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Global Economic Developments and Outlook Jörg Decressin Chief , World Economic Studies Division

Global Economic Developments and Outlook Jörg Decressin Chief , World Economic Studies Division Research Department International Monetary Fund March 17, 2009. Outline. What are economic prospects? What are the policy priorities?.

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Global Economic Developments and Outlook Jörg Decressin Chief , World Economic Studies Division

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  1. Global Economic Developments and Outlook Jörg Decressin Chief , World Economic Studies Division Research Department International Monetary Fund March 17, 2009

  2. Outline • What are economic prospects? • What are the policy priorities?

  3. Industrial production and merchandise exports have plummeted Global Industrial Production and Merchandise Exports (Annualized three-month percent change) Industrial production (left scale) Merchandise export value (right scale) 1997 03 Jan. 2009 2001 05 07 99

  4. World economy is expected to contract in 2009 and recover modestly in 2010 Real GDP Growth (Annual percent change) Emerging and Developing economies Advanced economies 75 85 95 05 1970 80 90 2000 10

  5. Advanced economies to suffer deepest recession since World War II Real GDP Growth Rates (percent change) 2007 08 09 10 Emerging and Developing Economies 2007 08 09 10 Euro area 2007 08 09 10 Japan 2007 08 09 10 United States

  6. Risks to world GDP growth are to the downside Global GDP Growth (percent change, ppp-GDP weighted average)

  7. Key assumptions behind the global recovery in 2010: • Monetary easing • Fiscal stimulus • Improving financial conditions (most important) & stabilization in the U.S. housing market

  8. Monetary policy is supportive, including through unconventional measures; room to cut rates in some regions (Policy rates; percent) Emerging markets United States Euro area Japan

  9. Fiscal packages are expected to boost economic activity General Government Fiscal Balances (Percent of GDP) Emerging and Developing economies World Advanced economies 06 08 2000 02 04 10

  10. What more needs to be done?

  11. Macroeconomic and financial policies need to be mutually reinforcing • Monetary easing, including through unconventional measures • Expansionary fiscal policies, within strong medium-run frameworks • Healing the financial sector—this is the “sine qua non” and would make macroeconomic policies more effective

  12. Expansionary policies during financial crisis episodes help shorten recessions Survivor Functions for Advanced Economies’ Recessions (probability of remaining in a recession beyond a certain number of quarters) Financial crisis episodes Full sample Financial crisis episodes with high fiscal response Financial crisis episodes with high monetary response 1 10 0 4 8 9 2 3 7 6 5 Quarters

  13. A sustained recovery will not be possible until financial sector health is restored! • Three-pronged approach: liquidity, solvency, dealing with bad assets • Key challenge: • Removing toxic assets from bank balance sheets in a transparent and coordinated manner

  14. Beyond the short run: initial lessons from the crisis • Financial regulation perimeter to be broadened and made more flexible (curtail regulatory arbitrage!); robust market clearing arrangements; more transparency about risks • Dealing with systemic risks through a greater macroeconomic emphasis on financial supervision and regulation and a greater prudential emphasis on monetary policy • Coordination, e.g., binding code of conduct on beggar-thy-neighbor financial sector policies

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