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The Global and Regional Outlook
Task Force on Economic Challenges’ Meeting
8 December 2008
Olaf Unteroberdoerster
Resident Representative, Hong Kong SAR,
International Monetary Fund
The global economy is set for a major
downturn
Global Real GDP Growth
(Annual percent change)
9
World
Advanced economies
Emerging and developing economies
8
7
6
5
4
3
2
1
0
Source: IMF, WEO database.
2010
2005
2000
1995
1990
1985
1980
1975
1970
-1
2
Despite aggressive policies to stabilize
markets…
Changes in Policy Rates Since August 2007
(In percent)
Total Assets on Federal Reserve's
Balance Sheet
0.0
(In billions of U.S. dollars)
2,200
-0.5
Other
ABCP Credit Facility
Estimated forex swap lines
AIG loan
PDCF
TAF
2,000
-1.0
1,800
1,600
-1.5
1,400
-2.0
1,200
-2.5
1,000
800
-3.0
600
-3.5
400
200
-4.0
Source: Haver Analytics.
Source: U.S. Federal
Reserve.
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Japan
Mar-08
Euro Area
Feb-08
United
Kingdom
Jan-08
United
States
Dec-07
0
-4.5
3
... credit is rapidly decelerating
Private Sector Credit Growth
(12-month percent change)
16
14
12
United States
United Kingdom
Euro area
10
8
6
4
2
M
ar
M 92
ar
-9
M 3
ar
-9
M 4
ar
M 95
ar
-9
M 6
ar
M 97
ar
-9
M 8
ar
M 99
ar
-0
M 0
ar
-0
M 1
ar
M 02
ar
-0
M 3
ar
M 04
ar
-0
M 5
ar
-0
M 6
ar
M 07
ar
-0
M 8
ar
-0
9
0
Sources: Haver Analytics; and IMF staff estimates.
4
History suggests that banking stress brings
severe and long recessions
Duration
(In quarters)
9
8
Recession not preceded by financial stress 1/
Recession preceded by bank-related financial stress 1/
Average Output Loss per Quarter
(In percent of GDP)
0.0
-0.2
7
-0.4
6
-0.6
5
-0.8
4
-1.0
3
-1.2
2
-1.4
1
-1.6
0
-1.8
Source: IMF staff calculations.
1
See Table 4.2 of Chapter 4 of October 2008 World
Economic Outlook.
Source: IMF staff calculations.
1
See Table 4.2 of Chapter 4 of October 2008 World
Economic Outlook.
Recession not preceded by financial stress 1/
Recession preceded by bank-related financial stress 1/
5
A significant slowdown is expected in the U.S.
economy, raising the specter of deflation
United States: Contributions to GDP Growth
(Percentage points, annual rate)
8
Private consumption
Private fixed investment
Change in private inventories
Govt consumption & investment
Net exports
Real GDP growth
6
4
United States: CPI Inflation
(percent changes)
6
All Items (monthly)
All Items (year over year)
Core (year over year)
5
4
3
2
2
0
1
-2
0
Projections
Source: IMF, WEO database; and staff estimates.
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
-1
Jan-05
2009:Q4
2009:Q3
2009:Q2
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
-4
Source: Haver Analytics.
6
The U.S. recession is going to be more
severe than in 1991
United States: Recession Comparisons
(In percent of potential GDP)
15
12.5
Cumulative output loss relative to potential
Maximal output gap
8.0
10
5
3.8
2.0
0.1
0
-5
-1.8
-2.7
-0.4
-3.1
-7.0
-10
1980
1982
Source: IMF staff estimates.
1991
2001
2008
7
However, large risks to the forecast…
U.S. Growth Forecast: Balance of Risks
(GDP growth; yr/yr percent change)
4
4
90 percent confidence interval
3
2
2
1
-2
1
50 percent confidence
interval
0
-1
3
0
Growth Forecast
2008
2009
Annual average
1.4
-0.7
Q4/Q4
0.4
-0.5
-1
-2
-3
2005
2006
Source: IMF staff calculations.
-3
2007
2008
2009
8
…because the housing downturn could be
sharper than expected…
United States: Housing Starts and New
Home Inventories
Thousands of units
1
House Price Gaps
(In percent)
Ratio
2400
12
35
Median
Maximum
Minimum
30
25
2000
10
20
15
1600
8
10
5
1200
6
0
-5
Source: Haver Analytics.
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Korea
Canada
U.S.
Japan
Spain
France
Germany
2
Jan-03
400
Australia
Housing starts (left scale)
New home inventories (months' supply, right scale)
-10
United
Kingdom
4
Ireland
800
Source: IMF staff calculations.
1
The house price gap is the percent increase in house prices during the
period 1997 to end-2007 that is not accounted for by fundamentals. The
range refers to the range of gap estimates generated by small perturbations
of the estimated models and is an indicator of the robustness of the results.
9
...and credit growth could be even lower
than expected
Changes in Credit Standards
1
U.S. Corporate Default Rates
(Percent of respondents )
140
120
100
U.S.: C&I loan standards
U.S.: Mortgage lending standards
ECB: Lending standards to large
companies
ECB: Lending standards to
households (house purchase)
Percent of issuers
Basis points
18
16
1800
High yield default rate (left scale)
High yield spread (right scale)
1600
14
1400
12
1200
40
10
1000
20
8
800
0
6
600
4
400
2
200
0
2001 2002 2003 2004 2005 2006 2007 2008
0
80
60
-20
-40
2005
2006
2007
2008
Source: Haver Analytics.
1
Change in balance of respondents between "tightened
considerably and tightened somewhat" and "eased
somewhat and eased considerably."
Source: Moody's.
10
The corporate sector may already be coming
under severe stress
Global PMI: Total Economy
United States: Retail Sales and Car Sales
(12-month percent change)
(50+=expansion)
12
40
9
65
Output
Employment
30
60
6
20
3
10
0
0
-3
55
50
-10
45
Source: Haver Analytics.
Source: Haver Analytics.
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
40
Jan-05
-30
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-07
Apr-07
Jul-07
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
-9
-20
Retail sales (left scale)
Car sales (right scale)
Apr-06
Jul-06
Oct-06
-6
11
What does this mean for Asia?
Growth to slow sharply next year…
Asia: Real GDP Growth
(Year-on-year percent change)
2007
2008
2009
Latest projections
Japan
China
Korea
Indonesia
Thailand
Hong Kong SAR
Malaysia
Singapore
Philippines
Vietnam
Brunei Darussalam
Cambodia
Lao P.D.R.
ASEAN+3
2.2
0.5
-0.2
11.9
5.0
6.3
4.9
6.4
6.3
7.7
7.2
8.5
0.6
10.2
7.9
9.7
4.1
6.0
4.5
3.7
5.7
2.7
4.4
6.3
-0.5
7.0
7.5
8.5
2.0
4.5
4.0
2.0
3.8
2.0
3.5
5.0
2.8
6.0
6.8
7.6
5.9
4.9
Sources: CEIC Data Company Ltd; and IMF, WEO database.
1
From fourth quarter of preceding year.
12
…and coming exclusively from
domestic demand
Emerging Asia: Contributions to GDP Growth
(Year-on-year change in percent of previous year's GDP)
16
Private consumption
Gross fixed investment
Net exports
Other
Real GDP growth
14
12
10
8
6
4
2
0
Sources: CEIC Data Company Ltd; and IMF staff calculations.
2009
2008
2007
2006
2005
-2
13
However, downside risks abound
Asia GDP Growth
(Central forecast (line) and 50, 70, and 90 percent confidence intervals (areas); in percent)
8.0
8.0
7.5
7.5
7.0
7.0
6.5
6.5
6.0
6.0
5.5
5.5
50 percent confidence interval
5.0
5.0
4.5
4.5
4.0
4.0
90 percent confidence interval
3.5
3.5
3.0
3.0
2.5
2001
2002
2003
2004
2005
2006
Source: IMF staff's assessment of the balance of risks.
2007
2008
2.5
2009
14
The forecasts assume smaller export and domestic
demand slowdowns than in previous crises…
Emerging Asia: Exports and Domestic Demand
(Change in growth rate from previous year; in percent)
0
-2
-4
-6
-8
-10
-12
Exports
-14
Private consumption and
gross fixed investment
-16
-18
2001
Sources: IMF, WEO database; and staff calculations.
2009
Forecast
15
...and recent data show a sharp contraction in
demand for Asian exports
United States: ISM Imports Index
China Real Import Growth
(50+=expansion)
(3-mma of 12-month percent change)
70
30
65
25
60
20
55
15
50
10
45
5
40
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
Source: Haver Analytics.
Jan-06
0
35
Source: CEIC Data Company Ltd.
16
…as well as rapidly softening
domestic demand...
China: Manufacturing PMI
(50+=expansion, 50-=contraction)
62
58
54
50
Overall
New orders
New export orders
46
Source: Haver Analytics.
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
42
17
Slower growth and tighter funding conditions
may put pressures on corporate Asia
Asian Corporate Sector: External Financing
(bonds, equity and loans; in billions of U.S. dollars)
100
(3-month moving average)
1150
Bond
Equity
Loan
90
80
Japan: Number of Corporate Bankruptcies
1100
70
1050
60
1000
50
40
950
30
900
20
10
850
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
800
Dec-06
Source: Data provided by the Bond, Equity and Loan
database of the IMF sourced from Dealogic.
2008-Q3
2008-Q2
2008-Q1
2007-Q4
2007-Q3
2007-Q2
2007-Q1
0
Source: CEIC Data Company Ltd.
18
Some countries may be more vulnerable
than others
Vulnerability factors differ across countries and
include:
 Current account deficits
 Reliance on wholesale funding, including by banks
 Significant foreign participation in domestic equity and bond
markets
 Corporate stress from sudden stops in financing
 Domestic macro imbalances
 Property sector booms
 Lower commodity prices
19
Policies needed to support corporate
sector and aggregate demand...
In many cases, room to ease monetary and fiscal policy
further to address downside risks to growth
Need for public recapitalization of banks cannot be
excluded.
Action is needed to guarantee trade financing
Direct support to corporates may be required if banks
do not resume lending
 Aim to minimize distortions
 Formulate exit strategies
20
Longer term challenge: a new financial
architecture...
The G-20 Summit on Financial Markets and the World
Economy focused on reforms needed to address the
weaknesses exposed by the financial crisis
Priorities for reform include:
strengthening transparency and accountability
enhancing sound regulation
promoting integrity in financial markets
reinforcing international cooperation, and
reforming international financial institutions
21
...and a new role for the IMF
Enhancing the resources of the Fund in line with
increasing private sector flows
G-20 summit agreed to review the adequacy of
resources
Resources could be increased by large Fund quota
increase, in tandem with increasing voice of emerging
markets and developing countries
The Fund, along with an expanded FSF, should
identify vulnerabilities and provide early warnings, and
develop recommendations to mitigate pro-cyclicality
All G20 members to undertake FSAPs
22