WEO GFSR April 2011 Seminar by Shogo Ishii, Director, IMF … · 2011-04-28 · Shogo IshiiShogo Ishii Director IMF Regional Office for Asia and the Pacific Presentation OutlinePresentation

April 2011

Shogo IshiiShogo Ishii

Director

IMF Regional Office for Asia and the Pacific

Presentation OutlinePresentation Outline

Recent Economic and Financial Developments

Outlook and RisksOutlook and Risks

Policy ChallengesPolicy Challenges

1

Recent Economic and Financial Developments

2

After an inventory acceleration-slowdown cycle, activity seems poised to reaccelerate in 2011.y p

Industrial Production( li d h f

Manufacturing PMI(I d )(annualized percent change of 3mma

over previous 3mma)(Index)

Industrial Production(annualized 3-month percent change)

082005 07 Jan.11

0906 062000 04 Feb.11

0802

3

However labor markets are recoveringHowever, labor markets are recovering at different speeds.

10

11

10

11 Unemployment Rate(percent)

United States Euro Area

9

10

9

10 United States Euro Area

United Kingdom Emerging Economies

7

8

7

8

5

6

5

6

4

5

4

5

2005 2006 2007 2008 2009 2010 2011

4

Source: IMF, Global Data Source.

Global financial stability: Better, but still fragile

Credit risksEmerging market risksRisks

April 2011

October 2010

Macroeconomic risks Market andMacroeconomic risks Market and liquidity risks

Away from center signifies higherAway from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite.

Monetary and financial Risk appetite

Conditions

5

Equity markets have recovered to a large extent and l ili i l “ l”volatility is close to “normal”.

Equity Markets Implied Volatility( t)(index; 2007=100; national currency) (percent)

May 10, 2010

2000 04 Mar.11

06 0802

Mar-11

6

Still, credit growth is low in advanced economies. B di i b i i iBut, credit is buoyant in many emerging economies

Real Private Credit Growth (yoy percent change)

1

2000 04 Jan.11

06 08

Source: Bank of Japan, European Central Bank, and the Federal Reserve Board.1 Spike in late 2010 due to securitized credit card assets that banks owned and that were brought onto their balance sheets in

2010

02 2006 07 Dec.10

08 09

7

Capital inflows to emerging markets have slowed since fall 2010

Emerging Bond Funds (billions of U.S. dollars, weekly flows)

Emerging Equity Funds(billions of U.S. dollars, weekly flows)

Source: EPFR Global.

3/23/2011

8

However, a sharp increase in commodity prices has b h llbecome a new challenge

Oil Price ProspectsGlobal Commodity Prices Oil Price Prospects(In U.S. dollars per barrel)

Global Commodity Prices(Jan 2005 = 100)

9Note: West Texas Intermediate (WTI) oil price futures information used.

Energy and food prices are spilling over into core inflationinto core inflation

Advanced Economies Emerging Economies6

on

, 35

y = -0.1674x + 3.5896R² = 0.1579

4

el p

rice

infl

atio

08

ave

rage y = 0.4241x + 7.4695

R² = 0.2053

15

25

pri

ce in

flat

ion

, av

era

ge

0

2

No

n-f

ue

20

0

5

5

No

n-f

ue

l p2

00

8

8 35

,

0

-2 0 2 4 6 8Fuel price inflation, 2007 average

-5

-5 0 5 10 15Fuel price inflation, 2007 average

y = 0.1767x + 2.6701R² = 0.0312

4

6

ce in

flat

ion

, ve

rage

y = 0.6191x + 5.0193R² = 0.3581

15

25

pri

ce in

flat

ion

8 a

vera

ge

0

2

No

n-f

oo

d p

ric

20

08

av

-5

5N

on

-fo

od

p2

00

8

10

0 1 2 3 4 5Food price inflation, 2007 average

Sources: IMF, World Economic Outlook; and IMF staff estimates.

-20 -10 0 10 20 30Food price inflation, 2007 average

Outlook and Risks

11

The global economy will continue to recover,

Gl b l GDP G th P t Contribution to Global Annual Growth(In percent)

Global GDP Growth Prospect

(annualized percent change )

12

but at different speedsAverage projected real GDP growth during 2011-2012

(percent)

less than 00 to 3 t 63 to 6

more than 6

13

Sources: IMF, World Economic Outlook; and IMF staff calculations.

Causes of the slow recovery in advanced economies

Supply sideFactors prior to the crisis

Factors after the crisis

• Low

to the crisis

• Housing market

the crisis

• High levels of d bt dproductivity

growth

• Low labor force

market debt and leverage

• Vulnerable• Low labor force growth

Vulnerable financial institutions

14

Downside risks have diminished but continue to dominate.

Prospects for World GDP Growth(percent change)

Upside risks:

• Buoyant EM activity

• Strong corporate balance h tsheets

Downside risks:

• Sovereign/financial risks

• Oil supply concerns

15

In Japan, a sharp slowdown is expected, followed by aIn Japan, a sharp slowdown is expected, followed by a rapid recovery beginning in the second half of 2011Japan: Growth Rate - Range of Private Estimates

Key factors affecting the recovery:

P h t d l

Japan: Growth Rate Range of Private Estimates(Year-on-year; in percent)

Power shortages and supply chain disruptions

Fukushima nuclear power Fukushima nuclear power plant

Consumer and investor Consumer and investor confidence

Fiscal and monetary policyFiscal and monetary policy

Source: IMF staff estimates as of March 30, 2011.

16

There are large funding needs in many advanced economies in 2011.

S l t d Ad d E i G t d B k B d D i 2011Selected Advanced Economies: Government and Bank Bonds Due in 2011(In percent of GDP)

17

Sovereign balance sheets remain under strain in some advanced economies.in some advanced economies.

Sovereign CDS Spreads(5-year tenor, in basis points)

EU/ECB/IMFpackage for Greece

EU/ECB/IMF package for Ireland

18

Banking systems remain vulnerable.

Uncertainty

Sovereign

Uncertainty about asset

quality

Leverage too high

Sovereign risks

Incomplete Policy ActionBank

funding pressures

Weak tail of banks

Investor concerns

about bank debt

19

Solvency and funding improving, but uneven…

rce

nt)

7

8

sets

(p

er

June 2010

December 2008

6

7

ng

ible

as

U it d St t

5

ity

to t

an United States

4

mo

n e

qu

i

Japan

Euro area

3

ble

co

mm

UnitedKingdom

8

2

15 20 25 30 35 40 45 50Reliance on wholesale funding (percentage of total funding)T

an

gib

…and more capital is needed.

EU Bank Core Tier 1 Ratios, 2010(percent of risk-weighted assets)

6 percent core Tier 1

(5% of banks,2% of bank assets)

20

The housing sector remains a main weaknessin the U.S.

U.S. Inventory of Houses and Foreclosures

(millions)(millions)

22

In emerging economies, inflation has picked up amid strong economic activityeconomic activity

Headline Inflation(Twelve month change)

Core Inflation(Twelve month change)(Twelve-month change) (Twelve-month change)

062002 04 Feb.11

08 062002 04 Feb.11

08

23

Policy Challenges

24

Major challenges

Advanced Economies Emerging Economies

Shift to Structural Policies Focus on Macroeconomic Policies

• Sovereign：

• Fiscal consolidation

• Banking Sector：

• Contain overheating risks and financial sector vulnerabilities:

• Tighten macroeconomic policiesBanking Sector：

• Strengthen the quality and level of capital

g p

• Adopt macro-prudential policies

• Enhance capacity to absorb capital inflows:• Resolution or liquidation of weak

banks

• Improve asset quality

inflows:

• Deepen domestic capital markets

•Household Sector:

• Restructure and reduce debts

25

In many advanced economies, h k l h ll f l l dthe key policy challenge is fiscal consolidation.

Real Policy Rates Fiscal Balance and Public Debt( t f GDP)(relative to core inflation)

Fiscal

(percent of GDP)

Balance(right scale)

Public Debt(left scale)

062000 02 Feb.11

0804 Mar.12 26

Much more adjustment is needed to achieve sound public financesto achieve sound public finances.

Change in Structural Balance(percent of GDP)

1,2Required Adjustment(percent of GDP)(percent of GDP) (percent of GDP)

Sources: IMF, Fiscal Monitor; and IMF staff calculations.CA: Canada, FR: France, DE: Germany, IT: Italy, JP: Japan, ES: Spain, GB: United Kingdom, US: United States.Cyclically adjusted primary balance adjustment needed to the debt ratio to 60 percent in 2030, except for Japan (200 percent in 2030).

1

2

27

In many emerging economies, macroeconomic policies need to be tightened

Real Policy Rates Fiscal Balance and Public Debt( t f GDP)

macroeconomic policies need to be tightened.

(relative to core inflation) (percent of GDP)

Fiscal Balance

(right scale)

Public Debt(left scale)(left scale)

062003 04 Feb.11

080705 09 10 2000 02 10 1604 06 08 12 14

28

Challenges and resolution in banking systemsChallenges and resolution in banking systems

Ch ll S l iChallenge Solution

Asset quality uncertainty Comprehensive, tough, and transparent stress tests

High levels of leverage Improve capital base

Remaining weak banks Restructure or rehabilitate

Investor concern about bank debt

Clarify investors burden in the restructuring

B k f di R d h t t h l l f diBank funding pressures Reduce short-term wholesale funding

Sovereign risks Fiscal consolidation

29

Global demand rebalancing is needed.

Global Imbalances1

(percent of world GDP)

Total Domestic Demand(percent)

1,2 1,3

1,4

1996 2000 04 08 12

1 CHN+EMA: China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, and Thailand; DEU+JPN: Germany and Japan; OCADC: Bulgaria Croatia Czech

16Sources: Federal Reserve Board; and IMF staff calculations.

1Based on the IMF staff ’s Consultative Group on Exchange Rate Issues (CGER).

2These economies account for 18.5 percent of global GDP.3These economies account for 27.4 percent of global GDP.DEU+JPN: Germany and Japan; OCADC: Bulgaria, Croatia, Czech

Republic, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Turkey, and United Kingdom; ROW: rest of the world; US: United States.

These economies account for 27.4 percent of global GDP.4These economies account for 39.2 percent of global GDP.

30

Global demand rebalancing and exchange rate policy

Net Financial Flows, 2008–10(billions of U.S. dollars)

1 REER Change in EM(percent change from June 2007 to February 2011; GDP weighted)

1Asia: Developing Asia, MENA: Middle East and North Africa, LAC: Latin America and the C ibb

Asia MENA LAC

Excessive external

Excessive external

Aligned

Caribbean.surpluses deficits

31

SummarySummary

Economic activity continues to recover in 2011 but downside risks dominateEconomic activity continues to recover in 2011, but downside risks dominate. Sharply rising commodity prices are a new risk.Rebalancing is proceeding slowly.

The global recovery is continuing broadly as anticipated, but at different speeds.

Global financial stability is improving, but remains fragile, especially in Europe.

Challenges• Advanced economies: fiscal consolidation strengthening of the banking sectorAdvanced economies: fiscal consolidation, strengthening of the banking sector, and improve household balance sheets• Emerging economies: maintaining macroeconomic and financial stability• Rebalancing global demand

32

Rebalancing global demand