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world economy update

world economy update

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July 8, 2009
Contractionary Forces Receding But Weak Recovery Ahead

The global economy is beginning to pull out of a recession unprecedented in the post\u2013World War II era, but stabilization is uneven and the recovery is expected to be sluggish. Economic growth during 2009\u201310 is now projected to be about \u00bd percentage points higher than projected in the April 2009

World Economic Outlook (WEO), reaching 2.5 percent in 2010. Financial conditions have improved

more than expected, owing mainly to public intervention, and recent data suggest that the rate of
decline in economic activity is moderating, although to varying degrees among regions. Despite these
positive signs, the global recession is not over, and the recovery is still expected to be slow, as
financial systems remain impaired, support from public policies will gradually diminish, and
households in countries that suffered asset price busts will rebuild savings. The main policy priority
remains restoring financial sector health. Macroeconomic policies need to stay supportive, while
preparing the ground for an orderly unwinding of extraordinary levels of public intervention. At the
same time, given weak internal demand prospects in a number of current account deficit countries,
including the United States, policies need to sustain stronger demand in key surplus countries.

Stabilization is uneven and recovery will
likely be sluggish.

The world economy is stabilizing, helped by
unprecedented macroeconomic and financial
policy support. However, the recession is not
over and the recovery is likely to be sluggish.
Following a disappointing first quarter, during
which the global economy contracted almost
as fast as during the fourth quarter of 2008,
(Figure 1), high-frequency data point to a
return to modest growth at the global level
(Figure 2). However, the advanced economies
as a group are still projected not to show a
sustained pickup in activity until the second
half of 2010, consistent with the April 2009
WEO forecast.

Accordingly, global activity is forecast to
contract by 1.4 percent in 2009 and to expand
by 2.5 percent in 2010, which is 0.6 percentage
point higher than envisaged in the April 2009

WEO (Table 1). The higher annual average
growth rate for 2010 largely reflects carryover
from a markup in growth during the final half
of 2009. On a fourth-quarter-over-fourth-
quarter basis, real GDP growth is projected at
2.9 percent in 2010, compared with 2.6 percent
in the April WEO forecast.

-10
-8
-6
-4
-2
0246810
12
Figure 1. Global GDP Growth
(Percent; quarter-over-quarter, annualized)
Source: IMF staff estimates.
Emerging and
developing economies
Advanced
economies
2005
10
08
09
06
07
World
2
Table 1. Overview of the World Economic Outlook Projections
(Percent change, unless otherwise noted)
Estimates
2007
2008
2009
2010
2009
2010
2008
2009
2010
World output1
5.1
3.1
-1.4
2.5
-0.1
0.6
0.2
0.0
2.9
Advanced economies
2.7
0.8
-3.8
0.6
0.0
0.6
-1.8
-2.2
1.3
United States
2.0
1.1
-2.6
0.8
0.2
0.8
-0.8
-1.4
1.7
Euro area
2.7
0.8
-4.8
-0.3
-0.6
0.1
-1.7
-3.8
0.6
Germany
2.5
1.3
-6.2
-0.6
-0.6
0.4
-1.8
-4.6
0.0
France
2.3
0.3
-3.0
0.4
0.0
0.0
-1.7
-1.9
1.3
Italy
1.6
-1.0
-5.1
-0.1
-0.7
0.3
-3.0
-3.3
0.4
Spain
3.7
1.2
-4.0
-0.8
-1.0
-0.1
-0.7
-4.1
0.3
Japan
2.3
-0.7
-6.0
1.7
0.2
1.2
-4.4
-1.8
0.9
United Kingdom
2.6
0.7
-4.2
0.2
-0.1
0.6
-1.8
-2.5
0.5
Canada
2.5
0.4
-2.3
1.6
0.2
0.4
-1.0
-1.5
2.5
Other advanced economies
4.7
1.6
-3.9
1.0
0.2
0.4
-2.8
-1.6
2.3
Newly industrialized Asian economies
5.7
1.5
-5.2
1.4
0.4
0.6
-4.9
-0.9
2.6
Emerging and developing economies2
8.3
6.0
1.5
4.7
-0.1
0.7
3.3
3.3
5.1
Africa
6.2
5.2
1.8
4.1
-0.2
0.2
...
...
...
Sub-Sahara
6.9
5.5
1.5
4.1
-0.2
0.3
...
...
...
Central and eastern Europe
5.4
3.0
-5.0
1.0
-1.3
0.2
...
...
...
Commonwealth of Independent States
8.6
5.5
-5.8
2.0
-0.7
0.8
...
...
...
Russ
i
a
8.1
5.6
-6.5
1.5
-
0
.5
1.0
1
.
1
-
0
.
8
-
1
.
8
Excluding Russia
9.8
5.4
-3.9
3.2
-1.0
0.1
...
...
...
Developing Asia
10.6
7.6
5.5
7.0
0.7
0.9
...
...
...
China
13.0
9.0
7.5
8.5
1.0
1.0
6.9
8.4
8.6
India
9.4
7.3
5.4
6.5
0.9
0.9
4.8
5.8
6.7
ASEAN-53
6.3
4.8
-0.3
3.7
-0.3
1.4
1.9
1.6
4.4
Middle East
6.3
5.2
2.0
3.7
-0.5
0.2
...
...
...
Western Hemisphere
5.7
4.2
-2.6
2.3
-1.1
0.7
...
...
...
Brazil
5.7
5.1
-1.3
2.5
0.0
0.3
1.3
1.5
2.5
Mexico
3.3
1.3
-7.3
3.0
-3.6
2.0
-1.7
-4.0
3.1
Memorandum
European Union
3.1
1.1
-4.7
-0.1
-0.7
0.2
...
...
...
World growth based on market exchange rates
3.8
2.0
-2.6
1.7
-0.1
0.7
...
...
...
World trade volume (goods and services)
7.2
2.9
-12.2
1.0
-1.2
0.4
...
...
...
Imports
Advanced economies
4.7
0.4
-13.6
0.6
-1.5
0.2
...
...
...
Emerging and developing economies
13.8
9.4
-9.6
0.8
-0.8
0.2
...
...
...
Exports
Advanced economies
6.2
2.0
-15.0
1.3
-1.5
0.8
...
...
...
Emerging and developing economies
9.5
4.1
-6.5
1.4
-0.1
0.2
...
...
...
Commodity prices (U.S. dollars)
Oil4
10.7
36.4
-37.6
23.1
8.8
2.9
...
...
...
Nonfuel (average based on world
commodity export weights)
14.1
7.5
-23.8
2.2
4.1
-2.2
...
...
...
Consumer prices
Advanced economies
2.2
3.4
0.1
0.9
0.3
0.6
2
.
1
0
.
5
0
.
6
Emerging and developing economies
2
6.4
9.3
5.3
4.6
-0.4
-0.1
7.6
4.2
3.7
London interbank offered rate (percent)5
On U.S. dollar deposits
5.3
3.0
1.2
1.4
-0.3
0.0
...
...
...
On euro deposits
4.3
4.6
1.4
1.8
-0.2
-0.2
...
...
...
On Japanese yen deposits
0.9
1.0
0.9
0.4
-0.1
-0.1
...
...
...
Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during May 7-June 4, 2009. Country weights used to construct
aggregate growth rates for groups of countries were revised. When economies are not listed alphabetically, they are ordered on the basis of economic size.

1The quarterly estimates and projections account for 90 percent of the world purchasing-power-parity weights.
2The quarterly estimates and projections account for approximately 76 percent of the emerging and developing economies.
3Indonesia, Malaysia, Philippines, Thailand, and Vietnam.
4Simple average of prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $97.03 in 2008;

the assumed price based on future markets is $60.50 in 2009 and $74.50 in 2010.
5Six-month rate for the United States and Japan. Three-month rate for the euro area.
Q4 over Q4
Projections
Projections
2009 WEO Projections
Difference from April
Year over Year
3
-30
-25
-20
-15
-10
-5
05
10
15
20
-80
-60
-40
-200
20
40
60
30
35
40
45
50
55
60
65
Manufacturing Purchasing
Managers Index
(index)
Merchandise Exports
Figure 2. Selected High-Frequency Indicators
(Annualized percent change of 3-month moving average over previous
3-month moving average unless otherwise noted)
Sources: Haver Analytics; and IMF staff calculations.

Argentina, Brazil, Bulgaria, Chile, China, Colombia, Estonia, Hungary, India, Indonesia, Latvia, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia, Slovak Republic, South Africa, Thailand, Turkey, Ukraine, and Venezuela.

Australia, Canada, Czech Republic, Denmark, euro area, Hong Kong SAR, Israel, Japan, Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States.

1
2
May
09
Apr.
09
2005
06
07
08
2005
06
07
08
-15
-10
-5
0510
15
20
25
Retail Sales
2005
06
07
08
Apr.
09
World
Industrial Production
World
2005
06
07
08 Apr.
09
Advanced
economies2
Emerging
economies1
Emerging
economies1
Advanced
economies2
Emerging
economies1
Advanced
economies2
World
Emerging
economies1
Advanced
economies2

Going forward, the pace of recovery will
depend on the balance between opposing
forces. The downward drag exerted by the
financial shock, the sharp fall of global trade,
and the general increase in uncertainty and
collapse of confidence is gradually
diminishing. However, supportive forces are
still weak. Many housing markets have yet to
bottom out. Importantly, financial markets
remain impaired and bank balance sheets still
need to be cleaned and institutions
restructured. Cuts in policy interest rates,
continued provision of ample liquidity, credit
easing, public guarantees, and bank
recapitalization have appreciably lowered

concerns about systemic failure and have
supported intermediation (as discussed in the
July 2009 Global Financial Stability Report
Market Update). Consistent with these

developments, financial stress indexes for
advanced and emerging economies have
receded since the beginning of 2009
(Figure 3).1 However, the improvements are
far from uniform across markets and countries.
In particular, bank lending conditions are
expected to remain tight and external financing
conditions constrained for a considerable time.

-505
10
15
20
Figure 3. Financial Stress in Advanced and Emerging
Economies
(Purchasing-power-parity-weighted average; stress index deviation from
aver age)
Source: IMF staff calculations.
The financial stress indices are expressed as a deviation from average since mid 1990s.
The components of the indices for advanced and emerging economies differ.
United States
Western
Europe
2007
May
09
08
Advanced
economy
aggregate
-4
-2
0246810
Latin
America
Emerging
Europe
Emerging
Asia
Advanced Economies
Emerging Economies
Japan
2007
Apr.
09
08
Emerging
economy
aggregate
1
1

At the same time, commodity prices have
rebounded ahead of the recovery (Figure 4).
The recent rally in commodity prices has been
strong and broad-based, reflecting improved
market sentiment, U.S. dollar depreciation, and
commodity-specific factors. In the oil market,

1The Financial Stress Index captures episodes of

impaired financial intermediation by assessing market
responses in securities markets, exchange markets, and
the banking sector (see Balakrishnan, Danninger,
Elekdag, and Tytell, 2009, The Transmission of

Financial Stress from Advanced to Emerging
Economies, IMF Working Paper No. 09/133).

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