Mediocre Growth, High Risks, and The Long Road Ahead

IMF Blog, April 17, 2012

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Baseline forecast released by the IMF on April 17 assumes another European flare-up will be avoided, but that uncertainty will linger.
The baseline recognizes strong brakes to growth in advanced countries: fiscal consolidation, bank deleveraging, high household debt in some countries, foreclosures weighing on housing prices and housing investment.
Forecasts imply world growth of 3.5% for 2012, improving to 4.1% for 2013.
The April forecast is roughly 0.2% higher than the January forecast, but 0.5% lower than the forecast from last September.

Fiscal consolidation is needed and is proceeding, but is weighing on growth.
Bank deleveraging is needed and is leading, especially in Europe, to tight credit.
In many countries, in particular in the United States, some households are burdened with high debt, leading to lower consumption.
Foreclosures are weighing on housing prices, and on housing investment.

Advanced countries as a whole: growth of 1.4 percent in 2012, and 2.0 percent in 2013.
United States: 2.1 percent in 2012, and 2.4 percent in 2013.
Euro area: -0.3 percent in 2012, and 0.9 percent in 2013. (The negative number for 2012 reflects negative growth in countries such as Italy and Spain; German and French growth are forecast to be positive, although quite low.)
China: 8.2% for 2012.
India: 6.9% for 2012.
Brazil: 3.0% for 2012 (roughly the same as in January).
Russia: 4.0% for 2012 (slightly higher than in January).
Sub-Saharan Africa: 5.4% for 2012.
Many emerging and developing economies: continued strong growth, although somewhat lower than in the past; immediate challenges mainly from outside (lower exports to advanced countries, volatility of commodity prices, high volatility of capital flows).

Geopolitical tension affecting the oil market.
Main risk: another acute crisis in Europe.
- The building of the “firewalls”, when completed, will represent major progress, but firewalls alone cannot solve fiscal, competitiveness, and growth issues in affected countries.
- Bad macroeconomic or political news can trigger crisis dynamics similar to last fall.
Ongoing market pressure for immediate fiscal consolidation, combined with adverse market reactions when consolidation leads to lower growth.

Fiscal policy:
- Immediate adjustment is needed for credibility.
- Search for credible long-term commitments by passing measures that decrease trend spending and by putting in place fiscal rules that reduce deficits over time.
- Insufficient progress has been made along these lines, especially in the United States and in Japan.
Bank deleveraging:
- Ensure deleveraging does not lead to a credit crunch, either at home or abroad.
- Partial public recapitalization of banks should remain on the agenda; to the extent that it would increase credit and activity, it could easily pay for itself, more so than most other fiscal measures.
Europe-specific measures to reduce risks:
- Decrease links between sovereigns and banks (examples given: common deposit insurance, common regulation and supervision).
- Now that the fiscal pact has been introduced, Euro countries should explore the scope for issuing common sovereign bonds.
Structural reform priority:
- Highest priority, and most difficult, is to durably increase growth and decrease unemployment in advanced economies, especially in Europe.
- Search for structural and fiscal reforms that help in the long run, but do not depress demand in the short run, should be very high on the policy agenda.
- Such reforms probably hold the key to a successful and durable exit from the crisis.

Olivier Blanchard, April 17, 2012