World Economic Outlook, October 2014 : Legacies, Clouds, Uncertainties

International Monetary Fund. Research Dept.

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781498331555
• Year: 2014

NONE

Chapter 1. Recent Developments, Prospects, and Policy Priorities

Despite setbacks, an uneven global recovery continues. In advanced economies, the legacies of the precrisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery. Emerging markets are adjusting to rates of economic growth lower than those reached in the precrisis boom and the postcrisis recovery. Overall, the pace of recovery is becoming more country specific.

Other elements are also affecting the outlook. Financial markets have been optimistic, with higher equity prices, compressed spreads, and very low volatility. However, this has not translated into a pickup in investment, which—particularly in advanced economies—has remained subdued. And there are concerns that markets are underpricing risk, not fully internalizing the uncertainties surrounding the macroeconomic outlook and their implications for the pace of withdrawal of monetary stimulus in some major advanced economies. Geopolitical tensions have risen. So far their macroeconomic effects appear mostly confined to the regions involved, but there are tangible risks of more widespread disruptions. Some medium-term problems that predate the crisis, such as the impact of an aging population on the labor force and weak growth in total factor productivity, are coming back to the fore and need to be tackled. These problems show up in low potential growth in advanced economies—which may be affecting the pace of recovery today—and a decline in potential growth in emerging markets.

With world growth in the first half of 2014 slower than expected, global growth for 2014 is projected at 3.3 percent, 0.4 percentage point lower relative to the April 2014 World Economic Outlook (WEO). The growth projection for 2015 is also slightly lower at 3.8 percent. These projections are predicated on the assumption that key drivers supporting the recovery in advanced economies—including moderating fiscal consolidation (Japan being one exception) and highly accommodative monetary policy—remain in place. Projections also assume a decline in geopolitical tensions, supporting some recovery in stressed economies. Growth prospects across both advanced economies and emerging markets exhibit sizable heterogeneity. Among advanced economies, growth is projected to pick up, but is slower in the euro area and Japan and generally faster in the United States and elsewhere. Among major emerging markets, growth is projected to remain high in emerging Asia, with a modest slowdown in China and a pickup in India, but to stay subdued in Brazil and Russia.

The pace of the global recovery has disappointed in recent years. With weaker-than-expected global growth for the first half of 2014 and increased downside risks, the projected pickup in growth may again fail to materialize or fall short of expectations. This further underscores that in most economies, raising actual and potential growth must remain a priority. In advanced economies, this will require continued support from monetary policy and fiscal adjustment attuned in pace and composition to supporting both the recovery and long-term growth. In a number of economies, an increase in public infrastructure investment can support demand in the short term and help boost potential output in the medium term. In emerging markets, the scope for macroeconomic policies to support growth, if needed, varies across countries and regions, but space is limited in countries with external vulnerabilities. And in advanced economies as well as in emerging market and developing economies, there is a general, urgent need for structural reforms to strengthen growth potential or make growth more sustainable.

Recent Developments and Prospects

The Starting Point: The Global Economy in the First Half of 2014

Growth in the first half of 2014 was less than the levels projected in the April 2014 WEO (Figure 1.1), reflecting a number of negative surprises.

• Weaker U.S. growth (0.8 percent at an annualized rate), with a surprising decline in activity during the first quarter of 2014. This weaker growth reflects factors that appear mostly temporary, including a harsh winter and an inventory correction, as well as a large decline in exports after rapid growth in the fourth quarter of 2013. Growth rebounded in the second quarter of this year, and labor market conditions continued to improve, with robust employment growth. Despite the slowdown, U.S. imports were stronger than expected during the first half of the year, suggesting that spillovers from weaker U.S. activity through trade channels were limited.
• Weaker activity in Russia and the Commonwealth of Independent States (CIS). For the former, this reflects a sizable decline in investment and large capital outflows following the intensification of tensions with Ukraine. For the latter, it reflects weakness in Ukraine and spillovers from the Russian slowdown.
• Slower growth in Latin America—particularly in Brazil, where investment remains weak and GDP contracted in the first and second quarter.
• Stagnant euro area growth, with an output contraction in Italy, no growth in France, and unexpected weakness in Germany in the second quarter.
• Weaker-than-forecast GDP expansion in Japan.
• Weaker activity in China in the first quarter. In response, the Chinese authorities have implemented measures to buttress activity, which have supported faster growth in the second quarter.

Figure 1.1. Global Activity Indicators

Sources: CPB Netherlands Bureau for Economic Policy Analysis; Haver Analytics; Markit Economics; and IMF staff estimates.

Note: IP = industrial production; PMI = purchasing managers’ index.

¹ Australia, Canada, Czech Republic, Denmark, euro area, Hong Kong SAR (IP only), Israel, Japan, Korea, New Zealand, Norway (IP only), Singapore, Sweden (IP only), Switzerland, Taiwan Province of China, United Kingdom, United States.

² Argentina (IP only), Brazil, Bulgaria (IP only), Chile (IP only), China, Colombia (IP only), Hungary, India, Indonesia, Latvia (IP only), Lithuania (IP only), Malaysia (IP only), Mexico, Pakistan (IP only), Peru (IP only), Philippines (IP only), Poland, Romania (IP only), Russia, South Africa, Thailand (IP only), Turkey, Ukraine (IP only), Venezuela (IP only).

Inflation generally remains below central bank policy targets in advanced economies, an indication that many of these economies have substantial output gaps. In the euro area, inflation has remained below expectations and declined further to 0.4 percent (year over year) in August (Figure 1.2). In several economies with unemployment greater than the area-wide average, mild deflation in consumer prices continues. Inflation in the United States has risen modestly during the past several months but still remains below the Federal Reserve’s longer-term objective of 2 percent. In Japan, headline and core inflation (excluding food and energy) have risen, to about 1.3 and 0.6 percent in July (year over year), respectively, excluding the effects of the consumption tax increase. In emerging market economies, inflation has remained broadly stable since the spring.

Figure 1.2. Global Inflation

(Year-over-year percent change, unless indicated otherwise)

Sources: Consensus Economics; IMF, Primary Commodity Price System; and IMF staff estimates.

Note: CIS = Commonwealth of Independent States; ED Asia excl. China = emerging and developing Asia excluding China; ED Europe = emerging and developing Europe; LAC = Latin America and the Caribbean; SSA = sub-Saharan Africa.

¹ In Japan, the increase in inflation in 2014 reflects, to a large extent, the increase in the consumption tax.

Monetary policy conditions have remained very accommodative in advanced economies and broadly unchanged in emerging markets since the spring (Figure 1.3). In the euro area, the European Central Bank (ECB) has announced a range of actions to tackle low inflation and address fragmentation, including a reduction in policy rates, targeted credit easing, and other measures to boost liquidity. In the United States, although the monetary stance remains expansionary, the reduction in the monthly volume of asset purchases by the Federal Reserve has continued, and purchases are expected to be wound down by the fall of this year. In emerging markets, policy rates have been reduced in Chile, Mexico, and Peru following disappointing growth, and in Turkey, where part of the sharp tightening earlier in the year has been unwound. Policy rates were raised in the first half of the year in Brazil and Colombia; in Russia, which is facing pressure on the ruble; and in South Africa.

Figure 1.3. Monetary Conditions in Advanced Economies

Sources: Bank of Spain; Bloomberg, L.P.; European Central Bank (ECB); Haver Analytics; Organisation for Economic Co-operation and Development; and IMF staff calculations.

¹ Expectations are based on the federal funds rate futures for the United States, the sterling overnight interbank average rate for the United Kingdom, and the euro interbank offered forward rate for the euro area; updated September 22, 2014.

² Flow-of-funds data are used for the euro area, Spain, and the United States. Italian bank loans to Italian residents are corrected for securitizations.

³ Interpolated from annual net worth as a percentage of disposable income.

⁴ Euro area includes subsector employers (including self-employed workers).

⁵ Upward-pressure countries are those with a residential real estate vulnerability index above the median for advanced economies (AEs): Australia, Austria, Belgium, Canada, Estonia, France, Hong Kong SAR, Israel, New Zealand, Norway, Portugal, Sweden, United Kingdom.

⁶ Data are through September 19, 2014, except in the case of ECB (September 12, 2014). ECB calculations are based on the Eurosystem’s weekly financial statement.

Geopolitical tensions have increased since the spring, with a worsening of the Russia-Ukraine situation and continued strife in some countries in the Middle East. So far the impact of these tensions on economic activity appears to have been mostly limited to the countries involved and their closest trading partners: financial market reaction has been muted, and commodity prices have actually eased. However, it is difficult to assess the implications of the worsening of such tensions since early July.

Financial cond...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Assumptions and Conventions
• Further Information and Data
• Preface
• Foreword
• Executive Summary
• Chapter 1. Recent Developments, Prospects, and Policy Priorities
• Chapter 2. Country and Regional Perspectives
• Chapter 3. Is It Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment
• Chapter 4. Are Global Imbalances at a Turning Point?
• Annex: IMF Executive Board Discussion of the Outlook, September 2014
• Statistical Appendix
• World Economic Outlook, Selected Topics
• Update: IMF World Economic Outlook, January 2015: Cross Currents
• Tables
• Table 1.1. Overview of the World Economic Outlook Projections
• Table 1.SF.1. World Fossil Fuel Reserves, Production, and Consumption
• Table 2.1. Selected Advanced Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
• Table 2.2. Selected European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
• Table 2.3. Selected Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
• Table 2.4. Selected Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
• Table 2.5. Commonwealth of Independent States: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
• Table 2.6. Selected Middle East and North African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
• Table 2.7. Selected Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
• Table 3.1. Elasticity of Output to Public Capital
• Table 3.2. Economy Group Composition
• Table 3.3. Data Sources
• Table 3.4. Effect of Public Investment on Output in Advanced Economies: Robustness Checks
• Table 3.5. Effect of Public Investment on Output in Emerging Market and Developing Economies: Public Investment Shocks Derived from a Fiscal Policy Rule
• Table 4.1. Largest Deficit and Surplus Economies, 2006 and 2013
• Table 4.2. Largest Debtor and Creditor Economies (Net Foreign Assets and Liabilities), 2006 and 2013
• Table 4.4. Data Sources
• Table 4.5. Sample Economies
• Table 4.8. Estimated Threshold Values and Associated Classification Errors
• Table 4.1.1. Largest Deficit and Surplus Economies, 1986 and 1991
• Table A1. Summary of World Output
• Online Tables
• Footnotes