IMF World Economic Outlook (WEO) Update -- Global Economic Slump Challenges Policies, January 2009

World Economic Outlook, January 28, 2009

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Bibliographic details

• Published: January 28, 2009
• Series: World Economic Outlook

Overview

• World growth is projected to fall to ½ percent in 2009, its lowest rate since World War II.
• The projection for global growth in 2010 is 3 percent, reflecting a gradual recovery contingent on strong policy actions.
• This outlook represents a downward revision of about 1¾ percentage point from the November 2008 WEO Update.

Growth projections and revisions

• World output (year-over-year): 5.2 (2007), 3.4 (2008), 0.5 (2009), 3.0 (2010).
• Q4 over Q4 and differences from November projections are incorporated in the baseline projections.
• World growth measured in market exchange rates is expected to turn negative in 2009.
• World trade volume (goods and services) experienced a sharp decline in late 2008 and is projected to remain weak during 2009.

Financial market conditions

• Financial market conditions have remained extremely difficult and more protracted than envisaged in November 2008.
• In advanced economies, spreads in funding markets have only gradually narrowed since end-October despite government guarantees; many credit market spreads remain close to their peaks.
• In emerging economies, sovereign and corporate spreads remain elevated despite recent moderation.
• Equity markets in both advanced and emerging economies have made little or no gains; currency markets have been volatile.
• Financial markets are expected to remain strained during 2009 until forceful restructuring and resolution of uncertainty about losses are implemented.

Real-financial feedback loop and macro impact

• Asset values fell sharply across advanced and emerging economies in late 2008, reducing household wealth and consumer demand.
• High uncertainty prompted households and businesses to postpone expenditures, reducing demand for consumer and capital goods.
• Disruptions in credit constrained household spending and curtailed production and trade, reinforcing a pernicious feedback loop between the real and financial sectors.
• Global output and trade plummeted in the final months of 2008.

Advanced economies

• Output in advanced economies is expected to contract by 2 percent in 2009—the first annual contraction in the postwar period.
• The cumulative output loss (relative to potential) is comparable to the 1974-75 and 1980-82 periods.
• Under assumptions of comprehensive financial policy actions, sizable fiscal stimulus, and large interest rate cuts, output is expected to start recovering in late 2009 and rise by about 1 percent in 2010.
• Stabilization in the U.S. housing market is expected to help underpin the recovery.

Emerging and developing economies

• Growth in emerging and developing economies is expected to slow from 6¼ percent in 2008 to 3¼ percent in 2009.
• Drag factors include falling export demand and financing, lower commodity prices, and much tighter external financing constraints—especially for economies with large external imbalances.
• Stronger economic frameworks provide greater room for policy support than in past downturns, helping cushion the shock.
• Developing countries in Africa and elsewhere are better prepared due to improved macroeconomic implementation, but Africa remains in a weaker position because of poverty levels and reliance on commodity exports.

Commodity prices and inflation

• The slump in global demand led to a collapse in commodity prices; oil prices have declined by over 60 percent since their peak in July 2008.
• The IMF baseline petroleum price projection is $50 a barrel for 2009 and $60 a barrel for 2010 (revised from $68 and $78).
• Metals and food prices have been marked down in line with recent developments.
• Inflation pressures have subsided:
  • Advanced economies headline inflation: 3½ percent in 2008 → ¼ percent in 2009 → ¾ percent in 2010.
  • Emerging and developing economies inflation: 9½ percent in 2008 → 5¾ percent in 2009 → 5 percent in 2010.

Policy responses and recommendations

• Financial sector: need to restore functionality and unclog credit markets by producing credible loan loss recognition; sorting financial companies according to medium-run viability; providing public support to viable institutions by injecting capital and carving out bad assets.
• Specific financial measures recommended include:
  • Force credible and coordinated loan loss recognition.
  • Resolve insolvent banks.
  • Set up public agencies to dispose of bad debts, possibly through a "bad bank" approach, while safeguarding public resources.
• Monetary policy:
  • Central banks in advanced economies have cut policy rates substantially; short-term market interest rates in 2009 are assumed about ¾ percentage point lower in the United States, the euro area, and the United Kingdom relative to the November WEO Update.
  • With interest rates approaching zero in several major countries, central banks are exploring alternative approaches that use their balance sheets to ease monetary conditions further.
  • Emphasis on unlocking key (high-spread, low-liquidity) credit markets.
• Fiscal policy:
  • Fiscal stimulus in G-20 countries in 2009 is projected to be 1.5 percent of GDP.
  • Fiscal balances in advanced economies are projected to deteriorate by 3¼ percentage points to -7 percent of GDP in 2009 due to stimulus, automatic stabilizers, revenue losses, and financial rescue costs.
  • Fiscal stimulus packages should rely primarily on temporary measures and be formulated within medium-term fiscal frameworks to ensure reversibility and long-term sustainability.
  • Countries with limited fiscal space should prioritize supporting the financial sector and credit flows while adjusting budgets to less favorable external conditions.
  • Avoid cutbacks in foreign aid in response to tightening budgets.

Risks and uncertainty

• The uncertainty surrounding the outlook is unusually large; downside risks dominate.
• Main downside risk: if financial strains and uncertainties are not forcefully addressed, the real-financial feedback loop could intensify, further damaging global growth.
• Rising risks of deflation in a number of advanced economies.
• Emerging economies' corporate sectors face risks from continued limited access to external financing.
• Sharp increase in public debt issuance could prompt adverse market reactions unless governments clarify strategies to ensure long-term sustainability.
• Upside risk: stronger-than-expected policy actions could improve global financial conditions faster than expected and lift growth.

Key statistics and highlighted figures

• World growth: ½ percent (2009), 3 percent (2010).
• Downward revision from November 2008 WEO Update: about 1¾ percentage point.
• Advanced economies growth: -2 percent (2009).
• Emerging and developing economies growth: 6¼ percent (2008) → 3¼ percent (2009).
• Oil price assumptions: $50.00 a barrel (2009), $60.00 a barrel (2010); average price of oil in U.S. dollars a barrel was $97.03 in 2008.
• Oil price change in 2009 projection: -48.5 percent (listed in Table 1.1 commodity line).
• Advanced economies headline inflation: 3½ percent (2008) → ¼ percent (2009) → ¾ percent (2010).
• Emerging and developing economies inflation: 9½ percent (2008) → 5¾ percent (2009) → 5 percent (2010).
• Fiscal stimulus in G-20 countries in 2009: 1.5 percent of GDP.
• Fiscal balance deterioration in advanced economies: deterioration by 3¼ percentage points to -7 percent of GDP in 2009.
• Table 1.1 selected aggregates (percent change, unless otherwise noted): World output 5.2 (2007), 3.4 (2008), 0.5 (2009), 3.0 (2010).

IMF World Economic Outlook (WEO) Update -- Global Economic Slump Challenges Policies, January 2009

Content in this bundle

• 0109a (PDF)
• 0109c (PDF)
• 0109f (PDF)
• 0109j (PDF)
• 122308pdf (PDF)
• Spn0901pdf (PDF)
• 0109pdf (PDF)
• Table1pdf (PDF)
• 0109r (PDF)
• 0109s (PDF)
• figure1
  • figure1 (CSV)
• figure2 (dataset overview)
  • figure2 (dataset overview) (CSV)
• figure3 — dataset overview
  • figure3 — dataset overview (CSV)
• figure4
  • figure4 (CSV)
• figure5 (dataset overview)
  • figure5 (dataset overview) (CSV)
• figure6
  • figure6 (CSV)

References

• October 2008
• Archive of WEO Reports
• Research at the IMF
• World Economic Outlook Database
• discussion forum
• United Kingdom and the IMF
• United States and the IMF
• https://www.imf.org/en/publications/weo
• Global Economy in Crosscurrents of War and Technology
• https://www.imf.org/en/publications/gfsr
• Global Financial Markets Confront the War in the Middle East and Amplification Risks
• https://www.imf.org/en/publications/fm
• Fiscal Policy under Pressure: High Debt, Rising Risks
• https://www.imf.org/en/publications/reo
• Asia and Pacific
• Europe
• Middle East and Central Asia
• Sub-Saharan Africa
• Western Hemisphere
• https://www.imf.org/en/publications/areb
• Getting to Growth in an Age of Uncertainty
• https://www.imf.org/en/publications/finance-development
• More Publications
• November 2008 WEO Update
• January 2009 Global Financial Stability Report—Market Update
• https://www.imf.org/en/home