1

World Economic

Situation and

Prospects 2013

Pingfan Hong

March 21 2013

At G-24 TGM

Washington DC

2 2

Outline

1. World Economic Outlook

• Global and regional growth prospects

• Trends in international trade and finance

2. Downside Risks and Uncertainties

• Euro area crisis

• US fiscal uncertainty

• Hard landing in major developing countries

3. Key Policy Issues

• Macroeconomic policy stance

• International policy coordination

3

Global growth projected to pick up slightly

– downside risks remain

4 4

Synchronized world economies

Annual GDP growth (%)

-8

-6

-4

-2

0

2

4

6

8

10

2004 2006 2008 2010 2012 2014

Developed economies Economies in transition Developing economies

5

Contributions to WGP growth by major groups

44%35% 33% 31%

42%

3%

4% 4% 4%

4%

53%61% 63% 65%

54%

2010 2011 2012 2013 2014

Developed economies Economies in transition Developing economies

Developing economies drive global growth

6

Developed economies:

trapped in low-growth?

Annual GDP Growth (%)

-6

-4

-2

0

2

4

6

USA European Union Japan

2007 2008 2009 2010 2011 2012 2013 2014

7

Economies in transition: moderate growth

Annual GDP Growth (%)

-10

-5

0

5

10

CIS and Georgia South-Eastern Europe

2007 2008 2009 2010 2011 2012 2013 2014

8

Developing regions: Gradual pick-up in

growth expected

Annual GDP Growth (%)

-2

0

2

4

6

8

10

12

Africa East Asia South Asia Western

Asia

Latin

America

and the

Caribbean

2007 2008 2009 2010 2011 2012 2013 2014

9

Annual GDP growth (%)

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Least developed countries: Recovery

projected, growth below potential

10

Jobs crisis continues:

Record unemployment in Europe

Monthly unemployment rates (%), Jan 2007 - Feb 2013

0

2

4

6

8

10

12

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

Jan-1

2

Jul-12

Jan-1

3

Japan United States EU (27 economies)

11

Job losses after the financial crisis:

cyclical or structural?

-7

-6

-5

-4

-3

-2

-1

0

1

0 6 12 18 24 30 36 42 48 54 60 66

Number of months from the employment turning point

De

gre

e o

f e

mp

loy

me

nt

be

low

(-)

or

ab

ov

e (

+)

turn

ing

po

int

lev

el

20011990

2008

19811980 1974

Post-recession employment recovery in the United States

12

2

4

6

8

10

2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1

Philippines Brazil

Mexico

Developing countries: Unemployment

trends differ

0

10

20

30

40

50

60

2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1

South Africa - YouthSouth Africa - Total

Quarterly Unemployment Rates (%)

13

Annual consumer price inflation rate (%)

-2

-1

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011 2012 2013 2014

United States European Union Japan

Developed economies: Inflationary

pressures remain low

14

Developing regions:

Inflation projected to slow

Annual consumer price inflation rate (%)

0

2

4

6

8

10

12

14

2006 2007 2008 2009 2010 2011 2012e 2013f 2014f

Africa (excl. Zimbabwe) East Asia

South Asia Western Asia

Latin America and the Caribbean

15

World exports, Jan 2006- Nov 2012

(Jan 2006 = 100)

80

90

100

110

120

130

140

150

160

Ja

n-0

6

Ju

l-0

6

Ja

n-0

7

Ju

l-0

7

Ja

n-0

8

Ju

l-0

8

Ja

n-0

9

Ju

l-0

9

Ja

n-1

0

Ju

l-1

0

Ja

n-1

1

Ju

l-1

1

Ja

n-1

2

Ju

l-1

2

Emerging economies World Developed economies

Uneven recovery in international trade

16

International commodity prices:

slight moderation Commodity price (2000=100)

100

150

200

250

300

350

400

450

500

2008 2009 2010 2011 2012 2013Food (All) Agricultural raw materialsMinerals, ores and metals Oil (Brent)

17

Stock market indices have recently moved up

40

60

80

100

120

140

160

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Ja

n-1

3

S&P 500 Euro Stoxx 50 Nikkei 225 Hang Seng

18

Euro area crisis: spreads have come down

10-y government bond yield spread vis-à-vis Germany bund

0

3

6

9

12

15

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Jan-

11

Jul-

11

Jan-

12

Jul-

12

Jan-

13

%

0

7

14

21

28

35

Ireland (LHS) Italy (LHS) Portugal (LHS)Spain (LHS) Greece (RHS)

19

Financial resources

from the poor to the rich

Net capital flows to emerging markets

20

Developing countries piling up

foreign exchange reserves

21

ODA far below the target

22

Significant changes in real effective

among major reserve currencies

Real effective exchange rates (Jan 2011 = 100)

80

85

90

95

100

105

110

Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013

United States Euro area Japan

23

Developing countries: diverging trends in

real effective exchange rates Real effective exchnage rate (Jan 2011=100)

80

85

90

95

100

105

110

Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013

Republic of Korea China Brazil South Africa

24

1. Further deepening of the euro area crisis • Vicious circle between sovereign risk and bank fragility

• Downward spiral between austerity and recession

• New policies promising, but uncertainties remain

2. From “fiscal cliff” to debt ceiling in the U.S. • No increase in income tax rates for 99% families, but payroll tax

holiday expired

• Automatic government spending cuts activated

• Debt ceiling pending

3. Hard landing in major developing countries • Continued deceleration in fixed investment

• Greater weakness in external demand

Downside Risks

25 25

Soft landing or hard landing ?

GDP growth rate (%)

-2

0

2

4

6

8

10

12

14

16

2000 2002 2004 2006 2008 2010 2012 2014

ChinaBrazilIndia

forecast

26

Cyclical risks • Housing bubble

• Local government debt and investment vehicles

• Shadow banking

Structural hurdles • Unbalanced economic structure

• Rising costs of environmental degradation and natural resources depletion.

• Inequality, monopoly

• Turning points in both demographic dividend and Lewis curve

Challenges for macroeconomic policy and reforms

Downside risks for Chinese economy

27 27

Impact of downside risks on

world economy will be substantial

28

Macro policy stance in developed economies • Continued fiscal tightening (Japan exception)

• Bold policy actions in Japan

• Open-ended strategy in monetary easing

• Targeting unemployment rate in the US

Macro policy stance in major developing countries • Mild expansionary fiscal combined with neutral monetary in China

• Neutral fiscal combined with expansionary monetary in L.A.

• Limited policy space in some developing countries

Policy suggestions from WESP 2013 • More concerted policy actions

• Focus more on jobs creation

International policy coordination • Global imbalances

Policy issues

29

Major developed countries collecting

seigniorage from developing countries

through quantitative easing

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2005 2006 2007 2008 2009 2010 2011 2012

Developing country foreign reserves

G4: Central bank assets aggregate

$billion

30

Are global imbalances still a problem?

-3

-2

-1

0

1

2

3

1997 1999 2001 2003 2005 2007 2009 2011 2013

USA Rest of the WorldOil exporters Germany and JapanEuropean Union less Germany East Asia less ChinaChina

31

Misconception in the popularly proposed rebalancing framework:

GDP = Consumption + Investment + Net Export

• This accounting identity does not define the causality

• The components are not independent variables

• Consumption cannot substitute for investment as the driver for long-term growth

• Tradeoff between current consumption and future consumption

• Increasing consumption to GDP ratio now will lead to lower GDP growth in the future

Pitfalls in China’s rebalancing

32

Consumption is not a driver for GDP growth

33

High investment rate is a necessary condition

for robust GDP growth

34

Thank you!