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WEO Update: IMF Urges Stimulus as Global Growth Marked Down Sharply

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 2008
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The IMF is urging countries to stimulate their economies to counter a bigger-than-expected slowdown in the global economy triggered by recent financial turmoil.

In its latest forecast for world economic growth, the IMF sharply revised its growth projections downward, saying that “global activity is slowing quickly.”

“Prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen,” the IMF said in its updated World Economic Outlook (WEO), published on November 6.

It said that world output is projected to expand by 2.2 percent in 2009, down by some ¾ percentage point of GDP relative to the projections in the October WEO. In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the postwar period. In emerging economies, growth is projected to slow appreciably but still reach 5 percent in 2009.

But the IMF noted that these projections were based on currently announced policies, and advocated further policy actions to sustain demand. “Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth,” the outlook said.

Global activity slowing quickly

The IMF said that world growth is projected to slow from 5 percent in 2007 to 3¾ percent in 2008 and to just over 2 percent in 2009, with the downturn led by advanced economies.

• Activity in the advanced economies is now expected to contract by ¼ percent on an annual basis in 2009, down ¾ percentage points from the October 2008 WEO projections. This would be the first annual contraction during the postwar period, although the downturn is broadly comparable in magnitude to those that occurred in 1975 and 1982. A recovery is projected to begin late in 2009. The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions. Growth in the euro area will be hard hit by tightening financial conditions and falling confidence. In Japan, the support to growth from net exports is expected to decline.

• The downward revisions to 2009 real GDP growth projections are somewhat larger in emerging and developing economies, averaging 1percent. This would leave their growth rate at 5 percent, higher than in earlier business cycle troughs (for example, in 1990, 1998, and 2001). However, the cyclical downturn in emerging economies is of a similar magnitude to that in the advanced economies when measured relative to higher trend growth rates, in line with past cycles. Downward revisions vary considerably across regions. Among the most affected are commodity exporters, because commodity price projections have been marked down sharply, and countries with acute external financing and liquidity problems. Countries in East Asia—including China—generally have suffered smaller markdowns, because their financial situations are typically more robust, they have benefited from improved terms of trade from falling commodity prices, and they have already initiated a shift toward macroeconomic policy easing.

Reduced inflationary pressures

The forecast said that a combination of stabilizing commodity prices and increasing economic slack will help to contain inflation pressures.

In the advanced economies, headline inflation should decline to below 1½ percent by the end of 2009. In emerging economies, inflation is also expected to moderate, albeit more gradually. However, in a number of these countries, inflation risks are still manifest, as higher commodity prices and continued pressure on local supply conditions have affected wage demands and inflation expectations.

Limiting the damage

Comprehensive policy actions are being implemented to address the root causes of financial stress and to support demand, but it will take time to reap their full benefits. The initiatives include programs to purchase distressed assets, use of public funds to recapitalize banks and provide comprehensive guarantees, and a coordinated reduction in policy rates by major central banks.

The IMF forecast said that a stronger macroeconomic policy response to the crisis could help limit the damage. “There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors. Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated,” it stated.

But the forecast said that monetary policy easing may not be enough. “Fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space.”

Cross-border consistency

The IMF said that policies need to be coordinated across borders. “Crucially, there must be better cross-border consistency of policies,” the forecast said.

“A key task will be to develop cooperative arrangements for the resolution of large cross-border institutions where none currently exist, given the limitations of individual country frameworks. Moreover, the extension of financial support and guarantees must consider potential cross-border effects, including for emerging economies. Finally, exit strategies for the public sector from financial system ownership need to be developed.”

“Dramatic fall in confidence”

At a press briefing, IMF Research Department Director Olivier Blanchard noted that an abrupt decrease in demand in advanced economies, coupled with a sharp worsening of credit conditions for emerging economies, had led the IMF to revise its global growth forecast.

“What we have seen here is a dramatic fall in confidence, both by consumers and by firms,” Blanchard said. “For consumers, their wealth has gone down. What is going to happen over the next few years is highly uncertain, and this has led them to cut spending.”

Emerging economies have experienced not just a sharp worsening of credit conditions but also lower exports owing to decreased demand in advanced countries, said Blanchard. These developments prompted the IMF to lower the growth forecast for emerging economies by 1 percent.

Latest IMF projections

Prospects for global growth have deteriorated over the past month.

(year-over-year percent change)
ProjectionsVariance from last

IMF forecast
20072008200920082009
World output5.03.72.2–0.2–0.8
Advanced economies2.61.4–0.3–0.1–0.8
United States2.01.4–0.7–0.1–0.8
Euro area2.61.2–0.5–0.1–0.7
Germany2.51.7–0.8–0.2–0.8
France2.20.8–0.5–0.1–0.6
Italy1.5–0.2–0.6–0.1–0.4
Spain3.71.4–0.7–0.5
Japan2.10.5–0.2–0.2–0.7
United Kingdom3.00.8–1.3–0.2–1.2
Canada2.70.60.3–0.1–0.9
Other advanced economies4.72.91.5–0.2–1.0
Newly industrialized Asian economies5.63.92.1–0.1–1.1
Emerging market and developing economies8.06.65.1–0.3–1.0
Africa6.15.24.7–0.7–1.3
Sub-Saharan Africa6.85.55.1–0.6–1.2
Central and eastern Europe5.74.22.5–0.3–0.9
Commonwealth of Independent States8.66.93.2–0.3–2.5
Russia8.16.83.5–0.2–2.0
Excluding Russia9.86.91.6–0.7–4.6
Developing Asia10.08.37.1–0.1–0.6
China11.99.78.5–0.1–0.8
India9.37.86.3–0.1–0.6
ASEAN–56.35.44.2–0.1–0.7
Middle East6.06.15.3–0.3–0.6
Western Hemisphere5.64.52.5–0.1–0.7
Brazil5.45.23.0–0.5
Mexico3.21.90.9–0.1–0.9
Source: IMF, World Economic Outlook, November 2008.

Another factor was the migration of the financial crisis to emerging markets. “That comes from continued deleveraging—that is, the sale of assets—by financial institutions in advanced countries,” Blanchard said. “We had anticipated it, but it has been broader and stronger than we had anticipated, affecting a large number of countries.”

As for the appropriate policy response, Blanchard said that there is still scope in some countries to use monetary policy, citing the European Central Bank and the Bank of England’s recent interest rate cuts. But he stressed that global fiscal expansion was very much needed, and noted that there was room for additional fiscal stimulus in a number of countries, including the United States, Germany, and China.

“There are always risks to expanding fiscal deficits, but here the benefits exceed the risks in a number of countries,” Blanchard said.

To read the full text of the World Economic Outlook update, visit the WEO website at www.imf.org/external/pubs/ft/weo/2008/update/03/index.htm

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