IMF World Economic Outlook (WEO) Update -- New Setbacks, Further Policy Action Needed, July 2012
World Economic Outlook, July 16, 2012
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Bibliographic details
- Published: July 16, 2012
- Series: World Economic Outlook
Executive summary and headline projections
- Global growth is projected at 3.5 percent in 2012 and 3.9 percent in 2013, marginally lower than in the April 2012 World Economic Outlook.
- Projections incorporate weaker growth through much of the second half of 2012 in both advanced and key emerging market economies.
- Projections assume: (a) financial conditions in the euro area periphery will gradually ease through 2013 following June EU leaders' summit decisions; and (b) U.S. legislation will be modified to avoid a large near-term fiscal contraction (the so-called fiscal cliff).
Key recent developments and near-term outlook
- First-quarter 2012: Global growth increased to 3.6 percent (seasonally adjusted annual rate), surprising on the upside by some ¼ percentage point relative to April forecasts.
- Second-quarter 2012: Developments worsened—financial market and sovereign stress in the euro area periphery ratcheted up close to end-2011 levels; job creation hampered; unemployment remains high in many advanced economies.
- Global commodity and financial market moves:
- Crude oil was about $86 a barrel in the second quarter, some 25 percent below mid-March highs.
- The average price of oil in U.S. dollars a barrel was $104.01 in 2011; the assumed price based on futures markets is $101.80 in 2012 and $94.16 in 2013.
- Global consumer price inflation: headline inflation is expected to slip from 4½ percent in the last quarter of 2011 to 3–3½ percent in 2012–13.
Regional and sectoral projections (high-level)
- Advanced economies: growth projected to expand by 1.4 percent in 2012 and 1.9 percent in 2013 (a downward revision of 0.2 percentage point for 2013 relative to April 2012 WEO), with the euro area periphery experiencing the greatest weakness.
- Emerging and developing economies: growth projected to moderate to 5.6 percent in 2012 and pick up to 5.9 percent in 2013 (downward revisions of 0.1 and 0.2 percentage point in 2012 and 2013, respectively, relative to April 2012 WEO).
- Regions with specific notes:
- Central and Eastern Europe: projected relatively weaker growth tied to euro area linkages.
- Middle East and North Africa: stronger in 2012–13 relative to 2011 as key oil exporters boost production and Libya rebounds.
- Sub-Saharan Africa: expected to remain robust in 2012–13 with modest revisions since April 2012 WEO.
Major downside risks and contingencies
- Immediate risk: delayed or insufficient policy action that escalates the euro area crisis further.
- U.S. fiscal risks:
- In the extreme, failure to extend temporary tax cuts and reverse automatic spending cuts could reduce the U.S. structural fiscal deficit by more than 4 percentage points of GDP in 2013, stalling U.S. growth with significant global spillovers.
- Delays in raising the federal debt ceiling could increase risks of financial market disruptions and confidence losses.
- Medium-term risks:
- Insufficient progress on credible medium-term fiscal consolidation in the United States and Japan could push public debt ratios along unsustainable trajectories and trigger higher sovereign borrowing costs.
- Emerging markets: external factors, potential overestimation of potential growth after a decade of above-trend expansion, financial-stability risks after rapid credit growth, and tail risks of a hard landing in China.
- Commodity price risks: oil price risks have abated recently; non-oil commodity price risks tilt downward.
Crisis-management priorities and recommended policy actions
- Europe / euro area:
- Priority: resolve the euro area crisis and break adverse sovereign-bank links.
- Implement the single supervisory mechanism promptly so the European Stability Mechanism (ESM) can recapitalize banks directly.
- Complementary steps needed: pan-European deposit insurance guarantee scheme, bank resolution mechanism with common backstops, ratification of the ESM by all members, and further progress on banking and fiscal union.
- Support short-term demand and orderly market conditions; allow monetary policy easing and ensure monetary support transmits across the region.
- Consider nonstandard ECB measures if needed: reactivation of the Securities Market Programme, additional LTROs with lower collateral requirements, or QE-style asset purchases.
- Fiscal consolidation plans must be implemented with focus on structural fiscal targets; allow automatic stabilizers to operate fully in economies not under market pressure; economies with limited fiscal vulnerability should stand ready with contingency measures.
- Undertake wide-ranging structural reforms to raise growth and address intra-area current account imbalances.
- United States and other advanced economies:
- Avoid the fiscal cliff, reach bipartisan agreements to modify near-term legislation, and raise the federal debt ceiling well ahead of the deadline.
- Develop credible medium-term fiscal plans to put government debt on a downward track.
- Monetary authorities should be prepared to respond with further unconventional measures to a weaker near-term environment.
- Allow automatic stabilizers to operate fully; recalibrate fiscal consolidation plans if large downside risks materialize.
- Japan:
- Secure full Diet approval of a gradual consumption tax-rate increase (after passage in the Lower House) to maintain confidence in fiscal sustainability.
- Emerging and developing economies:
- Stand ready to adjust policies in response to spillovers from weaker advanced-economy prospects, slowing export growth, and volatile capital flows.
- Tailor policy responses to cyclical positions:
- Where inflation and credit pressures have eased or inflation expectations are anchored, consider further cuts in policy rates.
- Where inflation and credit pressures persist, use targeted measures to address bank liquidity or funding pressures.
- Economies with sustainable public finances and market financing at sustainable rates should allow automatic stabilizers to operate fully.
- Economies with large fiscal and external surpluses could consider fiscal support.
- Prioritize enhanced risk-based prudential regulation, supervision, and macroprudential measures after years of rapid credit growth.
Policy implications for markets and growth
- Timely implementation of EU summit decisions, progress on banking and fiscal union, and periphery countries’ reform commitments are critical to restore confidence and ease financial conditions.
- Failure to act timely in Europe or fiscal missteps in the United States could materially worsen the global outlook and trigger significant spillovers to global trade, commodity prices, and financial markets.
IMF World Economic Outlook Update, July 2012 (forecasts and analysis summarized from the WEO Update text).
Content in this bundle
- Figure 1. Global GDP Growth
- Figure 2. Recent Economic Indicators
- Figure 3. Recent Financial Market Developments
- Figure 4. Global Financial Market Reverberations
- مستجدات آفاق الاقتصاد العالمي :انتكاسات جديدة، وحاجة إلى مزيد من إجراءات السياسة - يوليو 2012
- 《世界经济展望》最新预测，2012年7月——新的挫折，需要进一步采取政策行动
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- 2012年7月WEO 改訂見通し: 情勢は後退、更なる政策措置が不可欠, 2012年7月16日
- Fig1.pdf
- Fig2.ai
- Fig3.ai
- Fig4.ai
- IMF World Economic Outlook
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- 0712s
References
- https://www.imf.org/en/publications/weo
- Global Economy in Crosscurrents of War and Technology
- https://www.imf.org/en/publications/gfsr
- Global Financial Markets Confront the War in the Middle East and Amplification Risks
- https://www.imf.org/en/publications/fm
- Fiscal Policy under Pressure: High Debt, Rising Risks
- https://www.imf.org/en/publications/reo
- Asia and Pacific
- Europe
- Middle East and Central Asia
- Sub-Saharan Africa
- Western Hemisphere
- https://www.imf.org/en/publications/areb
- Getting to Growth in an Age of Uncertainty
- https://www.imf.org/en/publications/finance-development
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