Exchange RateOil Price and Exchange Rate( index; January 1, 2014 = 100)( index; January 1, 2014 = 100)

Three factors at play: Three factors at play: Three factors at play: Three factors at play:

110

120Oil Price 1/ (USD/barrel) Exchange Rate (USD/Ruble)

CrimeaSecond round of

US sanctions•• Political uncertainty: slowdown Political uncertainty: slowdown

in growth since 2011.in growth since 2011.•• Political uncertainty: slowdown Political uncertainty: slowdown

in growth since 2011.in growth since 2011.

90

100

Russia imposes retaliatory food

•• Geopolitical tensions and Geopolitical tensions and sanctions: about 1sanctions: about 1--1.5% lower 1.5% lower

•• Geopolitical tensions and Geopolitical tensions and sanctions: about 1sanctions: about 1--1.5% lower 1.5% lower

70

80

EU sanctions

Minsk agreement

retaliatory food import ban growth in 2014.growth in 2014.

•• Oil price decline: real incomeOil price decline: real income

growth in 2014.growth in 2014.

•• Oil price decline: real incomeOil price decline: real income

50

60

1/15/15

First round of US sanctions

New round of US and EU

ti

Oil price decline: real income Oil price decline: real income decrease by more than 7% of decrease by more than 7% of GDP (in USD dollars).GDP (in USD dollars).

Oil price decline: real income Oil price decline: real income decrease by more than 7% of decrease by more than 7% of GDP (in USD dollars).GDP (in USD dollars).

40Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15

Source: Bloomberg, L.P.; and Primary Commodity Price System, Global Data Source, IMF.1/ APSP Crude oil.

7

1/15/15sanctions

Exchange Rate AdjustmentsExchange Rate Adjustments

AE R l Eff ti E h R tAE R l Eff ti E h R t EM R l Eff ti E h R tEM R l Eff ti E h R t

The Evolution of Exchange RatesThe Evolution of Exchange Rates

110Brazil Russia India China

110U.S. U.K. Japan Euro area

AE: Real Effective Exchange RateAE: Real Effective Exchange Rate(index; Aug. 2014=100; CPI(index; Aug. 2014=100; CPI--based)based)

EM: Real Effective Exchange RateEM: Real Effective Exchange Rate(index; Aug. 2014=100; CPI(index; Aug. 2014=100; CPI--based)based)

100

105

105

90

95

100

75

80

8595

65

70

75

85

90

Aug-14 Sep-14 Oct-14 Nov-14 Dec-14Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

Source: IMF, Source: IMF, Global Data SourceGlobal Data Source. .

8

Advanced Economies: Real GDPAdvanced Economies: Real GDP Emerging Markets: Real GDPEmerging Markets: Real GDP

Implications of a Dollar Appreciation/Euro DepreciationImplications of a Dollar Appreciation/Euro Depreciation

2.0Brazil India China

1.5 U.S. U.K. Japan Euro area

Advanced Economies: Real GDPAdvanced Economies: Real GDP(percent deviation from baseline)(percent deviation from baseline)

Emerging Markets: Real GDPEmerging Markets: Real GDP(percent deviation from baseline)(percent deviation from baseline)

1.51.0

0.5

1.0

0.5

0.0

-0 5

0.0

-1.0

-0.5

13 14 15 16 17 18 19-1.0

-0.5

13 14 15 16 17 18 19 13 14 15 16 17 18 1913 14 15 16 17 18 19

Source: IMF staff estimates. Source: IMF staff estimates. Note: 10% real effective dollar appreciation, 18% euro and yen (9% for UK pound) bilateral nominal depreciation. Note: 10% real effective dollar appreciation, 18% euro and yen (9% for UK pound) bilateral nominal depreciation.

9

The Ebbs and Flows of Capital.The Ebbs and Flows of Capital.What will Happen when US Interest Rates Increase? What will Happen when US Interest Rates Increase?

Asian EMsAsian EMs(Cumulative capital inflows, percent of GDP 1/)

Latin American EMsLatin American EMs

25

30FDI Equity Bond OI Bank OI Other

25

30

15

20

1

20

10

15

10

15

0

5

04-07 08-09 10-130

5

04 07 08 09 10 1304-07 08-09 10-13

14

04-07 08-09 10-13

Source: Source: IMF staff calculations.1/ Cumulative capital inflows by type, divided by GDP of the respective end of period.

The Bad NewsThe Bad NewsThe Bad NewsThe Bad News

Downward Revisions to Potential GrowthDownward Revisions to Potential GrowthDownward Revisions to Potential GrowthDownward Revisions to Potential Growth

Estimates of Potential GrowthEstimates of Potential Growth(potential growth projections; annual growth(potential growth projections; annual growth) )

U.S.U.S.Euro Euro AreaArea JapanJapan ChinaChina IndiaIndia RussiaRussia

Latin Latin AmericaAmericapp

55--year Aheadyear Ahead 2.12.1 1.31.3 0.40.4 6.26.2 6.76.7 1.51.5 2.32.3

Revision fromRevision fromOctoberOctober 20142014 0.00.0 0.00.0 --0.60.6 0.00.0 0.00.0 --0.30.3 --0.50.5

RevisionRevision from from April 2011 1/ April 2011 1/ --0.10.1 --0.20.2 --0.60.6 --3.33.3 --1.41.4 --2.52.5 --1.31.3

Sources: IMF, Sources: IMF, World Economic OutlookWorld Economic Outlook, Jan.15 update; IMF, , Jan.15 update; IMF, World Economic Outlook, World Economic Outlook, Oct. 14; and IMF, Oct. 14; and IMF, World Economic Outlook, World Economic Outlook, Apr. 11.Apr. 11.1/ The revision for Latin America is calculated based on data for Argentina, Barbados, Brazil, Chile, Guyana, Mexico, and Per1/ The revision for Latin America is calculated based on data for Argentina, Barbados, Brazil, Chile, Guyana, Mexico, and Peru.u.

10

Metal Prices 1/Metal Prices 1/ Latin America Scenario: 30 percentLatin America Scenario: 30 percent

Commodity Prices and Latin American GrowthCommodity Prices and Latin American Growth

Latin America metals net exportersMetals

Metal Prices 1/Metal Prices 1/(index; January 2011=100)(index; January 2011=100)

Latin America Scenario: 30 percent Latin America Scenario: 30 percent Decline in Metals PriceDecline in Metals Price(percent difference)(percent difference)

1

2

p

Chile

Chile - actual deviation from Jan. 2011 WEO baseline

100

105

110

1

0

85

90

95

-2

-1

70

75

80

-4

-3

55

60

65

Dec. 14

10 11 12 13 14Jan-11 Jan-12 Jan-13 Jan-14

Sources: Sources: Bloomberg, L.P.; IMF, Bloomberg, L.P.; IMF, Primary Commodity Price SystemPrimary Commodity Price System, and IMF staff calculations and projections., and IMF staff calculations and projections.1/ Metals index is the weighted average of eight spot prices; aluminum, copper, iron ore, lead, nickel, tin, uranium, and zinc.

11

China: Evolution of Potential GrowthChina: Evolution of Potential Growth

China: Potential Growth ComponentsChina: Potential Growth Components(percentage points)(percentage points)

12Change in Capital Change in trend employment Change in trend TFP Potential growth

10

6

8

4

0

2

18

Source: IMF staff calculations.

001 02 03 04 05 06 07 08 09 10 11 12 13 14

Projections for 2015Projections for 2015

2015 Growth Projections: Advanced Economies2015 Growth Projections: Advanced Economies(p(percent change from a year ercent change from a year earlier) earlier)

Euro Euro WorldWorld U.S.U.S. UKUK JapanJapan AreaArea GermanyGermany FranceFrance SpainSpain ItalyItaly

20152015 3 53 5 3 63 6 2 72 7 0 60 6 1 21 2 1 31 3 0 90 9 2 02 0 0 40 420152015 3.53.5 3.63.6 2.72.7 0.60.6 1.21.2 1.31.3 0.90.9 2.02.0 0.40.4

R i iR i iRevision Revision from October from October

20142014--0.30.3 0.50.5 0.00.0 --0.20.2 --0.20.2 --0.20.2 --0.10.1 0.30.3 --0.50.5

Sources: IMF, Sources: IMF, World Economic OutlookWorld Economic Outlook, Jan.15 update; and IMF, , Jan.15 update; and IMF, World Economic Outlook, World Economic Outlook, Oct. 14.Oct. 14.

12

2015 Growth Projections: Emerging Markets and LIDCs2015 Growth Projections: Emerging Markets and LIDCs(p(percent change from a year ercent change from a year earlier) earlier)

Emerging Emerging Market and Market and LowLow IncomeIncome

WorldWorldDeveloping Developing EconomiesEconomies ChinaChina IndiaIndia BrazilBrazil RussiaRussia

Developing Developing CountriesCountries

20152015 3 53 5 4 34 3 6 86 8 6 36 3 0 30 3 3 03 0 5 95 920152015 3.53.5 4.34.3 6.86.8 6.36.3 0.30.3 --3.03.0 5.95.9

Revision from Revision from October 2014October 2014 --0.30.3 --0.60.6 --0.30.3 --0.10.1 --1.11.1 --3.53.5 --0.60.6

Sources: IMF, Sources: IMF, World Economic OutlookWorld Economic Outlook, Jan.15 update; and IMF, , Jan.15 update; and IMF, World Economic Outlook, World Economic Outlook, Oct. 14.Oct. 14.

13

Policy Advice?Policy Advice?

New: Policy Advice for Oil Importers and ExportersNew: Policy Advice for Oil Importers and Exporters

Oil importers:Oil importers:

•• Given output gaps let demand and output increaseGiven output gaps let demand and output increase

Oil importers:Oil importers:

•• Given output gaps let demand and output increaseGiven output gaps let demand and output increase•• Given output gaps, let demand and output increaseGiven output gaps, let demand and output increase

•• Avoid passthrough of low headline into coreAvoid passthrough of low headline into core

Oil tOil t

•• Given output gaps, let demand and output increaseGiven output gaps, let demand and output increase

•• Avoid passthrough of low headline into coreAvoid passthrough of low headline into core

Oil tOil tOil exporters:Oil exporters:

•• Adjust government spending (choose the speed)Adjust government spending (choose the speed)

All f d i ti ( h th d)All f d i ti ( h th d)

Oil exporters:Oil exporters:

•• Adjust government spending (choose the speed)Adjust government spending (choose the speed)

All f d i ti ( h th d)All f d i ti ( h th d)•• Allow for depreciation (choose the speed)Allow for depreciation (choose the speed)

•• Avoid passthrough of depreciation into inflationAvoid passthrough of depreciation into inflation

•• Allow for depreciation (choose the speed)Allow for depreciation (choose the speed)

•• Avoid passthrough of depreciation into inflationAvoid passthrough of depreciation into inflation

AllAll

•• EMs: decrease energy subsidies and increase targeted transfersEMs: decrease energy subsidies and increase targeted transfers

AllAll

•• EMs: decrease energy subsidies and increase targeted transfersEMs: decrease energy subsidies and increase targeted transfers

•• AEs: consider increasing energy taxes, decreasing other taxesAEs: consider increasing energy taxes, decreasing other taxes•• AEs: consider increasing energy taxes, decreasing other taxesAEs: consider increasing energy taxes, decreasing other taxes

16

Risks and (Old but Still Relevant) Policy AdviceRisks and (Old but Still Relevant) Policy Advice

Slump in Euro area and JapanSlump in Euro area and Japan

P li i Th th dP li i Th th d

Slump in Euro area and JapanSlump in Euro area and Japan

P li i Th th dP li i Th th dPolicies: Three arrows as the common remedyPolicies: Three arrows as the common remedy

(Fiscal: Juncker Plan not enough)(Fiscal: Juncker Plan not enough)

Policies: Three arrows as the common remedyPolicies: Three arrows as the common remedy

(Fiscal: Juncker Plan not enough)(Fiscal: Juncker Plan not enough)

Geopolitical risks. UkraineGeopolitical risks. Ukraine--Russia, Middle EastRussia, Middle East

Political risks. Greece. Rise of antiPolitical risks. Greece. Rise of anti--european partieseuropean parties

Geopolitical risks. UkraineGeopolitical risks. Ukraine--Russia, Middle EastRussia, Middle East

Political risks. Greece. Rise of antiPolitical risks. Greece. Rise of anti--european partieseuropean partiesp pp p

Financial Increasing risk taking, turmoil Financial Increasing risk taking, turmoil

Upside risks:Upside risks:

p pp p

Financial Increasing risk taking, turmoil Financial Increasing risk taking, turmoil

Upside risks:Upside risks:Upside risks: Upside risks:

Underestimation of positive effects of oil price declineUnderestimation of positive effects of oil price decline

Upside risks: Upside risks:

Underestimation of positive effects of oil price declineUnderestimation of positive effects of oil price decline

16