## We May Have Avoided the Cliffs, But We Still Face High Mountains

_IMF Blog, January 23, 2013_

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: January 23, 2013

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### Short-term risks and current assessment
- Acute risks have decreased compared to the same time last year: "The United States has avoided the fiscal cliff, and the euro explosion in Europe did not occur."
- Uncertainty is lower, but "there remain considerable challenges ahead" and the recovery "continues to be slow, indeed much too slow."
- A year ago the two short-term risks were:
  - Excess fiscal consolidation in the United States due to gridlock.
  - Firewalls in Europe not strong enough to prevent a crisis in Spain or Italy.
- Developments noted:
  - The agreement at the end of 2012 in the United States does not solve the fiscal problems, but "the extent of fiscal consolidation in 2013 should be roughly appropriate."
  - In Europe, measures including the Outright Monetary Transaction program and the start of a banking union have reassured markets that "the firewall was indeed there, and that Europe was committed to the euro."
- Remaining global headwinds: ongoing need for fiscal consolidation (reduction of government debt and deficits) and a still weak financial system.

### Euro area: periphery and core outlook
- Euro area periphery:
  - Forecasted recessions with growth of "-1.0 percent" for Italy and "-1.5 percent" for Spain.
  - Adjustment process underway: competitiveness improving, export market shares increasing, sovereign spreads decreased, cross border imbalances stabilized or reversing.
  - Persisting problems: interest rates still too high, required fiscal adjustment still large, uncertainty remains — all contributing to low demand and low output.
- Core euro area:
  - Forecasted growth: "0.6 percent" for Germany and "0.3 percent" for France.
  - Low growth drivers: fiscal consolidation, lingering uncertainty, weakness in periphery countries, and low confidence among consumers and firms.
  - Financial conditions are improving and a gradual strengthening is expected over the course of the year.

### Japan
- Japan fell into recession in 2012.
- Policy response expectations:
  - New measures announced by the government (this month) should support positive growth in 2013 at "1.2%".
  - Higher inflation target and more ambitious monetary policy goals are viewed as welcome.
  - The fiscal package leads to a baseline growth forecast increase of "about 0.5 percent for 2013."
  - Warning: given the high level of debt and absence of a medium term fiscal consolidation plan, the package "comes ... with higher risks of a fiscal crisis."

### United States
- The United States is in better shape than Europe or Japan.
- Main outstanding issue: need for a clear medium-term fiscal consolidation plan.
- Even without such a plan, "fiscal consolidation is likely to proceed at a reasonable pace in 2013."
- Signs of strengthening:
  - Housing investment is on the rise.
  - Wealth to income ratios have returned to historical levels, suggesting stronger consumption in the future.
  - Fixed investment shows some signs of strengthening.
- Forecasted growth for 2013: "2 percent", with a gradual strengthening over the course of the year.

### Emerging market and developing economies
- Group forecast for 2013: "5.5 percent" growth, up from "5.1 percent" in 2012.
- Country forecasts for 2013:
  - China: "8.2 percent"
  - India: "5.9 percent"
  - Brazil: "3.5 percent"
- Risks and observations:
  - Weak investment in India and in Brazil is a source of concern.
  - Many countries have offset slower external demand with higher internal demand and managed capital flow volatility.

### Global forecast and labor market
- World growth forecast for 2013: "3.5 percent", compared to "3.2 percent" in 2012.
- Despite improvement, growth is "not enough to make a significant dent in the unemployment rate," which for advanced countries is forecast to remain at "roughly 8 percent."

### Policy recommendations and priority actions
- Main message: "Financial market optimism should not lead to policy complacency."
- Specific priorities:
  - Europe: implementation of laid-out plans remains key for the euro area (after clearer plans were set out).
  - Japan and the United States: both "still very much need medium term fiscal consolidation plans."
  - Financial sector: "financial reform still has a long way to go."
- Conclusion: With progress on these fronts, "cautious optimism may indeed be justified."

*Olivier Blanchard, January 23, 2013.*

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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=2027)

_Source: https://www.imf.org/en/blogs/articles/2013/01/23/we-may-have-avoided-the-cliffs-but-we-still-face-high-mountains_