October 28, 2008 October 28, 2008
Global Prospects and Policies Global Prospects and Policies
John Lipsky
First Deputy Managing Director
1
0 1 2 3 4 5 6 7 8 9
06 07 08 09 06 07 08 09 06 07 08 09 06 07 08 09
Real GDP Potential GDP
The Global Economy is Entering a Major Slowdown, ....Increasingly Affecting Emerging Economies
United States
United States Euro areaEuro area JapanJapan
Real GDP Growth Rates Real GDP Growth Rates
(percent change) (percent change)
Emerging & Developing Emerging & Developing
Economies Economies
Epicenter of the Crisis Epicenter of the Crisis
Housing Markets Housing Markets — — Undershooting Risks Undershooting Risks
Financial Markets Financial Markets — — Stress Still Spreading Stress Still Spreading
3
-20 -15 -10 -5 0 5 10 15 20 25 30
00 02 04 06 08
3 4 5 6 7 8
00 02 04 06 08
Housing Slumps Continue in the U.S. and
Other Advanced Economies: Undershooting Risk?
Spain U.K.
Residential Investment
(in percent of GDP; construction) House Prices
(in percent; year on year)
U.K.
Spain
Ireland
Ireland
08Q2 08Q2
U.S.
U.S.
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Jan-06 Jan-07 Jan-08
Interbank Markets Interbank Markets
(3
(3--month LIBOR minus Tmonth LIBOR minus T--bill rate; in percent)bill rate; in percent)
U.S.U.S.
Japan Japan U.K.U.K.
EuroEuro areaarea
10/22 10/22
Bank CDS Spreads Bank CDS Spreads
(10
(10-years; basis points)-years; basis points)
0 50 100 150 200 250 300 350 400
Jan-07 Jul-07 Jan-08 Jul-08 U.S.
U.S.
median median
Europe Europe median
median 10/2110/21
Financial Strains Remain Acute
5
Heat Map of Systemic Asset Classes
Emerging markets Corporate credit Prime RMBS
Commercial MBS Money markets
Financial institutions Subprime RMBS
Jan-07 Jul-07 Jan-08 Jul-08
Financial Crisis Continues to Spread
40 60 80 100 120 140 160
Jan-07 Jul-07 Jan-08 Jul-08
LATAM EMEA Asia S&P 500
S&P 500 and Emerging Market Equity Performance (index: 1/1/2007=100)
Global Equity Markets Have Sold Off Sharply, Particularly in Emerging Markets
10/22
7
0 400 800 1200 1600 2000 2400 2800
Jul-07 Nov-07 Mar-08 Jul-08
...and Emerging Economies with Large Current Account Deficits Appear Most Vulnerable
Sovereign CDS Spreads
(index: 7/1/2007=100)
Current account surplus or small deficit Current account deficit larger
than 5% of 2007 GDP
Equity Prices
(index: 7/1/2007=100)
45 50 55 60 65 70 75 80 85 90 95 100 105 110 115
Jul-07 Nov-07 Mar-08 Jul-08 Current account surplus
or small deficit
Current account deficit larger than 5% of 2007 GDP
10/21 10/22
Financial Crisis and It
Financial Crisis and It’ ’s Sources s Sources
Problem: Excessive Leverage & Risk in Problem: Excessive Leverage & Risk in Global Financial System
Global Financial System
Source 1: Improperly Drawn Source 1: Improperly Drawn Perimeters of Regulation
Perimeters of Regulation
Source 2: Lack of Macro Source 2: Lack of Macro - - Prudential Prudential Regulation
Regulation
9
Global Policy Actions Global Policy Actions
Decisive , Comprehensive and Coherent Decisive , Comprehensive and Coherent Policies
Policies
Role of the Fund: Role of the Fund:
Financial Support Financial Support
Analysis and Advice Analysis and Advice
Technical Assistance Technical Assistance
Global Challenges Ahead Global Challenges Ahead
Financial Architecture Issues Financial Architecture Issues
Early Warning Systems Early Warning Systems
