Front Matter

Front Matter

International Monetary Fund. Research Dept.
Published Date:
April 2012
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    © 2012 International Monetary Fund

    Cover and Design: Luisa Menjivar and Jorge Salazar

    Composition: Maryland Composition

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    World economic outlook (International Monetary Fund)

    World economic outlook: a survey by the staff of the International Monetary Fund.—Washington, DC: International Monetary Fund, 1980–

    v. ; 28 cm.—(1981–1984: Occasional paper / International Monetary Fund, 0251-6365).—(1986–: World economic and financial surveys, 0256-6877)

    Semiannual. Some issues also have thematic titles.

    Has occasional updates, 1984–

    1. Economic development—Periodicals. 2. Economic forecasting—Periodicals. 3. Economic policy—Periodicals. 4. International economic relations—Periodicals. I. International Monetary Fund. II. Series: Occasional paper (International Monetary Fund). III. Series: World economic and financial surveys.


    ISBN 978-1-61635-246-2

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    Assumptions and Conventions

    A number of assumptions have been adopted for the projections presented in the World Economic Outlook. It has been assumed that real effective exchange rates remained constant at their average levels during February 13– March 12, 2012, except for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1); that the average price of oil will be $114.71 a barrel in 2012 and $110.00 a barrel in 2013 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 0.7 percent in 2012 and 0.8 percent in 2013; that the three-month euro deposit rate will average 0.8 percent in 2012 and 2013; and that the six-month Japanese yen deposit rate will yield on average 0.6 percent in 2012 and 0.1 percent in 2013. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. The estimates and projections are based on statistical information available through early April 2012.

    • The following conventions are used throughout the World Economic Outlook:

    • … to indicate that data are not available or not applicable;

    • – between years or months (for example, 2011–12 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    • / between years or months (for example, 2011/12) to indicate a fiscal or financial year.

    • “Billion” means a thousand million; “trillion” means a thousand billion.

    “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    As in the September 2011 World Economic Outlook, fiscal and external debt data for Libya are excluded for 2011 and later due to the uncertain political situation.

    Data for the Syrian Arab Republic are excluded for 2011 and later due to the uncertain political situation.

    As in the September 2011 World Economic Outlook, Sudan’s data for 2011 exclude South Sudan after July 9. Projections for 2012 and onward pertain to the current Sudan.

    If no source is listed on tables and figures, data are drawn from the World Economic Outlook (WEO) database.

    When countries are not listed alphabetically, they are ordered on the basis of economic size.

    Minor discrepancies between sums of constituent figures and totals shown reflect rounding.

    As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

    Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless otherwise noted, country group composites represent calculations based on 90 percent or more of the weighted group data.

    The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.

    Further Information and Data

    This version of the World Economic Outlook is available in full through the IMF eLibrary ( and the IMF website ( Accompanying the publication on the IMF website is a larger compilation of data from the WEO database than is included in the report itself, including files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.

    The data appearing in the World Economic Outlook are compiled by the IMF staff at the time of the WEO exercises. The historical data and projections are based on the information gathered by the IMF country desk officers in the context of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each country. Historical data are updated on a continual basis as more information becomes available, and structural breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques. IMF staff estimates continue to serve as proxies for historical series when complete information is unavailable. As a result, WEO data can differ from other sources with official data, including the IMF’s International Financial Statistics.

    The WEO data and metadata provided are “as is” and “as available,” and every effort is made to ensure, but not guarantee, their timeliness, accuracy, and completeness. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary ( and on the IMF website ( All substantive changes are listed in detail in the online tables of contents.

    For details on the terms and conditions for usage of the WEO database, please refer to the IMF Copyright and Usage website,

    Inquiries about the content of the World Economic Outlook and the WEO database should be sent by mail, fax, or online forum (telephone inquiries cannot be accepted):

    World Economic Studies Division

    Research Department

    International Monetary Fund

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    The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—together with the Strategy, Policy, and Review Department; the Monetary and Capital Markets Department; and the Fiscal Affairs Department.

    The analysis in this report was coordinated in the Research Department under the general direction of Olivier Blanchard, Economic Counsellor and Director of Research. The project was directed by Jörg Decressin, Deputy Director, Research Department, and by Thomas Helbling, Division Chief, Research Department, with assistance from Petya Koeva Brooks, Mr. Helbling’s predecessor as division chief.

    The primary contributors to this report are Abdul Abiad, John Bluedorn, Rupa Duttagupta, Deniz Igan, Florence Jaumotte, Joong Shik Kang, Daniel Leigh, Andrea Pescatori, Shaun Roache, John Simon, Steven Snudden, Marco E. Terrones, and Petia Topalova. Other contributors include Bas Bakker, Julia Bersch, Phakawa Jeasakul, Edda Rós Karlsdóttir, Yuko Kinoshita, M. Ayhan Kose, Prakash Loungani, Frañek Rozwadowski, and Susan Yang. Gavin Asdorian, Shan Chen, Angela Espiritu, Nadezhda Lepeshko, Murad Omoev, Ezgi O. Ozturk, Katherine Pan, David Reichsfeld, Jair Rodriguez, Marina Rousset, Min Kyu Song, and Bennet Voorhees provided research assistance. Christopher Carroll, Kevin Clinton, Jose De Gregorio, and Lutz Killian provided comments and suggestions. Tingyun Chen, Mahnaz Hemmati, Toh Kuan, Rajesh Nilawar, Emory Oakes, and Steve Zhang provided technical support. Skeeter Mathurin and Claire Bea were responsible for word processing. Linda Griffin Kean of the External Relations Department edited the manuscript and coordinated the production of the publication, with assistance from Lucy Scott Morales. External consultants Amrita Dasgupta, Anastasia Francis, Aleksandr Gerasimov, Wendy Mak, Shamiso Mapondera, Nhu Nguyen, and Pavel Pimenov provided additional technical support.

    The analysis has benefited from comments and suggestions by staff from other IMF departments, as well as by Executive Directors following their discussion of the report on March 30, 2012. However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.


    Soon after the September 2011 World Economic Outlook went to press, the euro area went through another acute crisis.

    Market worries about fiscal sustainability in Italy and Spain led to a sharp increase in sovereign yields. With the value of some of the banks’ assets now in doubt, questions arose as to whether those banks would be able to convince investors to roll over their loans. Worried about funding, banks froze credit. Confidence decreased, and activity slumped.

    Strong policy responses turned things around. Elections in Spain and the appointment of a new prime minister in Italy gave some reassurance to investors. The adoption of a fiscal compact showed the commitment of EU members to dealing with their deficits and debt. Most important, the provision of liquidity by the European Central Bank (ECB) removed short-term bank rollover risk, which in turn decreased pressure on sovereign bonds.

    With the passing of the crisis, and some good news about the U.S. economy, some optimism has returned. It should remain tempered. Even absent another European crisis, most advanced economies still face major brakes on growth. And the risk of another crisis is still very much present and could well affect both advanced and emerging economies.

    Let me first focus on the baseline. One must wonder why, with nominal interest rates expected to remain close to zero for some time, demand is not stronger in advanced economies. The reason is that they face, in varying combinations, two main brakes on growth: fiscal consolidation and bank deleveraging. Both reflect needed adjustments, but both decrease growth in the short term.

    Fiscal consolidation is in effect in most advanced economies. With an average decrease in the cyclically adjusted primary deficit slightly under 1 percentage point of GDP this year, and a multiplier of 1, fiscal consolidation will be subtracting roughly 1 percentage point from advanced economy growth this year.

    Bank deleveraging is affecting primarily Europe. While such deleveraging does not necessarily imply lower credit to the private sector, the evidence suggests that it is contributing to a tighter credit supply. Our best estimates are that it may subtract another 1 percentage point from euro area growth this year.

    These effects are reflected in our forecasts. We forecast that growth will remain weak, especially in Europe, and unemployment will remain high for some time.

    Emerging economies are not immune to these developments. Low advanced economy growth has meant lower export growth. And financial uncertainty, together with sharp shifts in risk appetite, has led to volatile capital flows. For the most part, however, emerging economies have enough policy room to maintain solid growth. As is typically the case, such a statement masks heterogeneity across countries. Some countries need to watch overheating, while others still have a negative output gap and can use policy to sustain growth. Overall, while we have revised our forecast down somewhat from September, we still project sustained growth in emerging economies.

    Turning to risks, geopolitical tension affecting the oil market is surely a risk. The main one, however, remains another acute crisis in Europe. The building of the firewalls, when it is completed, will represent major progress. If and when needed, funds can be mobilized to help some countries survive the effects of adverse shifts in investor sentiment and give them more time to implement fiscal consolidation and reforms. By themselves, however, firewalls cannot solve the difficult fiscal, competitiveness, and growth issues some of these countries face. Bad news on the macroeconomic or political front still carries the risk of triggering the type of dynamics we saw last fall.

    Turning to policy, many of the policy debates revolve around how best to balance the adverse short-term effects of fiscal consolidation and bank deleveraging versus their favorable long-term effects.

    In the case of fiscal policy, the issue is complicated by the pressure from markets for immediate fiscal consolidation. It is further complicated by the fact that markets appear somewhat schizophrenic—they ask for fiscal consolidation but react badly when consolidation leads to lower growth. The right strategy remains the same as before. While some immediate adjustment is needed for credibility, the search should be for credible long-term commitments—through a combination of decisions that decrease trend spending and put in place fiscal institutions and rules that automatically reduce spending and deficits over time. Insufficient progress has been made along these lines, especially in the United States and in Japan. In the absence of greater progress, the current degree of short-term fiscal consolidation appears roughly appropriate.

    In the case of bank deleveraging, the challenge is twofold. As with fiscal policy, the first challenge is to determine the right speed of overall deleveraging. The second is to make sure that deleveraging does not lead to a credit crunch, either at home or abroad. Partial public recapitalization of banks does not appear to be on the agenda anymore, but perhaps it should be. To the extent that it would increase credit and activity, it could easily pay for itself—more so than most other fiscal measures.

    Turning to policies aimed at reducing risks, the focus is clearly on Europe. Measures should be taken to decrease the links between sovereigns and banks, from the creation of euro level deposit insurance and bank resolution to the introduction of limited forms of Eurobonds, such as the creation of a common euro bill market. These measures are urgently needed and can make a difference were another crisis to take place soon.

    Taking one step back, perhaps the highest priority, but also the most difficult to achieve, is to durably increase growth in advanced economies, and especially in Europe. Low growth not only makes for a subdued baseline forecast, but also for a harder fiscal adjustment and higher risks along the way. For the moment, the focus should be on measures that increase demand. Looking forward, however, the focus should also be on measures that increase potential growth. The Holy Grail would be measures that do both. There are probably few of those. More realistically, the search must be for reforms that help in the long term but do not depress demand in the short term. Identifying these reforms, and addressing their potentially adverse short-term effects, should be very high on the policy agenda.

    Olivier Blanchard

    Economic Counsellor

    Executive Summary

    After suffering a major setback during 2011, global prospects are gradually strengthening again, but downside risks remain elevated. Improved activity in the United States during the second half of 2011 and better policies in the euro area in response to its deepening economic crisis have reduced the threat of a sharp global slowdown. Accordingly, weak recovery will likely resume in the major advanced economies, and activity is expected to remain relatively solid in most emerging and developing economies. However, the recent improvements are very fragile. Policymakers need to continue to implement the fundamental changes required to achieve healthy growth over the medium term. With large output gaps in advanced economies, they must also calibrate policies with a view to supporting still-weak growth over the near term.

    Global growth is projected to drop from about 4 percent in 2011 to about 3½ percent in 2012 because of weak activity during the second half of 2011 and the first half of 2012. The January 2012 WEO Update had already marked down the projections of the September 2011 World Economic Outlook, mainly on account of the damage done by deteriorating sovereign and banking sector developments in the euro area. For most economies, including the euro area, growth is now expected to be modestly stronger than predicted in the January 2012 WEO Update. As discussed in Chapter 1, the reacceleration of activity during the course of 2012 is expected to return global growth to about 4 percent in 2013. The euro area is still projected to go into a mild recession in 2012 as a result of the sovereign debt crisis and a general loss of confidence, the effects of bank deleveraging on the real economy, and the impact of fiscal consolidation in response to market pressures. Because of the problems in Europe, activity will continue to disappoint for the advanced economies as a group, expanding by only about 1½ percent in 2012 and by 2 percent in 2013. Job creation in these economies will likely remain sluggish, and the unemployed will need further income support and help with skills development, retraining, and job searching. Real GDP growth in the emerging and developing economies is projected to slow from 6¼ percent in 2011 to 5¾ percent in 2012 but then to reaccelerate to 6 percent in 2013, helped by easier macroeconomic policies and strengthening foreign demand. The spillovers from the euro area crisis, discussed in Chapter 2, will severely affect the rest of Europe; other economies will likely experience further financial volatility but no major impact on activity unless the euro area crisis intensifies once again.

    Policy has played an important role in lowering systemic risk, but there can be no pause. The European Central Bank’s three-year longer-term refinancing operations (LTROs), a stronger European firewall, ambitious fiscal adjustment programs, and the launch of major product and labor market reforms helped stabilize conditions in the euro area, relieving pressure on banks and sovereigns, but concerns linger. Furthermore, the recent extension of U.S. payroll tax relief and unemployment benefits has forestalled abrupt fiscal tightening that would have harmed the U.S. economy. More generally, many advanced economies have made good progress in designing and implementing strong medium-term fiscal consolidation programs. At the same time, emerging and developing economies continue to benefit from past policy improvements. With no further action, however, problems could easily flare up again in the euro area and fiscal policy could tighten very abruptly in the United States in 2013.

    Accordingly, downside risks continue to loom large, a recurrent feature in recent issues of the World Economic Outlook. Unfortunately, some risks identified previously have come to pass, and the projections here are only modestly more favorable than those identified in a previous downside scenario.1 The most immediate concern is still that further escalation of the euro area crisis will trigger a much more generalized flight from risk. This scenario, discussed in depth in this issue, suggests that global and euro area output could decline, respectively, by 2 percent and 3½ percent over a two-year horizon relative to WEO projections. Alternatively, geopolitical uncertainty could trigger a sharp increase in oil prices: an increase in these prices by about 50 percent would lower global output by 1¼ percent. The effects on output could be much larger if the tensions were accompanied by significant financial volatility and losses in confidence. Furthermore, excessively tight macroeconomic policies could push another of the major economies into sustained deflation or a prolonged period of very weak activity. Additionally, latent risks include disruption in global bond and currency markets as a result of high budget deficits and debt in Japan and the United States and rapidly slowing activity in some emerging economies. However, growth could also be better than projected if policies improve further, financial conditions continue to ease, and geopolitical tensions recede.

    Policies must be strengthened to solidify the weak recovery and contain the many downside risks. In the short term, this will require more efforts to address the euro area crisis, a temperate approach to fiscal restraint in response to weaker activity, a continuation of very accommodative monetary policies, and ample liquidity to the financial sector.

    • In the euro area, the recent decision to combine the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) is welcome and, along with other recent European efforts, will strengthen the European crisis mechanism and support the IMF’s efforts to bolster the global firewall. Sufficient fiscal consolidation is taking place but should be structured to avoid an excessive decline in demand in the near term. Given prospects for very low domestic inflation, there is room for further monetary easing; unconventional support (notably LTROs and purchases of government bonds) should continue to ensure orderly conditions in funding markets and thereby facilitate the pass-through of monetary policy to the real economy. In addition, banks must be recapitalized—this may require direct support from a more flexible EFSF/ESM.

    • In the United States and Japan, sufficient fiscal adjustment is planned over the near term but there is still an urgent need for strong, sustainable fiscal consolidation paths over the medium term. Also, given very low domestic inflation pressure, further monetary easing may be needed in Japan to ensure that it achieves its inflation objective over the medium term. More easing would also be needed in the United States if activity threatens to disappoint.

    • More generally, given the weak growth prospects in the major economies, those with room for fiscal policy maneuvering, in terms of the strength of their fiscal accounts and credibility with markets, can reconsider the pace of consolidation. Others should let automatic stabilizers operate freely for as long as they can readily finance higher deficits.

    Looking further ahead, the challenge is to improve the weak medium-term growth outlook for the major advanced economies. The most important priorities remain fundamental reform of the financial sector; more progress with fiscal consolidation, including ambitious reform of entitlement programs; and structural reforms to boost potential output. In addition to implementing new consensus regulations (such as Basel III) at the national level, financial sector reform must address many weaknesses brought to light by the financial crisis, including the problems related to institutions considered too big or too complex to fail, the shadow banking system, and cross-border collaboration between bank supervisors. Reforms to aging-related spending are crucial because they can greatly reduce future spending without significantly harming demand today. Such measures can demonstrate policymakers’ ability to act decisively and thereby help rebuild market confidence in the sustainability of public finances. This, in turn, can create more room for fiscal and monetary policy to support financial repair and demand without raising the specter of inflationary government deficit financing. Structural reforms must be deployed on many fronts—for example, in the euro area, to improve economies’ capacity to adjust to competitiveness shocks, and in Japan, to boost labor force participation.

    Policies directed at real estate markets can accelerate the improvement of household balance sheets and thus support otherwise anemic consumption. Countries that have adopted such policies, such as Iceland, have seen major benefits, as discussed in Chapter 3. In the United States, the administration has tried various programs but, given their limited success, is now proposing a more forceful approach. Elsewhere, the authorities have left it to banks and households to sort out the problems. In general, fears about moral hazard—by letting individuals who made excessively risky or speculative housing investments off the hook—have stood in the way of progress. These issues are similar to those that are making it so difficult to address the euro area crisis, although in Europe the moral hazard argument is being applied to countries rather than individuals. But in both cases, the use of targeted interventions to support demand can be more effective than much more costly macroeconomic programs. And the moral hazard dimension can be addressed in part through better regulation and supervision.

    Emerging and developing economies continue to reap the benefits of strong macroeconomic and structural policies, but domestic vulnerabilities have been gradually building. Many of these economies have had an unusually good run over the past decade, supported by rapid credit growth or high commodity prices. To the extent that credit growth is a manifestation of financial deepening, this has been positive for growth. But in most economies, credit cannot continue to expand at its present pace without raising serious concerns about the quality of bank lending. Another consideration is that commodity prices are unlikely to grow at the elevated pace witnessed over the past decade, notwithstanding short-term spikes related to geopolitical tensions. This means that fiscal and other policies may well have to adapt to lower potential output growth, an issue discussed in Chapter 4.

    The key near-term challenge for emerging and developing economies is how to appropriately calibrate macroeconomic policies to address the significant downside risks from advanced economies while keeping in check overheating pressures from strong activity, high credit growth, volatile capital flows, still-elevated commodity prices, and renewed risks to inflation and fiscal positions from energy prices. The appropriate response will vary. For economies that have largely normalized macroeconomic policies, the near-term focus should be on responding to lower external demand from advanced economies. At the same time, these economies must be prepared to cope with adverse spillovers and volatile capital flows. Other economies should continue to rebuild macroeconomic policy room and strengthen prudential policies and frameworks. Monetary policymakers need to be vigilant that oil price hikes do not translate into broader inflation pressure, and fiscal policy must contain damage to public sector balance sheets by targeting subsidies only to the most vulnerable households.

    The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.

    Austerity alone cannot treat the economic malaise in the major advanced economies. Policies must also ease the adjustments and better target the fundamental problems—weak households in the United States and weak sovereigns in the euro area—by drawing on resources from stronger peers. Policymakers must guard against overplaying the risks related to unconventional monetary support and thereby limiting central banks’ room for policy maneuvering. While unconventional policies cannot substitute for fundamental reform, they can limit the risk of another major economy falling into a debt-deflation trap, which could seriously hurt prospects for better policies and higher global growth.

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