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World Economic Outlook
Transitions and Tensions
1
Rupa DuttaguptaDeputy Division Chief
Research Department, IMF
United Nations, Project LINK Meetings, October 21, 2013
Global growth dynamics are in transition
Two new developments:
• Markets anticipated a change in U.S. monetary policy
• Lower growth in emerging market economies, notably China
2
1.0
1.5
2.0
2.5
3.0
Jan. 2013 Mar. 13 May 13 Jul. 13 Sep. 13
GDP growth in 2013
GDP growth in 2014
10‐year government bond yields
Despite still ample slack in U.S. labor markets and downward revisions to real GDP growth, monetary conditions have tightened since May.
Government Bond Yields and GDP Growth From Consensus Forecast (percent
44
45
46
47
48
49
50
4
5
6
7
8
9
10
2006 07 08 09 10 11 12 13
Unemployment rate(left scale)
Employment aspercent of population
Unemployment Rate(percent)
Sources: Bloomberg, L.P., Consensus Forecast; and IMF staff estimates. 3
May 22, 2013
0
1
2
3
4
5
6
7
2007 08 09 10 11 12
GermanyJapanUnited States
U.S. average 30‐year fixed rate mortgage
Tighter U.S. monetary conditions have spilled over into the euro area and, to a lesser extent, Japan.
Key Interest Rates 2/(percent)
Sep.13
0
0.1
0.2
0.3
0.4
0.5
0.6
t t+12 t+24 t+36
United States
Europe
Policy Rate Expectations 1/(percent; months on x‐axis; dashed lines are from the April 2013 WEO)
Source: Bloomberg, L.P. 1/ Expectations are based on the federal funds rate for the United States, the sterling overnight interbank average rate for the United Kingdom, and the euro interbank offered forward rate for Europe; updated September 24, 2013.2/ Interest rates are 10‐year government bond yields unless noted otherwise.
4
46
48
50
52
54
56
58
10 11 12 13
Advanced economies
Emerging marketeconomies
Sources: IMF, World Economic Outlook; and IMF, Global Data Source.1/ Lighter shades indicate Hodrick‐Prescott smoothed lines.
‐10
‐5
0
5
10
15
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Advanced economies
Emerging market anddeveloping economies
Real GDP Growth 1/(percent; quarter on quarter annualized; sa)
Manufacturing PMI(index; >50=expansion; sa)
13Q2
EMEs slowing and AEs picking up
Aug. 13
5
‐3.5
‐3.0
‐2.5
‐2.0
‐1.5
‐1.0
‐0.5
0.0
0.5
1.0
Brazil South Africa China Russia India
Potential
Cyclical
Change in real growth
Long‐term Expectations: Up and Down 2/(medium‐term growth forecast; change from April 2004 WEO)
Decomposing the 2011‐13 Slowdown 1/(percentage points)
EM growth has declined for cyclical and structural reasons.
‐2
‐1
0
1
2
3
04 05 06 07 08 09 10 11 12 13
BrazilIndiaChinaSouth AfricaRussia
Source: IMF, World Economic Outlook.1/ Cyclical component of growth calculated as the difference between real and potential growth. Potential growth estimated using multivariate filter (see Box 1.2 of the October 2013 WEO for details). 2/ 5‐year ahead growth forecasts used as a proxy for longer term growth expectations. India’s figures for the July 2013 update are in fiscal year terms.
6
Tighter U.S. monetary conditions interacted with EM domestic weaknesses and led to tighter EM funding conditions.
Sources: Bloomberg, L.P.; EPFR Global/Haver Analytics; and IMF staff calculations.Note: ECB = European Central Bank; LTROs = longer‐term refinancing operations.
Net Capital Flows to Emerging Markets Breakdown(billions of U.S. dollars; monthly flows)
‐30
‐25
‐20
‐15
‐10
‐5
0
5
10
15
20
2010:H1 10:H2 11:H1 11:H2 12:H1 12:H2
Equity
Bond
Interest Rate Spreads(basis points)
0
250
500
750
1000
1250
1500
1750
2002 04 06 08 10 12
Sovereign 2/
United States BB
Corporate 3/
Sep. 13
May 22, 2013
VXY 1/
Greek crisis
Irishcrisis
1st ECB LTROs
June 29, 2012
May 22, 2013
1/ JPMorgan emerging market volatility index.2/ JPMorgan EMBI Global Index spread.3/ JPMorgan CEMBI Broad Index spread.
7
Sep. 13
Key EMs are under pressure but exchange rates have acted as a buffer and reduced or reversed previous overvaluations.
Sources: Haver Analytics; IMF, World Economic Outlook, April 2013 and IMF staff calculations.Note: Aln. = aligned emerging market economies, including India, Mexico, Poland, Russia, Saudi Arabia; Def. = deficit emerging market economies, including Brazil, Indonesia, South Africa, Turkey; Sur. = surplus emerging market economies, including China, Malaysia, Thailand.
8
‐15
‐10
‐5
0
5
10
15
20
Sur. Def. Aln.
Percent change from April 2013 to Aug. 2013
Real Effective Exchange Rates(percent change from January 2010 to August 2013)
Exchange rate depreciation, however, will not forestall lower growth—extent of slowing depends on policy room.
‐2.5
‐2.0
‐1.5
‐1.0
‐0.5
0.0
TUR IDN BRA CHN IND RUS MEX‐15
‐10
‐5
0
5
TUR IDN BRA CHN IND RUS MEXSource: IMF staff estimates.Note: BRA = Brazil; CHN = China; IDN = Indonesia; IND = India; MEX = Mexico; RUS = Russia; TUR = Turkey.
‐15
‐10
‐5
0
5
TUR IDN BRA CHN IND RUS MEX
Equity Prices(percent deviation)
Market Interest Rates(percentage point deviation)
Bilateral Exchange Rate(against the U.S. dollar; percent deviation; positive = appreciation)
Real GDP(percent deviation)
0.0
0.5
1.0
1.5
2.0
2.5
TUR IDN BRA CHN IND RUS MEX
9
AE monetary policy: U.S. tapers gradually, keeps rates on hold until2016; euro area and Japan stay very accommodativeAE monetary policy: U.S. tapers gradually, keeps rates on hold until2016; euro area and Japan stay very accommodative
Assumptions underlying the forecast
AE Fiscal policy: Less tightening in U.S. & euro area; more in Japan.AE Fiscal policy: Less tightening in U.S. & euro area; more in Japan.
EM: tightening of external financing conditions is largely a one offEM: tightening of external financing conditions is largely a one off
10
10
World U.S. Euro Area Japan Brazil Russia India China
2013(Oct. 2013) 2.9 1.6 ‐0.4 2.0 2.5 1.5 3.8 7.6
2013(Jul. 2013) 3.1 1.7 ‐0.6 2.0 2.5 2.5 5.6 7.8
2014(Oct. 2013) 3.6 2.6 1.0 1.2 2.5 3.0 5.1 7.3
2014(Jul. 2013) 3.8 2.7 0.9 1.2 3.2 3.3 6.3 7.7
WEO Real GDP Growth Projections (percent change from a year earlier)
Source: IMF, World Economic Outlook.
The WEO forecast has been revised down, mainly on account of emerging economies.
8
11
Global growth impulses to be increasingly driven by advanced economies
Source: IMF staff estimates.Note: EMDEs = Emerging Market and Developing Economies.
‐1
‐0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
2013 Global Growth 2013 Change in Global Growth 2014 Global Growth 2014 Change in Global Growth
United States
Japan
Euro Area
Other Advanced Economies
Developing Asia
Latin America
Other EMDEs
Global Growth
Contributors to Global Growth and Changes in Global Growth(Percent)
12
0
1
2
3
4
5
6
2010 2011 2012 2013 2014
90 percent confidence interval
90 percent confidence interval (April 2013 WEO)
Baseline
Near‐term risks remain on the downside.Market risk indicators do not point to a large change in risks.
Prospects for World GDP Growth(percent change)
Downside risks:US budget/debt ceiling Emerging economiesUS interest ratesEuro areaUS & Japan MT fiscalMonetary policyGeopolitical
Source: Consensus Forecasts; and IMF staff estimates.13
Risks from higher interest rates in advanced economies for emerging economies
Why rates in AEs would be higher matters:
Higher‐than‐expected growth → good for the world
Tighter policy stance → not good for the world
Higher‐than‐expected infla on → bad for the world
Worse fiscal posi ons → ugly for the world
Other? Depends.14
EM growth and capital flows do not necessarily fall muchwhen U.S. policy rates rise because of stronger U.S. growth.
‐18‐15‐12‐9‐6‐30369
‐6 ‐5 ‐4 ‐3 ‐2 ‐1 0 1 2 3 4 5 6
Source: IMF staff estimates.
Latin America and the Caribbean: Gross Capital Inflows (percent of GDP; deviations from t=0)
‐18‐15‐12‐9‐6‐30369
‐6 ‐5 ‐4 ‐3 ‐2 ‐1 0 1 2 3 4 5 6
Emerging Asia: Gross Capital Inflows(percent of GDP; deviations from t=0)
Februrary 1994 June 1999 June 2004
‐8‐6‐4‐202468
1012
–6 –5 –4 –3 –2 –1 0 1 2 3 4 5 6
Latin America and the Caribbean: GDP Growth (year‐over‐year percent change, SA; deviations from t=0)
‐8‐6‐4‐2024681012
–6 –5 –4 –3 –2 –1 0 1 2 3 4 5 6
Emerging Asia: GDP Growth(year‐over‐year percent change, SA; deviations from t=0)
0
50
100
150
200
250
300
0
10
20
30
40
50
60
70
80
90
1001997 Crisis EMs 2/
Selected large EMs with capital outflows
Short‐term external debt (% of GDP)
Short‐term external debt (% of GDP)
Key EMs Under Pressure Today vs. 1997 Asian Financial Crisis EMs(percent)
EMs are now more resilient than in 1997. However, vulnerabilities have built up in some.
(initial conditions)
Source: IMF, World Economic Outlook, April 2013.1/ Brazil, Indonesia, India, Turkey, and South Africa. Data shown for 2012.2/ Indonesia, Korea, Thailand, Malaysia, and Philippines. Data shown for 1996.
16
Right Scale
Fixed ER regime (% of total) External debt (% of GDP) Reserves (% of short‐term external debt)
Euro area investment stalls, notably in periphery Japan policy implementation is incompleteEuro area investment stalls, notably in periphery Japan policy implementation is incomplete
Over the medium term, a plausible downside scenario is one of several, limited disappointments and much lower global growth.
US potential growth disappoints US monetary conditions tighten more than assumed in the WEO forecastFiscal accidents in AEs
US potential growth disappoints US monetary conditions tighten more than assumed in the WEO forecastFiscal accidents in AEs
Tighter external funding conditions for EMLess potential growth in EM, notably ChinaLower commodities prices
Tighter external funding conditions for EMLess potential growth in EM, notably ChinaLower commodities prices
17
17
In the plausible downside scenario, U.S. policy rates stay close to the zero bound for many years.
Source: IMF staff estimates.
0.0
0.5
1.0
1.5
2.0
2.5
2013 2014 2015 2016 2017 20180.00
0.25
0.50
0.75
1.00
2013 2014 2015 2016 2017 2018
Real GDP Growth(percent)
Market Interest Rate(percentage points)
GDP Growth(percent)
Market Interest Rate(percentage points)
United States
Japan
18
1.5
2.0
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 20180.0
1.0
2.0
3.0
4.0
2013 2014 2015 2016 2017 2018
EM are hit particularly hard and global growth averages 3 percent, rather than 4 percent.
4.5
5.0
5.5
6.0
6.5
7.0
2013 2014 2015 2016 2017 2018
Source: IMF staff estimates.
2.5
3.0
3.5
4.0
4.5
2013 2014 2015 2016 2017 2018
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 2018
60
80
100
120
2013 2014 2015 2016 2017 2018
Emerging Asia: Real GDP Growth(percent)
Latin America: Real GDP Growth(percentage points)
World: Real GDP Growth(percent)
World: Oil Price(U.S. dollars a barrel)
19
Euro area: banking union; financial sector, structural, entitlement reforms; fiscal adjustment
Japan: work on all 3 arrows of AbenomicsUS: address ST fiscal challenges; easy monetary policy; careful calibration and effective
communication on timing of exit from asset purchases; MT fiscal adjustment & entitlement reforms
Euro area: banking union; financial sector, structural, entitlement reforms; fiscal adjustment
Japan: work on all 3 arrows of AbenomicsUS: address ST fiscal challenges; easy monetary policy; careful calibration and effective
communication on timing of exit from asset purchases; MT fiscal adjustment & entitlement reforms
Policies
China: advance rebalancing and reform shadow bankingIndia: improve fiscal policy and remove structural bottlenecksBrazil: raise domestic saving and foster private invetsmentRussia: rebuild fiscal buffers and improve the investment climate
China: advance rebalancing and reform shadow bankingIndia: improve fiscal policy and remove structural bottlenecksBrazil: raise domestic saving and foster private invetsmentRussia: rebuild fiscal buffers and improve the investment climate
EMDC: (i) exchange rate buffer; (ii) monetary policy to keep inflation well anchored; cut rates if room exists; (iii) fiscal policy to be geared to MT objectives; stimulate only if major slowdown threatens; (iv) preserve financial stability; (v) structural reforms
EMDC: (i) exchange rate buffer; (ii) monetary policy to keep inflation well anchored; cut rates if room exists; (iii) fiscal policy to be geared to MT objectives; stimulate only if major slowdown threatens; (iv) preserve financial stability; (v) structural reforms
20
20
Thank you
21
Global aggregates: Headline Inflation(year‐over‐year percent change; dashed lines are the six‐to‐ten‐year inflation expectations)
But inflation pressures are very low. Thus, our WEO assumes that monetary policy stays very accommodative in advanced economies.
‐3
‐2
‐1
0
1
2
3
4
5
6
7
8
9
10
2002 04 06 08 10 12
Emerging Market and Developing EconomiesEuro areaJapanUnited States
Sources: Consensus Forecast; and IMF staff estimates. 22
14:Q4
23
AE fiscal policy will be less tight in 2014, except in Japan.
Source: IMF staff estimates.
‐1
‐0.5
0
0.5
1
1.5
2
2.5
3
2010 11 12 13 14
Euro area United States Japan April 2013 WEO
Fiscal Impulse(Change in structural balance as percent of GDP)
23
‐0.6
‐0.5
‐0.4
‐0.3
‐0.2
‐0.1
0.0
United States LAC Asia Europe
Econometric Evidence(peak effect of 100 basis point increase in U.S. policy interest rate; percent)
Source: IMF staff calculations.1/ U.S. monetary policy shock defined as a surprise change in monetary policy rates that is not a response to inflation or economic conditions, and is taken from Romer and Romer (2004). See October 2013 WEO Chapter 3 for details.
Spillovers:(effects of a US monetary policy shock) 1/
24