IMF World Economic Outlook (WEO) Update -- Global Recovery Stalls, Downside Risks Intensify, January 2012

World Economic Outlook, January 24, 2012

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IMF World Economic Outlook (WEO) Update -- Global Recovery Stalls, Downside Risks Intensify, January 2012

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Bibliographic details

• Published: January 24, 2012
• Series: World Economic Outlook

Global outlook and headline projections

• Global output is projected to expand by 3¼ percent in 2012 — a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO).
• Global GDP expanded at an annualized rate of 3½ percent during Q3 2011.
• Table 1 key year-over-year projections (percent change unless noted):
  • World Output: 2010 = 5.2; 2011 = 3.8; 2012 = 3.3; 2013 = 3.9; Q4 over Q4 estimates = 3.4; difference from September 2011 WEO projections = –0.7 (2012), –0.6 (2013).
  • Advanced Economies: 2010 = 3.2; 2011 = 1.6; 2012 = 1.2; 2013 = 1.9; difference from Sept. 2011 = –0.5.
  • Emerging and Developing Economies: 2010 = 7.3; 2011 = 6.2; 2012 = 5.4; 2013 = 5.9; difference from Sept. 2011 = –½ percentage point (average 2012–13 expected to be 5¾ percent).
  • Developing Asia (including China and India): 2010 = 9.5; 2011 = 7.9; 2012 = 7.8; 2013 = 7.4; China: 2010 = 10.4; 2011 = 9.2; 2012 = 8.2; India: 2010 = 9.9; 2011 = 7.0; 2012 = 6.7.
  • World Trade Volume (goods and services) — 2010 = 12.7; 2011 = –2.0.
  • Commodity prices (U.S. dollars): Oil average price in 2011 = $104.23 a barrel; assumed price based on futures markets = $99.09 in 2012 and $95.55 in 2013.
  • Nonfuel commodity prices projected change in 2012 = –14 percent.
  • Consumer prices: advanced economy inflation projected to fall to about 1½ percent in the course of 2012 (peak about 2¾ percent in 2011); emerging and developing economies inflation projected around 6¼ percent during 2012 (down from over 7¼ percent in 2011).

Drivers of deterioration and regional effects

• Primary driver: intensifying strains in the euro area interacting with financial fragilities elsewhere (widened sovereign spreads, bank funding dried up, bank deleveraging).
• Financial market developments:
  • Sovereign spreads for many euro area countries reached highs not seen since the launch of the Economic and Monetary Union.
  • ECB offered a three-year Long-Term Refinancing Operation (LTRO) in response to funding strains.
  • Bank lending conditions moved sideways or deteriorated across a number of advanced economies.
  • Capital flows to emerging economies fell sharply; currency markets were volatile (Japanese yen appreciated; many emerging market currencies depreciated significantly).
• Regional outlook highlights:
  • Euro area: now expected to go into a mild recession in 2012; significant downward revision of 1½ percentage points since the September 2011 WEO.
  • Advanced economies (ex-euro area): activity projected to expand by 1½ percent on average during 2012–13; growth too sluggish to make a major dent in very high unemployment.
  • Emerging and developing economies: average growth during 2012–13 expected to be 5¾ percent (down from 6¾ percent during 2010–11); developing Asia projected to grow 7½ percent on average during 2012–13.
  • Middle East and North Africa: activity expected to accelerate in 2012–13 driven mainly by the recovery in Libya and strong oil exporters; most oil-importing countries face muted prospects.
  • Sub-Saharan Africa: output expected to expand by around 5½ percent in 2012; impact of global slowdown limited to a few countries (notably South Africa).
  • Central and Eastern Europe: expected to face the largest adverse spillovers due to strong trade and financial linkages with the euro area.

Downside scenarios and risks (quantified)

• Euro-area-driven downside scenario assumptions and impacts:
  • Sovereign spreads temporarily rise; fiscal consolidation is more front-loaded; bank asset quality deteriorates; private investment contracts by additional 1¾ percentage points of GDP (relative to WEO projections).
  • Euro area output reduced by about 4 percent relative to the WEO forecast.
  • Global output lower than WEO projections by about 2 percent (assuming financial contagion to the rest of the world more intense than baseline but weaker than following the collapse of Lehman Brothers in 2008).
• Other key risks:
  • Insufficient progress on medium-term fiscal consolidation in the United States and Japan could lead to turmoil in global bond and currency markets.
  • Political paralysis in the United States could produce excessive near-term fiscal tightening.
  • Hard landing risk in key emerging economies if buoyant credit and asset price growth unwind.
  • Geopolitical oil supply risks (e.g., intensified concerns about an Iran-related shock) could have a large market impact given limited inventories and spare capacity.

Commodity prices and inflation dynamics

• Oil: baseline petroleum price projection for 2012 is broadly unchanged since September 2011 ($99 a barrel compared with $100).
• Non-oil commodity prices: projected to fall by 14 percent in 2012; near-term risks to these prices skewed to the downside.
• Inflation:
  • Advanced economies: inflation projected to ease, reaching about 1½ percent in 2012 (down from about 2¾ percent in 2011).
  • Emerging and developing economies: inflation projected around 6¼ percent during 2012 (down from over 7¼ percent in 2011), though inflation may remain persistent in some regions.

Policy recommendations and required actions (enumerated)

• Overarching requirements for a more resilient recovery:
  • Sustained but gradual adjustment.
  • Ample liquidity and easy monetary policy, mainly in advanced economies.
  • Restored confidence in policymakers’ ability to act.
  • Not all countries should adjust in the same way, to the same extent, or at the same time.
• Fiscal adjustment:
  • Let automatic stabilizers operate freely for as long as financing conditions permit.
  • Countries with very low interest rates or other fiscal space (including some in the euro area) should reconsider the pace of near-term consolidation.
  • United States and Japan should formulate and implement credible medium-term consolidation plans (examples: reforms to slow growth of health care and pension spending; caps on discretionary spending; tax system reforms).
• Liquidity and monetary policy:
  • Monetary policy should continue to support growth while inflation expectations remain anchored and unemployment stays high.
  • If downside risks materialize, further monetary stimulus — including quantitative easing — may be necessary.
  • Targeted programs to ease credit constraints on businesses and households where monetary transmission is impaired.
  • In the euro area: additional and timely monetary easing by the ECB; continued provision of liquidity and engagement in securities purchases; sufficient funding through the EFSF and ESM.
• Bank deleveraging and financial repair:
  • Inject more capital into euro area banks (including public sources) and avoid excessively fast deleveraging to prevent a credit crunch.
  • Countries under pressure may require recourse to euro-wide resources to facilitate bank recapitalization.
  • Easy short-term funding should be coupled with repair and reform of financial systems to normalize credit conditions (see January 2012 Global Financial Stability Report Update).
• Restoring confidence in the euro area:
  • Deepen financial and fiscal integration over time (common supervision, resolution, and deposit insurance).
  • Near-term: a pan-euro area facility with capacity to take direct stakes in banks.
  • Further fiscal integration and more risk sharing across euro area members alongside stronger fiscal discipline or centralization.
  • Fold EFSF into the ESM and increase the size of the ESM to add substantial real resources.
  • Medium-term: structural reforms to labor and product markets to address internal imbalances and competitiveness problems.
• Policy guidance for emerging and developing economies:
  • Respond to moderating domestic demand and slowing external demand while managing volatile capital flows.
  • Countries with controlled inflation, low public debt, and external surpluses (including China and selected emerging Asian economies) can deploy additional social spending to support poorer households.
  • Economies with diminishing inflation but weaker fiscal fundamentals can stop tightening or ease monetary policy while managing lending to overheating sectors via macroprudential measures.
  • Economies with relatively high inflation and public debt (including India and some Middle Eastern economies) should be cautious about policy easing.
• Collective action and structural reforms:
  • Foster global demand rebalancing by economies with strong household balance sheets and external positions eliminating distortions that weigh on domestic demand.
  • Structural reforms to boost potential output: reform labor and product markets; strengthen resilience to population aging; improve social safety nets, pension, health care, and education systems; strengthen financial sectors; improve business environment for private investment.

IMF World Economic Outlook Update — Global Recovery Stalls, Downside Risks Intensify, January 2012

Content in this bundle

• Figure 1. Global GDP Growth
  • Figure 1. Global GDP Growth (CSV)
• Figure 2. Recent Economic Indicators
  • Figure 2. Recent Economic Indicators (CSV)
• Figure 3. Recent Financial Market Developments
  • Figure 3. Recent Financial Market Developments (CSV)
• Figure 4. WEO Downside Scenario
  • Figure 4. WEO Downside Scenario (CSV)
• Figure 5. Net Fund Flows to Emerging Markets
  • Figure 5. Net Fund Flows to Emerging Markets (CSV)
• 0112a
  • 0112a (Markdown version)
  • 0112a (PDF)
• 世界经济展望最新预测 2012年1月——全球复苏停滞，下行风险加剧
  • 世界经济展望最新预测 2012年1月——全球复苏停滞，下行风险加剧 (Markdown version)
  • 世界经济展望最新预测 2012年1月——全球复苏停滞，下行风险加剧 (PDF)
• Mise à jour des Perspectives de l’économie mondiale; le 24 janvier 2012; FMI
  • Mise à jour des Perspectives de l’économie mondiale; le 24 janvier 2012; FMI (Markdown version)
  • Mise à jour des Perspectives de l’économie mondiale; le 24 janvier 2012; FMI (PDF)
• 世界経済見通し改訂見通し　2012年1月　--　世界経済は失速、強まる下振れリスク
  • 世界経済見通し改訂見通し　2012年1月　--　世界経済は失速、強まる下振れリスク (Markdown version)
  • 世界経済見通し改訂見通し　2012年1月　--　世界経済は失速、強まる下振れリスク (PDF)
• Figure 1. Global GDP Growth
  • Figure 1. Global GDP Growth (Markdown version)
  • Figure 1. Global GDP Growth (PDF)
• Figure 2. Recent Economic Indicators
  • Figure 2. Recent Economic Indicators (Markdown version)
  • Figure 2. Recent Economic Indicators (PDF)
• _fig3pdf
  • _fig3pdf (Markdown version)
  • _fig3pdf (PDF)
• _fig4pdf
  • _fig4pdf (Markdown version)
  • _fig4pdf (PDF)
• Figure 5. Net Fund Flows to Emerging Markets
  • Figure 5. Net Fund Flows to Emerging Markets (Markdown version)
  • Figure 5. Net Fund Flows to Emerging Markets (PDF)
• _0112pdf
  • _0112pdf (Markdown version)
  • _0112pdf (PDF)
• Перспективы развития мировой экономики - Бюллетень; 24 января 2012 года
  • Перспективы развития мировой экономики - Бюллетень; 24 января 2012 года (Markdown version)
  • Перспективы развития мировой экономики - Бюллетень; 24 января 2012 года (PDF)
• Section 1 — La recuperación mundial se estanca, los riesgos a la baja se intensifican
  • Section 1 — La recuperación mundial se estanca, los riesgos a la baja se intensifican (Markdown version)
  • Section 1 — La recuperación mundial se estanca, los riesgos a la baja se intensifican (PDF)

References

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• September 2011 World Economic Outlook (WEO)
• WEO Update
• January 2012 Fiscal Monitor Update
• January 2012 Global Financial Stability Report Update