IMF World Economic Outlook (WEO) Update -- A Policy-Driven, Multispeed Recovery, January 2010
World Economic Outlook, January 26, 2010
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- Published: January 26, 2010
- Series: World Economic Outlook
Executive overview and headline projection
- The global recovery is proceeding at different speeds across regions.
- World output in 2010 is expected to rise by 4 percent. This represents an upward revision of ¾ percentage point from the October 2009 World Economic Outlook.
- In most advanced economies, the recovery is expected to remain sluggish by past standards, whereas in many emerging and developing economies activity is expected to be relatively vigorous, largely driven by buoyant internal demand.
- Policies need to foster a rebalancing of global demand, remaining supportive where recoveries are not yet well sustained.
Real activity rebound and role of policy stimulus
- Global production and trade bounced back in the second half of 2009.
- Confidence rebounded strongly on both the financial and real fronts, as extraordinary policy support forestalled another Great Depression.
- Drivers of the rebound:
- Monetary policy: interest rates down to record lows in most advanced and in many emerging economies; central bank balance sheets expanded to unprecedented levels in key advanced economies.
- Fiscal policy: major stimulus in response to the deep downturn.
- Public support of the financial sector: crucial in breaking the negative feedback loop between the financial and real sectors.
- Few indications that autonomous (not-policy-induced) private demand is taking hold, at least in advanced economies.
Table 1.1. Overview of the World Economic Outlook Projections (selected figures)
(Percent change, unless otherwise noted)
- World output: 2008 = 3.0; 2009 = -0.8; 2010 = 3.9; 2011 = 4.3.
- Advanced economies: 2008 = 0.5; 2009 = -3.2; 2010 = 2.1; 2011 = 2.4.
- United States: 2008 = 0.4; 2009 = -2.5; 2010 = 2.7; 2011 = 1.2.
- Euro area: 2008 = 0.6; 2009 = -3.9; 2010 = 1.0; 2011 = 1.6.
- Japan: 2008 = -1.2; 2009 = -5.3; 2010 = 2.2.
- Emerging and developing economies2: 2008 = 6.1; 2009 = 6.0; 2010 = 6.3; 2011 = 6.4.
- Developing Asia: 2008 = 7.9; 2009 = 6.5; 2010 = 8.4.
- China: 2008 = 9.6; 2009 = 8.7; 2010 = 10.0; 2011 = 9.7.
- India: 2008 = 7.3; 2009 = 7.7; 2010 = 7.8; 2011 = 8.3.
- World trade volume (goods and services): 2008 = 2.8; 2009 = -12.3.
- World growth based on market exchange rates: 2008 = -2.1.
- Commodity prices (U.S. dollars) — Oil4: 2008 = 36.4; 2009 = -36.1; 2010 = 22.6; Nonfuel (average ...): 2008 = 7.5; 2009 = -18.9.
- Petroleum price assumptions: the average price of oil in U.S. dollars a barrel was $62.00 in 2009; the assumed price based on future markets is $76.00 in 2010 and $82.00 in 2011.
Recovery is proceeding at varying speeds
- Advanced economies: output is expected to expand by 2 percent in 2010 (upward revision of 3/4 percentage point). In 2011, growth is projected to edge up to 2½ percent. Real output is expected to remain below its pre-crisis level until late 2011.
- Emerging and developing economies: growth expected to rise to about 6 percent in 2010, following a modest 2 percent in 2009. The new projection reflects an upward revision of almost 1 percentage point. In 2011, output is projected to accelerate further.
- Heterogeneity across countries and regions reflects different initial conditions, external shocks, and policy responses; key emerging economies in Asia are leading the recovery while some advanced European and several central and eastern European and CIS economies are lagging.
Financial conditions — improvements and remaining challenges
- Money markets stabilized and the tightening of bank lending standards moderated; most banks in core markets are now less reliant on central bank emergency facilities and government guarantees.
- Bank lending is likely to remain sluggish due to: need to rebuild capital, weakness of private securitization, and potential further credit write-downs (notably related to commercial real estate).
- Equity markets have rebounded and corporate bond issuance has reached record levels, but this has not offset reductions in bank credit growth to the private sector.
- Consumers and small and medium-size enterprises remain likely to face credit constraints; public lending programs and guarantees have been critical in channeling credit.
- Sovereign debt has come under pressure for some small countries; investors are increasingly differentiating across countries.
- Portfolio flows into emerging markets have picked up, easing financial conditions and prompting concerns about asset price valuations.
- Cross-border bank financing is still contracting in most regions as global banks continue to delever, limiting domestic credit growth in regions reliant on such flows.
Commodity prices
- Commodity prices rose strongly in the early stages of the recovery despite generally high inventories, driven by buoyant recovery in emerging Asia and improved global financial conditions.
- Looking ahead, commodity prices are expected to rise a bit further, supported by global demand strength, especially from emerging economies, but upward pressure is expected to be modest given above-average inventories and substantial spare capacity in many commodity sectors.
- IMF baseline petroleum price projection unchanged for 2010 and revised up to $82 a barrel in 2011 (from $79 a barrel in the October 2009 WEO). Other non-fuel commodity prices marked up modestly.
Inflation outlook
- Low capacity utilization and well-anchored inflation expectations are expected to contain inflation pressures.
- Advanced economies: headline inflation expected to pick up from zero in 2009 to 1¼ percent in 2010, as rebounding energy prices more than offset slowing labor costs.
- Emerging and developing economies: inflation expected to edge up to 6¼ percent in 2010 due to more limited slack and increased capital flows.
Risks to the outlook
- Upside risks:
- Continued reversal of the confidence crisis and reduction in uncertainty could foster stronger-than-expected improvement in financial market sentiment, capital flows, trade, and private demand.
- New policy initiatives in the United States to reduce unemployment could boost U.S. and global growth.
- Downside risks:
- Premature and incoherent exit from supportive policies could undermine global growth and rebalancing.
- Impaired financial systems, housing markets, or rising unemployment in key advanced economies could hold back household spending more than expected.
- Worsening budgetary positions and fiscal sustainability concerns could unsettle financial markets and raise borrowing costs for households and companies.
- Rallying commodity prices may constrain the recovery in advanced economies.
Policy guidance: sustaining the recovery and preparing for exit
- Policy objectives:
- Rebalance demand away from public toward private sectors and from economies with excessive external deficits toward those with excessive surpluses.
- Repair financial sectors and foster restructuring in real sectors.
- Monetary policy:
- Many central banks can afford to maintain low interest rates over the coming year given low underlying inflation and high unemployment.
- Credible strategies for unwinding monetary policy support need to be prepared and communicated now to anchor expectations.
- Countries with robust rebounds of activity and credit should tighten monetary conditions earlier and faster.
- Fiscal policy:
- Fiscal policies need to remain supportive in the near term; the fiscal stimulus planned for 2010 should be fully implemented.
- Countries facing fiscal sustainability concerns should devise and communicate credible exit strategies.
- Durable exit will often require unwinding crisis-related stimulus and substantial improvements in primary balances for a sustained period.
- Fiscal adjustment strategies should include: reducing fiscal deficits mindful of protecting spending on the poor and foreign aid, and reforming entitlement spending, among other measures.
- Sequencing of exit from accommodative policies should consider:
- Whether high fiscal deficits and debt raise sovereign risk concerns.
- Whether low interest rates are contributing to asset price bubbles.
- Exchange rate pressures and positions relative to medium-term fundamentals.
- How quickly monetary or fiscal policy can be adjusted to changes in domestic demand.
Financial-sector repair and reform
- Continued need to tackle banks’ impaired assets and restructuring, especially in advanced and hardest-hit emerging economies.
- Unwinding financial sector support measures should be gradual and can be facilitated by incentives that make measures less attractive as conditions improve.
- Policymakers need to reform the financial sector to reduce future instability risks and rethink how potential fallout of financial crises would be borne, while making the sector more effective and resilient.
Managing capital inflows in emerging markets
- Some emerging market countries will have to manage a surge of capital inflows; responses differ across countries.
- Possible responses include some fiscal tightening to ease pressure on interest rates and exchange rate appreciation or greater exchange rate flexibility.
- Recognizing inflows can be large and partly transitory, appropriate tools may include macro-prudential policies to limit asset price bubbles, some reserve accumulation, and some capital controls on inflows.
Structural policy challenges for rebalancing
- Economies with excessive external surpluses and high domestic saving rates: foster global rebalancing through structural policies to support domestic demand and develop non-tradable sectors.
- Economies that relied on domestic demand-led growth: shift resources toward the tradable sector.
IMF World Economic Outlook (WEO) Update -- A Policy-Driven, Multispeed Recovery, January 2010
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