IMF World Economic Outlook (WEO) Update, July 2015: Slower Growth in Emerging Markets, a Gradual Pickup in Advanced Economies
World Economic Outlook, July 9, 2015
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- Published: July 9, 2015
- Series: World Economic Outlook
Global outlook and headline projections
- Global growth is projected at 3.3 percent in 2015 and 3.8 percent in 2016.
- The boost from lower oil prices is more than offset by negative factors, including investment weakness and diminished medium-term growth expectations in many advanced and emerging market economies.
- A first-quarter 2015 setback, with world growth at 2.2 percent, was about 0.8 percentage point below the April 2015 WEO forecast, largely reflecting an unexpected U.S. output contraction and spillovers to Canada and Mexico.
- Oil price assumptions and recent observations:
- Average annual oil price expected for 2015—US$59 a barrel.
- The average price of oil in U.S. dollars a barrel was $96.25 in 2014; the assumed price based on futures markets is $58.87 in 2015 and $64.22 in 2016.
- Financial market movements and exchange rates:
- Longer-term sovereign bond yields have risen by about 30 basis points in the United States and by about 80 basis points on average in the euro area (excluding Greece) since April.
- The dollar has depreciated by some 2 percent in real effective terms relative to the baseline values assumed for the April 2015 WEO.
- The euro has appreciated by about 1 percent relative to those baseline values.
- After a major rally with the Shanghai composite index up by over 150 percent when it peaked in mid-June, the Chinese stock market declined by about 30 percent in recent days.
Developments affecting the forecast
- Weaker first-quarter growth
- World growth in Q1 2015: 2.2 percent (shortfall of 0.8 percentage point vs April 2015 WEO).
- U.S. weakness driven by one-off factors: harsh winter weather, port closures, and strong downsizing of capital expenditure in the oil sector.
- Outside North America, positive and negative surprises roughly offset; emerging market and developing economies broadly weakened.
- Oil price rebound
- Oil prices rebounded in Q2 2015 reflecting higher demand and expectations of slower U.S. oil production growth.
- Global oil supply remains well above 2014 levels and global oil inventories are still rising.
- Reduction in oil investment may lead to a weaker boost to North American activity from lower oil prices than previously expected.
- Inflation and labor markets
- Fuel end-user prices have started rising with the oil price rebound; monthly headline inflation has started to bottom out in many advanced economies.
- Core inflation remains broadly stable well below inflation objectives; headline inflation has declined in many emerging market economies with weak domestic demand.
- Other financial developments
- Bond yields and risk premiums in emerging market economies have risen broadly in line with advanced-economy instruments.
- Capital flows to emerging markets estimated to have decreased in 2015 compared to H2 2014; many have seen further currency depreciation.
- Bank holiday and referendum in Greece have led to sharply higher spreads on Greek sovereign bonds, especially at short maturities.
- Elsewhere market reactions have been relatively muted with modest declines in risky asset prices and modest increases in safe-haven sovereign bond prices.
Updated forecasts by country group
- Advanced economies
- Growth projected to increase from 1.8 percent in 2014 to 2.1 percent in 2015 and 2.4 percent in 2016 (a more gradual pickup than in the April 2015 WEO).
- North American weakness expected to be temporary; underlying drivers in the United States (wage growth, labor market conditions, easy financial conditions, lower fuel prices, strengthening housing market) remain intact.
- Euro area: recovery broadly on track with revised upward growth projections for many economies; Greece expected to experience a heavier toll on activity.
- Japan: Q1 2015 growth stronger than expected (pickup in capital investment), but consumption remains sluggish and more than half of quarterly growth stemmed from inventory changes.
- Emerging market and developing economies
- Growth projected to slow from 4.6 percent in 2014 to 4.2 percent in 2015, and pick up to 4.7 percent in 2016.
- Slowdown drivers: lower commodity prices, tighter external financial conditions (notably in Latin America and oil exporters), rebalancing in China, structural bottlenecks, and geopolitical distress (notably in the Commonwealth of Independent States and parts of the Middle East and North Africa).
- 2016 pickup expected largely from improvement in several distressed economies, including Russia and some economies in the Middle East and North Africa.
- Much of the recent slowdown in many emerging market and developing economies has been a moderation from above-trend growth.
Risks to the forecast
- Distribution of risks remains slightly tilted to the downside.
- Near-term downside risks:
- Increased financial market volatility and disruptive asset price shifts.
- Capital flow reversals in emerging market economies if asset price shifts occur.
- Further U.S. dollar appreciation posing balance sheet and funding risks for dollar debtors.
- Contagion from Greece remains limited so far, but higher sovereign yields in some euro area economies reduce upside risks and leave some risk of financial stress reemergence.
- Medium-term risks:
- Lower potential output growth in both advanced and emerging market economies.
- Slow return to full employment amid very low inflation and crisis legacies in advanced economies.
- Greater difficulties in China’s transition to a new growth model, as illustrated by recent financial market turbulence.
- Spillovers from increased geopolitical tensions in Ukraine, the Middle East, or parts of Africa.
- Upside possibility:
- A greater boost from lower oil prices, especially in advanced economies, remains an upside risk given the muted consumption response so far.
Policy priorities and recommendations
- General priority: raise actual and potential output using a combination of demand support and structural reforms.
- Advanced economies
- Continue accommodative monetary policy to support activity and lift inflation back to target.
- In countries with fiscal space, ease the near-term fiscal stance, especially through increased infrastructure investment.
- In high public debt economies, balance fiscal consolidation between debt reduction and avoiding a drag on activity.
- Implement structural reforms urgently to tackle crisis legacies and raise potential output.
- Emerging market and developing economies
- Use available macroeconomic policy space to support demand where possible.
- Fiscal policy rebalancing should aim to boost longer-run growth through tax reform and spending reprioritization.
- Oil importers: lower oil prices reduce price pressures and external vulnerabilities, easing the burden on monetary policy.
- Oil exporters: adjust public spending to lower oil revenue where there is no fiscal space.
- Exchange rate depreciation can help offset demand impacts of oil-related terms-of-trade losses in flexible-exchange-rate regimes.
- Structural reforms to raise productivity and remove production bottlenecks are urgently needed.
Key numerical highlights (preserving source figures)
- World growth: 3.4 (2013), 3.3 (2014), 3.8 (2016 projection); global growth projected at 3.3 percent in 2015 and 3.8 percent in 2016.
- First-quarter 2015 world growth: 2.2 percent (shortfall of 0.8 percentage point versus April 2015 WEO).
- Advanced economies growth: 1.8 percent (2014), 2.1 percent (2015 projection), 2.4 percent (2016 projection).
- Emerging market and developing economies growth: 5.0 (2013), 4.6 (2014), 4.2 (2015 projection), 4.7 (2016 projection).
- United States growth: 2.5 (2013), 3.0 (2014); noted unexpected Q1 2015 contraction contributing to the shortfall.
- Commonwealth of Independent States: -2.2 (2013), 0.4 (2014), -1.0 (2015).
- China growth: 7.7 (2013), 7.4 (2014), 6.3 (2015), 7.3 (2016) as listed in the table.
- India: 7.5 (2013) and noted fiscal-year basis reporting.
- Oil price specifics: $96.25 (2014 average), $58.87 (assumed 2015 futures-based), $64.22 (assumed 2016 futures-based); stated average annual oil price expected for 2015—US$59 a barrel.
- Bond yields: about 30 basis points higher in the United States and about 80 basis points higher on average in the euro area (excluding Greece) since April.
- Exchange rates: dollar depreciated by some 2 percent in real effective terms versus April WEO baseline; euro appreciated by about 1 percent versus that baseline.
- Shanghai composite index: up by over 150 percent when it peaked in mid-June; declined by about 30 percent in recent days.
Source: IMF, World Economic Outlook Update, July 2015
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References
- https://www.imf.org/en/publications/weo/issues/2016/12/31/info.htm
- April 2015
- Growth Slows in Emerging Markets, Picks Up in Advanced Economies -- IMF Survey Story
- Behind the News in Greece and China, Moderate Growth Continues -- Blog by Olivier Blanchard
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