1. The Global Economic Outlook Carmen M. Reinhart Deputy Director, Research Department International Monetary Fund October 24, 2002

2. After good performance over much of the 1990s, Global economic growth slowed to stall speed in 2001 And the return to sustained growth remains a forecast Much of this depends on A revival in the performance of the U.S. economy Halting of the slide of key industrial and emerging market economies

3. Prospects for the U.S. economy

4. In response to dwindling economic slack, The Federal Reserve began to tighten policy in May 1999 Ultimately raising the federal funds rate from 4-3/4 percent to 6-1/2 percent by May 2000 In the event, this policy restraint was augmented by: Elevated energy prices Firms’ efforts to cope with excessive stocks of inventories and capital Drag on the manufacturing sector by the strong dollar Negative wealth effect from the overall fall in equity prices

5. 19791982198519881991199419972000 0 2 4 6 8 U.S. Real GDP Percent Q4:Q4 growth The result was the short recession of 2001...

6. JanAprJulOctJanAprJulOctJanAprJulOct 200020012002 2 3 4 5 6 7 8 Nominal Effective Federal Funds Rate Percent Weekly Part of the reason was the speed and size of the policy response (1)The intended funds rate was cut 4-3/4 percent in one year (2)A tax cut came on line in the summer of 2001

7. 197819811984198719901993199619992002 0 2 4 6 8 10 Real Federal Funds Rate Percent Quarterly Average, nominal less four-quarter PCE inflation Monetary policy ease has put the real funds rate at zero.

8. 19791982198519881991199419972000 8 10 12 14 16 18 20 Thirty-Year Fixed Rate Mortgage Rate Percent Quarterly... and fostered low mortgage rates.

9. But there are risks to this outlook.

10. (percent) Most U.S. forecasts for 2002 have been marked down – both consensus and WEO 20012002 Dec/01Apr/02 +/  2*SD ADJ +/  1*SD ADJ Mean WEO

11. (percent of forecasters) And 2003 looks more uncertain as well. Oct/02 Jun/02 GDP Growth (%) WEO 2.6% 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 Consensus Forecasts

12. Among the reasons there are risks to the U.S. outlook are...

13. 197819811984198719901993199619992002 4 6 8 10 12 Unemployment Rate Percent Quarterly A rising unemployment rate may make households less confident.

14. 197819811984198719901993199619992002 200 400 600 800 1000 1200 1400 1600 S&P 500 Equity Price Index Level Quarterly Change from record high (percent): S&P 500 -36 Nasdaq-77 Change in 2002 (percent): S&P 500 -25 Nasdaq-42 Equity prices have declined further...

15. JanAprJulOctJanAprJulOctJanAprJulOct 200020012002 20 25 30 35 40 45 50 Implied Volatility on the S&P 100 Percent, a.r. Weekly Investors are skittish...

16. JanAprJulOctJanAprJulOctJanAprJulOct 200020012002 5 6 7 8 9 10 11 Junk Bond Spread Percent Weekly... and risk spreads remain high. Risk spreads are particularly high for weaker credits—both in markets and at banks.

17. Oil Prices are also high... Aug. 8/02 Oct.22/02 (US$ / barrel) Apr.16/02 2000 01 02 2003... but at least they are forecasted to fall.

18. In the WEO forecast, we’re less confident about other major central banks The Bank of Japan is constrained at the zero bound to nominal interest rates and apparently has little confidence in quantitative measures The European Central Bank has been reluctant to offset aggregate demand shocks in the past

19. This is a problem because there are significant risks abroad that may require policy action.

20. Share prices have fallen in major equity markets S&P 500 TOPIX Euro STOXX

21. Euro Area Confidence Indicators have weakened IFO Business Confidence (left scale) EC Business Sentiment Index (right scale) (index; 1991=100)(index; 1995=100)

22. In Japan, Industrial Production and Orders have cooled Industrial Production (left scale) Machine Tools Orders (right scale) (percent change from previous month; Three-month moving average)

23. Sluggish growth in industrial economies poses problems for emerging market economies.

24. Exports of emerging economies are only now recovering Latin America Asia (ex. China and India) (percent change from a year earlier; Three-month moving average) Others

25. … as is industrial production in emerging economies Latin America Asia (ex. China and India) (percent change from a year earlier; Three-month moving average) Others

26. This tentative recovery is subject to significant threats... Argentina’s economy has imploded, affecting both Uruguay and Brazil The potential political transition in Brazil has highlighted the precariousness of its debt situation Less robust growth than expected in the United States poses problems for Mexico

27. (percent per annum) Sep-02 Apr-02 2002 GDP Growth Projections Advanced Economies AfricaAsia Mid.East & Turkey Latin America Cent.& East. Europe The largest swing in 2002 has been for Latin America

28. (percent per annum) 2003 GDP Growth Projections Advanced Economies AfricaAsia Mid.East & Turkey Latin America Cent.& East. Europe Sep-02 Apr-02 And 2003 has been marked down too

29. Vulnerability of emerging market economies to the U.S. cycle.

30. 2. Capital flows to emerging markets depend on the U.S. business cycle

31. 3. That sensitivity is greatest for FDI