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World economic outlook (International Monetary Fund)
World economic outlook: a survey by the staff of the International Monetary Fund.—1980– —Washington, D.C.: The Fund, 1980–
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Contents
Assumptions and Conventions
Preface
Foreword
Chapter I. Economic Prospects and Policy Issues
United States and Canada: Robust Growth Set to Continue, but the U.S. Housing Market is a Key Uncertainty
Western Europe: Is the Expansion Finally Gaining Traction?
Japan and Other Industrial Countries in Asia: Managing Three Major Transitions in Japan
Emerging Asia: Strong Growth Expected to Continue
Latin America: Improving the Business Climate Key to Raising Long-Term Growth
Emerging Europe: Addressing Rising Current Account Deficits
Commonwealth of Independent States: A Rebalancing of Growth Is Needed to Sustain the Expansion
Africa: Sustaining the Recent Growth Acceleration
Middle East: Booming Asset Prices Across the Region
Appendix 1.1. Recent Developments in Commodity Markets
Appendix 1.2. The Global Implications of an Avian Flu Pandemic
References
Chapter II. Oil Prices and Global Imbalances
How Does the Current Oil Price Shock Compare with Previous Episodes?
How Will the Current Oil Price Shock Affect Global Imbalances?
Conclusions
Appendix 2.1. Oil Prices and Global Imbalances: Methodology, Data, and Further Results
References
Chapter III. How Has Globalization Affected Inflation?
Recent Inflation Developments
Understanding Globalization and Inflation: A Broad Framework
Globalization and Inflation: An Aggregate Perspective
A Sectoral Perspective on Globalization and Prices
A Cost Perspective on the Moderation in Sectoral Producer Prices
Summary and Policy Conclusions
Appendix 3.1. Sample Composition, Data Sources, and Methods
Appendix 3.2. A Sectoral Perspective on Globalization and Inflation
References
Chapter IV. Awash With Cash: Why Are Corporate Savings So High?
What Has Been Driving the Increase in Corporate Excess Saving?
Are Current Trends in Corporate Excess Saving Sustainable?
Conclusions
Appendix 4.1. Econometric Methodology
References
Annex: IMF Executive Board Discussion of the Outlook, March 2006
Statistical Appendix
Assumptions
What’s New
Data and Conventions
Classification of Countries List of Tables
Output (Tables 1–6)
Inflation (Tables 7–11)
Financial Policies (Tables 12–19)
Foreign Trade (Tables 20–24)
Current Account Transactions (Tables 25–31)
Balance of Payments and External Financing (Tables 32–36)
External Debt and Debt Service (Tables 37–42)
Flow of Funds (Table 43)
Medium–Term Baseline Scenario (Tables 44–45)
World Economic Outlook and Staff Studies for the World Economic Outlook, Selected Topics
Boxes
1.1 Long Term Interest Rates from a Historical Perspective
1.2 The Impact of Recent Housing Market Adjustments in Industrial Countries
1.3 How Accurate Are the Forecasts in the World Economic Outlook?
1.4 How Much Progress Has Been Made in Addressing Global Imbalances?
1.5 The Doha Round After The Hong Kong SAR Meetings
1.6 China’s GDP Revision: What Does It Mean for China and the Global Economy?
1.7 The Spanish Flu of 1918–19
2.1 How Rapidly Are Oil Exporters Spending Their Revenue Gains?
2.2 Recycling Petrodollars in the 1970s
2.3 The Impact of Petrodollars on U.S. and Emerging Market Bond Yields
3.1 Globalization and Inflation in Emerging Markets
3.2 Globalization and Low Inflation in a Historical Perspective
3.3 Exchange Rate Pass-Through to Import Prices
4.1 Drawing the Line Between Personal and Corporate Savings
4.2 Trends in the Financial Sector’s Profits and Savings
A1 Economic Policy Assumptions Underlying the Projections for Selected Advanced Economies
Tables
1.1 Overview of the World Economic Outlook Projections
1.2 Emerging Market and Developing Countries: Net Capital Flows
1.3 Major Advanced Economies: General Government Fiscal Balances and Debt
1.4 Advanced Economies: Real GDP, Consumer Prices, and Unemployment
1.5 Advanced Economies: Current Account Positions
1.6 Selected Asian Economies: Real GDP, Consumer Prices, and Current Account Balance
1.7 Selected Western Hemisphere Countries: Real GDP, Consumer Prices, and Current Account Balance
1.8 Emerging Europe: Real GDP, Consumer Prices, and Current Account Balance
1.9 Commonwealth of Independent States: Real GDP, Consumer Prices, and Current Account Balance
1.10 Selected African Countries: Real GDP, Consumer Prices, and Current Account Balance
1.11 Selected Middle Eastern Countries: Real GDP, Consumer Prices, and Current Account Balance
1.12 Global Oil Demand by Region
1.13 Nonenergy Commodity Prices
2.1 Increase in Fuel Exporters’ Net Oil Exports
2.2 Change in Net Oil Exports, 2002–05
2.3 Petroleum Reserves
2.4 Composition of Merchandise Imports
2.5 Impact of Oil Price Shock: Greater Spending by Fuel Exporters
2.6 Impact of Oil Price Shock: Delayed Pass-Through to Core Inflation
3.1 Estimates of Output-Inflation Sensitivity and Inflation Persistence in Advanced Economies
3.2 The Cumulative Impact of a 1 Percent Decrease in Real Import Prices on Inflation
3.3 Impact of Trade Openness on Relative Producer Price Inflation
3.4 Producer Price Inflation by Cost Components
3.5 Impact of Trade Openness on Productivity, Labor Compensation, and Unit Labor Costs
3.6 Inflation in Advanced Economies: SUR Estimates
3.7 Classification of Sectors by Technological and Skill Intensity
3.8 Impact of Changes in Import Prices on Relative Producer Price Inflation
3.9 Impact of Trade Openness on Cost Components
4.1 Nonfinancial Corporate Sector: Change in Selected Variables
4.2 Group of Seven (G-7) Countries: Cash Accumulation by Size of Firm’s Sales
4.3 Defined Benefits Corporate Pension Plans: Assets Over Liabilities
4.4 Weighted Average, Median, and 90th Percentile of Selected Series, by Change in Cash to Total Assets by Quartile, 2001–04
4.5 Regression Results: Dependent Variable—Change in Cash and Short-Term Investments
Figures
1.1 Prospects for World GDP Growth
1.2 Global Indicators
1.3 Current and Forward–Looking Indicators
1.4 Developments in Mature Financial Markets
1.5 Emerging Market Financial Conditions
1.6 Global Exchange Rate Developments
1.7 Global Inflation
1.8 Global Outlook
1.9 Fiscal and Monetary Policies in the Major Advanced Economies
1.10 How Will Global Imbalances Adjust?
1.11 United States: The Housing Market and Growth
1.12 Western Europe: Social Policy Indicators and Outcomes
1.13 Japan: Reversing the Relative Decline in Per Capita GDP Growth
1.14 Emerging Asia: Understanding Recent Developments in the Current Account
1.15 Latin America: Public Debt Ratios and Investment
1.16 Emerging Europe: Current Account Deficits Remain High
1.17 Commonwealth of Independent States: Unbalanced Growth Raises Concerns About the Outlook
1.18 Sub-Saharan Africa: Growth, Investment, and Economic Transitions
1.19 Middle East: Surging Asset Markets
1.20 Crude Oil Prices, Futures, and Petroleum Product Prices
1.21 World Refinery Capacity, Spare Capacity, and Production
1.22 Commercial Oil Inventories, Spot and Future Prices
1.23 Energy Prices, Taxes, and Fuel Subsidies
1.24 Nonenergy Commodities
1.25 Semiconductor Market
2.1 Current Account Balances and Net Foreign Asset Positions
2.2 Real Oil Prices and Net Oil Exports
2.3 Fuel Exporters’ Cumulative Current Account Balances and Capital Flows
2.4 Fuel Exporters’ Cumulative Current Account Balances and Identified Asset Purchases
2.5 Current Account and Oil Trade Balances
2.6 Impact of Oil Price Shocks on External Imbalances, 1972–2004
2.7 Adjustment to Oil Price Shocks, 1979:Q2–2003:Q4
2.8 Additional Results: Adjustment to Oil Price Shocks, 1979:Q2–2003:Q4
3.1 Inflation
3.2 Inflation Volatility
3.3 Prices of Goods and Services
3.4 Trade and Financial Openness
3.5 Inflation over the Business Cycle, 1961–2003
3.6 Selected Structural Indicators
3.7 Import Prices
3.8 The Impact of Import Prices on CPI Inflation
3.9 Inflation in Manufacturing and Business Services in Selected Industrial Countries
3.10 Relative Producer Price Inflation by Technological and Skill Intensity
3.11 Producer Price Inflation and Openness
3.12 Contributions to Declines in Relative Producer Prices
3.13 Producer Price Inflation by Cost Components
4.1 Group of Seven (G-7), Excluding Germany: Gross Saving, Capital Spending, and Net Lending/Borrowing
4.2 Nonfinancial Corporate Sector: Gross Saving, Capital Spending, and Net Lending/Borrowing
4.3 Nonfinancial Corporate Sector: Gross Operating Surplus and Profits
4.4 Nonfinancial Corporate Sector: Financial Accounts, Selected Variables
4.5 Financial Transactions: Nonfinancial Corporate Sector of the G–7 Countries
4.6 Cash Accumulation in the G–7 Countries by Industry
4.7 Sales Volatility and Intangible Assets in the G–7 Countries
4.8 Nonfinancial Corporate Sector Debt
Assumptions and Conventions
A number of assumptions have been adopted for the projections presented in the World Economic Outlook. It has been assumed that real effective exchange rates will remain constant at their average levels during February 9–March 9, 2006, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to remain constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies in industrial countries, see Box A1); that the average price of oil will be $61.25 a barrel in 2006 and $63.00 a barrel in 2007, and remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 5.0 percent in 2006 and 5.1 percent in 2007; that the three–month euro deposits rate will average 3.0 percent in 2006 and 3.4 percent in 2007; and that the six–month Japanese yen deposit rate will yield an average of 0.3 percent in 2006 and of 0.9 percent in 2007. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. The estimates and projections are based on statistical information available through early April 2006.
The following conventions have been used throughout the World Economic Outlook:
. . . to indicate that data are not available or not applicable;
— to indicate that the figure is zero or negligible;
– between years or months (for example, 2004–05 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2004/05) to indicate a fiscal or financial year.
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percent point).
In figures and tables, shaded areas indicate IMF staff projections.
Minor discrepancies between sums of constituent figures and totals shown are due to rounding.
As used in this report, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Further Information and Data
This report on the World Economic Outlookis available in full on the IMF’s Internet site, http://www.imf.org. Accompanying it on the website is a larger compilation of data from the WEO database than in the report itself, consisting of files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.
Inquiries about the content of the World Economic Outlook and the WEO database should be sent by mail, electronic mail, or telefax (telephone inquiries cannot be accepted) to:
World Economic Studies Division
Research Department
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431, U.S.A.
E-mail: weo@imf.org Telefax: (202) 623–6343
Preface
The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments together with the Policy Development and Review Department, the International Capital Markets Department, the Monetary and Financial Systems Department, and the Fiscal Affairs Department.
The analysis in this report has been coordinated in the Research Department under the general direction of Raghuram Rajan, Economic Counsellor and Director of Research. The project has been directed by David Robinson, Deputy Director of the Research Department, together with Tim Callen, Division Chief, Research Department.
The primary contributors to this report are Thomas Helbling, Subir Lall, Kalpana Kochhar, Sandy Mackenzie, Gian Maria Milesi–Ferretti, S. Hossein Samiei, Roberto Cardarelli, To-Nhu Dao, Selim Elekdag, Toh Kuan, Florence Jaumotte, Valerie Mercer-Blackman, Paul Nicholson, Alessandro Rebucci, Martin Sommer, Nikola Spatafora, and Johannes Wiegand. Christian de Guzman, Stephanie Denis, Angela Espiritu, Bennett Sutton, and Ercument Tulun provided research assistance. Mahnaz Hemmati, Laurent Meister, and Casper Meyer managed the database and the computer systems. Sylvia Brescia, Celia Burns, and Seetha Milton were responsible for word processing. Other contributors include Laurence Ball, Nicoletta Batini, Pelin Berkmen, Michael Bordo, James Boughton, Luis Catão, Jean Pierre Chauffour, Li Cui, Daniel Hardy, Lutz Kilian, Laura Kodres, Kornélia Krajnyák, Suchitra Kumarapathy, Doug Laxton, Vojislav Maksimovic, Sam Ouliaris, Lars Pedersen, M. Hashem Pesaran, Miguel Segoviano, Marco Terrones, Kenichi Ueda, and Frank Warnock. Jeff Hayden of the External Relations Department edited the manuscript and coordinated the production of the publication.
The analysis has benefited from comments and suggestions by staff from other IMF departments, as well as by Executive Directors following their discussion of the report on March 29 and 31, 2006. However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.
Foreword
The World Economic Outlook is a cooperative effort. A few members of the Research Department put it together, but in doing so they rely heavily on staff from around the Fund. I thank Tim Callen, members of the World Economic Studies Division, and all the IMF staff from other divisions and departments who worked together to bring this World Economic Outlook to you. I am especially grateful to David Robinson, who has supervised an impressive series of high-quality Outlooks over the last six years, and will now be moving on to a different position in the Fund.
The world economy is in the midst of an extraordinary purple patch, with what looks like a third year of significantly above-trend growth. Growth is also becoming more balanced with Japan picking up strongly, and the euro area showing advance signs of steadier growth. Perhaps the best reflection of the times is that sub-Saharan Africa is headed for its best growth performance in over 30 years.
As past Outlookshave documented, an important reason for this good performance has been greater flows of goods, services, and capital across the world, a phenomenon known colloquially as globalization. The chapters in this Outlookall try to make sense of this phenomenon.
Chapter III, “How Has Globalization Affected Inflation?,” finds that globalization has at times had an important impact on inflation over the past decade. IMF staff estimates suggest that through non-oil import prices, globalization has reduced inflation by an average of a ¼ of a percentage point a year in the advanced economies, with a larger effect of a ½ percentage point a year in the United States. At times when global spare capacity has been plentiful, as for instance after the 1997–98 crises in emerging markets, these direct effects have been even larger, shaving more than 1 percentage point off actual inflation in some advanced economies over one- to two–year periods. More generally, globalization has contributed to reducing the sensitivity of inflation to domestic capacity constraints, while increasing the sensitivity to global constraints. It has also restrained wage increases in industries most open to global competition, and even lowered the sensitivity of wages to productivity increases.
For globalization to have a substantial lasting impact on inflation, however, it must change the overarching objectives of monetary policy—such as the central bank’s inflation target—which, over the medium term, determines inflation. After all, with such a target, downward pressure from abroad on the domestic price index would only allow central bankers more room to be accommodative. In my view, however, the true impact of globalization has been in contributing to wage and price restraint at a time when central bankers were establishing their inflation–fighting credibility, thus allowing them to achieve targets and gain credibility without the need to tighten to politically difficult levels.
Despite being helpful in the past, globalization may not continue to be a crutch for central bankers. Spare capacity is decreasing worldwide, especially in the United States, the United Kingdom, and Canada. International competition helps less in restraining prices when there are global supply constraints. Tight domestic labor markets can also attenuate the effects of global competition on wages—in the United States, wage pressures are beginning to come to the fore. Central bankers must therefore remain vigilant for signs of a pickup in inflation in the period ahead.
Another aspect of globalization is an integrated market for world savings and borrowing. What is particularly interesting here is that the identity of the savers and borrowers has shifted in the last few years. Corporations are usually net borrowers. In 2003 and 2004, though, total corporate excess savings (undistributed profit less capital expenditure) in the G-7 countries amounted to $1.3 trillion, which was more than twice the combined current account surpluses of emerging market and developing countries over the same period.
This increase in corporate savings can be decomposed into two main components. First, there has been a substantial increase in corporate profits in the G–7 since about 2000. In general, this has not been because of better operating profits, but because taxes and interest rates have come down so that profits after interest and taxes have gone up—in other words, profitability is largely due to accommodative monetary and fiscal policy rather than, as commonly believed, productive efficiency. The second and arguably more important component is falling capital spending. It accounted for as much as three– quarters of the total increase in corporate excess savings since 2000. One reason for lower capital spending is that the real price of capital goods has declined sharply, so less has to be invested to increase the real capital stock by a given amount. Another reason is a drop in realcapital spending. Here there is no uniform pattern across all seven countries—the United States and Germany are responsible for much of the decline.
Taken together, Chapters III and IV suggest an extraordinary confluence of global forces have kept the world economy going in the last few years. As investment slowed following the overcapacity built up by excess investment in the late 1990s and early 2000s, excess corporate savings contributed to the global savings pool to push down long-term interest rates. Consumption picked up—driven more by accommodative policy and its effects on house prices and household wealth than by improved job prospects. Quiescent inflation, partly because of a significant global output gap, allowed monetary policy to be very accommodative. Now as the global output gap narrows, monetary accommodation is being withdrawn. Also real corporate investment is likely to pick up. Both will tend to reduce corporate excess savings and push up long-term interest rates. This will slow asset price growth, but consumption may continue to be supported, this time by improved job prospects.
Such a scenario would be the proverbial soft landing. There are less benign possibilities. For instance, consumption growth may fall more rapidly than anticipated as the froth comes out of house prices, and this may have knock-on effects on confidence and investment. Our overall assessment, taking a variety of risks into consideration, is that surrounding the central scenario of robust growth, the risks are weighted to the downside.
Even as the internal transition of savings from corporations to households and governments takes place within some countries, we also need a shift in aggregate demand across countries. Chapter II explains how the oil price shock—itself a result of past underinvestment in the industry—will widen existing global current account imbalances and prolong them. Because the inflationary consequences of oil prices have been limited—partly a result of globalization—and because financing conditions have been benign, oil consumers have not had to adjust as much as they did in the past. Oil producers are rightfully being more circumspect about spending, mindful of past waste. As a result, oil-price–induced imbalances are likely to be with us for some time.
Should this be a concern? More generally, should we worry about the size of the global current account imbalances, given that they have been financed so long? I think we should. For one, the benign global financing conditions appear to be turning so the past need not say much about the future. More important, the imbalances are unsustainable at their current level—even with increasing economic integration, there is a limit to how much a country can depend on the outside world. Deficit countries have to start thinking about weaning themselves of reliance on global savings while surplus countries have to find ways to depend less on external demand. Since adjustment is inevitable, would it not be better to commit to a medium-term policy framework today so that public policy can support private sector adjustment and ensure the process is smooth?
A set of such frameworks for all the major players would have two additional effects. First, it would indicate that the imbalances are a shared responsibility and help prevent concerns about imbalances degenerating into protectionism. Second, it would reassure financial markets that a policy framework for supporting adjustment is in place, thus limiting the risk of an abrupt and costly, market-induced, adjustment.
Unfortunately, the rapidity with which globalization is advancing seems to worry citizens. Some governments see their role increasingly as slowing globalization, extracting political mileage by pandering to vociferous interest groups obstructing change, rather than educating citizens to accept it. Even as linkages between economies grow, far too many governments are putting the slightest domestic constraint above any international interest. Others are reviving beggar-thy-neighbor policies, except they are now on the capital account—shielding large swathes of their own economy from corporate takeovers while encouraging their own companies to take advantage of the continued openness of others. Multilateralism is in retreat everywhere.
These are the best of times but they are also the most dangerous of times. We need to strengthen the process of multilateral dialogue, else globalization could prompt a backlash that might reverse much that has been gained over the last few decades. An important test of the resolve of economic policymakers is whether they will take serious steps to monitor each other (through organizations like the Fund) and force a narrowing of the imbalances over time, or whether they will take their chances with the market and protectionist politics. I hope good sense will prevail.
Raghuram Rajan
Economic Counsellor and Director, Research Department