IMF World Economic Outlook (WEO) Update, January 2015: Cross Currents
World Economic Outlook, January 20, 2015
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- Published: January 20, 2015
- Series: World Economic Outlook
Executive summary and headline projections
- Global growth in 2015–16 is projected at 3.5 and 3.7 percent.
- These projections are downward revisions of 0.3 percent relative to the October 2014 WEO.
- The boost to global growth from lower oil prices is expected to be more than offset by negative factors, including investment weakness and adjustments to diminished expectations about medium-term growth.
Four key developments shaping the outlook
- Oil prices in U.S. dollars have declined by about 55 percent since September, reflecting both unexpected demand weakness in some major economies and a large supply contribution (including OPEC’s decision to maintain production).
- Global growth increased broadly to 3¾ percent in Q3 2014, up from 3¼ percent in Q2 2014, masking marked growth divergences among major economies—especially a stronger-than-expected U.S. recovery and weaker performance elsewhere, most notably Japan.
- The U.S. dollar has appreciated some 6 percent in real effective terms relative to the values used in the October 2014 WEO; the euro and the yen have depreciated by about 2 percent and 8 percent, respectively; many emerging market currencies, particularly of commodity exporters, have weakened.
- Interest rates and risk spreads have risen in many emerging market economies, notably commodity exporters; long-term government bond yields have declined further in major advanced economies; global equity indices in national currency have remained broadly unchanged since October.
Regional and country-level projections and notes
- United States:
- Growth rebounded ahead of expectations after the Q1 2014 contraction; unemployment declined further; inflation pressures stayed muted.
- Growth is projected to exceed 3 percent in 2015–16.
- The recent dollar appreciation is projected to reduce net exports.
- Euro area:
- Q3 2014 growth was modestly weaker than expected, largely due to weak investment; inflation and inflation expectations continued to decline.
- Annual growth is projected at 1.2 percent in 2015 and 1.4 percent in 2016.
- Japan:
- The economy fell into technical recession in Q3 2014.
- Policy responses (additional monetary easing and the delay in the second consumption tax rate increase), together with the oil price boost and yen depreciation, are expected to strengthen growth to above trend in 2015–16.
- Emerging market and developing economies:
- Growth is projected at 4.3 percent in 2015 and 4.7 percent in 2016.
- Reasons for the downshift relative to October 2014: lower growth in China and its regional implications; a much weaker outlook in Russia; downward revisions to potential growth in commodity exporters.
- Latin America and the Caribbean growth forecast reduced to 1.3 percent in 2015 and 2.3 percent in 2016.
- India: growth forecast broadly unchanged, with weaker external demand offset by terms-of-trade boost from lower oil prices and a pickup after policy reforms.
Oil prices and quantitative facts
- The average price of oil in U.S. dollars a barrel was $96.26 in 2014.
- The assumed price based on futures markets is $56.73 in 2015 and $63.88 in 2016.
- Commodity price and other numeric indicators cited in the WEO table (selected):
- World Output 1/: 2013 = 3.3; 2014 = 3.5; 2015 = 3.7; difference from October 2014 WEO Projections = -0.3.
- World Trade Volume (goods and services) and other table cells are presented in the source table.
Risks to the outlook
- New risk dimension: sizable uncertainty about the oil price path and the underlying drivers of the price decline.
- Upside risk: a greater-than-expected boost from lower oil prices, especially in advanced economies.
- Upside risk to oil price: prices could rebound earlier or more than expected if the supply response is stronger.
- Downside risks:
- Shifts in sentiment and bouts of volatility in global financial markets, with potential triggers including surprises in activity in major economies or surprises in the path of U.S. monetary policy normalization.
- Emerging market economies are particularly exposed to capital flow reversals; oil exporters face increased external and balance sheet vulnerabilities.
- Continued concerns about stagnation and low inflation in the euro area and Japan.
- Geopolitical risks remain high, though risks of global oil market disruptions have been downgraded given ample net flow supply.
Policy priorities and recommendations
- Urgent need for structural reforms in many economies to raise actual and potential output.
- Macro policy priorities differ by country type:
- Advanced economies:
- Large output gaps persist and inflation is below target; monetary policy remains constrained by the zero lower bound.
- Monetary policy must stay accommodative through other means if declines in inflation lead to downdrafts in inflation expectations.
- Fiscal adjustment should be attuned in pace and composition to support both recovery and long-term growth; strong case for increasing infrastructure investment in some economies.
- Emerging market economies:
- Macro policy space to support growth is limited in many; in some, lower oil prices alleviate inflation pressure and external vulnerabilities, allowing central banks not to raise policy interest rates or to raise them more gradually.
- Oil exporters:
- Those with fiscal buffers can let fiscal deficits increase and draw on accumulated funds to smooth adjustment.
- For others, allowing substantial exchange rate depreciation will be the main cushion; some will need to strengthen monetary frameworks to prevent depreciation-induced inflation spirals.
- Opportunity to reform energy subsidies and taxes in both oil exporters and importers:
- In oil importers, savings from removing general energy subsidies should be reallocated toward more targeted transfers, deficit reduction where relevant, and increased public infrastructure if conditions are right.
The effects of lower oil prices (scenario analysis)
- Two scenarios (Arezki and Blanchard (2014) framework):
- Scenario 1 (sustained supply shift): 60 percent of the decline in the WEO oil price path through 2019 relative to October 2014 is attributed to supply shifts (implying an oil price decline of 22 percent in 2015 and 13 percent in 2019).
- Under this scenario, the supply shift lifts global GDP by 0.7 and 0.8 percent, respectively, in 2015–16.
- Scenario 2 (supply response over time): supply shift accounts for 60 percent of the initial price decline but its contribution declines to zero by 2019 due to supply response.
- Under this scenario, the initial supply shift implies an increase in global GDP of 0.3 percent in 2015 and 0.4 percent in 2016 relative to the October WEO oil path.
- Asymmetric country effects:
- Oil importers benefit from higher real incomes and lower production costs; simulations suggest GDP increases between 0.4 and 0.7 percent in 2015 for China and between 0.2 and 0.5 percent in the United States (in the scenario analysis).
- For many importers, recent currency depreciation against the U.S. dollar mutes the domestic-currency oil price decline.
- Oil exporters generally face lower real incomes and profits; effects depend on whether governments adjust spending and the presence of fiscal buffers.
IMF World Economic Outlook Update, January 2015: Cross Currents
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References
- October 2014
- https://www.imf.org/en/publications/weo/issues/2016/12/31/info.htm
- JPG File
- October 2014
- IMF Survey Story: Global Growth Revised Down, Despite Cheaper Oil, Faster U.S. Growth
- Blog by Olivier Blanchard: Global Economy Faces Strong and Complex Cross Currents
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