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