WORLD ECONOMIC OUTLOOK April 2010 Rebalancing Growth International Monetary Fund World Economic and Financial Surveys ©2010 International Monetary Fund Production: IMF Multimedia Services Division Cover and Design: Luisa Menjivar and Jorge Salazar Composition: Maryland Composition Cataloging-in-Publication Data World economic outlook (International Monetary Fund) World economic outlook : a survey by the staff of the International Monetary Fund. — Washington, DC : International Monetary Fund, 1980– v. ; 28 cm. — (1981–1984: Occasional paper / International Monetary Fund, 0251-6365). — (1986– : World economic and financial surveys, 0256-6877) Semiannual. Has occasional updates, 1984– 1. Economic history, 1971–1990 — Periodicals. 2. Economic history, 1990– — Periodicals. I. International Monetary Fund. II. Series: Occasional paper (International Monetary Fund). III. Series: World economic and financial surveys. HC10.W7979 84-640155 338.5’443’09048—dc19 AACR2 MARC-S ISBN 978-1-58906-915-2 Please send orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431, U.S.A. Tel.: (202) 623-7430 Fax: (202) 623-7201 E-mail: publications@imf.org www.imfbookstore.org iii Assumptions and Conventions ix Preface xi Joint Foreword to World Economic Outlook and Global Financial Stability Report xii Executive Summary xiv Chapter 1. Global Prospects and Policies 1 Recovery Is Stronger than Expected, but Speed Varies 1 Financial Conditions Are Easing, but Not for All Sectors 3 Capital Is Again Flowing to Emerging Economies 4 Policy Support Has Been Essential in Fostering Recovery 5 Multispeed Recovery to Continue during 2010–11 6 Infl ation Pressures Are Generally Subdued but Diverge 9 Important Risks Remain amid Sharply Diminished Room for Policy Maneuvers 11 Policies Need to Sustain and Strengthen Recovery 13 Global Demand Rebalancing: e Role of Credibility and Policy Coordination 25 Appendix 1.1. Commodity Market Developments and Prospects 27 References 41 Chapter 2. Country and Regional Perspectives 43 A Stimulus-Driven U.S. Recovery Is under Way 43 Asia Is Staging a Vigorous and Balanced Recovery 47 Europe Is Facing an Uneven Recovery and Complex Policy Challenges 52 e CIS Economies Are Recovering at a Moderate Pace 57 Latin America and the Caribbean Are Recovering at a Robust Pace 59 e Middle East and North Africa Region Is Recovering at a Good Pace 62 Africa Is Coming through the Crisis Well 64 Chapter 3. Unemployment Dynamics during Recessions and Recoveries: Okun’s Law and Beyond 69 Broad Labor Market Dynamics during the Great Recession 71 Using Okun’s Law as a Framework 72 Step 1: Okun’s Law across Countries and over Time 81 Step 2: Analyzing Unemployment Rate “Forecast Errors” 83 e Key Issues: Drivers of Great Recession Dynamics and Recovery Prospects 86 Conclusions and Implications for the Recovery 98 Appendix 3.1. Data Sources and Construction 99 Appendix 3.2. Methodological Details 100 Appendix 3.3. Analysis on Dynamic Betas Derived from the Employment Version of Okun’s Law 103 Appendix 3.4. Regression Results Using Employment Forecast Errors and a Static Okun’s Law Specifi cation 104 CONTENTS CONTENTS iv Appendix 3.5. Vector Autoregression Forecasting Methodology 106 References 107 Chapter 4. Getting the Balance Right: Transitioning out of Sustained Current Account Surpluses 109 Surplus Reversals: Defi nition and Anatomy 110 Are Policy-Driven Surplus Reversals Detrimental to Growth? 114 Surplus Reversals: Case Studies 120 Lessons for Economies Considering a Transition out of External Surpluses 133 Appendix 4.1. Sample for Analysis and Data Sources 134 Appendix 4.2. Scoring Method Used to Group Economies 135 References 135 Annex: IMF Executive Board Discussion of the Outlook, April 2010 139 Statistical Appendix 141 Assumptions 141 What’s New 141 Data and Conventions 146 Classifi cation of Countries 147 General Features and Composition of Groups in the World Economic Outlook Classifi cation 147 List of Tables 153 Output (Tables A1–A4) 155 Infl ation (Tables A5–A7) 163 Financial Policies (Table A8) 169 Foreign Trade (Table A9) 170 Current Account Transactions (Tables A10–A12) 172 Balance of Payments and External Financing (Tables A13–A15) 178 Flow of Funds (Table A16) 182 Medium-Term Baseline Scenario (Table A17) 186 World Economic Outlook, Selected Topics 187 Boxes Box 1.1. Lessons from the Crisis: On the Choice of Exchange Rate Regime 14 Box 1.2. How Unusual Is the Current Commodity Price Recovery? 31 Box 1.3. Commodity Futures Price Curves and Cyclical Market Adjustment 34 Box 3.1. e Dualism between Temporary and Permanent Contracts: Measures, Eff ects, and Policy Issues 76 Box 3.2. Short-Time Work Programs 89 Box 4.1. Japan after the Plaza Accord 127 Box 4.2. Taiwan Province of China in the Late 1980s 132 A1. Economic Policy Assumptions Underlying the Projections for Selected Economies 142 Tables Table 1.1. Overview of the World Economic Outlook Projections 2 Table 1.2. Commodity Real Price Developments 30 CONTENTS v Table 1.3. Global Oil Demand and Production by Region 38 Table 2.1. Selected Advanced Economies: Real GDP, Consumer Prices, and Current Account Balance 47 Table 2.2. Advanced Economies: Unemployment 48 Table 2.3. Selected Asian Economies: Real GDP, Consumer Prices, and Current Account Balance 50 Table 2.4. Selected European Economies: Real GDP, Consumer Prices, and Current Account Balance 55 Table 2.5. Commonwealth of Independent States: Real GDP, Consumer Prices, and Current Account Balance 57 Table 2.6. Selected Western Hemisphere Economies: Real GDP, Consumer Prices, and Current Account Balance 61 Table 2.7. Selected Middle East and North African Economies: Real GDP, Consumer Prices, and Current Account Balance 65 Table 2.8. Selected Sub-Saharan African Economies: Real GDP, Consumer Prices, and Current Account Balance 67 Table 3.1. Factors Infl uencing the Responsiveness of Changes in Unemployment to Changes in Output 83 Table 3.2. Unemployment Forecast Errors during Recessions 85 Table 3.3. Unemployment Forecast Errors during Recoveries 85 Table 3.4. Data Sources 99 Table 3.5. Okun’s Law Lag Lengths (Great Recession) 102 Table 3.6. Factors Infl uencing the Responsiveness of Changes in Employment to Changes in Output 103 Table 3.7. Employment Forecast Errors during Recessions 104 Table 3.8. Employment Forecast Errors during Recoveries 105 Table 3.9. Regressions Using Forecast Errors Based on the Static Version of Okun’s Law 105 Table 4.1. Decomposition of Current Account Surplus Reversals 113 Table 4.2. Exchange Rate Developments during Current Account Surplus Reversals 113 Table 4.3. Structural Reallocation during Current Account Surplus Reversals 118 Table 4.4. Estimation Results: Change in Growth after Current Account Surplus Reversals 119 Table 4.5. Historical Current Account Surplus Reversal Episodes: Relevance for Today’s Current Account Surplus Economies 121 Table 4.6. Case Studies: Policies Used during Current Account Surplus Reversals 125 Table 4.7. Case Studies: Key Indicators after Current Account Surplus Reversals 130 Table 4.8. Sample for Analysis and Current Surplus Episodes 134 Table 4.9. Data Sources 135 Figures Figure 1.1. Current and Forward-Looking Indicators 3 Figure 1.2. Global Indicators 4 Figure 1.3. Developments in Mature Credit Markets 5 Figure 1.4. Emerging Market Conditions 6 Figure 1.5. External Developments 7 Figure 1.6. Global Imbalances 8 Figure 1.7. General Government Fiscal Balances and Public Debt 9 Figure 1.8. Measures of Monetary Policy and Liquidity in Selected Advanced Economies 10 CONTENTS vi Figure 1.9. Prospects for Near-Term Activity 11 Figure 1.10. Emerging Economies: GDP Growth by Recession Episode 12 Figure 1.11. Global Outlook 13 Figure 1.12. Global Infl ation 17 Figure 1.13. Infl ation, Defl ation Risk, and Unemployment 18 Figure 1.14. Risks to the Global Outlook 19 Figure 1.15. Downside Scenario: A Loss of Momentum 20 Figure 1.16. Medium-Term Growth Prospects and Precrisis Currency Valuations 25 Figure 1.17a. Fiscal Consolidation Packages Designed to Raise Potential Output Diff erent Assumptions about Credibility 27 Figure 1.17b. Scenarios Designed to Raise Potential Output and Reduce Government Defi cits 28 Figure 1.18. Commodity and Petroleum Prices 29 Figure 1.19. World Energy Market Developments 37 Figure 1.20. Developments in Metal Markets 39 Figure 1.21. Recent Developments in Markets for Major Food Crops 40 Figure 2.1. Average Projected Real GDP Growth during 2010–11 44 Figure 2.2. Decomposing the Variation in 2010–11 Growth Projections 45 Figure 2.3. United States: A Stimulus-Supported Recovery 46 Figure 2.4. Asia: Average Projected Real GDP Growth during 2010–11 49 Figure 2.5. Asia: A Vigorous and Balanced Rebound 51 Figure 2.6. Europe: Average Projected Real GDP Growth during 2010–11 53 Figure 2.7. Europe: A Moderate Recovery Held Back by Fiscal and External Imbalances 54 Figure 2.8. Commonwealth of Independent States: Average Projected Real GDP Growth during 2010–11 56 Figure 2.9. Commonwealth of Independent States: A Modest Recovery Ahead 58 Figure 2.10. Latin America and the Caribbean: Average Projected Real GDP Growth during 2010–11 60 Figure 2.11. Latin America and the Caribbean: A Robust Recovery 62 Figure 2.12. Middle East and North Africa: Average Projected Real GDP Growth during 2010–11 63 Figure 2.13. Middle East and North Africa: Growing out of Its Downturn 64 Figure 2.14. Sub-Saharan Africa: Average Projected Real GDP Growth during 2010–11 66 Figure 2.15. Sub-Saharan Africa: Rebounding Strongly 68 Figure 3.1. Change in Unemployment Rates and Output Declines during the Great Recession 70 Figure 3.2. Broad Measures of Unemployment 71 Figure 3.3. Evolution of Employment, Unemployment, and Labor Participation 72 Figure 3.4. Labor Dynamics in the United States, Germany, and Japan 73 Figure 3.5. Relationship between Unemployment and Output over Time 74 Figure 3.6. Output per Capita and Employment Rate Responses during Past Recessions 81 Figure 3.7. Dynamic Betas: e Long-Term Impact of Output Fluctuations on Unemployment Rate Dynamics 82 Figure 3.8. Decomposition of the Actual Change in the Unemployment Rate during the Great Recession 87 Figure 3.9. Decomposition of the Cumulative Change in the Unemployment Rate during the Great Recession 88 Figure 3.10. How Long before Employment Recovers? 94 Figure 3.11. Forecasts of Employment, Unemployment Rate, and GDP for Advanced Economies, Based on Okun’s Law 95 Figure 3.12. Dispersion of GDP Consensus Forecasts 96 CONTENTS vii Figure 3.13. Forecasts of Employment, Unemployment Rate, and GDP for Advanced Economies, Based on Vector Autoregression 106 Figure 4.1. Global Imbalances 110 Figure 4.2. Methodology Example (Korea 1989) 111 Figure 4.3. Output and Employment Growth during Surplus Reversals 115 Figure 4.4. Change in Growth after Surplus Reversals 116 Figure 4.5. Contributions to Growth 117 Figure 4.6. Case Studies: Pretransition Initial Conditions 122, 123 Figure 4.7. Case Studies: Posttransition Implications 129 Figure 4.8. Japan at the End of Bretton Woods 131 ix A number of assumptions have been adopted for the projections presented in the World Economic Outlook. It has been assumed that real eff ective exchange rates remained constant at their average levels during Febru- ary 23–March 23, 2010, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that estab- lished policies of national authorities will be maintained (for specifi c assumptions about fi scal and monetary policies for selected economies, see Box A1); that the average price of oil will be $80.00 a barrel in 2010 and $83.00 a barrel in 2011 and will remain unchanged in real terms over the medium term; that the six-month London interbank off ered rate (LIBOR) on U.S. dollar deposits will average 0.5 percent in 2010 and 1.7 percent in 2011; that the three-month euro deposit rate will average 0.9 percent in 2010 and 1.6 percent in 2011; and that the six-month Japanese yen deposit rate will yield on average 0.6 percent in 2010 and 0.7 per- cent in 2011. ese are, of course, working hypotheses rather than forecasts, and the uncertainties surround- ing them add to the margin of error that would in any event be involved in the projections. e estimates and projections are based on statistical information available through mid-April 2010. e following conventions are used throughout the World Economic Outlook: . . . to indicate that data are not available or not applicable; – between years or months (for example, 2008–09 or January–June) to indicate the years or months covered, including the beginning and ending years or months; / between years or months (for example, 2008/09) to indicate a fi scal or fi nancial year. “Billion” means a thousand million; “trillion” means a thousand billion. “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point). In fi gures and tables, shaded areas indicate IMF staff projections. If no source is listed on tables and fi gures, data are drawn from the World Economic Outlook (WEO) database. When countries are not listed alphabetically, they are ordered on the basis of economic size. Minor discrepancies between sums of constituent fi gures and totals shown refl ect rounding. As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis. e boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorse- ment or acceptance of such boundaries. ASSUMPTIONS AND CONVENTIONS x FURTHER INFORMATION AND DATA x is version of the World Economic Outlook is available in full on the IMF’s website, www.imf.org. Accom- panying it on the website is a larger compilation of data from the WEO database than is included in the report itself, including fi les containing the series most frequently requested by readers. ese fi les may be downloaded for use in a variety of software packages. Inquiries about the content of the World Economic Outlook and the WEO database should be sent by mail, forum, or fax (telephone inquiries cannot be accepted) to World Economic Studies Division Research Department International Monetary Fund 700 19th Street, N.W. Washington, D.C. 20431, U.S.A. Forum address: www.imf.org/weoforum Fax: (202) 623-6343 FURTHER INFORMATION AND DATA [...]... 1. 4 –3 .1 1. 2 3.2 6 .1 5.2 1. 9 –3.8 8.6 10 .7 6.0 5.0 4.3 –2.4 2 010 3.9 2.2 2.8 1. 2 1. 2 1. 5 1. 4 –0 .1 1.6 2.3 3.4 2.8 3.4 6.3 1. 3 1. 7 8.9 9.4 10 .9 4.2 4.2 2.3 2 011 4.5 2.5 2.4 1. 8 2 .1 1.9 1. 3 1. 8 2.3 2.6 3.3 4.4 5.9 7.3 4 .1 4.2 9 .1 10 .1 8.2 6.2 4.2 5.5 0.9 1. 8 2.8 –4 .1 –2.0 10 .7 1. 0 3.2 7.0 1. 8 3.4 6 .1 0.0 0.2 1. 2 –0 .1 0.0 –0.2 –2.2 1. 3 2.0 0.6 8.5 12 .0 –8.4 5.4 9.7 4.6 8.2 –0 .1 3.2... January 2 010 WEO Projections Estimates Q4 over Q4 Projections 2008 3.0 0.5 0.4 0.6 1. 2 0.3 1. 3 0.9 1. 2 0.5 0.4 1. 7 1. 8 6 .1 3.0 5.5 5.6 5.3 7.9 9.6 7.3 4.7 5 .1 5.5 4.3 5 .1 1.5 2009 –0.6 –3.2 –2.4 –4 .1 –5.0 –2.2 –5.0 –3.6 –5.2 –4.9 –2.6 1. 1 –0.9 2.4 –3.7 –6.6 –7.9 –3.5 6.6 8.7 5.7 1. 7 2.4 2 .1 1. 8 –0.2 –6.5 2 010 4.2 2.3 3 .1 1.0 1. 2 1. 5 0.8 –0.4 1. 9 1. 3 3 .1 3.7 5.2 6.3 2.8 4.0 4.0 3.9 8.7 10 .0 8.8 5.4... 4.2 2 011 4.3 2.4 2.6 1. 5 1. 7 1. 8 1. 2 0.9 2.0 2.5 3.2 3.9 4.9 6.5 3.4 3.6 3.3 4.5 8.7 9.9 8.4 5.6 4.8 5.9 4.0 4 .1 4.5 2 010 0.3 0.2 0.4 0.0 –0.3 0 .1 –0.2 0.2 0.2 0.0 0.5 0.4 0.4 0.3 0.8 0.2 0.4 –0.4 0.3 0.0 1. 1 0.7 0.0 0.4 0.3 0.8 0.2 2 011 0.0 0.0 0.2 –0 .1 –0.2 0 .1 –0 .1 0.0 –0.2 –0.2 –0.4 0.3 0.2 0.2 –0.3 –0.4 –0 .1 –0.6 0.3 0.2 0.6 0.3 0 .1 0.4 0.2 0.4 –0.2 2009 1. 7 –0.5 0 .1 –2.2 –2.4 –0.3 –3.0 –3 .1 1. 4... 1. 3 2.0 0.6 8.5 12 .0 –8.4 5.4 9.7 4.6 8.2 –0 .1 3.2 –0.9 0.5 1. 9 4.0 11 .7 –8.2 6.6 8.3 5.0 8.4 0.7 2.9 –0.6 0.6 36.4 –36.3 29.5 3.8 6.9 –4 .1 7.5 18 .7 13 .9 –0.5 8 .1 2 .1 3.4 9.2 0 .1 5.2 1. 5 6.2 1. 4 4.7 0.2 0.0 –0 .1 0 .1 0.8 4.9 1. 3 5.8 1. 6 4.0 3.0 4.6 1. 0 1. 1 1. 2 0.7 0.5 0.9 0.6 1. 7 1. 6 0.7 –0.2 –0.4 0.0 –0 .1 –0.7 0.0 Note: Real effective exchange rates are assumed to... (2009:Q4 GDP in percent of 2008:Q2 GDP) 10 Real GDP Growth Emerging and developing economies 8 World 6 11 5 11 0 4 10 5 2 10 0 0 10 15 Contribution to Global GDP 8 Growth, PPP Basis (percent, three-year moving 6 averages) Africa and Middle East 2000 CEE and CIS 2 90 Latin America 80 Advanced economies Emerging Asia -4 19 70 95 Advanced economies -2 Real Commodity Prices (19 95 = 10 0) 90 Capital Is Again Flowing... 07 -20 -30 Feb 10 08 Retail Sales 36 Emerging Emerging Asia economies3 2 18 World 0 Advanced economies 4 -2 2005 06 07 0 Feb 10 Manufacturing Purchasing 65 Managers’ Index (index) Emerging 60 economies3 08 2005 55 06 07 -9 08 16 0 0 Euro area (right scale) 60 35 40 30 20 2000 02 04 -15 80 40 06 08 Mar 10 -5 -10 10 0 Advanced economies 4 -18 5 12 0 50 Feb 10 Consumer Confidence 18 0 (index) 14 0 45 9 Advanced... the financial and real estate crises 1 Bank loans to nonfinancial corporations in the euro area are four to five times larger than bonds issued by these corporations; in the United States, bonds are a more important source of corporate funding International Monetary Fund | April 2 010 1 WORLD ECONOMIC OUTLOOK: REBALANCING GROWTH Table 1. 1 Overview of the World Economic Outlook Projections (Percent change,... International Monetary Fund | April 2 010 3 WORLD ECONOMIC OUTLOOK: REBALANCING GROWTH Figure 1. 2 Global Indicators1 (Annual percent change unless noted otherwise) Real GDP growth picked up starting in 2009:Q2 However, output in most regions of the world remains below or around precrisis levels The exception is emerging Asia, which accounts for a growing share of world activity Commodity prices have... potential growth Industrial confidence has returned to precrisis levels, but household confidence in advanced economies continues to lag, reflecting subdued employment 40 World Trade 30 20 10 0 -10 2 -20 Trade value CPB trade volume index -30 -40 -50 -60 -70 08 Jan 2000 02 04 06 10 6 Employment Emerging economies3 4 World Industrial Production Emerging Asia 30 20 10 0 Emerging World economies3 -10 Advanced... Multispeed Recovery Will Continue The world economy is poised for further recovery but at varying speeds across and within regions Global growth is projected to reach 4¼ percent in 2 010 and 2 011 Advanced economies are now EXECUTIVE SUMMARY expected to expand by 2¼ percent in 2 010 , and by 2½ percent in 2 011 , following a decline in output of more than 3 percent in 2009 Growth in emerging and developing economies . 3 .1 2.6 0.4 0.2 0 .1 2.8 2.4 Euro Area 0.6 –4 .1 1.0 1. 5 0.0 –0 .1 –2.2 1. 2 1. 8 Germany 1. 2 –5.0 1. 2 1. 7 –0.3 –0.2 –2.4 1. 2 2 .1 France 0.3 –2.2 1. 5 1. 8 0 .1 0 .1 –0.3 1. 5 1. 9 Italy 1. 3 –5.0 0.8 1. 2. Economies 10 CONTENTS vi Figure 1. 9. Prospects for Near-Term Activity 11 Figure 1. 10. Emerging Economies: GDP Growth by Recession Episode 12 Figure 1. 11. Global Outlook 13 Figure 1. 12. Global. ation 17 Figure 1. 13. Infl ation, Defl ation Risk, and Unemployment 18 Figure 1. 14. Risks to the Global Outlook 19 Figure 1. 15. Downside Scenario: A Loss of Momentum 20 Figure 1. 16. Medium-Term Growth