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In our April 2015 World Economic Outlook, we forecast global growth to be roughly the same this year than last year, 3.5% versus 3.4%. This global number reflects an increase in growth in advanced economies, 2.4% versus 1.8%, offset by a decrease in growth in emerging market and developing economies, 4.3% versus 4.6% last year. In short, to repeat the words used by the IMF Managing Director last week, we see growth as “moderate and uneven”.
Behind these numbers lies an unusually complex set of forces shaping the world economy. Some, such as the decline in the price of oil and the evolution of exchange rates, are highly visible. Some, from crisis legacies to lower potential growth, play more of a role behind the scene but are important nevertheless. Let me briefly review them.
Legacies from both the financial and the euro crises are still visible in many advanced economies. To varying degrees, weak banks and high levels of debt—public, corporate, or household—still weigh on spending and growth. Low growth, in turn, makes deleveraging a slow process. There is a clear lesson here: Deleveraging will take time.
Potential growth has declined. Potential growth in advanced economies was already declining before the crisis. Aging, together with a slowdown in total productivity, were at work. The crisis made it worse, with the large decrease in investment leading to even lower capital growth. Capital growth will recover, but aging and weak productivity growth will continue to limit growth. The decrease is more pronounced in emerging markets, where aging, lower capital accumulation and lower productivity growth are combining to significantly lower potential growth in the future. It would be wrong to speak, as some have done, of stagnation, but prospects are more subdued. And more subdued prospects lead, in turn, to lower spending and lower growth today.
The decline in the price of oil has led to a large reallocation of real income from oil exporters to oil importers. The early evidence suggests that, in oil importers, from the United States, to the euro area, to China, and to India, the increase in real income is increasing spending. Oil exporters have cut spending but to a smaller extent: many have substantial financial reserves and are in a position to reduce spending slowly.
Exchange rate movements have been unusually large. Among major currencies, the dollar has seen a major appreciation, and the euro and the yen a major depreciation. These movements clearly reflect differences in monetary policy, with the United States expecting to exit the zero lower bound this year, but with no such prospects for the euro area or Japan. To the extent that both the euro area and Japan were at risk of another relapse, the euro and yen depreciations will help. To some extent, the United States has the policy room to offset the adverse effects of the dollar appreciation. Thus, this adjustment of exchange rates must be seen, on net, as good news for the world economy.
Now, put all these forces together. Some countries suffer from adverse legacies, others do not. Some countries suffer from lower potential growth, others do not. Some countries gain from the decrease in the price of oil, others lose. Some countries’ currencies move with the dollar, others move with the euro and the yen. Add to this a couple of idiosyncratic developments, such as the economic trouble in Russia, or the weakness of Brazil. On net, as I have indicated, our baseline forecasts are for an increase in growth in advanced economies, and for a decrease in growth in emerging markets and developing economies. But these overall numbers do not do full justice to the diversity of underlying evolutions.
As always, there are risks to the forecasts. We see macroeconomic risks as having slightly decreased. The major risk last year—namely, a recession in the Euro area—has decreased, and so has the risk of deflation. But financial and geopolitical risks have increased. Large movements in relative prices, whether exchange rates or the price of oil, creates losers and winners. Energy companies and oil-producing countries face both tougher conditions and higher risks. If large exchange rate movements were to continue, they could both create further financial risks and ignite international tensions. A Greek crisis cannot be ruled out, an event that could unsettle financial markets. Turmoil continues in Ukraine and in the Middle East, although so far without systemic economic implications.
Turning finally to policy recommendations. Given the diversity of situations, it is obvious that policy advice must be country-specific. Even so, some general principles continue to hold. Measures to sustain growth both in the short and the longer term continue to be of the essence. With the introduction of quantitative easing in the euro area, monetary policy in advanced economies has largely accomplished what it can. On the fiscal side, the decrease in the price of oil has created an opportunity to decrease energy subsidies and replace them with better-targeted programs. The case for more infrastructure investment we made in the previous World Economic Outlook remains. And while structural reforms cannot do miracles, they can increase the level of output and increase growth for some time. The proper menu differs by country. Given the short-term political costs associated with many of these reforms, the challenge remains to choose carefully, and to implement them.
[youtube https://www.youtube.com/watch?v=y0z9H3k8Ne0&w=560&h=315]
