World Economic Outlook

Financial Systems and Economic Cycles

September 2006

The World Economic Outlook (WEO) presents the IMF staff's analysis and projections of economic developments at the global level, in major country groups (classified by region, stage of development, etc.), and in many individual countries. It focuses on major economic policy issues as well as on the analysis of economic developments and prospects. It is usually prepared twice a year, as documentation for meetings of the International Monetary and Financial Committee, and forms the main instrument of the IMF's global surveillance activities.

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Chapter 1. Global Prospects and Policy Issues
89 kb	Assumptions and Conventions
	Preface
	Foreword
	Executive Summary

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	Global Economic Environment
	Outlook and Short-Term Risks
	Unwinding Global Imbalances
	Policy Challenges
	Appendix 1.1. Recent Developments in Commodity Markets
	References

Chapter 2. Country and Regional Perspectives
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	United States and Canada: Inflationary Pressures Are Beginning to Rise
	Western Europe: Structural Reforms Remain the Key to Stronger Growth
	Japan: Monetary Policy Adjusts to the End of Deflation
	Emerging Asia: China's Growth Spurt Benefits the Region but Carries Risks
	Latin America: Continuing to Build Resilience
	Emerging Europe: Managing Risks From Heavy Reliance on Foreign Savings
	Commonwealth of Independent States: Managing Large Foreign Currency Inflows
	Africa: Strong Growth Continues Despite High Oil Prices
	Middle East: Living with Booming Oil Exports
	References

Chapter 3. Asia Rising: Patterns of Economic Development and Growth
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	Asia's Economic Success
	Perspiration or Inspiration?
	Sectoral Effects: Cross-Sector Shifts or Within-Sector Growth?
	Policy Determinants of Productivity Growth
	Conclusions
	Appendix 3.1 Asia Rising: Methods and Additional Results
	References

Chapter 4. How Do Financial Systems Affect Economic Cycles?
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	How Have Financial Systems Changed?
	How Do Differences in Financial Systems Affect the Behavior of Households Firms, and Cross-Border Capital Flows?
	Conclusions
	Appendix 4.1 Building the Financial Index
	Appendix 4.2 Econometric Methodology
	References

Chapter 5. The Boom in NonFuel Commodity Prices: Can It Last?
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	Long-Term Trends in Commodity Prices and Volatility
	Assessment of Recent Developments
	Role of Emerging Markets
	Will the Recent Run-Up in Metals Prices Be Sustained?
	Outlook for Food and Other Agricultural Commodities
	Conclusions
	Appendix 5.1 Model of Aluminum and Copper Markets
	Appendix 5.2 Modeling the Relationship Between Speculation and Commodity Prices
	References

	Annex: IMF Executive Board Discussion of the Outlook, August 2006

Statistical Appendix
	Assumptions
	What's New
	Data and Conventions
	Classification of Countries
	General Features and Composition of Countries in the World Economic Outlook
	Classification

List of Tables
	Output (Tables 1–6)
	Inflation (Tables 7–11)
	Financial Policies (Tables 12–19)
	Foreign Trade (Tables 20–24)
	Current Account Transactions (Tables 25–31)
	Balance of Payments and External Financing (Tables 32–36)
	External Debt and Debt Service (Tables 37–42)
	Flow of Funds (Table 43)
	Medium-Term Baseline Scenario (Tables 44–45)

	World Economic Outlook and Staff Studies for the World Economic Outlook, Selected Topics

Chapter 1 Boxes
Chart Chart	Data Data	1.1	Capital Flows to Emerging Market Countries: a Long-Term Perspective
Chart	Data	1.2	How emerging Market Countries May Be Affected By External Shocks
Chart Chart	Data Data	1.3	How Will Global Imbalances Adjust?
		1.4	International and National Oil Companies in a Changing Oil Sector Environment

Chapter 2 Boxes
Chart Chart	Data Data	2.1	Improved Emerging Market Fiscal Performance: Cyclical or Structural?
Chart	Data	2.2	Commodity Price Shocks, Growth, and Financing in Sub-Saharan Africa

Chapter 3 Boxes
Chart Chart	Data Data	3.1	Japan's Potential Output and Productivity Growth
Chart Chart	Data Data	3.2	The Evolution and Impact of Corporate Governance Quality in Asia

Chapter 4 Boxes
		4.1	Financial Leverage and Debt Deflation

Chapter 5 Boxes
Chart Chart	Data Data	5.1	Has Speculation Contributed to Higher Commodity Prices?
		5.2	Agricultural Trade Liberalization and Commodity Prices

Appendix Boxes
		A1.	Economic Policy Assumptions Underlying the Projections for Selected Advanced Economies

Tables
1.1	Overview of the World Economic Outlook Projections
1.2	Emerging Market and Developing Countries: Net Capital Flows
1.3	Major Advanced Economies: General Government Fiscal Balances and Debt
1.4	Global Oil Demand by Region
1.5	Selected Domestic Fuel Price Changes, January 2005–June 2006
1.6	Nonenergy Commodity Prices
2.1	Advanced Economies: Real GDP, Consumer Prices, and Unemployment
2.2	Advanced Economies: Current Account Positions
2.3	Selected Asian Countries: Real GDP, Consumer Prices, and Current Account Balance
2.4	Selected Western Hemisphere Countries: Real GDP, Consumer Prices, and Current Account Balance
2.5	Emerging Europe: Real GDP, Consumer Prices, and Current Account Balance
2.6	Commonwealth of Independent States: Real GDP, Consumer Prices, and Current Account Balance
2.7	Selected African Countries: Real GDP, Consumer Prices, and Current Account Balance
2.8	Selected Middle Eastern Countries: Real GDP, Consumer Prices, and Current Account Balance
3.1	Sectoral Shares in Value Added and Employment
3.2	Determinants of Productivity Growth
4.1	Dependent Variable: Private Consumption
4.2	Dependent Variable: _1,i,t
4.3	Dependent Variable: Bilateral Portfolio Investment
5.1	Dependence on Exports of Selected Non-Fuel Commodities
5.2	Decomposition of IMF Non-Fuel Commodities Price Index, 2002–06
5.3	Consumption of Industrial Metals and Oil
5.4	Consumption of Selected Agricultural Commodities
5.5	Cash Costs of Production for Selected Base Metals
5.6	Estimated Elasticities of Demand for Selected Base Metals
5.7	Estimates of Metal Demand
5.8	Estimates of Price Equations
5.9	Equation for Industrial Production
5.10	Consumption of Metals
5.11	Summary of the Results from Rolling Regressions

Chapter 1 Charts
Chart	Data	1.1	Global Indicators
Chart	Data	1.2	Current and Forward-Looking Indicators
Chart	Data	1.3	Measures of the Output Gap and Labor Market Pressures
Chart	Data	1.4	Global Inflation
Chart	Data	1.5	Developments in Mature Financial Markets
Chart	Data	1.6	Mature Financial Market Indicators
Chart	Data	1.7	External Developments in Major Advanced Economies
Chart	Data	1.8	External Developments in Emerging Market Countries
Chart	Data	1.9	Emerging Market Financial Conditions
Chart	Data	1.10	Global Outlook
Chart	Data	1.11	Prospects for World GDP Growth
Chart	Data	1.12	Productivity Developments in Selected Advanced Economies
Chart	Data	1.13	Impact of Commodity Price Movements on Trade Balances in Emerging Markets and Developing Countries
Chart	Data	1.14	Current Account Balances and Net Foreign Assets
Chart	Data	1.15	Crude Oil Spot and Futures Prices, Price Volatility, and Consumption-Production Changes
Chart	Data	1.16	OPEC Production, OPEC Spare Capacity, and OECD Inventories
Chart	Data	1.17	Stock Market Valuations and Real Investment in Oil and Non-Oil Sectors
Chart	Data	1.18	Nonenergy Commodities
Chart	Data	1.19	Semiconductor Market

Chapter 2 Charts
Chart	Data	2.1	United States: Are Inflationary Pressures Building
Chart	Data	2.2	Western Europe: Boosting Productivity is the Key to Stronger Growth
Chart	Data	2.3	Japan: Balancing Inflation and Deflation Risks
Chart	Data	2.4	Emerging Asia: The Regional Impact of China's Rapid Growth
Chart	Data	2.5	Latin America: Progress Toward Fiscal Sustainability
Chart	Data	2.6	Latin America: Mixed Performance in the Hydrocarbons Sector
Chart	Data	2.7	Emerging Europe: Rapid Growth and Its Risks
Chart	Data	2.8	Commonwealth of Independent States: Strong Foreign Currency Inflows Create Macroeconomic Challenges
Chart	Data	2.9	Sub-Saharan Africa: Oil-Importing Countries Record Strong Growth Despite High Oil Prices
Chart	Data	2.10	Middle East: Spending Booming Oil Revenue Wisely

Chapter 3 Charts
Chart	Data	3.1	Output per Capita
Chart	Data	3.2	Selected Indicators
Chart	Data	3.3	Growth Decompositions
Chart	Data	3.4	Information and Communications Technologies (ICT) Investment and Labor Productivity Growth, 1989–2005
Chart	Data	3.5	Sectoral Shares of Value Added and Employment for Asia
Chart	Data	3.6	Employment and Labor Productivity in the Agricultural Sector Over Time
Chart	Data	3.7	Productivity Growth by Sector
Chart	Data	3.8	Sectoral Productivity Growth Since Takeoff
Chart	Data	3.9	9Contributions to Average Labor Productivity Growth Differential with the United States
Chart	Data	3.10	Skill Intensive Manufacturing Sectors: Employment and Value Added Shares
Chart	Data	3.11	Contributions to Average Manufacturing Productivity Growth Differential with the United States
Chart	Data	3.12	Determinants of Productivity Growth, 1970–2004
Chart	Data	3.13	Determinants of Labor Shifts from Agriculture
Chart	Data	3.14	Partial Correlations Between Labor Shift From Agriculture and Its Determinants

Chapter 4 Charts
Chart	Data	4.1	Stock and Bond Market Capitalization and Nonfinancial Sector Liabilities,1995–2004
Chart	Data	4.2	Traditional Banking: Index for Selected Advanced Economies
Chart	Data	4.3	New Financial Intermediation: Index for Selected Advanced Countries
Chart	Data	4.4	Financial Markets: Index for Selected Advanced Economies
Chart	Data	4.5	Financial Index Scores for Advanced Economies
Chart	Data	4.6	Features of Mortgage Markets
Chart	Data	4.7	Total Household Liabilities
Chart	Data	4.8	Consumption-Income Correlations and the Financial Index, 1985–2005
Chart	Data	4.9	Private Consumption: Response to Equity Busts, 1985–2005
Chart	Data	4.10	Private Consumption and Residential Investment: A Response to Housing Busts, 1970–2005
Chart	Data	4.11	Depth of Equity and Housing Busts and the Financial Index, 1985–2005
Chart	Data	4.12	Investment and Financing by the Corporate Sector
Chart	Data	4.13	The Financial Index and Foreign Portfolio Investment
		4.14	The Financial Index
Chart	Data	4.15	The Financial Index: Subindices for Selected Advanced Economies
		4.16	Clustering Results

Chapter 5 Charts
Chart	Data	5.1	Dependence on Exports of Non-Fuel Commodities and Geographical Concentration of Production
Chart	Data	5.2	Long-Term Price Trends
Chart	Data	5.3	Volatility in Nonfuel Commodities Prices
Chart	Data	5.4	Commodity Prices over the Business Cycle
Chart	Data	5.5	Recent Developments in Commodity Prices
Chart	Data	5.6	Perspective on the Recent Price Developments, 1957–2006
Chart	Data	5.7	Consumption of Base Metals and Steel, 1960–2005
Chart	Data	5.8	The Importance of Industry at Various Stages of Economic Development, 1965–2004
Chart	Data	5.9	Base Metal Prices on Futures Markets
Chart	Data	5.10	Model-Based Forecasts of Aluminum and Copper Prices
Chart	Data	5.11	Consumption of Base Metals and Industrial Production, 1960–2005
Chart	Data	5.12	Crude Oil: Rolling Estimates of the Model's Long-Run Parameters
Chart	Data	5.13	Crude Oil: Rolling Estimates of the Model's Short-Run Parameters

World Economic Outlook

Financial Systems and Economic Cycles

Contents