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WEO; emerging market; Box; U.S. dollar; market; economy; advanced economy; net debtor countries; income share; financial market; factor income; Emerging and frontier financial markets; Income inequality; Capital inflows; Inflation; Personal income; Global; Asia and Pacific; Europe; Central and Eastern Europe; Middle East
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Abstract

The following remarks by the Acting Chair were made at the conclusion of the Executive Board’s discussion of the World Economic Outlook on September 24, 2007.

Annex IMF Executive Board Discussion of the Outlook, September 2007

The following remarks by the Acting Chair were made at the conclusion of the Executive Board’s discussion of the World Economic Outlook on September 24, 2007.

Global Prospects and Policies

Executive Directors welcomed the continued strong growth of the global economy in the first half of 2007, while emphasizing that downside risks to the near-term outlook have increased in the face of the ongoing financial market disturbances. They expected global growth in the period ahead to be slower than previously forecast in the July update, although the severity of the slowdown is difficult to predict given the uncertainties regarding the magnitude and duration of the financial stress. Directors were generally of the view that the global economy’s strong fundamentals and the continued robust growth of emerging market and other developing economies will cushion the impact of the disturbances. In light of this, many Directors agreed that while the situation was still evolving, at this point the degree of the slowdown seemed likely to be relatively modest and agreed with the staff’s baseline forecast. However, a number of Directors cautioned that the slowdown in growth could be more severe.

Directors acknowledged that at the current juncture, the global outlook remains exceptionally uncertain. A number of Directors saw heightened risks of prolonged financial market instability and a broad credit retrenchment, with the possibility of further financial contagion and declining confidence that could weaken the global growth environment. In particular, further downward pressure on house prices in the United States may cause steeper declines in residential investment and consumption growth, with consequently more severe spillovers to the rest of the world. In addition, the risks faced by some countries may be compounded by the rapid appreciation of their currencies. Some emerging market countries with large current account deficits could be particularly at risk from more restricted availability of external financing. Some Directors also stressed that the possibility of a disorderly unwinding of global imbalances remains an important concern. Others saw little risk of a disorderly unwinding.

Against this backdrop, Directors underscored the importance of sound policies and continued vigilance. They saw the task of restoring orderly conditions in financial markets as the immediate policy priority, and generally endorsed the actions by central banks in the major advanced economies to address the continuing squeeze in liquidity. At the same time, they emphasized that it is important to avoid perceptions that central banks will automatically respond to financial distress by taking action to curtail losses, which could raise moral hazard and reduce credit discipline. A number of Directors viewed the repricing of risks and tightening of credit standards as a return toward greater market discipline after a prolonged period of excessive risk-taking in certain market segments. Directors believed that an important lesson to be learned from the financial market turbulence is the need to ensure effective financial regulation, which will call for greater transparency and improved awareness of financial risks.

Directors noted that a slower pace of growth is likely to moderate pressures on capacity and resources, which will help reduce inflationary pressure. At the same time, tight commodities markets and rising food prices will remain important sources of price pressures, especially if growth continues to be strong in emerging markets. Directors agreed that in setting the monetary stance, central banks should focus on achieving price stability in the medium term, and continue to carefully assess the inflation outlook in light of the envisaged downside risks to growth.

Looking toward the medium term, Directors underlined the importance of actions to strengthen the foundations for sustained high growth. Many countries will need to pursue ambitious medium-term fiscal consolidation plans to address rising pressures on health and social security spending. They will also need to advance key reforms—including further liberalizing financial and service sectors in advanced countries and improving infrastructure and the business environment in emerging and developing countries—in order to take full advantage of the opportunities provided by globalization and technological advances.

Directors welcomed the analysis of the role that better monetary and fiscal policies, stronger institutions, and financial development have played over the past two decades in reducing the volatility of economic growth. Some Directors noted that fewer exogenous shocks and the rise of the emerging market economies may have contributed to lower volatility. Directors emphasized, however, that the lower volatility of growth does not mean that future stability should be taken for granted. Policymakers will need to stand ready to adapt to changing circumstances, particularly in light of the increased risk of spillover effects associated with the more synchronized business cycles across countries.

Advanced Economies

Most Directors agreed that the risks to the short-term outlook in the United States are firmly on the downside, given the financial market turmoil, weak housing market, softening labor market, and declining productivity growth. They emphasized that the current financial market turmoil could broaden, and a more protracted housing downturn could put pressure on household finances and consumption. They accordingly considered the downward revision in the growth forecast for 2008 to be reasonable. With inflation pressures declining and inflation expectations remaining well anchored, Directors saw room for monetary policy to help cushion the downside risks to the outlook. Directors were encouraged by the recent fiscal overperformance, while stressing that a more ambitious medium-term program of fiscal consolidation will be needed to guarantee long-term fiscal sustainability.

Directors welcomed the relatively strong performance of the euro area economy, but cautioned that the balance of risks to near-term growth has shifted to the downside because of slowing growth in the United States and the financial market turmoil. They noted that the European Central Bank continues to monitor developments closely to ensure inflation objectives are met. Directors welcomed the progress made toward fiscal consolidation, but felt that more ambitious efforts will be necessary given the strength of the cyclical upswing and the looming pressures from population aging. Directors also noted that the euro area’s long-term prospects will hinge on its success in accelerating productivity and employment growth, and improving structural flexibility. Enhancing the contestability of services markets will help boost productivity in these sectors, while steps to strengthen incentives to work and improve wage flexibility will be key elements in labor and product market reforms.

Directors noted that after two quarters of very strong growth, the Japanese economy contracted in the second quarter of 2007, driven by a drop in investment and weaker consumption growth. The outlook remains mixed, as growth could be dampened by the recent financial market turmoil and yen appreciation. Directors supported the Bank of Japan’s accommodative monetary stance, and suggested that monetary tightening should await clear signs that inflation is moving decisively higher and that risks from recent financial market volatility are waning. Directors were encouraged by the considerable progress made in reducing the fiscal deficit in recent years, but urged a more ambitious fiscal agenda to lower the public debt ratio and meet the challenge of population aging.

Emerging Market and Other Developing Countries

Directors believed that large foreign exchange inflows in emerging market and other developing countries could continue to complicate macroeconomic management in the coming years. They stressed that the nature of the inflows—including their composition and terms—and country circumstances will determine the appropriate policy response to large capital inflows in individual cases. Many Directors agreed that fiscal restraint and increasing exchange rate flexibility, complemented by capital account liberalization, can be helpful in attenuating the impact of these inflows. A number of Directors, however, noted that fiscal adjustment may not always be feasible or effective, and that sustained exchange rate appreciation could cause difficulties. These Directors suggested that temporary capital controls, while not a first-best measure, might be a practical way to deal with capital flows in certain cases, as a useful supplement to macroeconomic policies. A number of Directors considered it important to distinguish between short-term and long-term capital flows, as the policy implications would be different. Directors agreed that fostering financial development and strengthening financial regulation and supervision are also important in the face of capital inflows.

Directors expected growth in emerging market countries in Asia to remain strong, led by China and India. Most Directors viewed the balance of risks as being tilted to the downside, particularly because of the U.S. economic slowdown. Some Directors, however, believed that the risks to growth and inflation in China are on the upside in the absence of additional monetary tightening and more flexible exchange rate management. Against the background of continuing large current account surpluses in many countries in the region, several Directors emphasized that greater exchange rate flexibility and measures to boost domestic demand would help reduce the reliance on export-led growth.

Directors welcomed the favorable economic performance and the reduced external vulnerability in Latin America, which reflect stronger policy frameworks, improved debt management, and development of domestic capital markets. At the same time, they observed that growth remains subject to risks arising from the close trade and financial linkages with the United States and the dependence on commodity exports. They emphasized the importance of reforms to foster investment and productivity growth. Directors noted that in recent years Latin American countries have experienced large foreign exchange flows. They welcomed the greater exchange rate flexibility in many countries that has helped to contain inflation in the face of these inflows.

Directors welcomed the continued rapid economic convergence of emerging Europe, supported by robust productivity growth, but expressed concern about overheating in some countries. They observed that the recent financial market turbulence has heightened concerns about the vulnerability of some countries in the region to reversals of capital flows, especially given the heavy reliance on foreign-currency borrowing and the potential for spillover effects. In this context, Directors underscored the importance of prudent macroeconomic policies, structural reforms to improve economic flexibility, and vigilant bank supervision.

Directors observed that economic activity in the Commonwealth of Independent States continues to expand rapidly, supported by high commodity prices and large capital inflows. Growth prospects appear to be generally positive, although global credit retrenchment has affected the outlook in some countries. Directors welcomed the region’s ability to attract large inflows of foreign private capital, but underscored that limited exchange rate flexibility in many countries has resulted in upward price pressures. They saw a need for more flexible exchange rates, and for continued efforts to strengthen institutions, the business climate, and bank regulation and supervision.

Directors were encouraged by the sustained expansion in sub-Saharan Africa, which is being led by high commodity prices, improved policy implementation, reforms to strengthen the business environment, and debt reduction. Growth is expected to accelerate in a number of countries in 2008 as new oil projects come on stream. Sustaining the growth performance and promoting export diversification will require continued macroeconomic stability and a vibrant private sector, supported by further trade liberalization, improved market access for regional exports, and fulfillment of aid commitments by advanced economies.

In the Middle East, high oil prices have supported buoyant growth and strong external and fiscal balances in oil-exporting countries, and are expected to continue to do so in the near term. At the same time, Directors noted that resource utilization and import prices are rising, leading to inflationary pressures in many oil-exporting and oil-importing countries. The challenge for fiscal policy in oil-exporting countries is to strike the right balance between using the oil revenues to pursue long-term development objectives and exercising restraint in the short term to counterbalance strong private demand growth. While welcoming the ongoing buildup of investment in the petroleum sector in a number of oil-exporting countries, Directors underscored the importance of continuing to foster private investment in both the oil and the non-oil sectors of these economies.

Multilateral and Other Issues

Directors welcomed the analysis of the relationship between globalization and inequality, while noting the importance of interpreting the results in the context of individual country circumstances. Most Directors accepted the two main findings of the study: first, that technological change is more important than globalization in explaining rising inequality in many countries; and, second, that contrary to popular belief, trade liberalization appears to reduce inequality while financial globalization appears to increase it. Directors cautioned that the solution to rising inequality would be not to restrict foreign direct investment, but rather to strengthen education to ensure that workers have the appropriate skills in the emerging “knowledge-based” global economy. Labor market reforms will be needed to ensure that jobs are created flexibly in the most dynamic sectors. Also, social safety nets should be enhanced to provide greater protection for those who may be adversely affected by globalization, and policies will be needed to increase the availability of finance to the poor.

Directors emphasized that multilateral action to ensure a smooth unwinding of global imbalances remains a critical task. During the Fund’s Multilateral Consultation, the participants indicated their policy plans that are consistent with the strategy endorsed by the IMFC for reducing global imbalances. These comprise steps to boost national saving in the United States, including fiscal consolidation; further progress on growth-enhancing reforms in Europe; further structural reforms, including fiscal consolidation, in Japan; reforms to boost domestic demand in emerging Asia, together with greater exchange rate flexibility in a number of surplus countries; and increased spending consistent with absorptive capacity and macroeconomic stability in oil-producing countries. Full implementation of these policy plans is needed to reduce imbalances while sustaining growth. While Directors acknowledged that there has been some progress toward realignment of major world currencies, they noted the staff’s analysis that the U.S. dollar is still overvalued and that the yen, the renminbi, and the currencies of the oil-exporting countries are still undervalued relative to their medium-term fundamentals.

Directors expressed concern about the continued lack of progress with the Doha multilateral trade round, and the risk that this would encourage protectionist measures. They expressed hope that countries would find a way to re-energize the process of multilateral trade liberalization. Directors also agreed that global issues such as climate change and energy security would also require a multilateral approach.

Statistical Appendix

The Statistical Appendix presents historical data, as well as projections. It comprises five sections: Assumptions, What’s New, Data and Conventions, Classification of Countries, and Statistical Tables.

The assumptions underlying the estimates and projections for 2007–08 and the medium-term scenario for 2009–12 are summarized in the first section. The second section presents a brief description of changes to the database and statistical tables. The third section provides a general description of the data and of the conventions used for calculating country group composites. The classification of countries in the various groups presented in the World Economic Outlook is summarized in the fourth section.

The last, and main, section comprises the statistical tables. Data in these tables have been compiled on the basis of information available through end-September 2007. The figures for 2007 and beyond are shown with the same degree of precision as the historical figures solely for convenience; because they are projections, the same degree of accuracy is not to be inferred.

Assumptions

Real effective exchange rates for the advanced economies are assumed to remain constant at their average levels during the period August 22 to September 19, 2007. For 2007 and 2008, these assumptions imply average U.S. dollar/ SDR conversion rates of 1.520 and 1.538, U.S. dollar/euro conversion rates of 1.35 and 1.37, and yen/U.S. dollar conversion rates of 118.4 and 115.0, respectively.

It is assumed that the price of oil will average $68.52 a barrel in 2007 and $75.00 a barrel in 2008.

Established policies of national authorities are assumed to be maintained. The more specific policy assumptions underlying the projections for selected advanced economies are described in Box A1.

With regard to interest rates, it is assumed that the London interbank offered rate (LIBOR) on six-month U.S. dollar deposits will average 5.2 percent in 2007 and 4.4 percent in 2008, that three-month euro deposits will average 4.0 percent in 2007 and 4.1 percent in 2008, and that six-month Japanese yen deposits will average 0.9 percent in 2007 and 1.1 percent in 2008.

With respect to introduction of the euro, on December 31, 1998, the Council of the European Union decided that, effective January 1, 1999, the irrevocably fixed conversion rates between the euro and currencies of the member states adopting the euro are as follows.

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See Box 5.4 in the October 1998 World Economic Outlook for details on how the conversion rates were established.

Economic Policy Assumptions Underlying the Projections for Selected Economies

The short-term fiscal policy assumptions used in the World Economic Outlook are based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions and projected fiscal outturns. The medium-term fiscal projections incorporate policy measures that are judged likely to be implemented. In cases where the IMF staff has insufficient information to assess the authorities’ budget intentions and prospects for policy implementation, an unchanged structural primary balance is assumed, unless otherwise indicated. Specific assumptions used in some of the advanced economies follow (see also Tables B5–B7 in the Statistical Appendix for data on fiscal and structural balances).1

United States. The fiscal projections are based on the administration’s FY2008 budget and Mid-Session Review (February and July, 2007). Adjustments are made to account for differences in macroeconomic projections as well as staff assumptions about (1) additional defense spending based on analysis by the Congressional Budget Office; (2) slower compression in the growth rate of discretionary spending; and (3) continued AMT relief beyond FY2008. The projections also assume that proposed Medicare savings are achieved only in part, and that personal retirement accounts are not introduced.

Japan. The medium-term fiscal projections assume that expenditure and revenue of the general government (excluding social security) are adjusted in line with the current government target to achieve primary fiscal balance (excluding social security) by FY2011.

Germany. Projections reflect the fiscal measures announced in the 2005 government’s coalition agreement, 2007 Stability and Growth Pact, the 2008 budget, and 2009–2011 financial plan for the central government. Specifically, projections include the increase in indirect taxes due to the VAT rate increase in 2007, as well as a loss in direct tax revenue due to corporate income tax reform implementation in 2008.

France. The fiscal projections for 2007 are based on the initial budget law and incorporate the impact of the July 2007 tax package. Medium-term projections reflect the authorities’ latest official tax revenue forecast, including the impact of the recent tax measures, but assume different spending and nontax revenue profiles, consistent with an unchanged policy assumption. All fiscal projections are adjusted for the IMF staff’s macroeconomic assumptions.

Italy. For 2007, the deficit projection is based on the IMF staff’s assessment of this year’s budget, adjusted for recent developments, including the additional expenditure package adopted in the summer of 2007. In addition, it is assumed that revenue overperformance relative to the official projections in the medium-term economic and budget plan of June (also known as DPEF) would not be spent. For the medium term, staff projects its own “current policies” scenario, defined as a constant structural primary balance net of one-off measures.

United Kingdom. The fiscal projections are based on information provided in the 2007 Budget Report. Additionally, the projections incorporate the most recent statistical releases from the Office for National Statistics, including provisional budgetary outturns through the first quarter of 2007.

Canada. Projections use the baseline forecast in the 2007 Budget for FY2007/08–2008/09 and the 2006 Economic and Fiscal Update for FY2009/10–2010/11. The staff forecast incorporates the most recent data releases from Statistics Canada, including provincial and territorial budgetary outturns through the first quarter of 2007.

Australia. The fiscal projections through the fiscal year 2010/11 are based on the budget published in May 2007. For the remainder of the projection period, the IMF staff assumes unchanged policies.

Austria. Fiscal figures for 2006 are based on the authorities’ estimated outturn. Projections for 2007 and beyond are IMF staff projections based on current policies in place.

Brazil. The fiscal projections for 2007 are based on the information provided in the 2007 budget and recent budget execution decrees, with some adjustments made by the IMF staff. For the remainder of the projection period, the IMF staff assumes unchanged policies, except for a further increase in public investment in line with the authorities’ intentions.

Belgium. The projections for 2007 are based on the information provided in the 2007 Budget Report. For 2007, the projection excludes one-off measures not explicitly outlined in the budget (representing 0.3 percent of GDP). For the remainder of the projection period, the IMF staff assumes unchanged policies.

China. Projections for 2007 are based on the authorities’ budget released in March, with some adjustment for the IMF staff’s definition for overall budget balance. For 2008, IMF staff projections assume that the deficit will be held roughly constant at its projected 2008 level (just under 1 percent of GDP), which is broadly in line with the authorities’ budget plans.

Denmark. Projections for 2007 are aligned with the latest official projections and budget. For 2008–12, the projections incorporate the June 2006 welfare agreement as well as key features of the prior medium-term fiscal plan.

Greece. Projections are based on the 2007 budget, the latest Stability Program, and other forecasts provided by the authorities. According to preliminary estimates by the European Commission, the revision of gross national income could lead to a permanent increase of Greece’s contribution to the EU budget of less than ¼ percent of GDP, as well as to a one-off payment of arrears of such a contribution of about ¾ percent of GDP, which could accrue to the 2007 balance. These possible contributions are not reflected in the staff projections.

Hong Kong SAR. Fiscal projections for 2007–10 are consistent with the authorities’ medium-term strategy as outlined in the FY2007–08 budget, with projections for 2011–12 based on the assumptions underlying the IMF staff’s medium-term macroeconomic scenario.

India. Projections for 2007 are based on the authorities’ budget, with some adjustment for the IMF staff’s assumptions. For the remainder of the projection period, the IMF staff assumes unchanged policies.

Korea. Projections for 2007 are based on the authorities’ budget, with some adjustment for the IMF staff’s assumptions. For 2008–12, projections are in line with the authorities’ budget plans.

Mexico. Fiscal projections for 2007 build on the authorities’ budget. Projections for 2008 and beyond are based on the IMF staff calculations in line with the Federal Government Fiscal Responsibility Law.

Netherlands. The fiscal projections build on the 2006 and 2007 budgets, the latest Stability Program, and other forecasts provided by the authorities.

New Zealand. The fiscal projections through the fiscal year 2010/11 are based on the 2007/08 budget released in May 2007. For the remainder of the projection period, the IMF staff assumes unchanged policies. The New Zealand fiscal account switched to new GAAP standards beginning in the 2006/07 fiscal year, with no comparable historical data.

Portugal. Fiscal projections through 2010 are based on the IMF staff’s assessment of the 2007 budget and the authorities’ revised projections presented in April 2007, which updated the current Stability Program. In subsequent years, the fiscal projections assume maintaining the primary balance excluding age-related expenditures.

Singapore. For FY2007/08, expenditure projections are based on budget numbers, while revenue projections reflect IMF staff estimates of the impact of new policy measures, including an increase in the goods and services tax. Medium-term revenue projections assume that capital gains on fiscal reserves will be included in investment income.

Spain. Fiscal projections through 2009 are based on the 2007 budget and the 2008 draft budget policies outlined in the authorities’ updated Stability Program 2006–09, information from recent statistical releases, and official announcements. In subsequent years, the fiscal projections assume unchanged policies.

Sweden. The fiscal projections are based on information provided in the budget presented on October 16, 2006. Additionally, the projections incorporate the most recent statistical releases from Statistics Sweden, including provisional budgetary outturns through December 2006.

Switzerland. Projections for 2007–12 are based on IMF staff calculations, which incorporate measures to restore balance in the Federal accounts and strengthen social security finances.

Monetary policy assumptions are based on the established policy framework in each country. In most cases, this implies a nonaccommoda-tive stance over the business cycle: official interest rates will therefore increase when economic indicators suggest that inflation will rise above its acceptable rate or range, and they will decrease when indicators suggest that prospective inflation will not exceed the acceptable rate or range, that prospective output growth is below its potential rate, and that the margin of slack in the economy is significant. On this basis, the LIBOR on six-month U.S. dollar deposits is assumed to average 5.2 percent in 2007 and 4.4 percent in 2008 (see Table 1.1). The projected path reflects the assumption prevailing in financial markets that the Federal Reserve will cut interest rates in late 2007 and early 2008. The rate on three-month euro deposits is assumed to average 4.0 percent in 2007 and 4.1 percent in 2008. The interest rate on six-month Japanese yen deposits is assumed to average 0.9 percent in 2007 and 1.1 percent in 2008.

1 The output gap is actual less potential output, as a percent of potential output. Structural balances are expressed as a percent of potential output. The structural budget balance is the budgetary position that would be observed if the level of actual output coincided with potential output. Changes in the structural budget balance consequently include effects of temporary fiscal measures, the impact of fluctuations in interest rates and debt-service costs, and other noncyclical fluctuations in the budget balance. The computations of structural budget balances are based on IMF staff estimates of potential GDP and revenue and expenditure elasticities (see the October 1993 World Economic Outlook, Annex I). Net debt is defined as gross debt less financial assets of the general government, which include assets held by the social security insurance system. Estimates of the output gap and of the structural balance are subject to significant margins of uncertainty.

What’s New

The following changes have been made to streamline the Statistical Appendix of the World Economic Outlook. Starting with this issue, the printed version of the World Economic Outlook will carry only Part A Tables in the Statistical Appendix section.

Part A contains Tables 1, 2, 3, 6, 7, 8, 11, 20, 25, 26, 31, 35, 43, and 44 from the previous issues of the World Economic Outlook; Tables 1.2 and 1.3, which used to be in the main text of the report; and a new table on private capital flows. Tables in Part A present summary data for both advanced economies and emerging market and developing countries in the categories of Output, Inflation, Financial Policies, Foreign Trade, Current Account Transactions, Balance of Payments and External Financing, Flow of Funds, and Medium-Term Baseline Scenario.

Part B of the Statistical Appendix contains the remaining tables. The complete Statistical Appendix, which includes both Part A and Part B Tables, will be available only via the Internet at www.imf.org/external/pubs/ft/weo/2007/02/index.htm.

Data and Conventions

Data and projections for 182 countries form the statistical basis for the World Economic Outlook (the World Economic Outlook database). The data are maintained jointly by the IMF’s Research Department and area departments, with the latter regularly updating country projections based on consistent global assumptions.

Although national statistical agencies are the ultimate providers of historical data and definitions, international organizations are also involved in statistical issues, with the objective of harmonizing methodologies for the national compilation of statistics, including the analytical frameworks, concepts, definitions, classifications, and valuation procedures used in the production of economic statistics. The World Economic Outlook database reflects information from both national source agencies and international organizations.

The comprehensive revision of the standardized System of National Accounts 1993 (SNA), the IMF’s Balance of Payments Manual, Fifth Edition (BPM5), the Monetary and Financial Statistics Manual (MFSM), and the Government Finance Statistics Manual 2001 (GFSM 2001) represented important improvements in the standards of economic statistics and analysis.3 The IMF was actively involved in all these projects, particularly the Balance of Payments, Monetary and Financial Statistics, and Government Finance Statistics manuals, which reflects the IMF’s special interest in countries’ external positions, financial sector stability, and public sector fiscal positions. The process of adapting country data to the new definitions began in earnest when the manuals were released. However, full concordance with the manuals is ultimately dependent on the provision by national statistical compilers of revised country data, and hence the World Economic Outlook estimates are still only partially adapted to these manuals.

In line with recent improvements in standards of reporting economic statistics, several countries have phased out their traditional fixed-base-year method of calculating real macroeconomic variables levels and growth by switching to a chain-weighted method of computing aggregate growth. Recent dramatic changes in the structure of these economies have obliged these countries to revise the way in which they measure real GDP levels and growth. Switching to the chain-weighted method of computing aggregate growth, which uses current price information, allows countries to measure GDP growth more accurately by eliminating upward biases in new data.4 Currently, real macroeconomic data for Albania, Australia, Austria, Azerbaijan, Belgium, Canada, the Czech Republic, Cyprus, Denmark, the euro area, Finland, France, Georgia, Germany, Greece, Iceland, Ireland, Italy, Japan, Kazakhstan, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Norway, Poland, Portugal, Russia, Slovenia, Spain, Sweden, Switzerland, the United Kingdom, and the United States are based on chain-weighted methodology. However, data before 1996 (Albania), 1995 (Belgium), 1995 (Cyprus), 1995 (Czech Republic), 1995 (euro area), 1991 (Germany), 2000 (Greece), 1994 (Kazakhstan), 1990 (Iceland), 1995 (Ireland), 1994 (Japan), 1995 (Luxembourg), 2000 (Malta), 1995 (Poland), 1995 (Russia), 1995 (Slovenia), and 1995 (Spain) are based on unrevised national accounts and subject to revision in the future.

The members of the European Union have adopted a harmonized system for the compilation of the national accounts, referred to as ESA 1995. All national accounts data from 1995 onward are presented on the basis of the new system. Revision by national authorities of data prior to 1995 to conform to the new system has progressed but has, in some cases, not been completed. In such cases, historical World Economic Outlook data have been carefully adjusted to avoid breaks in the series. Users of EU national accounts data prior to 1995 should nevertheless exercise caution until such time as the revision of historical data by national statistical agencies has been fully completed. See Box 1.2, “Revisions in National Accounts Methodologies,” in the May 2000 World Economic Outlook.

Composite data for country groups in the World Economic Outlook are either sums or weighted averages of data for individual countries. Unless otherwise indicated, multiyear averages of growth rates are expressed as compound annual rates of change.5 Arithmetically weighted averages are used for all data except inflation and money growth for the other emerging market and developing country group, for which geometric averages are used. The following conventions apply.

  • Country group composites for exchange rates, interest rates, and the growth rates of monetary aggregates are weighted by GDP converted to U.S. dollars at market exchange rates (averaged over the preceding three years) as a share of group GDP.

  • Composites for other data relating to the domestic economy, whether growth rates or ratios, are weighted by GDP valued at purchasing power parities (PPPs) as a share of total world or group GDP.6

  • Composites for data relating to the domestic economy for the euro area (13 member countries throughout the entire period unless otherwise noted) are aggregates of national source data using weights based on 1995 European currency unit (ECU) exchange rates.

  • Composite unemployment rates and employment growth are weighted by labor force as a share of group labor force.

  • Composites relating to the external economy are sums of individual country data after conversion to U.S. dollars at the average market exchange rates in the years indicated for balance of payments data and at end-of-year market exchange rates for debt denominated in currencies other than U.S. dollars. Composites of changes in foreign trade volumes and prices, however, are arithmetic averages of percentage changes for individual countries weighted by the U.S. dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year).

For central and eastern European countries, external transactions in nonconvertible currencies (through 1990) are converted to U.S. dollars at the implicit U.S. dollar/ruble conversion rates obtained from each country’s national currency exchange rate for the U.S. dollar and for the ruble.

All data refer to calendar years, except for the following countries, which refer to fiscal years: Australia (July/June), Bangladesh (July/ June), Egypt (July/June), Ethiopia (July/June), Islamic Republic of Iran (March/February), Mauritius (July/June), Myanmar (April/March), Nepal (July/June), New Zealand (July/June), Pakistan (July/June), Samoa (July/June), and Tonga (July/June).

Classification of Countries

Summary of the Country Classification

The country classification in the World Economic Outlook divides the world into two major groups: advanced economies, and other emerging market and developing countries.7 Rather than being based on strict criteria, economic or otherwise, this classification has evolved over time with the objective of facilitating analysis by providing a reasonably meaningful organization of data. Table A provides an overview of these standard groups in the World Economic Outlook, showing the number of countries in each group and the average 2006 shares of groups in aggregate PPP-valued GDP, total exports of goods and services, and population.

Table A.

Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 20061

(Percent of total for group or world)

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The GDP shares are based on the purchasing-power-parity (PPP) valuation of country GDPs. The number of countries comprising each group reflects those for which data are included in the group aggregates.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

A few countries are currently not included in these groups, either because they are not IMF members and their economies are not monitored by the IMF or because databases have not yet been fully developed. Because of data limitations, group composites do not reflect the following countries: the Islamic Republic of Afghanistan, Bosnia and Herzegovina, Brunei Darussalam, Eritrea, Iraq, Liberia, Serbia, Somalia, and Timor-Leste. Cuba and the Democratic People’s Republic of Korea are examples of countries that are not IMF members, whereas San Marino, among the advanced economies, and Aruba, Marshall Islands, Federated States of Micronesia, Palau, and the Republic of Montenegro, among the developing countries, are examples of economies for which databases have not been completed.

General Features and Composition of Groups in the World Economic Outlook Classification

Advanced Economies

The 30 advanced economies are listed in Table B. The seven largest in terms of GDP—the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada—constitute the subgroup of major advanced economies, often referred to as the Group of Seven (G-7) countries. The 13 members of the euro area and the four newly industrialized Asian economies are also distinguished as subgroups. Composite data shown in the tables for the euro area cover the current members for all years, even though the membership has increased over time.

Table B.

Advanced Economies by Subgroup

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On July 1, 1997, Hong Kong was returned to the People’s Republic of China and became a Special Administrative Region of China.

In 1991 and subsequent years, data for Germany refer to west Germany and the eastern Länder (that is, the former German Democratic Republic). Before 1991, economic data were not available on a unified basis or in a consistent manner. Hence, in tables featuring data expressed as annual percent change, these apply to west Germany in years up to and including 1991, but to unified Germany from 1992 onward. In general, data on national accounts and domestic economic and financial activity through 1990 cover west Germany only, whereas data for the central government and balance of payments apply to west Germany through June 1990 and to unified Germany thereafter.

Table C lists the member countries of the European Union, not all of which are classified as advanced economies in the World Economic Outlook.

Table C.

European Union

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Other Emerging Market and Developing Countries

The group of other emerging market and developing countries (143 countries) includes all countries that are not classified as advanced economies.

The regional breakdowns of other emerging market and developing countries—Africa, central and eastern Europe, Commonwealth of Independent States, developing Asia, Middle East, and Western Hemisphere—largely conform to the regional breakdowns in the IMF’s International Financial Statistics. In both classifications, Egypt and the Libyan Arab Jamahiriya are included in the Middle East region rather than in Africa. In addition, the World Economic Outlook sometimes refers to the regional group of Middle East and North Africa countries, also referred to as the MENA countries, whose composition straddles the Africa and Middle East regions. This group is defined as the Arab League countries plus the Islamic Republic of Iran (see Table D).

Table D.

Middle East and North Africa Countries

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Other emerging market and developing countries are also classified according to analytical criteria. The analytical criteria reflect countries’ composition of export earnings and other income from abroad; exchange rate arrangements; a distinction between net creditor and net debtor countries; and, for the net debtor countries, financial criteria based on external financing sources and experience with external debt servicing. The detailed composition of other emerging market and developing countries in the regional and analytical groups is shown in Tables E and F.

Table E.

Other Emerging Market and Developing Countries by Region and Main Source of Export Earnings

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Note: Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.
Table F.

Other Emerging Market and Developing Countries by Region, Net External Position, and Heavily Indebted Poor Countries

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Dot instead of star indicates that the net debtor’s main external finance source is official financing.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

The analytical criterion, by source of export earnings, distinguishes between categories: fuel (Standard International Trade Classification–SITC 3) and nonfuel and then focuses on nonfuel primary products (SITC 0, 1, 2, 4, and 68).

The financial criteria focus on net creditor countries, net debtor countries, and heavily indebted poor countries (HIPCs). Net debtor countries are further differentiated on the basis of two additional financial criteria: by official external financing and by experience with debt servicing.8 The HIPC group comprises the countries considered by the IMF and the World Bank for their debt initiative, known as the HIPC Initiative, with the aim of reducing the external debt burdens of all the eligible HIPCs to a “sustainable” level in a reasonably short period of time.9

List of Tables

Medium-Term Baseline Scenario

Table A1.

Summary of World Output1

(Annual percent change)

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Real GDP.

In this table, “other advanced economies” means advanced economies excluding the United States, euro area countries, and Japan.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table A2.

Advanced Economies: Real GDP and Total Domestic Demand

(Annual percent change)

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From fourth quarter of preceding year.

Table A3.

Advanced Economies: Components of Real GDP

(Annual percent change)

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Changes expressed as percent of GDP in the preceding period.

Table A4.

Other Emerging Market and Developing Countries—by Country: Real GDP1

(Annual percent change)

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For many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years.

The percent changes in 2002 are calculated over a period of 18 months, reflecting a change in the fiscal year cycle (from July–June to January–December).

Data for some countries refer to real net material product (NMP) or are estimates based on NMP. For many countries, figures for recent years are IMF staff estimates. The figures should be interpreted only as indicative of broad orders of magnitude because reliable, comparable data are not generally available. In particular, the growth of output of new private enterprises of the informal economy is not fully reflected in the recent figures.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table A5.

Summary of Inflation

(Percent)

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In this table, “other advanced economies” means advanced economies excluding the United States, euro area countries, and Japan.

Based on Eurostat’s harmonized index of consumer prices.

Excludes Zimbabwe.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table A6.

Advanced Economies: Consumer Prices

(Annual percent change)

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Based on Eurostat’s harmonized index of consumer prices.

Table A7.

Other Emerging Market and Developing Countries—by Country: Consumer Prices1

(Annual percent change)

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In accordance with standard practice in the World Economic Outlook, movements in consumer prices are indicated as annual averages rather than as December/December changes during the year, as is the practice in some countries. For many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years. In this table, Africa excludes Zimbabwe.

The percent changes in 2002 are calculated over a period of 18 months, reflecting a change in the fiscal year cycle (from July–June to January–December).

Given recent trends, it is not possible to forecast inflation with any degree of precision and consequently no projection for 2008 is shown.

For many countries, inflation for the earlier years is measured on the basis of a retail price index. Consumer price indices with a broader and more up-to-date coverage are typically used for more recent years.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table A8.

Major Advanced Economies: General Government Fiscal Balances and Debt1

(Percent of GDP)

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Note: The methodology and specific assumptions for each country are discussed in Box A1 in the Statistical Appendix.

Debt data refer to end of year. Debt data are not always comparable across countries.

Percent of potential GDP.

Beginning in 1995, the debt and debt–service obligations of the Treuhandanstalt (and of various other agencies) were taken over by the general government. This debt is equivalent to 8 percent of GDP, and the associated debt service to ½ to 1 percent of GDP.

Excludes one-off receipts from the sale of mobile telephone licenses (the equivalent of 2.5 percent of GDP in 2000 for Germany, 0.1 percent of GDP in 2001 and 2002 for France, and 1.2 percent of GDP in 2000 for Italy). Also excludes one-off receipts from sizable asset transactions, in particular 0.5 percent of GDP for France in 2005.

Table A9.

Summary of World Trade Volumes and Prices

(Annual percent change)

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Average of annual percent change for world exports and imports.

As represented, respectively, by the export unit value index for the manufactures of the advanced economies; the average of U.K. Brent, Dubai, and West Texas Intermediate crude oil prices; and the average of world market prices for nonfuel primary commodities weighted by their 1995–97 shares in world commodity exports.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Average of U.K. Brent, Dubai, and West Texas Intermediate crude oil prices.

For the manufactures exported by the advanced economies.

Table A10.

Summary of Balances on Current Account

(Billions of U.S. dollars)

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Reflects errors, omissions, and asymmetries in balance of payments statistics on current account, as well as the exclusion of data for international organizations and a limited number of countries. Calculated as the sum of the balance of individual euro area countries. See “Classification of Countries” in the introduction to this Statistical Appendix.

In this table, “other advanced economies” means advanced economies excluding the United States, euro area countries, and Japan.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table A11.

Advanced Economies: Balance on Current Account

(Percent of GDP)

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Calculated as the sum of the balances of individual euro area countries.

Corrected for reporting discrepancies in intra-area transactions.

Table A12.

Other Emerging Market and Developing Countries—by Country: Balance on Current Account

(Percent of GDP)

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Given recent trends, it is not possible to forecast nominal GDP with any precision and consequently no projection for 2008 is shown.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table A13.

Emerging Market and Developing Countries: Net Capital Flows1

(Billions of U.S. dollars)

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Net capital flows comprise net direct investment, net portfolio investment, and other long− and short-term net investment flows, including official and private borrowing. In this table, Hong Kong SAR, Israel, Korea, Singapore, and Taiwan Province of China are included.

Because of data limitations, flows listed under “private capital flows, net” may include some official flows.

Excludes grants and includes overseas investments of official investment agencies.

A minus sign indicates an increase.

The sum of the current account balance, net private capital flows, net official flows, and the change in reserves equals, with the opposite sign, the sum of the capital account and errors and omissions. For regional current account balances, see Table A10 of the Statistical Appendix.

Consists of developing Asia and the newly industrialized Asian economies.

Includes Israel.

Table A14.

Emerging Market and Developing Countries: Private Capital Flows1

(Billions of U.S. dollars)

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Private capital flows comprise direct investment, portfolio investment, and other long- and short-term investment flows. In this table, Hong Kong SAR, Israel, Korea, Singapore, and Taiwan Province of China are included.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Consists of developing Asia and the newly industrialized Asian economies.

Includes Israel.

Table A15.

Other Emerging Market and Developing Countries: Reserves1

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In this table, official holdings of gold are valued at SDR 35 an ounce. This convention results in a marked underestimate of reserves for countries that have substantial gold holdings.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Reserves at year-end in percent of imports of goods and services for the year indicated.

Table A16.

Summary of Sources and Uses of World Saving

(Percent of GDP)

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Note: The estimates in this table are based on individual countries’ national accounts and balance of payments statistics. Country group composites are calculated as the sum of the U.S. dollar values for the relevant individual countries. This differs from the calculations in the April 2005 and earlier World Economic Outlooks, where the composites were weighted by GDP valued at purchasing power parities as a share of total world GDP. For many countries, the estimates of national saving are built up from national accounts data on gross domestic investment and from balance-of-payments-based data on net foreign investment. The latter, which is equivalent to the current account balance, comprises three components: current transfers, net factor income, and the resource balance. The mixing of data source, which is dictated by availability, implies that the estimates for national saving that are derived incorporate the statistical discrepancies. Furthermore, error omissions and asymmetries in balance of payments statistics affect the estimates for net lending; at the global level, net lending, which in theory would be zero, equals the world current account discrepancy. Notwithstanding these statistical shortcomings, flow of funds estimates, such as those presented in these tables, provide a useful framework for analyzing development in saving and investment, both over time and across regions and countries.

Excludes Zimbabwe.

Calculated from the data of individual euro area countries.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table A17.

Summary of World Medium-Term Baseline Scenario

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Data refer to trade in goods and services.

Excludes Zimbabwe.

London interbank offered rate on U.S. dollar deposits less percent change in U.S. GDP deflator.

GDP-weighted average of 10-year (or nearest maturity) government bond rates for the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada.

World Economic Outlook and Staff Studies for the World Economic Outlook, Selected Topics, 2000–2007

I. Methodology—Aggregation, Modeling, and Forecasting

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II. Historical Surveys

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III. Economic Growth—Sources and Patterns

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IV. Inflation and Deflation; Commodity Markets

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V. Fiscal Policy

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VI. Monetary Policy; Financial Markets; Flow of Funds

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VII. Labor Markets, Poverty, and Inequality

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VIII. Exchange Rate Issues

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IX. External Payments, Trade, Capital Movements, and Foreign Debt

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X. Regional Issues

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XI. Country-Specific Analyses

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1

The conversion rate for Greece was established prior to inclusion in the euro area on January 1, 2001.

2

The conversion rate for Slovenia was established prior to inclusion in the euro area on January 1, 2007.

3

Commission of the European Communities, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations, and World Bank, System of National Accounts 1993 (Brussels/ Luxembourg, New York, Paris, and Washington, 1993); International Monetary Fund, Balance of Payments Manual, Fifth Edition (Washington, 1993); International Monetary Fund, Monetary and Financial Statistics Manual (Washington, 2000); and International Monetary Fund, Government Finance Statistics Manual (Washington, 2001).

4

Charles Steindel, 1995, “Chain-Weighting: The New Approach to Measuring GDP,” Current Issues in Economics and Finance (Federal Reserve Bank of New York), Vol. 1 (December).

5

Averages for real GDP and its components, employment, per capita GDP, inflation, factor productivity, trade, and commodity prices are calculated based on compound annual rate of change, except for the unemployment rate, which is based on simple arithmetic average.

6

See Box A2 of the April 2004 World Economic Outlook for a summary of the revised PPP-based weights and Annex IV of the May 1993 World Economic Outlook. See also Anne-Marie Gulde and Marianne Schulze-Ghattas, “Purchasing Power Parity Based Weights for the World Economic Outlook,” in Staff Studies for the World Economic Outlook (International Monetary Fund, December 1993), pp. 106–23.

7

As used here, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. It also covers some territorial entities that are not states, but for which statistical data are maintained on a separate and independent basis.

8

During 2001–05, 51 countries incurred external payments arrears or entered into official or commercial bank debt-rescheduling agreements. This group of countries is referred to as countries with arrears and/or rescheduling during 2001–05.

9

See David Andrews, Anthony R. Boote, Syed S. Rizavi, and Sukwinder Singh, Debt Relief for Low-Income Countries: The Enhanced HIPC Initiative, IMF Pamphlet Series, No. 51 (Washington: International Monetary Fund, November 1999).

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Cover World Economic Outlook, October 2007
World Economic Outlook, October 2007
Globalization and Inequality
Author:
International Monetary Fund. Research Dept.
ISBN:
9781589066885
ISSN:
0256-6877
Publication Date:
11 Apr 2007
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781589066885.081
Pages:
276