## Global Economy Faces Strong and Complex Cross Currents

_IMF Blog, January 19, 2015_

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: January 19, 2015

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### Overview
- The world economy is experiencing strong and complex cross currents: major economies benefit from the decline in the price of oil, while lower long run prospects in many regions are weakening demand.
- World Economic Outlook Update (released in Beijing) projects:
  - Global growth in 2015 is 3.5%, 0.3% higher than global growth in 2014, but 0.3% less than the forecast in October.
  - Global growth in 2016 is forecast at 3.7%, a downward revision from the last World Economic Outlook.

### Oil price effects
- Recent price movement:
  - The price of oil declined from about 100 dollars a barrel in June to less than 50 dollars today.
  - The decline appears largely due to an unexpected change in OPEC strategy: maintaining OPEC supply despite increasing non OPEC supply and weakening global demand.
  - Expectation: much but not all of the price decline to be persistent.
- Effects on oil importers:
  - Price decline increases real income and decreases firms' production costs, leading to more spending.
  - Numerical illustration: if oil consumption equals 3% of GDP, a 50% drop reflects an increase in real income of 1.5%.
  - Lower inflation resulting from the decline is a concern in an environment of too low inflation and central banks’ policy rates close to zero.
  - Net assessment: for oil importers the effect is strongly positive.
- Effects on oil exporters and energy firms:
  - Persistent price decreases imply oil exporters will need to reduce government spending.
  - Those with substantial buffers or flexible exchange rates can adjust more slowly; others may need more dramatic adjustments.
  - Adverse effects on Russia and Nigeria are likely to be very large.
  - Some energy firms may face financial risks; systemic risks from country or corporate defaults appear limited.

### Exchange rate movements and implications
- Since August:
  - The dollar has appreciated in real terms by 7%.
  - The euro has depreciated by 3%.
  - The yen has depreciated by 10%.
- Implications:
  - Dollar appreciation may slow the US recovery but is seen as a welcome adjustment.
  - Appreciation should boost demand in the euro area and Japan and may help them out of slump.

### Country and regional outlook
- Divergence among advanced economies for 2015:
  - United States growth revised up to 3.6%.
  - Euro area growth revised down to 1.2%.
  - Japan growth revised down to 0.6%.
- Emerging markets and regions:
  - Large downward revisions in Sub-Saharan Africa, the economies of the Commonwealth of Independent States (CIS), and Latin America.
  - Smaller downward revisions in Emerging Asia, where growth remains very high, particularly in leading economies like India and China.
- Country-specific notes:
  - Japan: 2014 disappointment; sustained growth requires more private demand in the short run and higher potential growth in the medium run; structural reform impetus remains too weak.
  - Russia: suffering from uncertainty, poor investment climate, sanctions, and lower oil prices.
  - China: gradual decrease in growth to below 7% in 2015 reflects a deliberate reorientation toward consumption and away from real estate and shadow banking; this lower growth affects the rest of Asia.
  - Effects of commodity price declines since 2011 are lowering growth prospects in Latin America and sub-Saharan Africa.

### Risks and policy implications
- Downside risks:
  - Stagnation in the Euro area and in Japan is the most obvious downside risk.
  - Risks of turmoil from increases in short rates in the United States are present but limited.
  - Some corporates in emerging markets indebted in dollars could be vulnerable to a strong dollar and weak earnings from low commodity prices.
- Policy priorities:
  - For advanced economies at risk of stagnation (Euro area, Japan): use the "three arrows"—monetary policy, fiscal policy, and structural policies.
  - For oil exporters: reduce spending if price declines persist; pace depends on buffers and exchange rate flexibility.
  - For oil importers: benefits from lower oil prices can act like a significant fiscal expansion, but low inflation near zero policy rates requires monitoring.
- Systemic risk assessment:
  - While some corporate and country financial strains are expected, systemic risks from defaults appear limited.

### Concluding assessment and scenarios
- The forecast is slightly pessimistic relative to potential upside from the oil price decline:
  - The decline in oil prices may provide a stronger “shot in the arm” than is implicit in current forecasts.
  - Possibility: forecasts may prove too pessimistic when reassessed in the spring.

*Source: Olivier Blanchard, "Global Economy Faces Strong and Complex Cross Currents", January 19, 2015.*

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## References

- [oil](http://blogs.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/)
- [World Economic Outlook Update](http://www.imf.org/external/pubs/ft/weo/2015/update/01/index.htm)
- [last](http://www.imf.org/external/pubs/ft/survey/so/2014/NEW100714A.htm)
- [Latin America’s](http://www.imf.org/external/pubs/ft/survey/so/2014/car101014c.htm)
- [Russia](http://www.imf.org/external/np/ms/2014/100114.htm)
- [China](http://www.imf.org/external/pubs/ft/survey/so/2014/car073014a.htm)
- [Hear](http://www.imf.org/external/pubs/ft/survey/so/SinglePodcastHighlight.aspx?podcastid=333)
- [Watch](http://www.imf.org/external/mmedia/view.aspx?vid=3995314733001)
- [Infographic](http://www.imf.org/external/pubs/ft/weo/2015/update/01/info.htm)

_Source: https://www.imf.org/en/blogs/articles/2015/01/19/global-economy-faces-strong-and-complex-cross-currents_