IMF World Economic Outlook (WEO) Update -- Global slowdown and rising inflation, July 2008
World Economic Outlook, July 15, 2008
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- Published: July 15, 2008
- Series: World Economic Outlook
Overview
- The global economy is "caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing economies."
- Global growth is expected to decelerate significantly in the second half of 2008, before recovering gradually in 2009.
- Top policy priority: head off rising inflationary pressure while keeping sight of risks to growth.
The Growth Slowdown
- Global growth trajectory and projections:
- Global growth decelerated to 4½ percent in the first quarter of 2008 (measured over four quarters earlier), down from 5 percent in the third quarter of 2007.
- Global growth is projected to moderate from 5 percent in 2007 to 4.1 percent in 2008 and 3.9 percent in 2009.
- On a fourth-quarter-on-fourth-quarter (q4/q4) basis: growth would decelerate from 4.8 percent in 2007 to 3.0 percent in 2008, before picking up to 4.3 percent in 2009.
- Selected country and regional projections and notes:
- United States: growth in 2008 would moderate to 1.3 percent on an annual-average basis; the economy is projected to contract moderately during the second half of the year, then gradually recover in 2009.
- Emerging and developing economies: growth projected to ease to around 7 percent in 2008-09, from 8 percent in 2007.
- China: growth projected to moderate from near 12 percent in 2007 to around 10 percent in 2008-09.
- Risks to the outlook:
- Financial risks remain elevated; rising losses in a global slowdown could add strains on capital and squeeze credit availability.
- Inflationary pressures will constrain policy responses to slower growth.
- Positive upside: demand might be more resilient than projected, as in Q1 2008.
Inflation: Scope and Drivers
- Current inflationary context:
- Headline inflation in advanced economies rose to 3.5 percent in May 2008 (12-month change); core inflation remained at 1.8 percent.
- In emerging and developing economies, headline and core inflation have risen to 8.6 percent and 4.2 percent, respectively—the highest rates since around the beginning of the current decade.
- Main drivers:
- Higher food and fuel prices; oil prices substantially above previous real-term records due to supply concerns and limited spare capacity.
- Food prices boosted by poor weather conditions and strong demand growth (including biofuels).
- Forecast adjustments:
- Inflation forecasts for emerging and developing economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 percent and 7.4 percent, respectively.
- Policy implications:
- Advanced economies: case for monetary tightening less compelling given anchored inflation expectations and labor costs, but inflation needs close monitoring.
- Emerging economies: many require tighter monetary policy, greater fiscal restraint, and in some cases more flexible exchange rate management.
Food and Fuel Price Surge: Origins, Prospects, and Risks (Annex summary)
- Origins:
- Strong global growth in 2003-07 increased commodity demand, particularly from emerging and developing economies.
- Growing supply problems and low short-term responsiveness of demand and supply have underpinned sharp price run-ups.
- Oil market specifics:
- Sluggish supply response against already stretched spare capacity.
- Production and distribution capacity slow to build due to soaring investment costs, technological, geological, and policy constraints, and run-down of existing fields.
- High oil prices along the futures curve reflect expectations that sustained high prices are needed to spur massive investment.
- Food market specifics:
- Demand growth has generally outstripped supply growth for many food commodities over the past 8-10 years; global inventories declined to low levels last seen in the mid-1970s.
- Reinforcing developments since 2006:
- Unfavorable weather reduced harvest yields in 2006 and 2007, notably wheat.
- Rising biofuel production: rising corn-based ethanol production accounted for about three-fourths of the increase in global corn consumption in 2006-07.
- Higher oil and energy prices raised production costs for food (transportation, fertilizer prices have more than tripled since early 2006).
- Growing use of export restrictions by food exporters put pressure on world prices (notably rice).
- Near- and medium-term outlook:
- Oil and food prices likely to remain high and volatile; baseline forecasts show only moderate declines.
- Oil production expected to remain broadly stagnant; small new capacity likely offset by declines in existing fields.
- Food prices may ease more substantially in the medium term if appropriate policy incentives enable supply expansion.
- Recent movements: wheat prices down about 30 percent from March 2008 peak on better harvest expectations; corn and soybean prices rose further due to harvest concerns.
- Policy challenges and responses:
- Low- and middle-income countries face difficult trade-offs: feed the hungry without feeding inflation or depleting reserves.
- Passing full price increases to consumers would encourage supply response and reduce demand, but temporary and targeted social measures are needed to cushion impacts.
- Multilateral efforts needed to address both effects and causes of the crisis—help to finance imports and social spending, assistance in policy design, and actions to promote better supply-demand balance in commodities markets.
Financial Market Turbulence and Downside Risks
- Financial market conditions remain difficult and fragile despite policy responses and progress toward bank recapitalization.
- Markets remain sensitive to concerns about losses amid slowing economies.
- Credit extension constrained by the need to repair balance sheets; credit conditions in advanced economies expected to remain tight in coming quarters.
- Further discussion to appear in the Global Financial Stability Report Market Update (due in late July).
Macroeconomic Policy Guidance
- Policymakers must balance slowing demand against rising inflation.
- Many central banks have tightened policy stances; however, interest rates in emerging and developing economies generally remain negative in real terms in several cases.
- Recommended approaches:
- Advanced economies: monitor inflation closely; tightening less clearly warranted given weak growth and anchored expectations, but vigilance required.
- Emerging economies operating above trend growth: tighten monetary policy, adopt greater fiscal restraint, and, where appropriate, pursue more flexible exchange rate management to reverse inflation build-up.
- Low-income countries: adopt temporary, targeted social measures and seek international assistance where needed.
Key Projections and Statistics (as presented in Table 1)
- World output (Year over Year):
- 2006: 5.1
- 2007: 5.0
- 2008 (Estim.): 4.1
- 2009 (Projections): 3.9
- Difference from April Projections: 0.4 (2008), 0.1 (2009)
- Q4 over Q4:
- World output: 4.8 (2007), 3.0 (2008), 4.3 (2009)
- Advanced economies (Year over Year):
- 2006: 2.7
- 2007: 1.7
- 2008: 1.4
- 2009: 2.6
- United States:
- 2006: 2.9
- 2007: 2.2
- 2008: 1.3
- 2009: 0.8
- Difference from April Projections: 0.2 (2008), 2.5 (Q4/Q4 difference), 0.3 (another difference figure)
- Emerging and developing economies (Year over Year):
- 2006: 7.9
- 2007: 8.0
- 2008: 6.7
- 2009: 8.5
- Difference from April Projections: 6.3 (2008), 7.5 (2009)
- China:
- 2006: 11.6
- 2007: 11.9
- 2008: 9.8
- 2009: 11.3
- Difference from April Projections: 8.8 (2008), 11.1 (2009)
- India:
- 2006: 9.3
- 2007: 8.9
- 2008: 7.6
- Commodity prices (U.S. dollars):
- Oil: 2006 change 20.5; 2007 change 10.7; 2008 change 63.8; 2009 change 29.5; Difference from April Projections: 8.3
- Note: The average price of oil in U.S. dollars a barrel was $71.13 in 2007; the assumed price based on future markets is $116.50 in 2008 and $125.00 in 2009.
- Nonfuel (average based on world commodity export weights):
- 2006: 23.2
- 2007: 14.1
- 2008: 14.6
- Difference from April Projections: -5.2
- Consumer prices (Emerging and developing economies): 9.1 (figure shown in table)
- London interbank offered rate (percent):
- On U.S. dollar deposits: 5.3 (six-month rate)
- On Japanese yen deposits: 1.1 (six-month rate)
- Note: Real effective exchange rates assumed constant at levels prevailing during May 21-June 18, 2008.
IMF World Economic Outlook Update — Global slowdown and rising inflation, July 2008
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