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Global Economy Under Stress Charles Collyns Higher School of Economics Moscow October 20, 2008. Global economy has cooled. Domestic Demand (Percent change from a year ago). GDP (Percent change from a year ago). Russia. Russia. Emerging economies. Emerging economies. Advanced

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Global Economy Under Stress Charles Collyns Higher School of Economics Moscow October 20, 2008


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    1. Global Economy Under Stress Charles Collyns Higher School of Economics Moscow October 20, 2008

    2. Global economy has cooled... Domestic Demand (Percent change from a year ago) GDP (Percent change from a year ago) Russia Russia Emerging economies Emerging economies Advanced economies Advanced economies 2000 02 04 06 08: Q2 2000 02 04 06 08: Q2

    3. ... And leading indicators point to slower growth ahead Consumer Confidence (United States, 1985 = 100; Euro Area, percent balance) Manufacturing PMIs (Values greater than 50 indicate expansion) Sep.08 Sep. 08 2000 02 04 06 2000 02 04 06

    4. Global financial system on the brink High-Grade Corporate Spreads (basis points) Bank CDS Spreads (10-years; basis points) Interbank Markets (3-month LIBOR minus T-bill rate; in percent) U.S. U.S. median U.S. AAA Euro area Japan Europe AAA Europe median 10/15 10/15 10/15

    5. Off the high board Commercial Paper Market (US$ bn) Money Market Funds (US$ bn) Asset-backed Non-asset backed Prime Government

    6. Emerging markets increasingly affected Corporate Bond Spreads (basis points) Equity Markets (2000 = 100; national currency) 06 Oct. 08 04 06 Oct. 08 2000 02 04 2002

    7. Against a Deepening Financial Crisis, Global Economy Faces Major Downturn Global GDP Growth (percent change, PPP basis) Emerging & developing economies Trend 1970-2006 Average downturn growth rate 1970-2006 Advanced economies

    8. Advanced economies now facing recession Real GDP Growth Rates (percent change) 2007 08 09 10 Euro area 2007 08 09 10 Japan 2007 08 09 10 United States

    9. Where is the U.S. recovery coming from? Real GDP Growth and its Components (percent change) Q1 Q2 Q3 Q4 2007 Q1 Q2 Q3 Q4 2008 Q1 Q2 Q3 Q4 2009

    10. How does the US downturn compare? Downturns and Recoveries (Real GDP; in percent change from year earlier) Past U.S. recessions and recoveries, 1974-2001 Current U.S. projections 2008Q1 Typical advanced economy path following housing correction

    11. Where is the Euro area recovery coming from? Real GDP Growth and its Components (percent change) Q1 Q2 Q3 Q4 2007 Q1 Q2 Q3 Q4 2008 Q1 Q2 Q3 Q4 2009

    12. Emerging and developing economies have not decoupled Real GDP Growth Rates (percent change) 07 08 09 10 Middle East 07 08 09 10 Latin America 07 08 09 10 Emerging Europe 07 08 09 10 Africa 07 08 09 10 Emerging Asia

    13. Domestic demand is the key in BRICs (percent change) Total growth Private consumption Net exports Terms of trade gain Other Gross fixed capital formation Brazil Russia China India

    14. Risks around baseline tilted to the downside Global GDP Growth (percent change, ppp-GDP weighted average)

    15. Road to Recovery – and the Potholes • Stabilizing financial conditions • – but deleveraging will be protracted • Turnaround in U.S. housing market • – but what about Europe? • Resilience in emerging economies • – but still vulnerabilities in some • Subsiding inflation • – another commodities surprise?

    16. Global problem needs a global solution • Protection of deposits and other short-term liabilities • Removal of troubled assets and recognition of losses • Use of public money to recapitalize banks • Macroeconomic policy support to break negative spiral • Emerging and developing economies should have access to emergency funding

    17. More capital needed (Billions of U.S. dollars) $ 640-735 billion out of $1.4 trillion $ 675 billion still needed $ 518 billion $ 364 billion Total Estimated Losses Capital Raised Writedowns* * Includes writedowns due to asset valuation yet to be passed through income statement.

    18. How much will bank credit be squeezed? Changes in Credit Standards (percent of respondants1) Commercial Loan Growth (3m percent change, annualized) Residential Loan Growth (3m percent change, annualized) 2005 06 Aug. 08 2005 06 07 08: Q3 07 2005 06 Aug. 08 07 1 Change in the balance of respondents between the “tightened considerably and tightened somewhat” and the “eased somewhat and eased considerably.”

    19. Deleveraging will take a large toll on credit growth Private Sector Credit Growth (Borrowing as a percent of debt outstanding, quarter-on-quarter, annualized, seasonally adjusted) United States Projection Euro area 2002 12 06 08 10 04

    20. US Housing – How close to the floor? Real House Prices (index, 1995 = 100) Real Residential Investment (percent of GDP) Inventories of New Homes 1970-2000 average 80 2000 80 2000 80 2000 1970 1970 Aug. 08 08: Q2 1970 Aug. 08 90 90 90

    21. Housing Problems in Other Advanced Economies? House Price Gaps (percent) House Prices (in percent; year on year) Residential Investment (in percent of GDP; construction) U.K. Spain Spain U.S. U.K. Ireland Ireland U.S. 08Q2 08Q2

    22. Emerging market inflows resilient so far... (Bond, equity and loan issuance, billions of U.S. dollars) Q3 08 2002 07 06 03 04 05

    23. Reduced external vulnerabilities—but not for all Emerging and Developing Economy External Indicators (percent of total GDP) Emerging Europe External Indicators (percent of regional GDP) External debt (left scale) External Debt (left scale) Change in reserves Change in reserves Current account Current account

    24. Emerging Economies Increasingly Affected, Risks of Sudden Stops Sovereign CDS Spreads (index: 7/1/2007=100) Equity Prices (index: 7/1/2007=100) Current account deficit larger than 5% of 2007 GDP Current account surplus or small deficit Current account deficit larger than 5% of 2007 GDP Current account surplus or small deficit 10/3 10/3

    25. Where will commodity prices go? Selected Food Prices (January 2006 = 100) Selected Commodity Prices (January 2002 = 100) Futures Energy Wheat Metals Corn Beverages Rice (CBOT) Futures curves as of October 3, 2008 Soya Agricultural raw materials Food 04 08 06 2002

    26. Oil price outlook highly uncertain OPEC Spare Capacity (percent of world oil consumption) Crude Oil Prices (Brent; from futures options; as of October 3 2008; U.S. dollars per barrel) Forecast Saudi Arabia 1996-2006 average Other OPEC 2006 Sep. 2009 2007 2008

    27. Inflation pressures contained in advanced economies Inflation Exp. (Percent from 10yr index linked bonds) Headline Inflation (12 month percent change) Core Inflation (12 month percent change)

    28. Greater inflation concerns in emerging economies Core Price Inflation (12 month percent change) Headline Inflation (12 month percent change) 2003 06 Aug. 08 2003 06 Aug. 08 05 09 07 05 04 07 04 Food Price Inflation (12 month percent change) Fuel Price Inflation (12 month percent change) 2003 06 Jul. 08 06 Jul. 08 05 07 05 04 07 04 2003

    29. Key Messages • Major global downturn inevitable • Substantial downside risks to baseline • Comprehensive, coordinated response to financial crisis essential to avoid the worst • Emerging and developing economies should be ready for tough times ahead

    30. WEO Can Be Downloaded From http://www.imf.org/weo

    31. Can there be a creditless recovery? United States Credit and Output Growth 1/ (percent change from a year ago; GDP growth on the left axis, all others on the right axis) HH Credit (RHS) GDP Growth (LHS) NFC Credit (RHS) 1/ Highlighted areas indicate recessions.

    32. Greater inflation concerns in emerging economies Core Price Inflation (12 month percent change) Headline Inflation (12 month percent change) 2003 06 Aug. 08 2003 06 Aug. 08 05 09 07 05 04 07 04 Food Price Inflation (12 month percent change) Fuel Price Inflation (12 month percent change) 2003 06 Jul. 08 06 Jul. 08 05 07 05 04 07 04 2003

    33. Global economy has cooled... Domestic Demand (Percent change from a year ago) GDP (Percent change from a year ago) Emerging Europe Emerging economies Emerging Europe Emerging economies Advanced economies Advanced economies 2000 02 04 06 08: Q2 2000 02 04 06 08: Q2

    34. Greater inflation concerns in emerging economies Core Price Inflation (12 month percent change) Headline Inflation (12 month percent change) 2003 06 Aug. 08 2003 06 Aug. 08 05 09 07 05 04 07 04 Food Price Inflation (12 month percent change) Fuel Price Inflation (12 month percent change) 2003 06 Jul. 08 06 Jul. 08 05 07 05 04 07 04 2003

    35. Reduced external vulnerabilities, greater resilience Emerging and Developing Economy External Indicators (percent of total GDP) External debt (left scale) Change in reserves Current account

    36. Domestic demand has strong momentum in BRICs (percent change) Total growth Net exports Total domestic demand Terms of trade gain Brazil Russia China India

    37. Inflation Has Been High—Particularly in Emerging Economies But Should Begin to Ease on a Global Basis Core Inflation (year-over-year percent change) Headline Inflation (year-over-year percent change) Emerging Emerging Advanced Advanced

    38. Against a Deepening Financial Crisis, Global Economy Faces Serious Downturn (annual percent change) Trend, 1970-2006 Downturn Average, 1970-2006 1/ 1/ Two or three year average during the growth downturn.

    39. Greater inflation concerns in emerging economies Core Price Inflation (12 month percent change) Headline Inflation (12 month percent change) 2003 06 Aug. 08 2003 06 Aug. 08 05 09 07 05 04 07 04 Food Price Inflation (12 month percent change) Fuel Price Inflation (12 month percent change) 2003 06 Jul. 08 06 Jul. 08 05 07 05 04 07 04 2003

    40. 2001 2001 2001 2008 2008 2008 Still, no global recession this time, unlike in 2001-02. Advanced Economies (GDP Growth, 2001 vs. 2008) Emerging Economies (GDP Growth, 2001 vs. 2008) Global (GDP Growth, 2001 vs. 2008)

    41. Global economy has cooled... Domestic Demand (Percent change from a year ago) GDP (Percent change from a year ago) Emerging economies Emerging economies Advanced economies Advanced economies 2000 02 04 06 08: Q2 2000 02 04 06 08: Q2

    42. Interest spreads still widening U.S. Mortgage Spreads (over 1 month LIBOR rates, basis points) Corporate Spreads (basis points) 2006 2006 Sep. 2008 Sep. 2008 2007 2007

    43. Fine-tuning the forecast 2009 Real GDP Growth (percent change)

    44. Tail risks in the financial system have been reduced—but fragilities remain Bank CDS Spreads (10-years; median; in basis points) Sep.08 08 2007

    45. Still more work to do? Real Policy Rates: Latest Levels and Changes from End-2006 (in percent)

    46. Still more work to do? Real Policy Rates: Latest Levels and Changes from End-2006 (in percent; relative to core CPI)

    47. Title Financial Conditions Index Euro area United States Japan 07 Aug. 08 06 2005

    48. When will U.S. housing find a floor? New Home Sales & Starts (y/y pct change of 3m moving average) Inventories (3 month moving average) 04 00 02 06 Jul. 08 04 00 02 06 Aug. 08 House Prices (y/y percent change) Mortgage Delinquencies & Foreclosures (percent of total mortgages) 04 04 09 00 02 06 Q2 08 00 02 06 Q2 08

    49. Liquidity strains and volatility remain high Market Pricing of Volatility (10-years; medians in basis points) Interbank Markets (3-month LIBOR minus T-bill rate; in percent) TAF Dec 12 United States Euro area Japan Q1 Q2 Q3 Q4 2006 Q1 Q2 Q3 Q4 2007 Q1 Q2 Aug. 2008 2000 01 02 03 04 05 06 07 Aug. 08

    50. Upside risk to global growth Downside risk to global growth Concerns shift from financial risk to inflation risk(Percentage points of global GDP growth)