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Critical Challenges for the Global Economy ICRIER New Delhi, India April 20, 2007. India: Difference Over A Decade (Index, 1996 = 100). U$12.4 billion. U$197.3 billion. U$4,159 billion. 48.8 % GDP. U$797. U$41.2 billion. U$1,822 billion. 25.7 % GDP. U$2.5 billion. U$406.

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Critical Challenges for the Global Economy ICRIER New Delhi, India April 20, 2007

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Critical challenges for the global economy icrier new delhi india april 20 2007

Critical Challenges

for the Global Economy

ICRIER

New Delhi, India

April 20, 2007


Critical challenges for the global economy icrier new delhi india april 20 2007

India: Difference Over A Decade

(Index, 1996 = 100)

U$12.4 billion

U$197.3 billion

U$4,159 billion

48.8 % GDP

U$797

U$41.2 billion

U$1,822 billion

25.7 % GDP

U$2.5 billion

U$406


Critical challenges for the global economy icrier new delhi india april 20 2007

Critical Challenges for the Global Economy

  • Coming in for a soft landing?

  • Bumps in the runway:

  • The U.S. housing market

  • Inflation concerns and the oil market

  • Financial risks facing emerging markets

  • Longer-term Challenges:

  • Unwinding global imbalances

  • Sustaining global productivity growth


Critical challenges for the global economy icrier new delhi india april 20 2007

Baseline GDP Growth Forecast Remains for Continued Strong Growth

(Percent per annum)

2006

2007


Critical challenges for the global economy icrier new delhi india april 20 2007

The Housing Correction Has Cooled the U.S. Economy

(Percent change from four quarters earlier)

Exports

Residential investment

Investment

Consumption

Non-residential construction

Output

Business investment

2003

04

05

06

2003

04

05

06


Critical challenges for the global economy icrier new delhi india april 20 2007

...And the Slowdown Has Had Limited Impact on the Rest of the World(Percent change from four quarters earlier)

Rest of the World

United States


Critical challenges for the global economy icrier new delhi india april 20 2007

Spillovers to the Rest of the World from U.S. Slowdowns Have Been Limited(Change in GDP growth; median for region)


Critical challenges for the global economy icrier new delhi india april 20 2007

Impact of Growth Declines in the U.S. and Japan (Shading denotes one standard error confidence interval)

Impact of U.S. Growth Declines on Growth in Latin America

Impact of U.S. Growth Declines on Growth in Emerging Asia

Impact of U.S. Growth Declines on Growth in Other Advanced Economies

Impact of Japan’s Growth Declines on Growth in Emerging Asia


Critical challenges for the global economy icrier new delhi india april 20 2007

Investment and Exports are Strong in the Euro Area, But Consumption Lags

(Percent change from four quarters earlier)

Exports

Investment

Output

Consumption

2003

04

05

06


Critical challenges for the global economy icrier new delhi india april 20 2007

Japan Remains on Track Despite Mid-06 Dip

(Percent change from four quarters earlier)

Investment

Output

Exports

(left scale)

Consumption

2003

04

05

06


Emerging market and developing country growth has been strong percent seven year moving average

Emerging Market and Developing Country Growth Has Been Strong(Percent; seven-year moving average)

Asia

Middle East

Sub-Saharan Africa

Latin America

Emerging Europe


Growth in china continues to boom y y percent change

Growth in China Continues to Boom(Y/Y percent change)

Real GDP Growth

(left scale)

Fixed Asset Investment

(6-month m.a.; right scale)


Growth in india also remains rapid y y percent change

Growth in India Also Remains Rapid(Y/Y percent change)

Real GDP Growth

Industrial Production Growth


Critical challenges for the global economy icrier new delhi india april 20 2007

Markets Go Up, Markets Go Down

(Asset class returns; percent change)


Critical challenges for the global economy icrier new delhi india april 20 2007

But Overall Financial Conditions Remain Supportive of Global Growth

Implied Volatilities (percent; 10-day mma)

Industrial

country

equities

Emerging Market Currencies

Major currencies


Critical challenges for the global economy icrier new delhi india april 20 2007

Credit Markets Are Pricing in a Soft Landing

Policy Rates

(percent)

Long-Term Rates

(deviations from long-term average)

United

States

Futures rates

as of 4/10/07

United

States

Japan

Euro area

Euro area

Japan


Critical challenges for the global economy icrier new delhi india april 20 2007

Despite Recent Bad News, Our Forecast For Global Growth Is Now More Evenly Balanced

(Percent)


Critical challenges for the global economy icrier new delhi india april 20 2007

Upside risk to global growth

Downside risk to global growth

Most Global Risk Factors Have Improved Since September

(Percentage points of global GDP growth over next 12 months)


Critical challenges for the global economy icrier new delhi india april 20 2007

Critical Challenges for the Global Economy

  • Coming in for a soft landing?

  • Bumps in the runway:

  • The U.S. housing market

  • Inflation concerns and the oil market

  • Financial risks facing emerging markets

  • Longer-term Challenges:

  • Unwinding global imbalances

  • Sustaining global productivity growth


Critical challenges for the global economy icrier new delhi india april 20 2007

U.S. House Price Increases Have Cooled Fast (Y/Y percent change; relative to CPI)

Existing homes (OFHEO)

Existing homes (NAR)

New homes


Recent data paints an uncertain outlook for the u s housing sector

Recent Data Paints an Uncertain Outlook for the U.S. Housing Sector

Sales

(units; millions)

Starts and Permits

(units; millions)

Mortgage Applications for Purchase

(index; four week moving average)

Inventories

(months of supply)


Critical challenges for the global economy icrier new delhi india april 20 2007

...But Problems in the U.S. Sub-Prime Mortgage Market Seem Contained

Spreads

(basis points)

Housing Market Delinquencies

(percent of total residential loans outstanding)


Critical challenges for the global economy icrier new delhi india april 20 2007

And Household Finances Remain in Good Shape

Household Net Assets

(ratio to disposable income)

Household Liabilities

(percent of disposable income)

06:

Q4

06:

Q4


Critical challenges for the global economy icrier new delhi india april 20 2007

Housing Is The Tail Not The Dog

(Percent increase on previous year for foreclosures; percent for unemployment rate; 2006Q4)


Critical challenges for the global economy icrier new delhi india april 20 2007

Critical Challenges for the Global Economy

  • Coming in for a soft landing?

  • Bumps in the runway:

  • The U.S. housing market

  • Inflation concerns and the oil market

  • Financial risks facing emerging markets

  • Longer-term Challenges:

  • Unwinding global imbalances

  • Sustaining global productivity growth


Critical challenges for the global economy icrier new delhi india april 20 2007

Inflation Risks Are Down as Headline Inflation Has Moderated

(Y/Y percent changes)

Headline inflation

Core inflation

U.S.

(PCE)

U.S.

(PCE)

Euro area (HICP)

Euro area (HICP)

Japan (CPI)

Japan (CPI)

Feb. 07

Feb. 07


Critical challenges for the global economy icrier new delhi india april 20 2007

The Elephant in the Room:

Rising Levels of Capacity Utilization, Everywhere

Output Gap

(percent of potential GDP)

Non-Fuel Import Prices

(December 2005 = 100)

Advanced

economies

United States

Euro area

World

Japan

Emerging

markets


Critical challenges for the global economy icrier new delhi india april 20 2007

U.S. Labor Costs Have Accelerated as Productivity Has Slowed

(Non-farm business sector; percent change from four quarters earlier)

Compensation

Productivity

Unit labor costs

1996

98

2000

02

04

06


Critical challenges for the global economy icrier new delhi india april 20 2007

Unemployment Rates Are Declining Across the Major Advanced Economies

(Percent)

Euro area

United States

Japan

06

1998

2000

04

02


Critical challenges for the global economy icrier new delhi india april 20 2007

Growth of World Oil Demand and Non-OPEC Supply Are in Better Balance

(2002–06)


Critical challenges for the global economy icrier new delhi india april 20 2007

But Global Spare Oil Production Capacity Remains Limited

(Millions of barrels a day)


Critical challenges for the global economy icrier new delhi india april 20 2007

Expected Oil Prices Show Continued Potential for a Spike(From futures options; as of April 2nd 2007; U.S. dollars per barrel)


Critical challenges for the global economy icrier new delhi india april 20 2007

Critical Challenges for the Global Economy

  • Coming in for a soft landing?

  • Bumps in the runway:

  • The U.S. housing market

  • Inflation concerns and the oil market

  • Financial risks facing emerging markets

  • Longer-term Challenges:

  • Unwinding global imbalances

  • Sustaining global productivity growth


Critical challenges for the global economy icrier new delhi india april 20 2007

Capital Flows to Emerging Markets Have Been Strong and Spreads Have Continued to Compress

Emerging Market Financing

(billions of U.S. dollars)

EMBI Global Composite

(basis points)

2002

03

04

05

06


Critical challenges for the global economy icrier new delhi india april 20 2007

Emerging Market Corrections Are Getting Smaller

(Percent)


Critical challenges for the global economy icrier new delhi india april 20 2007

But Is It Too Good To Be True?

(Billions of U.S. dollars)

Emerging Europe and CIS

Capital Flows –

All Regions

FDI

Flows to the private sector excl. FDI

Flows to the private sector excl. FDI

FDI

Flows to the public sector

Flows to the public sector


If liquidity conditions tighten will capital flows to emerging markets slow billions of u s dollars

If Liquidity Conditions Tighten, Will Capital Flows to Emerging Markets Slow?(Billions of U.S. dollars)

Industrial Country Liquidity Index1

(advanced one year; right scale)

Financial Flows to Emerging Markets

(left scale)

1Computed as the change in base money (measured in U.S. dollars).


Critical challenges for the global economy icrier new delhi india april 20 2007

Large Current Account Deficits May Be A Source Of Vulnerability

(Emerging market country current accounts in 2006; percent of GDP)


Critical challenges for the global economy icrier new delhi india april 20 2007

Inward Capital Flows to India and China Are Also Surging

(Billions of U.S. dollars)

Emerging Asia excluding

China and India

Emerging Asia

India

China


Critical challenges for the global economy icrier new delhi india april 20 2007

Critical Challenges for the Global Economy

  • Coming in for a soft landing?

  • Bumps in the runway:

  • The U.S. housing market

  • Inflation concerns and the oil market

  • Financial risks facing emerging markets

  • Longer-term Challenges:

  • Unwinding global imbalances

  • Sustaining global productivity growth


Critical challenges for the global economy icrier new delhi india april 20 2007

Global Imbalances Have Widened

(Percent of GDP)

United States

Saudi Arabia

Oil trade

Net income

Oil trade

Net income

Current account

Non-oil trade

Non-oil trade

Current account

Euro Area

China

Non-oil trade

Non-oil trade

Current account

Current account

Net income

Oil trade

Oil trade

Net income


Critical challenges for the global economy icrier new delhi india april 20 2007

U.S. Dollar Has Depreciated, But No Real Appreciation in Key Surplus Countries

U.S. dollar(2000=100)

Euro

Yen

Renminbi


Critical challenges for the global economy icrier new delhi india april 20 2007

Global Imbalances Are Likely to Remain Large

(Percent of GDP)

United States

Saudi Arabia

Net income

Oil trade

Oil trade

Net income

Current account

Non-oil trade

Non-oil trade

Current account

Euro Area

China

Current account

Non-oil trade

Current account

Non-oil trade

Net income

Oil trade

Net income

Oil trade


Critical challenges for the global economy icrier new delhi india april 20 2007

Net Foreign Assets

(Percent of world GDP)

Emerging Asia

Japan

Oil Exporters

euro area

United States


Critical challenges for the global economy icrier new delhi india april 20 2007

Meeting U.S. Financing Needs

(Four-quarter moving average; percent of GDP)

Foreign private sector

Foreign official sector


Critical challenges for the global economy icrier new delhi india april 20 2007

Adjustment of Global Imbalances—

How Could India Be Affected?

  • Smooth unwinding led by rebalancing of domestic demand remains the most likely outcome

  • Potential for “disorderly adjustment”—rapid movement in exchange rates worldwide, volatile financial conditions

  • Demand rebalancing in the United States could imply a prolonged period of sub-par global growth

  • Risk of rising protectionist pressures


Critical challenges for the global economy icrier new delhi india april 20 2007

Critical Challenges for the Global Economy

  • Coming in for a soft landing?

  • Bumps in the runway:

  • The U.S. housing market

  • Inflation concerns and the oil market

  • Financial risks facing emerging markets

  • Longer-term Challenges:

  • Unwinding global imbalances

  • Sustaining global productivity growth


Critical challenges for the global economy icrier new delhi india april 20 2007

World GDP Growth Remains at the Fastest Sustained Pace Since the Early 1970s

(Annual percent change)

Trend,

1970–2005


Critical challenges for the global economy icrier new delhi india april 20 2007

Global Productivity Has Accelerated Led by Emerging Market Countries

(Annual percent change; three-year moving average)


Critical challenges for the global economy icrier new delhi india april 20 2007

And China, India, and Emerging Europe Have Been in Front

(Annual percent increase; three-year moving average)

1 Excludes China and India.


Critical challenges for the global economy icrier new delhi india april 20 2007

Sources of Growth in Labor Productivity

(Percentage points, per year)

Global, 1970–present

Asia, Since Growth Takeoff


Critical challenges for the global economy icrier new delhi india april 20 2007

Productivity Growth Has Been Particularly Strong in Industry

(Annual percent change)

Global, 1980–2004

Asia, Since Growth Takeoff


Critical challenges for the global economy icrier new delhi india april 20 2007

Asia, Since Growth Takeoff: Contribution to Labor Productivity Growth Differential with the United States

(Percentage points per year)


Critical challenges for the global economy icrier new delhi india april 20 2007

Asian Industry Is Catching Up—But What About Services and Agriculture?

(Percent of U.S. productivity levels; in PPP-terms)


Critical challenges for the global economy icrier new delhi india april 20 2007

Sectoral Productivity Growth Since Takeoff

(Annual percent change; decades on x-axis)

Services

Industry

Agriculture

China

NIEs

Japan

NIEs

China

India

China

NIEs

India

Japan

ASEAN-4

Japan

ASEAN-4

India

ASEAN-4


Trade gdp world and high growth countries percent

Trade/GDP: World and High Growth Countries(Percent)

Note: High growth economies = avg. GDP growth >7% 1980–2006


Critical challenges for the global economy icrier new delhi india april 20 2007

Sustaining Global Productivity Growth

  • Domestic market reforms can help to sustain rapid productivity growth in emerging market and developing countries

  • Further steps to remove trade barriers—both unilateral and multilateral—are also crucial

  • But greater attention must be paid both in advanced and developing countries to make sure that the fruits of globalization are well distributed


Critical challenges for the global economy icrier new delhi india april 20 2007

In Conclusion:

  • Notwithstanding recent volatility and U.S. slowdown, continued robust global growth still looks the most likely outcome.

  • Policy makers and financial markets around the world need to be ready for surprises.

  • Take advantage of good times to tackle structural impediments to sustained growth.


Critical challenges for the global economy icrier new delhi india april 20 2007

Download the WEO

http://www.imf.org/weo


Increasing trade integration has quadrupled the effective global labor supply index 1980 100

Increasing Trade Integration Has Quadrupled the Effective Global Labor Supply(Index, 1980 = 100)

Global Labor Supply

Export-Weighted Labor Force by Region1

1National labor forces scaled by export-to-GDP ratios.


Critical challenges for the global economy icrier new delhi india april 20 2007

Emerging Market and Developing Countries Set for Continued Expansion

(Percent change)


Critical challenges for the global economy icrier new delhi india april 20 2007

Global Savings, Investment, and

Current Accounts

(Percent of world GDP)


Critical challenges for the global economy icrier new delhi india april 20 2007

Emerging Asia: Balance of Payments and Reserve Accumulation1

(Percent of GDP)

1 Excludes Hong Kong SAR and Singapore.


Critical challenges for the global economy icrier new delhi india april 20 2007

Savings and Investment in Asia

(Percent of each subregion’s GDP)

East Asia (excl. China)

China

Savings

Current account

(right scale)

Current account

(right scale)

Savings

Investment

Investment

Other Emerging Markets

India

Current account

(right scale)

Current account

(right scale)

Investment

Investment

Savings

Savings


Critical challenges for the global economy icrier new delhi india april 20 2007

China: GDP and Fixed Asset Investment

(Y/Y percent change)

Real GDP Growth

(left scale)

Fixed Asset Investment

(6-month m.a.; right scale)


Critical challenges for the global economy icrier new delhi india april 20 2007

Exchange Rate Depreciation Helps to Smooth the Impact of Current Account Adjustment

Average Change in GDP Growth (percent change)

Total Change in REER

(percent)


Critical challenges for the global economy icrier new delhi india april 20 2007

Advanced Economies: Total Change in Real Effective Exchange Rate and Average Change in GDP Growth During Deficit Reversals

Greece: 1990

Canada: 1981

Germany: 1965

Japan: 1974

Austria: 1977

New Zealand: 1974

Canada: 1993

United States: 1987

Finland: 1991


Critical challenges for the global economy icrier new delhi india april 20 2007

Advanced Economies: Change in Structural Fiscal Balance During Deficit Reversals(Medians across the two groups of episodes; percent of potential GDP)


Critical challenges for the global economy icrier new delhi india april 20 2007

Episodes of Surplus Reversals in Emerging Markets

Hong Kong SAR: 1975

South Africa: 1962

Argentina:

2002

Korea: 1988


Critical challenges for the global economy icrier new delhi india april 20 2007

Emerging Markets: Key Indicators During Surplus Reversals

(Medians across episodes)

Real Effective Exchange Rate

(index, 100 at t = 0)

Real Exports

(annual percent change)

Real GDP Growth

(annual percent change)

Real Imports

(annual percent change)


But the labor market remains relatively strong change from a quarter ago in nonfarm payrolls

But the Labor Market Remains Relatively Strong(Change from a quarter ago in nonfarm payrolls)

Mid-cycle pauses

Current cycle

Recessions


The trade channel in action u s real import growth in percent

The Trade Channel in Action(U.S. real import growth in percent)


Labor productivity and employment in the euro area are both growing y y percent change

Labor Productivity and Employment in the Euro Area are Both Growing(Y/Y percent change)


Critical challenges for the global economy icrier new delhi india april 20 2007

Growth in Advanced Countries Should Ease to Be Broadly in Line with Potential

(Percent change)


Rising commodity prices have been an important support 2002 q1 100

Rising Commodity Prices Have Been An Important Support(2002:Q1 = 100)

Energy

Metals

Beverages

Agricultural Raw

Materials

Food


Critical challenges for the global economy icrier new delhi india april 20 2007

Sources of Growth in Output Per Capita

(Percentage points, per year)

Global, 1970–present

Asia, Since Growth Takeoff


Critical challenges for the global economy icrier new delhi india april 20 2007

China: Marginal Revenue Product of Capital by Ownership Relative to Domestic Firms

(Percent)


Critical challenges for the global economy icrier new delhi india april 20 2007

And 2006 Looks Worse Than 1996

(Emerging market country current accounts in 1996 and 2006; percent of GDP)

1996

2006


Labor compensation has grown robustly in advanced and emerging countries

Labor Compensation Has Grown Robustly in Advanced and Emerging Countries

Advanced Economies: Labor Compensation

(index, 1980 = 100;weighted)

Emerging Asia: Manufacturing Wages

(percent of U.S.; constant PPP)


Critical challenges for the global economy icrier new delhi india april 20 2007

But the Share of Income Accruing to Labor Has Declined Especially in Europe(Advanced economies; income share of labor by country groups;percent of GDP)


Critical challenges for the global economy icrier new delhi india april 20 2007

Technology Had a Bigger Impact on Labor Shares than Globalization(Advanced economies; annual percentage points)

Decomposing Changes

in the Labor Share

Decomposing the Contribution of Labor Globalization

Contribution of labor globalization

Change in the labor share

Contribution of technological change

Contribution of trade prices

Contribution of labor globalization

Contribution of offshoring

Contribution of labor market policies

Contribution of immigration share


Critical challenges for the global economy icrier new delhi india april 20 2007

Labor Market Reforms Can Help Support the Labor Share (Decomposing changes in the labor share; annual percentage points)

Change in the labor share

Contribution of technological change

Contribution of labor globalization

Contribution of labor market policies


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