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The World Economy: How Did We Get Here and Where Are
We Going?!
Minouche Shafik, Deputy Managing Director!
International Monetary Fund!
Presentation at the London School of Economics!
October 26, 2011!
A Sharp Decrease in Growth WEO Real GDP Growth Projections (percent change from a year earlier)
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
Source: IMF, World Economic Outlook.
1
The Confluence of Two Factors
Slower
Underlying
Growth:
Balance sheet repairs.
A Crisis of
Confidence:
Political uncertainty, and fiscal/financial
interactions.
Interacting
in Bad
Ways:
This is where the risks are.
27!
2
Why the Slowdown?
Crisis of Confidence
Risks
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
Fiscal Consolidation: Proceeding, But a Long Way to Go
Change in Cyclically-Adjusted Primary Balances
(percent of GDP)
Total required adjustment by 2020 1/
Japan
Greece
U.S.
Ireland
U.K.
Portugal
France
Spain
Canada
Italy
Germany
-2
0
2
4
6
8
10
12
14
16
-2
0
2
4
6
8
10
12
14
16
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
Fiscal Consolidation: Proceeding, But a Long Way to Go
Change in Cyclically-Adjusted Primary Balances
(percent of GDP)
Projected adjustment (2010-15)
Remaining adjustment until 2020 to achieve illustrative debt targets 1/
Japan
Greece
U.S.
Ireland
U.K.
Portugal
France
Spain
Canada
Italy
Germany
-2
0
2
4
6
8
10
12
14
16
-2
0
2
4
6
8
10
12
14
16
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
6
Fiscal Consolidation: Proceeding, But a Long Way to Go
Change in Cyclically-Adjusted Primary Balances
(percent of GDP)
Projected adjustment (2010-11)
Japan
Greece
U.S.
Ireland
U.K.
Portugal
France
Spain
Canada
Italy
Germany
-2
0
2
4
6
8
10
12
14
16
-2
0
2
4
6
8
10
12
14
16
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
7
Low Private Domestic Demand: Mechanical Brakes or Animal Spirits?
18
U.S. Housing Inventories and
Foreclosures
(millions of units)
U.S. Expected Change in Income and Wages 2/ 3/
(percent; median; 3-month moving average)
4.0
Delinquencies and Foreclosures
16
Actual Inventories
14
Underwater Mortgages 1/
Family income
growth
3.5
3.0
12
2.5
Wage growth
2011Q2
10
2.0
8
1.5
6
1.0
4
2
0.5
0
0.0
06
07
08
09
10
11
Jul. 11
95
97
99
01
03
05
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.
07
09
11
5
External Rebalancing Has Stalled
Global Imbalances 1/
(current account; percent of world GDP)
U.K.
4
CEE
GIPS
ROW
U.S.
JPN
EMA
DEU
CHN
OIL
Discrepancy
3
2
1
0
-1
-2
-3
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
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. 6
Why the Slowdown?
Crisis of Confidence
Risks
Policies
Global Financial Stability Is Worsening
Credit Strain and Market & Liquidity Strain IndicatorsRisk Appetite
10
10
Lehman
9
Lehman
9
8
8
7
7
6
6
5
5
Worsening
4
4
3
3
2
2
1
1
0
06
07
08
09
Decreasing
10
Apr.Sep.
11 11
0
06
07
08
09
10
Apr. Sep.
11 11
Source: IMF staff estimates.
7
-80
-158
5!
Gold
Risk assets
10-year treasury
10-year bund
Swiss franc
Commodities
S&P 500
EM Equities
Eurofirst 300
Vix (inverted)
Bank equities
Commodities
Oil
US Spanish
French
Sovereign CDS
Italian Greek Irish Spanish WE sovereign
20
Greek
Italian Prompting a Flight to Safe Assets
Asset Price Performance since April GFSR
(percent)
Safe-haven assets
0
-20
-40
-60
8
Sovereign Spillovers to the EU Banking System
Cumulative Spillovers from High-Spread Euro Area Sovereigns, 2010 Till Now
(billions of euros)
€60
€80
€200
€300
Spillovers from . . . Greek sovereign
Irish & Portuguese sovereign
Belgian, Spanish & Italian sovereign
High-spread euro area banking sector
9
EU Bank Capital: Current Situation
40
Core Tier 1 Ratios
(percent of risk-weighted assets)
35
30
25
0% of banks
0% of total assets
20
15
10
6%
5
0
Individual Banks
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.
10
EU Bank Capital: Current Situation
40
Core Tier 1 Ratios
(percent of risk-weighted assets)
35
30
25
18% of banks
19% of total assets
20
0% of banks
0% of total assets
15
10
8%
6%
5
0
Individual Banks
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.
10
EU Bank Capital: Current Situation
40
Core Tier 1 Ratios
(percent of risk-weighted assets)
35
30
25
20
63% of banks
70% of total assets
18% of banks
19% of total assets
0% of banks
0% of total assets
15
10%
8%
6%
10
5
0
Individual Banks
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.
10
Capital Flows to EMs: Volatility Dominates
(billions of U.S. dollars; weekly flows)
Bond Funds Equity Funds
2.0
8
QE2 (Nov. 3)
1.5
S&P downgrade
(Aug. 5)
QE2 (Nov. 3)
6
1.0
4
0.5
2
0.0
0
-0.5
-2
-1.0
-4
EMEA
-1.5
-2.0
LatAm
Asia excl.
Japan
-6
-8
S&P downgrade
(Aug. 5)
EMEA
LatAm
Asia excl. Japan
Global
Total
9/21
9/21
-2.5
-10
Jan-10 Apr-10 Jul-10 Oct-10 Feb-11 May-11 Aug-11
Jan-10 Apr-10 Jul-10 Oct-10 Feb-11 May-11 Aug-11
Source: EPFR Global.
11
Rapid Credit Growth Can Lead to Rising Nonperforming Loans in
EMs
Predicted NPL Ratios in 2011 and 2012 Credit and GDP Growth
300
12
Russia
Turkey
250
Credit growth
(percent, no shock)
(cumulative percent change; 2005 – 2010)
Brazil
Poland
150
2012
8
India
China
Indonesia
6
Colombi
a Peru
Morocc
Mexico
o South
Africa
Chile
100
2011
10
Argentina
200
2010 (Actual)
4
50 Hungary
Philippines
Malaysia
Thailand
2
0
0
0
50
100
150
200
Nominal GDP growth
250
300
Emerging Asia
Sources: IMF, Global Data Source; IMF, International Financial Statistics; and IMF staff estimates.
EMEA
Latin America
12
Why the Slowdown?
Crisis of Confidence
Risks
Policies
Risks − Adverse Feedback Loops
Lower growth
Automatic
stabilizers
held back
Worsen
fiscal
balance
Lower bank
asset quality
Less bank
lending
Higher
guarantees
Fiscal
Sovereign
risks
increase
Financial
13
Risks − Adverse Feedback Loops
Lower growth
Automatic
stabilizers
held back
Worsen
fiscal
balance
Lower bank
asset quality
Less bank
lending
Higher
guarantees
Fiscal
Too
Too Loose
Tight
Sovereign
risks
increase
Financial
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
High unemployment with Limited Policy Space
Unemployment Rate (percent; weighted by labor force) 9.0
World
Advanced
Emerging
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
Aug-11
4.0
03
04
05
06
07
08
Source: IMF, Global Data Source.!
09
10
11
15
Declining Share of Labor in Income likely to Persist
85
80
75
Mean
75th Percentile
25th Percentile
85
80
75
Canada
France
Germany
Italy
Japan
United Kingdom
United States
70
70
65
65
60
60
55
1980 1985 1990 1995 2000 2005
55
1980 1985 1990 1995 2000 2005
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.
16
Against a Backdrop of High Income Inequality in Many
Countries
60
GINI Coefficient1,2
(Percent)
50
40
30
20
10
0
a
a
a
n
ia
ia
ne
ni
ni
ni
ta
at
er
a
a
ai
e
s
i
o
r
g
u
k
m
m
Al
Cr
th
Uk
Pa
Ar
Ro
Li
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.
a
vi
t
La
d
In
es
on
ia
Vi
m
na
t
e
M
a
r it
au
a
ni
D
o
j ib
i
ut
M
o
c
ro
co
a
a
a
es
el
in
ti n
in
u
h
n
z
p
C
p
ge
ne
ili
Ar
Ve
Ph
ru
Pe
a
ile
r ic
f
Ch
A
h
ut
o
S
17
Why the Slowdown?
Crisis of Confidence
Risks
Policies
Need for Collective Action
To Preserve Stability and Sustainable Global Growth
Restoring
Confidence
• Global economy entering a danger zone
• Decisive action needed to safeguard stability and prevent a
crisis from deepening
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
18
Restore Sound Public Finances
Sovereign
Balance Sheet
Repair
Principles
• Credible medium-term plans and frameworks
• No one-size-fits-all: size and speed of
adjustment varies
Achieving
Credibility
• Entitlement reforms necessary, not sufficient
• Well-designed rules and institutions key
• But no substitute for political will
Concretely
• For most, plans and frameworks help afford
greater flexibility through more “back-loaded”
timing
• For most, let automatic stabilizers operate
19
Monetary Policy
• Keep policy rates low (or lower if room allows and
risks warrant)
Advanced
Economies
• Deal with undesirable side effects through macroprudential policies
• Be ready to use unconventional measures (e.g., QE,
SMP)
Emerging
Market
Economies
• Tighten if needed, but be ready to shift • Complement with macro-prudential/capital flow
measures where needed
20
Better Target Financial and Structural Policies
Advanced
Economies
Private
Sector
Balance
Sheet Repair
U.S.
• Mortgage debt
Households
• Adequate capital buffers; sources: European
private/national/EFSF
Banks
• Restructure/resolve where necessary
Advanced
Economies
Better target
structural
reforms for
growth
U.S. and
Europe
• Tackle high unemployment
• Better align reform plans with OECD’s
priorities for growth
• Enhance supply potential
21
Better Target Financial and Structural Policies
Emerging
Market
Economies
Contain
Vulnerabiliti
es and
Enhance
Resilience
LowIncome
Countries
Remain
resilient and
supportive
of
sustainable
growth
Beyond
Fiscal and
Monetary
Policies
• Prudential (macro and micro)
• Structural financial reform
• Continue advancing structural reforms,
medium-term public investment
Macro and
frameworks
structural
policies
• Rebuild policy buffers mostly exhausted
in previous crisis
22
Tackling Global Imbalances
Global Growth and Stability
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
27!
23
Thank You