IMF World Economic Outlook (WEO) Update: Is the Tide Rising?
World Economic Outlook, January 21, 2014
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- Published: January 21, 2014
- Series: World Economic Outlook
Overview
- Global activity strengthened during the second half of 2013, as anticipated in the October 2013 World Economic Outlook (WEO).
- Activity is expected to improve further in 2014–15, largely on account of recovery in the advanced economies.
- Global growth is now projected to be slightly higher in 2014, at around 3.7 percent, rising to 3.9 percent in 2015, a broadly unchanged outlook from the October 2013 WEO.
- Downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain.
Key projections and statistics
- World Output (Percent change): 2012: 3.1; 2013: 3.0; 2014: 3.7; 2015: 3.9.
- Advanced Economies (Percent change): 2012: 1.4; 2013: 1.3; 2014: 2.2; 2015: 2.3.
- Emerging Market and Developing Economies (Percent change): 2012: 4.9; 2013: 4.7; 2014: 5.1; 2015: 5.4.
- United States: growth expected to be 2.8 percent in 2014, up from 1.9 percent in 2013; growth projected at 3 percent for 2015 (3.4 percent in October 2013).
- Euro Area: growth projected to strengthen to 1 percent in 2014 and 1.4 percent in 2015.
- Japan: annual growth expected to remain broadly unchanged at 1.7 percent in 2014, before moderating to 1 percent in 2015.
- China: growth is expected to moderate slightly to around 7½ percent in 2014–15.
- Global summary: "In sum, global growth is projected to increase from 3 percent in 2013 to 3.7 percent in 2014 and 3.9 percent in 2015."
- Oil price (simple average of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil): average price in U.S. dollars a barrel was $104.11 in 2013; assumed price based on futures markets is $103.84 in 2014 and $98.47 in 2015.
Recent developments driving projections
- Global activity and world trade picked up in the second half of 2013; recent data suggest global growth was somewhat stronger than anticipated in the October 2013 WEO.
- Final demand in advanced economies expanded broadly as expected—much of the upward surprise in growth is due to higher inventory demand.
- In emerging market economies, an export rebound was the main driver behind better activity, while domestic demand generally remained subdued, except in China.
- Financial conditions in advanced economies have eased since the October 2013 WEO, with little change since the U.S. Federal Reserve announcement on December 18 that it will begin tapering quantitative easing measures.
- In emerging market economies, financial conditions remained tighter following the surprise U.S. tapering announcements in May 2013: equity prices have not fully recovered, many sovereign bond yields have edged up, and some currencies have been under pressure.
Regional and country notes
- United States: pickup in 2014 expected to be carried by final domestic demand, supported in part by a reduction in the fiscal drag as a result of the recent budget agreement; the recent budget agreement implies a tighter projected fiscal stance in 2015.
- Euro area: recovery is uneven; high debt (public and private) and financial fragmentation will hold back domestic demand, while exports should further contribute to growth; some economies under stress see more modest pickups despite upward revisions (including Spain).
- United Kingdom: activity buoyed by easier credit conditions and increased confidence; growth expected to average 2¼ percent in 2014–15, but economic slack will remain high.
- Japan: temporary fiscal stimulus should partly offset the drag from the consumption tax increase in early 2014.
- China: rebound in the second half of 2013 was due largely to an acceleration in investment; surge expected to be temporary partly because of policy measures aimed at slowing credit growth and raising the cost of capital.
- India: growth picked up after a favorable monsoon season and higher export growth and is expected to firm further on stronger structural policies supporting investment.
- Several emerging market and developing economies (including Brazil and Russia) saw downward revisions to growth in 2013 or 2014 compared to October 2013 WEO forecasts.
- Middle East and North Africa: downward revisions to growth in 2014, and upward revisions in 2015, mainly reflect expectations that the rebound in oil output in Libya after outages in 2013 will proceed at a slower pace.
Risks to the outlook
- Downside risks—both previously discussed and new—remain.
- New risk: very low inflation in advanced economies, especially the euro area, could cause longer-term inflation expectations to drift down, increasing the risks of lower-than-expected inflation and raising the likelihood of deflation in the event of adverse shocks.
- Downside risks to financial stability persist: corporate leverage has risen; in many emerging market economies increased exposures to foreign currency liabilities heighten vulnerability.
- Asset valuations in some markets could come under pressure if interest rates rose more than expected.
- Increased financial market and capital flow volatility in emerging market economies remains a concern given that the Fed will start tapering in early 2014; portfolio shifts and some capital outflows are likely with Fed tapering and could combine with domestic weaknesses to produce sharper capital outflows and exchange rate adjustments.
Policy priorities and recommendations
- Advanced economies:
- Avoid a premature withdrawal of monetary policy accommodation, including in the United States, as output gaps are still large while inflation is low and fiscal consolidation continues.
- Stronger growth is needed to complete balance sheet repair after the crisis and to lower related legacy risks.
- In the euro area, the European Central Bank (ECB) should consider additional measures, including longer-term liquidity provision and targeted lending, to strengthen demand and reduce financial market fragmentation.
- Repair bank balance sheets through the Balance Sheet Assessment exercise, recapitalize weak banks, and complete the Banking Union by unifying supervision and crisis resolution to revive credit and sever the sovereign-bank link.
- Implement more structural reforms to lift investment and prospects.
- Emerging market and developing economies:
- Manage risks of potential capital flow reversals; economies with domestic weaknesses and related external current account deficits appear particularly exposed.
- Allow exchange rates to depreciate in response to deteriorating external funding conditions.
- Where exchange rate adjustment is constrained (because of balance sheet mismatches, large pass-through to inflation, or weak monetary policy frameworks), consider a combination of tightening macroeconomic policies and stronger regulatory and supervisory policy efforts.
- In China, make more progress on rebalancing domestic demand from investment to consumption to contain risks to growth and financial stability from overinvestment.
IMF World Economic Outlook Update: Is the Tide Rising? (January 2014).
Content in this bundle
- Figure 1. World Trade Volumes, Industrial Production and Manufacturing PMI
- Figure 2. Global GDP Growth
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References
- October 2013
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