Transcript The Global Economic Outlook

The Global Economic Outlook
Carmen M. Reinhart
Deputy Director, Research Department
International Monetary Fund
October 24, 2002
After good performance over much of the 1990s,
World Real GDP Growth
percent, at market exchange rates
4
3.5
3
2.5
2
1.5
1
0.5
0
Global economic growth
slowed to stall speed in 2001
And the return to sustained
growth remains a forecast
Much of this depends on


1994 1996 1998 2000 2002
Source: IMF, WEO (9/02)
A revival in the performance
of the U.S. economy
Halting of the slide of key
industrial and emerging
market economies
Prospects for the U.S. economy
In response to dwindling economic slack,
The Federal Reserve began to tighten policy in May
1999

Ultimately raising the federal funds rate from 4-3/4 percent
to 6-1/2 percent by May 2000
In the event, this policy restraint was augmented by:




Elevated energy prices
Firms’ efforts to cope with excessive stocks of inventories
and capital
Drag on the manufacturing sector by the strong dollar
Negative wealth effect from the overall fall in equity prices
The result was the short recession of 2001 . . .
U.S. Real GDP
Q4:Q4 growth
Percent
8
6
4
2
0
1979
1982
1985
1988
1991
1994
1997
2000
Part of the reason was the speed and size of the
policy response
Nominal Effective Federal Funds Rate
Weekly
Percent
8
(1) The intended funds rate was
cut 4-3/4 percent in one year
7
(2) A tax cut came on line in the
summer of 2001
6
5
4
3
2
Jan
Apr
Jul
2000
Oct
Jan
Apr
Jul
2001
Oct
Jan
Apr
Jul
2002
Oct
Monetary policy ease has put the real funds rate at zero.
Real Federal Funds Rate
Quarterly Average, nominal less four-quarter PCE inflation
Percent
10
8
6
4
2
0
1978
1981
1984
1987
1990
1993
1996
1999
2002
. . . and fostered low mortgage rates.
Thirty-Year Fixed Rate Mortgage Rate
Quarterly
Percent
20
18
16
14
12
10
8
1979
1982
1985
1988
1991
1994
1997
2000
But there are risks to this outlook.
Most U.S. forecasts for 2002 have been marked
down – both consensus and WEO
5
(percent)
Dec/01
Apr/02
4
3
2
1
0
-1
+/ 2*SDADJ
+/ 1*SDADJ
Mean
-2
Jan
2001
WEO
Apr
Jul
Oct
Jan
2002
Apr
Jul
Oct
And 2003 looks more uncertain as well.
60 (percent of forecasters)
WEO
2.6%
50
Jun/02
40
30
Consensus Forecasts
Oct/02
20
10
0
1.25 1.75 2.25 2.75
3.25 3.75 4.25 4.75 5.25
GDP Growth (%)
Among the reasons there are risks to the U.S.
outlook are . . .
A rising unemployment rate
may make households less confident.
Unemployment Rate
Quarterly
Percent
12
10
8
6
4
1978
1981
1984
1987
1990
1993
1996
1999
2002
Equity prices have declined further . . .
Change in 2002
(percent):
S&P 500 Equity Price Index
S&P 500
Nasdaq
Quarterly
-25
-42
Level
Change from record
high (percent):
S&P 500
Nasdaq
1600
1400
-36
-77
1200
1000
800
600
400
200
1978
1981
1984
1987
1990
1993
1996
1999
2002
Investors are skittish . . .
Implied Volatility on the S&P 100
Percent, a.r.
Weekly
50
45
40
35
30
25
20
Jan
Apr
Jul
2000
Oct
Jan
Apr
Jul
2001
Oct
Jan
Apr
Jul
2002
Oct
. . . and risk spreads remain high.
Junk Bond Spread
Weekly
Percent
Risk spreads are particularly high for
weaker credits—both in markets and at
banks.
11
10
9
8
7
6
5
Jan
Apr
Jul
2000
Oct
Jan
Apr
Jul
2001
Oct
Jan
Apr
Jul
2002
Oct
Oil Prices are also high . . .
36
(US$ / barrel)
34
32
. . . but at least they are forecasted
to fall.
30
Oct.22/02
28
26
24
Apr.16/02
22
Aug. 8/02
20
18
2000
01
02
2003
In the WEO forecast, we’re less confident about
other major central banks
The Bank of Japan is constrained at the zero bound
to nominal interest rates and apparently has little
confidence in quantitative measures
The European Central Bank has been reluctant to
offset aggregate demand shocks in the past
This is a problem because there are significant
risks abroad that may require policy action.
Share prices have fallen in major equity markets
220
200
(log scale;
Jan.2/98=100)
Euro STOXX
180
160
140
120
S&P 500
100
80
1998
TOPIX
99
2000
01
02
Euro Area Confidence Indicators have weakened
108
(index; 1991=100)
(index; 1995=100)
EC Business
Sentiment Index
104
(right scale)
100
106
105
104
103
102
96
101
IFO Business
Confidence
92
100
(left scale)
99
88
98
84
97
98
99
00
01
02
In Japan, Industrial Production and Orders have cooled
3
2
(percent change from previous month;
Machine Tools Orders
Three-month moving average)
(right scale)
Industrial Production
(left scale)
1
9
6
3
0
0
-1
-3
-2
-6
-3
-9
98
99
00
01
02
Sluggish growth in industrial economies poses
problems for emerging market economies.
Exports of emerging economies are only now recovering
30 (percent change from a year earlier;
25 Three-month moving average)
20
15
Others
10
5
0
-5
-10
Latin America
-15
Asia
(ex. China and India)
-20
-25
98
99
00
01
02
… as is industrial production in emerging economies
15
(percent change from a year earlier;
Three-month moving average)
10
Others
5
0
Latin America
-5
Asia
(ex. China and India)
-10
-15
98
99
00
01
02
This tentative recovery is subject to significant
threats . . .
Argentina’s economy has imploded, affecting both
Uruguay and Brazil
The potential political transition in Brazil has
highlighted the precariousness of its debt situation
Less robust growth than expected in the United
States poses problems for Mexico
2002 GDP Growth Projections
8
6
(percent per annum)
Sep-02
Apr-02
The largest swing
in 2002 has been
for Latin America
4
2
0
Advanced
Economies
-2
Africa
Asia
Mid.East
& Turkey
Latin Cent.& East.
America
Europe
2003 GDP Growth Projections
8
(percent per annum)
Apr-02
And 2003
has been
marked
down too
6
Sep-02
4
2
0
Advanced
Economies
Africa
Asia
Mid.East
& Turkey
Latin Cent.& East.
America
Europe
Vulnerability of emerging market economies to
the U.S. cycle.
2. Capital flows to emerging markets depend on the
U.S. business cycle
Net Private Capital Flows
Western Hemisphere.
Middle East and Europe
Other Asian emerging
Asia-crisis
Africa
Total
-5
expansion
0
5
10
15
billions 1970 US$
recession
20
3. That sensitivity is greatest for FDI
Net Private Direct Investment
Western Hemisphere
Middle East and Europe
Other Asian emerging
Asia-crisis
Africa
Total
-2
expansion
0
2
4 6
8 10 12
billions 1970 US$
recession