Behind the News in Greece and China, Moderate Growth Continues

IMF Blog, July 9, 2015

Source details

Canonical URL: Behind the News in Greece and China, Moderate Growth Continues

Greece accounts for less than two percent of the Eurozone GDP, and less than one half of one percent of world GDP.
A disorderly exit from the Eurozone would likely cause more suffering in Greece, but effects on the rest of the world economy are likely to be limited.
Mechanical linkages through trade or finance are described as small.
Contagion and "unknown unknowns" remain concerns, but had not materialized at the time of writing; the world economy "has withstood the stress tests of the last two weeks fairly well."
Larger lesson: the post crisis world is a world with high debt; episodes of debt dynamics getting out of control can occur for states, financial institutions, or firms.

World economy forecasts: 3.3 percent for this year, and 3.8 percent next year.
Unexpected development: announcement of a negative growth rate for the first quarter in the United States, which by itself can account for more than half of the revision of 0.2 percent to the world economy forecast for 2015.
Assessment of U.S. data: once the fog cleared, the negative Q1 print was not seen as indicating underlying U.S. weakness; "Fundamentals are still solid, and the U.S. recovery is on track."

Advanced economies:
- Eurozone recovery is "more solidly anchored," including much of the periphery.
- Spain’s growth rate is now forecast to exceed 3 percent.
- Japan’s growth for 2015 revised slightly down but remains positive, at 0.8 percent.
Emerging market and developing economies:
- China: forecast unchanged at 6.8 percent for 2015; 2016 forecast 6.3 percent; 2017 forecast 6.0 percent.
- Noted increased uncertainty and the puncture of a stock market bubble with limited effects on spending.
- Slowdown primarily led by a slowdown in real estate investment, characterized as "basically desirable."
- Forecast construction assumes Chinese authorities will allow a moderate slowdown while using monetary and fiscal policies if needed to prevent too sharp a slowdown.
- Brazil: growth revised down to -1.5 percent; low confidence plus tighter policies aimed at reestablishing confidence are yielding a recession in the short run.
- Russia: growth forecast at -3.4 percent, "a bit better than forecast in April," supported by some improvement in commodity prices and confidence but still "clearly very bad."

Nature and distribution of risks are similar to those in the April World Economic Outlook.
Downside risks:
- Disruptive asset shifts and lower liquidity in some markets remain relevant downside risks.
- Such risks may materialize when the Fed exits the zero lower bound, though other events could also trigger financial instability.
Upside or reassuring developments:
- Risk of deflation has decreased: pass-through of lower oil prices is "now largely in the past."
- Despite low actual inflation, inflation expectations have remained anchored.

1. How fast advanced economies can eliminate crisis legacies, in particular debt overhang for governments, corporations, and households.

High debt, even if sustainable, acts as a brake to spending and requires low interest rates to sustain demand and output.
Low interest rates can lead central banks to run into the zero lower bound and to excessive risk taking.

2. Whether advanced economies can significantly increase medium-term growth.

Aging populations and low total factor productivity combine to deliver low potential growth in many countries.
Low growth, especially combined with high inequality, can lead to fiscal, social, and political tensions.
Structural reforms are posed as the challenge to improve underlying trends.

3. Whether slowdowns in a number of emerging market economies are temporary or permanent.

Example: steady decrease in growth in Latin America over the last five years suggests high growth in the 2000s reflected increasing commodity prices and loose international financial conditions.
Key question: how best to manage the transition to an environment of stable or even declining prices and tighter financial conditions.

Characterization: "Moderate growth continues."
Policy emphasis:
- Measures to increase demand in the short run remain essential.
- Measures to increase supply in the medium run (structural reforms) remain essential.
Preparedness: need to be ready for more episodes of debt stress for states, financial institutions, or firms.

Olivier Blanchard, July 9, 2015