Recovery Strengthening, but Much Work Remains
IMF Blog, January 21, 2014
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Bibliographic details
- Authors: Olivier Blanchard
- Published: January 21, 2014
Opening remarks and context
- Tribute: remembrance of Wabel Abdallah, IMF resident representative in Afghanistan, killed in the terrorist attack in Kabul.
- Overall framing: update of the World Economic Outlook distilled into three main messages.
Main messages from the World Economic Outlook update
- Recovery strengthening:
- World growth: increase from 3% in 2013 to 3.7% in 2014.
- Advanced economies: increase from 1.3% in 2013 to 2.2% in 2014.
- Emerging market and developing economies: increase from 4.7% in 2013 to 5.1% in 2014.
- Recovery largely anticipated:
- Forecast revision for world growth in 2014: revised by just 0.1% relative to the October forecast.
- Underlying reasons: diminishing drag from fiscal consolidation, slow healing of the financial system, decreasing uncertainty.
- Recovery remains weak and uneven:
- Stronger in the US than in Europe; stronger in the Euro core than in Southern Europe.
- Unemployment remains much too high in most advanced economies.
- Downside risks remain.
Regional tour d’horizon — key forecasts and observations
- United States:
- US growth forecast: 2.8% for 2014, compared to 1.9% in 2013.
- Drivers: strong private demand; December budget agreement limits fiscal consolidation in 2014.
- Monetary policy: remains very accommodative; focus turning to monetary policy exit; expectation that the policy rate will rise in 2015.
- Japan:
- Japan grew at 1.7% in 2013; forecast is 1.7% for 2014.
- Source of growth: largely fiscal stimulus and exports.
- Policy challenge: need for consumption and investment to take over; challenge of achieving enough fiscal consolidation to reassure debt holders without slowing the recovery.
- Europe (Euro core and UK):
- UK growth forecast: 2.4% for 2014.
- Germany growth forecast: 1.6% for 2014.
- France growth forecast: 0.9% for 2014.
- Conditions: public debts on sustainable paths in core; fiscal consolidation slowing; favorable credit conditions; confidence remains low in France.
- Southern Europe:
- 2014: forecast positive growth, but fragile.
- Dynamics: strong exports versus weak internal demand driven by loops among weak activity, weak banks, weak firms, and fiscal consolidation.
- Policy implication: sustained growth requires cutting those loops and relying on both external and internal demand.
- Emerging market and developing economies:
- Growth: lower than in the past but expected to remain high.
- External influences: benefit from higher advanced-economy growth; face tighter financial conditions as US monetary policy normalizes.
- IMF view: for most countries, higher advanced growth will dominate tighter financial conditions.
- Domestic challenge highlighted: China needs to contain building risks in the financial sector without excessively slowing growth.
Risks to the outlook and policy priorities
- Monetary policy normalization risks:
- Normalizing policy in advanced economies could produce complex and sometimes disruptive capital movements across countries.
- Emerging market economies with weak macro frameworks are most vulnerable.
- Required responses: clear communication by advanced-economy central banks; stronger domestic policies in stressed emerging market economies.
- Deflation risk in the Euro area:
- Baseline: forecasts for low but positive inflation in the Euro area.
- Risk scenario: inflation could turn into deflation, which would raise real interest rates, increase public and private debt burdens, lower demand and growth, and generate further deflationary pressure.
- Policy priorities to avoid deflation: accommodative monetary policy by the ECB; strengthening of banks’ balance sheets.
- Operational priority: carrying out the balance sheet assessment and stress test process now under way is highlighted as possibly the most important short-term task facing the Euro area.
- Summary judgment:
- Recovery is indeed strengthening, but much work remains to address unevenness, financial vulnerabilities, and macroeconomic risks.
Source: “Recovery Strengthening, but Much Work Remains,” Olivier Blanchard, January 21, 2014.
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