{
  "title": "Global Economy: Continuing Recovery But Clouds on the Horizon",
  "publication": "IMF Blog, July 8, 2010",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2010/07/08/global-economy-continuing-recovery-but-clouds-on-the-horizon",
  "canonical": "https://www.imf.org/en/blogs/articles/2010/07/08/global-economy-continuing-recovery-but-clouds-on-the-horizon",
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  "summary": "Author: Olivier Blanchard",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Author: Olivier Blanchard\n- Date: July 8, 2010\n- Core message: Two opposing forces — stronger-than-expected near-term activity versus emerging fiscal and financial clouds (originating in Greece and extending to Europe) — create uncertainty for the recovery."
    },
    {
      "heading": "Growth forecasts and recent performance",
      "content": "- World growth forecast for 2010: about 4½ % (revised up from April forecast of around 4¼ %).\n- World growth forecast for 2011: about 4¼ % (broadly unchanged).\n- Advanced countries growth forecasts: 2.6% for 2010 and 2.4% for 2011.\n  - Implication: these low growth rates imply that high unemployment will remain a central issue.\n- Emerging and developing economies growth forecasts: 6.8% in 2010 and 6.4% in 2011.\n  - Revisions: an upward revision of 0.5% for 2010 and a small downward revision of 0.1% for 2011.\n- Short-term performance: the world economy expanded at an annualized rate of over 5 % in the first quarter of 2010, with stronger-than-expected growth in the United States, Europe, Japan, Brazil, and India.\n- Recent indicators suggest some slowdown of demand, but it is too early to assess significance."
    },
    {
      "heading": "Macroeconomic implications of European fiscal/financial stress",
      "content": "- Trigger: worries about fiscal solvency in Greece spread to concerns about fiscal solvency elsewhere and then to banking solvency, producing financial turbulence and disruptions in market financing, including a freeze in the interbank market in Europe.\n- Baseline assumption: policy responses will be adequate and will limit effects on the real economy.\n- Even under adequate policy responses, four main macroeconomic implications are likely:\n  - A depreciation of the Euro.\n  - A tightening of bank lending, especially (but perhaps not only) in Europe.\n  - The need for fiscal consolidation, which, even if well executed, is likely to affect demand and growth adversely in the short run.\n  - A near-term reallocation of capital flows."
    },
    {
      "heading": "Fiscal consolidation: timing, credibility, and design",
      "content": "- Rationale: fiscal stimulus in 2008–2009 was necessary; now countries must return to a sustainable fiscal path.\n- Key objective: establish a credible roadmap to stabilize the ratio of debt to GDP over the medium term, with the goal of decreasing it substantially over the longer term.\n  - G-20 commitment: advanced economies committed to fiscal plans that will stabilize or reduce government debt to GDP ratios by 2016.\n- Two paths to credibility:\n  - Passing reforms that improve medium- and long-term outlooks (example cited: increases in the retirement age in line with higher life expectancy).\n  - Instituting fiscal rules (example cited: limits on the growth of spending over time).\n- Guidance on timing and pace:\n  - Adjustment should start soon.\n  - Avoid excessive front-loading or too sharp a cut in deficits this year or next year, as that would be counterproductive given the fragile recovery and limited offset from already very accommodative monetary policy.\n  - Current plans for 2011, which imply an average decrease in the cyclically adjusted deficit in advanced G-20 countries, of about 1.25%, strike the IMF as roughly appropriate.\n- Noted shortfalls: many countries still lack ambitious entitlement reforms and, in many cases, better fiscal rules."
    },
    {
      "heading": "Capital flows and emerging market policy challenges",
      "content": "- Prior to European problems: capital flows to emerging market countries were steadily increasing.\n- Impact of European events: a partial reversal as higher risk aversion led investors to repatriate funds, decreasing capital flows to emerging markets.\n- Outlook: the reversal is expected to be temporary; the trend is continuing strong capital flows to emerging market countries.\n- Two policy considerations for emerging markets managing inflows:\n  - These flows are largely driven by good fundamentals and likely to be long lasting; limiting their overall size through controls or fighting their exchange-rate effects through reserve accumulation may be difficult and eventually self-defeating.\n  - Many emerging market countries would benefit from a shift from external to internal demand to sustain growth amid lower exports to advanced countries and to better satisfy domestic needs.\n    - Achieving this requires structural reforms and exchange rate appreciations.\n    - The IMF notes decisions by China to boost internal demand and allow for more flexibility of the yuan as welcome steps."
    },
    {
      "heading": "Summary conclusions",
      "content": "- The IMF remains cautiously optimistic about the pace of recovery but identifies clear dangers and policy challenges.\n- Key determinants of the outcome:\n  - How Europe deals with fiscal and financial problems.\n  - How advanced countries proceed with fiscal consolidation (timing, pace, credibility).\n  - How emerging countries rebalance their economies toward more internal demand.\n\nOlivier Blanchard, July 8, 2010 — Global Economy: Continuing Recovery But Clouds on the Horizon\n\n---\n\n\n References\n\n- World Economic Outlook\n\nSource: https://www.imf.org/en/blogs/articles/2010/07/08/global-economy-continuing-recovery-but-clouds-on-the-horizon"
    }
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    "Authors: Olivier Blanchard",
    "Published: July 8, 2010",
    "Author: Olivier Blanchard",
    "Date: July 8, 2010",
    "Core message: Two opposing forces — stronger-than-expected near-term activity versus emerging fiscal and financial clouds (originating in Greece and extending to Europe) — create uncertainty for the recovery.",
    "World growth forecast for 2010: about 4½ % (revised up from April forecast of around 4¼ %).",
    "World growth forecast for 2011: about 4¼ % (broadly unchanged).",
    "Advanced countries growth forecasts: 2.6% for 2010 and 2.4% for 2011.",
    "Emerging and developing economies growth forecasts: 6.8% in 2010 and 6.4% in 2011.",
    "Short-term performance: the world economy expanded at an annualized rate of over 5 % in the first quarter of 2010, with stronger-than-expected growth in the United States, Europe, Japan, Brazil, and India.",
    "Recent indicators suggest some slowdown of demand, but it is too early to assess significance.",
    "Trigger: worries about fiscal solvency in Greece spread to concerns about fiscal solvency elsewhere and then to banking solvency, producing financial turbulence and disruptions in market financing, including a freeze in the interbank market in Europe.",
    "Baseline assumption: policy responses will be adequate and will limit effects on the real economy.",
    "Even under adequate policy responses, four main macroeconomic implications are likely:",
    "Rationale: fiscal stimulus in 2008–2009 was necessary; now countries must return to a sustainable fiscal path.",
    "Key objective: establish a credible roadmap to stabilize the ratio of debt to GDP over the medium term, with the goal of decreasing it substantially over the longer term.",
    "Two paths to credibility:",
    "Guidance on timing and pace:",
    "Noted shortfalls: many countries still lack ambitious entitlement reforms and, in many cases, better fiscal rules.",
    "Prior to European problems: capital flows to emerging market countries were steadily increasing.",
    "Impact of European events: a partial reversal as higher risk aversion led investors to repatriate funds, decreasing capital flows to emerging markets.",
    "Outlook: the reversal is expected to be temporary; the trend is continuing strong capital flows to emerging market countries.",
    "Two policy considerations for emerging markets managing inflows:",
    "The IMF remains cautiously optimistic about the pace of recovery but identifies clear dangers and policy challenges.",
    "Key determinants of the outcome:",
    "[World Economic Outlook](http://www.imf.org/external/pubs/ft/weo/2010/update/02/index.htm)"
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