World Faces Weak Economic Recovery
IMF Blog, July 16, 2012
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- Authors: Olivier Blanchard
- Published: July 16, 2012
Global overview
- The global recovery continues, but the recovery is weak; indeed a bit weaker than forecast in April.
- In the Euro zone, growth is close to zero, reflecting positive but low growth in the core countries, and negative growth in most periphery countries.
- In the United States, growth is positive, but too low to make a serious dent to unemployment.
- Growth has also slowed in major emerging economies, from China to India and Brazil.
- Downside risks, coming primarily from Europe, have increased.
Baseline forecasts and country specifics
- Europe: increasing divergence between core and periphery countries.
- Periphery Euro countries, including Italy and Spain, face a difficult adjustment.
- Fiscal consolidation is necessary, but weighs heavily on growth.
- Structural reforms will bear fruit only in the future.
- Banks face bad legacy loans and increasing non-performing loans reflecting depressed activity.
- High debt burdens make borrowing expensive for governments.
- The result is negative growth this year and next for both Italy and Spain.
- Core Euro countries, including France and Germany:
- Required fiscal consolidation is smaller; banks generally in better shape.
- Growth forecasts for 2012: 1% for Germany, 0.3% for France.
- Growth expected to be a bit higher for both in 2013.
- United States:
- Recovery continues with mixed signals; fiscal consolidation and lower exports weigh on growth.
- Housing appears to be stabilizing.
- Forecasts: 2.0% growth for 2012, and 2.3% for 2013, a revision of -0.1% in both cases.
- Emerging market countries:
- Growth has slowed more than expected in April.
- China: forecast revised from 8.2% to 8% for 2012.
- India: forecast revised from 6.9% to 6.1% for 2012.
- Brazil: forecast revised from 3.0% to 2.5% for 2012.
- Proximate causes vary, with lower exports and lower investment dominant.
- Expectation: soft landings, but at lower growth rates than in the past.
- World growth aggregate:
- Forecast for world growth: 3.5% for 2012, 3.9% for 2013, down .1% and .2% respectively.
Downside risks
- The increase in downside risks is more worrisome than the small baseline revisions.
- Main risk: vicious cycles in Spain or Italy strengthen, output falls further, and a country loses access to financial markets.
- Such an outcome could easily derail the world recovery.
- Baseline forecasts assume policies will be implemented to slowly decrease the spreads on Spanish and Italian bonds from their current high to a still high, but lower level in 2013.
- Achieving this requires that the right policies be adopted and implemented.
What must be done — policy recommendations
- Two conditions for containing and resolving the Euro crisis:
1. Countries under pressure must follow through with:
- Fiscal consolidation
- Wage and price adjustments
- Structural reforms
- Bank recapitalization if and when needed
- Note: Spanish and Italian governments have taken important steps, but success requires financing at reasonable rates.
2. Other Euro members must help make the adjustment feasible by:
- Designing a euro level architecture
- Being willing, in the short run, to stabilize funding conditions in sovereign debt markets
- Progress was made in recent weeks, but more remains to be done.
- United States:
- Short-run priority: avoid the fiscal cliff.
- Concern: lack of a medium term fiscal plan is worrisome and a source of future risks.
- Emerging economies:
- No simple common advice; recommended posture is to "be ready."
- Prepare to use both economic and macroprudential policies to respond to a complex external environment.
- Expect capital flows to remain highly volatile and exports to advanced countries to remain subdued.
- Broader measures to support the recovery:
- Adopt the right pace of fiscal consolidation.
- Continue expansionary monetary policy.
- Get the financial sector back to health to decrease borrowing costs.
- Demonstrate solidarity, especially within the Euro zone.
Authored by Olivier Blanchard — July 16, 2012
Content in this bundle
- iMFdirect 博客: 全球面临经济复苏疲软
- 弱い世界経済回復; オリビエ・ブランシャール; iMF direct ブログ 2012年7月16日掲載
- Мир ожидает вялый подъем экономики; Оливье Бланшар; Блог iMFdirect; 16 июля 2012 г.
