Global Outlook—Still Three Speeds, But Slower

IMF Blog, July 9, 2013

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Global Outlook—Still Three Speeds, But Slower

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Bibliographic details

• Authors: Olivier Blanchard
• Published: July 9, 2013

Overview

• The world economy remains in 3-speed mode: emerging markets growing rapidly, the United States with a steady recovery, and much of Europe continuing to struggle.
• Overall growth is a bit weaker than forecast in April, with a particularly noticeable downward revision in emerging markets.
• The BRICS are beginning to run into speed bumps after years of strong growth, shifting policy focus toward boosting potential output growth and, for China, achieving more sustainable and balanced growth.

What the Numbers Show

• Growth in emerging market and developing economies:
  • Forecast to be 5.0% in 2013 (0.3% less than April forecast).
  • Forecast to increase to 5.4% in 2014 (0.3% downward revision from April).
• Major emerging market economies (2013 forecasts and revisions):
  • China: 7.8% in 2013 (downward revision of 0.3%).
  • India: 5.6% in 2013 (downward revision of 0.2%).
  • Brazil: 2.5% in 2013 (downward revision of 0.5%).
  • Russia: 2.5% in 2013 (downward revision of 0.9%).
  • In all four cases, 2014 forecasts have also been revised down by similar or larger amounts.
• Advanced economies:
  • United States: 1.7% in 2013 (downward revision of 0.2%); expected to increase to 2.7% in 2014.
  • Euro area: -0.6% in 2013 (downward revision of 0.2%); growth should turn positive in 2014 but remain very low.
  • Japan: 2.0% in 2013 (upward revision of 0.5%); 1.2% in 2014 (downward revision of 0.3%).

The Story Behind These Numbers

• Emerging market slowdown appears to have both cyclical and structural components:
  • Demand side: slowdown in exports from low growth in advanced countries contributes, and domestic demand (consumption or investment) is also contributing in each case.
  • Supply side: slowdown has not been accompanied by much of a decrease in inflation, suggesting potential output has moved more or less in line with actual output. Implication: growth in emerging markets will remain high but may be substantially lower than before the crisis.
• United States:
  • Slowdown not particularly worrisome; hides a robust recovery in private demand.
  • Stronger-than-expected and stronger-than-desirable fiscal consolidation has been only partly offset by a stronger housing market—explains the downward revision.
  • If fiscal consolidation had been weaker, growth in the US would be substantially stronger.
• Europe (particularly the Euro area):
  • Southern periphery: improvements in relative costs are increasing export shares but cannot offset very weak internal demand; high interest rates and fiscal consolidation are factors; unemployment remains unacceptably high.
  • Core countries: forecasts revised down—lower exports (and induced low investment) affect Germany; large fiscal consolidation affects France; a general lack of confidence may be partly self-fulfilling.
• Japan:
  • Described as "three and a half speed"; too early to tell how much reflects Abenomics, but growth this year stronger than expected and confidence appears to be building.

Old Risks Remain; New Risks Arise

• Old risks: main ones related to Europe continue to be present.
• Three main new risks identified:

1. Risks to growth in China:

• Large increase in investment since the crisis, largely financed through the shadow banking system, creates a difficult policy choice:
• Either let investment remain high (risk: unproductive investment and building credit risks), or tighten credit and slow investment (risk: decrease in growth, since consumption is unlikely to increase fast enough to compensate).
• Net: downside risks to growth in China.

2. Risks from Japan’s Abenomics (the "three arrows": fiscal stimulus, aggressive monetary easing, structural reforms):

• Unless the second arrow is complemented by a credible medium-run fiscal plan and the third arrow reflects substantial structural reforms, investors may worry about debt sustainability and demand a higher interest rate, complicating debt sustainability.

3. Risks associated with the exit from quantitative easing in the United States:

• Recent high volatility attributed to investors realizing quantitative easing would eventually end, prompting simultaneous portfolio rebalancing and causing overshooting, isolated dislocations, and high volatility.
• Expectation: volatility should decrease going forward, but further episodes of market nervousness cannot be ruled out.

Policy Recommendations

• Emerging market economies:
  • Focus on boosting potential growth.
  • Manage capital outflows that may follow from US quantitative easing exit.
• United States and Japan:
  • Adopt a credible medium-term fiscal plan.
• Europe:
  • Implement measures to nurture the timid recovery, including:
  • Gradual fiscal adjustment.
  • Assessment and repair of bank balance sheets.
  • Progress on the banking union.

Olivier Blanchard, July 9, 2013 — World Economic Outlook update.

References

• World Economic Outlook