IMF World Economic Outlook (WEO) Update -- Global Recovery Advances but Remains Uneven, January 2011
World Economic Outlook, January 25, 2011
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- Published: January 25, 2011
- Series: World Economic Outlook
Overview
- The two-speed recovery continues: advanced economies show moderated but subdued growth with high unemployment and renewed stresses in the euro area periphery; many emerging economies remain buoyant with emerging inflation pressures and signs of overheating driven in part by strong capital inflows.
- Global output is projected to expand by 4½ percent in 2011, an upward revision of about ¼ percentage point relative to the October 2010 WEO.
- Downside risks remain elevated, with the most urgent requirements being comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies.
Growth projections and regional outlook (key figures from Table 1)
- World Output (Year over Year): 2009: –0.6; 2010: 5.0; 2011: 4.4; 2012: 4.5; Difference from October 2010 WEO Projections: 0.2 (2011), 0.0 (2012); Q4 over Q4 Projections: 4.7 (2011)
- Advanced Economies (Year over Year): 2009: –3.4; 2010: 3.0; 2011: 2.5; Difference from October 2010 WEO Projections: 0.3 (2011), –0.1 (2012); Q4 over Q4 Projections: 2.9 (2011), 2.6 (2012)
- United States (Year over Year): 2009: –2.6; 2010: 2.8; 2011: 2.7; Difference from October 2010 WEO Projections: 0.7 (2011), –0.3 (2012); Q4 over Q4 Projections: 3.2 (2011)
- Euro Area (Year over Year): 2009: –4.1; 2010: 1.8; 2011: 1.5; 2012: 1.7; Q4 over Q4 Projections: 2.1 (2011), 1.2 (2012), 2.0 (Q4)
- Japan (Year over Year): 2009: –6.3; 2010: 0.1; 2011: 3.3; 2012: 2.4
- Emerging and Developing Economies (Year over Year): 2009: 7.1; 2010: 6.5; 2011: 7.2; 2012: 7.0; Q4 over Q4 Projections: 6.8 (2011)
- Developing Asia (Year over Year): 2009: 9.3; 2010: 8.4; 2011: 9.1; 2012: 8.6
- China (Year over Year): 2009: 9.2; 2010: 10.3; 2011: 9.6; 2012: 9.5; Q4 over Q4 Projections: 9.7 (2011)
- India (Year over Year): 2009: 5.7; 2010: 8.0; 2011: 7.9
- Sub-Saharan Africa (Year over Year): 2009: 5.8; Projected growth: 5½ percent in 2011 and 5¾ percent in 2012 (region highlighted for strong growth)
- World Trade Volume (goods and services): 2009: –10.7; 2010: 12.0
- World Growth Based on Market Exchange Rates: –2.1 (2009)
- World Trade Imports and Exports (selected): Imports 2009: –12.4; 2010: 11.1; Exports 2009: –11.9; 2010: 11.4
- Oil price averages and assumptions: average price in 2010 was $78.93 a barrel; assumed price based on futures markets is $89.50 in 2011 and $89.75 in 2012; IMF baseline petroleum price projection for 2011 is $90 per barrel.
Sub-Saharan Africa (Box 1) — outlook and policy implications
- Regional growth: projected at 5½ percent in 2011; LICs projected to grow by 6½ percent in 2011; South Africa growth restricted to about 3½ percent in 2011.
- Precrisis performance: growth in the region’s 29 LICs was more than 6 percent during 2004–08.
- Drivers of recovery: automatic stabilizers, expansion in public investment and social support programs, continued monetary accommodation, and growing trade ties with Asia.
- Risks and policy priorities:
- Risks: modest and uncertain pace of recovery in Europe (major trade partner), sharp pickup in fuel and food prices affecting non-oil exporters, elevated fiscal deficits, a busy political calendar including perhaps 17 national elections.
- Policy shifts needed: review consistency of wider fiscal deficits with financing and medium-term debt sustainability; ensure appropriateness of composition of government spending and revenue sources; remain alert to inflation pressures from rising commodity prices; intensify monitoring and regulation of the financial sector; continue business-environment improvements; strengthen public financing mechanisms for government spending, including infrastructure investment.
Financial conditions and risks
- Recent improvements: global financial conditions broadly improved in the second half of 2010—equity markets rose, risk spreads tightened, and bank lending conditions eased in major advanced economies.
- Persistent vulnerabilities: weak real estate markets and household income in some advanced economies (for example, United States); subdued securitization; renewed financial turbulence in the periphery of the euro area late 2010 (Ireland episode).
- Baseline financial outlook: financial conditions generally expected to remain stable or improve in 2011; bank lending conditions in major advanced economies expected to ease further; bond issuance by nonfinancial firms expected to strengthen; real yields likely to remain low through 2011.
- Euro-area periphery risks: European sovereign peripheral spreads and bank funding costs likely to remain elevated during the first half of the year; financial turbulence could re-intensify.
- Contagion scenario (alternative downside illustration):
- If a large shock plus insufficient policy action causes significant losses in the euro area periphery, capital ratios could fall substantially in several countries.
- Under a scenario where European banks tighten lending conditions by a magnitude similar to the Lehman collapse in 2008, euro area growth would be reduced by about 2½ percentage points relative to the baseline.
- Assuming limited spillovers to the rest of the world (U.S. bank-lending tightness about half that in Europe), global growth in 2011 would be lower by about 1 percentage point than in the baseline.
- If contagion is more severe with generalized risk aversion, drying up of liquidity, and sharp equity falls, the impact on global growth would be substantially larger.
Commodity prices and inflation
- Commodity price outlook:
- Oil: IMF baseline petroleum price projection for 2011 is $90 per barrel (up from $79 per barrel in the October 2010 WEO).
- Non-oil commodities: expected to increase by 11 percent in 2011 (weather-related crop damage contributed to price pressures).
- Inflation:
- Emerging and developing economies: consumer prices projected to rise 6 percent in 2011, an upward revision of ¾ percentage point relative to the October 2010 WEO.
- Advanced economies: inflation expected to remain at 1½ percent in 2011, unchanged from 2010.
- Risks: near-term risks skewed to the upside for most commodity classes; persistent high food price inflation straining low-income household budgets and feeding into overall inflation in some economies; signs of overheating visible via rapid credit growth or rising asset prices in some emerging markets.
Policy recommendations and priorities
- Euro area and advanced economies:
- Comprehensive, rapid, and decisive policy actions required to address downside risks in the euro area — strengthen fiscal balances, introduce structural reforms, step up liquidity support, conduct more realistic and stringent stress tests followed by recapitalization, and ensure the EFSF/ESM can raise and deploy sufficient resources flexibly.
- Continue ECB liquidity provision and securities purchases to help preserve financial stability.
- Repair and reform financial systems to normalize credit conditions and reduce burdens on monetary and fiscal policy (detailed in the January 2011 Global Financial Stability Report Update).
- Formulate credible medium-term fiscal consolidation plans; U.S. fiscal deficit projected at 10¾ percent in 2011 and gross government debt projected to exceed 110 percent of GDP in 2016 — calls for entitlement reforms, caps on discretionary spending, tax system reforms, and stronger fiscal institutions (fiscal issues discussed in the January 2011 Fiscal Monitor Update).
- Maintain monetary accommodation while inflation expectations remain anchored and unemployment stays high.
- Emerging and developing economies:
- Respond timely to overheating pressures: monetary tightening where appropriate, with preference in some cases for nominal exchange rate appreciation.
- Complement macro policies with prudential measures (for example, stricter loan-to-value ratios, funding composition restrictions) and, where necessary, capital controls to manage strong capital inflows and prevent boom-bust dynamics.
- Allow currency appreciation in surplus countries to combat overheating and facilitate external rebalancing; use fiscal adjustment where currency is above levels consistent with medium-term fundamentals.
- Cross-border and global coordination:
- Policies that repair financial systems and restore fiscal sustainability in advanced economies will produce beneficial spillovers to emerging economies.
- A combination of fiscal consolidation, financial sector repair, appropriate monetary stances, and macro-prudential measures is needed to reduce vulnerabilities and rebalance growth globally.
IMF World Economic Outlook Update -- Global Recovery Advances but Remains Uneven, January 2011
Content in this bundle
- Figure 1. Global GDP Growth
- Figure 2. Recent Economic Indicators
- Figure 3. Recent Financial Market Developments
- Figure 4. An Alternative Scenario of Intensified Financial Stress in the Euro Area
- Figure 5. Net Fund Flows to Emerging Markets
- Figure 6. Global Imbalances
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