Tuesday, September 9, 2008

IMF is pretty darn positive on Global Outlook

Today, IMF First Deputy Managing Director John Lipsky, spoke (click on the link to see Lipsky's picture - love the stache, don't you? Don't worry, most Germans don't look like that!) at the Die Zeit Conference in Frankfurt, Germany. His speech outlined the IMF’s outlook for the global economy: “Recovery in global economic activity should begin to take a hold in 2009 as the adverse terms-of-trade effects of the sharp increase in oil prices during 2008 begin to unwind in 2009 and the U.S. housing sector finds a bottom and begins to turn around.” So 2009 it is! My favorite chart from the speech:

Chart Source: IMF

Highlights from the speech:

  • Global growth should slow from 5% in 2007 to 3% in 2008, and accelerate to 4% in 2009.
  • Falling oil prices and stabilization of the U.S. housing market are key to the outlook.
  • Emerging economies have remained quite resilient to the U.S. slowdown and will play an important role in the re-emergence of global growth.
  • Inflation risks are still in the pipeline; this will be a main driver of the oncoming slowdown in emerging economies.
  • Only about half of the overall $1.1 trillion in losses has occurred to date (see recent post).
  • Downturns that coincide with financial stresses are historically larger and deeper than those that are not – financial deleveraging still poses a major risk since it has been difficult for firms to raise capital.

Lipsky’s noted positives for a brighter global economy in 2009:

  • Inflation pressures have receded in the advanced World.
  • The U.S. takeover of Fannie Mae and Freddie Mac should support the mortgage market and “underpin the U.S. housing market, the banking system, and the broader economy.”

He is certainly putting a lot of stock in the U.S. Treasury’s decision to nationalize Fannie and Freddie. I only hope that Lipsky is correct; however, I have my doubts that the biggest intervention in history will alone stabilize the financial system. There is the only way that the U.S. Treasury’s actions will stabilize the financial system, and let me tell you, it is a big “if”:

U.S. Treasury intervention → mortgage rates fall below 6% and stay there (if they stay there, it is implied that bank lending standards would have loosened a bit) → potential homebuyers are enticed to buy → sales bottom → demand for housing grows and the excess supply of homes on the market goes away → prices rise → mortgage default rates start to fall → bank losses stop → the banking sector heals and so do many other parts of the U.S. economy → global growth resumes.

I am nervous, but confident that this long list of “things to do” will indeed get done.

Please leave comments. Rebecca Wilder

1 comment:

  1. Love the chart. Sorry I didn't see this post yesterday. It is good to hear what other parts of the world think about what is happening. Stache or no, he has some very good points to make.
    Re: Fannie/Freddie takeover: What the gov't. does with them later may be a key component. Also, unless they have gotten rid of other management, any change in their actions will be stymied.


Note: Only a member of this blog may post a comment.