Abstract

World Economic Outlook

Titlepage

World Economic Outlook

October 2016

Subdued Demand

Symptoms and Remedies

Copyright

©2016 International Monetary Fund

Cover and Design: Luisa Menjivar and Jorge Salazar

Composition: AGS, An RR Donnelley Company

Cataloging-in-Publication Data

Joint Bank-Fund Library

Names: International Monetary Fund.

Title: World economic outlook (International Monetary Fund)

Other titles: WEO | Occasional paper (International Monetary Fund) | World economic and financial surveys.

Description: Washington, DC : International Monetary Fund, 1980- | Semiannual | Some issues also have thematic titles. | Began with issue for May 1980. | 1981-1984: Occasional paper / International Monetary Fund, 0251-6365 | 1986-: World economic and financial surveys, 0256-6877.

Identifiers: ISSN 0256-6877 (print) | ISSN 1564-5215 (online)

Subjects: LCSH: Economic development—Periodicals. | International economic relations—Periodicals. | Debts, External—Periodicals. | Balance of payments—Periodicals. | International finance—Periodicals. | Economic forecasting—Periodicals.

Classification: LCC HC10.W79

HC10.80

ISBN 978-1-51359-954-0 (paper)

978-1-47553-996-7 (PDF)

978-1-47553-981-3 (ePub)

978-1-47553-998-1 (Mobi)

The World Economic Outlook (WEO) is a survey by the IMF staff published twice a year, in the spring and fall. The WEO is prepared by the IMF staff and has benefited from comments and suggestions by Executive Directors following their discussion of the report on September 23, 2016. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.

Recommended citation: International Monetary Fund. 2016. World Economic Outlook: Subdued Demand: Symptoms and Remedies. Washington, October.

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Contents

  • Assumptions and Conventions

  • Further Information and Data

  • Preface

  • Foreword

  • Executive Summary

  • Chapter 1. Global Prospects and Policies

    • Recent Developments and Prospects

    • The Forecast

    • Risks

    • Policy Priorities

    • Scenario Box 1. Tariff Scenarios

    • Box 1.1. World Growth Projections over the Medium Term

    • Special Feature: Commodity Market Developments and Forecasts, with a Focus on Food Security and Markets in the World Economy

    • References

  • Chapter 2. Global Trade: What’s behind the Slowdown?

    • The Implications of Trade for Productivity and Welfare: A Primer

    • The Slowdown in Trade Growth: Key Patterns

    • Understanding the Slowdown in Trade Growth

    • Summary and Policy Implications

    • Box 2.1. Is the Trade Slowdown Contributing to the Global Productivity Slowdown? New Evidence

    • Box 2.2. The Role of Trade Policies in Reinvigorating Trade

    • Box 2.3. Potential Gains from Jump-Starting Trade Liberalization

    • Annex 2.1. Data

    • Annex 2.2. Constructing Disaggregated Import Volume and Price Indices

    • Annex 2.3. Analysis Using an Empirical Model of Import Demand

    • Annex 2.4. Analysis Using a General Equilibrium Model

    • Annex 2.5. Analysis at the Product Level

    • Annex 2.6. Analysis Using Gravity Model of Trade

    • References

  • Chapter 3. Global Disinflation in an Era of Constrained Monetary Policy

    • A Primer on the Costs of Disinflation, Persistently Low Inflation, and Deflation

    • Inflation Dynamics: Patterns and Recent Drivers

    • How Well Anchored Are Inflation Expectations?

    • Summary and Policy Implications

    • Box 3.1. Industrial Slack and Producer Price Inflation

    • Box 3.2. The Japanese Experience with Deflation

    • Box 3.3. How Much Do Global Prices Matter for Food Inflation?

    • Box 3.4. The Impact of Commodity Prices on Producer Price Inflation

    • Box 3.5. A Transparent Risk-Management Approach to Monetary Policy

    • Annex 3.1. Sample and Data

    • Annex 3.2. Model Simulations

    • Annex 3.3. Principal Component Analysis

    • Annex 3.4. Drivers of the Recent Decline in Inflation

    • Annex 3.5. The Effect of Inflation Shocks on Inflation Expectations

    • References

  • Chapter 4. Spillovers from China’s Transition and from Migration

    • Introduction

    • The Challenges and Opportunities of Migration

    • Box 4.1. China’s Ties with Low-Income and Developing Countries

    • Box 4.2. Conflicts Driving Migration: Middle East and North Africa

    • Box 4.3. Migration in Sub-Saharan Africa

    • References

  • Statistical Appendix

    • Assumptions

    • What’s New

    • Data and Conventions

    • Country Notes

    • Classification of Countries

    • General Features and Composition of Groups in the World Economic Outlook Classification

    • Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2015

    • Table B. Advanced Economies by Subgroup

    • Table C. European Union

    • Table D. Emerging Market and Developing Economies by Region and Main Source of Export Earnings

    • Table E. Emerging Market and Developing Economies by Region, Net External Position, and Status as Heavily Indebted Poor Countries and Low-Income Developing Countries

    • Table F. Economies with Exceptional Reporting Periods

    • Table G. Key Data Documentation

    • Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies

    • List of Tables

      • Output (Tables A1–A4)

      • Inflation (Tables A5–A7)

      • Financial Policies (Table A8)

      • Foreign Trade (Table A9)

      • Current Account Transactions (Tables A10–A12)

      • Balance of Payments and External Financing (Table A13)

      • Flow of Funds (Table A14)

      • Medium-Term Baseline Scenario (Table A15)

  • World Economic Outlook, Selected Topics

  • IMF Executive Board Discussion of the Outlook, September 2016

  • Tables

    • Table 1.1. Overview of the World Economic Outlook Projections

    • Annex Table 1.1.1. Europe: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

    • Annex Table 1.1.2. Asia and Pacific: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

    • Annex Table 1.1.3. Western Hemisphere: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

    • Annex Table 1.1.4. Commonwealth of Independent States: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

    • Annex Table 1.1.5. Middle East, North Africa, Afghanistan, and Pakistan: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

    • Annex Table 1.1.6. Sub-Saharan Africa: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

    • Table 1.SF.1. Used-to-Available Land Suitable for Agriculture by Region, 2013

    • Table 1.SF.2. Food Exports

    • Table 1.SF.3. Agricultural Yield

    • Table 1.SF.4. Urban Population by Region

    • Table 1.SF.5. Net Export of Food

    • Table 1.SF.6. Share of Food and Beverages in Total Consumption, 2010

    • Table 1.SF.1.1. Impact of Land Governance and Food Security on Land Deals

    • Table 2.1. Historical Association among Real Import Growth at the Product Level, Trade Policies, and Participation in Global Value Chains

    • Table 2.1.1. Baseline Estimation Results

    • Table 2.2.1. Trade Policy Challenges Vary across Countries

    • Annex Table 2.1.1. Data Sources

    • Annex Table 2.1.2. Sample of Economies Included in the Analytical Exercises

    • Annex Table 2.3.1. Import Content of Aggregate Demand Components

    • Annex Table 2.3.2. Empirical Model of Real Imports of Goods and Services

    • Annex Table 2.3.3. Empirical Model of Real Imports of Goods

    • Annex Table 2.3.4. Empirical Model of Real Imports of Services

    • Annex Table 2.3.5. Residuals: Real Goods Import Growth

    • Annex Table 2.3.6. Residuals: Real Services Import Growth

    • Annex Table 2.3.7. Residuals: Real Goods Import Growth Controlling for Global Uncertainty, Global Financial Conditions, and Financial Stress

    • Annex Table 2.3.8. Decomposing the Decline in Real Goods Import Growth: Full Sample

    • Annex Table 2.3.9. Residuals: Real Goods Import Growth, Corrected for Potential Effect of Trade Policies on Aggregate Demand

    • Annex Table 2.3.10. Decomposing the Decline in Real Goods Import Growth Controlling for Trade Policies

    • Annex Table 2.5.1. Alternative Specifications for Real Imports in Product-Level Regressions

    • Annex Table 2.5.2. Alternative Specifications for Nominal Imports in Product-Level Regressions

    • Annex Table 2.6.1. Link between Global Value Chain Integration and Yearly Nominal Import Growth Using Gravity Model Estimated in Levels

    • Annex Table 2.6.2. Link between Global Value Chain Integration and Yearly Nominal Import Growth Using Gravity Model Estimated in Growth Rates

    • Table 3.3.1. Cross-Country Determinants of Pass-Through of Free-on-Board Food Prices to Food Consumer Price Inflation

    • Annex Table 3.1.1. Sample of Advanced and Emerging Market Economies

    • Annex Table 3.1.2. Data Sources

    • Table A1. Summary of World Output

    • Table A2. Advanced Economies: Real GDP and Total Domestic Demand

    • Table A3. Advanced Economies: Components of Real GDP

    • Table A4. Emerging Market and Developing Economies: Real GDP

    • Table A5. Summary of Inflation

    • Table A6. Advanced Economies: Consumer Prices

    • Table A7. Emerging Market and Developing Economies: Consumer Prices

    • Table A8. Major Advanced Economies: General Government Fiscal Balances and Debt

    • Table A9. Summary of World Trade Volumes and Prices

    • Table A10. Summary of Current Account Balances

    • Table A11. Advanced Economies: Balance on Current Account

    • Table A12. Emerging Market and Developing Economies: Balance on Current Account

    • Table A13. Summary of Financial Account Balances

    • Table A14. Summary of Net Lending and Borrowing

    • Table A15. Summary of World Medium-Term Baseline Scenario

  • Online Tables

    • Table B1. Advanced Economies: Unemployment, Employment, and Real GDP per Capita

    • Table B2. Emerging Market and Developing Economies: Real GDP

    • Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing

    • Table B4. Emerging Market and Developing Economies: Consumer Prices

    • Table B5. Summary of Fiscal and Financial Indicators

    • Table B6. Advanced Economies: General and Central Government Net Lending/Borrowing and General Government Net Lending/Borrowing Excluding Social Security Schemes

    • Table B7. Advanced Economies: General Government Structural Balances

    • Table B8. Emerging Market and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance

    • Table B9. Emerging Market and Developing Economies: General Government Net Lending/Borrowing

    • Table B10. Selected Advanced Economies: Exchange Rates

    • Table B11. Emerging Market and Developing Economies: Broad Money Aggregates

    • Table B12. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services

    • Table B13. Emerging Market and Developing Economies by Region: Total Trade in Goods

    • Table B14. Emerging Market and Developing Economies by Source of Export Earnings: Total Trade in Goods

    • Table B15. Summary of Current Account Transactions

    • Table B16. Emerging Market and Developing Economies: Summary of External Debt and Debt Service

    • Table B17. Emerging Market and Developing Economies by Region: External Debt by Maturity

    • Table B18. Emerging Market and Developing Economies by Analytical Criteria: External Debt by Maturity

    • Table B19. Emerging Market and Developing Economies: Ratio of External Debt to GDP

    • Table B20. Emerging Market and Developing Economies: Debt-Service Ratios

    • Table B21. Emerging Market and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators

  • Figures

    • Figure 1.1. Global Activity Indicators

    • Figure 1.2. Global Inflation

    • Figure 1.3. Commodity and Oil Markets

    • Figure 1.4. Real Effective Exchange Rate Changes, March 2016–September 2016

    • Figure 1.5. Emerging Market Economies: Capital Flows

    • Figure 1.6. Advanced Economies: Monetary and Financial Market Conditions

    • Figure 1.7. Advanced Economies: Credit, House Prices, and Balance Sheets

    • Figure 1.8. Emerging Market Economies: Interest Rates

    • Figure 1.9. Emerging Market Economies: Equity Markets and Credit

    • Figure 1.10. Domestic Demand, Output Gap, Unemployment, and Labor Force Participation in Advanced Economies

    • Figure 1.11. Demographics

    • Figure 1.12. Advanced Economies: Growth, Investment, and Employment in Recent WEO Vintages

    • Figure 1.13. Emerging Markets: Terms-of-Trade Windfall Gains and Losses and Real Exchange Rates

    • Figure 1.14. Real per Capita Growth Rates and Convergence (1995–2020)

    • Figure 1.15. Fiscal Indicators

    • Figure 1.16. External Sector

    • Figure 1.17. Creditors versus Debtors

    • Figure 1.18. Current Account Gaps and Real Exchange Rates

    • Figure 1.19. Risks to the Global Outlook

    • Figure 1.20. Recession and Deflation Risks

    • Scenario Figure 1. Unilateral and Bilateral Imposition of Tariffs on Imported Goods

    • Scenario Figure 2. A Worldwide Increase in Protectionism

    • Figure 1.1.1 World Growth Projections over the Medium Term

    • Figure 1.SF.1. Commodity Market Developments

    • Figure 1.SF.2. Producer Support Estimate

    • Figure 1.SF.3. World Food Production and Consumption by Country, 2015

    • Figure 1.SF.4. Population and World Food Consumption

    • Figure 1.SF.5. Maize Yield

    • Figure 1.SF.6. Food Prices and Violent Events

    • Figure 1.SF.7. Global Food Security Index, 2016

    • Figure 1.SF.1.1. Evolution of Deals over Time by Target Region

    • Figure 2.1. World Real Trade and GDP Growth in Historical Perspective

    • Figure 2.2. World Trade in Volumes, Values, and across Countries

    • Figure 2.3. Trade Dynamics across Broad Country Groups

    • Figure 2.4. Trade Dynamics across Types of Trade and Products

    • Figure 2.5. Empirical Model: Actual and Predicted Evolution of Real Import Growth

    • Figure 2.6. Empirical Model: Difference between Actual and Predicted Growth of Real Goods Imports

    • Figure 2.7. Empirical Model: Decomposing the Slowdown in Real Goods Import Growth

    • Figure 2.8. Structural Model: Actual and Model-Implied Evolution of Nominal Import-to-GDP Ratio

    • Figure 2.9. Trade Costs in Historical Perspective: A Top-Down Approach

    • Figure 2.10. Trade Policies in Historical Perspective

    • Figure 2.11. Logistics and Transportation Costs of Trade in Historical Perspective

    • Figure 2.12. Global Value Chains in Historical Perspective

    • Figure 2.13. Contribution of Trade Policies and Global Value Chains to the Slowdown in Real Goods Import Growth

    • Figure 2.14. Gravity Model: Global Value Chain Participation and Bilateral Sectoral Trade Growth

    • Figure 2.1.1. The Evolution of Trade across Industries in Major Economies

    • Figure 2.2.1. Potential Gains from Tackling Traditional Trade Barriers

    • Figure 2.2.2. Trade Policy Frontier Areas

    • Figure 2.3.1. Gains from Eliminating Tariffs and Implementing the World Trade Organization Trade Facilitation Agreement

    • Annex Figure 2.1.1. Nominal Import Growth across Categories of Services

    • Annex Figure 2.2.1. Real Import Growth

    • Annex Figure 2.5.1. Trade Finance Availability

    • Annex Figure 2.5.2. Contribution of Trade Policies and Global Value Chains to the Slowdown in Real and Nominal Goods Import Growth

    • Figure 3.1. Oil Prices and Consumer Price Inflation

    • Figure 3.2. Share of Countries with Low Inflation

    • Figure 3.3. Medium-Term Inflation Expectations and Oil Prices

    • Figure 3.4. Effect of Disinflationary Shocks in Advanced Economies under Constrained Monetary Policy and Unanchored Inflation Expectations

    • Figure 3.5. Consumer Price Inflation

    • Figure 3.6. Share of Consumer Price Inflation Variation Explained by First Common Factor

    • Figure 3.7. Core Consumer Price Inflation

    • Figure 3.8. Wage Inflation in Advanced Economies

    • Figure 3.9. Sectoral Producer Prices in Advanced Economies

    • Figure 3.10. Sectoral Consumer Prices in Advanced Economies

    • Figure 3.11. Estimated Phillips Curve Parameters

    • Figure 3.12. Contribution to Inflation Deviations from Targets: Advanced Economies

    • Figure 3.13. Contribution to Inflation Deviations from Targets: Emerging Market Economies

    • Figure 3.14. Correlation of Manufacturing Slack in China, Japan, and the United States with Import Price Contribution to Inflation in Other Economies

    • Figure 3.15. Survey- and Market-Based Inflation Expectations

    • Figure 3.16. Sensitivity of Inflation Expectations to Inflation Surprises

    • Figure 3.17. Sensitivity of Inflation Expectations to Inflation Surprises and Monetary Policy Frameworks

    • Figure 3.18. Sensitivity of Inflation Expectations to Inflation Surprises before and after Adoption of Inflation Targeting

    • Figure 3.19. Sensitivity of Inflation Expectations to Inflation Surprises over Time

    • Figure 3.20. Change in Sensitivity of Inflation Expectations to Inflation Surprises

    • Figure 3.21. Average Sensitivity of Inflation Expectations to Inflation Surprises in Countries at the Effective Lower Bound

    • Figure 3.22. Sensitivity of Longer-Term Inflation Expectations to Changes in Oil Prices

    • Figure 3.1.1. Producer Price and Consumer Price Inflation in China, Japan, and the United States

    • Figure 3.1.2. Industrial Slack in China, Japan, and the United States

    • Figure 3.1.3. Decomposition for Total Producer Price Inflation for China, Japan, and the United States

    • Figure 3.2.1. Inflation Dynamics

    • Figure 3.2.2. Cyclical and Structural Indicators in Japan

    • Figure 3.2.3. Policy Indicators in Japan

    • Figure 3.3.1. Food Weights in Consumption and per Capita GDP

    • Figure 3.3.2. World Food Prices and Consumer Food Prices

    • Figure 3.3.3. Food Prices Relative to Nonfood Prices

    • Figure 3.3.4. Food Pass-Through Coefficients for Various Country Groups

    • Figure 3.3.5. Distribution of Food Pass-Through Coefficients

    • Figure 3.4.1. Commodity Prices and Producer Prices

    • Figure 3.4.2. Contribution to Cumulative Producer Price Inflation

    • Figure 3.5.1. Forecast as Envisaged at 2009:Q2: Loss-Minimization versus Linear Reaction Function

    • Annex Figure 3.2.1. Effect of Disinflationary Shocks on Core Inflation in Advanced Economies under Constrained Monetary Policy

    • Annex Figure 3.2.2. Effect of Disinflationary Shocks on Core Inflation in Advanced Economies under Constrained Monetary Policy and Unanchored Inflation Expectations

    • Annex Figure 3.3.1. Share of Consumer Price Inflation Variation Explained by Different Factors

    • Annex Figure 3.3.2. First Common Factor and Commodity Prices

    • Annex Figure 3.4.1. Contribution to Inflation Deviations from Targets Using Various Measures of Inflation Expectations

    • Annex Figure 3.4.2. Contribution to Inflation Deviations from Targets Using Various Measures of Cyclical Unemployment

    • Annex Figure 3.4.3. Correlation of Manufacturing Slack in China, Japan, and the United States with Import Price Contribution to Inflation in Other Economies

    • Annex Figure 3.4.4. Correlation of China Manufacturing Slack with Import Price Contribution to Inflation in Other Economies: Results from Panel Regressions

    • Annex Figure 3.5.1. Change in Inflation Expectations and Inflation Shocks

    • Annex Figure 3.5.2. Sensitivity of Inflation Expectations when Controlling for Slack: Advanced Economies

    • Figure 4.1. China: GDP and Trade Growth

    • Figure 4.2. Number of International Migrants and Refugees

    • Figure 4.3. China: Global Clout and Rebalancing

    • Figure 4.4. Spillovers from China over Time

    • Figure 4.5. Impact on Exports of a 1 Percent Shock to China’s Demand after One Year

    • Figure 4.6. Decline in Average Export Growth Rate Attributed to China Demand, 2014:Q1–2015:Q3

    • Figure 4.7. China: Processing Trade

    • Figure 4.8. A Large Footprint in Commodity Markets

    • Figure 4.9. Cumulative One-Year Price Impact from a 1 Percent Shock to China’s Industrial Production

    • Figure 4.10. China: Slowdown Scenario

    • Figure 4.11. Spillovers from China

    • Figure 4.12. Transmission of Spillovers through Financial Channels

    • Figure 4.13. China: Cyclical Slowdown Scenario

    • Figure 4.14. International Migrants and Refugees

    • Figure 4.15. Migration by Age and Skill

    • Figure 4.16. Determinants of Migration

    • Figure 4.17. Females: Low Education versus High Skilled, 2000

    • Figure 4.18. Labor Market Performance

    • Figure 4.19. Germany: Present Value of Expected Future Net Fiscal Contribution by Age Group

    • Figure 4.20. Estimated Impact of Migration in More Developed Economies, 2100

    • Figure 4.21. Migration: Positive Longer-Term Growth Effects

    • Figure 4.22. Contributions of Outward Migration to Population Growth

    • Figure 4.23. Migration of Population with Tertiary Education

    • Figure 4.24. Remittances and Diasporas

    • Figure 4.1.1. China’s Ties with Low-Income and Developing Countries

    • Figure 4.3.1. Migration in Sub-Saharan Africa

    • Figure 4.3.2. Age and Education of Migrants and Origin Country Population

    • Figure 4.3.3. Top Receivers of Remittances in Sub-Saharan Africa, 2013–15

Editor’s note

October 4, 2016

Statistical Tables A2 and A6 have been replaced to correct incorrect values for Macao SAR, Iceland, and San Marino in the first column of each table.

Assumptions and Conventions

A number of assumptions have been adopted for the projections presented in the World Economic Outlook (WEO). It has been assumed that real effective exchange rates remained constant at their average levels during July 22 to August 19, 2016, except for those 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 in the Statistical Appendix); that the average price of oil will be $42.96 a barrel in 2016 and $50.64 a barrel in 2017 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 1.0 percent in 2016 and 1.3 percent in 2017; that the three-month euro deposit rate will average −0.3 percent in 2016 and −0.4 percent in 2017; and that the six-month Japanese yen deposit rate will yield on average 0.0 percent in 2016 and −0.1 percent in 2017. 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 September 16, 2016.

The following conventions are used throughout the WEO:

. . . to indicate that data are not available or not applicable;

– between years or months (for example, 2015–16 or January–June) to indicate the years or months covered, including the beginning and ending years or months; and

/ between years or months (for example, 2015/16) to indicate a fiscal or financial year.

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

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

Data refer to calendar years, except in the case of a few countries that use fiscal years. Please refer to Table F in the Statistical Appendix, which lists the economies with exceptional reporting periods for national accounts and government finance data for each country.

For some countries, the figures for 2015 and earlier are based on estimates rather than actual outturns. Please refer to Table G in the Statistical Appendix, which lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments indicators for each country.

In the tables and figures, the following conventions apply:

  • If no source is listed on tables and figures, data are drawn from the 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 noted otherwise, 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 (WEO) 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 those in 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 their timeliness, accuracy, and completeness, but it cannot be guaranteed. 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):

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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 Maurice Obstfeld, Economic Counsellor and Director of Research. The project was directed by Gian Maria Milesi-Ferretti, Deputy Director, Research Department; Oya Celasun, Division Chief, Research Department; and Helge Berger, Division Chief, Research Department and Head of the IMF’s Spillover Task Force.

The primary contributors to this report were Rabah Arezki, Aqib Aslam, Claudia Berg, Samya Beidas-Strom, Patrick Blagrave, Christian Bogmans, Emine Boz, Luis Catão, Eugenio Cerutti, Sangyup Choi, Davide Furceri, Bertrand Gruss, Zsóka Kóczán, Ksenia Koloskova, Toh Kuan, Weicheng Lian, Akito Matsumoto, Malhar Nabar, Marcos Poplawski-Ribeiro, Sweta Saxena, Petia Topalova, and Esteban Vesperoni.

Other contributors include Jaebin Ahn, Emre Alper, Michal Andrle, Elif Arbatli, Gavin Asdorian, Felicia Belostecinic, Diego Cerdeiro, Kevin Clinton, Vanessa Diaz Montelongo, Romain Duval, Rupa Duttagupta, Angela Espiritu, Rachel Yuting Fan, Emily Forrest, Mitko Grigorov, Refet Gürkaynak, Mahnaz Hemmati, Christian Henn, Benjamin Hilgenstock, Niko Hobdari, Ava Yeabin Hong, Keiko Honjo, Benjamin Hunt, Gabi Ionescu, Zoltan Matyas Jakab, Hao Jiang, Alimata Kini-Kaboré, Sinem Kılıç Çelik, Douglas Laxton, Andrei Levchenko, Olivia Ma, Trevor Charles Meadows, Juan Angel Garcia Morales, Brent Neiman, Emory Oakes, Evgenia Pugacheva, Rachel Szymanski, Daniel Te Kaat, Sheng Tibung, Nicholas Tong, Ali Uppal, Hou Wang, Niklas Westelius, Jilun Xing, Yuan Zeng, Fan Zhang, and Qiaoqiao Zhang.

Joseph Procopio from the Communications Department led the editorial team for the report, with support from Michael Harrup and Christine Ebrahimzadeh and editorial assistance from Linda Kean, Lucy Scott Morales, Lorraine Coffey, Gregg Forte, EEI Communications, and AGS (an RR Donnelley Company).

The analysis has benefited from comments and suggestions by staff members from other IMF departments, as well as by Executive Directors following their discussion of the report on September 23, 2016. 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

When I arrived at the International Monetary Fund about a year ago, our worries focused on China’s growth prospects amid domestic rebalancing, the struggles of primary commodity exporters, and the timing and impact of the Federal Reserve’s first interest rate increase since 2006. Today, stable growth performance has reduced near-term concerns about China, commodity prices have partially recovered, and the Federal Reserve’s initial interest rate hike is behind us. Global asset markets seem placid after these developments, with advanced economy equity prices at high levels, market-based volatility measures low, and renewed capital inflows to emerging market economies. And our baseline forecast sees improving world growth in the years ahead. That projected improvement is driven by emerging market and developing economies: as conditions in economies under stress gradually normalize, China’s growth rate—while declining—remains high, and the recovery is gaining traction elsewhere.

A closer look, however, gives cause for disquiet. China’s growth stability owes much to macroeconomic stimulus measures that slow needed adjustments in both its real economy and financial sector. Commodity exporters still struggle with past investment overhangs in extractive sectors, along with the challenges of fiscal adjustment and longer-term economic diversification. And the Federal Reserve, despite an ever-strengthening U.S. job market, has so far judged a second interest rate rise to be too risky, several times citing worrisome economic developments abroad.

Asset prices and emerging market capital inflows are supported by ultra-low interest rates in advanced economies that now seem poised to persist considerably longer than they did last October. But while lower-for-longer interest rates have their upsides, they also reflect difficult economic realities. Our expectations for future global growth and productivity have fallen in light of recent disappointing outcomes. Deflation pressures persist. And policy uncertainty in the global economy, as reflected in news-based measures, is elevated. The current outlook remains subdued.

Political tensions have now made advanced economies a major locus of policy uncertainty. Most dramatically, the unexpected vote for Brexit on June 23 leaves unclear the future shape of the United Kingdom’s trade and financial relations with the remaining 27 European Union (EU) members, introducing political and economic uncertainties that threaten to dampen investment and hiring throughout Europe. Alongside economic anxiety and other factors, the Brexit vote reflects a resentment of cross-border migration that has fueled nationalist sentiment in Europe and called into question the way forward for EU integration. These trends are exacerbated by the difficulties of absorbing a large volume of refugees who have fled tragic events in the Middle East. In general, centrifugal political forces across the continent are making it harder to advance or even maintain economic reforms. Similar tensions afflict the U.S. political scene, where anti-immigrant and antitrade rhetoric have been prominent from the start of the current presidential election round. Across the world, protectionist trade measures have been on the rise.

Inside the World Economic Outlook

Not coincidentally, the chapters in this new World Economic Outlook focus on several of these concerns. After Chapter 1’s summary of the global outlook, Chapter 2 analyzes the forces behind the recent growth slowdown in the volume of international trade. A major driver is slower growth in aggregate demand, particularly in investment, which is especially apt to generate international trade flows in the form of capital goods and intermediate inputs. But key roles are also played by the slowing momentum of trade liberalization measures, the return of some protectionist measures, and the (possibly related) retraction of global value chains. Some of the trade slowdown may reflect a natural maturation of the tendencies that propelled trade growth in the past, but it also seems likely that more worrisome pressures are at work, and that these may in turn reduce business dynamism and productivity growth.

The topic of Chapter 3 is the persistently low inflation in many economies and its relationship to falling commodity prices, remaining output gaps, global excess capacity, and possibly de-anchored inflation expectations. The chapter finds that medium-term measures of inflation expectations generally remain reasonably close to central bank targets so far, but also shows that for countries with policy interest rates at their effective lower bounds, expectations of medium-term inflation have become more sensitive to weaker-than-expected inflation outcomes. The danger is that expectations will diverge downward from targets, raising real interest rates and thereby reducing monetary policy effectiveness while dragging these economies into low inflation or deflation traps.

Finally, Chapter 4 focuses on two salient cross-border economic spillovers that have driven recent global economic and political developments: repercussions from China’s slowing growth and migration. Spillovers from China’s economy have increased markedly since the mid-1990s, operating primarily through trade linkages and through the impact of China growth shocks on global commodity prices. China’s growing global role makes it all the more important for it to address its internal imbalances so as to approach smoothly a more sustainable consumption- and service-oriented growth framework. Regarding migration, Chapter 4 finds that both sending and receiving countries are impacted. Most striking, perhaps, is the result that low-skilled and high-skilled migrants alike contribute to positive long-term productivity effects in receiving advanced economies. Moreover, these effects raise per capita income broadly across the income distribution. Demands to reduce immigration would foreclose these income gains, while accentuating the negative effects of workforce aging.

Policy Implications

A common thread connecting the chapters of this World Economic Outlook is the still weak and precarious nature of the global recovery, and the threats it faces. Especially in a low-demand environment where key policy interest rates are near effective lower bounds, tepid growth risks becoming self-perpetuating as investment falls, productivity growth declines, labor markets become less dynamic, and human capital erodes. Moreover, declining growth rates, along with increased income inequality and concerns about the impact of migration, contribute to political tensions that block constructive economic reforms and threaten a rollback of trade integration. These tensions will only worsen as governments struggle more and more to make good on social entitlements in the face of shrinking tax bases.

Some argue that current economic growth rates are acceptable, being consistent with past historical averages, and that they appear even more favorable when viewed in per capita terms. This argument ignores the still sizable slack in many advanced economies and the large number of emerging market and developing economies in recession or with stagnant per capita incomes. True, exogenous factors such as demographics likely weigh even on per capita growth, as does China’s necessary rebalancing. But significant opportunities for boosting jobs and incomes around the world are being lost today through short-sighted policy approaches.

What can be done to close remaining output gaps, fight deflation, and lift potential output?

A comprehensive, three-pronged policy approach that supports overstretched monetary policies with fiscal policy (where fiscal space allows) and structural reforms is essential. Even where fiscal space is limited, there is scope to change the composition of spending and revenues in a way that supports near-term growth and future productive capacity. One cause of economic uncertainty, however, is the fear that each of these three tools faces economic or political constraints, which could prevent policymakers from responding aggressively to a new global slowdown. Policy space can be created, however, if policy is based on consistent frameworks that communicate to markets how instruments will be used to attain objectives over time, exploiting their synergies while safeguarding medium-term inflation goals and fiscal sustainability. This is intranational policy coordination. International coordination can create even more policy space, thanks to positive, mutually reinforcing spillovers between different countries’ demand support measures. Both intranational and international coordination make the whole greater than the sum of its parts.

The policy framework should include measures that mitigate the adverse income-distribution effects of economic changes, whether due to technology, globalization forces, or other developments. Educational investments that equip people with adaptable skills, as well as better social insurance mechanisms and appropriate income tax regimes, can enhance risk sharing and resilience for all, not just those with access to sophisticated financial markets.

It is vitally important to defend the prospects for increasing trade integration. A global environment hostile to trade will make it impossible for commodity exporters and low-income countries in general to develop new export models and gradually narrow income gaps with richer countries. It will also broadly deter global productivity growth, the spread of knowledge and technology, and investment. In short, turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.

The need for international cooperation extends to a much broader set of international public-good problems—refugees, climate, infectious disease, security, corporate taxation, and financial stability, for example. An increasingly interdependent world will achieve more growth and stability if governments engage cooperatively around the many areas where their interests intersect.

Maurice Obstfeld

Economic Counsellor

Executive Summary

Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June U.K. vote in favor of leaving the European Union (Brexit) and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer. Although the market reaction to the Brexit shock was reassuringly orderly, the ultimate impact remains very unclear, as the fate of institutional and trade arrangements between the United Kingdom and the European Union is uncertain. Financial market sentiment toward emerging market economies has improved with expectations of lower interest rates in advanced economies, reduced concern about China’s near-term prospects following policy support to growth, and some firming of commodity prices. But prospects differ sharply across countries and regions, with emerging Asia in general and India in particular showing robust growth and sub-Saharan Africa experiencing a sharp slowdown. In advanced economies, a subdued outlook subject to sizable uncertainty and downside risks may fuel further political discontent, with antiintegration policy platforms gaining more traction. Several emerging market and developing economies still face daunting policy challenges in adjusting to weaker commodity prices. These worrisome prospects make the need for a broad-based policy response to raise growth and manage vulnerabilities more urgent than ever.

The current outlook is shaped by a complex confluence of ongoing realignments, long-term trends, and new shocks. These factors imply a generally subdued baseline for growth, but also substantial uncertainty about future economic prospects. The main unforeseen development in recent months was the U.K. vote in favor of leaving the European Union. Brexit is very much an unfolding event—the long-term shape of relations between the United Kingdom and the European Union, and the extent to which their mutual trade and financial flows will be curtailed, will likely become clear only after several years. Adding to the uncertainty is the impact of the referendum results on political sentiment in other EU members, as well as on global pressure to adopt populist, inward-looking policies.

Important ongoing realignments—particularly salient for emerging market and developing economies—include rebalancing in China and the macro-economic and structural adjustment of commodity exporters to a long-term decline in their terms of trade. Slow-moving changes that are playing an important role in the outlook for advanced economies (as well as for some emerging market economies) include demographic and labor-market trends, but also an ill-understood protracted slowdown in productivity, which is hampering income growth and contributing to political discontent.

In the World Economic Outlook (WEO) baseline scenario, global growth is projected to decline to 3.1 percent in 2016, and to rebound next year to 3.4 percent. The 2016 forecast reflects weaker-than-expected U.S. activity in the first half of the year as well as materialization of an important downside risk with the Brexit vote. Although financial market reaction to the result of the U.K. referendum has been contained, the increase in economic, political, and institutional uncertainty and the likely reduction in trade and financial flows between the United Kingdom and the rest of the European Union over the medium term is expected to have negative macroeconomic consequences, especially in the United Kingdom. As a result, the 2016 growth forecast for advanced economies has been marked down to 1.6 percent.

Growth in emerging market and developing economies is expected to strengthen slightly in 2016 to 4.2 percent after five consecutive years of decline, accounting for over three-quarters of projected world growth this year. However, the outlook for these economies is uneven and generally weaker than in the past. While external financing conditions have eased with expectations of lower interest rates in advanced economies, other factors are weighing on activity. These include a slowdown in China, whose spillovers are magnified by its lower reliance on import- and resource-intensive investment; commodity exporters’ continued adjustment to lower revenues; spillovers from persistently weak demand in advanced economies; and domestic strife, political discord, and geopolitical tensions in several countries. While growth in emerging Asia and especially India continues to be resilient, the largest economies in sub-Saharan Africa (Nigeria, South Africa, Angola) are experiencing sharp slowdowns or recessions as lower commodity prices interact with difficult domestic political and economic conditions. Brazil and Russia continue to face challenging macroeconomic conditions, but their outlook has strengthened somewhat relative to last April.

The recovery is projected to pick up in 2017 as the outlook improves for emerging market and developing economies and the U.S. economy regains some momentum, with a fading drag from inventories and a recovery in investment. Although longer-term prospects for advanced economies remain muted, given demographic headwinds and weak productivity growth, the forecast envisages a further strengthening of growth in emerging market and developing economies over the medium term. But as noted in previous WEOs, this forecast depends on a number of important assumptions:

  • A gradual normalization of conditions in economies currently under stress, with a general pickup in growth in commodity exporters, albeit to levels more modest than in the past

  • A gradual slowdown and rebalancing of China’s economy with medium-term growth rates that—at close to 6 percent—remain higher than the average for emerging market and developing economies

  • Resilient growth in other emerging market and developing economies

Both economic and noneconomic factors threaten to keep these assumptions from being realized and imperil the baseline outlook more generally. In particular, some risks flagged in recent WEOs have become more prominent in recent months. The first is political discord and inward-looking policies. The Brexit vote and the ongoing U.S. presidential election campaign have highlighted a fraying consensus about the benefits of cross-border economic integration. Concerns about the impact of foreign competition on jobs and wages in a context of weak growth have enhanced the appeal of protectionist policy approaches, with potential ramifications for global trade flows and integration more broadly. Concerns about unequal (and widening) income distribution are rising, fueled by weak income growth as productivity dynamics remain disappointing. Uncertainty about the evolution of these trends may lead firms to defer investment and hiring decisions, thus slowing near-term activity, while an inward-looking policy shift could also stoke further cross-border political discord.

A second risk is stagnation in advanced economies. As global growth remains sluggish, the prospect of an extended shortfall in private demand leading to permanently lower growth and low inflation becomes ever more tangible, particularly in some advanced economies where balance sheets remain impaired. At the same time, a protracted period of weak inflation in advanced economies risks unmooring inflation expectations, causing expected real interest rates to rise and spending to decline, eventually feeding back to even weaker overall growth and inflation.

Other risks flagged in previous WEOs remain important potential influences on the outlook. China’s ongoing adjustment and associated spillovers continue to be pertinent, even as near-term sentiment regarding China has appeared to recover from the acute anxiety at the start of the year. The economy’s transition away from reliance on investment, industry, and exports in favor of greater dependence on consumption and services could become bumpier than expected at times, with important implications for commodity and machinery exporters as well as for countries indirectly exposed to China through financial contagion channels. That risk is heightened by the current short-term growth-promoting measures on which China is relying, as a still-rising credit-to-GDP ratio and lack of decisive progress in addressing corporate debt and governance concerns in state-owned enterprises raise the risk of a disruptive adjustment. More generally, although financial conditions in emerging markets have continued to improve in recent months, underlying vulnerabilities remain among some large emerging market economies. High corporate debt, declining profitability, weak bank balance sheets—together with the need to rebuild policy buffers, particularly in commodity exporters—leave these economies still exposed to sudden shifts in investor confidence. A range of additional noneconomic factors continues to influence the outlook in various regions—the protracted effects of a drought in eastern and southern Africa; civil war and domestic conflict in parts of the Middle East and Africa and the tragic plight of refugees in neighboring countries and in Europe; multiple acts of terror worldwide; and the spread of the Zika virus in Latin America and the Caribbean, the southern United States, and southeast Asia. If these factors intensify, they could collectively take a large toll on market sentiment, hurting demand and activity.

Upside developments include the orderly repricing in financial markets after the initial shock of the Brexit vote; sustained improvements in the U.S. labor market; and a modest recent uptick in commodity prices, which should ease some of the pressure on commodity exporters. These developments point to the possibility of a better-than-envisaged pickup in momentum, which could be even stronger if countries adopt comprehensive frameworks to lift actual and potential output.

While the baseline forecast for the global economy points to a pickup in growth over the rest of the forecast horizon from its subdued pace this year, the potential for setbacks to this outlook is high, as underscored by repeated growth markdowns in recent years. Against this backdrop, policy priorities differ across individual economies depending on the specific objectives of improving growth momentum, combating deflation pressures, or building resilience. But a common theme is that urgent action relying on all policy levers is needed to head off further growth disappointments and combat damaging perceptions that policies are ineffective in boosting growth or that the rewards accrue only to those at the higher end of the income distribution.

In advanced economies, output gaps are still negative, wage pressures are generally muted, and the risk of persistent low inflation (or deflation, in some cases) has risen. Monetary policy therefore must remain accommodative, relying on unconventional strategies as needed. But accommodative monetary policy alone cannot lift demand sufficiently, and fiscal support—calibrated to the amount of space available and oriented toward policies that protect the vulnerable and lift medium-term growth prospects—therefore remains essential for generating momentum and avoiding a lasting downshift in medium-term inflation expectations. In countries facing rising public debt and social entitlement outlays, credible commitments to medium-term consolidation can generate additional space for near-term support. And fiscal policy should concentrate outlays on uses that most strongly support demand and longer-term potential growth. More broadly, accommodative macroeconomic policies must be accompanied by structural reforms that can counteract waning potential growth—including efforts to boost labor force participation, improve the matching process in labor markets, and promote investment in research and development and innovation. As discussed in Chapter 3 of the April 2016 WEO, comprehensive policies that combine demand support with reforms targeting a country’s structural needs, anchored in coherent and well-communicated policy frameworks, can fire up both short-term activity and medium-term potential output.

Across emerging market and developing economies, the broad common policy objectives are continued convergence to higher incomes by reducing distortions in product, labor, and capital markets and giving people a better chance in life by investing wisely in education and health care. These goals can only be realized in an environment safe from financial vulnerability and the risk of reversals. Economies with large and rising non-financial debt, unhedged foreign liabilities, or heavy reliance on short-term borrowing to fund longer-term investments must adopt stronger risk management practices and contain currency and balance sheet mismatches.

For countries hardest hit by the slump in commodity prices, adjustment to reestablish macroeconomic stability is urgent. This implies fully allowing the exchange rate to absorb pressures for countries not relying on an exchange rate peg, tightening monetary policy where needed to tackle sharp increases in inflation, and ensuring that needed fiscal consolidation is as growth friendly as possible.

Low-income developing economies must rebuild fiscal buffers while continuing to spend on critical capital needs and social outlays, strengthen debt management, and implement structural reforms—including in education—that pave the way for economic diversification and higher productivity.

While essential at the country level, these policies for all country groups would be even more effective if adopted broadly throughout the world, with due attention to country-specific priorities.

With growth weak and policy space limited in many countries, continued multilateral effort is required in several areas to minimize risks to financial stability and sustain global improvements in living standards. This effort must proceed simultaneously on a number of fronts. Policymakers must address the backlash against global trade by refocusing the discussion on the long-term benefits of economic integration and ensuring that well-targeted social initiatives help those who are adversely affected and facilitate, through retraining, their absorption into expanding sectors. Effective banking resolution frameworks, both national and international, are vital, and emerging risks from nonbank intermediaries must be addressed. A stronger global safety net is more important than ever to protect economies with robust fundamentals that may nevertheless be vulnerable to cross-border contagion and spillovers, including strains that are not economic.