the global economic outlook carmen m. reinhart deputy director, research department international...
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The Global Economic Outlook
Carmen M. Reinhart
Deputy Director, Research DepartmentInternational Monetary Fund
October 24, 2002
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After good performance over much of the 1990s,
0
0.5
1
1.5
2
2.5
3
3.5
4
1994 1996 1998 2000 2002
Source: IMF, WEO (9/02)
World Real GDP Growthpercent, at market exchange rates
Global economic growth slowed to stall speed in 2001
And the return to sustained growth remains a forecast
Much of this depends on A revival in the
performance of the U.S. economy
Halting of the slide of key industrial and emerging market economies
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Prospects for the U.S. economy
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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
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1979 1982 1985 1988 1991 1994 1997 2000
0
2
4
6
8
U.S. Real GDP
PercentQ4:Q4 growth
The result was the short recession of 2001 . . .
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Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct2000 2001 2002
2
3
4
5
6
7
8
Nominal Effective Federal Funds Rate
PercentWeekly
Part of the reason was the speed and size of the policy response
(1) The intended funds rate was cut 4-3/4 percent in one year
(2) A tax cut came on line in the summer of 2001
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1978 1981 1984 1987 1990 1993 1996 1999 2002
0
2
4
6
8
10
Real Federal Funds Rate
PercentQuarterly Average, nominal less four-quarter PCE inflation
Monetary policy ease has put the real funds rate at zero.
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1979 1982 1985 1988 1991 1994 1997 2000
8
10
12
14
16
18
20
Thirty-Year Fixed Rate Mortgage Rate
PercentQuarterly
. . . and fostered low mortgage rates.
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But there are risks to this outlook.
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-2
-1
0
1
2
3
4
5
Jan Apr Jul Oct Jan Apr Jul Oct
(percent)
Most U.S. forecasts for 2002 have been marked down – both consensus and WEO
2001 2002
Dec/01 Apr/02
+/ 2*SDADJ
+/ 1*SDADJ
Mean
WEO
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0
10
20
30
40
50
60(percent of forecasters)
And 2003 looks more uncertain as well.
Oct/02
Jun/02
GDP Growth (%)
WEO2.6%
1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25
Consensus Forecasts
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Among the reasons there are risks to the U.S. outlook are . . .
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1978 1981 1984 1987 1990 1993 1996 1999 2002
4
6
8
10
12
Unemployment Rate
PercentQuarterly
A rising unemployment rate may make households less confident.
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1978 1981 1984 1987 1990 1993 1996 1999 2002
200
400
600
800
1000
1200
1400
1600
S&P 500 Equity Price Index
LevelQuarterly
Change from record high (percent):
S&P 500 -36Nasdaq -77
Change in 2002 (percent):
S&P 500 -25Nasdaq -42
Equity prices have declined further . . .
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Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct2000 2001 2002
20
25
30
35
40
45
50
Implied Volatility on the S&P 100Percent, a.r.
Weekly
Investors are skittish . . .
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Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
2000 2001 2002
5
6
7
8
9
10
11
Junk Bond Spread
PercentWeekly
. . . and risk spreads remain high.
Risk spreads are particularly high forweaker credits—both in markets and atbanks.
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18
20
22
24
26
28
30
32
34
36
Oil Prices are also high . . .
Aug. 8/02
Oct.22/02
(US$ / barrel)
Apr.16/02
2000 01 02 2003
. . . but at least they are forecasted to fall.
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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
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This is a problem because there are significant risks abroad that may require policy action.
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Share prices have fallen in major equity markets
S&P 500
TOPIX
Euro STOXX
80
100
120
140
160
180
200
220
1998 99 2000 01 02
(log scale;Jan.2/ 98=100)
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84
88
92
96
100
104
108
98 99 00 01 0297
98
99
100
101
102
103
104
105
106
Euro Area Confidence Indicators have weakened
IFO BusinessConfidence(left scale)
EC BusinessSentiment Index
(right scale)
(index; 1991=100) (index; 1995=100)
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-3
-2
-1
0
1
2
3
98 99 00 01 02-9
-6
-3
0
3
6
9
In Japan, Industrial Production and Orders have cooled
Industrial Production(left scale)
Machine Tools Orders(right scale)
(percent change from previous month;Three-month moving average)
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Sluggish growth in industrial economies poses problems for emerging market economies.
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-25
-20
-15
-10
-5
0
5
10
15
20
25
30
98 99 00 01 02
Exports of emerging economies are only now recovering
Latin America
Asia(ex. China and India)
(percent change from a year earlier;Three-month moving average)
Others
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-15
-10
-5
0
5
10
15
98 99 00 01 02
… as is industrial production in emerging economies
Latin America
Asia(ex. China and India)
(percent change from a year earlier;Three-month moving average)
Others
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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
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-2
0
2
4
6
8(percent per annum)
Sep-02Apr-02
2002 GDP Growth Projections
AdvancedEconomies
Africa Asia Mid.East& Turkey
LatinAmerica
Cent.& East.Europe
The largest swing in 2002 has been for Latin America
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0
2
4
6
8(percent per annum)
2003 GDP Growth Projections
AdvancedEconomies
Africa Asia Mid.East& Turkey
LatinAmerica
Cent.& East.Europe
Sep-02
Apr-02 And 2003 has been marked down too
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Vulnerability of emerging market economies to the U.S. cycle.
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2. Capital flows to emerging markets depend on the U.S. business cycle
billions 1970 US$
Total
Africa
Asia-crisis
Other Asian emerging
Middle East and Europe
Western Hemisphere.
-5 0 5 10 15 20
expansion recession
Net Private Capital Flows
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3. That sensitivity is greatest for FDI
billions 1970 US$
Total
Africa
Asia-crisis
Other Asian emerging
Middle East and Europe
Western Hemisphere
-2 0 2 4 6 8 10 12
expansion recession
Net Private Direct Investment