Wor l d Eco no mic a nd F i na nci a l S ur v e y s World Economic Outlook Crisis and Recovery APR 09 World Economic and Financial Surveys WORLD ECONOMIC OUTLOOK April 2009 Crisis and Recovery International Monetary Fund ©2009 International Monetary Fund Production: IMF Multimedia Services Division Cover and Design: Luisa Menjivar and Jorge Salazar Composition: Julio Prego 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– Economic history, 1971–1990 — Periodicals 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 978-1-58906-806-3 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 Telefax: (202) 623-7201 E-mail: publications@imf.org Internet: www.imfbookstore.org CONTENTS Assumptions and Conventions ix Preface xi Joint Foreword to World Economic Outlook and Global Financial Stability Report xii Executive Summary xv Chapter Global Prospects and Policies How Did Things Get So Bad, So Fast? Short-Term Prospects Are Precarious Medium-Term Prospects beyond the Crisis Policies to End the Crisis while Paving the Way to Sustained Recovery Appendix 1.1 Commodity Market Developments and Prospects Appendix 1.2 Fan Chart for Global Growth Appendix 1.3 Assumptions behind the Downside Scenario References Chapter Country and Regional Perspectives The United States Is Grappling with the Financial Core of the Crisis Asia Is Struggling to Rebalance Growth from External to Domestic Sources Europe Is Searching for a Coherent Policy Response The CIS Economies Are Suffering a Triple Blow Other Advanced Economies Are Dealing with Adverse Terms-of-Trade Shocks Latin America and the Caribbean Face Growing Pressures Middle Eastern Economies Are Buffering Global Shocks Hard-Won Economic Gains in Africa Are Being Threatened References Chapter From Recession to Recovery: How Soon and How Strong? Business Cycles in the Advanced Economies Does the Cause of a Downturn Affect the Shape of the Cycle? Can Policies Play a Useful Countercyclical Role? Lessons for the Current Recession and Prospects for Recovery Appendix 3.1 Data Sources and Methodologies References 27 32 44 55 58 60 63 63 71 75 84 86 87 91 93 95 97 98 106 113 123 126 130 iii CONTENTS Chapter How Linkages Fuel the Fire: The Transmission of Financial Stress from Advanced to Emerging Economies Measuring Financial Stress Links between Advanced and Emerging Economies The Transmission of Financial Stress: An Overall Analysis Lessons from Previous Advanced Economy Banking Crises Implications for the Current Crisis Which Policies Can Help? Appendix 4.1 A Financial Stress Index for Emerging Economies Appendix 4.2 Financial Stress in Emerging Economies: Econometric Analysis References 133 136 141 147 155 157 159 160 162 166 Annex: IMF Executive Board Discussion of the Outlook, April 2009 171 Statistical Appendix 175 Assumptions What’s New Data and Conventions Classification of Countries General Features and Composition of Groups in the World Economic Outlook Classification List of Tables Output (Tables A1–A4) Inflation (Tables A5–A7) Financial Policies (Table A8) Foreign Trade (Table A9) Current Account Transactions (Tables A10–A12) Balance of Payments and External Financing (Tables A13–A15) Flow of Funds (Table A16) Medium-Term Baseline Scenario (Table A17) World Economic Outlook, Selected Topics 175 180 180 182 184 189 197 203 204 206 212 216 220 221 Boxes 1.1 Global Business Cycles 1.2 How Vulnerable Are Nonfinancial Firms? 1.3 Assessing Deflation Risks in the G3 Economies 1.4 Global Imbalances and the Financial Crisis 1.5 Will Commodity Prices Rise Again when the Global Economy Recovers? 2.1 The Case of Vanishing Household Wealth 2.2 Vulnerabilities in Emerging Economies 3.1 How Similar Is the Current Crisis to the Great Depression? 3.2 Is Credit a Vital Ingredient for Recovery? Evidence from Industry-Level Data 4.1 Impact of Foreign Bank Ownership during Home-Grown Crises A1 Economic Policy Assumptions Underlying the Projections for Selected Economies iv 11 20 24 34 47 66 79 99 115 158 176 CONTENTS Tables 1.1 Overview of the World Economic Outlook Projections 1.2 Comparison of Commodity Price Volatility 1.3 Global Oil Demand and Production by Region 1.4 Underlying World Merchandise Trade Flows 1.5 Factors Explaining the Additional Decline in Output Growth for 2009–10 2.1 Advanced Economies: Real GDP, Consumer Prices, and Unemployment 2.2 Selected Asian Economies: Real GDP, Consumer Prices, and Current Account Balance 2.3 Advanced Economies: Current Account Positions 2.4 Selected Emerging European Economies: Real GDP, Consumer Prices, and Current Account Balance 2.5 Selected Commonwealth of Independent States Economies: Real GDP, Consumer Prices, and Current Account Balance 2.6 Selected Western Hemisphere Economies: Real GDP, Consumer Prices, and Current Account Balance 2.7 Selected Middle Eastern Economies: Real GDP, Consumer Prices, and Current Account Balance 2.8 Selected African Economies: Real GDP, Consumer Prices, and Current Account Balance 3.1 Business Cycles in the Industrial Countries: Summary Statistics 3.2 Financial Crises and Associated Recessions 3.3 Impact of Policies on the Probability of Exiting a Recession 3.4 Impact of Policies on the Strength of Recoveries 3.5 Results from Categorizing Recessions 3.6 Financial Crises and Deregulation in the Mortgage Market 3.7 Impact of Policies on the Strength of Recoveries Using an Alternative Measure of Fiscal Policy 4.1 Episodes of Widespread Financial Stress in Advanced Economies 4.2 The Role of Linkages as Determinants of Comovement 4.3 Emerging Economy Stress: Country-Specific Effects 4.4 Emerging Economy Stress: Determinants of Common Time Trend 4.5 Emerging Economy Stress: Country-Specific Effects and Interactions with Stress in Advanced Economies 10 46 53 59 59 65 73 74 78 86 90 92 94 105 107 123 124 128 129 130 138 152 153 163 166 Figures 1.1 Global Indicators 1.2 Developments in Mature Credit Markets 1.3 Emerging Market Conditions 1.4 Current and Forward-Looking Indicators 1.5 Global Inflation 1.6 External Developments 1.7 Measures of Monetary Policy and Liquidity in Selected Advanced Economies 1.8 Global Outlook 1.9 Potential Growth and the Output Gap 1.10 Risks to World GDP Growth 1.11 Housing Developments 1.12 Downside Scenario 15 16 17 18 27 v CONTENTS 1.13 Net Capital Flows to Emerging and Developing Economies 1.14 General Government Fiscal Balances and Public Debt 1.15 Global Saving, Investment, and Current Accounts 1.16 Alternative Medium-Term Scenarios 1.17 Commodity and Petroleum Prices 1.18 World Oil Market Developments 1.19 Developments in Metal and Energy Markets 1.20 Recent Developments in Markets for Major Food Crops 1.21 Dispersion of Forecasts and Selected Risk Factors 1.22 Balance of Risks Associated with Selected Risk Factors 2.1 United States: The Center of the Crisis 2.2 Advanced and Emerging Asia: Suffering from the Collapse of Global Trade 2.3 Europe: Developing a Common Response 2.4 Europe: Subdued Medium-Run Growth Prospects 2.5 Commonwealth of Independent States: Struggling with Capital Outflows 2.6 Canada, Australia, and New Zealand: Dealing with Terms-of-Trade Shocks 2.7 Latin America: Pressures Are Growing 2.8 Middle East: Coping with Lower Oil Prices 2.9 Africa: Hard-Won Gains at Risk 3.1 Business Cycle Peaks and Troughs 3.2 Business Cycles Have Moderated over Time 3.3 Temporal Evolution of Recessions by Shock 3.4 Average Statistics for Recessions and Recoveries 3.5 Expansions in the Run-Up to Recessions Associated with Financial Crises and Other Shocks 3.6 House Price-to-Rental Ratios for Recessions Associated with Financial Crises and Other Shocks 3.7 Household Saving Rate and Net Lending before and after Business Cycle Peaks 3.8 Recessions and Recoveries Associated with Financial Crises and Other Shocks 3.9 Highly Synchronized Recessions 3.10 Are Highly Synchronized Recessions Different? 3.11 Average Policy Response during a Recession 3.12 Impact of Policies during Financial Crisis Episodes 3.13 Effect of Policy Variables on the Strength of Recovery 3.14 Relationship between the Impact of Fiscal Policy on the Strength of Recovery and Debt-to-GDP Ratio 3.15 Economic Indicators around Peaks of Current and Previous Recessions 4.1 Indicators of Financial Stress in Emerging Economies 4.2 Capital Flows to Emerging Economies 4.3 Sudden Stops and Activity 4.4 Financial Stress in Advanced Economies 4.5 Financial Stress Indices in Emerging Economies 4.6 Financial Stress in Emerging and Advanced Economies 4.7 The Transmission of Stress: Schematic Depiction of Effects 4.8 Financial Integration of Emerging and Developing Economies 4.9 Financial Exposures of Emerging to Advanced Economies 4.10 Financial Linkages between Advanced and Emerging Economies vi 29 30 31 33 45 52 54 55 58 60 64 72 76 77 85 88 89 91 93 104 104 107 108 109 110 111 112 113 114 119 120 121 122 125 134 135 136 137 141 142 143 144 146 147 CONTENTS 4.11 Vulnerability Indicators by Region, 1990–2007 4.12 Comovement in Financial Stress between Emerging and Advanced Economies 4.13 Explaining Financial Stress in Emerging Economies 4.14 Impact of the Latin American Debt Crisis on Banking Liabilities 4.15 Impact of the Japanese Banking Crisis on Bank Lending 4.16 Exposure to Bank-Lending Liabilities and Twin Deficits in Emerging Economies, 2002–06 4.17 Emerging Economy Stress: Common Time Component and Stress in Advanced Economies 148 150 154 156 157 159 162 vii ASSUMPTIONS AND CONVENTIONS A number of assumptions have been adopted for the projections presented in the World Economic Outlook It has been assumed that real effective exchange rates remain constant at their average levels during February 25–March 25, 2009, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to remain constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1); that the average price of oil will be $52.00 a barrel in 2009 and $62.50 a barrel in 2010, and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S dollar deposits will average 1.5 percent in 2009 and 1.4 percent in 2010; that the three-month euro deposit rate will average 1.6 percent in 2009 and 2.0 percent in 2010; and that the six-month Japanese yen deposit rate will yield an average of 1.0 percent in 2009 and 0.5 percent in 2010 These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error in the projections The estimates and projections are based on statistical information available through mid-April 2009 The 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, 2006–07 or January–June) to indicate the years or months covered, including the beginning and ending years or months; / between years or months (for example, 2006/07) to indicate a fiscal or financial year “Billion” means a thousand million; “trillion” means a thousand billion “Basis points” refer to hundredths of percentage point (for example, 25 basis points are equivalent to ¼ of percentage point) In figures and tables, shaded areas indicate IMF staff projections If no source is listed on tables and figures, 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 figures and totals shown reflect rounding As used in this report, the term “country” does 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 ix .. .World Economic and Financial Surveys WORLD ECONOMIC OUTLOOK April 2009 Crisis and Recovery International Monetary Fund ©2009 International... Monetary Fund, 0251-6365) — (1986– : World economic and financial surveys, 0256-6877) Semiannual Has occasional updates, 1984– Economic history, 1971–1990 — Periodicals Economic history, 1990– — Periodicals... up efforts to heal the financial sector, while continuing to support demand with monetary and fiscal easing Recent Economic and Financial Developments Economies around the world have been seriously