Global Economic Developments and Outlook
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Global Economic Developments and Outlook Jörg Decressin Chief , World Economic Studies Division Research Department International Monetary Fund March 17, 2009. Outline. What are economic prospects? What are the policy priorities?.

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Global economic developments and outlook j rg decressin chief world economic studies division

Global Economic Developments and Outlook

Jörg Decressin

Chief , World Economic Studies Division

Research Department

International Monetary Fund

March 17, 2009


Global economic developments and outlook j rg decressin chief world economic studies division

Outline

  • What are economic prospects?

  • What are the policy priorities?


Global economic developments and outlook j rg decressin chief world economic studies division

Industrial production and merchandise exports have plummeted

Global Industrial Production and Merchandise Exports

(Annualized three-month percent change)

Industrial production

(left scale)

Merchandise export value

(right scale)

1997

03

Jan.

2009

2001

05

07

99


Global economic developments and outlook j rg decressin chief world economic studies division

World economy is expected to contract in 2009 and recover modestly in 2010

Real GDP Growth

(Annual percent change)

Emerging and

Developing economies

Advanced

economies

75

85

95

05

1970

80

90

2000

10


Global economic developments and outlook j rg decressin chief world economic studies division

Advanced economies to suffer deepest recession since World War II

Real GDP Growth Rates

(percent change)

2007 08 09 10

Emerging and

Developing Economies

2007 08 09 10

Euro area

2007 08 09 10

Japan

2007 08 09 10

United States


Global economic developments and outlook j rg decressin chief world economic studies division

Risks to world GDP growth are to the downside

Global GDP Growth

(percent change, ppp-GDP weighted average)


Global economic developments and outlook j rg decressin chief world economic studies division

Key assumptions behind the global recovery in 2010:

  • Monetary easing

  • Fiscal stimulus

  • Improving financial conditions (most important) & stabilization in the U.S. housing market


Global economic developments and outlook j rg decressin chief world economic studies division

Monetary policy is supportive, including through unconventional measures; room to cut rates in some regions

(Policy rates; percent)

Emerging markets

United

States

Euro area

Japan


Global economic developments and outlook j rg decressin chief world economic studies division

Fiscal packages are expected to boost economic activity

General Government Fiscal Balances

(Percent of GDP)

Emerging and

Developing economies

World

Advanced

economies

06

08

2000

02

04

10


What more needs to be done

What more needs to be done?


Macroeconomic and financial policies need to be mutually reinforcing

Macroeconomic and financial policies need to be mutually reinforcing

  • Monetary easing, including through unconventional measures

  • Expansionary fiscal policies, within strong medium-run frameworks

  • Healing the financial sector—this is the “sine qua non” and would make macroeconomic policies more effective


Global economic developments and outlook j rg decressin chief world economic studies division

Expansionary policies during financial crisis episodes help shorten recessions

Survivor Functions for Advanced Economies’ Recessions

(probability of remaining in a recession beyond a certain number of quarters)

Financial crisis episodes

Full sample

Financial crisis episodes with high fiscal response

Financial crisis episodes with high monetary response

1

10

0

4

8

9

2

3

7

6

5

Quarters


Global economic developments and outlook j rg decressin chief world economic studies division

A sustained recovery will not be possible until financial sector health is restored!

  • Three-pronged approach: liquidity, solvency, dealing with bad assets

  • Key challenge:

    • Removing toxic assets from bank balance sheets in a transparent and coordinated manner


Global economic developments and outlook j rg decressin chief world economic studies division

Beyond the short run:

initial lessons from the crisis

  • Financial regulation perimeter to be broadened and made more flexible (curtail regulatory arbitrage!); robust market clearing arrangements; more transparency about risks

  • Dealing with systemic risks through a greater macroeconomic emphasis on financial supervision and regulation and a greater prudential emphasis on monetary policy

  • Coordination, e.g., binding code of conduct on beggar-thy-neighbor financial sector policies


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