The Global Economic Outlook

Carmen M. Reinhart

Deputy Director, Research DepartmentInternational Monetary Fund

October 24, 2002

After good performance over much of the 1990s,

0

0.5

1

1.5

2

2.5

3

3.5

4

1994 1996 1998 2000 2002

Source: IMF, WEO (9/02)

World Real GDP Growthpercent, at market exchange rates

Global economic growth slowed to stall speed in 2001

And the return to sustained growth remains a forecast

Much of this depends on A revival in the

performance of the U.S. economy

Halting of the slide of key industrial and emerging market economies

Prospects for the U.S. economy

In response to dwindling economic slack,

The Federal Reserve began to tighten policy in May 1999

Ultimately raising the federal funds rate from 4-3/4 percent to 6-1/2 percent by May 2000

In the event, this policy restraint was augmented by:

Elevated energy prices Firms’ efforts to cope with excessive stocks of inventories

and capital Drag on the manufacturing sector by the strong dollar Negative wealth effect from the overall fall in equity

prices

1979 1982 1985 1988 1991 1994 1997 2000

0

2

4

6

8

U.S. Real GDP

PercentQ4:Q4 growth

The result was the short recession of 2001 . . .

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct2000 2001 2002

2

3

4

5

6

7

8

Nominal Effective Federal Funds Rate

PercentWeekly

Part of the reason was the speed and size of the policy response

(1) The intended funds rate was cut 4-3/4 percent in one year

(2) A tax cut came on line in the summer of 2001

1978 1981 1984 1987 1990 1993 1996 1999 2002

0

2

4

6

8

10

Real Federal Funds Rate

PercentQuarterly Average, nominal less four-quarter PCE inflation

Monetary policy ease has put the real funds rate at zero.

1979 1982 1985 1988 1991 1994 1997 2000

8

10

12

14

16

18

20

Thirty-Year Fixed Rate Mortgage Rate

PercentQuarterly

. . . and fostered low mortgage rates.

But there are risks to this outlook.

-2

-1

0

1

2

3

4

5

Jan Apr Jul Oct Jan Apr Jul Oct

(percent)

Most U.S. forecasts for 2002 have been marked down – both consensus and WEO

2001 2002

Dec/01 Apr/02

+/ 2*SDADJ

+/ 1*SDADJ

Mean

WEO

0

10

20

30

40

50

60(percent of forecasters)

And 2003 looks more uncertain as well.

Oct/02

Jun/02

GDP Growth (%)

WEO2.6%

1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25

Consensus Forecasts

Among the reasons there are risks to the U.S. outlook are . . .

1978 1981 1984 1987 1990 1993 1996 1999 2002

4

6

8

10

12

Unemployment Rate

PercentQuarterly

A rising unemployment rate may make households less confident.

1978 1981 1984 1987 1990 1993 1996 1999 2002

200

400

600

800

1000

1200

1400

1600

S&P 500 Equity Price Index

LevelQuarterly

Change from record high (percent):

S&P 500 -36Nasdaq -77

Change in 2002 (percent):

S&P 500 -25Nasdaq -42

Equity prices have declined further . . .

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct2000 2001 2002

20

25

30

35

40

45

50

Implied Volatility on the S&P 100Percent, a.r.

Weekly

Investors are skittish . . .

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

2000 2001 2002

5

6

7

8

9

10

11

Junk Bond Spread

PercentWeekly

. . . and risk spreads remain high.

Risk spreads are particularly high forweaker credits—both in markets and atbanks.

18

20

22

24

26

28

30

32

34

36

Oil Prices are also high . . .

Aug. 8/02

Oct.22/02

(US$ / barrel)

Apr.16/02

2000 01 02 2003

. . . but at least they are forecasted to fall.

In the WEO forecast, we’re less confident about other major central banks

The Bank of Japan is constrained at the zero bound to nominal interest rates and apparently has little confidence in quantitative measures

The European Central Bank has been reluctant to offset aggregate demand shocks in the past

This is a problem because there are significant risks abroad that may require policy action.

Share prices have fallen in major equity markets

S&P 500

TOPIX

Euro STOXX

80

100

120

140

160

180

200

220

1998 99 2000 01 02

(log scale;Jan.2/ 98=100)

84

88

92

96

100

104

108

98 99 00 01 0297

98

99

100

101

102

103

104

105

106

Euro Area Confidence Indicators have weakened

IFO BusinessConfidence(left scale)

EC BusinessSentiment Index

(right scale)

(index; 1991=100) (index; 1995=100)

-3

-2

-1

0

1

2

3

98 99 00 01 02-9

-6

-3

0

3

6

9

In Japan, Industrial Production and Orders have cooled

Industrial Production(left scale)

Machine Tools Orders(right scale)

(percent change from previous month;Three-month moving average)

Sluggish growth in industrial economies poses problems for emerging market economies.

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

98 99 00 01 02

Exports of emerging economies are only now recovering

Latin America

Asia(ex. China and India)

(percent change from a year earlier;Three-month moving average)

Others

-15

-10

-5

0

5

10

15

98 99 00 01 02

… as is industrial production in emerging economies

Latin America

Asia(ex. China and India)

(percent change from a year earlier;Three-month moving average)

Others

This tentative recovery is subject to significant threats . . .

Argentina’s economy has imploded, affecting both Uruguay and Brazil

The potential political transition in Brazil has highlighted the precariousness of its debt situation

Less robust growth than expected in the United States poses problems for Mexico

-2

0

2

4

6

8(percent per annum)

Sep-02Apr-02

2002 GDP Growth Projections

AdvancedEconomies

Africa Asia Mid.East& Turkey

LatinAmerica

Cent.& East.Europe

The largest swing in 2002 has been for Latin America

0

2

4

6

8(percent per annum)

2003 GDP Growth Projections

AdvancedEconomies

Africa Asia Mid.East& Turkey

LatinAmerica

Cent.& East.Europe

Sep-02

Apr-02 And 2003 has been marked down too

Vulnerability of emerging market economies to the U.S. cycle.

2. Capital flows to emerging markets depend on the U.S. business cycle

billions 1970 US$

Total

Africa

Asia-crisis

Other Asian emerging

Middle East and Europe

Western Hemisphere.

-5 0 5 10 15 20

expansion recession

Net Private Capital Flows

3. That sensitivity is greatest for FDI

billions 1970 US$

Total

Africa

Asia-crisis

Other Asian emerging

Middle East and Europe

Western Hemisphere

-2 0 2 4 6 8 10 12

expansion recession

Net Private Direct Investment