World Economic Outlook
Financial Stress, Downturns, and Recoveries
October 2008
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The World Economic Outlook (WEO) presents the IMF staff's analysis and projections of economic developments at the global level, in major country groups (classified by region, stage of development, etc.), and in many individual countries. It focuses on major economic policy issues as well as on the analysis of economic developments and prospects. It is usually prepared twice a year, as documentation for meetings of the International Monetary and Financial Committee, and forms the main instrument of the IMF's global surveillance activities. |
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Contents
| Assumptions and Conventions | |||
Preface |
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Foreword |
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Executive Summary |
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| Chapter 1. Global Prospects and Policies | |||
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| Full Text | Video Briefing | Boxes | Figures | |||
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Global Economy under Stress Financial System in Crisis Deepening Housing Corrections Overstretched Commodity Markets Have Macroeconomic Policies Been Too Loose? Prospects for a Turnaround Policy Challenges for the Global Economy Appendix 1.1 Assessing and Communicating Risks to the Global Outlook References |
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| Chapter 2. Country and Regional Perspectives | |||
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United States and Canada: Bending but Not Buckling Western Europe: Struggling with Multiple Shocks Advanced Asia: Responding to External Shocks Emerging Asia: Balancing Risks to Growth and Price Stability Latin America and the Caribbean: Navigating a More Perilous Environment Emerging Europe: Prospects for a Soft Landing Commonwealth of Independent States: Managing the Commodity Price Boom Sub-Saharan Africa: A Test of Policy Frameworks Middle East: Overheating Still A Concern References |
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| Chapter 3. Is Inflation Back? Commodity Prices and Inflation | |||
| Full Text | Summary | Video | Boxes | Figures | |||
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Surging Commodity Prices: Origins and Prospects Commodity Price Shocks and Inflation Monetary Policy Responses to Commodity Price Shocks Summary and Conclusions Appendix 3.1. Recent Commodity Market Developments Appendix 3.2. Accounting for Food Price Increases, 2006–08 Appendix 3.3. Estimating Inflationary Effects of Commodity Price Shocks References |
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| Chapter 4. Financial Stress and Economic Downturns | |||
| Full Text | Summary | Video | Boxes | Figures | |||
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Identifying Episodes of Financial Stress Financial Stress, Economic Slowdown, and Recession Has Financial Innovation Affected the Interplay between Financial Stress and Economic Cycles The Current Financial Crisis in Historical Context Conclusions Appendix 4.1. Data and Methodology References |
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| Chapter 5. Fiscal Policy as a Countercyclical Tool | |||
| Full Text | Summary | Video | Boxes | Figures | |||
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Understanding the Fiscal Policy Debate How Has Discretionary Fiscal Policy Typically Responded? Are Fiscal Policy Reactions Different in Emerging and Advanced Economies? The Macroeconomic Effects of Discretionary Fiscal Policy A Simulation-Based Perspective on Fiscal Stimulus Conclusions and Policy Considerations Appendix 5.1. Data and Empirical Methods References |
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| Chapter 6. Divergence of Current Account Balances across Emerging Economies | |||
| Full Text | Summary | Video | Boxes | Figures | |||
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Recent Current Account Patterns in Emerging Economies What Factors Have Contributed to Recent Current Account Patterns Sustainability of Current Account Imbalances Conclusions and Policy Implications Appendix 6.1. Variable Definitions and Data Source Appendix 6.2. Econometric Approach References |
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| Annex: IMF Executive Board Discussion of the Outlook, September 2008 | |||
| Statistical Appendix | |||
| Assumptions | |||
| What's New | |||
| Data and Conventions | |||
| Classification of Countries | |||
| General Features and Composition of Groups in the World Economic Outlook Classification |
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| List of Tables Part A | |||
| Output (Tables A1–A4) | |||
| Inflation (Tables A5–A7) | |||
| Financial Policies (Table A8) | |||
| Foreign Trade (Table A9) | |||
| Current Account Transactions (Tables A10–A12) | |||
| Balance of Payments and External Financing (Tables A13– A15) |
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| Flow of Funds (Table A16) | |||
| Medium–Term Baseline Scenario (Table A17) | |||
| List of Tables Part B | |||
| Output (Tables B1–B2) | |||
| Inflation (Tables B3–B4) | |||
| Financial Policies (Tables B5–B10) | |||
| Foreign Trade (Tables B11–B13) | |||
| Current Account Transactions (Tables B14–B17) | |||
| Balance of Payments and External Financing (Tables B18–B20) | |||
| External Debt and Debt Service (Tables B21–B25) | |||
| Medium-Term Baseline Scenario (Table B26) | |||
| Boxes | |||
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Data Data Data |
1.1 | The Latest Bout of Financial Distress: How Does It Change the Marcroeconomic Outlook? |
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Data Data Data Data |
1.2 | House Prices: Corrections and Consequences |
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1.3 | Measuring Output Gaps |
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Data Data |
2.1 | EMU: 10 Years On |
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Data Data Data |
3.1 | Does Financial Investment Affect Commodity Price Behavior? |
| Chart | Data | 3.2 | Fiscal Responses to Recent Commodity Price Increases: An Assessment |
| Chart | Data | 3.3 | Monetary Policy Regimes and Commodity Prices |
| 4.1 | Policies to Resolve Financial System Stress and Restore Sound Financial Intermediation | ||
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Chart Chart |
Data Data |
5.1 | Differences in the Extent of Automatic Stabilizers and Their Relationship with Discretionary Fiscal Policy |
| 5.2 | Why Is It So Hard to Determine the Effects of Fiscal Stimulus? | ||
| Chart | Data | 5.3 | Have U.S. Tax Cuts Been "TTT"? |
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Data Data |
6.1 | Current Account Determinants for Oil-Exporting Countries |
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Data Data Data |
6.2 | Sovereign Wealth Funds: Implications for Global Financial Markets |
| Chart | Data | 6.3 | Historical Perspective on Growth and the Current Account |
| A1 | Economic Policy Assumptions Underlying the Projections for Selected Economies | ||
| Tables | |||
| 1.1 | Overview of the World Economic Outlook Projections | ||
| 2.1 | Advanced Economies: Real GDP, Consumer Prices, and Unemployment | ||
| 2.2 | Advanced Economies: Current Account Positions | ||
| 2.3 | Selected Asian Economies: Real GDP, Consumer Prices, and Current Account Balance | ||
| 2.4 | Selected Western Hemisphere Economies: Real GDP, Consumer Prices, and Current Account Balance | ||
| 2.5 | Selected Emerging European Economies: Real GDP, Consumer Prices, and Current Account Balance | ||
| 2.6 | Commonwealth of Independent States (CIS): Real GDP, Consumer Prices, and Current Account Balance | ||
| 2.7 | Selected African Economies: Real GDP, Consumer Prices, and Current Account Balance | ||
| 2.8 | Selected Middle Eastern Economies: Real GDP, Consumer Prices, and Current Account Balance | ||
| 3.1 | Contributions of Common Factors to Commodity Price Fluctuations | ||
| 3.2 | Selected Indicators of Spillovers across Major Food Commodity Prices | ||
| 3.3 | Global Oil Demand and Production by Region | ||
| 3.4 | Elasticity Estimates Used for Price Calculations | ||
| 4.1 | Descriptive Statistics on Financial Stress Episodes | ||
| 4.2 | Descriptive Statistics on Financial Stress, Slowdowns, and Recessions | ||
| 4.3 | Cross-Section Regressions | ||
| 4.4 | Six Major Periods of Financial Stress and Economic Contractions | ||
| 4.5 | Data | ||
| 4.6 | Average Yearly Share of Total Bank Assets of Banks in Sample | ||
| 5.1 | Macroeconomic Indicators around Downturns, with and without a Fiscal Impulse: All Economies | ||
| 5.2 | Real GDP Growth and Fiscal Impulse under Various Initial Conditions: All Economies | ||
| 5.3 | Real GDP Growth and Fiscal Impulse by Composition: All Economies | ||
| 5.4 | Responses of Real GDP to Discretionary Fiscal Policy Changes | ||
| 5.5 | List of Countries and Downturn Episodes | ||
| 5.6 | Discretionary Fiscal Policy and Growth: Regression Results with Arellano-Bond Dynamic Panel Estimator Using Elasticity-Based Fiscal Impulse Measure | ||
| 5.7 | Discretionary Fiscal Policy and Growth: Regression Results with Arellano-Bond Dynamic Panel Estimator Using Regression-Based Fiscal Impulse Measure | ||
| 6.1 | Determinants of the Current Account Balance | ||
| 6.2 | Duration Regressions of Persistent and Large Current Account Deficits | ||
| 6.3 | Explaining Differentiated Effects in Emerging Europe | ||
| 6.4 | List of Persistently Large Current Account Imbalance Episodes | ||
| 6.5 | Duration Analysis and Domestic Financial Sector Liberalization | ||
| 6.6 | Duration Analysis and Risk of Abrupt and Non-Abrupt Endings | ||
| Figures | |||
| Chart | Data | 1.1 | Global Indicators |
| Chart | Data | 1.2 | Current and Forward-Looking Indicators |
| Chart | Data | 1.3 | Global Inflation |
| Chart | Data | 1.4 | External Developments in Selected Advanced Economies |
| Chart | Data | 1.5 | External Developments in Emerging and Developing Economies |
| Chart | Data | 1.6 | Developments in Mature Credit Markets |
| Chart | Data | 1.7 | Mature Financial and Housing Market Indicators |
| Chart | Data | 1.8 | Emerging Economy Financial Conditions |
| Chart | Data | 1.9 | Measures of Monetary Policy and Liquidity in Selected Advanced Economies |
| Chart | Data | 1.10 | Measures of the Output Gap and Capacity Pressures |
| Chart | Data | 1.11 | Global Outlook |
| Chart | Data | 1.12 | Risks to the Global Outlook |
| Chart | Data | 1.13 | Impact of Financial Shock on the Global Economy |
| Chart | Data | 1.14 | Current Account Balances and Net Foreign Assets |
| Chart | Data | 1.15 | Median Forecast Errors during Global Recessions and at Other Times, 1991–2007 |
| Chart | Data | 1.16 | Histograms of Forecast Errors, 1991–2007 |
| Chart | Data | 1.17 | Probability of Global Recessions |
| Chart | Data | 1.18 | Illustrative GPM-Based 90 Percent Confidence Intervals |
| Chart | Data | 2.1 | United States: Strains on Households |
| Chart | Data | 2.2 | Western Europe: Slowing Demand and High Inflation |
| Chart | Data | 2.3 | Japan: How Well Would the Economy Weather a Terms-of-Trade Shock? |
| Chart | Data | 2.4 | Emerging Asia: Remaining Inflation Concerns |
| Chart | Data | 2.5 | Latin America: Inflation Returns |
| Chart | Data | 2.6 | Emerging Europe: Are Credit Booms Cooling Off? |
| Chart | Data | 2.7 | Commonwealth of Independent States (CIS): Managing the Commodity Price Boom |
| Chart | Data | 2.8 | Sub-Saharan Africa: The Mixed Blessing of High Commodity Prices |
| Chart | Data | 2.9 | Middle East: Managing Inflation Pressures |
| Chart | Data | 3.1 | Commodity Prices in Historical Context |
| Chart | Data | 3.2 | Marginal Change in Energy Intensity, Commodity Inventories, and OPEC Spare Capacity ....... |
| Chart | Data | 3.3 | Grain and Oil Demand, Production, and Inventories in Comparison |
| Chart | Data | 3.4 | Oil Supply Developments |
| Chart | Data | 3.5 | Price Trends of Major Foods |
| Chart | Data | 3.6 | Duration and Amplitude of Food and Crude Oil Price Cycles |
| Chart | Data | 3.7 | Inflation around the World |
| Chart | Data | 3.8 | Changes in International and Domestic Commodity Prices and Headline Inflation |
| Chart | Data | 3.9 | The Relative Importance of Food and Energy |
| Chart | Data | 3.10 | Monetary and Exchange Rate Policies |
| Chart | Data | 3.11 | Commodity Price Pass-Through |
| Chart | Data | 3.12 | Changes in Expected Inflation in Response to Changes in Actual Inflation |
| Chart | Data | 3.13 | Activity, Interest Rates, and Inflation |
| Chart | Data | 3.14 | Stylized Advanced Economy with Adverse and Favorable Supply Shocks |
| Chart | Data | 3.15 | Stylized More-Vulnerable Emerging Market Economy with Adverse and Favorable Supply Shocks |
| Chart | Data | 3.16 | Potential Costs of Delaying Interest Rate Hikes |
| Chart | Data | 3.17 | Commodity and Petroleum Prices |
| Chart | Data | 3.18 | World Oil Market Balances and Oil Futures Price |
| Chart | Data | 3.19 | Developments in Food and Metal Markets |
| Chart | Data | 4.1 | Financial Stress and Output Loss |
| Chart | Data | 4.2 | Financial Stress Index |
| Chart | Data | 4.3 | Financial Stress and Shocks |
| Chart | Data | 4.4 | Contribution of Banking, Securities, and Foreign Exchange to Current Financial Stress Episode |
| Chart | Data | 4.5 | Lag between Financial Stress and Downturns |
| Chart | Data | 4.6 | Selected Macrovariables around Economic Downturns with and without Financial Stress |
| Chart | Data | 4.7 | Banking-Related Financial Stress, Slowdowns, and Recessions |
| Chart | Data | 4.8 | Cost of Capital and Bank Asset Growth around Banking Financial Stress Episodes |
| Chart | Data | 4.9 | Selected Macrovariables around Financial Stress Episodes |
| Chart | Data | 4.10 | Initial Conditions of Financial Stress Episodes |
| Chart | Data | 4.11 | Financial Stress and Economic Downturns: Controlling for Four Main Shocks |
| Chart | Data | 4.12 | The Procyclicality of Leverage in Investment and Commercial Banks |
| Chart | Data | 4.13 | Procyclical Leverage and Arm's-Length Financial Systems |
| Chart | Data | 4.14 | Arm's-Length Financial Systems, GDP Growth, and Bank Leverage |
| Chart | Data | 4.15 | The Current Financial Stress Episode in the United States and Euro Area in Historical Context |
| Chart | Data | 5.1 | How Often and Quickly Has Fiscal Stimulus Been Used in G7 Economies? |
| Chart | Data | 5.2 | How Strong Was the Fiscal Policy Response in G7 Economies? |
| Chart | Data | 5.3 | How Have Fiscal Policy Responses Varied across Advanced Economies? |
| Chart | Data | 5.4 | Is There a Bias toward Easing during Downturns in G7 Economies? |
| Chart | Data | 5.5 | Did G7 Economies Respond to Erroneously Perceived Downturns? |
| Chart | Data | 5.6 | Composition of Fiscal Stimulus during Downturns for Advanced and Emerging Economies |
| Chart | Data | 5.7 | Fiscal Policy Responses in Downturns and Upturns |
| Chart | Data | 5.8 | Macroeconomic Indicators after Downturns, with and without a Fiscal Stimulus |
| Chart | Data | 5.9 | Changes in Real GDP Growth and Fiscal Policies under Various Initial Conditions |
| Chart | Data | 5.10 | Effect of Fiscal Expansion in a Large Economy |
| Chart | Data | 5.11 | Fiscal Expansion in a Large Economy Compared with a Small Open Economy with Monetary Accommodation |
| Chart | Data | 5.12 | Effect of Fiscal Expansion in a Small Economy with Market-Risk-Premium Reaction |
| Chart | Data | 6.1 | Patterns of Divergence in Current Account Balance |
| Chart | Data | 6.2 | External Balances by Component |
| Chart | Data | 6.3 | Current Account Balance, Saving, and Investment |
| Chart | Data | 6.4 | Saving and Investment by Components |
| Chart | Data | 6.5 | Growth Takeoffs |
| Chart | Data | 6.6 | Current Account Reversals around Crises |
| Chart | Data | 6.7 | Current Account Balance and Real GDP per Capita Growth |
| Chart | Data | 6.8 | Patterns of Financial Development |
| Chart | Data | 6.9 | Explaining the Current Account Balances of Emerging Asia and Emerging Europe |
| Chart | Data | 6.10 | Explaining Current Account Balances: Results by Subregion |
| Chart | Data | 6.11 | Deviation from Predicted Real Effective Exchange Rates |
| Chart | Data | 6.12 | Residual Current Account Balance, Deviation of Real Effective Exchange Rate from Predicted Level and Stock of Reserves |
| Chart | Data | 6.13 | Persistently Large Current Account Deficit and Surplus Episodes, 1960-2007 |
| Chart | Data | 6.14 | Duration of Large, Persistent Current Account Deficits, 1960-2007 |
| Chart | Data | 6.15 | Survival Functions of Deficit Episodes |
| Chart | Data | 6.16 | Predicted Duration and Actual Length of Ongoing Deficit Episodes |
| Chart | Data | 6.17 | Corporate Profitability and Productivity Growth |