Four Forces Facing the Global Economy

IMF Blog, April 14, 2015

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Global growth forecast: "roughly the same this year than last year, 3.5% versus 3.4%."
Advanced economies growth: "2.4% versus 1.8%."
Emerging market and developing economies growth: "4.3% versus 4.6% last year."
Overall characterization: growth is “moderate and uneven”.

Persisting legacies from the financial and euro crises in many advanced economies:
- Weak banks and high levels of debt—public, corporate, or household—still weigh on spending and growth.
- Low growth slows deleveraging: "Deleveraging will take time."

Pre-crisis trend: potential growth in advanced economies was already declining due to aging and a slowdown in total productivity.
Crisis effects: large decrease in investment led to lower capital growth; capital growth will recover, but aging and weak productivity will continue to limit growth.
Emerging markets: decline in potential growth is more pronounced—"aging, lower capital accumulation and lower productivity growth are combining to significantly lower potential growth in the future."
Conclusion: prospects are "more subdued" (but "It would be wrong to speak, as some have done, of stagnation").

The decline in the price of oil has produced a "large reallocation of real income from oil exporters to oil importers."
Early evidence:
- In oil importers (United States, euro area, China, India), the increase in real income is increasing spending.
- Oil exporters have cut spending but to a smaller extent because many "have substantial financial reserves and are in a position to reduce spending slowly."

Exchange rate volatility described as "unusually large":
- The dollar has seen a major appreciation.
- The euro and the yen have seen major depreciations.
These movements reflect differences in monetary policy:
- United States expects to exit "the zero lower bound this year."
- No such prospects for the euro area or Japan.
Implications:
- Euro and yen depreciations will help those economies if they were at risk of another relapse.
- The United States "has the policy room to offset the adverse effects of the dollar appreciation."
- Net assessment: "this adjustment of exchange rates must be seen, on net, as good news for the world economy."

Heterogeneous impacts across countries:
- Some countries face adverse legacies; others do not.
- Some countries face lower potential growth; others do not.
- Some countries gain from lower oil prices; others lose.
- Currency movements differ across countries (dollar-linked vs euro/yen-linked).
- Idiosyncratic developments (e.g., economic trouble in Russia, weakness of Brazil) add to diversity.
Baseline forecasts: increase in growth in advanced economies and decrease in growth in emerging markets and developing economies, but these aggregates "do not do full justice to the diversity of underlying evolutions."

Overall assessment: "macroeconomic risks as having slightly decreased."
- Major risk last year—a recession in the Euro area—has decreased.
- Risk of deflation has decreased.
Rising risks:
- Financial and geopolitical risks have increased.
- Large movements in relative prices (exchange rates, oil price) create losers and winners; energy companies and oil-producing countries face tougher conditions and higher risks.
- Continued large exchange rate movements could create further financial risks and ignite international tensions.
- A Greek crisis "cannot be ruled out" and could unsettle financial markets.
- Turmoil continues in Ukraine and in the Middle East, "although so far without systemic economic implications."

Olivier Blanchard, April 14, 2015