WORLD ECONOMIC OUTLOOK
October 2008
Financial Stress, Downturns, and Recoveries
International Monetary Fund
W o r l d E c o n o m i c a n d F i n a n c i a l S u r v e y s
©2008 International Monetary Fund

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Surging Commodity Prices: Origins and Prospects 84
Commodity Price Shocks and Inflation 99
Monetary Policy Responses to Commodity Price Shocks 109
Summary and Conclusions 116
Appendix 3.1. Recent Commodity Market Developments 118
Appendix 3.2. Accounting for Food Price Increases, 2006–08 122
Appendix 3.3 Estimating Inflationary Effects of Commodity Price Shocks 124
References 126
contents
iv
Chapter 4. Financial Stress and Economic Downturns
Identifying Episodes of Financial Stress 131
Financial Stress, Economic Slowdown, and Recession 136
Has Financial Innovation Affected the Interplay between Financial Stress and Economic Cycles 141
The Current Financial Crisis in Historical Context 145
Conclusions 148
Appendix 4.1. Data and Methodology 154
References 156
Chapter 5. Fiscal Policy as a Countercyclical Tool
Understanding the Fiscal Policy Debate 160
How Has Discretionary Fiscal Policy Typically Responded? 166
Are Fiscal Policy Reactions Different in Emerging and Advanced Economies? 170
The Macroeconomic Effects of Discretionary Fiscal Policy 173
A Simulation-Based Perspective on Fiscal Stimulus 180
Conclusions and Policy Considerations 183
Appendix 5.1. Data and Empirical Methods 187
References 195
Chapter 6. Divergence of Current Account Balances across Emerging Economies
Recent Current Account Patterns in Emerging Economies 199
What Factors Have Contributed to Recent Current Account Patterns 210

3.1 Does Financial Investment Affect Commodity Price Behavior? 88
3.2 Fiscal Responses to Recent Commodity Price Increases: An Assessment 103
3.3 Monetary Policy Regimes and Commodity Prices 112
4.1 Policies to Resolve Financial System Stress and Restore Sound Financial Intermediation 151
5.1 Differences in the Extent of Automatic Stabilizers and Their Relationship
with Discretionary Fiscal Policy 161
5.2 Why Is It So Hard to Determine the Effects of Fiscal Stimulus? 164
5.3 Have U.S. Tax Cuts Been “TTT”? 172
6.1 Current Account Determinants for Oil-Exporting Countries 200
6.2 Sovereign Wealth Funds: Implications for Global Financial Markets 204
6.3 Historical Perspective on Growth and the Current Account 214
A1 Economic Policy Assumptions Underlying the Projections for Selected Economies 248
Tables
1.1 Overview of the World Economic Outlook Projections 2
2.1 Advanced Economies: Real GDP, Consumer Prices, and Unemployment 52
2.2 Advanced Economies: Current Account Positions 54
2.3 Selected Asian Economies: Real GDP, Consumer Prices, and Current Account Balance 65
2.4 Selected Western Hemisphere Economies: Real GDP, Consumer Prices, and
Current Account Balance 67
2.5 Selected Emerging European Economies: Real GDP, Consumer Prices, and
Current Account Balance 70
2.6 Commonwealth of Independent States (CIS): Real GDP, Consumer Prices, and
Current Account Balance 73
2.7 Selected African Economies: Real GDP, Consumer Prices, and
Current Account Balance 76
2.8 Selected Middle Eastern Economies: Real GDP, Consumer Prices, and
Current Account Balance 78
3.1 Contributions of Common Factors to Commodity Price Fluctuations 94
3.2 Selected Indicators of Spillovers across Major Food Commodity Prices 98
3.3 Global Oil Demand and Production by Region 120

1.3 Global Inflation 5
1.4 External Developments in Selected Advanced Economies 6
1.5 External Developments in Emerging and Developing Economies 7
1.6 Developments in Mature Credit Markets 8
1.7 Mature Financial and Housing Market Indicators 9
1.8 Emerging Market Conditions 10
1.9 Measures of Monetary Policy and Liquidity in Selected Advanced Economies 22
1.10 Measures of the Output Gap and Capacity Pressures 24
1.11 Global Outlook 25
1.12 Risks to the Global Outlook 30
1.13 Impact of Financial Shock on the Global Economy 32
1.14 Current Account Balances and Net Foreign Assets 34
1.15 Median Forecast Errors during Global Recessions and at Other Times, 1991–2007 42
1.16 Histograms of Forecast Errors, 1991–2007 43
1.17 Probability of Global Recessions 44
1.18 Illustrative GPM-Based 90 Percent Confidence Intervals 46
2.1 United States: Strains on Households 50
2.2 Western Europe: Slowing Demand and High Inflation 53
2.3 Japan: How Well Would the Economy Weather a Terms-of-Trade Shock? 57
2.4 Emerging Asia: Remaining Inflation Concerns 63
2.5 Latin America: Inflation Returns 68
2.6 Emerging Europe: Are Credit Booms Cooling Off? 69
2.7 Commonwealth of Independent States (CIS): Managing the Commodity Price Boom 72
2.8 Sub-Saharan Africa: The Mixed Blessing of High Commodity Prices 75
2.9 Middle East: Managing Inflation Pressures 79
3.1 Commodity Prices in Historical Context 85
contents
vii
3.2 Marginal Change in Energy Intensity, Commodity Inventories, and OPEC Spare Capacity 86
3.3 Grain and Oil Demand, Production, and Inventories in Comparison 87

4.12 The Procyclicality of Leverage in Investment and Commercial Banks 146
4.13 Procyclical Leverage and Arm’s-Length Financial Systems 147
4.14 Arm’s-Length Financial Systems, GDP Growth, and Bank Leverage 148
4.15 The Current Financial Stress Episode in the United States and Euro Area in
Historical Context 150
5.1 How Often and Quickly Has Fiscal Stimulus Been Used in G7 Economies? 167
5.2 How Strong Was the Fiscal Policy Response in G7 Economies? 168
5.3 How Have Fiscal Policy Responses Varied across Advanced Economies? 169
5.4 Is There a Bias toward Easing during Downturns in G7 Economies? 170
5.5 Did G7 Economies Respond to Erroneously Perceived Downturns? 171
5.6 Composition of Fiscal Stimulus during Downturns for Advanced and

Emerging Economies 174
5.7 Fiscal Policy Responses in Downturns and Upturns 175
5.8 Macroeconomic Indicators after Downturns, with and without a Fiscal Stimulus 177
5.9 Changes in Real GDP Growth and Fiscal Policies under Various Initial Conditions 179
5.10 Effect of Fiscal Expansion in a Large Economy 182
contents
viii
5.11 Fiscal Expansion in a Large Economy Compared with a Small Open Economy
with Monetary Accommodation 184
5.12 Effect of Fiscal Expansion in a Small Economy with Market-Risk-Premium Reaction 185
6.1 Patterns of Divergence in Current Account Balance 199
6.2 External Balances by Component 203
6.3 Current Account Balance, Saving, and Investment 208
6.4 Saving and Investment by Components 209
6.5 Growth Takeoffs 210
6.6 Current Account Reversals around Crises 211
6.7 Current Account Balance and Real GDP per Capita Growth 212
6.8 Patterns of Financial Development 213

“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent
to ¼ of 1 percent point).
In figures and tables, shaded areas indicate IMF staff projections.
Minor discrepancies between sums of constituent figures and totals shown are due to rounding.
As used in this report, the term “country” does not in all cases refer to a territorial entity that is a
state as understood by international law and practice. As used here, the term also covers some territo-
rial entities that are not states but for which statistical data are maintained on a separate and indepen-
dent basis.
ASSUMPTIONS AND CONVENTIONS
ix
x
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FURTHER INFORMATION AND DATAFURTHER INFORMATION AND DATA
x
The analysis and projections contained in the World Economic Outlook are integral elements of the
IMF’s surveillance of economic developments and policies in its member countries, of developments

attributed to Executive Directors or to their national authorities.
PREFACE
xi
FOREWORD
xii
FOREWORD
Having just joined the IMF, I can take very
little credit for this edition of the World Economic
Outlook. I regret it: Like its predecessors, this is
a remarkable document which gives the reader
a clear sense of what is happening in the world
economy. I thank Simon Johnson, Charles Col-
lyns, Jörg Decressin, and their team for their
work.
Chapters 1 and 2 assess the state and the
evolution of the world economy, an exercise that
has rarely been so difficult. The world economy
is decelerating quickly—buffeted by an extraor-
dinary financial shock and by still-high energy
and commodity prices—and many advanced
economies are close to or moving into recession.
Developments in financial markets have domi-
nated the news in recent weeks. The subprime
crisis that unfolded in 2007 has now morphed
into a credit crisis that has caused major disrup-
tion to financial institutions in the United States
and Europe. Intensifying solvency concerns
about a number of the largest U.S based and
European financial institutions have pushed the
global financial system to the brink of systemic

Oil exporters have found it difficult to dampen
overheating economies.
Looking to the future, it is necessary to assess
how these shocks will likely work their way
through the world economy. Our forecasts are
based on three major assumptions. The first
is that commodity and oil prices are likely to
stabilize, relieving pressure on inflation and
giving more room, if needed, for expansionary
policies. The second is that U.S. housing prices
and activity will hit bottom within the next year,
leading to a recovery of residential investment.
The third is that, although credit will remain
tight, the elements of a systemic solution to the
financial crisis are now being put in place and
will prevent a further worsening of financial
intermediation. It is this combination that leads
us to forecast that world growth will begin to
recover at the end of 2009, albeit at a very slow
pace. There is, however, more than the usual
amount of uncertainty, and the downside risks
are far from negligible.
As usual, this World Economic Outlook also
tackles a number of topically important issues
in greater depth. Chapter 3 examines the threat
that the recent boom in commodity prices could
unwind the past two decades’ progress against
inflation. To be sure, the fall in some prices—
notably for oil—since mid-July has eased some
of the pressure, but it is too early to relax. Com-

economic activity? It is now all too clear that we
are seeing the deepest shock to the global finan-
cial system since the Great Depression, at least
for the United States. Are we then doomed to
a slump in output as occurred in the 1930s? As
Chapter 4 shows, the historical record is mixed.
Periods of financial stress have not always been
followed by recessions or even by economic
slowdowns. However, the analysis also shows that
when the financial stress does major damage to
the banking system—as in the current epi-
sode—the likelihood increases of a severe and
protracted downturn in activity. This is clearly
demonstrated by the experiences of many econ-
omies that have struggled with virulent financial
crises over the past decades, for example, the
Nordic countries and Japan. Moreover, econo-
mies with more-arm’s length or market-based
financial systems seem to be particularly vul-
nerable to sharp contractions in activity in the
face of financial stress. This is because leverage
tends to be more procyclical in these econo-
mies—the risks of a credit crunch are greater.
Does this mean that the United States—with a
market-based financial system par excellence—is
heading for a deep recession? Not necessarily,
because, as the chapter shows, other factors
also matter. Two sources of support for the U.S.
economy are the quick and strong reaction of
the Federal Reserve to lower policy rates and the

worth considering. First, there is the possibility
that automatic stabilizers could be boosted by
making regular tax and transfer programs more
cyclically responsive. For example, the generos-
ity of unemployment insurance systems could be
automatically increased when the economy is in
Foreword
xiv
a downturn and jobs are harder to find. Second,
steps could be taken to strengthen the overall
governance structure for fiscal policy—thereby
reducing the risk of “debt bias” by ensuring that
fiscal easing during a downturn is balanced by
tightening during expansions. Improved gov-
ernance could bolster the credibility and thus
the effectiveness of fiscal stimulus. Recognizing
the pros and cons of these approaches, I do feel
they are worthy of consideration.
Finally, Chapter 6 tries to solve an important
puzzle: Why have the current account balances
of emerging economies been so divergent in
recent years, with some economies in emerg-
ing Asia registering large surpluses and others,
particularly in emerging Europe, sustaining very
large and long-lasting deficits? There is no single
answer, but the chapter suggests that important
contributors have been emerging Europe’s rapid
financial liberalization and capital account open-
ing, particularly in those economies integrat-
ing rapidly into the European Union, and the

recession, while growth in emerging economies
is also weakening.
The financial crisis that first erupted with the
U.S. subprime mortgage collapse in August 2007
has deepened further in the past six months
and entered a tumultuous new phase in Septem-
ber. The impact has been felt across the global
financial system, including in emerging markets
to an increasing extent. Intensifying solvency
concerns have led to emergency resolutions of
major U.S. and European financial institutions
and have badly shaken confidence. In response,
the U.S. and European authorities have taken
extraordinary measures aimed at stabilizing
markets, including massive liquidity provision,
prompt intervention to resolve weak institu-
tions, extension of deposit insurance, and recent
U.S. legislation to use public funds to purchase
troubled assets from banks. However, the situa-
tion remains highly uncertain as this report goes
to press.
At the same time, the combination of the
surge in food and fuel prices under way since
2004 and tightening capacity constraints has
propelled inflation to rates not seen in a decade.
As analyzed in Chapter 3, consumer price rises
have been particularly strong in emerging and
developing economies. This acceleration reflects
the high weight of food in consumption baskets,
still-quite-rapid growth, and less-well-anchored

likely to remain at exceptionally high levels for
xv
EXECUTIVE SUMMARY
executive summary
xvi
some time, slowing down the return to more
liquid conditions in key financial markets.
Furthermore, additional credit losses are very
likely as the global economy decelerates. In this
setting, financial institutions’ ability to raise new
capital will remain very challenged. Accordingly,
as discussed in the October 2008 Global Financial
Stability Report, the required deleveraging will
continue to be a protracted process, implying
that limits on the pace of credit creation—and
on activity—will be present at least through
2009.
Nonetheless, several factors are expected to
lay the groundwork for a gradual recovery to
emerge later in 2009:
• Commodity prices are projected to stabilize,
albeit at 20-year highs. The adverse terms-
of-trade effects of the more than 50 percent
increase in oil prices during 2008 should
begin to unwind in 2009, boosting consump-
tion in oil-importing countries.
• The U.S. housing sector is expected to finally
reach bottom in the coming year, ending the
intense drag on growth that has been pres-
ent since 2006. The eventual stabilization of

ing slack and stabilizing commodity prices is
expected to contain the pace of price increases,
bringing inflation back below 2 percent in 2009
in advanced economies. In emerging and devel-
oping economies, inflation would ebb more
gradually, as recent commodity price increases
continue to feed through to consumers.
There are substantial downside risks to this
baseline forecast. The principal risk revolves
around two related financial concerns: that
financial stress could remain very high and that
credit constraints from deleveraging could be
deeper and more protracted than envisaged
in the baseline. In addition, the U.S. hous-
ing market deterioration could be deeper and
more prolonged than forecast, while European
housing markets could weaken more broadly.
Inflation risks to growth are now more balanced
because commodity prices have retreated as the
global economy slows. At the same time, poten-
tial disruptions to capital flows and the risks of
rising protectionism represent additional risks to
the recovery.
The connections between financial stress and
economic downturns are explored in Chapter 4,
which compares recent experience to earlier
episodes. The analysis indicates that financial
stress that is rooted in the banking sector typi-
cally has more adverse economic effects than
stress in stock markets or exchange rates and

Policymakers around the world today face the
daunting task of stabilizing financial conditions
while simultaneously nursing their economies
through a period of slower growth and contain-
ing inflation. Multilateral efforts take on par-
ticular importance in current circumstances,
including policy initiatives to remedy the finan-
cial turmoil, alleviate the tightness in commod-
ity markets, and support low-income economies
burdened by high food import bills.
Country authorities are actively pursuing
policies intended to stabilize financial condi-
tions. Achieving this daunting task will require
comprehensive responses that address the
systemic problems––dealing with troubled
assets, fostering the rebuilding of bank capital,
and restoring liquid conditions in funding
markets—while being mindful of taxpayer
interests and moral hazard considerations.
Approaches at the national level should be
internationally coordinated to deal with joint
problems and to avoid creating adverse, cross-
border incentives.
The U.S. initiative to purchase real-estate-
related assets should help over time to reduce
the pressure on banks from distressed assets,
and thus support a return of stable fund-
ing sources and confidence. However, public
funds are also likely to be needed to help
banks rebuild their capital bases. In western

mine fiscal sustainability. In the current
circumstances, available fiscal room should
be focused on supporting stabilization of
the financial and housing sectors as needed,
rather than for more broad-brush stimulus.
In due course, offsetting adjustments to fiscal
policies will be needed to safeguard medium-
term consolidation objectives.
Macroeconomic policy priorities vary con-
siderably across emerging and developing
economies, as policymakers balance growth and
inflation risks.
executive summary
xviii
• In an increasing number of economies,
the balance of risks has now shifted toward
concern about slowing activity as external
conditions deteriorate and headline inflation
starts to moderate. This shift would justify a
halt to the monetary policy tightening cycle,
particularly where second-round effects on
inflation from commodity prices have been
limited, and a turn to easing would be called
for if the outlook continues to deteriorate.
In the face of sharp capital outflows, coun-
tries will need to respond quickly to ensure
adequate liquidity, while using the exchange
rate to absorb some of the pressure. Further-
more, they should step up efforts to improve
capabilities to prevent, manage, and resolve

larly important for current account deficit
countries with pegged exchange rates. In
the oil-exporting economies with currencies
pegged to the U.S. dollar, spending can be
focused on relieving supply bottlenecks. While
emerging economies have greater scope than
in the past to use countercyclical fiscal policy
should their economic outlook deteriorate,
the analysis in Chapter 5 cautions that this is
unlikely to be effective unless confidence in
sustainability has been firmly established and
measures are timely and well targeted. More
broadly, general food and fuel subsidies have
become increasingly costly and are inherently
inefficient. Targeted programs that help poor
families meet rising living expenses are a pre-
ferred option.
Policy Frameworks in Need of Reform
The deteriorating performance of the global
economy has raised concerns about the choice
of macroeconomic policy frameworks and the
appropriateness of policies affecting financial
and commodity markets.
Operationalizing “Leaning against the Wind”
The current exceptional environment has
heightened interest in developing policies that
would be better geared toward avoiding asset
price booms and busts, including through stron-
ger policy responses in boom times. A promising
approach would be to introduce a macropru-

As well as dealing with the immediate systemic
threats, determined efforts are being marshaled
to address the manifold weaknesses revealed by
the current financial turbulence. As laid out in
the October 2008 Global Financial Stability Report,
a central objective is to ensure more effective
and resilient risk management by individual
institutions, including by setting more robust
regulatory capital requirements and insisting
on stronger liquidity management practices and
improved disclosure of on- and off-balance-sheet
risk. Another important task is to strengthen
crisis resolution frameworks.
Moreover, the financial turmoil has revealed
that national financial stability frameworks have
failed to keep up with financial market innova-
tion and globalization, at the price of deleteri-
ous cross-border spillovers. Greater cross-border
coordination and collaboration among national
prudential authorities are needed, particularly
for the purposes of preventing, managing, and
resolving financial stress both in markets and in
major financial institutions.
Fostering Energy Conservation and Greater Oil
and Food Supply
The recent decline in commodity prices
should not detract from efforts to relieve strains
in commodity markets. There is little concrete
evidence that rising investor interest in com-
modities as an alternative asset—or outright

reflecting the depreciation of the U.S. currency
back toward a real effective rate that is broadly
consistent with medium-term equilibrium.
However, U.S. dollar depreciation has occurred
mainly against the euro and some other flexibly
managed currencies.
The multilateral strategy endorsed by the
International Monetary and Financial Commit-
tee in 2005 and elaborated by the Multilateral
Consultation on Global Imbalances in 2006 and
2007 remains relevant but needs to be applied
flexibly. U.S. fiscal consolidation remains a key
medium-term objective, but recent countercycli-
cal fiscal stimulus and public support to stabi-
executive summary
executive summary
xx
lize financial institutions have been warranted.
Further effective appreciation of the renminbi
would contribute to China’s broader strategy
to shift the sources of growth toward inter-
nal demand and to increase the effectiveness
of monetary policy. A slowdown in spending
growth in Middle Eastern oil exporters would
help reduce overheating in their economies, as
would a heightened focus on relieving supply
bottlenecks. At the same time, product and
labor market reforms in the euro area and
Japan would raise potential growth.
Finally, rising protectionist pressures on

although a recovery is projected to take hold progres-
sively in 2009, the pickup is likely to be unusually
gradual, held back by continued financial market
deleveraging. In this context, elevated rates of headline
inflation should recede quickly, provided oil prices stay
at or below current levels. The emerging and developing
economies are also slowing, in many cases to rates well
below trend, although some still face significant infla-
tion pressure even with more stable commodity prices.
The immediate policy challenge is to stabilize global
financial markets, while nursing economies through a
global downturn and keeping inflation under control.
Over a longer horizon, policymakers will be looking to
rebuild firm underpinnings for financial intermedia-
tion and will be considering how to reduce procyclical
tendencies in the global economy and strengthen supply-
demand responses in commodity markets.
T
his chapter opens with an overview of
a global economy under stress. It then
examines the expanding financial crisis
and its macroeconomic implications in
more detail, as well as the imbalances in housing
and commodity markets. This analysis sets the
stage for the discussion of the outlook and risks.
The final part of the chapter discusses the policy
challenges. Chapter 2 looks in more detail at
developments and policy issues in each of the
world’s main regions.
Global Economy under Stress

institutions, stabilizing markets, and bolstering
confidence, but markets remains highly unset-
tled and volatile as this report goes to press.
Faced by increasingly difficult conditions,
the global economy has slowed markedly. The
advanced economies grew at a collective annual-
ized rate of only 1 percent during the period
from the fourth quarter of 2007 through the
second quarter of 2008, down from 2½ percent
during the first three quarters of 2007. The
U.S. economy has suffered most from the direct
effects of the financial crisis that originated in
its own subprime mortgage market, which has
tightened credit conditions and amplified the
GLOBAL PROSPECTS AND POLICIES
CHAPTER 1 Global ProsPects and Policies
2
Table 1.1. Overview of the World Economic Outlook Projections
(Percent change, unless otherwise noted)
Year over Year

Difference from July
2008 WEO Projections
Q4 over Q4
Projections Estimates Projections
2006 2007 2008 2009 2008 2009 2007 2008 2009
World output
1
5.1 5.0 3.9 3.0 –0.2 –0.9 4.8 2.8 3.2
Advanced economies 3.0 2.6 1.5 0.5 –0.2 –0.9 2.6 0.7 1.0

World growth based on market exchange rates 3.9 3.7 2.7 1.9 –0.2 –0.8 . . . . . . . . .
World trade volume (goods and services)
9.3 7.2 4.9 4.1 –1.2 –1.9 . . . . . . . . .
Imports
Advanced economies 7.5 4.5 1.9 1.1 –1.6 –2.3 . . . . . . . . .
Emerging and developing economies 14.7 14.2 11.7 10.5 –0.7 –1.1 . . . . . . . . .
Exports
Advanced economies 8.4 5.9 4.3 2.5 –0.7 –1.8 . . . . . . . . .
Emerging and developing economies 11.0 9.5 6.3 7.4 –2.0 –1.7 . . . . . . . . .
Commodity prices (U.S. dollars)

Oil
3
20.5 10.7 50.8 –6.3 –13.0 –13.6 . . . . . . . . .
Nonfuel (average based on world
commodity export weights) 23.2 14.1 13.3 –6.2 –1.3 –1.0 . . . . . . . . .
Consumer prices
Advanced economies 2.4 2.2 3.6 2.0 0.2 –0.3 3.0 3.3 1.7
Emerging and developing economies
2
5.4 6.4 9.4 7.8 0.3 0.4 6.7 7.9 6.2
London interbank offered rate (percent)
4

On U.S. dollar deposits 5.3 5.3 3.2 3.1 0.4 –0.5 . . . . . . . . .
On euro deposits 3.1 4.3 4.8 4.2 –0.2 –1.1 . . . . . . . . .
On Japanese yen deposits 0.4 0.9 1.0 1.2 –0.1 –0.3 . . . . . . . . .
Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during August 18–September 15, 2008.
1
The quarterly estimates and projections account for 90 percent of the world purchasing-power-parity weights.

experienced during the 2001–02 recession.
The emerging and developing economies
have not decoupled from this downturn. Growth
in these countries eased from 8 percent in the
first three quarters of 2007 to 7½ percent in the
subsequent three quarters, as domestic demand
(particularly business investment) and net
exports have moderated. Moreover, recent trade
and business activity indicators are signaling con-
tinuing deceleration. Growth has been most resil-
ient in commodity-exporting countries, which
are benefiting from still-high export prices. By
contrast, countries with the strongest trade links
with the United States and Europe are slowing
markedly, while some countries that relied on
bank-related or portfolio inflows to finance large
current account deficits have been hit hard by an
abrupt tightening of external financing. Never-
theless, as a group, emerging economies have so
far sustained market access better than in earlier
episodes of financial turbulence, reflecting
improvements in policy frameworks and stronger
public sector balance sheets.
Despite the deceleration of global growth,
headline inflation has risen around the world
0
25
50
75
100

Source: IMF staff estimates.
Shaded areas indicate IMF staff projections. Aggregates are computed on the basis of
purchasing-power-parity (PPP) weights unless otherwise noted.
Average growth rates for individual countries, aggregated using PPP weights; the
aggregates shift over time in favor of faster-growing economies, giving the line an upward
trend.

Simple average of spot prices of U.K. Brent, Dubai Fateh, and West Texas Intermediate
crude oil.

2
1
2
2
0
5
10
15
20
25
Consumer Prices
Advanced
economies
Emerging and
developing economies
Real GDP Growth
Advanced
economies
1970 80 90 2000 10
1970 80 90 2000 10

05–09
Global economy under stress
CHAPTER 1 Global ProsPects and Policies
4
to the highest rates since the late 1990s, pushed
up by the surge in fuel and food prices. In
the advanced economies, 12-month headline
inflation registered 4¼ percent in August 2008,
down modestly from a peak in July in the wake
of some commodity price easing (Figure 1.3).
Measures of underlying inflation—price indices
excluding food and fuel prices, inflation expec-
tations, and labor costs—have been broadly
contained, although there has been upward
drift in some measures. Reflecting heightened
inflation concerns, the Federal Reserve has held
the federal funds rate at 2 percent since April,
after six months of steep cuts, and the European
Central Bank increased its policy rate one notch
to 4¼ percent in early July.
The resurgence in inflation has been more
marked in the emerging and developing econo-
mies, with headline inflation reaching 8¼ per
-
cent in the aggregate in August and with a wide
swath of countries now experiencing double-
digit inflation. To some extent, the difference
reflects the considerably greater weight of food
prices in consumption baskets in these econo-
mies—typically in the range of 30–45 percent

160
180
-24
-20
-16
-12
-8
-4
0
4
8
40
45
50
55
60
Manufacturing Purchasing
Managers Index
(index)
Consumer Confidence
(index)
United States
(left scale)
Euro area
(right scale)
-10
-5
0
5
10

5
4
2000 02 04 06 Aug.
08
Sep.
08
Sep.
08
Advanced
economies
1
2000 02 04 06 2000 02 04 06
0
2
4
6
8
10
Advanced
economies
1
World
Domestic Demand Growth
(percent)
Emerging
economies
2,3
08:
Q2
2000 02 04 06

0
5
10
15
20
25
30
World Trade
2000 02 04 06 Jul.
08
CPB trade
volume index
5
Trade value
4
5
ible exchange rate management. However, as
discussed below, some of these steps have been
reversed recently in the face of intense liquidity
strains related to recent financial turmoil. Some
countries have also tightened fiscal policies to
help restrain the growth of aggregate demand.
Going beyond macroeconomic policies, a num-
ber of countries have sought to limit the impact
of rising international commodity prices on
domestic prices by delaying or limiting the pass-
through of oil prices—with a potentially heavy
fiscal cost—by lowering tariffs on imported food,
and in some cases by prohibiting or imposing
taxes on food exports.

against the U.S. dollar. As a result, their nominal
effective exchange rates have tended to depreci-
ate, although exchange rates have appreciated
-12
-6
0
6
12
18
24
0
1
2
3
4
5
6
7
8
9
Sources: Bloomberg Financial Markets; Haver Analytics; and IMF staff calculations.
Personal consumption expenditure deflator.
Ten-year breakeven rates.
1
2
Global Aggregates
0
1
2
3

-1
0
1
2
3
4
5
Advanced Economies: Core
Inflation
Japan
Euro area
Figure 1.3. Global Inflation
(Twelve-month change in the consumer price index unless otherwise
noted)
Headline inflation has surged, particularly in emerging and developing economies,
reflecting both a jump in food and fuel prices and a more general tightening of
capacity constraints. The advanced economies have also experienced a marked
acceleration of headline inflation, driven mainly by the pass-through of high
international oil prices, but indicators of underlying inflation have risen only
modestly.
Emerging
economies

2002 03 04 05 06 Aug.
08
2002 03 04 05 06 Aug.
08
2002 03 04 05 06 Aug.
08
2002 03 04 05 06 Aug.

Advanced
economies
Fuel Price Inflation
Emerging
economies

World
Advanced
economies
Emerging
economies

United States
1
2002 03 04 05 06 Jul.
08
2002 03 04 05 06 Jul.
08
07 07
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Advanced Economies: Inflation
Expectations