Thus far, economic recovery is proceeding broadly as expected, although downside risks remain elevated. Most advanced and a few emerging economies still face major adjustments, including the need to strengthen household balance sheets, stabilize and subsequently reduce high public debt, and repair and reform their financial sectors. In many of these economies, the financial sector is still vulnerable to shocks, and growth appears to be slowing as policy stimulus wanes. By contrast, in emerging and developing economies prudent policies, implemented partly in response to earlier crises, have contributed to a significantly improved medium-term growth outlook relative to the aftermath of previous global recessions. However, activity in these economies, particularly those in emerging Asia, remains dependent on demand in advanced economies. In this setting, global activity is forecast to expand by 4.8 percent in 2010 and 4.2 percent in 2011, with a temporary slowdown during the second half of 2010 and the first half of 2011. Output of emerging and developing economies is projected to expand at rates of 7.1 percent and 6.4 percent in 2010 and 2011, respectively. In advanced economies, however, growth is projected to be only 2.7 percent and 2.2 percent, respectively. Risks to the forecast are mainly to the downside. Sustained, healthy recovery rests on two rebalancing acts: internal rebalancing, with a strengthening of private demand in advanced economies, allowing for fiscal consolidation; and external rebalancing, with an increase in net exports in deficit countries and a decrease in net exports in surplus countries, notably emerging Asia. The two interact in strong ways. Increased net exports in advanced economies imply higher demand and higher growth, allowing more room for fiscal consolidation. A number of policies are required to support these rebalancing acts. In advanced economies, repair and reform of the financial sector need to accelerate to allow a resumption of healthy credit growth. In addition, fiscal adjustment needs to start in earnest in 2011. Specific plans to cut future budget deficits are urgently needed to create new room for fiscal policy maneuver. If global growth threatens to slow appreciably more than expected, countries with fiscal room could postpone some of the planned consolidation. Meanwhile, key emerging economies will need to further develop domestic sources of growth, with the support of greater exchange rate flexibility.
As discussed in Chapter 1, the global recovery is continuing, but its strength is not yet assured. Economic prospects remain uneven across countries and regions (Figure 2.1). In general, the pace of recovery is expected to be faster in economies that had stronger fundamentals before the crisis, smaller output losses during it, and now have more room for policy maneuver and deep links with fast-growing trading partners.1 China’s increasingly wide trading network is driving growth prospects in numerous economies, especially commodity exporters. Strong internal dynamics are supporting near-term growth in other emerging economies, too. However, economic prospects are subdued in major advanced economies, where much-needed policy adjustments have only just begun—in the form of financial sector repair and reform and medium-term fiscal consolidation. This will weigh on growth in emerging economies, raising the need to boost domestic sources of demand. At the same time, capital will continue to flow toward strong emerging and developing economies, induced by relatively good growth prospects and favorable interest rate differentials. This chapter begins with Asia, which is leading the global recovery. Then it turns to North America, where there is renewed concern that the recovery may be stalling, with significant implications for the rest of the world. Next, the chapter reviews Europe’s economic and policy challenges, which in many ways mirror those at the global level: the need for demand rebalancing within the region, financial sector repair, and medium-term fiscal consolidation. It then outlines the wide range of developments and prospects in Latin America and the Caribbean (LAC), the Commonwealth of Independent States (CIS), the Middle East and North Africa (MENA), and sub-Saharan Africa.
This chapter examines the effects of fiscal consolidation—tax hikes and government spending cuts—on economic activity. Based on a historical analysis of fiscal consolidation in advanced economies, and on simulations of the IMF’s Global Integrated Monetary and Fiscal Model (GIMF), it finds that fiscal consolidation typically reduces output and raises unemployment in the short term. At the same time, interest rate cuts, a fall in the value of the currency, and a rise in net exports usually soften the contractionary impact. Consolidation is more painful when it relies primarily on tax hikes; this occurs largely because central banks typically provide less monetary stimulus during such episodes, particularly when they involve indirect tax hikes that raise inflation. Also, fiscal consolidation is more costly when the perceived risk of sovereign default is low. These findings suggest that budget deficit cuts are likely to be more painful if they occur simultaneously across many countries, and if monetary policy is not in a position to offset them. Over the long term, reducing government debt is likely to raise output, as real interest rates decline and the lighter burden of interest payments permits cuts to distortionary taxes.
This chapter looks at trade dynamics following banking and debt crises, to help us understand how trade might evolve for economies recently affected by such crises. Imports of the crisis economy tend to fall substantially in the short term—beyond what would be expected from the decline in output—and they stay depressed through the medium term. In contrast, exports of the crisis economy are not as badly affected. These findings suggest that the recovery of import demand in the United States and much of western Europe may be even more anemic than suggested by their relatively weak projected output recoveries. Thus, the narrowing of the large current account deficits of some crisis countries such as the United States that occurred in 2009 may prove to be quite durable. For economies that experience a crisis, the chapter underscores the importance of embracing structural reforms to help support the recovery of output and trade. For economies that rely heavily on external demand for their growth, the chapter’s findings highlight the urgency of reorienting growth by strengthening domestic demand.
The recovery of world activity and trade became more firmly established during the first half of 1994. Continental western Europe and Japan have now begun to emerge from some of the deepest recessions in half a century. At the same time, upswings have gained momentum in the United Kingdom, Canada, and Australia, while in the United States a high level of capacity utilization has already been restored. A particularly positive aspect of the world economic situation remains the rapid expansion in many Asian and some Latin American developing countries. The decline in output during the early part of the transition process in central Europe and the Baltic region has bottomed out, and economic growth has resumed in some of these countries. In contrast, registered output has continued to decline in Russia, Ukraine, Belarus, and the Trans-caucasian and central Asian countries in transition. Although the outlook is beginning to improve in some African countries as a result of stronger commodity prices and enhanced economic reform efforts, economic conditions remain difficult in most of the continent.
With expansions in North America now well under way, and with clearer signs of recovery across Europe and in Japan, global output is projected to expand by 3 percent this year and by 3½ percent in 1995, close to the trend rate of growth over the past two decades (Table 1). Thus, the marked slowdown in world trade and growth in the early 1990s—which occurred despite the strength of economic activity in the developing countries as a group during this period—appears to have run its course. Continued strong performance in many developing countries is expected to yield average growth of 5½ percent this year and next. Disparities between individual countries continue to be large, however.
Expansions have been under way for some time in the United States, the United Kingdom, Canada, and Australia, and there are firm signs of improving economic growth in most other industrial countries. Inflation is now at the lowest rates in decades in many countries (see Chart 7 in Chapter II). The medium-term prospect for the industrial countries is for growth to proceed at a moderate pace sufficient to diminish margins of slack and to bring, over time, significant reductions in cyclical unemployment and in the cyclical components of large budget deficits. There appears to be no immediate danger of—and under proper policies, no medium-term reason to expect—a general upsurge of inflation. As economic expansion proceeds, however, situations of excess demand may again emerge. Moreover, efforts at fiscal consolidation may flag because the cyclical recovery will give the appearance of an improvement in budget deficits well beyond what actually has been achieved in terms of underlying structural balances. The result, as in the late 1980s in many countries, could be a resurgence of inflationary pressures and the persistence of high real interest rates owing to fiscal crowding out. This risk would be aggravated to the extent that recent increases in unemployment might become entrenched, as has occurred in the past in Europe.
The substantial rise in private capital flows to many developing countries in recent years has helped the developing world to sustain relatively rapid growth during a period of protracted weakness in the industrial countries. The capital inflows can be attributed in part to the successful adjustment and stabilization efforts of a large number of developing countries, but they are also likely to have been boosted by the sluggishness of activity, and hence of the demand for funds, and the associated decline in interest rates in the industrial countries. The moderation of such flows in the first half of 1994 seems mainly to reflect the rise in interest rates worldwide, although concern about the emergence of financial imbalances in some developing countries may also have contributed.
El informe sobre las Perspectivas de la economía mundial, publicado dos veces al año en inglés, francés, español y árabe, presenta análisis realizados por economistas del cuerpo técnico del FMI sobre la evolución económica mundial a corto y mediano plazo. En los capítulos se presenta un panorama de la economía mundial; se consideran cuestiones que afectan a los países industriales, los países en desarrollo y las economías en transición hacia un sistema de mercado, y se abordan temas relevantes para la situación actual. Anexos, recuadros, gráficos y un extenso apéndice estadístico complementan el texto.
La recuperación de la Gran Recesión está evolucionando, en general, tal como se esperaba, aunque la mayoría de las economías avanzadas y unas pocas economías emergentes todavía enfrentan importantes ajustes. La recuperación en estas economías es lenta, y con un elevado desempleo. En cambio, muchas economías emergentes y en desarrollo están registrando nuevamente un crecimiento vigoroso. Para lograr una recuperación sólida y sostenida deberán emprenderse simultáneamente dos acciones: por un lado, un reequilibrio interno, orientado al fortalecimiento de la demanda privada en las economías avanzadas, que permita llevar a cabo la consolidación fiscal; por el otro, un reequilibrio externo, centrado en aumentar las exportaciones netas en los países con déficits, y reducir las exportaciones netas en los países con superávits, especialmente Asia emergente. Esta edición de Perspectivas de la economía mundial evalúa la interacción entre estas dos acciones simultáneas y determina las políticas necesarias para apoyarlas. En uno de los dos capítulos analíticos, se analiza el efecto de la consolidación fiscal en la producción y el empleo en las economías avanzadas, usando datos presupuestarios detallados; el otro examina el colapso y la recuperación del comercio en economías que han experimentado crisis.