World Economic Outlook, April 2013 : Hopes, Realities, Risks

Front Matter

Front Matter

Author(s):
International Monetary Fund. Research Dept.
Published Date:
April 2013
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    World Economic and Financial Surveys

    WORLD ECONOMIC OUTLOOK

    April 2013

    Hopes, Realities, Risks

    International Monetary Fund

    ©2013 International Monetary Fund

    Cover and Design: Luisa Menjivar and Jorge Salazar

    Composition: Maryland Composition

    Cataloging-in-Publication Data

    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.

    HC10.80

    ISBN 9781616355555

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    Contents

    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 11–March 11, 2013, 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 $102.60 a barrel in 2013 and $97.58 a barrel in 2014 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 0.5 percent in 2013 and 0.6 percent in 2014; that the three-month euro deposit rate will average 0.2 percent in 2013 and 0.4 percent in 2014; and that the six-month Japanese yen deposit rate will yield on average 0.2 percent in 2013 and 2014. 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 2013.

    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, 2012–13 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    • / between years or months (for example, 2012/13) 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).

    For some countries, the figures for 2012 and earlier are based on estimates rather than actual outturns.

    Data refer to calendar years, except for a few countries that use fiscal years. Please refer to the country information section of the WEO online database on the IMF website (www.imf.org) for a complete listing of the reference periods for each country.

    Projections for Cyprus are excluded due to the ongoing crisis.

    Mongolia is classified as Developing Asia (previously classified as a member of the Commonwealth of Independent States).

    Afghanistan and Pakistan, previously classified as Developing Asia, have been added to the Middle East and North Africa (MENA) to create the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region. The MENA aggregate (excluding Afghanistan and Pakistan) will be maintained.

    Data for the Marshall Islands and Micronesia are now included in the Developing Asia region.

    As in the October 2012 World Economic Outlook, data for Syria are excluded for 2011 and later due to the uncertain political situation.

    Starting with the April 2013 World Economic Outlook, the Newly Industrialized Asian Economies (NIEs) grouping has been eliminated.

    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 (www.elibrary.imf.org) and the IMF website (www.imf.org). 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 (www.elibrary.imf.org) and on the IMF website (www.imf.org). 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, www.imf.org/external/terms.htm.

    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

    700 19th Street, N.W.

    Washington, DC 20431, U.S.A.

    Fax: (202) 623-6343

    Online Forum: www.imf.org/weoforum

    Preface

    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.

    The primary contributors to this report are Abdul Abiad, John Bluedorn, Rupa Duttagupta, Jaime Guajardo, Troy Matheson, Nkunde Mwase, Damiano Sandri, and John Simon.

    Other contributors include Ali Al-Eyd, Alberto Behar, Samya Beidas-Strom, Paul Cashin, Luis Cubeddu, Alfredo Cuevas, Gabriel Di Bella, Frigyes Ferdinand Heinz, Dora Iakova, Joong Shik Kang, Padamja Khandelwal, M. Ayhan Kose, Prakash Loungani, Romain Ranciere, Julien Reynaud, Marina Rousset, Jay Shambaugh, Shane Streifel, Yan Sun, Marco E. Terrones, and Olaf Unteroberdoerster.

    Gavin Asdorian, Shan Chen, Tingyun Chen, Angela Espiritu, Sinem Kilic Celik, Nadezhda Lepeshko, Ezgi O. Ozturk, Katherine Pan, Daniel Rivera-Greenwood, and Bennet Voorhees provided research assistance. Andrew Berg, Kevin Clinton, Olivier Coibion, Romain Duval, Douglas Laxton, Andrew Levin, Akito Matsumoto, Chris Papageorgiou, and Catherine Pattillo provided comments and suggestions. Mitko Grigorov, Mahnaz Hemmati, Toh Kuan, Rajesh Nilawar, Emory Oakes, and Steve Zhang provided technical support. Skeeter Mathurin and Luke Lee 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 consultant 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 April 1, 2013. 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.

    Foreword

    What was until now a two-speed recovery, strong in emerging market and developing economies but weaker in advanced economies, is becoming a three-speed recovery. Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on one hand and the euro area on the other.

    This is reflected in our forecasts. Growth in emerging market and developing economies is forecast to reach 5.3 percent in 2013 and 5.7 percent in 2014. Growth in the United States is forecast to be 1.9 percent in 2013 and 3.0 percent in 2014. In contrast, growth in the euro area is forecast to be –0.3 percent in 2013 and 1.1 percent in 2014.

    The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate. But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of GDP. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Federal Reserve’s “forward guidance” and by pent-up demand for housing and durables.

    The forecast for negative growth in the euro area reflects not only weakness in the periphery but also some weakness in the core. Germany’s growth is strengthening but is still forecast to be less than 1 percent in 2013. France’s growth is forecast to be negative in 2013, reflecting a combination of fiscal consolidation, poor export performance, and low confidence. This may call into question the ability of the core to help the periphery, if and when needed. Most euro area periphery countries, notably Italy and Spain, are expected to have substantial contractions in 2013. The process of internal devaluation is slowly taking place, and most of these countries are slowly becoming more competitive. External demand, however, is just not strong enough to compensate for weak internal demand. Adverse feedback loops between weak banks, weak sovereigns, and low activity are still reinforcing each other.

    Japan is forging a path of its own. After many years of deflation, and little or no growth, the new government has announced a new policy, based on aggressive quantitative easing, a positive inflation target, fiscal stimulus, and structural reforms. This policy will boost growth in the short term, and this is reflected in our forecast of 1.6 percent growth for 2013. Given the high level of public debt, however, embarking on a fiscal stimulus in the absence of a medium-term fiscal consolidation plan is risky; it increases the probability that investors will require a risk premium, and that this will lead in turn to debt unsustainability.

    In contrast to this mixed picture for the advanced economies, emerging market economies are doing well. In the past, the conditions that prevail today— high commodity prices, low interest rates, large capital inflows—would often have led to credit booms and overheating. This time, however, policymakers have generally succeeded in keeping aggregate demand in line with potential. At the same time, potential growth has itself apparently declined in a number of major emerging market economies, relative to precrisis trends. Although circumstances vary across countries, the evidence suggests that some of this decline has its source in policy-induced distortions, and those should be addressed.

    Turning to policies:

    In the United States, the focus should be on defining the right path of consolidation. While the sequester has decreased worries about debt sustainability, it is the wrong way to proceed. There should be both less and better fiscal consolidation now and a commitment to more fiscal consolidation in the future.

    In the euro area, institutional progress has been made over the past year, in particular on creating a road map for a banking union. The Outright Monetary Transactions program offered by the European Central Bank, even if not yet taken up, has reduced tail risks. Yet this is not enough. The interest rates facing borrowers in periphery countries are still too high to secure the recovery, and there is a need for further and urgent measures to strengthen banks, without weakening the sovereigns. The weakness of private demand also suggests that countries that have scope to do so should allow automatic stabilizers to operate, and some countries with fiscal space should go even beyond this.

    Emerging market economies face different challenges, one of which is handling capital flows. Fundamentally attractive prospects in emerging market economies, together with low interest rates in advanced economies, are likely to lead to continuing net capital inflows and exchange rate pressure in many emerging market economies. This is a desirable process and part of the global rebalancing that must take place if the world economy is to get back to health. At the same time, as we have seen, capital flows can be volatile, making macroeconomic management more difficult. The challenge for recipient countries is to accommodate the underlying trends while reducing the volatility of the flows when they threaten macro or financial stability.

    In short, recent good news about the United States has come with renewed worries about the euro area. Given the strong interconnections between countries, an uneven recovery is also a dangerous one. Some tail risks have decreased, but it is not time for policymakers to relax.

    Olivier Blanchard

    Economic Counsellor

    Executive Summary

    Global economic prospects have improved again but the road to recovery in the advanced economies will remain bumpy. World output growth is forecast to reach 3¼ percent in 2013 and 4 percent in 2014. In advanced economies, activity is expected to gradually accelerate, starting in the second half of 2013. Private demand appears increasingly robust in the United States but still very sluggish in the euro area. In emerging market and developing economies, activity has already picked up steam.

    Better, but Bumpy and Divergent, Prospects for Advanced Economies

    Over the past six months, advanced economy policymakers have successfully defused two of the biggest short-term threats to the global recovery, the threat of a euro area breakup and a sharp fiscal contraction in the United States caused by a plunge off the “fiscal cliff.” In response, financial markets have rallied on a broad front. Moreover, financial stability has improved, as underscored in the April 2013 Global Financial Stability Report (GFSR).

    The financial market rally has been helping economic recovery by improving funding conditions and supporting confidence, but growth prospects appear broadly unchanged. While U.S. private demand has been showing strength as credit and housing markets are healing, larger-than-expected fiscal adjustment is projected to keep real GDP growth at about 2 percent in 2013. In the euro area, better conditions for periphery sovereigns are not yet passing through to companies and households, because banks are still hobbled by poor profitability and low capital, constraining the supply of credit. Also, in many economies activity will be held back by continued fiscal adjustment, competitiveness problems, and balance sheet weaknesses. Furthermore, new political and financial risks that could put a damper on the recovery have come to the fore. Accordingly, real GDP is projected to contract relative to 2012, by about ¼ percent of GDP. Japan, by contrast, will see a fiscal- and monetary-stimulus-driven rebound, with real GDP growth reaching 1½ percent.

    Overall, the annual growth forecast for advanced economies in 2013—a modest 1¼ percent—is no better than the outcome for 2012. That said, assuming that policymakers avoid setbacks and deliver on their commitments, the projections in this World Economic Outlook (WEO) build on continued easing of the brakes on real activity. Consequently, in 2013, after a weak first half, real GDP growth in the advanced economies is projected to rise above 2 percent for the rest of the year and to average 2¼ percent in 2014, spurred by U.S. growth of about 3 percent.

    Reaccelerating Activity in Emerging Market and Developing Economies

    There was a noticeable slowdown in the emerging market and developing economies during 2012, a reflection of the sharp deceleration in demand from key advanced economies, domestic policy tightening, and the end of investment booms in some of the major emerging market economies. But with consumer demand resilient, macroeconomic policy on hold, and exports reviving, most economies in Asia and sub-Saharan Africa and many economies in Latin America and the Commonwealth of Independent States are now seeing higher growth. The recovery should again gain speed in emerging Europe as demand from advanced Europe slowly picks up. However, economies in the Middle East and North Africa continue to struggle with difficult internal transitions. And a couple of economies in South America are facing high inflation and increasing exchange market pressure.

    There is good news emanating from developing economies. Even as estimates of potential growth have been marked down in recent years for some of the larger emerging markets, it has been steadily improving elsewhere. In fact, Chapter 4 underscores that the prospects of many of today’s dynamic low-income countries appear stronger than those of their peers during the 1960s and 1970s.

    More Symmetric Risks

    Notwithstanding old dangers and new turbulence, the near-term risk picture has improved as recent policy actions in Europe and the United States have addressed some of the gravest short-term risks. In the euro area, the main short-term dangers now revolve around adjustment fatigue, weak balance sheets, broken credit channels in the periphery, and insufficient progress toward stronger economic and monetary union at the euro area level. In the United States and Japan, risks relate mainly to medium-term fiscal policy. Over the short term, a failure by the U.S. Congress to replace the automatic spending cuts (budget sequester) with back-loaded measures at the end of the current fiscal year would entail somewhat lower-than-projected growth in late 2013 and beyond. Of much greater concern would be a failure to raise the debt ceiling—the risk of such self-destructive inaction, however, appears low. Over the medium term, downside risks revolve around the absence of strong fiscal consolidation plans in the United States and Japan; high private sector debt, limited policy space, and insufficient institutional progress in the euro area, which could lead to a protracted period of low growth; distortions from easy and unconventional monetary policy in many advanced economies; and overinvestment and high asset prices in many emerging market and developing economies. Unless policies address these risks, global activity is likely to suffer periodic setbacks. By the same token, a stronger-than-projected policy response could also foster a stronger recovery in activity.

    Policymakers Cannot Afford to Relax Their Efforts

    In advanced economies, policy should use all prudent measures to support sluggish demand. However, the risks related to high sovereign debt limit the fiscal policy room to maneuver. There is no silver bullet to address all the concerns about demand and debt. Rather, fiscal adjustment needs to progress gradually, building on measures that limit damage to demand in the short term; monetary policy needs to stay supportive of activity; financial policies need to help improve the pass-through of monetary policy; and structural and other policies need to spur potential output and global demand rebalancing. Regarding monetary policy, one key finding of Chapter 3 is that inflation expectations have become much better anchored, affording central banks greater leeway to support activity—although they must be mindful of financial stability risks emanating from their policies, as discussed in detail in the April 2013 GFSR.

    The critical fiscal policy requirements are persistent but gradual consolidation and, for the United States and Japan, the design and implementation of comprehensive medium-term deficit-reduction plans. These requirements are urgent for Japan, given the significant risks related to the renewal of stimulus in an environment of very high public debt levels. In the United States, it is worrisome that after three years of deliberations, policymakers have not agreed on a credible plan for entitlement and tax reform and that improvement in near-term prospects seems to have come with a decreased sense of urgency for progress. The specific requirements and country details are discussed in the April 2013 Fiscal Monitor.

    The April 2013 GFSR underscores the need for further financial repair and reform, including restructuring weak banks and, in some cases, offering households and weak corporate debtors avenues other than traditional bankruptcy for dealing with debt overhang. Previous WEO reports also stressed the critical role of structural reforms in rebuilding competitiveness and boosting medium-term growth prospects in many euro area economies.

    In emerging market and developing economies, some tightening of policies appears appropriate over the medium term. The tightening should begin with monetary policy and be supported with prudential measures as needed to rein in budding excesses in financial sectors. Eventually, policymakers should also return fiscal balances to levels that afford ample room for policy maneuvering. Some will need to take significant action now; others will need only limited improvements over the medium term.

    Policy Spillovers

    The bumpy recovery and skewed macroeconomic policy mix in advanced economies are complicating policymaking in emerging market economies. Concerns resurfaced once again recently, when looser monetary policy in Japan and other factors prompted a large depreciation of the yen. That said, complaints about competitive exchange rate depreciations appear overblown. At this juncture, there seem to be no large deviations of the major currencies from medium-term fundamentals. The U.S. dollar and the euro appear moderately overvalued and the renminbi moderately undervalued. The evidence on valuation of the yen is mixed.

    The way to address currency worries is for all economies to pursue policies that foster internal and external balance. In the major advanced economies, this requires more progress with medium- and long-term fiscal adjustment plans, entitlement reform, and balance sheet repair. Short-term fiscal policies could then be less restrictive, which, together with better balance sheets, would relieve pressure from overburdened monetary policy. Emerging market and developing economies, in turn, face different challenges. Key external surplus economies should allow their exchange rates to be more market determined and should implement structural policies to rebalance the economy toward consumption-driven growth. Other economies need to deploy structural policies to foster the healthy absorption of capital inflows. When these flows threaten to destabilize their economies, they can adopt macroprudential or capital-flow-management measures to avoid the buildup of major internal imbalances.

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