## Legacies, Clouds and Uncertainties

_IMF Blog, October 7, 2014_

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**Canonical URL:** [Legacies, Clouds and Uncertainties](https://www.imf.org/en/blogs/articles/2014/10/07/legacies-clouds-and-uncertainties)

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: October 7, 2014

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### Global outlook and headline projections
- We forecast world growth to be 3.3% in 2014, down 0.1% from our July forecast, and 3.8% in 2015, down 0.2% from our July forecast.
- The recovery continues, but it is weak and uneven.
- Economic evolutions are becoming more differentiated across countries due to differing impacts of past legacies and lowered expectations about future potential growth.

### Two dominant forces shaping outcomes
- Legacy effects from the financial crisis: debt overhangs, high unemployment, and other after‑effects continue to weigh on demand and balance sheets.
- Anticipated weaker futures: downward revisions of potential growth are reducing confidence, demand, and growth today.
- These two forces operate with varying intensity across countries, increasing differentiation in growth trajectories.

### Advanced economies: heterogeneity and constraints
- United States and the United Kingdom are leaving the financial crisis behind and achieving decent growth; even so, potential growth is lower than in the early 2000s.
- Japan is growing, but faces major macroeconomic and fiscal challenges due to high public debt inherited from the past and very low potential growth going forward.
- The euro area nearly stalled earlier this year, even in the core; both legacies (primarily in the south) and low potential growth nearly everywhere are slowing recovery.

### Emerging markets: adjustments and divergence
- For emerging market economies as a whole, potential growth is now forecast to be 1.5% lower than it was in 2011.
- China is maintaining high growth despite the end of a housing and a credit boom; rebalancing is likely to imply slightly lower growth, viewed as a healthy development.
- India has recovered from its relative slump and, thanks in part to policy and a renewal of confidence, growth is expected to exceed 5% again.
- Russia faced low growth before the Ukraine crisis due to uncertain investment prospects; the crisis has made it worse.
- Brazil is weighed down by uncertain prospects and low investment.
- Low income developing countries continue to do remarkably well despite a slowdown in commodity prices; we forecast their growth rate to b 6.1% in 2014, 6.5 in 2015.

### Downside risks
- Extended period of low interest rates has led to some search for yield; financial markets may be too complacent about the future.
  - Macroprudential tools are the right instruments, but there is concern they may not be up to the task.
- Geopolitical risks have become more relevant:
  - So far, little evidence that the Ukraine crisis has had measurable effects beyond affected countries and immediate neighbors.
  - Turmoil in the Middle East has not substantially affected the level or volatility of energy prices to date, but risks of future effects remain.
- A stalling of the recovery in the euro area is a material risk: demand could weaken further and low inflation could turn into deflation. This is not the baseline, but would be a major global issue if it occurred.

### Policy implications and recommendations
- Advanced economies must address both legacies of the crisis and low potential growth:
  - While improving bank balance sheets has been a major focus, debt overhang of firms and households remains an issue in a number of countries.
  - So long as demand remains weak, monetary accommodation and low interest rates remain essential.
- Fiscal policy stance in the euro area:
  - Low spreads on sovereign bonds suggest past fiscal consolidation has built credibility; this credibility should not be threatened.
  - There is scope for fiscal policy to sustain the recovery: infrastructure investment, even if debt financed, may be justified to help demand in the short run and supply in the medium run.
  - Being ready to do more if the risk of stalling materializes is important.
- Raise potential growth where possible:
  - Higher potential growth would ease fiscal and financial challenges, but increasing potential output is a tall order and expectations should remain realistic.
  - Specific structural reforms in most countries can help; the challenge is to identify which reforms are most needed and politically feasible rather than relying on the generic mantra of “structural reforms.”
- Overarching policy challenge:
  - Reestablish confidence through a clear plan to deal with both the legacies of the crisis and the challenge of low potential growth.

*Source: Olivier Blanchard, "Legacies, Clouds and Uncertainties", October 7, 2014.*

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## References

- [World Economic Outlook](http://www.imf.org/external/pubs/ft/weo/2014/02/index.htm)
- [United States](http://www.imf.org/external/pubs/ft/survey/so/2014/new072314a.htm)
- [United Kingdom](http://www.imf.org/external/pubs/ft/survey/so/2014/car072814a.htm)
- [Japan](http://www.imf.org/external/pubs/ft/survey/so/2014/car073114a.htm)
- [euro area](http://www.imf.org/external/pubs/ft/survey/so/2014/car071414a.htm)
- [emerging market](http://www.imf.org/external/pubs/ft/survey/so/2014/pol061214a.htm)
- [China](http://www.imf.org/external/pubs/ft/survey/so/2014/CAR073014A.htm)
- [India](http://www.imf.org/external/pubs/ft/survey/so/2014/car022014a.htm)
- [https://www.imf.org/wp-content/uploads/2014/10/weo_tbl_102014_500.jpg](https://www.imf.org/wp-content/uploads/2014/10/weo_tbl_102014_500.jpg)
- [infrastructure investment](http://www.imf.org/external/pubs/ft/survey/so/2014/RES093014A.htm)

_Source: https://www.imf.org/en/blogs/articles/2014/10/07/legacies-clouds-and-uncertainties_