Titlepage
INTERNATIONAL MONETARY FUND
WORLD ECONOMIC OUTLOOK
Growth Slowdown, Precarious Recovery
2019 APR
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©2019 International Monetary Fund
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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 978-1-48439-748-0 (English Paper)
978-1-49830-610-2 (English ePub)
978-1-49830-611-9 (English Mobi)
978-1-49830-611-9 (English PDF)
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 March 21, 2019. 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. 2018. World Economic Outlook: Growth Slowdown, Precarious Recovery. Washington, DC, April.
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Contents
Assumptions and Conventions
Further Information
Data
Preface
Foreword
Executive Summary
Chapter 1. Global Prospects and Policies
Recent Developments: Global Expansion Loses Steam
The Forecast
Risks: Skewed to the Downside
Policy Priorities: Enhance Resilience, Raise Medium-Term Growth Prospects
Scenario Box 1. A No-Deal Brexit
Box 1.1. Labor Market Dynamics in Select Advanced Economies
Box 1.2. Global Growth Forecast: Assumptions on Policies, Financial Conditions, and Commodity Prices
Box 1.3. Worlds Apart? Within-Country Regional Disparities
Special Feature: Commodity Market Developments and Forecasts
References
Online Annexes
Chapter 2. The Rise of Corporate Market Power and its Macroeconomic Effects
Introduction
The Rise of Corporate Market Power
Macroeconomic Implications of Rising Market Power
Summary and Policy Implications
Box 2.1. The Comovement between Industry Concentration and Corporate Saving
Box 2.2. Effects of Mergers and Acquisitions on Market Power
References
Online Annexes
Annex 2.2. Assessing Corporate Market Power: Methodologies and Further Stylized Facts
Chapter 3. The Price of Capital Goods: A Driver of Investment under Threat?
Introduction
The Price of Capital Goods: Key Patterns
The Relative Price of Capital Goods: A Simple Framework
Drivers of Relative Investment Prices
Macroeconomic Implications of Shocks to the Price of Capital Goods
Summary and Policy Implications
Box 3.1. The Price of Manufactured Low-Carbon Energy Technologies
Box 3.2. Evidence from Big Data: Capital Goods Prices across Countries
Box 3.3. On the Underlying Source of Changes in Capital Goods Prices: A Model-Based Analysis
Box 3.4. Capital Goods Tariffs and Investment: Firm-Level Evidence from Colombia
References
Online Annexes
Annex 3.3. Using Trade Data to Uncover Differences in Capital Goods Prices across Countries
Annex 3.4. Drivers of Relative Investment Prices: Across Countries
Chapter 4. The Drivers of Bilateral Trade and the Spillovers from Tariffs
Introduction
Stylized Facts
Determinants of Bilateral Trade Balances
The Role of Macroeconomic Factors
A Closer Look at Tariffs and Their Spillovers
Conclusion
Box 4.1. Gross versus Value-Added Trade
Box 4.2. Bilateral and Aggregate Trade Balances
Box 4.3. Understanding Trade Deficit Adjustments: Does Bilateral Trade Play a Special Role?
Box 4.4. The Global Macro and Micro Effects of a US–China Trade Dispute: Insights from Three Models
References
Online Annexes
Annex 4.2. Derivation of Relation between Bilateral and Aggregate Trade Balances
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, 2018
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, April 2019
Tables
Table 1.1. Overview of the World Economic Outlook Projections
Scenario Table 1. Trade Assumptions in the Baseline, Scenario A, and Scenario B
Table 1.SF.1. Commodity Price Cycle Descriptive Statistics
Table 1.SF.2. Global Industrial Production Nowcast
Table 1.SF.3. Global GDP Nowcast
Table 1.SF.4. Forecasting Global Industrial Production and GDP
Annex Table 1.1.1. European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.4. Commonwealth of Independent States Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.5. Middle East, North African Economies, Afghanistan, and Pakistan: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.6. Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.7. Summary of World Real per Capita Output
Table 3.1. Sectoral Producer Prices
Table 3.2. Real Investment Rate and the Relative Price of Machinery and Equipment
Table 4.1. Sign and Significance of Tariff Effects on Economic Variables
Table 4.4.1. Macro Effects from a 25 Percent Increase in Tariffs Affecting All US–China Trade: Bilateral Trade Flows with Third Countries
Online Tables—Statistical Appendix
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. Trade Indicators
Figure 1.3. Commodity Prices
Figure 1.4. Global Inflation
Figure 1.5. Advanced Economies: Monetary and Financial Market Conditions
Figure 1.6. Emerging Market Economies: Interest Rates and Spreads
Figure 1.7. Emerging Market Economies: Equity Markets and Credit
Figure 1.8. Real Effective Exchange Rate Changes, September 2018–March 2019
Figure 1.9. Emerging Market Economies: Capital Flows
Figure 1.10. Half-Yearly Growth Forecasts
Figure 1.11. Forecast Assumptions: Fiscal Indicators
Figure 1.12. Commodity Price Assumptions and Terms-of-Trade Windfall Gains and Losses
Figure 1.13. Growth Rate: Emerging Markets and Developing Economies
Figure 1.14. Contributions to GDP Growth
Figure 1.15. Per Capita Real GDP Growth
Figure 1.16. Global Current Account Balance
Figure 1.17. Current Account Balances in Relation to Economic Fundamentals
Figure 1.18. Net International Investment Position
Figure 1.19. Policy Uncertainty and Trade Tensions
Figure 1.20. Geopolitical Risk Index
Figure 1.21. Risks to the Global Outlook
Scenario Figure 1. Real GDP in Brexit Scenario
Scenario Figure 2. Brexit Long-Term Real GDP Effects
Figure 1.1.1. Labor Market Dynamics in Selected Advanced Economies
Figure 1.3.1. Regional Disparities in GDP per Capita
Figure 1.SF.1. Commodity Market Developments
Figure 1.SF.2. Commodity Cycles and Economic Activity
Figure 1.SF.3. Synchronization with Economic Activity
Figure 1.SF.4. Commodity-Wide Synchronization
Figure 1.SF.5. Latent Factors and Economic Activity
Figure 1.SF.6. Global Real GDP Growth Nowcast: Actual versus Fitted Value
Figure 2.1. Worrisome Macroeconomic Trends
Figure 2.2. Evolution of Market Power
Figure 2.3. Markup Increases, by Country Income Group
Figure 2.4. Decomposition of Markup Increases
Figure 2.5. Disconnect between Firms in the Top Decile and the Rest
Figure 2.6. Patents and Markups: A Hump-Shaped Relationship
Figure 2.7. Implied Relationship between Higher Markups and Patents
Figure 2.8. Markups and Physical Capital Investment
Figure 2.9. Markup Increases, Investment, and the Natural Interest Rate
Figure 2.10. Markups and Labor Income Shares
Figure 2.1.1. Comovement between Average Industry Concentration and Corporate Saving in Group of Seven Countries
Figure 2.1.2. Change in Industry Concentration and Change in Saving Rates
Figure 2.2.1. Total Number of Deals and Share of Horizontal Deals
Figure 2.2.2. Impact of Mergers and Acquisitions on Acquirer Firm’s Markups, by Deal Type
Figure 3.1. Capital Stock, Investment, and the Relative Price of Capital Goods
Figure 3.2. Dynamics of Relative Prices across Types of Capital Goods and Broad Country Groups
Figure 3.3. Absolute and Relative Prices of Machinery and Equipment across Countries in 2011
Figure 3.4. Unit Values of Tradable Capital Goods across Countries
Figure 3.5. Trade Costs in 2011
Figure 3.6. Trade Costs, Relative Productivity, and the Price of Capital Goods in 2011
Figure 3.7. Contributions to Changes in Relative Producer Prices of Capital Goods: 2000–11
Figure 3.8. Elasticity of Real Investment-to-GDP Ratio to Relative Price of Capital Goods: Model Simulations versus Empirical Evidence
Figure 3.9. Contributions of Relative Prices to Increases in Real Investment in Machinery and Equipment, 1990–94 to 2010–14
Figure 3.1.1. Levelized Cost of Electricity of Low-Carbon Energy Sources
Figure 3.1.2. Annual Additions to Global Electricity Capacity
Figure 3.2.1. Price of Apple Products and Income
Figure 3.3.1. Model Simulations
Figure 3.4.1. Distribution of Tariff Changes between 2010 and 2011
Figure 3.4.2. Effect on Investment from Cuts in Tariffs on Capital Goods Inputs, Other Inputs, and Output
Figure 4.1. Bilateral Trade Balances, by Major Partners
Figure 4.2. Global Trade Imbalances
Figure 4.3. Trade Intensity and Barriers to Trade
Figure 4.4. Revealed Comparative Advantage
Figure 4.5. Largest Trade Flows, 1995 versus 2015
Figure 4.6. The Role of Global Value Chains
Figure 4.7. Contributions to Changes in Bilateral Trade Balances, 1995–2015
Figure 4.8. Effect of a Deterioration of Germany’s Aggregate Trade Balance on Selected Bilateral Balances
Figure 4.9. Contributions of Macroeconomic Drivers to Aggregate Trade Balances, Average 2010–17
Figure 4.10. Bilateral Trade Deficit Reversal Episodes
Figure 4.11. Tariffs and Global Value Chain Participation
Figure 4.12. Illustration of the Effect of Tariff Changes on Real Value Added
Figure 4.13. Sectoral Effects from a 25 Percent Increase in Tariffs Affecting All US–China Trade: World Real Value Added
Figure 4.1.1. Gross versus Value-Added Trade Balance
Figure 4.2.1. US–China Bilateral and Aggregate Trade Balances
Figure 4.3.1. Improvement in Bilateral Trade Deficits during Overall Trade Deficit Reversal Episodes
Figure 4.4.1. Macro Effects from a 25 Percent Increase in Tariffs Affecting All US–China Trade: Real GDP
Figure 4.4.2. Macro Effects from a 25 Percent Increase in Tariffs Affecting All US–China Trade: Real Exports
Figure 4.4.3. US Imports of Electronics and Machinery before and after Tariffs
Figure 4.4.4. Mexico’s Imports of Intermediate Inputs for the Electronics and Manufacturing Sectors
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 January 14 to February 11, 2019, 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 $59.16 a barrel in 2019 and $59.02 a barrel in 2020 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on US dollar deposits will average 3.2 percent in 2019 and 3.8 percent in 2020; that the three-month euro deposit rate will average –0.3 percent in 2019 and –0.2 in 2020; and that the six-month Japanese yen deposit rate will yield, on average, 0.0 percent in 2019 and 2020, respectively. 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 March 29, 2019.
The following conventions are used throughout the WEO:
… to indicate that data are not available or not applicable;
– between years or months (for example, 2018–19 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, 2018/19) 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 2018 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.
What is new in this publication:
FYR Macedonia is now called North Macedonia.
In February 2019, Zimbabwe adopted a new local currency unit, the RTGS dollar, which has become the official unit of account. Efforts are underway to revise and update all national accounts series to the new RTGS dollar. Current data are based on IMF staff estimates of price and exchange rate developments in US (and RTGS) dollars. Staff estimates of US dollar values may differ from authorities’ estimates.
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 IMF, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
Further Information
Corrections and Revisions
The data and analysis appearing in the World Economic Outlook (WEO) are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary (see below). All substantive changes are listed in the online table of contents.
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Data
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The data appearing in the WEO 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 these 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.
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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 Gita Gopinath, Economic Counsellor and Director of Research. The project was directed by Gian Maria Milesi-Ferretti, Deputy Director, Research Department and Oya Celasun, Division Chief, Research Department; and Helge Berger, Assistant Director, Research Department and Head of the IMF’s Spillover Task Force.
The primary contributors to this report were Christian Bogmans, Wenjie Chen, Federico Diez, Allan Dizioli, Romain Duval, Johannes Eugster, Benjamin Hunt, Florence Jaumotte, Callum Jones, Toh Kuan, Weicheng Lian, Margaux MacDonald, Akito Matsumoto, Malhar Nabar, Natalija Novta, Andrea Pescatori, Roberto Piazza, Rafael Portillo, Evgenia Pugacheva, Carolina Villegas-Sánchez, Yannick Timmer, and Petia Topalova.
Other contributors include Michal Andrle, Gavin Asdorian, Carlos Caceres, Luisa Calixto, Diego Cerdeiro, Kyun Suk Chang, Mai Chi Dao, Pankhuri Dutt, Angela Espiritu, Rebecca Eyassu, Jiayue Fan, Chanpheng Fizzarotti, Swarnali Ahmed Hannan, Mandy Hemmati, Ava Yeabin Hong, Christopher Johns, Lama Kiyasseh, Zsóka Kóczán, Jungjin Lee, Nan Li, Rui Mano, Sergii Meleshchuk, Cynthia Nyanchama Nyakeri, Emory Oakes, Ilse Peirtsegaele, Adrian Robles Villamil, Marika Santoro, Susie Xiaohui Sun, Ariana Tayebi, Nicholas Tong, Menexenia Tsaroucha, Shan Wang, Julia Xueliang Wang, Jilun Xing, Yuan Zeng, Qiaoqiao Zhang, Huiyuan Zhao, Caroline Chenqi Zhou, and Jillian Zirnhelt.
Joseph Procopio from the Communications Department led the editorial team for the report, with production and editorial support from Christine Ebrahimzadeh, and editorial assistance from James Unwin, Lucy Scott Morales, and Vector Talent Resources.
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 March 21, 2019. 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.
Foreward
One year ago economic activity was accelerating in almost all regions of the world and the global economy was projected to grow at 3.9 percent in 2018 and 2019. One year later, much has changed: the escalation of US–China trade tensions, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies have all contributed to a significantly weakened global expansion, especially in the second half of 2018. With this weakness expected to persist into the first half of 2019, the World Economic Outlook (WEO) projects a decline in growth in 2019 for 70 percent of the global economy. Global growth, which peaked at close to 4 percent in 2017, softened to 3.6 percent in 2018, and is projected to decline further to 3.3 percent in 2019. Although a 3.3 percent global expansion is still reasonable, the outlook for many countries is very challenging, with considerable uncertainties in the short term, especially as advanced economy growth rates converge toward their modest long-term potential.
While 2019 started out on a weak footing, a pickup is expected in the second half of the year. This pickup is supported by significant policy accommodation by major economies, made possible by the absence of inflationary pressures despite closing output gaps. The US Federal Reserve, in response to rising global risks, paused interest rate increases and signaled no increases for the rest of the year. The European Central Bank, the Bank of Japan, and the Bank of England have all shifted to a more accommodative stance. China has ramped up its fiscal and monetary stimulus to counter the negative effect of trade tariffs. Furthermore, the outlook for US–China trade tensions has improved as the prospects of a trade agreement take shape.
These policy responses have helped reverse the tightening of financial conditions to varying degrees across countries. Emerging markets have experienced a resumption in portfolio flows, a decline in sovereign borrowing costs, and a strengthening of their currencies relative to the dollar. While the improvement in financial markets has been rapid, those in the real economy have yet to materialize. Measures of industrial production and investment remain weak for most advanced and emerging economies, and global trade has yet to recover.
With improvements expected in the second half of 2019, global economic growth in 2020 is projected to return to 3.6 percent. This return is predicated on a rebound in Argentina and Turkey and some improvement in a set of other stressed emerging market and developing economies, and therefore subject to considerable uncertainty. Beyond 2020 growth will stabilize at around 3½ percent, bolstered mainly by growth in China and India and their increasing weights in world income. Growth in advanced economies will continue to slow gradually as the impact of US fiscal stimulus fades and growth tends toward the modest potential for the group, given ageing trends and low productivity growth. Growth in emerging market and developing economies will stabilize at around 5 percent, though with considerable variance between countries as subdued commodity prices and civil strife weaken prospects for some.
While the overall outlook remains benign, there are many downside risks. There is an uneasy truce on trade policy, as tensions could flare up again and play out in other areas (such as the auto industry) with large disruptions to global supply chains. Growth in China may surprise on the downside, and the risks surrounding Brexit remain heightened. In the face of significant financial vulnerabilities associated with large private and public sector debt in several countries, including sovereign-bank doom loop risks (for example, in Italy), there could be a rapid change in financial conditions owing to, for example, a risk-of episode or a no-deal Brexit.
With weak expansion projected for important parts of the world, a realization of these downside risks could dramatically worsen the outlook. This would take place at a time when conventional monetary and fiscal space is limited as a policy response. It is therefore imperative that costly policy mistakes are avoided. Policymakers need to work cooperatively to help ensure that policy uncertainty doesn’t weaken investment. Fiscal policy will need to manage trade-offs between supporting demand and ensuring that public debt remains on a sustainable path, and the optimal mix will depend on country-specific circumstances. Financial sector policies must address vulnerabilities proactively by deploying macroprudential tools. Low-income commodity exporters should diversify away from commodities given the subdued outlook for commodity prices. Monetary policy should remain data dependent, be well communicated, and ensure that inflation expectations remain anchored.
Across all economies, the imperative is to take actions that boost potential output, improve inclusiveness, and strengthen resilience. A social dialogue across all stakeholders to address inequality and political discontent will benefit economies. There is a need for greater multilateral cooperation to resolve trade conflicts, to address climate change and risks from cybersecurity, and to improve the effectiveness of international taxation.
This issue of the WEO also tackles three major developments that need to be addressed to enhance long-term growth. The first is rising inequality, the second is weak investment, and the third is rising protectionism in trade. Chapter 2 investigates the evolution of corporate market power (as measured by markups) and its ability to explain several macro phenomena, including weak investment and the declining labor shares that help fuel inequality. The finding is that the aggregate increase in markups since 2000 has been modest and, consequently, the implications for the macroeconomy relatively modest. There is, however, significant heterogeneity, with the aggregate increase driven mainly by a more substantial increase in markups by a small number of firms that are the more productive and innovative firms. The increase in aggregate market power therefore appears to be, as of now, less a phenomenon of poor competition and more one of winner-takes-most dynamics, where markups compensate in part for investment in intangible assets. However, going forward this market dominance could lead to unfair advantages that weaken market entry and competition and, more significantly, dampen investment and innovation. It is therefore important to cut barriers to market entry and reform and strengthen competition law to better align with the new economy.
Chapter 3 highlights the benefits for investment of reducing trade barriers. Over the past three decades, the relative price of machinery and equipment has fallen in all countries, driven both by higher productivity in the capital-goods-producing sector and increased trade integration. This decline has supported the rise in real investment rates in machinery and equipment, benefiting developing countries. Rising trade tensions could reverse these price declines and damage investment at a time when investment is already weak, which only further emphasizes the need to quickly resolve trade disagreements.
The final chapter of the WEO examines the link between bilateral trade tariffs and trade imbalances. US–China trade frictions have brought a focus on the question of whether bilateral trade imbalances can (or should) be addressed using bilateral trade measures. This chapter demonstrates that the link between the two is precarious. Bilateral trade balances since the mid-1990s have reflected mostly aggregate macro-economic forces known to determine aggregate trade balances at the country level and have had much less to do with bilateral tariffs. Targeting bilateral trade balances will likely only lead to trade diversion, with limited impact on country-level balances. The findings of this chapter help explain why, despite the tariff measures, the US trade deficit is the largest it has been since 2008. The chapter also establishes that the negative impact of tariffs on output is significantly higher today than in 1995 owing to the bigger role of global supply chains in world trade.
This is a delicate year for the global economy. If the downside risks do not materialize and the policy support put in place is effective, then global growth will return to 3.6 percent in 2020. If, however, any of the major risks materialize, then the expected recoveries in stressed economies, export-dependent economies, and highly indebted economies may not occur. In that case, policymakers will need to adjust. Depending on circumstances, this may require synchronized, country-specific policy stimulus across economies, complemented by accommodative monetary policy. Synchronization can make fiscal stimulus more effective through signaling effects that raise household and business confidence, and through the mitigation of leakages via imports. Finally, adequate resources for multilateral institutions remain essential to retain an effective global safety net, which would help stabilize the global economy.
Gita Gopinath
Economic Counsellor
Executive Summary
A Weakening Expansion
After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. China’s growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The euro area economy lost more momentum than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand. Conditions have eased in 2019 as the US Federal Reserve signaled a more accommodative monetary policy stance and markets became more optimistic about a US–China trade deal, but they remain slightly more restrictive than in the fall.
Global Growth Is Set to Moderate in the Near Term, Then Pick Up Modestly
As a result of these developments, global growth is now projected to slow from 3.6 percent in 2018 to 3.3 percent in 2019, before returning to 3.6 percent in 2020. Growth for 2018 was revised down by 0.1 percentage point relative to the October 2018 World Economic Outlook (WEO), reflecting weakness in the second half of the year, and the forecasts for 2019 and 2020 are now marked down by 0.4 percentage point and 0.1 percentage point, respectively. The current forecast envisages that global growth will level off in the first half of 2019 and firm up after that (Figure 1). The projected pickup in the second half of 2019 is predicated on an ongoing buildup of policy stimulus in China, recent improvements in global financial market sentiment, the waning of some temporary drags on growth in the euro area, and a gradual stabilization of conditions in stressed emerging market economies, including Argentina and Turkey. Improved momentum for emerging market and developing economies is projected to continue into 2020, primarily reflecting developments in economies currently experiencing macroeconomic distress—a forecast subject to notable uncertainty. By contrast, activity in advanced economies is projected to continue to slow gradually as the impact of US fiscal stimulus fades and growth tends toward the modest potential for the group.
Half-Yearly Growth Rates
(Annualized semiannual percent change)
Source: IMF staff estimates.Beyond 2020, global growth is set to plateau at about 3.6 percent over the medium term, sustained by the increase in the relative size of economies, such as those of China and India, which are projected to have robust growth by comparison to slower-growing advanced and emerging market economies (even though Chinese growth will eventually moderate). As noted in previous WEO reports, tepid labor productivity growth and slowing expansion of the labor force amid population aging will drag advanced economy growth lower over the projection horizon.
Growth across emerging market and developing economies is projected to stabilize slightly below 5 percent, though with variations by region and country. The baseline outlook for emerging Asia remains favorable, with China’s growth projected to slow gradually toward sustainable levels and convergence in frontier economies toward higher income levels. For other regions, the outlook is complicated by a combination of structural bottlenecks, slower advanced economy growth and, in some cases, high debt and tighter financial conditions. These factors, alongside subdued commodity prices and civil strife or conflict in some cases, contribute to subdued medium-term prospects for Latin America; the Middle East, North Africa, and Pakistan region; and parts of sub-Saharan Africa. In particular, convergence prospects are bleak for some 41 emerging market and developing economies, accounting for close to 10 percent of global GDP in purchasing-power-parity terms and with total population close to 1 billion, where per capita incomes are projected to fall further behind those in advanced economies over the next five years.
Risks Are Tilted to the Downside
While global growth could surprise favorably if trade differences are resolved quickly so that business confidence rebounds and investor sentiment strengthens further, the balance of risks to the outlook remains on the downside. A further escalation of trade tensions and the associated increases in policy uncertainty could further weaken growth. The potential remains for sharp deterioration in market sentiment, which would imply portfolio reallocations away from risk assets, wider spreads over safe haven securities, and generally tighter financial conditions, especially for vulnerable economies. Possible triggers for such an episode include a no-deal Brexit withdrawal of the United Kingdom from the European Union; persistently weak economic data pointing to a protracted global growth slowdown; and prolonged fiscal uncertainty and elevated yields in Italy—particularly if coupled with a deeper recession—with possible adverse spillovers for other euro area economies. A rapid reassessment by markets of the monetary policy stance in the United States could also tighten global financial conditions. Over the medium term, climate change and political discord in the context of rising inequality are key risks that could lower global potential output, with particularly severe implications for some vulnerable countries.
Policy Priorities
Amid waning global growth momentum and limited policy space to combat downturns, avoiding policy missteps that could harm economic activity needs to be the main priority. Macroeconomic and financial policy should aim to prevent further deceleration where output could fall below potential and facilitate a soft landing where policy support needs to be withdrawn. At the national level, this requires monetary policy to ensure that inflation remains on track toward the central bank’s target (or if it is close to target, that it stabilizes there) and that inflation expectations remain anchored. It requires fiscal policy to manage trade-offs between supporting demand and making sure that public debt stays on a sustainable path. Where fiscal consolidation is needed and monetary policy is constrained, its pace should be calibrated to secure stability while avoiding harming near-term growth and depleting programs that protect the vulnerable. If the current slowdown turns out to be more severe and protracted than expected in the baseline, macroeconomic policies should become more accommodative, particularly where output remains below potential and financial stability is not at risk. Across all economies, the imperative is to take actions that boost potential output growth, improve inclusiveness, and strengthen resilience. At the multilateral level, the main priority is for countries to resolve trade disagreements cooperatively, without raising distortionary barriers that would further destabilize a slowing global economy.