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