Advanced Economies Strengthening, Emerging Market Economies Weakening
IMF Blog, October 8, 2013
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Bibliographic details
- Authors: Olivier Blanchard
- Published: October 8, 2013
Main message and risk outlook
- The fiscal situation in the United States is foremost, with three related policy risks highlighted: the sequester, the government shutdown, and the debt ceiling.
- The sequester is producing a fiscal consolidation this year described as "both too large and too arbitrary."
- The shutdown is "another bad outcome" whose economic consequences are limited if short-lived.
- Failure to lift the debt ceiling is characterized as a "game changer" and a tail risk: "low probability" but, if it occurs, would cause "major consequences" including immediate disruptions in financial markets in the U.S. and abroad.
- Overall, "the world economy has entered yet another transition": advanced economies are slowly strengthening while emerging market economies have slowed down, more than forecast in July.
Growth forecasts and revisions
- Advanced economies: forecast growth of 1.2% this year, 2.0% next year (the same as July forecasts).
- Emerging markets and developing economies: forecast growth of 4.5% this year, 5.1% next year, representing a downward revision of 0.5% and 0.4% respectively relative to July forecasts.
Advanced economies — assessment and policy implications
- United States:
- "Private demand continues to be strong."
- Forecasts assume fiscal accidents are avoided; under that assumption "the recovery should strengthen."
- "Time to make plans for exit from both quantitative easing and zero policy rates—although not time to implement them yet."
- Communication around normalization (the Fed) is "new and delicate"; "reasonable to expect some volatility in long rates."
- Japan:
- Recovery continues but sustainability depends on "Abenomics meeting two major challenges":
- The right pace of fiscal consolidation (debate over the consumption tax increase): "neither too slow to compromise credibility, nor too fast to kill growth."
- A "credible set of structural reforms" to convert a cyclical recovery into sustained growth.
- Core Europe and the periphery:
- "Core Europe is, at last, showing some signs of recovery" partly due to a change in mood.
- Southern periphery countries "are still struggling": progress on competitiveness and exports not yet strong enough to offset depressed internal demand.
- Uncertainty about bank balance sheets persists; the promised "asset quality review" should help.
- Structural reforms remain "urgently needed to increase the anemic potential growth rate."
- Cross-cutting legacy issues for advanced economies:
- Public debt and, in some cases, private debt remain very high.
- Fiscal sustainability is "not a given."
- The architecture of the financial system is still evolving and its future solidity is unclear.
- Unemployment remains "too high."
Emerging market economies — causes of weakening and recommended responses
- Causes of slowdown:
- Growth decline in many emerging markets is "often more than we had forecast in July."
- The slowdown reflects both lower potential growth and cyclical adjustment.
- In the 2000s, unusually favorable world conditions (strong commodity prices, easy global financial conditions) boosted potential growth; with commodity prices stabilizing and financial conditions tightening, potential growth is lower and cyclical adjustments have intensified.
- Policy challenges for emerging market governments:
- Twofold challenge: adjust to lower potential growth, and where needed, deal with cyclical adjustment.
- Structural reforms are "becoming more urgent" to partially offset lower growth relative to the 2000s; examples include:
- Rebalancing towards consumption in China.
- Removing barriers to investment in India or Brazil.
- Macro advice for cyclical management:
- Countries with large fiscal deficits "must consolidate."
- Countries with inflation persistently above target "must tighten and, often more importantly, put in place a more credible monetary policy framework."
- Financial flows and exchange rates:
- Increase in U.S. long-term interest rates makes policy advice more relevant.
- Normalization of interest rates in advanced countries is likely to lead to a partial reversal of earlier capital flows.
- As investors repatriate funds, countries with weaker fiscal positions or higher inflation are particularly exposed.
- Recommended twofold response:
- Put macro fundamentals in order: clarify the monetary policy framework and maintain fiscal sustainability.
- Allow the exchange rate to depreciate in response to outflows. Foreign currency exposure is "more limited today," enabling adjustment without "major difficulties" in many cases.
Low-income countries and longer-term view
- Low-income countries are, in general, "quite resilient" today.
- However, they "will also face a more challenging environment" looking forward as global financial conditions change.
- The recovery from the crisis "continues, albeit too slowly," and multiple legacies of the crisis remain important policy concerns for years to come.
Olivier Blanchard, October 8, 2013
Content in this bundle
- iMFdirect博客: 先进经济体走强，新兴市场经济体变弱, 2013 年10 月8 日
- 先進国・地域の成長は力強さを増し、新興市場国・地域は減速, オリビエ・ブランシャール; iMFdirect ブログ, 2013年10月8日掲載
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