World Economic Outlook Hopes, Realities, Risks April 2013

1. WorldEconomicOutlookHopes, Realities, RisksApril 2013 Thomas Helbling Research Department, International Monetary Fund

2. Hope: move on after financial crisis Reality: Still grappling with the crisis legacy —3-speed global economy Advanced Economies with Systemic Banking Crises 1/ Output Dynamics after Banking Crises (Output in percent of pre-crisis trend; years from crisis on x-axis) Growth and Recovery in Advanced Economies (Real PPP GDP per capita) 1/ Crisis Countries include Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain, Sweden, Switzerland, United Kingdom, United States. 2/ The precrisis trend is estimated based on the window from 10 to 3 years before the crisis. Sources: World Bank; and IMF staff estimates. 2

3. Policy action has reduced tail risks, financial markets have rallied • Equity Markets • (2007 = 100; national currency) Government Bond Yields (Percent; Ten-year government bonds) Apr. 13 Sources: Haver Analytics; EPFR Global; and IMF staff calculations. Source: Bloomberg L.P.; and European Central Bank / Haver Analytics

4. But the forecast suggests that the transition from three-speed to full-speed global economy will be slow Advanced Economies (percent change from a year earlier) Emerging Economies (percent change from a year earlier) LAC: Latin America and the Caribbean; SSA: Sub-Saharan Africa; data are interpolated from annual frequency values Source: IMF Staff Estimates.

5. Bank lending conditions still tight, especially in the euro area Nonfinancial Firm and Household Credit Growth 1\ (year-over-year percent change) Lending Conditions (Net percentage of domestic respondents tightening standards for loans) 12:Q4 Sources: Lending surveys by the Bank of England, European Central Bank, Bank of Japan, and the U.S. Federal Reserve for house holds and corporations; Haver Analytics; and IMF staff estimates. 1\ Flow of funds data are used for the euro area, Spain and the United States. Italian bank loans to Italian residents are corrected for securitizations.

6. AE fiscal policy will remain tight in 2013, except in Japan, and monetary policy will be supportive EM fiscal and monetary policy will be close to neutral Fiscal Impulse (Change in structural balance as percent of GDP) Fiscal Impulse (Change in structural balance as percent of GDP) Source: IMF staff estimates. 6

7. The recovery has been weak in advanced economies, but not in most emerging economies • Global Recoveries: Real GDP(Per capita, PPP weight; trough in output at t=0) Advanced Economies Emerging and Developing Economies Source: IMF staff estimates.

8. Prospects for potential output growth in EMs have been downgraded Output Relative to Precrisis Trends in WEO Estimates in 2013 (percent of precrisis trend GDP) Reductions in Medium-Term Output (percent; relative to the September 2011 WEO) Source: IMF staff estimates. Note: AE= advanced economies; EM = emerging market and developing economies; CEE = central and eastern Europe; CIS = Commonwealth of Independent States; DA = developing Asia; LAC = Latin America and the Carribean; SSA = sub-Saharan Africa

9. The Outlook is still weak and uncertain. The forecast has been revised down WEO Real GDP Growth Projections (percent change from a year earlier) Source: IMF, World Economic Outlook. 8

10. Many risks remain, even if the economy is in a better place; market risks indicators do not point to large decrease in risks Prospects for World GDP Growth (percent change) Downside: ST stress or LT stagnation in euro area US debt ceiling Medium-term risks: high AE debt; lower EM growth Risks related to unconventional monetary policies: side effects; managing exit Upside: 1. Faster than expected U.S. recovery Source: Consensus Forecasts; Bloomberg L.P.; and IMF staff estimates.

11. What to do? Work on medium-term policies and don’t overburden monetary policy! Euro area • Accommodative monetary policy (2014 inflation < < 2% !!) and working on better pass through • Restructuring weak banks, with help of ESM if needed • Stronger EMU: banking union and capital market integration • More entitlement reform and more structural reform • Medium-term fiscal plans and entitlement reform • U.S. needs to durably address debt ceiling • Japan needs a strong medium-term growth strategy • Accommodative monetary policy, including BoJ reforms U.S and Japan EMDC • Rebuild policy space • Watch for legacies of past credit growth or ongoing expansions • Structural reforms: to reaccelerate potential output, absorb inflowing capital productively, rebalance growth 11

12. Main Message: Risks are down but forecasts are not up • Policies have addressed major risks but other risks remain • Global economy in broadly three speeds (3-speed global economy) • Emerging market and developing countries (EMDE): coping well • US, other advanced economies (AE): shift from public to private demand in train • Euro area: the handover from public to private demand is still stuck • Priorities • AE: achieving a better fiscal/financial/monetary policy mix • EMDE: rebuilding policy room for maneuver and structural reforms

13. Thank you!