The common message of these reports is that the outlook for the global economy is worsening across all regions, although to different degrees. They are at odds with last week's US government and G-7 statements, which are rather upbeat. As The Economist warned last week, however, "The worst thing for the world economy would be to assume the worst is over."
After the earlier release of chapters 3 and 4 of its "World Economic Outlook [WEO] -- Crisis and Recovery" report(http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm), the IMF released the remaining chapters 1 and 2, which contain its macroeconomic projections. It also released its latest "Global Financial Stability Report [GFSR]: Responding to the Financial Crisis and Measuring Systemic Risks" (http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm), which raises its estimate of writedowns on US-originated assets to $2.7 trillion from its January estimate of $2.2 trillion due to the worsening economic outlook. Including the toxic assets that originated in other advanced economies, this estimate rises to $4.1 trillion.
The GFSR emphasizes the speed and extent to which the financial crisis has engulfed emerging economies, especially those in Europe, since last September. It analyzes the critical risks confronting the global financial system through systemic linkages, investigating where and how financial stress arises and how it is transmitted. It also offers policy suggestions on reducing the damage inflicted by financial shocks on the real economy and a blueprint for repairing the global financial system. In light of the worsening outlook that emerging economies, such as Turkey, are facing this year, according to the GFSR, net negative capital flows, especially in bank lending, despite their estimated refinancing needs of $1.8 trillion, a new IMF position note, "Coping with the Crisis: Policy Options for Emerging Market Countries" (SPN/09/08) (http://www.imf.org/external/pubs/ft/spn/2009/spn0908.pdf) focuses largely on the rescue of emerging economies, with large debt overhangs, that were already vulnerable to homegrown crises due to their own unsustainable credit expansions and fiscal laxities. A joint publication of the IMF and the WB, the "Global Monitoring Report 2009: A Development Emergency" (http://go.worldbank.org/1J2GN1XTO0) focuses on the low-income and poor developing countries that are in desperate need, as the global crisis worsens, for official development assistance from rich donor countries.
These gloomy reports do not make for cheerful reading. They strongly suggest that, even under fairly optimistic assumptions about the effectiveness of current expansionary fiscal and monetary policies, we will continue to suffer for the rest of this year, and perhaps into the next year, from the deepest global recession since the end of World War II and the worst global financial crisis since the 1930s. What is disturbing is that these reports have gotten gloomier over the last year as the IMF and the WB periodically updated their analyses and projections. We are warned that things can still get worse. The joint foreword to the WEO report and GFSR states, "The current outlook is exceptionally uncertain, with risks still weighing on the downside." This warning reflects the concern that governments might fail individually or collectively to take further forceful policy actions to mitigate the negative feedback between the global recession and financial crisis. The IMF stresses that recovery of the real sector requires the easing of the financial crisis, which escalated dramatically last September, through the restructuring of the financial sector by: (1) providing liquidity to financial institutions, (2) cleansing their balance sheets of toxic assets, and (3) recapitalizing them if they are viable.
Chapter 1: "Global Prospects and Policies" and Chapter 2: "Country and Regional Perspectives" of the WEO report provide the IMF's macroeconomic projections for real gross domestic product (GDP) growth, consumer prices, real commodity prices and world trade volume at the global, regional and country levels. The world real GDP, which grew at 3.2 percent in 2008 and 5.2 percent in 2007, is projected to contract at 1.3 percent this year. The projections for advanced economies are worse than those for developing economies, except for Turkey. Turkey's real GDP, which grew at 1.1 percent in 2008 and 4.7 percent in 2007, is projected to contract this year at 5.1 percent, in contrast to the official Turkish estimate of 3.6 percent, which was revised recently from a positive growth rate of 4 percent. The Emerging Europe region, which includes Turkey, is projected to contract at 3.7 percent. These projections, which are already beginning to be realized, contradict the Justice and Development Party (AK Party) government's repeated assertions that the global crisis would have only a mild effect on the Turkish economy. The bad news regarding Turkey's sharp output contraction this year is counterbalanced by the projected sharp reductions in its inflation rate and current account deficits. The consumer price inflation is forecast to drop to 6.9 percent from 10.4 percent in 2008 and 8.8 percent in 2007. The current account deficit as a percentage of GDP is projected to fall to 1.2 percent from 5.7 percent in 2008 and 5.8 percent in 2007.
In my review of WEO's Chapter 4: "How Linkages Fuel the Fire: The Transmission of Financial Stress from Advanced to Emerging Economies" last week, I drew attention to an intriguing econometric result. It showed that among 18 emerging economies, Turkey was the most susceptible to financial shocks from advanced economies. Turkey not only had the strongest systemic stress transmission among the 18 emerging economies but also the size of its beta coefficient, at larger than unity, indicated that the financial shock was magnified in the transmission. Assuming the IMF's econometric analysis was correct, this result raised questions about the nature of Turkey's linkages with advanced economies. Now that the WEO's Chapter 2 projects such a sharp contraction in Turkey's real GDP this year, could that projected contraction be somehow related to Turkey's exceptionally strong susceptibility to financial shocks from advanced economies, as shown in Chapter 4? It is a question whose answer requires more research. Although a critical premise of the WEO report is that the global financial crisis has exacerbated the global recession, its empirical analyses underlying is macroeconomic projections in Chapters 1 and 2 and the econometric analyses on transmission of financial shocks from advanced to emerging economies in Chapter 4 are not interlinked.
