## World Faces Weak Economic Recovery

_IMF Blog, July 16, 2012_

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**Canonical URL:** [World Faces Weak Economic Recovery](https://www.imf.org/en/blogs/articles/2012/07/16/world-faces-weak-economic-recovery)

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: July 16, 2012

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### 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*

---

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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)
- [عربي](http://blog-montada.imf.org/?p=1541)
- [global recovery continues](http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm)
- [forecast in April](http://www.imf.org/external/pubs/ft/weo/2012/01/index.htm)

_Source: https://www.imf.org/en/blogs/articles/2012/07/16/world-faces-weak-economic-recovery_