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World Economic Outlook
Coping with High Debt and Sluggish Growth
October 2012
| Assumptions and Conventions | |||
| Further Information and Data | |||
| Preface | |||
| Foreword | |||
| Executive Summary |
The October 2012 World Economic Outlook (WEO) assesses the prospects for the global recovery in light of such risks as the ongoing euro area crisis and the "fiscal cliff" facing U.S. policymakers. Reducing the risks to the medium-term outlook implies reducing public debt in the major advanced economies, and Chapter 3 explores 100 years of history of dealing with public debt overhangs. In emerging market and developing economies, activity has been slowed by policy tightening in response to capacity constraints, weaker demand from advanced economies, and country-specific factors, but policy improvements have raised these economies' resilience to shocks, an issue explored in depth in Chapter 4.
The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook. A key reason is that policies in the major advanced economies have not rebuilt confidence in medium-term prospects. Tail risks, such as those relating to the viability of the euro area or major U.S. fiscal policy mistakes, continue to preoccupy investors. The World Economic Outlook (WEO) forecast thus sees only a gradual strengthening of activity from the relatively disappointing pace of early 2012.
| Boxes | |||
| Chart | Data | 1.1 | Are We Underestimating Short-term Fiscal Multipliers? |
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Chart Chart Chart |
Data Data Data |
1.2 | The Implications of High Public Debt in Advanced Economies |
| Chart | Data | 1.3 | How Does Uncertainty Affect Economic Performance? |
| 1.4 | Unconventional Energy in the United States | ||
| Chart | Data | 1.5 | Food Supply Crunch—Who Is Most Vulnerable? |
| Tables | |||
| 1.1 | Overview of the World Economic Outlook Projections | ||
| 1.SF.1 | Indices of Market Prices for Nonfuel and Fuel Commodities, 2009–12 | ||
| 1.SF.2 | Global Oil Supply and Demand by Region | ||
| 1.1.1 | Growth Forecast Errors and Fiscal Consolidation | ||
| 1.2.1 | Importance of the Intertemporal Elasticity of Substitution | ||
| 1.3.1 | Uncertainty over the Business Cycle | ||
| 1.3.2 | Uncertainty and Growth | ||
| 1.3.3 | Uncertainty and Business Cycles | ||
| 1.5.1 | Regional Food Vulnerability | ||
| Figures | |||
| Chart | Data | 1.1 | Global Indicators |
| Chart | Data | 1.2 | Euro Area Developments |
| Chart | Data | 1.3 | Current and Forward-Looking Growth Indicators |
| Chart | Data | 1.4 | Fiscal Policies |
| Chart | Data | 1.5 | Monetary Policies |
| Chart | Data | 1.6 | Recent Financial Market Developments |
| Chart | Data | 1.7 | Emerging Market Conditions |
| Chart | Data | 1.8 | GDP Growth |
| Chart | 1.9 | Overheating Indicators for the G20 Economies | |
| Chart | Data | 1.10 | Global Inflation |
| Chart | Data | 1.11 | Risks to the Global Outlook |
| Chart | Data | 1.12 | Recessions and Deflation Risks |
| Chart | Data | 1.13 | Upside and Downside Scenarios |
| Chart | Data | 1.14 | Output in Emerging Market and Developing Economies |
| Chart | Data | 1.15 | Lower Global Growth Scenario |
| Chart | Data | 1.16 | Crisis Comparisons |
| Chart | Data | 1.17 | Global Imbalances |
| Chart | Data | 1.18 | Euro Area Imbalances |
| Chart | Data | 1.SF.1 | IMF Commodity Price Index |
| Chart | Data | 1.SF.2 | Oil Prices and Volatility |
| Chart | Data | 1.SF.3 | Base Metal Spot Prices |
| Chart | Data | 1.SF.4 | Food Prices and Volatility |
| Chart | Data | 1.SF.5 | Influence of Common Factors: Pairwise Correlations with First Principal Components |
| Chart | Data | 1.SF.6 | Commodity Prices and Economic Activity: First Principal Components |
| Chart | Data | 1.SF.7 | Demand for Base Metals |
| Chart | Data | 1.SF.8 | Oil Supply and Demand |
| Chart | Data | 1.SF.9 | Oil Inventories and Spare Capacity |
| Chart | Data | 1.SF.10 | Inventory Buffers for Food |
| Chart | Data | 1.SF.11 | Futures Prices |
| Chart | Data | 1.SF.12 | Price Prospects for Selected Commodities |
Global growth slowed again during the second quarter of 2012 after rebounding during the first. The slowing was observed in all regions, which suggests an important role for common factors, many of which reflected wide-ranging spillovers from large country-specific or regional shocks. A first shock was the ratcheting up of financial stress in the euro area periphery in the second quarter. Second, domestic demand in many economies in Asia and Latin America (notably Brazil, China, and India, but also others) slowed, owing not just to weaker external demand from Europe but also to domestic factors. Growth also decelerated in the United States.
| Tables | |||
| 2.1 | Selected European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment | ||
| 2.2 | Selected Advanced Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment | ||
| 2.3 | Selected Asian Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment | ||
| 2.4 | Selected Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment | ||
| 2.5 | Commonwealth of Independent States: Real GDP, Consumer Prices, Current Account Balance, and Unemployment | ||
| 2.6 | Selected Middle East and North African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment | ||
| 2.7 | Selected Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment | ||
| 2.SF.1 | Behavior of Stress Indicators, 2007–12 | ||
| 2.SF.2 | Data for Spillover Focus | ||
| Figures | |||
| Chart | Data | 2.1 | Revisions to WEO Growth Projections for 2012 and 2013 |
| Chart | Data | 2.2 | The Effects of Lower Potential Growth |
| Chart | Data | 2.3 | Weekly Equity and Bond Fund Flows during Financial Stress in Advanced Economies |
| Chart | Data | 2.4 | Europe: Revisions to 2013 GDP Growth Forecasts |
| Chart | Data | 2.5 | Europe: In the Midst of Economic and Financial Stress |
| Chart | Data | 2.6 | United States and Canada: Revisions to 2013 GDP Growth Forecasts |
| Chart | Data | 2.7 | United States and Canada: A Weak Recovery |
| Chart | Data | 2.8 | Asia: Revisions to 2013 GDP Growth Forecasts |
| Chart | Data | 2.9 | Asia: Activity Decelerates |
| Chart | Data | 2.10 | Latin America and the Caribbean: Revisions to 2013 GDP Growth Forecasts |
| Chart | Data | 2.11 | Latin America: A Moderate Slowdown |
| Chart | Data | 2.12 | Commonwealth of Independent States: Revisions to 2013 GDP Growth Forecasts |
| Chart | Data | 2.13 | Commonwealth of Independent States: Vulnerable to Negative Spillovers |
| Chart | Data | 2.14 | Middle East and North Africa: Revisions to 2013 GDP Growth Forecasts |
| Chart | Data | 2.15 | Middle East and North Africa: An Uneven Recovery |
| Chart | Data | 2.16 | Sub-Saharan Africa: Revisions to 2013 GDP Growth Forecasts |
| Chart | Data | 2.17 | Sub-Saharan Africa: A Strong Expansion |
| Chart | Data | 2.SF.1 | Financing Conditions for Euro Area Periphery Economies and the United States, 2007-12 |
| Chart | Data | 2.SF.2 | Changes in Stress Indicators, 2007–12 |
| Chart | Data | 2.SF.3 | Global Weekly Capital Flows |
| Chart | Data | 2.SF.4 | Global Fund Flows during Stress |
| Chart | Data | 2.SF.5 | The Composition of Capital Flows during Stress |
| Chart | Data | 2.SF.6 | Global Asset Price Performance around Stress Episodes |
| Chart | Data | 2.SF.7 | Global Trade Linkages with Advanced Economies and China |
Throughout the past century, numerous advanced economies have faced public debt burdens as high, or higher, than those prevailing today. They responded with a wide variety of policy approaches. This chapter analyzes these experiences and concludes that the first priority today must be to complement fiscal consolidation with measures to support growth, especially, very accommodative monetary policy and structural reforms.
| Table | |||
| 3.1 | Differentiating Episodes by the Change in the Debt-to-GDP Ratio | ||
| Figures | |||
| Chart | Data | 3.1 | Public Debt in Advanced Economies |
| Chart | Data | 3.2 | Debt-to-GDP Dynamics after Public Debt Reaches 100 Percent of GDP |
| Chart | Data | 3.3 | Debt-to-GDP Dynamics |
| Chart | Data | 3.4 | High Debt, Growth, and Inflation |
| Chart | Data | 3.5 | Debt and Growth Performance |
| Chart | Data | 3.6 | Debt-to-GDP Dynamics after Crossing the 100 Percent Threshold |
| Chart | Data | 3.7 | United Kingdom: Deflation in the Aftermath of World War I |
| Chart | Data | 3.8 | United States: Debt Dynamics after World War II |
| Chart | Data | 3.9 | Japan: Lost Decade |
| Chart | Data | 3.10 | Italy: Fading Zeal |
| Chart | Data | 3.11 | Belgium: A Marathon Not a Sprint |
| Chart | Data | 3.12 | Canada: Fiscal Consolidation after 1985 |
| Chart | Data | 3.13 | Decomposition of Debt Dynamics in Case Study Countries |
| Chart | Data | 3.14 | Contribution to GDP from Exports |
Many emerging market and developing economies have done well over the past decade and through the global financial crisis, but the question on policymakers' minds now is whether this strong performance will last. There are reasons for optimism, including improved policymaking and greater "policy space"—room to respond to shocks without undermining sustainability.
| Boxes | |||
| Chart | Data | 4.1 | Diverging Global Labor Market Trends, 2007–11 |
| Chart | Data | Distribution of Okun’s Law Coefficients and Employment Responsiveness, 2007–11 | |
| Chart | Data | Okun's Law: Employment and Output in Emerging Market and Developing Economies | |
| Chart | Data | 4.2 | Composition of China's Growth and Imports |
| Chart | Data | Increasing Exports to China | |
| Chart | Data | Impact of an Investment Slowdown in China | |
| Chart | Data | 4.3 | The Resilience of Kenya and Tanzania |
| Tables | |||
| 4.1 | What Ends Expansions and Recoveries? | ||
| 4.2 | Data Sources | ||
| 4.3 | Economy Groups | ||
| 4.4 | AR(1) Median Coefficients and Interquartile Range | ||
| 4.5 | What Shortens Expansions? Robustness Checks | ||
| 4.1.1 | Short-Term Relationship between Labor Market Outcomes and Growth, by Country Group | ||
| 4.1.2 | Determinants of Okun Coefficients and Employment Responsiveness | ||
| Figures | |||
| Chart | Data | 4.1 | The Strong Performance of Emerging Market and Developing Economies |
| Chart | Data | 4.2 | Diverse Paths of Output |
| Chart | Data | 4.3 | Dynamics of Output per Capita following Peaks |
| Chart | Data | 4.4 | Emerging Market and Developing Economy Regions: Dynamics of Output per Capita following Peaks |
| Chart | Data | 4.5 | Along Which Dimensions Has Emerging Market and Developing Economy Growth Improved? |
| Chart | Data | 4.6 | Why Have Emerging Market and Developing Economies Become More Resilient? |
| Chart | Data | 4.7 | Emerging Market and Developing Economies: Effects of Various Shocks on the Likelihood That an Expansion Will End |
| Chart | Data | 4.8 | Emerging Market and Developing Economies: Effects of Policies on Expansion Duration and Speed of Recovery |
| Chart | Data | 4.9 | Emerging Market and Developing Economies: Effects of Structural Characteristics on Expansion Duration and Speed of Recovery |
| Chart | Data | 4.10 | Frequency of Various Types of Domestic and External Shocks to Emerging Market and Developing Economies |
| Chart | Data | 4.11 | Policy Frameworks and Policy Space in Emerging Market and Developing Economies |
| Chart | Data | 4.12 | Structural Characteristics of Emerging Market and Developing Economies |
| Chart | Data | 4.13 | Contribution of Shocks, Policies, and Structure to the Length of Expansions in Emerging Market and Developing Economies |
| Chart | Data | 4.14 | Emerging Market and Developing Economies: Effects of Changing the Autoregression Model Coefficients |
| Chart | Data | 4.15 | Emerging Market and Developing Economy Subgroups: Dynamics of Output per Capita following Peaks |
| Chart | Data | 4.16 | Emerging Market and Developing Economy Regions: Contributions of Shocks, Policies, and Structure to the Length of Expansions |
| Text (Download PDF) | |||
| Assumptions | |||
| What's New | |||
| Data and Conventions | |||
| Classification of Countries | |||
| General Features and Composition of Groups in the World Economic Outlook Classification | |||
| Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2011 | |||
| Table B. Advanced Economies by Subgroup | |||
| Table C. European Union | |||
| Table D. Emerging and Developing Economies by Region and Main Source of Export Earnings | |||
| Table E. Emerging and Developing Economies by Region, Net External Position, and Status as Heavily Indebted Poor Countries | |||
| Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies | |||
| List of Tables Part A (Download PDF) | |||
| Output (Tables A1–A4) | |||
| Inflation (Tables A5–A7) | |||
| Financial Policies (Table A8) | |||
| Foreign Trade (Table A9) | |||
| Current Account Transactions (Tables A10–A12) | |||
| Balance of Payments and External Financing (Tables A13–A14) | |||
| Flow of Funds (Table A15) | |||
| Medium–Term Baseline Scenario (Table A16) | |||
| List of Tables Part B (Download PDF - available on the web only) | |||
| Output (Tables B1–B2) | |||
| Inflation (Tables B3–B4) | |||
| Financial Policies (Tables B5–B10) | |||
| Foreign Trade (Tables B11–B13) | |||
| Current Account Transactions (Tables B14–B17) | |||
| Balance of Payments and External Financing (Tables B18–B20) | |||
| External Debt and Debt Service (Tables B21–B26) | |||
| Medium-Term Baseline Scenario (Table B27) | |||
| World Economic Outlook, Selected Topics | |||
