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Global Economic Outlook and Implications for Emerging Markets
Otaviano CanutoVice President and Head of Network
Poverty Reduction and Economic Management (PREM)The World Bank
www.worldbank.org/prem
International Pensions ConferenceWorld Bank, September 16-19, Washington
Feedback loops and vicious cycles in Advanced Economies
Source: Cecchetti, S. and Hofmann, B. “Breaking the vicious cycle: restoring balanced and sustainable growth in the global economy”, Vox EU, 29 June 2012.
Public money occupies the vacuum left by “private money”
• Central Banks balance sheets have expanded to unseen levels in both AEs and EMEs
• Monetary easing programs in AEs are flattening yield curves and bringing long term yields to historic low levels;
• Liquidity regulations are creating a sizeable captive demand for Government bonds implying further drops in yields;
• Public sector interventions to support banks either through bailouts and/or generous liquidity facilities => distortions in their cost of funding vis-à-vis other issuers;
• Currency manipulation has become a widespread behavior across AEs and EMEs generally to mitigate currency appreciation
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Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12
Yield of 10 year government bond
US UK Japan Germany
Source: Canuto et al. (2012). The New Financial Landscape: What It Means forEmerging Market Economies, Economic Premise n.87, Sept., www.worldbank.org/economicpremise
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Global Growth (%)
Advanced Economies Emerging Economies
Source: Canuto et al. (2012). The New Financial Landscape: What It Means forEmerging Market Economies, Economic Premise n.87, Sept., www.worldbank.org/economicpremise
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70
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100
110
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150
Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12
Commodity Price Index (Dec 31, 2011 = 100)
Aluminum Copper Corn Wheat Soybean
Source: Canuto et al. (2012). The New Financial Landscape: What It Means forEmerging Market Economies, Economic Premise n.87, Sept., www.worldbank.org/economicpremise
95
100
105
110
115
120
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Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12
EM Inflows and Prices
Local bond inflows (left scale) Equity inflows (left scale)
Foreign exchange performance (rigth scale) MSCI EM equity index (right scale)
USD bn; 4-week average Dec 30, 2011 = 100
Source: Canuto et al. (2012). The New Financial Landscape: What It Means forEmerging Market Economies, Economic Premise n.87, Sept., www.worldbank.org/economicpremise
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Developing countries have been resilient in part because trend output remained de-coupled… at least heretofore
Structural Change and Cycle in the Global Economy (a)
Fundamental changes: (i) marked improvement in macroeconomic policies in
DCs and healthier private and public Balance Sheets (leverage; currency mismatch)
(ii) ICT and transport innovations and global value chains; (iii) the mega process of labor transfer from subsistence to
manufacturing industry in China and others; (iv) structural change of conditions in natural resource-
based products (demand); and (v) successful poverty-reduction processes leading to new
middle classes
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A potential switchover of locomotives in the global economy
Growth Interdependence
Developing countries
(growth rates)
Available to download at www.worldbank.org/prem/vp/publications
Structural Change and Cycle in the Global Economy (b)
Super global cycle:
• The Great Leveraging/Deleveraging in Advanced Countries
• Metamorphosis into fiscal crises before completion of deleveraging
• Vicious circles and negative feedback loops
• Global imbalances
Towards a New Normal
After narrowing during the recession, external imbalances could widen again as growth recovers
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G-20 Large Oil Exporters ROW Deficit ROW SurplusG-20 Deficit Emg G-20 Deficit Adv G-20 Surplus EmgG-20 Surplus Adv WORLD SUM G-20
Current Account Balances(2000-15; percent of World GDP)
Source: IMF data and projections
Rebalancing growth a key element of structural reform agenda
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Current Account Balance as a Percentage of Euro Area GDP, 1995-2010
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Thankswww.worldbank.org/prem/vp/publications
Also available to download
www.huffingtonpost.com/otaviano-canuto
