## Global Economy: Some Bad News and Some Hope

_IMF Blog, October 9, 2012_

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: October 9, 2012

---

### Economic growth
- The world economic recovery continues, but it has weakened further.
- Relative to the IMF's forecasts last April, growth forecasts for 2013 have been revised down from 1.8% to 1.5% for advanced countries, and from 5.8% down to 5.6% for emerging and developing countries.
- The downward revisions are widespread, and are stronger for two sets of countries: members of the euro area, where we now expect growth close to zero in 2013, and for three large emerging market economies, China, India, and Brazil.

### Forces affecting advanced economies
- Upward force on growth:
  - Accommodative monetary policy: central banks maintain very low policy rates and experiment with programs to decrease rates in particular markets, help particular categories of borrowers, or help financial intermediation in general.
- Downward forces on growth:
  - Fiscal consolidation: proceeding according to plan in most countries, but weighing on demand; evidence suggests that, in the current environment, fiscal multipliers are large—larger than in normal times.
  - Weak financial systems: banks remain weak in many countries (more so in Europe than in the United States), exacerbated by low growth, leading many borrowers to face tight borrowing conditions.
  - General uncertainty: worries about European policymakers' ability to control the euro crisis, U.S. policymakers' failure to agree on a fiscal plan, and Japanese policymakers' ability to reduce their budget deficit further.

### Emerging and developing economies
- Interconnections:
  - Low growth in advanced countries affects emerging and developing economies through exports and supply chains.
  - Example: lower exports account for most of the decrease in growth in China; supply-chain effects account for much of the decrease in growth in Asia.
- Capital flows:
  - Alternative risk-off and risk-on episodes, triggered by progress and regress on policy actions, cause volatile capital flows, in particular to Asia and to Latin America.
- Domestic factors:
  - Policy uncertainty in India affecting domestic demand.
  - Tighter policies in Brazil in response to an earlier boom.
- Outlook:
  - These developments are not seen as signs of a hard landing in China, India, or Brazil; positive policy measures are being taken in all three countries.
  - Nonetheless, the result is expected to be lower growth for some time, lower than recent past growth.

### Policy recommendations
- Continue with accommodating monetary policy as a powerful force for growth.
- Continue steady fiscal consolidation: "not too slow, not too fast."
- Continue to repair the financial system.
- Decrease policy uncertainty.
- Deliver fiscal consolidation while maintaining growth.

### Euro area focus and banking architecture
- Recent change in attitudes: realization that an ambitious architecture must be put in place.
- Lessons identified:
  - Euro area countries can be hit by strong shocks.
  - Weak banks can considerably amplify adverse effects of shocks.
  - Sovereign/bank interactions can further worsen outcomes if the sovereign itself might be in trouble.
- Objectives for new architecture:
  - Reduce the amplitude of shocks in the first place.
  - Put in place a system of transfers to soften the effects of shocks.
  - Move supervision, resolution, and recapitalization processes of banks to the euro level.
- Progress:
  - These issues are being seriously explored and some mechanisms are being put together.

### Short-term measures, country actions, and scenarios
- Immediate needs for Spain and Italy:
  - Follow through with adjustment plans that reestablish competitiveness and fiscal balance while maintaining growth.
  - Be able to recapitalize banks, if needed, without adding to sovereign debt.
  - Be able to borrow at reasonable rates.
- Outlook if measures are implemented rapidly:
  - If the complex puzzle of mechanisms and measures can be rapidly completed, one can reasonably hope that the worst might be behind us.
  - If uncertainty is partly behind the slowdown and adoption/implementation of measures reduces it, outcomes may be better than the forecasts.
  - "The case for an upside scenario is a bit stronger than it has been for a while."

*Olivier Blanchard, October 9, 2012 — Global Economy: Some Bad News and Some Hope*

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## References

- [unemployment](http://blogs.imf.org/2012/10/03/restoring-jobs-by-restoring-growth/)
- [World Economic Outlook](http://www.imf.org/external/pubs/ft/survey/so/2012/RES100812A.htm)
- [Tokyo](http://www.imf.org/external/am/2012/index.htm)
- [euro area](http://www.imf.org/external/region/eur/index.htm)
- [China](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR072412A.htm)
- [India](http://www.imf.org/external/pubs/ft/survey/so/2012/car041712a.htm)
- [Brazil](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR072012A.htm)
- [weak financial system](http://blogs.imf.org/2012/09/28/not-making-the-grade-report-card-on-global-financial-reform/)
- [plan](http://blogs.imf.org/2012/07/18/signs-of-fiscal-progress-will-it-be-enough/)
- [banks are still weak](http://www.imf.org/external/pubs/ft/survey/so/2012/RES092512A.htm)
- [Japanese](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR061112B.htm)
- [interconnected](http://www.imf.org/external/pubs/ft/fandd/2012/09/index.htm)
- [capital flows](http://blogs.imf.org/2012/09/07/capital-controls-when-are-multilateral-considerations-of-the-essence/)
- [monetary policy](http://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm)
- [fiscal](http://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm)
- [not too slow, not too fast](http://blogs.imf.org/2012/04/20/making-goldilocks-happy/)
- [Spain](http://www.imf.org/external/country/ESP/index.htm)
- [Italy](http://www.imf.org/external/country/ITA/index.htm)

_Source: https://www.imf.org/en/blogs/articles/2012/10/09/global-economy-some-bad-news-and-some-hope_