The Global Economy and China

Tarhan Feyzioglu Resident Representative International Monetary Fund

The views expressed in this presentation are those of the author and should not be attributed to the IMF, its Executive Board, or its management.
March 2010

The Global Economy

March 2010

Across the globe, growth is returning and unemployment has stopped rising
15 Real GDP Growth
Unemployment Rate 1/
(Percent)

9.0 8.5 8.0 7.5

(Percent; quarter on quarter annualized)

10

7.0 6.5

0 World -5 Emerging Industrial -10 04 05 06 07 08 09

04 World Emerging 2/ Industrial 05 06 07 08 09

6.0 5.5 5.0 4.5

with production and trade seeing a recovery since bottoming out in late 2009.
25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 20 30 50

Industrial Production
Global IP

(Percent change; annualized 3mma)

70

Merchandise Exports
World

70 50 30 10

(Percent change; annualized 3mma)

60

Emerging

(sa, 50+=Expansion; RHS)

Global Manf. PMI

40

Advanced

-10 -30 -50 -70

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Systemic risks have eased largely in response to forceful policy efforts.

225 200 175 150 125 100 75 50 25 0 Jan-07 50 -50 Jan-10

CDS Spreads for High-Grade Financials (basis points) Lehman Bros.

Bear Stearns Bankruptcy collapse

650 550 450 350 250 150

Europe US (RHS)

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

While bank credit remains weak

20 15 10 5 0 -5 -10 United States Euro Area United Kingdom
Bank Credit to Private Sector (percent change year-on-year)

-40 -20 0 20 40 60 80 100

Bank Lending Surveys (percent)

United States Euro Area United Kingdom

Mar-97

Mar-99

Mar-01

Mar-03

Mar-05

Mar-07

Mar-09

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

inflows to EM are strong.

Push Factors Return of risk appetite Low G-4 interest rates, though little evidence of leverage Pull Factors Better growth prospects, particularly in Asia Expectations of currency appreciation
40 30 20 10 0 -10 -20 -30 Debt Equity
Net Flows into Dedicated EM Funds (billions of US dollars)

Q107

Q307

Q108

Q308

Q109

Q309

The Global Economy is Set to Expand.

2010 World Economic Consensus Outlook Forecasts 1/ 3.9 4.0 2.1 2.7 2.9 1.0 1.3 1.7 1.3 6.0 10.0 7.7 4.7 3.6 9.7 7.8 5.4 4.1 2011 World Economic Consensus Outlook Forecasts 1/ 4.3 4.2 2.4 2.4 3.1 1.6 1.6 2.2 1.5 6.3 9.7 7.8 3.7 3.4 9.1 7.9 4.5 4.5

World Advanced Economies United States Euro area Japan Emerging and Developing Economies China India Brazil Russia

1/ Consensus forecasts, Asia Pacific consensus forecasts (Jan. 11, 2010); Latin American consensus forecasts (Jan. 18, 2010); and Eastern European consensus forecasts (Jan. 18, 2010). India consensus forecast on fiscal year basis.

Sluggish demand recovery and commodity prices should keep inflation in check.
10 8 6 4 2 0 -2 02 03 04 05 06 07 08 09 10
World Advanced

Global Headline Inflation

(Percent change from a year earlier)

Emerging

This is a multispeed world.

Most advanced economies and some emerging markets Slower growth Banks facing credit losses and funding challenges Only limited exit in 2010 Systemic risks lower on transfer of risks to public balance sheets Expansion of sovereign debt an increasing concern Most emerging markets and some advanced economies More solid growth Banks healthier Have already begun to tighten or expected to tighten soon Systemic risks lower as growth prospects improve Inflows and risk of asset price bubbles

Outlook subject to risks in both directions.

Upside Risks:
Stronger-than-expected improvement in financial market sentiment prompting a surge in capital flows, trade, and private demand. New policy initiatives and additional stimulus aimed at reducing unemployment.

Downside Risks:
Premature and incoherent exit from supportive policies and a lack of progress in bank restructuring and recapitalization. Weak household spending due to impaired financial systems, weak housing markets, and rising unemployment. Rising fiscal sustainability concerns unsettle financial markets and raise borrowing costs.

China

March 2010

There are clear signs of recovery.

The authorities acted early and decisively to counter the negative impact of the global financial crisis. The economy grew 8.7 percent in 2009. Inflation stood at -0.7 percent in 2009.

Investment growth is strong.

Real estate investment recovered. The government encourages more low-income housing. Infrastructure investment increased sharply and will remain at this high level in 2010. Manufacturing investment grew rapidly.

50.0 40.0 30.0 20.0 10.0 0.0

Share in FAI 2009 growth

Fixed asset investment

Manufacturing

Infrastructure

Real estate

Other

Consumption growth is strong.

Labor markets recovered. Wage growth is strong, reflecting rapid productivity growth. The government is taking important steps to boost consumption.
1 0.9 0.8 15 0.7 0.6 10 Labor demand-supply ratio in city labor markets (LHS) Wage growth (real, ytd, in percent) (RHS) 5 25

20

0.5 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

GDP growth is expected to remain robust this year.

2008 GDP Contrib. C I NX Inflation 4.1 4.1 0.8 5.9 4.6 8.0 -3.9 1.9 3.1 9.0 2009 8.7 2010 10.0

Reorienting the economy toward consumption remains a key challenge.

There are limits to export growth.
14 12 10 8 6 4 2 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55

Share of services needs to rise.

Share of Employment in Service Sector
0.8

Market Share in Selected Economies Since Growth Take Off

Japan (19552008) Korea (19612008) China (19792008) NIEs excl. Korea (19652008) China forecast (200914)

14 12 10 8 6 4 2 0

Benchmark From International Experience

Japan

0.8

0.6 Korea 0.4 China

0.6

0.4

0.2

0.2

0.0 0 10 20 30 Per Capita Income (US$ thousands, PPP) 40

0.0

What does this all mean for Chinas iron ore imports?
70 60 50 40 30 20 10 0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09

Iron ore imports and domestic steel production (in million tons) Imports of Iron Ore Crude Steel Production

60 50 40 30 20 10 0 -10 -20

Steel production and downstreams (y/y growth, in percent)

Equipment Manufacturing Output Floor Space under Construction Crude Steel Production
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Thank you.

March 2010