Transcript Slide 1

World Economic and Market Developments
Olivier Blanchard
Economic Counsellor
Research Department
September 16, 2009
Will the Recovery be Sustained?

Where we are now. The nascent recovery.

What does a “typical” recovery look like?

How can the global recovery be sustained?


Problems on the supply side. Level and growth of
potential output.
Problems on the demand side. The two rebalancing
acts.
2
3
1. Where We Are
Recovery is Gaining Momentum, Particularly in Asia
4
5
Improving Confidence Now Seen in Real Activity
Real GDP Growth
(in percent; qoq; saar)
12
10
8
World
Emerging
6
4
2
0
-2
Advanced
-4
-6
09Q2
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
-8
-10
Jun-09
Exports and Manufacturing Helped by a Turn
in the Inventory Cycle
Merchandise Exports
(percent change; 3mma; annualized)
60
6
Industrial Production
(percent change; 3mma; annualized)
20
Emerging
Emerging
World
40
10
20
0
0
World
Advanced
-10
-20
-20
-40
Advanced
-60
Jul. 09
-80
Jan-07
Jan-08
Jan-09
-30
Jul. 09
Jan-07
Jan-08
Jan-09
-40
Consumer Confidence Slowly Recovering, but
Unemployment Still Rising
Consumer Confidence
7
Unemployment
(January 2005=100)
(percent change; weighted by labor force)
200
8.5
180
8.0
Advanced
160
7.5
140
120
7.0
World
100
6.5
80
60
U.S. (Conf. Board)
Japan (Econ. Soc. Res. Inst.)
40
U.K. (Building Society)
20
0
Emerging
6.0
5.5
Germany (Eur. Comm.)
05
06
07
08
Aug. 09
09
Jul. 09
5.0
05
06
07
08
09
8
Credit Market Stress is Continuing to Ease
Three-month Libor – OIS Spreads
(basis points)
Corporate Spreads
(basis points)
2500
400
350
U.S. dollar
U.S. High Grade
U.S. High Yield
Europe High Grade
Europe High Yield
Sterling
300
Swiss franc
Euro area
2000
250
1500
200
1000
150
100
500
50
9/15
0
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09
9/14
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09
0
9
Financial Market Conditions are Improving and
Risk Appetite is Returning
Asset Class Performance
Implied Volatility
110
(percent)
90
(September 1, 2008 = 100)
35
100
80
30
70
90
25
60
50
20
40
15
30
10
80
70
60
20
5
10
0
Sep-08
Dec-08
Mar-09
Jun-09
0
Sep-09
S&P 500 equity index
U.S. dollar/ Euro exchange rate (RHS)
50
40
Sep-08
Dec-08
Mar-09
Jun-09
GSI Commodity Price Index
MSCI Emerging Market Equities
MSCI Mature Market Equities
Sep-09
Emerging Market Issuance is Up,
but Not (yet?) Bank Flows
Emerging Market External Bond
and Equity Issuance
10
BIS Banks: External Claims
(percent change, exchange rate adjusted)
(billions of U.S. dollars)
Middle East/Africa
140
20
Europe
15
Latin America
120
Asia
10
100
5
80
0
60
-5
40
Asia
EMEA
-10
20
Latin America
Advanced
-15
EM
Q109
Q408
Q308
Q208
Q108
Q407
Q307
Q207
Q107
Q406
Q306
Q206
Q209
Q109
Q408
Q308
Q208
Q108
Q407
Q307
Q207
Q107
Q406
Q306
Q206
Q106
Q106
-20
0
11
2. What a Normal Recovery Looks Like

Looking at previous U.S. recoveries





The role of inventory investment at the start
The role of private demand later
Looking at the current recovery
Inventory investment, fiscal policy
Will private demand take the baton?
Following the 1991 Recession
12
U.S. GDP Growth Contributions 1/
(in percent; qoq saar)
7
6
Net Exports
5
Change in Private Inventories
4
Real GDP
Government Expenditure
Private Fixed Investment
Personal Consumption
3
2
1
0
-1
-2
-3
91Q2
91Q3
91Q4
1/ For the seven quarters following the trough.
92Q1
92Q2
92Q3
92Q4
Current Forecast for the U.S. Recovery
13
U.S. GDP Growth Contributions 1/
(in percent; qoq saar)
5
4
Real GDP
3
2
1
0
-1
Net Exports
-2
Government Expenditure
-3
Change in Private Inventories
-4
Private Fixed Investment
Personal Consumption
-5
09Q2
09Q3
09Q4
1/ For the seven quarters following the trough.
10Q1
10Q2
10Q3
10Q4
14
3. The Supply Side. How Much Has
Potential Output Gone Down?

Evidence from 88 banking crises
Following Banking Crises, Output Losses are
Significant and Sustained
Output Losses
(per capital GDP; percent deviation from pre-crisis trend)
10
0
-10
-20
-30
-1
0
1
2
3
4
5
6
7
Figure reports mean difference from pre-crisis trend (over t-10 to t-3); t=-1 normalized to 0; crisis begins at t=0.
Inner shading indicates 90% confidence interval for the mean; outer shading indicate inter-quartile range.
15
Post-Crisis Output Losses Reflect Capital,
Employment and Productivity Factors
16
Output Decomposition
(in percent; deviation from pre-crisis trend)
2
Capital per worker
1
0
-1
Employment rate
-2
-3
-4
Total factor productivity
-5
-6
-7
-1
0
1
2
3
4
5
6
Figure reports mean difference from pre-crisis trend (over t-10 to t-3);
crisis begins at t=0; t=-1 normalized to 0; observations limited by data availability.
7
Growth Tends to Recover Eventually
But Country Experiences Vary
17
24
20
(in percent)
Frequency
16
12
8
4
0
-8
-7
-5
-3
-1
0
2
4
6
medium-run growth relative to pre-crisis trend
Histograms report five-year average growth ending at t+8 relative to
pre-crisis trend, where crisis begins at year t.
8
9
18
4. Shift from Public to Private Spending.
Fiscal Space?
Public Finances will Need to be Consolidated
19
(percent of GDP)
G-20 Fiscal Balance
G-20 Government Debt
2
120
0
100
-2
80
-4
60
-6
-8
-10
40
All
All
Advanced
Advanced
20
Emerging
Emerging
-12
00
02
04
06
08
10
Source: IMF, World Economic Outlook.
12
14 00
0
02
04
06
08
10
12
14
Huge Adjustment Needed to Stabilize
Public Debt at Comfortable Level
Primary Balances
(percent of GDP)
10
2010 (Proj.)
2020 (Target=2014)
8
2014 (Proj.)
2020 (Target 80%) 1/
2020 (Target 60%) 1/
6
4
2
0
-2
-4
-6
-8
-10
-12
Japan (132%) 2/
U.S. (105%)
U.K. (98%)
1/ Primary balances required to reduce debt/GDP ratio to 60 or 80 percent by 2030.
2/ Debt/GDP ratio in 2014; net debt for Japan and gross debt for all others.
Italy (132%)
20
Euro Area Shows that Higher Debt
Can Lead to Higher Bond Yields
21
Average 10-yr government bond yield spread
over Germany, 2005-08 (bps)
Euro Area – Bond Yield Spreads and Public Debt
45
Greece
40
Cyprus
35
30
Italy
R2 = 0.2101
Slovenia
25
20
Ireland
Belgium
Portugal
15
Spain
10
Austria
Finland
5
France
Netherlands
0
0
20
40
60
80
100
Average general government debt, 2005-08 (percent of GDP)
120
22
Entitlement Reform: Path Toward
Fiscal Sustainability
Net Present Value of the Fiscal Costs of the Crisis and Age-Related
Spending
(percent of GDP)
Canada
Korea
United States
Australia
Advanced G-20 Countries
United Kingdom
France
Crisis
Germany
Aging
Mexico
Turkey
Italy
Japan
0
100
200
300
400
500
600
700
800
23
5. Will Private Spending Take the Baton?
24
Banks Continue to Delever
Lending Officer Surveys
(net percentage)
100
80
60
40
20
Private Sector Credit Growth
(in percent of outstanding)
25
United States
Euro area
United Kingdom
Japan
20
U.K.
15
Net percentage
tightening
standards on
business loans
10
5
U.S.
0
-20
Euro area
0
Net easing
-5
-40
-60
2005
2006
2007
2008
2009
-10
1990
1995
2000
2005
2010
25
Securitization Remains Impaired
Securitization Issuance
(billions of U.S. dollars)
United States
4,000
Europe
1,500
ABCP
3,500
CDO2
3,000
1,200
CDO
ABS
2,500
900
MBS
2,000
600
1,500
1,000
300
500
0
Data annualized for 2009.
2009
2008
2007
2006
2005
2004
2009
2008
2007
2006
2005
2004
0
Uncertainty about Long-run Rates of
Return on Equity?
26
Equity Market Real Total Returns over 10-year Periods
(percent; annualized)
25
United States
20
Avg. of France, Germany, and U.K.
15
10
5
0
-5
-10
1930
Jun. 09
1940
1950
1960
1970
1980
1990
2000
What will U.S. Consumers Do?
27
U.S. Household Saving Ratio
(ratio to disposable income)
9
8
7
6
5
4
3
2
1
0
1990
1994
1998
2002
2006
2010
2014
28
Higher Uncertainty Hurts Consumption
Response of Volatility
Response of Real GDP
0.25
0.004
0.20
0.002
0.000
0.15
-0.002
0.10
-0.004
0.05
-0.006
0.00
-0.008
-0.05
-0.010
1
4
7
10
13
16
1
Response of Real Household Wealth
4
7
10
13
16
Response of Real Consumption
0.010
0.004
0.005
0.002
0.000
0.000
-0.005
-0.010
-0.002
-0.015
-0.004
-0.020
-0.006
-0.025
-0.030
-0.008
1
4
7
10
13
16
1
4
7
10
13
16
29
What are the Prospects for Investment Demand?
Capacity Utilization
U.S. Corporate Sector
Cash Holdings
(percentage point deviation from
long-run average)
Sources of Financing for
Non-Financial Corporations
(percent; Avg. 2004-08)
9
20
U.S.
Japan
8
10
-20
90
80
6
-10
Non-Bank
100
Percent of total financial
liabilities (market value)
7
0
Banks
Percent of total assets
(market value)
70
5
60
4
50
40
3
-30
30
2
-40
20
1
10
Jul. 09
-50
09Q1
0
90
93
96
99
02
05
08
0
90
93
96
99
02
05
08
Euro area
U.K.
U.S.
30
6. Rebalancing World Demand
31
The Current State of Global Imbalances
Current Account Balances
(percent of world GDP)
4
US
OIL
CHN
GER
JPN
EMA
ROW
GIPS
UK
CEE
3
2
1
0
-1
-2
-3
1996
1998
2000
2002
2004
2006
2008
32
Composition of China’s GDP
GDP Composition
(in percent)
Private Consumption
Public Consumption
Change in Inventories
Net Exports
Fixed Investment
100
90
80
70
60
50
40
30
20
10
0
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
33
7. Back to Projections
34
Recovery Will Be Sluggish
(percent; quarter-over-quarter, annualized)
15
Emerging
10
World
5
Advanced
0
-5
-10
2005
2006
2007
2008
2009
2010
35
Some alternative scenarios (more in EWE)



US domestic and foreign demand do not pick up.
 Fiscal stimulus maintained. Debt sustainability?
 Fiscal stimulus phased out. Recovery? Fiscal
implications?
Potential output much lower. Tight limits on growth.
70’s style policy mistakes? Even if not, fiscal
implications?
Of the essence: World demand rebalancing, entitlement
reforms, recapitalization of banks.