Presentation on the Global Economy

Made at the Brookings Institution

Simon Johnson
Economic Counsellor
Research Department
January 31, 2008

The views expressed in this presentation are those of the author only, and the presence of them, or of links to them, on
the IMF website does not imply that the IMF, its Executive Board, or its management endorses or shares the views
expressed in the papers.
 Global Outlook is Subdued with Risks Heavily 1

Tilted to the Downside

(in percent) 6

Jan-08 WEO

90% Confidence interval

70% Confidence interval 3
50% Confidence interval

2
2004 2005 2006 2007 2008
 Will Divergent Growth in Emerging Markets Continue?
2

(in percent; yoy)

10

8 Emerging Markets

World

2
Advanced Economies

0
00 01 02 03 04 05 06 07 08
Source: WEO Update January 2008.
 Activity is Decelerating Globally, Q4 over Q4 3

(growth in percent; Q4/Q4)

4 U.S.

Euro area
0

Japan
-2
00 01 02 03 04 05 06 07 08
Source: WEO update January 2008.
 Long Term Government Bond Yields Have Fallen, 4

but Certain Interest Rates Remain High

Long-Term Interest Rates U.S. Interest Rates

(in percent; 10-yr Govt. Bond) (in percent)
6 9
U.K.

U.S.
8
5

3 Euro area
Jumbo mortgages 5
Corporate, A-AAA
Corporate, BB (rhs)
1/22 Conforming Mortgages 1/22
2 4
Jan-05 Jan-06 Jan-07 Jan-08 Jan-07 Jul-07 Jan-08
 Liquidity Strains Have Eased, but Underlying Credit 5

Problems Remain
Interbank Markets Bank CDS Spreads
(3-month LIBOR minus T-bill rate; in percent) (10-years; in basis points; Median)

2.5 120
12/12 12/12

U.S. 100
2.0
Euro
area U.S. 80
1.5

60

1.0
40

0.5 U.K.
20
Europe
Japan
0.0 0
1/22
Jul-07 Sep-07 Nov-07 Jan-08 1/21
Jul-07 Sep-07 Nov-07 Jan-08

1/ Euro LIBOR minus Germany’s government bond rate.

 Banks Are Showing Signs of Stress 6

(FTSE sectoral indices; 1/1/2007=100)

130 130

120 Korea 120

Australia
Germany
110 110

100 100

90 90

80 Italy 80

70 70
France
Japan

60 U.S. U.K. 60

1/21 1/21
50 50
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
 U.S. Labor Markets and Declining House Prices 7

Point to a Much Weaker Outlook

U.S. Private Payrolls U.S. House Price Expectations 1/
(thousands; 3-month moving average; (average annual change; in percent)
monthly net change; seas. adj.)

2
300
9/17/2007
Total
10/31/2007 0
200 1/18/2008

-2

100 -4
Other
-6
0

Housing-related
-8

-100
-10
Dec-07
-200 -12
03 04 05 06 07 08 09 10 11 12
1/ RPX 25 MSA Composite: Forward Term Structure.
 Several Advanced Economy Housing Markets 8

Look Stretched
House Prices Housing Valuation Ratios
(1997q1=100) (1997-2006; percent change)
U.S. Germany 200
U.K. Spain price/disposable income
Ireland France
Italy price/rent
150
500 U.S. price/disposable income

U.S. price/rent

400 100

300 50

200 U.S.
0

100
-50

G e al y
nd

0
K.

.
ce

y
n

S
an
ai
U.

U.
an
la

It
Sp

rm
e

Fr

97Q1 99Q1 01Q1 03Q1 05Q1 07Q1

Ir
 Signs of Non-Financial Corporate Stress Have 9

Intensified Again
(5-year CDS Spreads; in basis points)

Investment Grade Below Investment Grade

130 500

120 U.S.
450
110

100
Europe 400

90
350
80

70 300

60
250
50

40 200
U.S.
30
Europe 150
20
1/22 1/22
10 100
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
 Headline Inflation in Advanced Economies Has Jumped 10

Headline Core
(in percent; yoy) (in percent; yoy)

5 U.S. 5

4 Euro area 4

U.S.
3 3

Euro area
2 2

1 1
U.K. U.K.

0 0

-1 Japan -1

Japan Dec-07 Dec-07

-2 -2
02 03 04 05 06 07 02 03 04 05 06 07
 Inflation Expectations Remain Well-Anchored 11

(break-even rates; from 10-year inflation-indexed bonds)

3.5
U.K.
(RPI)
3.0
Canada
(20-yr)
2.5 U.S.

2.0
Euro area
(5-yr)
1.5

Japan
1.0

0.5

1/22
0.0
05 06 07 08
 Food and Fuel Price Inflation Hitting Emerging Markets 12
(in percentage points of annual inflation)
Effects of Oil Price Increase Effects of Oil and Food
0.5 Price Increase
5

Food Fuel
0.4
4

0.3
3

0.2 2

0.1 1

0
0.0

Ch il
y
R ly

Ca ce
da

a
Ja a

Fr .
G pan

a
.
.K

.S

az
an
si

di
Ch il

in
y
R ly

a
Ca ce
da

a
Ja a

Fr K.
er n

a
In .

an
na
.S

az

U
an

It

us
si

di

In

Br
G pa

in
a

m
.
an
na
U

U
It
us

Br
m

er

Estimated Impact of a 10 percent Oil Price Increase Estimated Impact of a 10 percent Oil and an 10 percent
on Annual Headline CPI inflation, selected Food Price Increase on Annual Headline CPI inflation,
countries. selected countries
 Capital Flows to Emerging Markets Have Not Abated 13

(cumulative flows; in billions of U.S. dollars)

Net Flows to Emerging Bank Flows to Emerging

Market Funds 1/ Markets 2/
100 1,200

1,000
80

800
60
Equity funds
Deposits 600
40
400

20 Loans
200
Debt funds
0 0
2004Q1 2005Q1 2006Q1 2007Q1
Q4 2004Q1 2005Q1 2006Q1 2007Q1 Q2
1/ Flows from United States and Europe.
2/ From BIS reporting banks.
 Asset Prices in Emerging Markets Remain High 14

House Prices Stock Market Indices

(2000Q1=100) (1/1/2007=100)
200 240

China
220
China

200

150
180

U.S.
India 160
Brazil
140
100 Thailand
Russia
Singapore 120

100
Hong Kong U.S.
07Q3 1/22
50 80
00Q1 02Q1 04Q1 06Q1 Jan-07 May-07 Sep-07 Jan-08
 Oil Prices Have Touched New Highs, 15

Amid Tight Market Conditions

Crude Oil Prices OPEC Spare Capacity
(Brent futures options; U.S. dollars per barrel)
barrel (in percent of world oil consumption)
8
140
90% confidence interval Forecast
70% confidence interval Other OPEC
130 7
50% confidence interval
Nov-07 WEO baseline for Brent
120
Dec-07 WEO baseline for Brent
Spot price
6
110

100 5

90
96-06 average 4
80
3
70
Saudi
60 Arabia 2
50
1
40
1/21
30 0
Jan-06 Jan-07 Jan-08 Jan-09 1996 1998 2000 2002 2004 2006 2008
Jan-08
High Oil Prices Could Slow a Narrowing of Imbalances 1/16
(Current Account; in Percent of GDP)
6

4
Japan

Euro area
0

-2

-4
U.S.
-6

-8
97 98 99 00 01 02 03 04 05 06 07 08
Source: WEO Update January 2008.
1/Oil Base Line assume $86.25 for 2008 and $84.25 for 2009.
 Exchange Rate Adjustments 17

Still Not Reflecting Current Account Positions

Exchange Rates 1/ Current Account Balances
(percent changes; (In percent of GDP; estimates for 2007)
1/17/08 vs. 8/22-9/19 average)

U.S. dollar per national currency REER

Brazil Brazil

Japan Japan

Euro area Euro Area

Malaysia Malaysia

Australia Australia

Russia Russia

China China

India India

Canada Canada

Saudi Arabia Saudi Arabia

U.S. U.S.

U.K. U.K.

-12 -8 -4 0 4 8 12 -8 -4 0 4 8 12 16 20 24 28

1/ Positive numbers denote appreciation of local currency.

 U.S. Dollar Share of Reserves Declining Slightly 18

(in percent of Global Reserves 1/)

U.S. dollar Japanese yen Euro Others

100%

90%
80%

70%

60%

50%
40%

30%
20%

10%

0%
01 02 03 04 05 06 07 Q3
1/ Total allocated reserves.