the world economy on a precipice uri dadush carnegie endowment for international peace beijing,...
TRANSCRIPT
The World Economy on a Precipice
Uri Dadush
Carnegie Endowment for International Peace
Beijing, March 2009
Main Points
1. Financial crisis has turned into a massive global recession
2. US sub-prime was the crisis trigger, but vulnerabilities run much deeper and wider
3. Despite improved fundamentals, developing countries are being engulfed by the crisis
4. Depression scenarios are no longer excludable, but most likely is an extended global recession
5. Bold policy steps essential – including to forestall protectionism
1. A MASSIVE, GLOBAL, CRISIS
A massive, global, crisis [Y=f(K,L,E)]
World output growth down from +3.5% p.a. in 2006-2007 to -5% (SAAR) estimated in the last six months
Stock markets around the world fall about 60% from their peak in Summer 2007
In the U.S., unemployment set to rise from 4.5% in 2007 to 9% or higher in 2009
Oil prices fall from $150 at the peak in Spring 2008, to near $40; prices of metals also collapse
Global Impact: all countries affected by financial turmoil since September
Most affected: Russia, Ukraine, Hungary, Greece
Least affected: China, United States, Philippines, Egypt
Based on change in exchange rate, spreads, and stock market.
2. CAUSES
Vulnerabilities and Triggers
US vulnerabilities
1. Monetary and Fiscal policies too loose too long
2. Innovation and Regulatory Failure
3. Excessive household debt and bank leverage
Global vulnerabilities
1. Demand Boom and Inflationary Pressures
2. Housing and Asset price boom
2. Large and widening external imbalances
Triggers
1. Subprime securities collapse
2. Lehman failure
A major sustained world boom precededA major sustained world boom preceded
Metal Prices
Global IP
Percent change, year-on-year
Source: World Bank.
-10
-5
0
5
10
Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
-75
-25
25
75
Inflation surged
High-income OECD
Developing countries
Median inflation rates: Jan 2000 to Dec 2008
Source: World Bank.
0
3
6
9
12
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
3. EFFECTS ON DEVELOPING COUNTRIES
Global industrial production plummets into 4th quarter of 2008... manufacturing production, ch% (saar)
-20
-15
-10
-5
0
5
10
15
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Source: DEC Prospects Group.
OECD
Developing
World
Developing exports in decline export volumes: ch% 3mma y/y
-15
-5
5
15
25
35
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Source: National Agencies through Thomson/Datastream.
China
India
Jordan
Mexico
..and corporate bond spreads have surged
Basis pointsBasis points
Emerging-market corporate bond (CEMBI) spreadsJan 2007 – Feb 2009
Source: JPMorganSource: JPMorgan
0
100
200
300
400
500
600
700
800
900
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep-0
7
Nov-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-0
8
Nov-08
Jan-
09
Brazil Philippines Russia Turkey
4. FORECAST AND RISKS
World trade to contract in 2009 for the first since the early 1980s (World Bank)
Source: World Bank.
annual percent change in trade volumes
World trade volume
Developing country exports
-3
0
3
6
9
12
15
18
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
$ billions$ billionsNet private debt and equity flows
1990-2008, projected 2009 PercenPercentt
Percent of GDP(right axis)
Private capital flows set to decline more sharply still in 2009
Source: World Bank, Projections: IIF (adjusted)
0
200
400
600
800
1000
1200
1990 1993 1996 1999 2002 2005 2008
0
2
4
6
8
Net private capital flows to decline $165 bn in 2009(IIF).
External Finance shortfall in developing countries in 2009 ( World Bank)
Private sector creditors shun emerging markets – net private capital flows fall to $160bn from $1 tril. In 2007
Higher borrowing costs as well as lower capital flows
104 of 129 developing countries will have current account surpluses inadequate to cover private debt coming due; Eastern Europe most affected.
Financial gap of about $268 bn in 98 of the 104 countries in the base case
In a low-case scenario, financial gap could be $700 bn.
Global GDP to decline this year for the first time since World Global GDP to decline this year for the first time since World War II( World Bank) War II( World Bank) Sharp decline in GDP growth expectedSharp decline in GDP growth expected
High-income
Developing
Source: Historical data: World Bank. Projections: IMF, adjusted
Growth of real GDP, percent
-2
0
2
4
6
8
1981 1985 1989 1993 1997 2001 2005 2009
The drivers of recovery
1. Fiscal stimulus (2.5-3% of GDP in ICs; less in DCs)
2. Lower interest rates (RIR near 0)
3. Bank recapitalization, guarantees, restructuring
4. Falling oil prices
5. Turn in the housing cycle/greed
BUT….will the state remain credible??
Did the financial crisis culminate in early October?
Spread between 3-month US$ Libor and policy interest rate, basis pointsSpread between 3-month US$ Libor and policy interest rate, basis points
-50
0
50
100
150
200
250
300
350
1/2/07 5/2/07 9/2/07 1/2/08 5/2/08 9/2/08 1/2/09
Spread Today
Why the crisis could easily become protracted and deeper
The intensity of the downturn to date
Financial crises lead to longer downturns (3-4 years) and to bigger GDP declines (5% to 25% peak to trough)
This financial crisis is big (judging by bailout costs and stock market decline to date)
The size of debts in the US and UK is unprecedented
Complexity of financial instruments
Global spread of the crisis and coordination issues
Is a depression possible?
-15
-10
-5
0
5
10
15
20
1930 1941 1952 1963 1974 1985 1996 2007
US GDP, annual growth
Source: BEA
volume
Price
5. POLICIES
G-20 Crucial Policy: Mitigating Recession
1. Fiscal Stimulus Size and burden sharing
2. Monetary Policy Quantitative Easing (which assets?)
3. Bank Restructuring Asset Purchases (“Bad Bank”) 4. Support to most vulnerable countries (IMF resources)
5. Preempting Protectionism
Risk of Resurgent Protectionism
The crisis has led to a large increase in uncertainty – regarding jobs, livelihoods, and the viability of firms
…and a massive expansion of states’ non-neutral interventions into the economy creates room for the politicization of economic decisions
Protectionism has been modest so far, but the risks of large deterioration are real
Policymakers must take several steps to cement a joint commitment to trade openness and collaborative recovery
We have not been here before: US economy is more trade dependent
1990 International dollars
Sources: GDP per capita: Angus Maddison, "Historical Statistics for the World Economy: 1-2006 AD. Imports 1920-1947: US Census. GDP 1920-1928: . GDP 1929-1948: US Bureau of Economic Analysis. 1948-2006: Imports as a percentage of GDP: World Bank, Global Economic Monitor
Percent
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1929 19341939 19441949 19541959 19641969 19741979 19841989 19941999 2004
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
GDP per capita (left axis) Imports/GDP (right axis)
Policy to Preempt Protectionism
Visible and fair burden sharing on stimulus
Moratorium on new trade restrictions through 2010 and formal monitoring and reporting in WTO
Establish coordination councils on sensitive industries
Reassert determination to conclude Doha by end 2009
Form a working group on WTO reform