IMF World Economic Outlook (WEO) Update -- Rapidly Weakening Prospects Call for New Policy Stimulus - November 2008
World Economic Outlook, November 6, 2008
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- Published: November 6, 2008
- Series: World Economic Outlook
Global growth outlook and key projections
- Prospects for global growth have deteriorated over the past month; 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.
- 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.
- 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; a recovery is projected to begin late in 2009.
- Emerging and developing economies:
- Downward revisions to 2009 real GDP growth projections average 1 percent, leaving their growth rate at 5 percent in 2009.
- Revisions vary considerably across regions; commodity exporters and countries with acute external financing and liquidity problems are among the most affected.
- Countries in East Asia (including China) generally have suffered smaller markdowns.
Commodities and inflation dynamics
- Weakening global demand is depressing commodity prices.
- Oil:
- Oil prices have declined by over 50 percent since their peak, retreating to levels not seen since early 2007.
- IMF baseline petroleum price projection for 2009 revised down from $100 to $68 a barrel relative to the October WEO.
- Metals and food prices have fallen from recent peaks.
- Inflation:
- Combination of stabilizing commodity prices and increasing slack will help 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 expected to moderate more gradually, but inflation risks remain in a number of countries.
Financial crisis: severity and market developments
- Markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions.
- Market moves:
- Credit spreads spiked to distressed levels.
- Major equity indices dropped by about 25 percent in October.
- Emerging markets: sovereign spreads doubled since the beginning of October, returning to 2002 levels; more than a third of the countries in the benchmark EMBIG index trading at spreads above 1,000 basis points.
- Emerging equity markets lost about a third of their value in local currency terms and more than 40 percent of their value in U.S. dollar terms.
- Policy responses implemented include programs to purchase distressed assets, use of public funds to recapitalize banks and provide comprehensive guarantees, and coordinated reductions in policy rates by major central banks.
- Even with rapid implementation, financial stress is likely to be deeper and more protracted than envisaged in the October 2008 WEO, with markets pricing in expectations of much higher corporate default rates and higher losses on securities and loans.
Confidence, demand, and real-side impacts
- Households and firms are increasingly anticipating a prolonged period of poor prospects for jobs and profits and are cutting back on consumption (notably durables) and investment.
- U.S. economy: households will suffer as they respond to depreciating real and financial assets and tightening financial conditions.
- Euro area: growth hard hit by tightening financial conditions and falling confidence.
- Japan: support to growth from net exports is expected to decline.
Policy easing to date and fiscal stance
- Monetary policy:
- Recent moderation of inflation risks has cleared the way for major central banks to cut policy interest rates.
- Relative to October WEO projections and latest cuts, interest rates in 2009 are assumed to be about 1 percentage point lower in the United States and the euro area and ¼ percentage point lower in Japan.
- Other advanced economies have also cut rates; in emerging economies the picture is mixed.
- Fiscal policy:
- Some governments have announced fiscal policy measures to support demand, but overall measures are limited and projections do not build in fiscal stimulus that is under discussion but not yet adopted.
- Fiscal policy stance is projected to be broadly neutral in 2009; in cyclically adjusted terms, general government deficits in advanced economies are not projected to change much in 2009 relative to 2008 unless new measures are adopted.
Risks, scenarios, and uncertainty
- Downside risks are serious and include:
- More intense and protracted deleveraging than factored into projections.
- Substantial capital flow reversals and disorderly exchange rate depreciations for many emerging economies.
- Growing risks of deflationary conditions in advanced economies (risks still small given well-anchored inflation expectations).
- Upside scenarios are limited but could arise if financial sector policy measures are fully specified and implemented and if corporate balance sheets help sustain investment and confidence.
- WEO projections and scenarios assume that policies do not respond to the latest deterioration in global growth prospects.
Policy recommendations: macroeconomic stimulus and financial sector actions
- Macroeconomic policy:
- Clear need for additional macroeconomic policy stimulus beyond announced measures to support growth and restore financial sector health.
- Exploit room to ease monetary policy where available; recognize monetary policy may be less effective amid severe financial conditions and zero-bound constraints.
- Broad-based fiscal stimulus is likely warranted where countries have fiscal space, provided it is well targeted and supported by accommodative monetary policy.
- Financial sector policies:
- Reinforce, clarify, and better coordinate financial policies to foster a more rapid recovery of lending and demand.
- Potentially broaden the scale of recapitalization efforts depending on how much prospects worsen.
- Clearly specify the coverage and legal foundation for guarantees and asset purchase programs.
- Continue generous central bank liquidity support.
- Consider measures to foster efficient and predictable resolution of mounting debt problems in the corporate and household sectors to preserve value to bank creditors.
- Develop cooperative arrangements for resolution of large cross-border institutions and improve cross-border consistency of policies.
- Ensure extension of financial support and guarantees takes cross-border effects into account, including impacts on emerging economies.
- Develop exit strategies for the public sector from financial system ownership.
IMF World Economic Outlook (WEO) Update -- Rapidly Weakening Prospects Call for New Policy Stimulus - November 2008
Content in this bundle
- Table 1.1. Overview of the World Economic Outlook Projections
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- _1108pdf
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- 1108s
- fig1 — dataset overview
- fig2
- fig3 (dataset overview)
- dataset overview (fig4)
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- Global Financial Markets Confront the War in the Middle East and Amplification Risks
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