Transcript of a Joint Seminar by the IMF and the Brookings Institution on "Global Downturn? The World Economy in 2008"

IMF News, January 31, 2008

Source details

Canonical URL: Transcript of a Joint Seminar by the IMF and the Brookings Institution on "Global Downturn? The World Economy in 2008"

Other formats

Bibliographic details

Published: January 31, 2008

Global forecast and headline figures

IMF global growth forecast for 2008: 4.1 percent (PPP-weighted).
IMF estimated actual global growth for 2007: 4.9 percent.
IMF baseline forecast for 2008 issued in October (same basis): 4.4 percent (revised down to 4.1 percent in January update).
Emphasis that PPP weights were updated (World Bank) and all figures use those revised PPP weights.

United States: growth dynamics and scenarios

IMF headline U.S. growth for 2008 (annual average): 1.5 percent.
IMF quarterly perspective (Q4 over Q4) presented as better reflection of dynamics:
- U.S. Q4 over Q4: slowdown from "around about 2-1/2 to 2.6 percent in 2007" to 0.8 percent in 2008.
- Euro Area Q4 over Q4: from about 2.3 percent to 1.3 percent.
Fiscal stimulus: estimated effect of the U.S. package adds .2 to .3 to the Q4 over Q4 number in 2008 (based on indications of size and timing).
Baseline includes a small house-price fall built into U.S. outlook: about a 10-percent fall.
Market-derived forward house-price indicator cited (RPX 25 MSA Composite): market (as of January 18) implying a 20-percent cumulative fall in house prices over the next 2 year and then flat to 2012 (dotted-market line).
Risk ranges discussed for U.S. first-half 2008 growth: speaker (Martin Baily) suggested a likely band of "plus 1-1/2 to minus 1-1/2" percent for the U.S. economy in the near term, with a roughly 80-percent probability of staying in that band and a smaller (about 15-percent) probability of deeper recession.

Financial conditions: liquidity, solvency, and market indicators

Interbank stress measure discussed: TED-equivalent spreads (3-month Libor minus Treasury bill) rose but fell after mid-December TAF auction; IMF view: liquidity pressures have receded following central bank liquidity provision measures.
Credit default swap (CDS) spreads on banks (10-year CDS) described as worrying: CDS spreads peaked in November, fell, and then rose again since the mid-December TAF auction — interpreted as market view of higher insolvency risk.
Equity prices: broad declines across U.S., Europe, Korea, Australia, Japan; shock began in U.S. but spread to other industrial countries exposed to U.S. mortgage securities.
Financial system losses and resolution pace: IMF Global Financial Stability Report update (released concurrently) outlines baseline assumptions that losses will be recognized over time; process is unfolding through 2008 but not as rapidly as desirable.
Private-sector positions referenced by audience question: approximate figures mentioned in discussion — "roughly $1.3 trillion in subprime mortgages" and "$600 billion or so in collateralized debt obligations" feeding downstream derivatives exposures (audience comment included in transcript).

Emerging markets: momentum, inflation, and capital flows

Emerging markets account for major share of global growth in the near term; IMF noted potential for emerging markets to "power through" in 2008 but emphasized uncertainty and vulnerabilities.
Inflation and commodity-price exposure:
- Food-price increases emphasized as large shocks to emerging markets.
- Biofuels policy in the U.S. identified as contributing to higher food and headline inflation in emerging markets (referenced earlier IMF WEO October analysis).
- Oil price level cited as "around $90 a barrel" and described as tight market with little usable spare capacity in OPEC (some sour crude in Saudi Arabia noted as limited margin).
Capital flows and reserve data:
- COFER database (IMF) release to end-December showed relatively small portfolio reallocation out of the U.S. dollar; much of the change in dollar holdings attributed to valuation effects from dollar depreciation.
- Concern: COFER covers a declining fraction of global reserves and some large reserve holders are not included — reduced transparency about the composition of flows/portfolios.
- High-frequency capital flow volatility noted; examples cited by participants include rapid short-term outflows (audience reference: "almost $2 billion out of Brazil in this month alone" — question from transcript).
Policy space and countercyclical capacity:
- IMF and discussants noted emerging markets have more policy space and better frameworks than in past crises, enabling potential countercyclical responses, though inflationary constraints limit options.
- China and India discussed explicitly:
- China: viewed as having scope to increase domestic consumption and to deploy countercyclical policy if needed; IMF engagement with Chinese authorities stressed.
- India: consensus view less confident about expansionary policy space relative to China, though some officials indicated potential scope.

Global imbalances, exchange rates, and current accounts

Exchange-rate movements since summer presented as broadly helpful:
- U.S. dollar real depreciation since 2002: "depreciated more than 20 percent in real terms since 2002."
- Recent real exchange-rate movement described as having come down "by around about 4 percent" on the real exchange rate line (red).
IMF view: exchange-rate adjustment has occurred and been generally orderly, but burden of adjustment has fallen disproportionately on countries with floating rates while many with fixed or managed rates have not adjusted sufficiently.
Simulated effects of U.S. slowdown on global current accounts: IMF modeling suggests a U.S. slowdown may produce only modest improvement in U.S. current account and does not by itself resolve large global imbalances — persistent surpluses would remain in many economies under a severe U.S. slowdown scenario.

Key risks, policy recommendations, and constraints

Key downside risks identified (relative to October WEO):
- Worsening downside risks from financial conditions.
- Continued downside risk in the U.S. and domestic demand in Europe and Japan (though somewhat less than in October).
Upside risks: persistence of emerging-market momentum could imply upside to growth in those economies.
Inflation constraints:
- Inflation remains elevated in many countries (headline and core in 2007); second-round inflation effects are a major concern in the Euro Area and constrain central banks’ ability to ease.
- IMF view: inflation expectations remain relatively well anchored in leading industrial countries but inflation is still an important policy constraint globally.
Policy recommendations and risk management (summarized from discussion):
- Use countercyclical fiscal and monetary measures judiciously where policy space exists; IMF supports temporary, targeted fiscal stimulus in countries with space and adequate medium-term fiscal frameworks (example: U.S. temporary stimulus to offset financial decelerator while retaining medium-term deficit reduction goals).
- Emerging markets should use scope to support domestic demand if needed while managing inflation risks; policy mix may include fiscal measures where credible and targeted.
- Address medium-term global imbalances through exchange-rate adjustment where appropriate and through structural policies to raise consumption in surplus countries and reduce excessive reliance on external demand.
- Improve transparency on global reserve and portfolio positions (COFER limitations noted) to reduce uncertainty about international flows and buildup of vulnerabilities.
- Avoid protectionism: panelists warned that retreat into protectionism would be damaging globally and urged continued commitment to open trade and cooperative policy responses.

Scenario outlines and probability judgments (from discussant remarks)

Base/near-term scenario:
- Global growth moderates to 4.1 percent in 2008 with emerging markets sustaining much of global momentum in 2008.
- U.S. Q4 over Q4 growth at 0.8 percent in 2008 with recovery in latter quarters, contingent on financial stability and policy response.
Downside financial-contagion scenario:
- Another wave of financial losses (bond insurers, structured investment vehicles, further write-downs) could trigger deeper recession dynamics via tighter credit, sharper declines in investment and consumption, and additional housing-market deterioration.
Housing-wealth-driven slowdown scenario:
- A large cumulative fall in U.S. house prices (market indicators referenced a 20-percent cumulative fall over 2 year) could reduce household wealth and consumption sufficiently to trigger broader recession dynamics; IMF baseline assumes a smaller built-in housing decline (about 10 percent).
Discussant probability judgment (Martin Baily):
- Approximately an 80-percent probability of U.S. growth remaining in the "plus 1-1/2 to minus 1-1/2" percent range in the near term.
- Approximately a 15-percent probability of a deeper recession than baseline.

Transcript of event in Washington, D.C., Thursday, January 31, 2008 — IMF Chief Economist Simon Johnson (Economic Counselor and Director, Research Department, IMF) and discussant Martin Baily (Senior Fellow, Brookings Institution); moderator Homi Kharas (Senior Fellow, Brookings Institution); introduction by Domenico Lombardi (Brookings).