IMF World Economic Outlook (WEO) Update -- Contractionary Forces Receding But Weak Recovery Ahead, July 2009

World Economic Outlook, July 8, 2009

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IMF World Economic Outlook (WEO) Update -- Contractionary Forces Receding But Weak Recovery Ahead, July 2009

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Bibliographic details

• Published: July 8, 2009
• Series: World Economic Outlook

Global overview and headline projections

• The global economy is beginning to pull out of a recession unprecedented in the post–World War II era, but stabilization is uneven and the recovery is expected to be sluggish.
• Economic growth during 2009–10 is now projected to be about ½ percentage points higher than projected in the April 2009 World Economic Outlook (WEO), reaching 2.5 percent in 2010.
• Global activity is forecast to contract by -1.4 percent in 2009 and to expand by 2.5 percent in 2010; on a fourth-quarter-over-fourth-quarter basis, real GDP growth is projected at 2.9 percent in 2010.
• Key summary figures from the WEO Table 1.1 (percent change, unless otherwise noted):
  • World output: 2007 = 5.1; 2008 = 3.1; 2009 = -1.4; 2010 = 2.5; Difference from April 2009 WEO Projections: -0.1 (2008), 0.6 (2010)
  • Advanced economies: 2007 = 2.7; 2008 = 0.8; 2009 = -3.8; 2010 = 0.6
  • United States: 2007 = 2.0; 2008 = 1.1; 2009 = -2.6; 2010 = -0.8
  • Emerging and developing economies: 2007 = 8.3; 2008 = 6.0; 2009 = 3.3
  • China: 2007 = 13.0; 2008 = 9.0; 2009 = 7.5; 2010 = 8.5
  • India: 2007 = 9.4; 2008 = 7.3; 2009 = 6.5; 2010 = 4.8
  • World trade volume (goods and services): 2007 = 7.2; 2008 = -12.2; 2009 = -1.2
  • Oil (U.S. dollars): 2008 average price per barrel = $97.03; assumed price based on future markets = $60.50 in 2009 and $74.50 in 2010
• Improvements in financial conditions have outpaced expectations, largely owing to public intervention; high-frequency data point to a return to modest global growth after a weak Q1 2009.

Drivers, balance of forces, and near-term outlook

• Downward drags diminishing: financial shock, sharp fall of global trade, and heightened uncertainty are gradually losing intensity.
• Supportive forces remain weak: many housing markets have yet to bottom out; financial markets remain impaired; bank balance sheets need cleaning and institutions restructuring.
• Temporary supports: cuts in policy interest rates, ample liquidity provision, credit easing, public guarantees, and bank recapitalization have reduced systemic failure concerns and supported intermediation.
• Commodity developments: commodity prices have rebounded ahead of the recovery; oil prices have responded to perceptions of tighter market dynamics and OPEC discipline; forward markets project oil at $74.50 for 2010.
• Outlook summary:
  • Activity and credit growth likely to remain subdued in many economies.
  • Expansionary macroeconomic policies and inventory adjustment are supporting global activity but are temporary forces.
  • Advanced economies as a group projected not to show a sustained pickup until the second half of 2010.

Regional and country highlights

• United States:
  • High-frequency indicators point to a diminishing rate of deterioration in the labor and housing markets; industrial production may be close to bottoming out; inventory cycle turning.
  • Stabilization in H2 2009 and gradual recovery emerging in 2010.
• Japan:
  • Signs of output stabilizing after a weak Q1 2009; improvement supported by consumer confidence, inventory adjustment, aggressive fiscal policies, and strong performance in other Asian economies.
• Euro area:
  • Consumer and business surveys recovering, but real activity shows few signs of stabilization; activity projected to strengthen more slowly; heavy dependence on a still-ailing banking sector.
• Emerging and developing economies:
  • Regain growth momentum in H2 2009 with regional differences.
  • Emerging Asia projections revised to 5.5 percent in 2009 and 7.0 percent in 2010, reflecting improved prospects in China and India and faster-than-expected turnaround in capital flows.
  • Latin America growth projections lowered by 1.1 percentage points in 2009 but revised up by 0.7 percentage points in 2010 due to rising commodity prices.
  • Central and eastern Europe: projections revised downward by 1.3 percentage points in 2009 and upward by 0.2 percentage points in 2010.
  • CIS: projections revised downward by 0.7 percentage points in 2009 and upward by 0.8 percentage points in 2010; Russia: 2008 = 8.1; 2009 = 5.6; 2010 = -6.5 (table entries reflect regional heterogeneity).
  • Emerging Africa and the Middle East: 2009 projections revised downward by 0.3 and 0.5 percentage points, respectively; 2010 broadly unchanged.
  • Low-income countries face challenges as official aid has fallen and vulnerability to commodity swings is high.

Inflation and labor market

• Inflation dynamics:
  • Year-over-year inflation moderated to 1.7 percent in May 2009, down from around 6 percent one year earlier.
  • In advanced economies, headline inflation fell below zero percent in May 2009; core inflation around 1½ percent.
  • Emerging markets: headline and core inflation fell below 4½ percent and to around 1 percent in May 2009, respectively.
  • Global inflation expected to remain subdued through 2010 due to significant excess capacity; inflation rates marked up by about ½ percentage point for 2010 from the April WEO forecast.
• Labor market:
  • Growth in 2010 would still fall short of potential until late in the year, implying continuing increases in unemployment.
  • Unemployment rates will reach double digits in some countries, weighing on wages and household spending.

Risks to the outlook

• Risks remain tilted to the downside though tail risks have diminished.
• Key downside risks:
  • Rising unemployment and renewed loss of confidence in financial sector stability could pressure asset prices and trigger deflation.
  • Questions about public debt sustainability in some countries could raise bond yields and impede housing market recovery.
  • Falling house prices could undermine bank capital bases.
  • Emerging economies vulnerable to intensified financial stress with potential feedback effects.
  • Policy responses that restrict trade/finance or roll back reforms could harm confidence and productivity.
• Upside risks:
  • Larger-than-expected drop in risk aversion and stronger internal demand dynamics in some major emerging economies.

Policy priorities and recommendations

• Overarching priority:
  • Restoring financial sector health remains the primary policy priority.
• Financial policy:
  • Continue efforts to restore bank solvency, clean bank balance sheets, and restructure or resolve institutions where necessary.
  • Achieve credible recapitalization together with appropriate restructuring or resolution; implement measures forcefully and transparently to rebuild confidence and reaccelerate credit growth.
  • Ensure short-term support measures are consistent with long-term objectives to strengthen incentives and market discipline.
• Monetary policy:
  • Monetary policy should remain supportive until growth resumes and deflationary risks dissipate.
  • Exploit remaining room to cut policy rates; continue exploring nonconventional measures to support credit flows.
  • Develop and communicate exit strategies for withdrawing exceptional conventional and nonconventional monetary support; develop tools to facilitate unwinding expanded central bank balance sheets.
• Fiscal policy:
  • Fiscal policy should stay supportive through 2010, with plans to rebuild fiscal balances and ensure sustainable debt paths once growth is reestablished.
  • Strengthen medium-run fiscal policy frameworks, fiscal rules, and institutions; reduce buildup of future pension and health liabilities.
  • Consider commitments to raise statutory retirement ages in line with life expectancies and to slow health services costs through efficiency improvements.
• Emerging economies:
  • Balance support for demand with risks of capital outflows and fiscal sustainability.
  • Where underlying inflationary pressures are easing, central banks should reduce policy rates cautiously to avoid disorderly exchange rate adjustments and large capital outflows.
  • Assess banking system soundness, especially where corporate sectors struggle due to falling export revenues and loss of external financing.
• Rebalancing global demand and medium-run growth:
  • Shift from temporary public demand support to policies that rebuild potential output and reallocate resources.
  • Rebalancing implies private demand must increase as public demand recedes; countries with large current account deficits (e.g., the United States) may need shifts toward external demand, while surplus countries must support stronger domestic demand.
  • Success in rebuilding financial sectors in advanced economies and supporting private consumption in surplus emerging economies will be critical to recovery beyond 2010.

IMF World Economic Outlook (WEO) Update, July 2009.

Content in this bundle

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• _0709pdf
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• 0709s
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• fig_1
  • fig_1 (CSV)
• fig_2
  • fig_2 (CSV)
• fig_3
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• dataset overview
  • dataset overview (CSV)
• fig_5
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References

• April 2009
• Sign up to receive free e-mail notices when new series and/or country items are posted on the IMF website.
• Modify your profile
• Webcast of a Press Briefing on the WEO Update and the GFSR Market Update
• https://www.imf.org/external/mmedia/view.asp?eventID=1545
• World Economic Outlook, April 2009
• Reports
• Databases
• Research at the IMF
• World Economic Outlook Database
• discussion forum
• https://www.imf.org/en/publications/weo
• Global Economy in Crosscurrents of War and Technology
• https://www.imf.org/en/publications/gfsr
• Global Financial Markets Confront the War in the Middle East and Amplification Risks
• https://www.imf.org/en/publications/fm
• Fiscal Policy under Pressure: High Debt, Rising Risks
• https://www.imf.org/en/publications/reo
• Asia and Pacific
• Europe
• Middle East and Central Asia
• Sub-Saharan Africa
• Western Hemisphere
• https://www.imf.org/en/publications/areb
• Getting to Growth in an Age of Uncertainty
• https://www.imf.org/en/publications/finance-development
• More Publications
• July 2009 Global Financial Stability Report Market Update
• The Transmission of Financial Stress from Advanced to Emerging Economies