Global Growth Hits a Soft Patch

IMF Blog, June 17, 2011

Source details

World forecast: 4.3% growth for 2011, and 4.5% for 2012.
Change versus April: down by 0.1% for 2011, and unchanged for 2012.
Overall assessment: "Despite a mild slowdown, the global economic recovery continues but the road to health will be a long one. Downside risks, both old and new, are increasing."

Advanced economies forecast: 2.2% for 2011, and 2.6% for 2012.
- Revision: down by 0.2% in 2011, and unchanged for 2012.
- Ongoing constraints: fiscal consolidation weighing on demand; continuing weaknesses in the financial system, in particular undercapitalized banks, slowing lending.
Emerging and developing economies forecast: 6.6% growth for 2011 and 6.4% for 2012.
- Revision: up by 01.% for 2011, and down by 0.1% for 2012.
- Risks: some face overheating; many are tightening policy but "many of them will need to do more."

Japan:
- Now predicted: negative growth for 2011.
- Cause: disruptions from the earthquake stronger than anticipated.
- Outlook: expectation that problems will go away and the economy will rebound more strongly in 2012.
United States:
- Forecast revisions: down by 0.3% in 2011, and 0.2% in 2012.
- Interpretation: viewed as "a bump in the road" rather than something more worrisome.
- Contributing factor: effect of oil prices on disposable income; if oil prices stay broadly stable (in line with financial markets' expectations), consumer and firm spending should remain steady in a weak recovery.

Risk 1 — Europe:
- Concern: lengthy, painful process to improve competitiveness and return to fiscal health in some countries.
- Required actions: fiscal consolidation, structural reforms, policies to protect the most vulnerable, and outside help/financing (official and private).
- Stakes: failure to implement policies or deliver financing risks disorderly financial and sovereign defaults, contagion across Europe, and potential derailment of the European and world recovery.
Risk 2 — Fiscal credibility in advanced countries:
- Concern: many countries, including the United States, lack a convincing medium term fiscal consolidation plan.
- Channels of harm: market worries → higher risk premia → higher borrowing costs for sovereigns and private borrowers; or precipitated fiscal adjustments → sharp decreases in demand.
- Outcome: in both channels, growth may be derailed.
Risk 3 — Emerging market overheating:
- Indicators: inflation increasing beyond what can be explained by commodity and food prices; high credit growth rates; some asset prices high relative to historical standards.
- Policy dilemmas: balancing strong domestic demand and strong capital inflows; need for appreciation in some Asian currencies and adjustment at other margins in some Latin American countries.
- Guidance: use the right combination of instruments — fiscal, monetary, and macro prudential — to slow economies in time and avoid costly boom-bust cycles.

For Europe and fragile sovereigns:
- Implement strong policies: fiscal consolidation, structural reforms, and measures to protect the most vulnerable.
- Secure help and outside financing (official and private) — "These countries cannot do it alone."
For advanced countries with fiscal gaps:
- Put in place convincing medium term fiscal consolidation plans to avoid higher risk premia or forced abrupt adjustments.
For emerging market economies:
- Tighten policy where needed; in some cases allow further currency appreciation and reduction of current account surplus; in others adjust through other margins if appreciation has already occurred.
- Employ a combination of fiscal, monetary, and macro prudential instruments to avoid overheating and boom-bust cycles.

Olivier Blanchard, June 17, 2011