## Advanced Economies Strengthening, Emerging Market Economies Weakening

_IMF Blog, October 8, 2013_

## Source details

**Canonical URL:** [Advanced Economies Strengthening, Emerging Market Economies Weakening](https://www.imf.org/en/blogs/articles/2013/10/08/advanced-economies-strengthening-emerging-market-economies-weakening)

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: October 8, 2013

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### 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*

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## 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**
  - [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 (Markdown version)](/external/chinese/np/blog/2013/100813c.pdf.md){rel="alternate" type="text/markdown"}
  - [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 (PDF)](/external/chinese/np/blog/2013/100813c.pdf){rel="external" type="application/pdf"}
- **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**
  - [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 (Markdown version)](/external/japanese/np/blog/2013/100813j.pdf.md){rel="alternate" type="text/markdown"}
  - [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 (PDF)](/external/japanese/np/blog/2013/100813j.pdf){rel="external" type="application/pdf"}
- **100813r**
  - [100813r (Markdown version)](/external/russian/np/blog/2013/100813r.pdf.md){rel="alternate" type="text/markdown"}
  - [100813r (PDF)](/external/russian/np/blog/2013/100813r.pdf){rel="external" type="application/pdf"}

---

## References

- [عربي](http://blog-montada.imf.org/?p=2522)
- [We see this as a tail risk](http://www.imf.org/external/pubs/ft/survey/so/2013/NEW100813A.htm)

_Source: https://www.imf.org/en/blogs/articles/2013/10/08/advanced-economies-strengthening-emerging-market-economies-weakening_