IMF Survey : Global Growth Disappoints, Pace of Recovery Uneven and Country-Specific

IMF News, October 7, 2014

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A weak and uneven global economic recovery continues, with the pace of recovery reflecting various country-specific conditions, according to the IMF’s World Economic Outlook (WEO).
Investment has been weaker than expected for some time, contributing to “global growth is still mediocre,” says Olivier Blanchard, Economic Counsellor and head of the IMF’s Research Department.
Two underlying forces weigh on global recovery: legacies of the precrisis boom and subsequent recession in advanced economies (notably high debt burdens and unemployment), and adjustments to lower potential growth in several emerging markets.

Global growth: 3.3 percent in 2014 and 3.8 percent in 2015.
The weaker-than-expected outlook for 2014 reflects setbacks to economic activity in the advanced economies during the first half of 2014, and a less optimistic outlook for several emerging market economies.
Potential growth rates are being revised down, affecting confidence, demand, and growth today.

Aggregated forecast: growth to rise to 1.8 percent in 2014 and 2.3 percent in 2015.
United States: projected faster growth following a temporary setback in the first quarter of 2014; employment growth strong and household balance sheets improved amid favorable financial conditions and a recovering housing market.
Euro area: recent growth disappointments highlight lingering fragilities; a gradual, but weak recovery is projected, supported by a sharp compression in interest spreads for stressed economies and record-low long-term interest rates in core euro area economies.
Japan: GDP contracted more than expected in the second quarter of 2014 following an increase in the consumption tax; private investment is forecast to recover and growth to remain broadly stable in 2015.

Aggregate forecast: growth at 4.4 percent for 2014 (a bit weaker than in the April 2014 WEO).
Drivers of slowdown: lackluster domestic demand and the impact of increasing geopolitical tensions, especially on Russia and neighboring countries.
Regional and country specifics:
- China: growth expected to decline slightly in 2014-15 to 7.4 percent, as the economy transitions to a more sustainable path.
- Emerging and developing Asia: growth expected to remain strong elsewhere in the region.
- Latin America: growth rate forecast to decrease by half this year, to around 1.3 percent, due to declining exports and domestic constraints; growth expected to rebound to around 2.2 percent in 2015.
- Sub-Saharan Africa: stronger growth expected because of supportive external demand conditions and strong investment demand, although prospects vary across countries.
- Middle East and North Africa: recovery remains fragile; growth expected to start picking up modestly on the back of improving domestic security conditions and improving external demand.
- Russia and other economies of the Commonwealth of Independent States: modest improvements in activity expected based on similar considerations.

The October WEO emphasizes increased downside risks—both short and medium term—that could dent global confidence and growth:
- Heightened geopolitical risks could prove more persistent or worsen, potentially causing sharply higher fuel prices, trade disruptions, and further economic distress.
- Easy financial conditions and the resulting search for yield could fuel financial excess; markets may have underpriced risks by not fully internalizing uncertainties around the global outlook. A larger-than-expected increase in U.S. long-term interest rates, geopolitical events, or major growth disappointments could trigger widespread disruption.
- In advanced economies, secular stagnation (a situation of a persistent shortfall of investment relative to saving, even with near-zero interest rates) and low potential growth remain important medium-term risks. Protracted low inflation or outright deflation, particularly in the euro area, could pose a risk to activity and debt sustainability in some countries.

Avoid prematurely normalizing monetary policy in advanced economies.
Fiscal adjustment should be tuned in both pace and composition to support the recovery and lay the groundwork for long-term growth and jobs.
Increase public infrastructure investment where there are clearly identified infrastructure gaps and efficient public investment processes (example needs cited include structure maintenance/upgrading in United States and Germany).
Emerging market scope to use macroeconomic policies to support growth varies and is more limited in countries with external vulnerabilities; they also need to prepare for monetary policy normalization in the United States and possible shifts in financial market sentiment.
Urgent need for country-specific structural reforms across both advanced and emerging market countries to strengthen potential growth or make growth more sustainable, including:
- Improving labor and product markets (e.g., reforms to lower the costs of hiring on regular employment contracts and facilitating greater labor force participation in many advanced European economies and Japan).
- Easing barriers to doing business and investment in services.
Emphasize identifying which structural reforms are most needed and politically feasible, and reestablishing confidence through clear plans to address both crisis legacies and the challenge of low potential growth.

Global growth: 3.3 percent in 2014; 3.8 percent in 2015.
Global growth (alternate mention): 3.3 percent in 2014—unchanged from 2013.
Advanced economies aggregate: 1.8 percent in 2014; 2.3 percent in 2015.
Emerging market and developing economies aggregate: 4.4 percent for 2014.
China: 7.4 percent in 2014-15.
Latin America: around 1.3 percent in 2014; around 2.2 percent in 2015.
Time references: first half of 2014; second quarter of 2014; October WEO; April 2014 WEO; 2015.

Source: IMF Survey : Global Growth Disappoints, Pace of Recovery Uneven and Country-Specific (October 7, 2014).