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World Economic and Financial Surveys
World Economic Outlook
April 2015
Uneven Growth
Short- and Long-Term Factors
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©2015 International Monetary Fund
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World economic outlook (International Monetary Fund)
World economic outlook : a survey by the staff of the International Monetary Fund. — Washington, DC : International Monetary Fund, 1980–
v. ; 28 cm. — (1981–1984: Occasional paper / International Monetary Fund, 0251-6365). — (1986– : World economic and financial surveys, 0256-6877)
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1. Economic development — Periodicals. 2. Economic forecasting — Periodicals. 3. Economic policy — Periodicals. 4. International economic relations — Periodicals. I. International Monetary Fund. II. Series: Occasional paper (International Monetary Fund). III. Series: World economic and financial surveys.
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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 April 3, 2015. 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. 2015. World Economic Outlook: Uneven Growth—Short- and Long-Term Factors. Washington (April).
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Contents
Assumptions and Conventions
Further Information and Data
Preface
Foreword
Executive Summary
Chapter 1. Recent Developments and Prospects
Recent Developments and Prospects
Risks
Policies
Special Feature: Commodity Market Developments and Forecasts, with a Focus on Investment in an Era of Low Oil Prices
Scenario Box 1. The Global Impact of Lower Oil Prices
Scenario Box 2. Global Implications of Exchange Rate Movements
Box 1.1. The Oil Price Collapse: Demand or Supply?
Box 1.2. Understanding the Role of Cyclical and Structural Factors in the Global Trade Slowdown
References
Chapter 2. Country and Regional Perspectives
The United States and Canada: A Solid Recovery
Europe
Asia and Pacific: Moderating but Still Outperforming Other Regions
Latin America and the Caribbean: Another Year of Subpar Growth
Commonwealth of Independent States: Oil Price Slump Worsens Outlook
The Middle East, North Africa, Afghanistan, and Pakistan: Oil, Conflicts, and Transitions
Sub-Saharan Africa: Resilience in the Face of Headwinds
Chapter 3. Where Are We Headed? Perspectives on Potential Output
Introduction
Potential Output: A Primer
Looking Back: How Did Potential Growth Evolve before the Crisis?
How Did Potential Growth Evolve during the Crisis?
Where Are We Headed?
Summary Findings and Policy Implications
Annex 3.1. Data Sources and Country Groupings
Annex 3.2. Multivariate Filter Methodology
Annex 3.3. Estimating Trend Labor Force Participation Rates
Annex 3.4. Potential Output in the Aftermath of the Global Financial Crisis
Annex 3.5. Human Capital Growth Projections
Box 3.1. Steady As She Goes: Estimating Sustainable Output
Box 3.2. U.S. Total Factor Productivity Spillovers
Box 3.3. Total Factor Productivity Growth in Advanced Economies: A Look into Sectoral Patterns
Box 3.4. The Effects of Financial Crises on Labor Productivity: The Role of Sectoral Reallocation
Box 3.5. The Effects of Structural Reforms on Total Factor Productivity
References
Chapter 4. Private Investment: What’s the Holdup?
Is There a Global Slump in Private Investment?
Is the Slump in Private Investment Due to Housing or Is It Broader?
How Much of the Slump in Business Investment Reflects Weak Economic Activity?
Which Firms Have Cut Back More on Investment? The Roles of Financial Constraints and Policy Uncertainty
Have Firms’ Investment Decisions Become Disconnected from Profitability and Financial Market Valuations?
Policy Implications
Annex 4.1. Data Sources: Aggregate Data
Annex 4.2. Data Sources: Basic Statistics—Firm-Level Data
Annex 4.3. Instrumental Variables Estimation
Annex 4.4. Local Projection Methods
Annex 4.5. Accelerator Model Estimation Results
Box 4.1. After the Boom: Private Investment in Emerging Market and Developing Economies
References
Statistical Appendix
Assumptions
What’s New
Data and Conventions
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, 2014
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 2015
Tables
Table 1.1. Overview of the World Economic Outlook Projections
Table 2.1. Advanced Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Table 2.2. European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Table 2.3. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Table 2.4. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Table 2.5. Commonwealth of Independent States Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Table 2.6. Middle East and North African Economies, Afghanistan, and Pakistan: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Table 2.7. Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 3.1.1. Countries Included in the Analysis
Annex Table 3.1.2. Data Sources
Table 3.2.1. Properties of Adjusted Total Factor Productivity Compared with Solow Residual, Advanced Economies, 1970–2007
Table 3.2.2. Transmission Channels
Table 3.5.1. Impact of Product and Labor Market Frictions on Total Factor Productivity Growth
Table 3.5.2. Impact of Information and Communications Technology, Human Capital, and Research and Development
Table 4.1. Firm-Level Evidence: Financial Constraints Channel
Table 4.2. Firm-Level Evidence: Policy Uncertainty Channel
Table 4.3. Investment, Tobin’s Q, Profits, and Cash
Annex Table 4.1.1. Data Sources
Annex Table 4.2.1. Aggregate Firm-Level Investment versus National Investment
Annex Table 4.3.1. Investment-Output Relationship: Instrumental Variables Estimation
Annex Table 4.5.1. Baseline Accelerator Model
Annex Table 4.5.2. Accelerator Model: In-Sample versus Out-of-Sample Estimates
Annex Table 4.5.3. Selected Euro Area Economies: Baseline and Augmented Accelerator Model—Equalized Sample
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 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. 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. 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. Advanced Economies: Monetary Conditions
Figure 1.4. Commodity and Oil Markets
Figure 1.5. Financial Market Conditions in Advanced Economies
Figure 1.6. Financial Market Conditions and Capital Flows in Emerging Market Economies
Figure 1.7. Fiscal Policies
Figure 1.8. Monetary Policies and Credit in Emerging Market Economies
Figure 1.9. GDP Growth Forecasts
Figure 1.10. External Sector
Figure 1.11. Exchange Rates and Reserves
Figure 1.12. Risks to the Global Outlook
Figure 1.13. Recession and Deflation Risks
Figure 1.14. Capacity, Unemployment, and Output Trends
Figure 1.SF.1. Commodity Price Indices
Figure 1.SF.2. Oil Supply Growth
Figure 1.SF.3. Brent Futures Curves
Figure 1.SF.4. Brent Price Prospects, March 17, 2015
Figure 1.SF.5. United States: Weekly Rig Count
Figure 1.SF.6. Global Oil Investment and Oil Price
Figure 1.SF.7. Response of Oil Investment to Oil Prices
Figure 1.SF.8. Response of Oil Production to Oil Investment
Figure 1.SF.9. OPEC and Non-OPEC Oil Production and Investment
Figure 1.SF.10. Conventional and Unconventional Oil Production and Investment
Figure 1.SF.11. Evolution of Break-Even Prices
Figure 1.SF.12. Oil Production and Operating Costs by Country
Scenario Figure 1. Potential Impact of the Decline in Oil Prices since August 2014
Scenario Figure 2. Impact of Exchange Rate Shifts since August 2014
Figure 1.1.1. Drivers of Oil Prices: Daily Two-Variable Model, July 2014–January 2015
Figure 1.1.2. Drivers of Oil Prices: Daily Two-Variable Model, 1986 and 2008
Figure 1.1.3. Drivers of Oil Prices: Quarterly Four-Variable Model
Figure 1.2.1. Growth in Real GDP and Volume of Imports
Figure 1.2.2. Cumulative Import Volumes: Data, Model, and Linear Trend
Figure 1.2.3. Long-Term Elasticity
Figure 1.2.4. Long-Term Elasticities
Figure 2.1. 2015 GDP Growth Forecasts and the Effects of an Oil Price Shock
Figure 2.2. United States and Canada: A Solid Recovery
Figure 2.3. Advanced Europe: Spillovers from a Stagnant Euro Area
Figure 2.4. Emerging and Developing Europe: Slower Growth amid Weak External Demand
Figure 2.5. Asia and Pacific: Moderating but Still Outperforming
Figure 2.6. Latin America and the Caribbean: Persistent Weakness
Figure 2.7. Commonwealth of Independent States: Coping with Geopolitical Risks and Lower Oil Prices
Figure 2.8. Middle East, North Africa, Afghanistan, and Pakistan: Oil, Conflicts, and Transitions
Figure 2.9. Sub-Saharan Africa: Resilience in the Face of Headwinds
Figure 3.1. Output Compared to Precrisis Expectations
Figure 3.2. WEO Medium-Term Growth Projections
Figure 3.3. Precrisis Potential Output Growth Evolution
Figure 3.4. Variation in Potential Output Growth across Countries
Figure 3.5. Determinants of Potential Output Growth in Advanced Economies
Figure 3.6. Determinants of Potential Output Growth in Emerging Market Economies
Figure 3.7. Components of Potential Output Growth during the Global Financial Crisis in Advanced Economies
Figure 3.8. Components of Potential Output Growth during the Global Financial Crisis in Emerging Market Economies
Figure 3.9. Effect of Demographics on Employment Growth
Figure 3.10. Investment-to-Capital Ratio
Figure 3.11. Future Evolution of Potential Output Growth and Its Components
Annex Figure 3.2.1. Potential Output Growth
Annex Figure 3.3.1. Population Share Distributions by Age
Annex Figure 3.4.1. Aftermath of the Global Financial Crisis in Advanced Economies
Annex Figure 3.4.2. Aftermath of the Global Financial Crisis in Emerging Market Economies
Annex Figure 3.5.1. Human Capital Growth Projections
Figure 3.1.1. Output Gap in Selected Euro Area Economies: Multivariate Filter Augmented with Financial Variables versus That with Inflation Only
Figure 3.1.2. Credit and Output Gaps Implied by the Dynamic Stochastic General Equilibrium Model
Figure 3.2.1. U.S. Total Factor Productivity Spillovers to Other Advanced Economies
Figure 3.3.1. Employment and Value Added, 1980–2007
Figure 3.3.2. Selected Country Groups: Total Factor Productivity Growth in Goods and Services Sectors
Figure 3.3.3. Information and Communications Technology Productivity Growth and Spillovers
Figure 3.4.1. Response of Labor Productivity to Crises
Figure 3.5.1. Short- and Medium-Term Impact of Structural Reforms on Total Factor Productivity Growth
Figure 4.1. Real Private Investment
Figure 4.2. Real Private Investment, 2008–14
Figure 4.3. Categories of Real Fixed Investment
Figure 4.4. Decomposition of the Investment Slump, 2008–14
Figure 4.5. Shares and Relative Prices of Investment Categories
Figure 4.6. Real Business Investment and Output Relative to Forecasts: Historical Recessions versus Global Financial Crisis
Figure 4.7. Real Business Investment: Actual and Predicted Based on Economic Activity
Figure 4.8. Accelerator Model: Real Business Investment
Figure 4.9. Real Business Investment: Accelerator Model Residuals and Investment Losses Relative to Precrisis Forecasts, 2008–14
Figure 4.10. Selected Euro Area Economies: Accelerator Model—Role of Financial Constraints and Policy Uncertainty
Figure 4.11. Firm Survey Responses: Factors Limiting Production
Figure 4.12. Firm Investment since the Crisis, by Firm Type
Figure 4.13. Tobin’s Q and Real Business-Investment-to-Capital Ratios
Figure 4.14. Investment: Actual and Predicted Based on Tobin’s Q
Annex Figure 4.3.1. Actual versus Predicted Real Business Investment—Robustness
Annex Figure 4.5.1. Accelerator Model: In Sample versus Out of Sample
Annex Figure 4.5.2. Accelerator Model: Controlling for the User Cost of Capital
Figure 4.1.1. Real Private Fixed Investment
Figure 4.1.2. Private Investment and Output Forecast Errors: Historical versus Post-2011 Slowdown
Figure 4.1.3. Contributors to the Private Investment Slowdown since 2011
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 February 6–March 6, 2015, 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 $58.14 a barrel in 2015 and $65.65 a barrel in 2016 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 0.7 percent in 2015 and 1.9 percent in 2016; that the three-month euro deposit rate will average 0.0 percent in 2015 and 2016; and that the six-month Japanese yen deposit rate will yield on average 0.1 percent in 2015 and 0.2 percent in 2016. 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 April 3, 2015.
The following conventions are used throughout the WEO:
. . . to indicate that data are not available or not applicable;
– between years or months (for example, 2014–15 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2014/15) 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 2014 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.
On January 1, 2015, Lithuania became the 19th country to join the euro area. Data for Lithuania are not included in the euro area aggregates because Eurostat has not fully released the consolidated data for the group, but the data are included in the advanced economies and subgroups aggregated by the WEO.
As in the October 2014 WEO, data for Syria are excluded from 2011 onward because of the uncertain political situation.
As in the October 2014 WEO, the consumer price projections for Argentina are excluded because of a structural break in the data. Please refer to note 6 in Table A7 for further details.
Because of the ongoing IMF program with Pakistan, the series from which nominal exchange rate assumptions are calculated are not made public—the nominal exchange rate is a market-sensitive issue in Pakistan.
The series from which the nominal exchange rate assumptions are calculated are not made public for Egypt because the nominal exchange rate is a market-sensitive issue in Egypt.
Starting with the April 2015 WEO, the classification for official external financing among emerging market and developing economies classified as net debtors has been eliminated because of a lack of available data.
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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Preface
The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—together with the Strategy, Policy, and Review Department, the Monetary and Capital Markets Department, and the Fiscal Affairs Department.
The analysis in this report was coordinated in the Research Department under the general direction of Olivier Blanchard, Economic Counsellor and Director of Research. The project was directed by Gian Maria Milesi-Ferretti, Deputy Director, Research Department, and Thomas Helbling, Division Chief, Research Department.
The primary contributors to this report were Abdul Abiad, Aseel Almansour, Aqib Aslam, Samya Beidas-Strom, Patrick Blagrave, Oya Celasun, Mai Dao, Davide Furceri, Roberto Garcia-Saltos, Sinem Kilic Celik, Daniel Leigh, Seok Gil Park, Marco Terrones, Hui Tong, Juan Yépez Albornoz, and Fan Zhang.
Other contributors include Ali Alichi, Rabah Arezki, Angana Banerji, Sami Ben Naceur, Helge Berger, Emine Boz, Ernesto Crivelli, Era Dabla-Norris, Harald Finger, Roberto Guimarães-Filho, Amr Hosny, Benjamin Hunt, Minsuk Kim, Nicolas Magud, Akito Matsumoto, Andre Meier, Pritha Mitra, Mico Mrkaic, Bhaswar Mukhopadhyay, Carolina Osorio Buitron, Marco Pani, Pau Rabanal, Jesmin Rahman, Michele Ruta, Annika Schnücker, Sebastian Sosa, Ara Stepanyan, Shane Streifel, Marzie Taheri Sanjani, Natalia Tamirisa, Bruno Versailles, Kevin Wiseman, and Aleksandra Zdzienicka.
Gavin Asdorian, Joshua Bosshardt, Angela Espiritu, Rachel Fan, Mitko Grigorov, Hao Jiang, Yun Liu, Olivia Ma, Vanessa Diaz Montelongo, Rachel Szymanski, and Hong Yang provided research assistance. Mahnaz Hemmati, Toh Kuan, Emory Oakes, and Richard Watson provided technical support. Alimata Kini Kaboré and Anduriña Espinoza-Wasil were responsible for word processing. Michael Harrup from the Communications Department led the editorial team and managed the report’s production, with support from Linda Kean and Joe Procopio and editorial assistance from Cathy Gagnet, Lucy Scott Morales, Sherrie Brown, Gregg Forte, Linda Long, and EEI Communications.
The Core Data Management team from the IMF’s IT department and external consultant Pavel Pimenov provided additional technical support.
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 April 3, 2015. However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.
Foreword
What strikes me as I write this is the complexity of the forces shaping macroeconomic evolutions around the world and the resulting difficulty of distilling a simple bottom line. Let me develop and expand.
Two deep forces are shaping these evolutions over the medium term:
Legacies of both the financial and the euro area crises are still visible in many countries. To varying degrees, weak banks and high levels of debt—public, corporate, or household—still weigh on spending and growth. Low growth, in turn, makes deleveraging a slow process.
Potential output growth has declined. As shown in Chapter 3, potential growth in advanced economies was already declining before the crisis. Aging, together with a slowdown in total productivity, has been at work. The crisis made it worse, with the large decrease in investment leading to even lower capital growth. As we exit from the crisis, and as suggested by Chapter 4, capital growth will recover, but aging and weak productivity growth will continue to weigh. The effects are even more pronounced in emerging markets, where aging, lower capital accumulation, and lower productivity growth are combining to significantly lower potential growth in the future. More subdued prospects lead, in turn, to lower spending and lower growth today.
On top of these two underlying forces, the current scene is dominated by two factors that both have major distributional implications, namely, the decline in the price of oil and large exchange rate movements.
The sharp decline in the price of oil came as a surprise. Many explanations have been offered after the fact, the most convincing of which focus on the steady increase in supply from nonconventional sources combined with a change in strategy by OPEC (the Organization of the Petroleum Exporting Countries). Most of these explanations suggest that the decline will likely be long lasting.
The price declines have effected a large reallocation of real income from oil exporters to oil importers. The early evidence suggests that in oil importers from the United States, to the euro area, to China, and to India, the increase in real income is increasing spending. Oil exporters have cut spending but to a smaller extent: many have substantial financial reserves and are in a position to reduce spending slowly.
Exchange rate movements have been unusually large. Among major currencies, the dollar has seen a major appreciation and the euro and the yen a major depreciation. These movements clearly reflect major differences in monetary policy, with the United States expecting to exit the zero lower bound this year, but with no such prospects for the euro area or Japan. Given that these differences have been clear for some time, the surprise here may be how long it took for these exchange rate movements to occur. To the extent that both the euro area and Japan were at risk of another relapse, the euro and yen depreciations will help. To some extent, the United States has the policy room to offset the adverse effects of the dollar appreciation. Thus, this adjustment of exchange rates must be seen, on net, as good news for the world economy.
Now, put these four forces together. Some countries suffer from legacies, others do not. Some countries suffer from lower potential growth, others do not. Some countries gain from the decrease in the price of oil, others lose. Some countries’ currencies move with the dollar, others move with the euro and the yen. Add to this a couple of idiosyncratic developments, such as the economic troubles in Russia or the weakness of Brazil. It is no surprise that the assessment must be granular. On net, our baseline forecasts are that advanced economies will do better this year than last year, that emerging markets and low-income countries will slow down relative to last year, and that, as a result, global growth will be roughly the same as last year. But these aggregate numbers do not do justice to the diversity of underlying evolutions.
Moving from the baseline to the risks, have they increased? I see macroeconomic risks as having slightly decreased. The major risk last year—namely, a recession in the euro area —has decreased, as has the risk of deflation. But financial and geopolitical risks have increased. Large movements in relative prices, whether exchange rates or the price of oil, create losers and winners. Energy companies and oil-producing countries face both tougher conditions and higher risks. So do non-U.S. companies and governments that have borrowed in dollars. If large exchange rate movements were to continue, they could both create further financial risks and reignite talk of currency wars. A Greek crisis cannot be ruled out, an event that would surely unsettle financial markets. Turmoil continues in Ukraine and in the Middle East, although so far without systemic economic implications.
Finally, given the diversity of situations, it is obvious that policy advice must be country specific. Even so, some general principles continue to hold. Measures to sustain growth both in the short and the longer term continue to be of the essence. With the introduction of quantitative easing in the euro area, monetary policy in advanced economies has largely accomplished what it can. Fiscal room exists in some countries but is limited; the decrease in the price of oil has created an opportunity to decrease energy subsidies and replace them with better-targeted programs. The case for more infrastructure investment that we made in the previous World Economic Outlook remains. And while structural reforms cannot do miracles, they can increase the level of output and increase growth for some time. The proper menu differs by country. Given the short-term political costs associated with many of these reforms, the challenge will be to choose carefully among them.
Olivier Blanchard
Economic Counsellor
Executive Summary
Global growth remains moderate, with uneven prospects across the main countries and regions. It is projected to be 3.5 percent in 2015, in line with forecasts in the January 2015 World Economic Outlook (WEO) Update. Relative to last year, the outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries.
A number of complex forces are shaping the outlook. These include medium- and long-term trends, global shocks, and many country- or region-specific factors:
In emerging markets, negative growth surprises for the past four years have led to diminished expectations regarding medium-term growth prospects.
In advanced economies, prospects for potential output are clouded by aging populations, weak investment, and lackluster total factor productivity growth. Expectations of lower potential growth weaken investment today.
Several advanced economies and some emerging markets are still dealing with crisis legacies, including persistent negative output gaps and high private or public debt or both.
Inflation and inflation expectations in most advanced economies are below target and are in some cases still declining—a particular concern for countries with crisis legacies of high debt and low growth, and little or no room to ease monetary policy.
Long-term bond yields have declined further and are at record lows in many advanced economies. To the extent that this decline reflects lower real interest rates, as opposed to lower inflation expectations, it supports the recovery.
Lower oil prices—which reflect to a significant extent supply factors—provide a boost to growth globally and in many oil importers but will weigh on activity in oil exporters.
Exchange rates across major currencies have changed substantially in recent months, reflecting variations in country growth rates, monetary policies, and the lower price of oil. By redistributing demand toward countries with more difficult macroeconomic conditions and less policy space, these changes could be beneficial to the global outlook. The result would be less risk of more severe distress and its possible spillover effects in these economies.
The net effect of these forces can be seen in higher projected growth this year in advanced economies relative to 2014, but slower projected growth in emerging markets. Nevertheless, emerging markets and developing economies still account for more than 70 percent of global growth in 2015.
This growth outlook for emerging markets primarily reflects more subdued prospects for some large emerging market economies as well as weaker activity in some major oil exporters because of the sharp drop in oil prices. The authorities in China are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth. Hence the forecast assumes a further slowdown in investment, particularly in real estate. The outlook for Brazil is affected by a drought, the tightening of macroeconomic policies, and weak private sector sentiment, related in part to the fallout from the Petrobras investigation. The growth forecasts for Russia reflect the economic impact of sharply lower oil prices and increased geopolitical tensions. For other emerging market commodity exporters, the impact of lower oil and other commodity prices on the terms of trade and real incomes is projected to take a toll on medium-term growth. Growth in emerging markets is expected to pick up in 2016, driving an increase in global growth to 3.8 percent, mostly reflecting some waning of downward pressures on activity in countries and regions with weak growth in 2015, such as Russia, Brazil, and the rest of Latin America.
In many emerging market and developing economies, macroeconomic policy space to support growth remains limited. In oil importers, however, lower oil prices will reduce inflation pressure and external vulnerabilities, and in economies with oil subsidies, the lower prices may provide some fiscal space or, where needed, scope to strengthen fiscal positions. Oil exporters have to absorb a large terms-of-trade shock and face greater fiscal and external vulnerabilities. Those with fiscal space can allow public spending to adjust gradually to lower oil revenues. In oil-exporting countries with some exchange rate flexibility, a depreciation would facilitate the adjustment. Emerging market and developing economies also have an important structural reform agenda, including measures to support capital accumulation (such as removing infrastructure bottlenecks, easing limits on trade and investment, and improving business conditions) and raise labor force participation and productivity (through reforms to education, labor, and product markets). And lower oil prices offer an opportunity to reform energy subsidies but also energy taxation (including in advanced economies).
Advanced economies are generally benefiting from lower oil prices. Growth in the United States is projected to exceed 3 percent in 2015–16, with domestic demand supported by lower oil prices, more moderate fiscal adjustment, and continued support from an accommodative monetary policy stance, despite the projected gradual rise in interest rates and some drag on net exports from recent dollar appreciation. After weak second and third quarters in 2014, growth in the euro area is showing signs of picking up, supported by lower oil prices, low interest rates, and a weaker euro. And after a disappointing 2014, growth in Japan is also projected to pick up, sustained by a weaker yen and lower oil prices.
In an environment of moderate and uneven growth, raising actual and potential output continues to be a policy priority in advanced economies. In many of these economies, the main macroeconomic policy issues are the persistent and sizable output gaps, as well as disinflation dynamics, which, as discussed in earlier WEO reports, pose risks to activity where monetary policy is constrained at the zero lower bound. Accommodative monetary policy—including through unconventional means—remains essential to prevent real interest rates from rising, and the recent decision by the European Central Bank to expand its asset purchase program through sovereign asset purchases is welcome. A strong case can be made for increased infrastructure investment in some advanced economies and for structural economic reforms more generally. Priorities vary, but many of these economies would benefit from reforms to strengthen labor force participation and trend employment, given aging populations, as well as measures to tackle private debt overhang.
The distribution of risks to global growth is now more balanced relative to the October 2014 WEO, but still tilted to the downside. A greater lift to demand from oil prices is a significant upside risk. The most salient downside risks identified in the October 2014 WEO remain relevant, however. Geopolitical tensions could intensify, affecting major economies. Disruptive asset price shifts in financial markets remain a concern. Term and other risk premiums in bond markets are still low in historical terms, and the context underlying this asset price configuration—very accommodative monetary policies in the major advanced economies—is expected to start changing in 2015. Triggers for turmoil include changing expectations about these elements as well as unexpected portfolio shifts more broadly. A further sharp dollar appreciation could trigger financial tensions elsewhere, particularly in emerging markets. Risks of stagnation and low inflation in advanced economies are still present, notwithstanding the recent upgrade to the near-term growth forecasts for some of these economies.