## Global Growth Hits a Soft Patch

_IMF Blog, June 17, 2011_

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: June 17, 2011

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### Global forecast and short-term outlook
- 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 vs. emerging and developing economies
- 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."

### Country-specific revisions and factors
- 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.

### Three key downside risks highlighted
- 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.

### Policy implications and recommendations
- 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*

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## References

- [https://www.imf.org/wp-content/uploads/2011/04/ob_spring-2011-weo2.jpg](https://www.imf.org/wp-content/uploads/2011/04/ob_spring-2011-weo2.jpg)
- [update](http://www.imf.org/external/pubs/ft/weo/2011/update/02/index.htm)

_Source: https://www.imf.org/en/blogs/articles/2011/06/17/global-growth-hits-a-soft-patch_