Friday, April 17, 2009

IMF's World Economic Outlook: Not Good

Excerpts from the IMF's World Economic Outlook (chapter 3 and 4).

Amazing comparisons with the Great Depression. The main difference:

"In both [the Great Depression and the current crisis], rapid credit expansion and financial innovation led to high leverage and created vulnerabilities to adverse shocks. However, while the credit boom in the 1920s was largely specific to the United States, the boom during 2004–07 was global, with increased leverage and risk-taking in advanced conomies and in many emerging economies. Moreover, levels of economic and financial integration are now much higher than during the interwar period, so U.S. financial shocks have a larger impact on global financial systems than in the 1930s."

Chart on the left presents main difference between "financial" and "regular" crises. Not sure if the combination would be simply additive or exponential.

So is the crisis over as the 30% bear market rally will have you believe? Some observations on items to focus on:

"What do these observations tell us about the dynamics of recovery after a financial crisis? First, households and firms either perceive a stronger need to restore their balance sheets after a period of overleveraging or are constrained to do so by sharp reductions in credit supply. Private consumption growth is likely to be weak until households are comfortable that they are more financially secure. It would be a mistake to think of recovery from such episodes as a process in which an economy simply reverts to its previous state.

Second, expenditures with long planning horizons—notably real estate and capital investment—suffer particularly from the after-effects of financial crises. This appears to be strongly associated with weak credit growth. The nature of these financial crises and the lack of credit growth during recovery indicate that this is a supply issue. Further, as elaborated in Box 3.2, industries that conventionally rely heavily on external credit recover much more slowly after these recessions.

Third, given the below-average trajectory of private demand, an important issue is how much public and external demand can contribute to growth. In many of the recoveries following financial crises examined in this section, an important condition was robust world growth. This raises the question of what happens when world growth is weak or nonexistent."

Lastly, what are the implications of highly synchronized recessions, of which the current one is a phenomenal example (IMF estimates that 65% of countries are currently in a recession, a record):

"What are the distinctive features of highly synchronized recessions? The most obvious is that they are severe, as seen in Figure 3.10. Moreover, recoveries from synchronous recessions are, on average, very slow, with output taking 50 percent longer on average to recover its previous peak than after other recessions. Credit growth is also weak, in contrast to recoveries from consynchronous recessions, during which credit and investment recover rapidly. As with financial crises, investment and asset prices continue to decline after the trough in GDP. However, a key difference from the recoveries following localized financial crises is that net trade is much weaker. When compared with nonsynchronous recessions, exports are typically more sluggish in synchronous recessions.

The United States has often been at the center of synchronous recessions. Three of the four synchronous recessions (including the current cycle) were preceded by, or coincided with, a recession in the United States. During both the 1975 and 1980 recessions, sharp falls in U.S. imports caused a significant contraction in world trade. In addition to strong trade linkages, downward movements in U.S. credit and equity prices are likely to be transmitted to other economies."

The rest of the world has every right to be worried, as things there are only starting to heat up.

Terrific read (original links here and here).

IMF zerohedge

Sphere: Related Content
Print this post
blog comments powered by Disqus