Titlepage
World Economic and Financial Surveys
World Economic Outlook
APR 16
Too Slow for Too Long
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©2016 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 978-1-49839-858-9 (paper)
978-1-47554-372-8 (PDF)
978-1-47556-199-9 (ePub)
978-1-47556-264-4 (Mobi)
The World Economic Outlook (WEO) is a survey by the IMF staff published twice a year, in the spring and fall. The WEO is prepared by the IMF staff and has benefited from comments and suggestions by Executive Directors following their discussion of the report on March 28, 2016. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund. 2016. World Economic Outlook: Too Slow for Too Long. 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
The Forecast
A Pronounced Increase in Downside Risks
Policy Priorities
Special Feature: Commodity Market Developments and Forecasts, with a Focus on the Energy Transition in an Era of Low Fossil Fuel Prices
Annex 1.1. Regional Projections
Scenario Box 1. The Estimated Impact of Lower Oil Prices
Scenario Box 2. Responding to Secular Stagnation Forces
Box 1.1. Dissecting the Global Trade Slowdown
Box 1.2. Macroeconomic Developments and Outlook in Low-Income Developing Countries: The Role of External Factors
References
Chapter 2. Understanding the Slowdown in Capital Flows to Emerging Markets
Anatomy of the Slowdown in Net Capital Inflows
Historical Comparisons: What Is Different This Time?
What Is Driving the Recent Slowdown in Capital Flows to Emerging Market Economies?
Conclusions
Annex 2.1. Sample of Emerging Market Economies
Annex 2.2. Data
Annex 2.3. Methodology
Box 2.1. Capital Flows to Low-Income Developing Countries
Box 2.2. U.S. Monetary Policy and Capital Flows to Emerging Markets
References
Chapter 3. Time for a Supply-Side Boost? Macroeconomic Effects of Labor and Product Market Reforms in Advanced Economies
The Economics of Product and Labor Market Reforms: A Primer
The Macroeconomic Effects of Reforms: A Model-Based Analysis
The Macroeconomic Effects of Reforms: An Empirical Analysis
Summary and Policy Implications
Annex 3.1. Modeling the Effects of Product and Labor Market Reforms
Annex 3.2. Identification of Reforms and Policy Shocks
Annex 3.3. The Macroeconomic Effects of Reforms: Empirical Analysis
Annex 3.4. Country Coverage and Data Sources
Box 3.1. Breaking the Deadlock: Identifying the Political Economy Drivers of Structural Reforms
Box 3.2. Reforming Collective-Bargaining Systems to Achieve High and Stable Employment
Box 3.3. The Potential Productivity Gains from Further Trade and Foreign Direct Investment Liberalization
Box 3.4. Can Reform Waves Turn the Tide? Some Case Studies Using the Synthetic Control Method
References
Statistical Appendix
Assumptions
What’s New
Data and Conventions
Country Notes
Classification of Countries
General Features and Composition of Groups in the World Economic Outlook Classification
Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2015
Table B. Advanced Economies by Subgroup
Table C. European Union
Table D. Emerging Market and Developing Economies by Region and Main Source of Export Earnings
Table E. Emerging Market and Developing Economies by Region, Net External Position, and Status as Heavily Indebted Poor Countries and Low-Income Developing Countries
Table F. Economies with Exceptional Reporting Periods
Table G. Key Data Documentation
Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies
List of Tables
Output (Tables A1–A4)
Inflation (Tables A5–A7)
Financial Policies (Table A8)
Foreign Trade (Table A9)
Current Account Transactions (Tables A10–A12)
Balance of Payments and External Financing (Table A13)
Flow of Funds (Table A14)
Medium-Term Baseline Scenario (Table A15)
World Economic Outlook, Selected Topics
IMF Executive Board Discussion of the Outlook, March 2016
Tables
Table 1.1. Overview of the World Economic Outlook Projections
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 and 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
Table 1.SF.1. World Energy Usage, 2013
Table 1.SF.2. Summary of Severe Accidents in the Energy Sector, 1970–2008
Table 1.SF.3. Global Share of Greenhouse Gas Emissions by Country
Table 1.SF.4. Greenhouse Gas Emissions Target Reductions, Paris Agreement, December 2015
Table 2.1. Foreign Reserves and the Current Account in Balance of Payments Adjustments
Table 2.2. Large Depreciations, Banking Sector Stress, and External Crises during Slowdown Episodes
Annex Table 2.1.1. Countries in the Chapter’s Emerging Market Economies Sample
Annex Table 2.1.2. External Crisis Episodes, 1980–2015
Annex Table 2.1.3. Large Depreciation Episodes, 1995–2000
Annex Table 2.1.4. Large Depreciation Episodes, 2010–15
Annex Table 2.3.1. Role of Global Factors in Explaining Gross Capital Inflows
Annex Table 2.3.2. Role of Global Factors in Explaining Gross Capital Outflows
Annex Table 2.3.3. Role of Country Characteristics in Explaining Gross Capital Inflows
Annex Table 2.3.4. Role of Country Characteristics in Explaining Gross Capital Outflows
Annex Table 2.3.5. Role of Interaction Terms in Explaining Gross Capital Inflows
Annex Table 2.3.6. Role of Country Characteristics and Global Factors in Explaining Gross Capital Inflows
Table 2.2.1. Short-Term Determinants of Emerging Market Fund Flows
Table 3.1 Effect of Product and Labor Market Reforms on Macroeconomic Outcomes
Annex Table 3.2.1. Examples of Reforms Identified
Annex Table 3.4.1. Country Coverage
Annex Table 3.4.2. Macroeconomic Data Sources
Table 3.1.1. Drivers of Reforms
Table A1. Summary of World Output
Table A2. Advanced Economies: Real GDP and Total Domestic Demand
Table A3. Advanced Economies: Components of Real GDP
Table A4. Emerging Market and Developing Economies: Real GDP
Table A5. Summary of Inflation
Table A6. Advanced Economies: Consumer Prices
Table A7. Emerging Market and Developing Economies: Consumer Prices
Table A8. Major Advanced Economies: General Government Fiscal Balances and Debt
Table A9. Summary of World Trade Volumes and Prices
Table A10. Summary of Current Account Balances
Table A11. Advanced Economies: Balance on Current Account
Table A12. Emerging Market and Developing Economies: Balance on Current Account
Table A13. Summary of Financial Account Balances
Table A14. Summary of Net Lending and Borrowing
Table A15. Summary of World Medium-Term Baseline Scenario
Online Tables
Table B1. Advanced Economies: Unemployment, Employment, and Real GDP per Capita
Table B2. Emerging Market and Developing Economies: Real GDP
Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing
Table B4. Emerging Market and Developing Economies: Consumer Prices
Table B5. Summary of Fiscal and Financial Indicators
Table B6. Advanced Economies: General and Central Government Net Lending/Borrowing and General Government Net Lending/Borrowing Excluding Social Security Schemes
Table B7. Advanced Economies: General Government Structural Balances
Table B8. Emerging Market and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance
Table B9. Emerging Market and Developing Economies: General Government Net Lending/Borrowing
Table B10. Selected Advanced Economies: Exchange Rates
Table B11. Emerging Market and Developing Economies: Broad Money Aggregates
Table B12. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services
Table B13. Emerging Market and Developing Economies by Region: Total Trade in Goods
Table B14. Emerging Market and Developing Economies by Source of Export Earnings: Total Trade in Goods
Table B15. Summary of Current Account Transactions
Table B16. Emerging Market and Developing Economies: Summary of External Debt and Debt Service
Table B17. Emerging Market and Developing Economies by Region: External Debt by Maturity
Table B18. Emerging Market and Developing Economies by Analytical Criteria: External Debt by Maturity
Table B19. Emerging Market and Developing Economies: Ratio of External Debt to GDP
Table B20. Emerging Market and Developing Economies: Debt-Service Ratios
Table B21. Emerging Market and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators
Figures
Figure 1.1. Global Activity Indicators
Figure 1.2. Global Inflation
Figure 1.3. Commodity and Oil Markets
Figure 1.4. Real Effective Exchange Rate Changes, August 2015–February 2016
Figure 1.5. Emerging Market Economies: Capital Flows
Figure 1.6. Advanced Economies: Monetary and Financial Market Conditions
Figure 1.7. Advanced Economies: Credit, House Prices, and Balance Sheets
Figure 1.8. Emerging Market Economies: Interest Rates
Figure 1.9. Emerging Market Economies: Equity Markets and Credit
Figure 1.10. China’s Share of Value-Added Exports and Change in Export Volume Growth
Figure 1.11. Terms-of-Trade Windfall Gains and Losses, Domestic Demand, Imports, and Output
Figure 1.12. Energy and Mining Investment
Figure 1.13. Global Investment and Trade Slowdown
Figure 1.14. Fiscal Policies
Figure 1.15. External Sector
Figure 1.16. Creditors versus Debtors
Figure 1.17. Risks to the Global Outlook
Figure 1.18. Recession and Deflation Risks
Scenario Figure 1. Decomposition of the Change in Oil Prices: 2014 World Economic Outlook versus April 2016 World Economic Outlook
Scenario Figure 2. Oil Scenario
Scenario Figure 3. Secular Stagnation and Reform
Figure 1.SF.1. Commodity Market Developments
Figure 1.SF.2. World Energy Intensity
Figure 1.SF.3. Car Ownership and GDP per Capita, 2013
Figure 1.SF.4. World Energy Consumption Share by Fuel Type
Figure 1.SF.5. Carbon Emissions for Various Fuels
Figure 1.SF.6. Electricity Generation
Figure 1.SF.7. Cost of Renewables and Research and Development Efforts
Figure 1.SF.8. U.S. Sales of Electric Vehicles and Gasoline Price
Figure 1.SF.9. Duck Curve: Illustrative Change in Projections of Net Load Curve
Figure 1.SF.10. World Patents
Figure 1.SF.11. Direct Normal Irradiation
Figure 1.1.1. Trade and Output Growth
Figure 1.1.2. Import Elasticity
Figure 1.1.3. Import Volume Index by End Use
Figure 1.1.4. Capital Goods Import Volume Index
Figure 1.2.1. Low-Income Developing Countries: Real GDP Growth
Figure 1.2.2. Low-Income Developing Countries: Purchasing-Power-Parity GDP Shares
Figure 1.2.3. Terms-of-Trade Windfall Gains and Losses
Figure 1.2.4. Trading Partners’ GDP Growth Changes
Figure 1.2.5. Sovereign Bond Spreads in Low-Income Developing Countries
Figure 1.2.6. Simulated Effects of Lower Oil Prices on Growth and Public Debt in Low-Income Developing Countries
Figure 2.1. Net Capital Inflows to Emerging Market Economies and Number of Debt Crises, 1980–2015:Q3
Figure 2.2. Net Capital Inflows to Emerging Market Economies, 2000–15:Q3
Figure 2.3. Capital Inflows and Outflows for Emerging Market Economies, 2000–15:Q3
Figure 2.4. Capital Inflows and Outflows for Emerging Market Economies by Asset Type: 2000–15:Q3
Figure 2.5. Net Capital Inflows by Region, 2000–15:Q3
Figure 2.6. Net Reserve Assets of Emerging Market Economies, 2000–15:Q3
Figure 2.7. Exchange Rates of Emerging Market Economies, 2010–15:Q3
Figure 2.8. Net Capital Inflow Slowdown and Exchange Rate Changes, 2010–15:Q3
Figure 2.9. Cost of Financing, Sovereign Spreads, and Capital Flows in Emerging Market Economies
Figure 2.10. Three Major Net Capital Inflow Slowdown Episodes
Figure 2.11. External Balance Sheets of Emerging Market Economies, 1980–2014
Figure 2.12. Gross Capital Inflows and Outflows of Emerging Market Economies, 1980–2014
Figure 2.13. Net External Debt Liabilities of Emerging Market Economies, 1980–2014
Figure 2.14. Outstanding Debt of Emerging Market Economies Denominated in Domestic Currency, 1995–2015
Figure 2.15. Net Capital Outflows and the Current Account during the 2010–15 Slowdown
Figure 2.16. Nominal Effective Exchange Rate Adjustment in 1995–2000 and 2010–15:Q3
Figure 2.17. Role of Global Factors in the Recent Slowdown
Figure 2.18. Estimated Time Fixed Effects and Average Gross Capital Inflows to Emerging Market Economies
Figure 2.19. Share of Variation in Gross Capital Inflows Explained by Global Factors
Figure 2.20. 2010–15 Gross Capital Inflow Slowdown and Country-Specific Characteristics
Figure 2.21. Differences in the Contribution of Global Factors between More and Less Flexible Exchange Rate Regimes
Figure 2.1.1. Net Capital Inflows to Low-Income Developing Countries, 2000–14
Figure 2.1.2. Capital Inflows and Outflows of Low-Income Developing Countries, 2000–14
Figure 2.1.3. Capital Inflows to Low-Income Developing Countries by Asset Type and Net Capital Inflows by Region, 2000–14
Figure 2.1.4. Net Reserve Assets and Current Account Balance, 2000–14
Figure 2.1.5. Net Capital Inflows to Low-Income Developing Countries, 2012–15, Restricted Sample
Figure 2.1.6. Exchange Rates of Low-Income Developing Countries, 2009–15:Q3
Figure 2.2.1. Correlation between Emerging Market Fund Flows and Emerging Market Total Portfolio Inflows
Figure 3.1. Evolution of Potential Output Growth and Its Components in Advanced Economies
Figure 3.2. Evolution of Product Market Regulations
Figure 3.3. Evolution of Labor Market Institutions
Figure 3.4. Selected Model Results
Figure 3.5. Macroeconomic Effects of Product Market Reforms
Figure 3.6. Direct and Indirect Sectoral Output Effects of Product Market Reforms
Figure 3.7. Direct Effects of Product Market Reforms on Incumbent Firms’ Output
Figure 3.8. Direct Effects of Product Market Reforms on Incumbent Firms’ Employment: The Role of Firm Size
Figure 3.9. Direct Effects of Product Market Reforms on Incumbent Firms’ Investment: The Role of Financial Conditions
Figure 3.10. Macro and Sectoral Effects of Employment Protection Legislation Reforms
Figure 3.11. Unemployment Effects of Unemployment Benefit Reforms
Figure 3.12. Macroeconomic Effects of Labor Tax Wedge Cuts
Figure 3.13. Macroeconomic Effects of Spending Shocks on Active Labor Market Policies
Figure 3.14. Role of Fiscal Policy in Shaping the Effects of Employment Protection Legislation and Unemployment Benefit Reforms on Unemployment
Figure 3.15. Effects of Reforms on Participation Rates of Women and Older Workers
Annex Figure 3.2.1. Number of Reforms Identified
Annex Figure 3.3.1. Effects of Reforms on Economic Activity: Robustness Check
Figure 3.2.1. Portugal: Employment Growth during the Global Financial Crisis among Firms Not Affiliated with an Employer Association
Figure 3.2.2. Change in Unemployment Rate
Figure 3.3.1. Trade Liberalization
Figure 3.4.1. Log of Real GDP per Capita in Purchasing-Power-Parity Terms
Editor’s notes:
(April 11, 2016)
Figure 1.9 on page 9 was corrected to include a portion of note 1 that was cut off in the original version.
Scenario Figure 1 on page 15 was corrected to include the source line, which was omitted in the original version.
(May 25, 2016)
Page 89 was corrected to remove a repeated paragraph.
(July 11, 2016)
The Sources and Note in Figure 2.14 on page 74 were replaced to correct an incorrect source attribution and provide some additional information.
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 2–March 1, 2016, except for those for the currencies participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $34.75 a barrel in 2016 and $40.99 a barrel in 2017 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 0.9 percent in 2016 and 1.5 percent in 2017; that the three-month euro deposit rate will average −0.3 percent in 2016 and −0.4 percent in 2017; and that the six-month Japanese yen deposit rate will yield on average −0.1 percent in 2016 and −0.3 percent in 2017. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. The estimates and projections are based on statistical information available through March 25, 2016.
The following conventions are used throughout the WEO:
… to indicate that data are not available or not applicable;
—between years or months (for example, 2015–16 or January—June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2015/16) to indicate a fiscal or financial year.
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
Data refer to calendar years, except in the case of a few countries that use fiscal years. Please refer to Table F in the Statistical Appendix, which lists the economies with exceptional reporting periods for national accounts and government finance data for each country.
For some countries, the figures for 2015 and earlier are based on estimates rather than actual outturns. Please refer to Table G in the Statistical Appendix, which lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments indicators for each country.
Data for Macao Special Administrative Region and the Commonwealth of Puerto Rico are included in data aggregated for the advanced economies. Macao is a Special Administrative Region of China, and Puerto Rico is a territory of the United States, but the WEO maintains statistical data for both economies on a separate and independent basis.
Argentina’s and Venezuela’s consumer prices are excluded from all the WEO groups’ aggregates. In the tables and figures, the following conventions apply:
If no source is listed on tables and figures, data are drawn from the WEO database.
When countries are not listed alphabetically, they are ordered on the basis of economic size.
Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless noted otherwise, country group composites represent calculations based on 90 percent or more of the weighted group data.
The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
Further Information and Data
This version of the World Economic Outlook (WEO) is available in full through the IMF eLibrary (www.elibrary.imf.org) and the IMF website (www.imf.org). Accompanying the publication on the IMF website is a larger compilation of data from the WEO database than is included in the report itself, including files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.
The data appearing in the World Economic Outlook are compiled by the IMF staff at the time of the WEO exercises. The historical data and projections are based on the information gathered by the IMF country desk officers in the context of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each country. Historical data are updated on a continual basis as more information becomes available, and structural breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques. IMF staff estimates continue to serve as proxies for historical series when complete information is unavailable. As a result, WEO data can differ from those in other sources with official data, including the IMF’s International Financial Statistics.
The WEO data and metadata provided are “as is” and “as available,” and every effort is made to ensure their timeliness, accuracy, and completeness, but it cannot be guaranteed. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
For details on the terms and conditions for usage of the WEO database, please refer to the IMF Copyright and Usage website (www.imf.org/external/terms.htm).
Inquiries about the content of the World Economic Outlook and the WEO database should be sent by mail, fax, or online forum (telephone inquiries cannot be accepted):
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Preface
The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—together with the Strategy, Policy, and Review Department, the Monetary and Capital Markets Department, and the Fiscal Affairs Department.
The analysis in this report was coordinated in the Research Department under the general direction of Maurice Obstfeld, Economic Counsellor and Director of Research. The project was directed by Gian Maria Milesi-Ferretti, Deputy Director, Research Department, and Oya Celasun, Division Chief, Research Department.
The primary contributors to this report were Rudolfs Bems, Luis Catão, Romain Duval, Davide Furceri, Alexander Hijzen, João Jalles, Sinem Kiliç Çelik, Zsóka Kóczán, Weicheng Lian, and Marcos Poplawski-Ribeiro.
Other contributors include Jaebin Ahn, Juliana Araujo, Rabah Arezki, Gavin Asdorian, Aqib Aslam, Samya Beidas-Strom, Christian Bogmans, Romain Bouis, Emine Boz, Matteo Cacciatore, Eugenio Cerutti, Vanessa Diaz Montelongo, Angela Espiritu, Johannes Eugster, Rachel Yuting Fan, Giuseppe Fiori, Emily Forrest, Peter Gal, Fabio Ghironi, Eric Gould, Mitko Grigorov, Mahnaz Hemmati, Bingjie Hu, Ben Hunt, Carla Intal, Hao Jiang, Maria Jovanović, Sung Eun Jung, Alimata Kini Kaboré, Toh Kuan, Douglas Laxton, Christina Yun Liu, Prakash Loungani, Olivia Ma, Pedro Martins, Akito Matsumoto, Trevor Meadows, Giovanni Melina, Jakob Miethe, Susanna Mursula, Futoshi Narita, Huy Nguyen, Emory Oakes, Andrea Presbitero, Frantisek Ricka, Rachel Szy-manski, Nicholas Tong, Petia Topalova, Hou Wang, Jilun Xing, Hong Yang, Felipe Zanna, Yuan Zeng, Fan Zhang, and Hongyan Zhao. Michael Harrup from the Communications Department led the editorial team for the report, with production and editorial support from Christine Ebrahimzadeh and editorial assistance from Lucy Scott Morales, Linda Long, Lorraine Coffey, Gregg Forte, and EEI Communications.
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 28, 2016. However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.
Foreword
Global recovery continues, but at an ever-slowing and increasingly fragile pace. The months since the last World Economic Outlook have seen a renewed episode of global asset market volatility, some loss of growth momentum in the advanced economies, and continuing headwinds for emerging market economies and lower-income countries. In addition, several stresses of noneconomic origin threaten economic activity. Not only do these developments lead us to a further broad-based reduction in our baseline projections for economic growth in 2016 and 2017; they also suggest that possible nonbaseline outcomes are at the same time less favorable and more likely.
Notwithstanding this cloudier picture of economic fundamentals, financial markets in advanced economies have, at this writing, partially reversed their swoon of the first weeks of 2016. Some improved data releases, a firming of oil prices, lower capital outflows from China, and decisions by major central banks have all contributed to improved sentiment. These developments are consistent with our central projection that growth over the next two years, while lower than we believed likely just a few months ago, will still be slightly higher than in 2015. Yet that outcome is far from assured. Significant downside risks remain, and events that make those risks more salient may well trigger renewed financial turbulence.
What are the risks? Important among purely economic risks is a return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop. Despite the recent rebound in asset prices, financial conditions in the United States, Europe, and Japan have been on a tightening trend since mid-2014, as the new Global Financial Stability Report documents.
Yet financial conditions have tightened even more outside the advanced economies. Increased net capital outflows from emerging markets—the subject of Chapter 2 of this World Economic Outlook report—could lead to further depreciation of their currencies, eventually triggering adverse balance sheet effects. Market perceptions of constrained macroeconomic policy space added to the recent bout of pessimism. These worries remain and are especially relevant for emerging market and developing economies.
China, now the world’s largest economy on a purchasing-power-parity basis, is navigating a momentous but complex transition toward more sustainable growth based on consumption and services. Ultimately, that process will benefit both China and the world. Given China’s important role in global trade, however, bumps along the way could have substantial spillover effects, especially on emerging market and developing economies.
Another threat is that persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment. Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation.
Adding to this list are several pressures with origins in political, geopolitical, or natural developments. In both the United States and Europe, the political discussion is turning increasingly inward. The causes are complex but certainly reflect growing income inequality as well as structural shifts, some connected with globalization, that are seen as having favored economic elites while leaving others behind. Fear of terrorism also plays a role. The result could be a turn toward more nationalistic policies, including protectionist ones.
In the United Kingdom, the planned June referendum on European Union membership has already created uncertainty for investors; a “Brexit” could do severe regional and global damage by disrupting established trading relationships. Adding to political strains in Europe is the tragedy of large-scale refugee inflows, especially from the Middle East. Of course, a sizable fraction of refugee flows originates in violent extremism or sectarian strife, factors that devastate source economies and threaten their neighbors. Yet there are also natural causes of population displacement, some linked to climate change. Extreme flooding and drought from the current El Niño is worsening poverty and displacement in a range of emerging markets and low-income developing countries.
Apart from these risks, the April World Economic Outlook also describes a further weakening of global growth under its baseline scenario. An important cause is that demand, notably investment demand, remains weak worldwide, but especially in commodity exporters, whose terms of trade have collapsed. China’s rebalancing process has subtracted measurably from world investment growth, and generally higher uncertainty about global growth prospects is also a factor. Weak investment demand, in turn, has been associated with slower growth in international trade, given the important roles played by capital and intermediate goods.
Emerging market and especially low-income commodity exporters will struggle to restore growth until they have diversified their export bases, a process that will take time. While in principle terms-of-trade losses by commodity exporters should translate into symmetric gains for importers, in practice the negative effects on producers seem to have dominated so far. The situation is not without precedent. In his classic 1973 book The World in Depression: 1929–1939, Charles P. Kindleberger noted a similar dynamic in the commodity price deflation of the 1920s: “The view taken here is that symmetry may obtain in the scholar’s study, but that it is hard to find in the real world. … The consuming countries might ultimately have realized that their real incomes had increased and permitted them to expand spending. Meanwhile the primary producers cannot wait.” As Chapter 1 in this World Economic Outlook report points out, commodity importers with policy interest rates currently near zero will face an additional offset to the positive income effect of lower commodity prices.
A diminished economic outlook burdened with larger downside risks raises the premium on intensifying and extending sound policies that safeguard near-term growth and boost potential output. Monetary policy must remain accommodative in the face of deflationary pressures, including through additional unconventional measures if needed. But monetary policy cannot bear the entire burden of responding to current challenges; it must be supported by other policies that directly boost supply and demand.
Infrastructure investment is needed across a range of countries and should be attractive in a setting of very low real interest rates. Countries with fiscal space should not wait to take advantage of it. Public action to encourage research and development activity, as documented in the new Fiscal Monitor, can boost output. At the same time, as Chapter 3 in this World Economic Outlook report shows, structural reforms in product and labor markets can be effective in boosting output, even in the short term, and especially if coupled with fiscal support. Tax reform, even when budget neutral, can create demand if well targeted, while simultaneously improving labor force participation and enhancing social cohesion. Not only financial stability, but the transmission of monetary and fiscal policy, would be enhanced by further financial reforms, including the resolution of impaired assets still held on banks’ books.
These measures should be taken now, but countries should also cooperate to design collective measures to be deployed in the future in case downside risks materialize. A range of demand- and supply-side policies can be more effective through positive output spillovers across countries; policymakers could already formulate contingent plans.
In addition, cooperation to enhance the global financial safety net and the global regulatory regime is central to a resilient international monetary and financial system. Some of the risks coming from noneconomic sources likewise present public goods problems solvable through international coordination, on the model of the December 2015 Paris climate agreement.
The current diminished outlook and associated downside possibilities warrant an immediate response. If national policymakers were to clearly recognize the risks they jointly face and act together to prepare for them, the positive effects on global confidence could be substantial. The result would be stronger growth under the baseline outcome as well as insurance against a derailed recovery.
Maurice Obstfeld
Economic Counsellor
Executive Summary
The baseline projection for global growth in 2016 is a modest 3.2 percent, broadly in line with last year, and a 0.2 percentage point downward revision relative to the January 2016 World Economic Outlook (WEO) Update. The recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalize. But uncertainty has increased, and risks of weaker growth scenarios are becoming more tangible. The fragile conjuncture increases the urgency of a broad-based policy response to raise growth and manage vulnerabilities.
The global recovery has weakened further amid increasing financial turbulence. Activity softened toward the end of 2015 in advanced economies, and stresses in several large emerging market economies showed no signs of abating. Adding to these headwinds are concerns about the global impact of the unwinding of prior excesses in China’s economy as it transitions to a more balanced growth path after a decade of strong credit and investment growth, along with signs of distress in other large emerging markets, including from falling commodity prices. With heightened risk aversion and increasing concerns about the lack of policy space, the valuation of risky assets as well as oil prices dropped sharply in early 2016. However, market sentiment began to improve in mid-February, and by the end of March market valuations had recovered most of or all the ground lost earlier in the year.
While growth in emerging market and developing economies still accounts for the lion’s share of projected world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades. In particular, a number of large emerging markets—including Brazil and Russia—are still mired in deep recessions. Others, including several oil-exporting countries, also face a difficult macroeconomic environment with sharply weaker terms of trade and tighter external financial conditions. Growth in China and India has been broadly in line with projections, but trade growth has slowed down noticeably. The trade slowdown is related to the decline in investment growth across emerging market economies, which reflects rebalancing in China but also the sharp scaling down of investment in commodity exporters, particularly those facing difficult macroeconomic conditions.
Growth in advanced economies is projected to remain modest, in line with 2015 outcomes. Unfavorable demographic trends, low productivity growth, and legacies from the global financial crisis continue to hamper a more robust pickup in activity. While very accommodative monetary policy and lower oil prices will support domestic demand, still-weak external demand, further exchange rate appreciation—especially in the United States—and somewhat tighter financial conditions will weigh on the recovery. In the euro area, the risk of a deanchoring of inflation expectations is a concern amid large debt overhangs in several countries.
The projected pickup in growth in 2017 (3.5 percent) and over the rest of the forecast horizon hinges crucially on rising growth in emerging market and developing economies, as growth in advanced economies is expected to remain modest, in line with weakened potential growth. This outcome relies on a number of important assumptions:
A gradual normalization of conditions in several economies currently under stress
A successful rebalancing of China’s economy with trend growth rates that—while lower than those of the past two decades—remain high
A pickup in activity in commodity exporters, albeit at rates more modest than in the past
Resilient growth in other emerging market and developing economies
In the current environment, the likelihood that this central scenario will materialize has weakened, as risks of weaker growth have become more salient.
Across advanced economies, activity slowed during the second part of 2015, and asset price declines and widening spreads have tightened financial conditions. If sustained, these developments could further weaken growth, with risks of a stagnation scenario with persistent negative output gaps and excessively low inflation.
Emerging market stress could rise further, also reflecting domestic vulnerabilities. For instance, an additional bout of exchange rate depreciations could further worsen corporate balance sheets, and a sharp decline in capital inflows could force a rapid compression of domestic demand.
A protracted period of low oil prices could further destabilize the outlook for oil-exporting countries. While some countries still have sizable buffers, these are eroding, and some countries already face the need for sharp expenditure cuts.
The rebalancing process in China may be less smooth than assumed in the baseline scenario. A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalized slowdown in the global economy, especially if it further curtailed expectations of future income.
Shocks of a noneconomic origin—related to geopolitical conflicts, political discord, terrorism, refugee flows, or global epidemics—loom over some countries and regions, and, if left unchecked, could have significant spillovers on global economic activity.
On the upside, the recent decline in oil prices may boost demand in oil-importing countries more strongly than currently envisaged, including through consumers’ possible perception that prices will remain lower for longer. More aggressive policy actions to lift demand and supply potential, as discussed in the following paragraph, could also foster stronger growth, in both the short and longer term. This could also help boost financial market confidence, and imply a recovery in equity prices and an unwinding of the recent tightening in financial conditions.
The fragile conjuncture increases the urgency of a broad-based policy response that safeguards near-term growth, while raising potential output, and manages vulnerabilities.
Strengthening growth. In advanced economies, securing higher and sustainable growth requires a three-pronged approach consisting of mutually reinforcing (1) structural reforms, (2) continued monetary policy accommodation, and (3) fiscal support—in the form of growth-friendly fiscal policies where adjustment is needed and fiscal stimulus where space allows. On the supply side, implementing a credible and country-specific structural reform agenda that takes into account both the short- and medium-term impact of reforms is a key element of the comprehensive strategy. Reforms that entail fiscal stimulus (for example, reducing labor tax wedges and increasing public spending on active labor market policies) and reforms that lower barriers to entry in product and services markets may be most valuable at this juncture, as they can provide some near-term demand support, not only through increased confidence and expectations of higher future income, but directly. On the demand side, accommodative monetary policy remains essential where output gaps are negative and inflation is too low. However, with interest rates at historic lows, a more comprehensive strategy is needed to ensure higher growth. Monetary policy must be complemented by concerted efforts to accelerate the repair of private sector balance sheets—especially in the euro area—to improve monetary policy transmission, ensure orderly deleveraging and bolster credit supply, and contain financial sector risks. Stronger near-term fiscal policy support, with a focus on boosting future productive capacity and financing demand-friendly structural reforms—where needed and where fiscal space is available—should provide a fillip to growth.
Securing resilience. In emerging market and developing economies, policymakers should reduce macro-economic and financial vulnerabilities and rebuild resilience, including by implementing productivity-enhancing reforms. In some commodity exporters, fiscal buffers can help smooth the adjustment to lower commodity prices, but it will be important to plan for fiscal adjustment to durably lower commodity revenues and new, more diverse growth models. In others, financial strains may limit the room to implement a gradual adjustment. Exchange rate flexibility, where feasible, should also be used to cushion the impact of adverse terms-of-trade shocks, although the effects of exchange rate depreciations on private and public sector balance sheets and on domestic inflation need to be closely monitored. Establishing fiscal policy frameworks that anchor longer-term plans will help build resilience by allowing smoother expenditure adjustment in response to adverse shocks. In commodity importers, whether all the gains should be saved depends on the extent of economic slack, the availability of fiscal space, and countries’ needs. In particular, these gains may provide an opportunity to finance critical structural reforms or growth-enhancing spending.
The threat of synchronized slowdown, the increase in the already significant downside risks, and restricted policy space in many economies call for bold multilateral actions to boost growth and contain risks at this critical stage of the global recovery.
The international policy response. Should a significant shortfall in growth threaten to push the global economy back into recession, a collective macroeconomic policy reaction would be needed. Policymakers in the larger economies should proactively identify additional policy actions that could be implemented quickly if there are signs that global downside risks are about to materialize.
Enhancing the global financial safety net and oversight. To address the potentially protracted risks faced by commodity exporters and emerging markets with strong fundamentals but high susceptibility to shocks, there may be a need to consider reforms to the global financial safety net. There also remains a pressing need at the global level to complement and implement the regulatory reform agenda.
Ring-fencing spillovers from noneconomic shocks. A few countries are currently bearing the brunt of the spillovers with often limited capacity and fiscal space. A coordinated worldwide initiative should support their efforts, with those at risk from spillovers contributing financial resources, and multilateral agencies, including the IMF, reassessing how they can best help channel those resources to areas in greatest need.